Option Investor
Newsletter

Daily Newsletter, Thursday, 3/16/2017

Table of Contents

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

Market Wrap

No Follow Through

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Global indices cheered a less than hawkish FOMC but there was no follow-through here at home. Today's action looks like a day of profit taking ahead of OPEX. With little in the way of economic data or earnings over the next two weeks it is likely we'll see more of this in the coming days.

The first reports of the earnings season are in, Oracle delivered much better than expected results yesterday and Adobe did the same today, but the big banks aren't scheduled to report for another month. With Alcoa sidelined as a market bell-weather it is the big banks that will indicate the beginning of peak season and the next likely period of significant market movement.

Asian indices finished the day higher but gains were not evenly distributed. The Nikkei lagged with an increase of only 0.07% while the Hong Kong index gained a little more than 2%. Japanese trading was hit by the BOJ's decision to hold rates steady and the statement that came with the decision. The bank sees positive signs within the economy and signaled no need for further stimulus at this time. In Europe indices began the day with significant gains but they were muted on reports of a letter bomb at IMF headquarters.

Market Statistics

Futures trading indicated a positive open all morning but cut the gains to near nothing as reports of the IMF incident hit the market, just prior to the 8:30AM release of data. The data was decent and helped support the market although the early highs were not reached. The open was weak, the indices posted gains but not as much as futures had suggested, about 2 points for the SPX versus an expected 4. Trading for the first hour was weak as well, drifting sideways just above break-even until profit taking pushed the index into negative territory. Losses were minimal, the indices tread water just below break-even the rest of the day, closing with little to no movement.

Economic Calendar

The Economy

Lots of data today, starting with Housing Starts and Building Permits. Housing starts jumped 3% in February, ahead of expectations, and are up 6.2% YOY. Single family homes led with a gain of 6.5% as construction of multi-family dwellings slows down. Building permits fell however, shedding -6.2% versus an expected gain of 1%, but are still up nearly 4.5% YOY. Single family homes also led in this category posting an increase of 3.1%. Completions rose 5.4% in the month and are up 8.7% YOY.

Initial claims for unemployment fell -2000 to 241,000 from last week's not-revised figure. The four week moving average of claims also fell, -750, to hit 237,250. On a not-adjusted basis claims fell -8.8% versus an expected -7.9% and are down -6.0% from last year. Claims continue to trend at/near long-term lows and consistent with labor market health.


Continuing claims fell -30,000 to 2.0300 million. on top of last week's upward revision of +2,000. The four week moving average also fell, -11,750, to 2.054 million. Both the headline number and moving average are trending near the long-term low and edging lower, consistent with ongoing labor market health.

The total number of claims jumped 55,000, a little surprising to me, but remain consistent with long term and seasonal trends. This week's figure, 2.490 million, is 5.9% below last year and consistent with labor market health. Looking forward we can still expect to see this figure fall off into the spring, how low it goes will be an indication of the health of labor market trends, will it the market keep improving or will it level out?


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey fell from last month's long-term high of 43.3 to 32.8 but remains strong relative to current and past economic expansions. The index has been positive for 8 months and is still sitting above recently broken 6 month highs. Within the report New Order was positive for another month and rose 1 point, Shipments gained 4. Deliveries and Unfilled Orders, both positive for 5 months, also rose indicating longer delivery time and more back-logged orders. Employment and hours Worked also increased, employment gained 6 points and has been positive for 4 months while hours gained 5 points and has been positive for 5 months. Most promising is the Future Outlook, gaining ground yet again to hit a 2.5 year high. The only negative is another increase in prices paid, another sign of slowly rising inflation.


The JOLTs report, job openings and labor turnover, and remains consistent with multi-year trends. The number of job openings held steady at 5.6 million while the hires and separations rate both edged higher. Separations were led by quits which edged higher by 129,000 to 3.2 million. The quits is used as an indication of labor market confidence and has been trending at long term highs for at least a year.


