Option Investor
Newsletter

Daily Newsletter, Thursday, 10/6/2016

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Fed Outlook, Clear As Mud

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Economic data and Federal Reserve officials continue to give mixed signals and leave Fed transparency as murky as ever. Stanley Fischer, vice-chairman of the board of governors and voting member of the FOMC, says low rates are a sign of possible economic trouble. Jeffrey Lacker, president of the Richmond Fed and not on the FOMC this year, says that rates should already be higher and that strong labor data bolsters this case. Today's data was good, when added to ISM and other data released this week point to economic recovery and higher interest rates.

Asian markets rose in the Thursday session, supported by rising oil prices. Gains were led by the Hang Seng index, most indices in the region closed well of intraday highs. European indices were not so buoyant, trading first up but later falling into negative territory on outlook concern. In both cases moves were small, less than 1%.

Market Statistics

Futures trading indicated a flat to slightly negative open for most of the morning. Economic data was good, but led to a slight increase in rate hike expectation that depressed trading further. The indices opened the day with small losses and then quickly moved lower to set an early low just before 10AM, and then another slightly lower low just after 11AM. This second low turned out to be intraday bottom and led to a quick reversal in price action. Between 11:15AM and 11:55AM the market rallied, recovering most if not all of its earlier losses, setting an intraday high, on the SPX, just above break even. This level held for the next several hours as the indices moved sideways within a narrow range into the close of the day.

Economic Calendar

The Economy

The Challenger Gray & Christmas report on planned lay-offs was the first bit of data released today. The headline number is 44,324, an increase of 38% over the previous month. At first glance this is not great but within the data are quite a few details that shed a more positive light on the labor situation. First, the number of lay-offs planned in September is about average for the past 2 years so not alarming in and of itself. Second, the number is 25% lower than this same time last year. Third, YTD lay-offs are down -12% from last year at this time. Fourth, 3rd quarter lay-offs are down -8% from the 2nd quarter and down -41% over the 3rd quarter of last year.

So, while lay-offs increased this month they are trending lower in the near and long terms. This month's gains were led by the education sector and primarily ITT Tech which is responsible for about 18% of the total. Back this out and lay-offs would have only gained about 12%. Computers and retail also contributed significantly to September job cuts. Cuts in the computer sector are a continuation of shake-up and consolidation within the sector that has been going on for nearly 2 years. Cuts in the retail sector are seasonal in nature and off-set by robust job gains announced in the August NFP report.


Initial claims for unemployment fell -5,000 from last week's not-revised data to hit 249,000. This is the 83rd week of claims below 300,000 and the 2nd week in 3 for claims to set a new 6 month low. The four week moving average of claims fell -2,500 to hit 253,500, the lowest level the average has seen since 1973. On a not adjusted basis claims rose by 2.2% week to week, versus an expected 4.5%, but are down -10.75% over this same time last year. Based on these numbers the labor market continues to show signs of active recovery.


Continuing claims fell by -6,000 to hit 2.058 million. This is the lowest level for this metric since July, 2000. The four week moving average of claims fell -21,000 to hit 2.094 million, also a low dating back to 2,000. Both of these figures continue to trend lower, consistent with ongoing labor market recovery. They, together with initial claims, my not indicate creation of new jobs but they certainly suggest that less people are losing work, more people who do lose a job find new work quicker and some of the massive amount of open jobs, as reported by JOLTs, are getting filled.

The total number of Americans filing for unemployment benefits fell by -79,054, consistent with seasonal and long term trends, to fall below my target of 1.80 million. What is not consistent is the rate of decline over the past few weeks, much greater than what we've seen at this time of year in the past and suggestive of some significant change in the overall employment situation. Based on seasonal trends we can expect to see total claims continue to decline for another 2-3 weeks before bottoming out. As I said before, these figures may not indicate job creation but they do indicate a decline in overall unemployment and ongoing health in the labor market.


