Option Investor
Newsletter

Daily Newsletter, Monday, 3/20/2017

Table of Contents

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

Market Wrap

G20, Fedspeak and Congressional Hearings

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Markets drift sideways in a vacuum of market moving news. G20 headlines, Fed-speakers and Congressional hearings pertaining to Russian involvement in US politics gave the market plenty to ponder but nothing concrete enough to move the market.

From theG20 front; rising concerns free-trade may break-down in the face of protectionism and a new buzz-word, "competitive devaluation", referring to the negative effects of currency war. In terms of Fed-speak there were two today and a total of 11 this week. This morning Neel Kashkari, a voting member, argued there was no reason to raise rates while core inflation, PCE, remained so low. This afternoon Philly Fed President Patrick Harker doubled-down on his view of economic strength and the need for gradual normalization. The big news, event rather, was the Congressional hearing on Russian tampering. FBI Director Comey says Russia did interfere, leaks within our government should be prosecuted to the full extent of the law and gave little detail on anything else.

Asian markets were mixed on G20 newsbites. Japan was down about -0.35, Chinese and other indices up about the same with more headlines expected from the China Development Forum over the next few days. The forum is a meeting of policy makers, international business people and organizations for the purposes of furthering China's development. Moves in Europe were just as small, if primarily to the downside, led by the the German DAX. In England stocks hovered closer to break-even, the FTSE closing with a gain of 0.7%, following the confirmation of the date for invocation of Article 50; March 29th.

Market Statistics

Futures trading was flat all morning with a slight dip into negative territory just before the opening bell. The open was weak, indices dipped into the red almost immediately, and then trend sideways until just after 1:30. At that time the indices dipped down to test intraday support and broke right through, hitting an intraday low before 1:45. The low sparked a rebound, indices moved up from there but found resistance at the just-broken intraday low. Resistance held and sent the indices back to the lows of the day where they languished into the close of the session.

Economic Calendar

The Economy

No economic data today and very little this week, or next week for that matter. This week Existing Home Sales on Wednesday, New Home Sales on Thursday, Jobless Claims also on Thursday and Durable Orders is all we get. Next week the biggest event will be the PCE data, due Friday, that Neel Kashkari spent so much time pointing to this morning. His view, PCE is well below target and a rise in rates won't spur business investment so why do it? The flaw in his logic is that a business-friendly administration has lifted sentiment and spurring activity within an already improving economy.

Moody's Survey Of Business Sentiment is unchanged in the last week at 33.8. This is the second week at a 10 month high. Mr. Zandi says that global business is strong and stable, responses to all 9 questions within the survey are upbeat.


We are in the earnings doldrums. There will be earnings releases from day to day, most days, and a few S&P 500 companies along the way, but no serious activity for several weeks. So far, 4 companies have reported for the calendar 1st quarter of 2017 and of those 2 beat revenue estimates and 2 beat EPS estimates. The blended rate for 1st quarter growth ticked higher with the data, rising a tenth to 9.0%. Based on the averages, providing earnings estimates are not more aggressive than they have been, we can expect to see the blended rate rise into the end of the quarter with a possible upside of 12%. Last quarter the final rate did not rise as much as expected but still gained a couple of points from the start to the end of the cycle.


Looking forward we can expect to see growth continue to expand into the end of the year and into next year. This year quarterly growth should expand to near 11% by the 4th quarter. Full year 2017 target is 9.8% this week, 2018 held steady at 12%.


The Dollar Index

The Dollar Index held relatively steady in today's session, closing with a gain near 0.1% after falling to test support at the $100 level. The index is caught in a swirling vortex of central bank policy and geo-political risk with little to move it over the next few weeks but headlines and speculation. Support is just below today's close, near $99.50 and the bottom of the 5 month trading range. A break below here would be bearish and may indicate a reversal. A bounce would be bullish but only in the near to short term, up to and until the next round of monthly data and/or central bank meetings, with resistance at $102 and $103.


The Gold Index

Gold prices continue to rebound on last week's FOMC stance, propelled higher today by G20 news and geo-political hotspots. Spot gold rose about $4 to trade just over $1233 and at a two week high. Upside resistance is just above today's close in a range up to $1250, a break above that would be bullish.