The Dollar Index

The Dollar Index slipped a little further in today's trading as BOJ confidence helped to undermine a dollar already falling on a lack of FOMC impetus. The Fed did indeed raise rates, and they also indicated a possible trajectory for the rest of the year, but they don't seem to be in much of a hurry and have kept the word "gradual" in their statement. Today's action saw the index fall a little more than -0.5% to break support at the $100.50 level. The indicators are both pointing lower and consistent with such a move. A break below this level would be bearish in the near term with targets at $100, $99.25 and $98.65. Looking out to the next 2 weeks there isn't much data to move the dollar one way or the other so sentiment, and day to day news, could induce some volatility.


The Gold Index

Gold prices got a big boost from the FOMC statement and outlook. The less-than-hawkish tone was nothing more and nothing less than what they have said before, exactly in-line with expectations and sell-the-reality event. Near term. Longer term we are still faced the possibility of the Fed turning more aggressive than expected. Inflation data remains mixed but trending steadily toward their target rate, and there is still the possibility that fiscal stimulus from the Executive Branch could spur economic activity and force their hand. Gold is moving higher in the near term, adding a little less than 1% today to trade at $1228, with resistance near $1,250.

The gold miners rose along with gold and rose again today but sellers stepped in and drove them back down. The Gold Miners ETF GDX gapped up at the open by more than 2%, hitting resistance at $23.50, and only sold off from there. Today's candle is a medium sized black bodied candle forming a bearish attack and may signify strong resistance at this level. Based on yesterday's price action and outlook for the dollar and gold the past two day's look like a combination of short covering followed by profit taking. The indicators continue to swing toward bullishness buy may be setting up for a bear signal within a bear market so I would be careful about bullish positions. If the ETF continues to fall support target is $23.50.


The Oil Index

Oil prices held fairly steady after yesterday's rebound. WTI fell a little more than -0.20% to trade just shy of $49. Prices are under pressure from rising US production and inventory, despite yesterday's drawdown, and will likely remain so in the near to short term.

The Oil Index opened with a small gap to the upside only to sell off throughout the remainder of the session. Today's candle is a small and black bodied and falling from resistance at the 1,200 level. This level may provide strong resistance in the near to short term is oil prices remain low. Looking forward the sector is still expected to see earnings growth into the end of the year and next year, the question now is how badly that outlook will be affected by the recent drop in oil prices. Until then I expect to see this index continue to move sideways with the possibility of a move down to test for firm support. Support appears to be just above 1,150, a move below here could go as low as 1,100.


In The News, Story Stocks and Earnings

Adobe reported earnings after the bell and beat on the top and bottom lines. The software company achieved record quarterly earnings and cash flow, increased its buyback plan and raised its guidance which combined to drive shares higher in after hours trading. The stock jumped more than 4% and is trading at a new all time high.


Dollar General reported before the bell and beat on the top and bottom lines. Net income increased more than 9%, guidance was issued above the consensus target and the dividend was raised leading to 2% pop in intraday trading. Shares hit resistance at $75 where sellers stepped in to drive shares back to break-even by the close. While the company is doing well now, it is sure to be hurt by border adjustment, should that come to pass, due to all the cheap junk they import from overseas.


Cato also reported before the bell and it is not good. The apparel company says sales were hurt by ongoing softness in retail as well as mistakes they made themselves. Because of this quarterly revenue fell and comp sales fell more than 12% each while quarterly earnings were a net loss and full year earnings fell -28%. Shares of the stock fell nearly -10% on the news but were able to recover most of the losses before the close.


The Indices

Today's action was was choppy and to the downside although most of the day's losses were recovered by the close of trading. Today's loss leader was the Dow Jones Transportation Average with a loss of -0.52%. The transports created a small black bodied candle falling from resistance at 9,200 and look like they may go a little lower. The indicators remains bearish, suggesting further downside, with target at 9,000 for the near term.


The S&P 500 made the next largest decline, -0.16%, and created a small to medium sized black bodied candle. Today's action fell from resistance at the top of yesterday's candle, just shy of 2,390, and about 10 points below the current all time high. The indicators are bearish but have begun to roll into trend following entry signals but are far from confirming. This may lead to range bound trading over the next week or more. Near term support is the bottom of last week's trading range, near 2,360, resistance is just above today's open.