Tomorrow is the all important NFP and unemployment data. ADP suggests that NFP may be on the weaker side, in the range of 160K to 180K, but stable relative to long term labor trends. Based on the claims data I expect to see a drop in unemployment and maybe even an uptick in the participation rate.

The Dollar Index

The Dollar Index surged higher today by 0.55%, breaking out of the narrowing trading range I have been watching. The move is being powered by this week's round of positive data and to some extend rising FOMC expectations although there are some caveats. First, the FOMC still isn't likely to raise rates soon and they might not this year at all. Second, the ECB meets before the FOMC and now that an ECB taper is on the table there is a chance the euro could be strengthened and suck the wind out of the dollar bull's sails. The indicators are bullish and pointing higher but remain consistent with range bound trading. If the index is able to break free of the trading range and move higher next target is near $97.50 and still within the 4 month FOMC-rate-hike-outlook driven trading range.


The Oil Index

Oil prices gained more than 1.5% today as bullish sentiment driven by the OPEC deal and yesterday's draw of crude supports higher prices. Today's move took WTI above $50 for the first time since July and looks like it could continue higher. The risk is that oil prices are now within a former congestion band and resistance zone set during June with bearish fundamentals in place. The OPEC deal is still without substance, production remains highs, storage is at/near record levels and there is little reason to think it won't stay that way.

The Oil Index gained a little more than a half percent to trade right up to the top of the 6 month trading range. The indicators are bullish and pointing higher so further testing of resistance or break above resistance is possible. A break above 1,175/1,180 would be bullish and could take the index up to 1,250 in the near to short term. However, until then, the index remains range bound and at the mercy of the oil markets. If oil is able to sustain its gains the Oil Index will likely do the same.


The Gold Index

Gold prices have broken out their trading range, fallen below critical support and heading lower. Today spot gold lost another -1.25% to trade just above $1,250. This move is driven by dollar strengthening economic data and FOMC rate hike outlook. $1,250 may provide support while we await data, the ECB and the FOMC meeting but if broken, could lead spot prices down to $1,200 or lower. Tomorrow's NFP could be the catalyst that does it, if it shows enough strength.

The gold miners are suffering from falling gold prices. The miners ETF GDX fell a little more than -3.5% today to hit a potential support level. Today's action created a small doji type candle just above the $22.50 level, an important level of support during the April/May period and the mid-point of the 2016 rally. I'm using this opportunity to set up some fresh Fibonacci Retracements, using the January 2016 low and the August 2016 high. So far, the indicators are consistent with support at the 50% level but this move is not played out. Expect further testing of the $22/$22.50 level which, if broken, could lead to a deeper retracement. Downside targets, on a break of the 50% line, are $19.75 and $16.50.


In The News, Story Stocks and Earnings

Twitter was trending on social media today as possible suitors pull away. The news is that Disney, Apple and Google among other big money names are no longer in the running. With interest waning the question arises, who will buy it and for how much? Shares of the stock fell more than -15% in the premarket, opened with a big loss and moved deeper into the red during the day. Twitter closed with a loss near -20% and could easily go lower until a viable bidder comes into the scene. #istilldontknowhowitworks, #whatsthepoint


Walmart reports earnings in about 6 weeks but provided a mid quarter update today. The company outlined a shift in strategy and gave guidance for the next three years. Moving forward the worlds largest retailer will slow the number of store openings and shift focus toward comp store sales and ecommerce. Guidance for the current year was maintained but fiscal 2017 and 2018 both came in well below analysts estimates. Shares of the stock fell more than -3.2% on the news, breaking below $70 for the first time since May.


The Indices

The indices began the day ducking for cover. At the low of the day the SPX was down nearly a half percent but by end of day that move had been erased although the trading was mixed. Three of the four major indices closed with losses but all closed more flat than not, within a range of 0.2% of break even. The biggest loser was the NASDAQ Composite which lost -0.16%. The tech heavy index created a very small spinning top doji candle just above the short term moving average and just below the recently set all time high. This is the 8th day the index has drift sideways at this level, after setting the all time high, and the indicators are deteriorating. MACD was weak to begin with and divergent from the high, stochastic the same. Now, both are confirming a peak with bearish crossovers but remain consistent with range bound trading in the longer term. Support is along the short term moving average, a break of that could move down to 5,080.