The gold miners traded flat today, the Miners ETF GDX gaining only 0.5% Recent price action suggests bullishness but that may be short lived. Short-term the ETF is in a range, following a down-trend, and near the mid-point of that range. The indicators are bullish and suggest a further move up but they are weak and there is resistance just above Thursday's high at the 38.2% retracement level. A move higher would need to break resistance to be bullish with an upside target of $25. A fall from this level may find support at $21.50.


The Oil Index

Oil prices fell -1.5% in today's session, reversing last week's rebound, to trade below $48. The three words that count right now are supply, production and capacity, all of which are at very high levels relative to demand and demand expectation. Until that changes I expect oil prices to remain under pressure, downside target near $45.

The Oil Index fell a quarter point to trade just below 1,180 today. The index is near the mid-point of a 12 month trading range with support at/near the 1,180 area. The lower half of the trading range is the trading range of last year, the upper half of the range is the break-out from that range driven by OPEC and their deal. Near term outlook remains mixed and driven by volatility in the oil market, short to long-term outlook is bullish and supported by earnings growth expectations. Even with the recent drop in prices the oil sector is still expected to see robust growth this year.


In The News, Story Stocks and Earnings

Shares of Transocean fell more than -2% on news it was selling 15 rigs to driller Borr Driller. The deal is worth $1.35 billion for 10 existing and 5 under-construction rigs comprising Transoceans entire jackup fleet. Analysts suspect the deal does not include full repayment of liability costs for the new builds which caused today's selling. Shares of the stock are now sitting on short-term support.


The once overly popular Jamba Juice reported earnings this morning and did not inspire much confidence. Sales and revenue missed for the 4th quarter and full year on declining comp store sales despite the addition of 75 new stores. Company CEO says 2016 was a year of transition and that they are on track to achieve their 5 goals for growth. Forward guidance is good, slightly above consensus estimate, but did not support prices. Shares fell more than -3% on the news.


The VIX rose slightly in the early morning session to open with a small gap. During the day the index fell-off, closing the gap but still ending the day with small gains. Despite this the index remains low and near the long-term low, trending sideways below $12.50 and consistent with bull market conditions. The indicators are weak. consistent with range bound trading and do suggest much movement within the broader market in the near term.


The Indices

The indices did a whole lot of nothing today. The open was soft, trading was without impetus and the session closed at the lows of the day. For the most part the indices closed with little to no overall movement with one exception, the Dow Jones Transportation Average. The transports fell nearly -0.50% to sit on support at 9,100. The indicators show some sign of support at this level but they remain bearish and weak. A break below this level would be bearish near-term with downside target near 9,000, a break below that would be bearish short term with target near 8,750. A bounce from this level would be trend following with upside target at the current all-time high.


The next biggest loser was the S&P 500 with a decline of -0.20%. The broad market created a small black bodied candle moving down to but not hitting near-term support. Today's action leaves the index near the mid-point of the near term trading range with bearish indicators. Downside momentum ticked higher and stochastic formed a bearish crossover suggesting that support will be tested. Support is near 2,355.


The Dow Jones Industrial Average made the smallest decline, only -0.04%, and created a small doji candle. Today's action is near the mid-point of the near-term trading range and looks like it will continue down to test support at the bottom of the range. Support is near 2,800, a break below here would be bearish in the near to short-term with downside targets of 20,500 and 20,000.


The NASDAQ Composite was able to eek out a small gain, 0.01%, and set a new intraday all-time high. The tech heavy index created a smallish doji candle, at the all-time high, and looks like it may continue to test resistance if not move higher. The indicators are consistent with a trend following swing in momentum that could lead to new all-time highs. If the index does not break to new highs and resistance is confirmed at this level the index will likely follow the broader market down to test near term support.


I think I mentioned this last week, it looks like the market has entered a holding pattern. Pick your reason, there just isn't any to support higher prices in the near term. It's about 5 week's until the next round of central bank meetings, the true onset of earnings season is still at least 3 weeks away and it's 2 weeks until the next important data. Until then expect the market to churn on day-to-day headlines, Fedspeak and geo-politics with a chance of near term correction. Longer term, looking forward, I am still bullish on the economy, earnings growth and the broad market, looking for the next bullish entry.

Until then, remember the trend!

Thomas Hughes


New Plays

Acquisition Candidate

by Jim Brown

Click here to email Jim Brown
Editor's Note

This biotech with a portfolio of potential cancer drugs is a potential acquisition candidate. While all small biotech firms are always acquisition candidates the focus on cancer using a novel approach puts Newlink at the top of the list.