The Down Jones Industrial Average made the smallest decline, only -0.07%, and set a 2 week while doing it. Today's action created a small bodied black candle with upper and lower shadows indicative of indecision but biased toward the downside. Price action has given the first indication that resistance is present at 21,000, if it is not broken near term trends may turn bearish. The indicators are bearish and suggestive of a test of support but also showing early signs of support and a possible trend following bounce. This may indicate a new trading range, possibly between 20,500 and 21,000, and consolidation leading up to the next big market move.


The NASDAQ Composite bucked today's trend closing with a small gain, 0.01%, and a hairsbreadth away from a new all time high. Today's candle is a small spinning top doji, a sign of indecisiveness but not a candle to make a trade on. The indicators are mixed, still slightly bullish but rolling over into what could become a trend following entry. Compared to the other indices the indicators here are more bullish but not yet confirmed so extreme caution is warranted for any new bullish positions being considered. Resistance is the current all time high, near term support is near 5,800.


Today's action gives me pause. It would have been nice to see follow through from yesterday and maybe a new all time high but without that it looks as if the market has entered another holding pattern while we wait on the next big move. Now that we've passed the FOMC meeting we've got a good month for the market to churn, consolidate and move sideways within recent ranges... or pull back to firmer support, it could happen. I remain bullish on the broad market for the short and long term, earnings and GDP growth outlook are good even without a Trump Bump, but the near term has become a question mark so I have turned neutral. Tomorrow could be a wild day in terms of volatility, it is triple witching options expiration and St. Patricks Day, and there is some data but nothing I expect to move the market.

Until then, remember the trend!

Thomas Hughes


New Plays

New Drugs Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company has multiple drugs in the pipeline with some very close to approval. ITCI is meeting with the FDA in late March to discuss the filing of their newest drug for schizophrena.


NEW BULLISH Plays

ITCI - Intercellular Therapies - Company Profile

Intra-Cellular Therapies is developing novel drugs for the treatment of neuropsychiatric and neurodegenerative diseases and diseases of the elderly, including Parkinson's and Alzheimer's disease. The Company is developing its lead drug candidate, lumateperone (also known as ITI-007), for the treatment of schizophrenia, bipolar disorder, behavioral disturbances in patients with dementia, including Alzheimer's disease, depression and other neuropsychiatric and neurological disorders. Lumateperone, a first-in-class molecule, is in Phase 3 clinical development for the treatment of schizophrenia, bipolar depression and agitation associated with dementia, including Alzheimer's disease. The Company is also utilizing its phosphodiesterase platform and other proprietary chemistry platforms to develop drugs for the treatment of CNS and other disorders. Company description from company website.

ITCI is meeting with the FDA in late March to discuss the filing of their newest drug for schizophrena and they have already contracted with a manufacturer to supply commercial quantities. The drug is lumateperone and it has already successfully navigated all the required studies and the results were presented at the annual meeting of the American College of Neuropsychopharmacology (ACNP) and the CNS Summit. For company information on their other drugs Click Here

They reported a smaller than expected Q4 loss of 64 cents compared to estimates for 77 cents. The company has averaged a 14.6% positive earnings surprise over the last four quarters. They are not a big company and deal mostly in research so they have a permanent loss until their new drugs hit the market. They have $10 per share in cash.

Shares were very volatile the day the earnings were released and shares settled at $13.50 several days later. Now a new uptrend has begun with a close at $15.75 today. The prior high was the mid $40 range. Shares crashed in September when a trial of drug ITI-007 for schizophrena failed a stage three trial for one specific test. The drug has 7 other uses.

Earnings May 31st.

There is an uptrend forming with resistance at $17. If the stock breaks above that resistance level it could run because of the recent memory of the $45 highs.