The next biggest move was made by the Dow Jones Industrial Average. The blue chips declined -0.09%, creating a very small doji-like spinning top just below the short term moving average. The index is trending sideways and nothing has changed about that. The indicators remain consistent with range bound trading as well. If the index is able to move higher next resistance is about 250 points higher at 18,500, if it moves down to the bottom of the range support is about 250 lower near 18,000.


The smallest decline was posted by the Dow Jones Transportation Average. The transports fell only -0.04%, barely declining at all, creating a small spinning top doji candle. Price action is hovering right at the top of the range, near 8,128, although it does not look like it will break above it at this time. The indicators are both rolling over to form bullish peaks, consistent with the top of a trading range. A break above this level would be bullish but would also face additional resistance at the 8,250 level. Support targets should prices pull back exist at at 8,000 and 7,750.


The S&P 500 posted the smallest move but the only gain in today's session, 0.04%. The broad market created a small spinning top doji style candle just above the short term moving average and very near the middle of the September/October trading range. The indicators are consistent with range bound trading and show a market that has reached a point of near calm. A move lower will find the bottom of the range, at 2,120 and near the previous all time high. A move higher will find the top of the range, near 2,185 and the current all time high.


A lot has happened in a couple of days. ISM and employment data have been good, ECB tapering has come onto the table, more FedSpeak to confuse the market and a sharp rise in oil prices. What hasn't happened is a change in the equities market. The indices continue to trend sideways and appear to have reached a point of calm ahead of the NFP report. This report is likely to shake the foundations of the market, at least for a few minutes, and move the indices within their ranges. Whether or not it will be strong enough to move the indices out of their ranges remains to be seen.

Don't forget, earnings season is here again, the next few weeks will be a roller coaster of reports, sentiment and has a high potential for knee-jerk market reactions so caution is due regardless your market stance. I remain cautious in the near term, eyeing early November and a cluster of events each with major market moving potential; the elections, the peak of earnings season and the next FOMC meeting. Longer term I'm bullish, earnings growth is at hand and economic data support it, just waiting for the market to give the signal to go all in.

Until then, remember the trend!

Thomas Hughes


New Plays

Coiled Spring

by Jim Brown

Click here to email Jim Brown
Editor's Note

The very tight range on the major indexes this afternoon was the equivalent of a spring being compressed. Traders were afraid to make any moves ahead of the Nonfarm Payrolls on Friday. The Dow traded in a very narrow 25-point range from 11:45 until the close. The S&P traded in only a 3 point range. Something spooked traders and investors and nobody was making any trades. The volume died at noon and everything went silent.

The S&P futures are down -6.50 as I type this. That is twice the range the S&P traded in all afternoon. We are setting up for a major move on Friday only we do not know in which direction. I am recommending we stand aside and see what Friday brings before launching any new positions.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

No Material Move

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P-600 remains locked in a narrow range along with the big cap indexes. The 748-758 range remains intact and other than the big drop to support at the open and nearly immediate rebound there was almost no movement.

The Dow trade in only a 25 point range after 11:45 until the close. Traders went dormant ahead of the payroll report Friday morning. The markets are setting up for a major move, only we do not know in which direction. The S&P futures are down -6.50 as I type this.




Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


GPRO - GoPro
The long stock position was opened with a trade at $17.06.



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BULLISH Play Updates

AAOI - Applied OptoElectric - Company Profile

Comments:

No specific news. Shares only declined -21 cents from Wednesday's 52-week high.

Original Trade Description: September 17th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide. Company description from FinViz.com.