NEW BULLISH Plays

NLNK - Newlink Genetics - Company Profile

NewLink Genetics Corporation, a biopharmaceutical company, focuses on discovering, developing, and commercializing immunotherapeutic products for the treatment of cancer. Its portfolio includes biologic product candidates based on its HyperAcute cellular immunotherapy technology, which is designed to stimulate the human immune system to attack cancer cells; and small-molecule product candidates that are focused on breaking the immune system's tolerance to cancer by inhibiting the indoleamine-2, 3-dioxygenase pathway and the tryptophan-2, 3-dioxygenase pathway. The company is developing IDO pathway inhibitors comprising indoximod that is in multiple Phase I and Phase II clinical trials for patients with melanoma, pancreatic cancer, malignant brain tumors, metastatic breast cancer, acute myeloid leukemia, prostate cancer, and non-small cell lung cancer (NSCLC); and GDC-0919 and atezolizumab (MPDL3280A) that is in Phase Ib clinical trials for patients with locally advanced or metastatic solid tumors. Its clinical development products include NLG2101 for metastatic breast cancer; NLG2102 for refractory malignant brain tumors; NLG2103 for advanced melanoma; NLG2104 for metastatic pancreatic cancer; NLG2105 for pediatric patients with refractory malignant brain tumors; and NLG2106 for acute myelogenous leukemia. The company's HyperAcute cellular immunotherapy product candidates under clinical development include tergenpumatucel-L, is being investigated in Phase Ib/II clinical trial for patients with advanced NSCLC; and dorgenmeltucel-L, is being investigated in a Phase II clinical trial for patients with advanced melanoma. Its infectious disease program includes replication-competent recombinant vesicular stomatitis virus, a vaccine technology to treat Ebola and Marburg viruses. The company has license and collaboration agreements with Genentech, Inc. and Merck, Sharpe and Dohme Corp. Company description from FinViz.com.

NewLink reported a loss of 46 cents in Q4 and that beat analyst estimates for 66 cents. Revenue of $12.7 million significantly beat estimates for $4.3 million. They ended the quarter with $131.5 million in cash.

Earnings May 30th.

Newlink has multiple drugs in the pipeline targeting cancer and it has been mentioned multiple times as a possible acquisition target by Gilead Sciences. In addition to the IDO pathway drugs they partnered with Merck to develop an Ebola vaccine. The drug received breakthrough therapy designation from the FDA and PRIME status from the EU Medicines Agency. In December, the final results of a trial in Guinea were published in the Lancet confirming the efficacy of the vaccine.

In early April the company will present two abstracts at the American Association for Cancer Research (AACR) annual meeting. Presenters accepted to deliver their abstracts normally rise into the meeting. They present on April 4th. The abstracts being presented are chosen by an AACR committee as the best and most promising. This is an honor to be chosen.

This is a stock only play because option prices are out of sight. Shares hit a new 52-week high on Monday.

Buy NLNK shares, currently $22.40, initial stop loss $20.65



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Small Caps Sink

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap winning streak ended at three days with better than half percent losses on the indexes. The Russell lost 7.42 points and the S&P-600 gave back 5 points. This was about a third of the gains from the prior three days so not a disaster but still frustrating.

Mondays after option expiration are normally flat with intraday weakness as option positins are settled. The next three weeks are typically choppy with periods of declines as traders take money out of the market to pay taxes and investors restructure their portfolios ahead of Q1 earnings, which start in just three weeks.





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


BCRX - BioCryst
The long stock position was opened at $8.82.



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BULLISH Play Updates

BCRX - Biocryst Pharmaceuticals - Company Profile

Comments:

No specific news. Minor gain but closed above resistance for a new 52-week high.