Buy ITCI shares, currently $15.75, initial stop loss $13.75,
No options recommended because of high prices and wide spreads.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Small Cap Revival

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes continued to post minor gains while the large cap indexes declined. The gains were small as were the declines but it is good to see the small caps post two consecutive days of gains. The bounce off support on Tuesday could have been the event we have been waiting for. When support did not break it may have encouraged investors. The small caps have been consolidating for three months while the big caps stocks have been moving higher. We may be seeing a reversal of that trend. However, two days do not make a trend.

Unfortunately, the rebound in small caps is lifting our shorts as well.

With all the major headlines behind us, there may not be anything to tank the market but they also may not be anything to motivate investors to buy in at the top.





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


CONN - Conn's
The short stock position was stopped at $8.40.

INFN - Infinera
The short stock position was stopped at $11.10 on a Goldman upgrade.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

ARNC - Arconic - Company Profile

Comments:

The battle between Arconic and Elliott Management escalated on Thursday after Elliott sent a letter to the board accusing them of trading away corporate assets in exchange for a promise to vote for the board members recommended by Arconic. The company resolved "potential claims" by the former owner of Firth Rixson in exchange for voting their 8.7 million shares as directed by the board for a period of two years. With Elliott involved in a proxy fight and attempting to replace the CEO and several board members, that 8.7 million votes is important.

We are not going to have to worry about it since the remaining call position will expire on Friday.

Original Trade Description: February 16th.

Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. Company description from FinViz.com.

What that description does not tell you is that Arconic is the old Alcoa. Back in October Alcoa spun off the aluminum smelter business and named it Alcoa. The remaining hith tech manufacturing business they named Arconic. Basically, this is the profitable part of the old Alcoa. They produce all sorts of high tech aluminum products for nice profits.

Their Q4 earnings were mixed because of expenses incurred as a result of the spinoff.

Zacks reported Q1 estimates have risen from 20 cents to 25 cents over the last several weeks as analysts reevaluate the new company. Full year estimates have risen from 92 cents to $1.10, a 19.6% increase.

On Wednesday Arconic said it had sold 60% of the Alcoa stake it kept during the spinoff for $890 million and would use the money to pay down debt and buy back shares. They also retained loss carry forward tax credits that will offset future earnings.

Earnings May 2nd.

Shares went ballistic after the Q4 earnings and rose from $23 to $30. Every day I kept watching the stock and thinking, "ok, tomorrow they will dip and I will add them to the portfolio." They never dipped until this week. That dip was very shallow and has lasted only 3 days.

We never know. They could fall off a cliff tomorrow and retest the $23 pre-earnings. I seriously doubt it because funds have been adding Arconic as a new position.

I am going to recommend an options only strategy with a four-week duration. I am recommending we buy a $30 call and a $28 put. The total cost will be $1.52 and that is our total risk. We only need ARNC to move in either direction more than a couple bucks and we should be profitable.

Either way at least one option should be profitable and offset the cost of the other. Depending on the market we could actually profit on both if we got a big dip and then a big rebound. The only way we lose both premiums is if the stock holds at $29 for the next month. That is not likely.

Update 2/17/17: Hedge fund Lion Point, a minor shareholder in Arconic, urged the company to "promptly engage" with Elliott Management to increase shareholder value. Elliott is the largest shareholder in Arconic is trying to get the CEO replaced and they have nominated five board members. Lion Point and Elliott both believe "the intrinsic value of Arconic materially exceeds the company's current stop price."

Update 2/23/17: Arconic declared a quarterly dividend of 6 cents on common stock, 93.75 cents on Class A preferred stock and $6.71875 on Class B shares. The dividends are payable on May 25th to holders on May 5th.

Update 3/2/17: The board appointed former UTX executive David Hess as an independent director. At the same time they issued an open letter to shareholders rebutting activist investor Elliott Management's attempt to take over the board and replace the CEO Klaus Kleinfeld. Shares declined $1 as the fight took a very public turn.

Position 2/17/17:

Long Mar $30 call @ 90 cents. No stop loss.
Closed 3/15/17: Long Mar $28 put @ 60 cents, exit $1.18, +.58 gain.