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25



ALRM - Alarm.com - Company Profile

Comments:

No specific news. Big drop with the market at the open but rebounded back to close flat.

Original Trade Description: October 1st.

Alarm.com Holdings, Inc. provides cloud-based software platform solutions for the connected homes in the United States and internationally. It offers multi-tenant software-as-a-service platform that allows home and business owners to intelligently secure and manage their properties, as well as remotely interact with an array of connected devices through a single intuitive interface. The company provides interactive security solutions, which offer intelligent security and awareness services through a dedicated, cellular, and two-way connection to the home or business; and intelligent automation solutions that connects, integrates, and controls the devices in the home or business, such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors, and other connected devices. It also offers video monitoring solutions, which provide live streaming, smart clip capture, high definition continuous recording, and instant video alerts through its mobile app or on the Web; and energy management solutions that offer enhanced energy monitoring and management services. It has approximately 2.6 million residential and business subscribers. Company description from FinViz.com.

For Q2, the company reported earnings of 15 cents compared to estimates for 11 cents. Revenue rose 24% to $64.4 million and beat estimates for $58.6 million. Software as a Service (SaaS) revenue rose 23% to $42 million. The company guided for the ful lyear for earnings of 49-51 cents and revenue of $242.3-$245.8 million. Analysts were expecting 48 cents on $241.7 million.

Earnings Nov 8th.

Despite the strong beat and strong guidance shares crashed from the historic high close of $33 before the earnings were released. Shares were up +135% since the February low at $14 and traders took profits. The only ratings change was from Raymond James from outperform to market perform based on value because of the strong gains. At the same time Imperial Capital raised their price target from $24.50 to $30. Since shares closed the day before at $30 that was an implied neutral rating.

Shares collapsed back to $28 and here there for three weeks then fell sharply on September 6th on no news to bottom at $25. That bottom was quickly bought and Friday's gain lifted the shares back over resistance at $28.50.

There is no bad press for Alarm.com. Earnings and revenue are growing, subscribers are growing and shares are back over resistance. If the market is going to rally in late October this should be a tech stock that outperforms.

Position 10/3/16 with a ALRM trade at $29.05

Long ALRM shares @ $29.05, see portfolio graphic for stop loss.

No options recommended because of price.



BOX - Box Inc - Company Profile

Comments:

No specific news. Another minor loss after a 14-month high on Tuesday.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.



FLXN - Flexion Therapeutics - Company Profile

Comments:

No specific news. Shares declined slightly after the big spike on Wednesday. They did hold over resistance.

Original Trade Description: October 4th.

Flexion Therapeutics, Inc., a specialty pharmaceutical company, focuses on the development and commercialization of anti-inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions. It lead product candidate includes Zilretta, a sustained-release intra-articular steroid, which is in clinical trials to treat the patients with moderate to severe osteoarthritis (OA) pain. The company is also developing FX007, a preclinical, small-molecule TrkA receptor antagonist to address post-operative pain; and FX005, a sustained-release intra-articular p38 MAP kinase inhibitor for patients with end-stage OA pain. Company description from FinViz.com.

The FDA has recently said that results from one phase 4 trial can support a FDA application for approval. Recently, Flexion reported positive results of a trial for Zilretta. The drug is a ne wform of treatment for chronic knee pain caused by arthritis. Typically, once a patient can no longer get by on aspirin or Advil, the next solution is quarterly shots of a corticosteroid. As time passes these shots have less of an impact on the pain and patients are suffering significantly before the quarter is over.

Zilretta provided a 50% improvement in pain relief and the lack of pain lasted for the entire trial. With more than five million patients currently on the corticosteroid treatment there is a huge market just waiting to be tapped. This is expected to be a billion dollar a year drug.

Flexion is going to market the drug itself rather than sell it off to some larger partner. They have been storing up cash and currently have $119 million with another $44 million in short term investments. The company only has $16 million in debt so net cash it is debt free. The company's market cap is only $500 million so a billion dollar drug could easily double the stock price.