Original Trade Description: March 18th

BioCryst Pharmaceuticals, Inc., a biotechnology company, designs, optimizes, and develops small molecule drugs that block key enzymes involved in the pathogenesis of diseases. The company markets peramivir, an intravenous neuraminidase inhibitor, which is approved for uncomplicated seasonal and acute influenza in the United States and Canada under the name RAPIVAB, in Japan and Taiwan as RAPIACTA, and in Korea as PERAMIFLU. It also has various ongoing development programs, including BCX7353 and second generation oral inhibitors of plasma kallikrein for hereditary angioedema; and galidesivir, a broad spectrum viral RNA polymerase inhibitor that is indicated to treat filoviruses, as well as forodesine, an oral purine nucleoside phosphorylase inhibitor for use in oncology. It has collaborative relationships with Mundipharma International Holdings Limited for the development and commercialization of forodesine; Shionogi & Co., Ltd. and Green Cross Corporation for the development and commercialization of peramivir in Japan, Taiwan, and South Korea; Seqirus UK Limited for the development and commercialization of RAPIVAB worldwide, except Japan, Taiwan, Korea, and Israel; and the University of Alabama at Birmingham for the development of influenza neuraminidase and complement inhibitors. Company description from FinViz.com.

BioCryst produces drugs and vaccines that treat or prevent the flu. They have a novel new drug called Rapivab that is used to treat viruses. They also have a new broad-spectrum antiviral for use against Ebola, Zika and the Marburg virus, among others. Whenever bird flu or swine flu headlines appear, BioCryst shares tend to rise because of their vaccines and treatments.

The current bird flu is H7N9 and a new version just appeared called the Yangtze River Delta lineage. This particular strain is highly contagious and jumps human to human. The virus has changed into a "high path" virus as opposed to a "low path" virus. That means it spreads faster inside the body and causes more damage. More than 41% of people infected eventually die.

The number of cases per year dating back to 2013 were in the 100-200 range and mostly in China. In the last several months with the outbreak of this new strain more than 460 cases have been confirmed. Remember, more than 41% die. This is the worst bird flu season on record.

Normally the bird flu is confined to mainland China. However, because there are open air fowl markets in China, the flu can be picked up by any migratory bird and spread around the world.

In early March, a form of H7N9 was discovered at a Tyson chicken farm in Tennessee. This was the high-path form. The farm was quarantined and the entire flock of 55,000 chickens was destroyed. The problem is that the infection was caused by a wild bird that contaminated the flock. Since the virus does not impact the birds, nobody knows if the flock is contaminated except they are constantly checked with blood tests. Once they find one chicken is infected it is too late.

In the U.S. bird farms are supposedly "bio-secure" to isolate the chickens from wild birds. Normally that works in most cases. However, the virus still makes it into the population unless extreme measures are taken.

The key to this position is that there will likely be more H7N9 headlines in the U.S. because the possibility of further farm contamination is too great. This is not one bird that flew from China and contaminated one farm. Birds carrying it fly north across Russia to Alaska infecting other birds as they go. Once in Alaska they are pushed south by the winter weather and everywhere they stop, other birds are infected. There is no telling how many thousands or even millions of wild birds are infected in the U.S. already because it does not affect their health. They are passive carriers.

When new headlines appear, it will boost stocks that have vaccines and treatments against exotic viruses like Ebola, Zika, etc. Those treatments will not specifically work against the bird flu other than as a broad-spectrum antiviral. However, the stocks will rise on the expectations.

BCRX spiked to $9 on the news of the farm in Tennessee and should move higher on their own even if there are no further headlines. The potential for the H7N9 contamination to be limited to just one farm is highly doubtful.

Earnings May 29th.

We have to buy the stock because the option premiums are inflated due to the expectations of another significant spike. I looked at buying a longer strike out in June but the spreads are too wide. If you buy that call you have to hold it or lose half your premiums if stopped out.

Position 3/20/17:

Long BCRX shares @ $8.82, see portfolio graphic for stop loss.
No options due to price and spreads.



CSIQ - Canadian Solar - Company Profile

Comments:

No specific news. Earnings are Tuesday before the bell. This will determine our final winner/loser status on this position.

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. Minor gain despite another drop in crude prices.

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. Minor decline in a weak market.

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.



ITCI - Intercellular Therapies - Company Profile

Comments:

No specific news. Shares have pulled back to support. Time for buyers to appear.

Original Trade Description: March 16th

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.

Position 3/17/17:

Long ITCI shares @ $15.72, initial stop loss $13.75,
No options recommended because of high prices and wide spreads.



VIPS - Vipshop Holdings - Company Profile

Comments:

No specific news. Shares are holding the recent gains.

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

FOSL - Fossil Group - Company Profile

Comments:

No specific news. Shares are heading lower again.

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.



SHLD - Sears Holdings - Company Profile

Comments:

No specific news. Minor 13 cent gain.

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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