CSIQ - Canadian Solar - Company Profile

Comments:

No specific news. Shares are continuing to rebound.

Original Trade Description: February 27th

Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar wafers, cells, and solar power products primarily under the Canadian Solar brand name. The company operates through Module, Energy Development, and Electricity Generation segments. Its products include various solar modules that are used in residential, commercial, and industrial solar power generation systems. The company also provides specialty solar products consisting of Andes Solar Home System, an off-grid solar system, designed to provide an economical source of electricity to homes and communities without access to grid; and Maple Solar System, a clean energy solution for families, as well as solar system kits, which are a ready-to-install packages, such as inverters, racking system, and other accessories. In addition, it develops, builds, and sells solar power projects; performs the engineering, procurement, and construction (EPC) work for the solar projects; and offers operation and maintenance services that include inspection, repair, and replacement of plant equipment, site management, and administrative support services. It offers its products to distributors, system integrators, project developers, and installers/EPC companies. The company has operations in North America, South America, Europe, Africa, the Middle East, Australia, and Asia. Company description from FinViz.com.

Shares are rebounding out of a three month base at $12 and nearing a four-month high. They had a tough Q3 where they matched earnings estimates after a drop in Chinese demand due to a drop in incentives. That resulted in a 30% decline in panel prices.

CSIQ is the second largest solar manufacturer in the world with 5.8 gigawatts of annual module capacity. It has a strong pipeline of orders, $1 billion in cash and $1.2 billion in future proceeds from the sale of non-core assets. That is a lot of liquidity for a solar company. They have an operating portfolio of solar plants worth $1.4 billion that will eventually be sold to investors.

CSIQ has earnings on March 9th. Normally I would not recommend a position ahead of earnings. However, I am not recommending this as a stock position. In a normal stock position we risk about $1 per share. I am recommending we buy a call option, currently 93 cents and hold over earnings. The stock is moving in the right direction and earnings expectations are low. We could have a break out situation with CSIQ.

Position 2/28/17:

Long April $16 call @ 95 cents, see portfolio graphic for stop loss.



ECA - Encana Corporation - Company Profile

Comments:

No specific news. Shares gave back 2% of the 7% gained on Wednesday as crude oil traded both positive and negative for the day.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compares to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings May 18th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Position 3/14/17:

Long ECA shares @ $10.43, see portfolio graphic for stop loss.

Optional: Long October $11 call @ $1.40, no stop loss.



ETSY - ETSY Inc - Company Profile

Comments:

No specific news. The rebound continued with a minor gain.

Original Trade Description: March 15th

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers. Company description from FinViz.com.

Etsy reported earnings of 3 cents that beat estimates for a penny. Revenue of $110.2 million also beat estimates for $106.9 million. Merchandise sold rose 16.7% to $865.2 million. The stock was crushed because the company guided for higher costs. However, there was a good reason and shares are starting to rise again.

Etsy is an ecommerce website where crafters can post and sell their wares. So far, so good. The company has come up with the great idea to sell craft supplies on the website so other existing crafters plus all the people shopping the website can buy their supplies there as well. Not only will the company provide supplies but they are adding tutorials and other craft ideas. That will make the site even more "sticky." This is scheduled to launch in April.

In addition, they introduced Google Shopping on the website and launched their first ever global brand campaign. They have changed the backend of the seller website to provide a new seller dashboard and new application called Shop Manager.

I think this expansion is a great idea. Where other retail websites are stagnant, Etsy is growing rapidly and these new features will increase viewers, buyers and sellers. The knee jerk decline in the stock price on the rise in expenses was a buying opportunity.

Earnings May 30th.

Position 3/16/17:

Long ETSY shares @ $10.25, see portfolio graphic for stop loss.

Optional: Long June $12.50 call @ 36 cents, no stop loss.



VIPS - Vipshop Holdings - Company Profile

Comments:

No specific news. Shares rocketed higher but there was no apparent headline to explain it.