They plan on filing the FDA application over the next couple months and that will be a major milestone for the company and should lift the stock. The approval will not be until late 2017 but we will be out of the position before the November earnings. We are just playing the buildup to the application.

Earnings Nov 3rd.

The $20 level appears to be resistance and it was tested on Monday. I am putting an entry trigger on the position just over $20.

Position 10/5/16 with a FLXN trade at $20.15

Long FLXN shares, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



FNSR - Finisar Corp - Company Profile

Comments:

No specific news. Shares posted a minor gain but still a gain in a weak market.

Original Trade Description: October 3rd.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Company description from FinViz.com.

Finisar shares rallied throughout the third quarter. In early September shares spiked after earnings and then leveled off but retaining a positive bias. They reported earnings of 38 cents that beat estimates for 30 cents. Revenue of $341.3 million also beat estimates for $334 million. The company guided for the current quarter for earnings of 44-50 cents on sales of $355-#375 million. Analysts were only expecting 32 cents and $344 million. The CEO blamed the soaring earnings on booming sales of certain transceivers and switches. China is in the middle of their upgrade to a 100 Gb infrastructure and the U.S. carriers like Verizon are just getting started.

Earnings December 8th.

Shares spiked from $23 to $27 on the news even after a big ramp up from $17 at the beginning of the quarter. Shares slowed their ascent but reached $30 last week. That is a five-year high. A move over that psychological resistance at $30 could start a new leg higher. The intraday high last week was $30.19. I am recommending we enter a position with a trade at $30.25.

Position 10/5/16 with a FNSR trade at $30.46

Long FNSR shares @ $30.46, see portfolio graphic for stop loss.



GPRO - GoPro Inc - Company Profile

Comments:

No specific news. Minor decline to open the position.

Original Trade Description: October 5th.

GoPro, Inc. develops and sells mountable and wearable cameras, and accessories in the United States and internationally. The company offers HERO line of capture devices, such as cameras; and mounts comprising equipment-based mounts consisting of helmet, handlebar, roll bar, and grip and tripod mounts that enable consumers to capture content while engaged in a range of activities, as well as mounts that enable customers to wear the mount on their bodies, such as wrist housings, chest harnesses, and head straps. It also provides LCD Touch BacPac, Battery BacPac, Smart Remote, and Floaty Backdoor accessories, as well as spare batteries, charging accessories, cables to connect its GoPro cameras to television monitors, video transmitters and external microphones, flotation devices, dive filters, and anti-fogging solutions. In addition, the company offers GoPro Studio, a video editing tool that allows users to create professional quality videos from their content; and GoPro App that allows users to control GoPro cameras remotely using a smartphone or tablet. Company description from FinViz.com.

Everybody knows the story of GoPro. They invented the action camera and the company was a smash hit. After they went public at $28 in 2014, shares rallied to more than $98 in the weeks that followed. They were making the talk show circuit almost weekly on CNBC, Bloomberg, etc. CEO Nick Woodman became a celebrity.

Then the problems started. The company's software was hard to use. New camera models did not work as expected. It was the perfect example of hyper growth without the growth of the infrastructure and products to support that growth. Competitors began to appear. Their cameras were cheaper and the software easier to use. The last model of the GoPro camera was flawed and the price was cut repeatedly.

The company promised great things ahead. It has been a long time since they released a product and they were faulted for that. However, rather than release another flawed product they took their time and made sure it was right.

This week they announced the new Hero5 camera and the smaller Hero5 Session camera. The big camera is $399 while the Session is $299. They have already exhibited the new cameras and given crowd demos and the excitement is growing. Both cameras are waterproof to 10 meters, capture 4K video at 30 fps. They have integrated voice control and microphones, with active noise cancellation. The Hero5 has a 12 megapixel camera and the Session has 10 megapixels. They Hero5 includes image stabilization, GPS capture and three stereo microphones.

