Option Investor
Newsletter

Daily Newsletter, Tuesday, 4/4/2017

Table of Contents

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

Market Wrap

Calm Before the Storm?

by Jim Brown

Click here to email Jim Brown

After a textbook example of window undressing on Monday, the markets were very calm on Tuesday. Too calm.

Market Statistics

There was some follow through window undressing at the open where portfolio managers repositioned cash they had used to dress up their final quarterly numbers. One analyst said it was the most window dressing he had seen since the recession. If we are only going to suffer Monday's decline and today's opening dip as a result, I would say we got off pretty easy.

The indexes traded in a narrow range with the S&P in a ten-point window and the Dow in a 95-point range. The Nasdaq was a little harder hit at the open and traded in a 22 point range. Each index posted minor gains with buyers appearing right at the close.

Weighing on the markets intraday was a headline the White House was considering a carbon tax to raise money for the overall tax cut plan. That spiked the solar stocks and weighed on energy equities. Very late in the session the administration said it was NOT considering a carbon tax and that allowed the markets to tick higher into the close. This allowed the S&P to close near the high for the day and right on resistance of 2,360.


The economic reports were as lackluster as the market. The CoreLogic Home Price Index rose 7% for February, up from 6.9% in January. Prices reached new highs in 11 states and DC. This was the 26th consecutive month of gains. The report was ignored.

The International Trade deficit declined slightly for February from -$48.2 billion to -$43.6 billion. The Chinese Lunar New Year came early in 2017 and pulled imports forward into January. The January deficit was about $6 billion more than the trailing 12-month average.

The New York ISM for March rose sharply from 51.3 to 56.5. This almost erased the drop from January's 57.7 to the 51.3 in February. However, the high for this cycle was the 63.8 reading in December.

The quantity of purchase component rose from 53.3 to 57.4 and employment from 43.2 to 47.7. A reading over 50 indicates expansion and the employment component is finally nearing that level. The big jump came in the six-month outlook, which rose from 58.2 to 75.6, which was the highest level in more than three years.

Expected revenues rose 14 points to 80 with current revenues rising from 62.1 to 65.4. Both of those are the highest since the summer of 2015.

Factory Orders for February rose 1% and in line with consensus estimates. Orders for January were revised higher from 1.2% to 1.5%. The headline gain was caused by a 1.8% rise in durable goods orders. However, orders ex-aircraft were down -0.1%. Unfilled orders were flat at zero after three months of declines.

None of those reports mattered to the market. Traders were still focused on the undressing and the constant dribble of headlines out of the White House and the House/Senate. There is a rumor there could be a vote on a healthcare bill later this week and it looks like the Senate republicans will invoke a rule change to confirm Gorsuch on Friday.

Wednesday is the first payroll number for March with the ADP report. The estimate has declined -5,000 since Friday to 185,000. The estimate for the Nonfarm Payrolls on Friday declined -10,000 to 180,000 new jobs. Since analysts have missed the prior two months by a mile, it will be interesting to see if they are any closer this month.

The estimate for the ISM Nonmanufacturing index at 57.0 has not changed. The Manufacturing ISM on Monday came in at 57.2 compared to consensus at 57.0 so everyone was accurate on that report.


Investors seem to be worried that the economic outlook is going to fade and the equity market is about to tank. The yield on the ten-year treasury has declined to 2.35%, down from 2.61% in the middle of March. The "Trump Bump" appears to be fading as his first 100 days in office expire on Saturday.

Kensho produced some research on a move of this magnitude in a 30-day period. It has happened 35 times since 2007. When the yield declines 30 bps in 30 days, the S&P declines an average of 2.31% in the weeks that follow. It occurred about 78% of the time. There were a few times when the market did not fall significantly but a 2.3% drop 78% of the time is a notable statistic. Treasury yields are falling because investors are buying treasuries instead of stocks. They are looking for safety rather than a sudden urge to earn 2.3% on their money.

There are numerous political reasons why economic optimism is fading and we are looking at roughly a 1% Q1 GDP. The GDP Now forecast rebounded from 0.9% to 1.2% after the international trade numbers this morning but that is still very anemic.



In stock news, the dumbest move of the day came from Verizon. They confirmed they were going to combine Yahoo and AOL and rename the combination "Oath." Seriously, they have two names that have been premium properties since the internet began and they are going to rename them Oath? Personally, I think that is a major marketing mistake but somebody in Verizon was paid big bucks to come up with that idea.