Original Trade Description: February 27th

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men, cosmetics, toys and games, sports equipment and hundreds of other categories. Company description from FinViz.com.

In Q4 revenue rose 36.5% to $2.73 billion. Full year revenue rose 40.8% to $8.15 billion. The number of active customers in Q4 rose 39% to 27.5 million. The number of total customers rose 42% to 52.1 million. Total orders for Q4 rose by 26% to 82.0 million. Total orders for the full year rose 40% to 269.8 million. Gross profits for Q4 rose 33.4% to $643.4 million. Gross profits for the full year rose 37.4% to $1.96 billion. They added five local distribution centers to further improve speed and efficiency of order processing. They have more than 20,000 staff and 2,000 self-operated delivery stations.

Earnings May 22nd.

Vipshop is tiny compared to Alibaba but they are growing rapidly and the three main rating agencies recently gave them favorable ratings. Fitch rated them BBB+, Moody's Baa1 and S&P BBB. The company is not a flash in the pan and those ratings indicate they are solid.

Shares spiked to $13 on the earnings news and moved sideways for a week. They posted a minor gain today in a weak market to close at a five-day high.

Update 3/7/17: The company announced a new credit facility for $632,500,000 for the purpose of repurchasing outstanding 1.5% convertible notes due 2019.

Position 3/3/17:

Long VIPS shares, currently $13.15, see portfolio graphic for stop loss.
Position 3/6/17: Long April $14 call @ 30 cents, no stop loss.




BEARISH Play Updates

CONN - Conn's Inc - Company Profile

Comments:

No specific news. Shares rebounded on no news to stop us out at $8.40.

Original Trade Description: March 6th

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through Retail and Credit segments. The company's stores provide home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; and home office products consisting of computers, tablets, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. Conn's, Inc. also provides repair service agreements, installment credit plans, and various credit insurance products. As of March 29, 2016, the company operated approximately 100 retail locations in Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Company description from FinViz.com.

In the Q3 earnings cycle, Conn's reported a smaller than expected loss of 12 cents. Analysts were looking for -19 cents. Revenue of $308.4 million and below the $395.23 million in the year ago quarter. They guided for Q4 same store sales to decline -10%. At the end of Q3 analysts were expecting a profit of 13 cents and revenue of $453.44 million. The odds of them beating this forecast are slim. Zacks said the analyst estimates have declined significantly to a loss of 52 cents for Q4. They have dropped 11 cents in just the last 30 days.

Conn's sells electronics along with appliances and furniture. Electronics sales are being dominated by Amazon and Best Buy. The furniture sector has been slow and appliances are hit and miss. With appliance prices rising sharply it has cut down on buyers that can afford the big ticket items.

Earnings March 28th.

I believe Conn's will continue lower because everything we have heard about the Q4 retail picture has been negative. Shares are trading at a 6-month low with support at $6.50. I believe we can still get $1.50 between now and earnings on the 28th. The odds of a rebound over the next three weeks are very slim.

Position 3/7/17:

Closed 3/16/17: Short CONN shares @ $8.00, exit 8.40, -.40 loss.
No options recommended because of price.



FOSL - Fossil Group - Company Profile

Comments:

No specific news but Fossil rebounded slightly with the retail sector.

Original Trade Description: March 5th

Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC BY MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, company-owned retail and outlet stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of January 2, 2016, it owned and operated 99 retail stores and 139 outlet stores located in the United States, as well as 250 retail stores and 131 outlet stores internationally. Company description from FinViz.com.

Fossil reported adjusted earnings of $1.36 that beat estimates for $1.21. Unfortunately, that was a decline of 23.2% over the year ago quarter. Revenue of $959.2 million declined -3% and missed estimates for $971.7 million. For the current quarter, the company expects to lose 10 to 25 cents compared to earnings of 11 cents a year ago. They guided for a wide range for earnings of $1.00 to $1.70 for the full year. They guided for Q1 revenue to decline 8% to 11.5%.