The biggest news is an automatic upload feature to send content to GoPro's subscription based cloud making it easy to access, edit and share the content. They announced a new edit feature called Quik that allows users to instantly edit content on their phones and create short videos for sites like YouTube, Facebook and Instagram.

They also launched their Karma drone. It has been promised for two years and has finally arrived. When sold with the Hero5 it is $1,099 and $999 with the Session. The drone has received wildly enthusiastic reviews and should be a big seller.

The long time between model releases has nearly eliminated channel inventory and that means all the new production will go directly into revenue.

Earnings Oct 27th.

This will be a short fuse play with earnings co close. Shares are trying to break over resistance at $17.35 and we want to own the shares when that happens. However, the last two days has seen spikes over that level so we cannot use that as an entry trigger. We have to commit at the open tomorrow.

Position 10/6/16:

Long GPRO shares @ $17.06, see portfolio graphic for stop loss.

No options recommended because of price. Expectation premiums are too high.




BEARISH Play Updates

PPC - Pilgrims Pride - Company Profile

Comments:

No specific news. Shares posted their second consecutive gain and missed our stop loss by 10 cents.

Original Trade Description: September 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946. Company description from FinViz.com.

The chicken business is becoming a lot more competitive. The consumer movement to free range chickens with no antibiotics and growth hormones is squeezing normal high volume breeders and reducing their market share. When your chickens have been previously grown in one square foot cages the change to free range brings a lot of problems and a decline in volumes. They are also faced with the growing occurrences of various bird flu breakouts.

PPC sells a lot of meat internationally and the prohibitions are growing against antibiotics and growth hormones. When an entire country becomes suddenly off limits because of new restrictions that can be costly.

In order to combat these problems the company spent large sums of money in research and development and now that debt has become a new burden in a shrinking marketplace. Earnings are also sensitive to price movement in the agricultural community with the cost of soybeans, corn and other feed grains continually rising. The fluctuating dollar is also a problem with their international sales.

Earnings Oct 26th.

Shares are about to trade at a 10-month low when they fall under $20.65. That could accelerate the selling as investors give up on the stock.

Position 9/27/16:

Short PPC shares @ $20.94, see portfolio graphic for stop loss.

Optional:

Long Nov $20 put @ 70 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

VXX down in a weak market. That continues to be a good sign for our long term prospects. Closed at a new historic low.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.



ZOES - Zoes Kitchen - Company Profile

Comments:

No specific news. New historic closing low.

Original Trade Description: September 27th.

Zoe's Kitchen, Inc., through its subsidiaries, develops and operates a chain of fast-casual restaurants. It operates a range of restaurant formats, including in-line, end-cap, and free-standing restaurants. As of August 22, 2016, the company operated 191 owned and franchised restaurants in 20 states of the United States. Zoe's Kitchen, Inc. was founded in 1995 and is based in Plano, Texas. Company description from FinViz.com.

For Q2, ZOES reported earnings of 6 cents that matched estimates. Revenue of $66.3 million missed estimates for $67.3 million The earnings were not the problem.

Same store sales rose only 4% and that was due to a 3.1% increase in prices so the real rise was only +0.9%. This compares to +8.0% in Q1. They also cut their guidance for the full year from 4.5% to 6.0% down to 4.0% to 5.0% and remember that includes a 3.1% price increase so the real comparable numbers are 0.9% to 1.9% sales growth.

The company also cut its revenue guidance from $277 - $281 million to $277 - $280 million, which is not a big drop but analysts were expecting $280 million so the midrange $278 million would be another miss.

Earnings Nov 14th.

The market appears saturated with fast casual restaurants and "earnings were not bad" is not sufficient to propel the stock higher given the decline in same store sales.

ZOES closed at a historic low at $23.80 on Sept 20th. Shares rallied on short covering in the market rebound but are headed back to set a new low.

Position 9/28/16:

Short ZOES shares @ $23.95, see portfolio graphic for stop loss.





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