Traditional watch sales declined -2%. Sales of jewelry and leathers declined -5%. Global same store sales fell -7% with declines in all product categories. Gross margin declined 200 basis points and operating margins fell from 9.0% to 6.9%. Cash on hand at the end of the quarter declined -$64 million to $236 million.

Over the last 30 days consensus earnings estimates for the ful lyear have declined from $1.94 to $1.19. All revisions have been negative.

Earnings May 16th.

Shares dropped sharply on Friday after the consensus earnings revisions were released. The $17.42 close was an 8 year low and the very negative comments above suggest shares could go a lot lower.

Update 3/15/17: Fossil said it entered into a loan modification agreement with its lenders that appears to be bearish. The amendment reduces the credit available to $850 million but the press release did not say what level it was reduced from. The amendment also removed an incremental term loan that was previously available. It also extends the maturity date until May 17th, 2019 BUT removes the company's ability to ask for an extension.

Basically, their credit limit was lowered, one facility was cancelled and they cannot ask for an extension of the maturity date, meaning the loan has to either be paid or a new loan with new lenders has to be acquired.

Position 3/6/17:

Short FOSL shares @ $17.48, see portfolio graphic for stop loss.

Optional: Long April $17 put @ $1.00, see portfolio graphic for stop loss.



INFN - Infinera Corporation - Company Profile

Comments:

Goldman upgraded INFN from neutral to buy and shares spiked 8% on the news. Our profitable short was immediately turned into a losing position. We still have the long July put and I added a stop loss. This remaining put will be followed in the weekend Lottery Play section.

Original Trade Description: February 25th

Infinera Corporation provides optical transport networking equipment, software, and services worldwide. The company offers Infinera DTN-X family of platforms for subsea, long-haul, regional, and metro mesh networks; Infinera DTN platform for subsea, long-haul, and regional mesh networks that support a range of Ethernet and optical transport network client interfaces; and Infinera FlexILS Line System platform that connects various Infinera platforms over long distance fiber optic cable. It also provides Infinera TM-Series, a carrier-grade packet-optical transport platform; Infinera TS-Series, a passive optical wavelength-division multiplexing (WDM) product; Infinera Cloud Xpress Platform, a compact platform for cloud/data center interconnect applications; and Infinera ATN Platform, a small form-factor WDM platform. In addition, the company offers Infinera Open Transport Switch, a software platform that enables abstraction and virtualization of the underlying Infinera platforms; and Infinera Management Suite, a network management system used by network operators to manage various Infinera platforms. Further, it provides various support services for vraious hardware and software products. The company serves communications service providers, Internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, and government entities. Company description from FinViz.com.

Infinera makes products primarily used by telecom companies to increase their capabilities over existing fiber optic cables to reduce the need to laying more fiber. Their major market today relies on infrastructure upgrades in China, which is a very competitive market.

The company reported a loss of 12 cents that narrowly beat estimates for a 13 cents loss but was down sharply from the 5 cent profit in the year ago quarter. Revenue declined 30% to $181 million but did beat estimates for $175 million. For the current quarter they guided for revenue of $167-$178 million, down from $249 million in the year ago quarter. Analysts were expecting $171 million. However, they guided for a loss of 16 cents and analysts were expecting 11 cents.

Analysts claim the company is suffering from a perfect storm of M&A among its biggest clients that has reduced demand.

Earnings May 11th.

After trading flat at $8.50 for seven months the shares spiked to just over $12 on the better than expected earnings. Short covering is a wonderful thing if you are long. However, everyone that sat on the $8 stock for seven months is now running for the exits. I believe the stock will return to its prior levels given the negative guidance.

Position 2/27/17:

Closed 3/16/17: Short INFN shares @ $10.87, exit $11.10, -.23 loss.

Still open: Long July $10 put @ 78 cents, see portfolio graphic for stop loss.



KR - Kroger Co - Company Profile

Comments:

Kroger said it had struck a deal with Uber for drivers to deliver groceries to local customers. Shares were also up on news the company and a union in Michigan had agreed on a new labor contract. Shares rallied 50 cents.

Original Trade Description: March 7th

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of January 30, 2016, the company operated 2,778 retail food stores, including 1,387 fuel centers; 784 convenience stores; and 323 fine jewelry stores and an online retail store, as well as franchised 78 convenience stores. Company description from FinViz.com.

Kroger reported earnings of 53 cents that matched estimates but declined 7% from the year ago quarter. Revenues rose 5% to $27.611 billion and that best estimates for $27.357 billion. Same store sales fell -0.7% and the first decline in 13 years. Analysts expected a 0.1% rise. Competitors Ahold Delhaize, Walmart, Publix and Aldi reported an increase in sales so apparently Kroger is losing market share.

They guided for 2017 for earnings in the range of $2.21-$2.25 per share. Analysts were expecting $2.23.

The Dow Theory Forecasts newsletter cut their rating on Kroger from buy to sell based on declining fundamentals, increased competition and disappointing guidance.

Earnings June 1st.

There is a major battle shaping for the grocery sector. German discounter Aldi is on a push to open hundreds of new stores in areas currently served by Kroger. Target has vowed to lower prices and sacrifice margins in order to retain market share. Amazon is experimenting with the grocery store concept and has been rumored to be considering opening more than 1,000 stores. Walmart has expanded their grocery departments and now carry more than 350 organic products under the private Walmart labels.

Kroger has been forced to adopt a more promotional posture with bigger ads and lower prices in order to retain share. Goldman removed Kroger from their conviction buy list and warned they doubt they will be able to even get close to their forecast for 8-11% earnings growth. Northcoast cut them from buy to neutral and several analysts cut their price targets.

Tuesday's close was a two year low and the decline is not likely to stop. The grocery sector is broken and profits are going to be tough to generate.

Position 3/8/17:

Short KR shares @ $28.85, see portfolio graphic for stop loss.

Optional: Long April $27.50 put @ 45 cents, no stop loss.



SHLD - Sears Holdings - Company Profile

Comments:

Sears said it was closing the Kmart store in Honolulu starting with a liquidation sale on March 30th. That is the only Kmart in Maui but there are several others in the neighboring islands.

Original Trade Description: March 11th

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short several times before. Sears is eventually expected to file bankruptcy. It is only a matter of time.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Feb-9th before spiking the next day on misplaced optimism to stop us out of a short position for a decent gain.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the completion of the sale of the Craftsman brand to Stanley Black & Decker for $525 million in cash and payments over the next 3-5 years to total $900 million. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

Sears reported an adjusted Q4 loss of $1.28 that was better than expectations for a loss of $2.85 per share. That still represented a loss of $607 million and they are burning cash at an alarming rate. Analysts now believe they need $2 billion to make it through 2017. Revenue was $6.1 billion, down from $7.3 billion but beat estimates for $5.9 billion.

Earnings June 8th.

Susquehanna said Sears is struggling just to exist and the results were terrible. They do believe the chain will continue to exist through 2017 thanks to sales of real estate and brands, and then the outlook becomes increasingly worse once there are no longer any assets to sell. By selling their real estate and leasing it back, they raise immediate cash but they take on a new debt on every store. Outstanding debt and capital lease obligations rose from $2.2 billion to $4.2 billion in 2016. That means their cash burn in 2017 will actually increase significantly.

Shares spiked on short covering after the earnings but came to a dead stop at $9.50 and exactly where resistance held back in January. I think the shorts will load up again now that earnings are over and no further headlines are expected.

Update 3/13/17: Sears lenders hired Kramer Levin to represent them in expected debt talks. The lenders are expecting trouble so they already hired a bankruptcy firm. That is not a good sign for Sears.

Update 3/15/17: Sears lost the third top executive in the last three months. Kmart president Alasdair James is no longer with the company. Sears does not announce departures because there has been so many. The name just disappears from the website. James was removed on Wednesday. Sears will not comment on departures even when asked.

Position 3/13/17:

Short SHLD shares @ $9.10, see portfolio graphic for stop loss.

No options recommended because of price.

The $9 put is $2.05 and 22% of the stock price.





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