They also confirmed that CEO Marissa Mayer will not stay with Yahoo after the acquisition is completed. I seriously doubt anyone actually expected her to stay. She has a $23 million severance package and $69 million in unexercised stock options, and $97 million in Yahoo stock she already owns and will be free to sell if she leaves the company.

Her replacement, Thomas McInerney, former CEO of IAC (formerly known as InterActiveCorp) will start the job with a $2 million base salary, $2 million in bonuses in 2017 plus incentive rewards of up to $24 million in stock. Mayer was hired to turnaround Yahoo and make it profitable again. McInerney will have a significantly easier job of babysitting the remaining Yahoo shell company, which controls $40 billion in Alibaba stock and a large investment in Yahoo Japan of roughly $20 billion. The Yahoo shell will be renamed Altaba with the stock symbol AABA. The company does not intend to buy any new companies or stocks or sell any of the assets they own. They will basically be a caretaker ETF holding those two Asian assets. Altaba will have no duties to either asset and all they have to do is sit back and collect any dividends that are paid.

McInerney's main task will be to protect the assets from a barrage of suits from leftover "Yahoo operating company liabilities, class action suits over data breaches and ongoing dialogues with regulators."


Nvidia (NVDA) was downgraded to market perform from sector weight to underweight or the equivalent of sell by Pacific Crest. The analyst said PC graphics were slowing, margins were shrinking and their data center sales were slowing. Shares crashed $7.60 on the downgrade.

However, multiple analysts immediately reiterated their buy ratings. Bank of America reiterated their $120 price target and buy rating and said "consider the source of the downgrade" in what was clearly a jab at the analyst. A Bank of America analyst said the person at Pacific Crest had a spotty record in the past and investors should research that record before jumping out of Nvidia.

I have been writing these commentaries for 20 years and I have never heard such a specific slam of another analyst. I am sure it happens behind closed doors but to make the accusation on national TV was astounding.

Regular readers know I am an avid fan of Nvidia. I have a computer background that dates back to the 1960s. I know what I am talking about when it comes to computers. If PC gaming is slowing, why does every new graphics card Nvidia announces sell out immediately and go on near permanent backorder even at the astronomical prices of $700 to $1000 each? Nvidia's margins are shrinking because they have dozens of new mass-market products that are selling like crazy at the slightly lower margins.

Nvidia said last week that TenCent had selected Nvidia's high power GPUs to power its cloud offerings to clients that need lots of processing power to run AI and machine learning in their clouds. TenCent said revenues rose 48% in 2016 to $21.9 billion. Angel List said more than 1,700 AI startups had been funded by 2,300 angel investors and almost all use cloud based Nvidia GPUs for their products and services. Nvidia can now claim that every significant cloud service provider is a customer and supplier of Nvidia GPUs as a service, including Amazon, Google, IBM SoftLayer, Microsoft, Alibaba Cloud and Nimbix. How is that a slowing of the data center business?

Japan is building a super computer powered by Nvidia processors named TSUBAME3.0. The Nvidia powered supercomputer is scheduled to go online in April and will be the most powerful in the world. The computer will use 24 Nvidia DGX-1 AI systems. This will be the largest installation of DGX-1 systems to date. Each DGX-1 combines the power of eight Nvidia Tesla P100 GPUs, each capable of delivering the performance of 250 normal servers. Each P100 can process 10 trillion instructions per second. That is a combined total of 192 P-100s equivalent to 48,000 regular servers with Intel processors. There is nobody even remotely close to Nvidia in this area.

If you want to sell Nvidia, that is your choice. I view ANY decline back to the $90-$100 level a gift for investors.


Caterpillar (CAT) has been trading sideways for the last four months after a monster post election spike. Goldman Sachs (GS) reiterated a buy rating on Tuesday with a $120 price target and added the stock to its conviction buy list. The analyst said CAT has an attractive combination of structurally higher mid-cycle EPS, exposure to underinvested machinery markets in the early stages of recovery, a management strategy of improving returns on capital and a 20% underweight position by mutual funds.

CAT is currently in a fight with the IRS and agents raided their offices about a month ago. CAT says they are cooperating and analysts believe it will end up in a settlement. CAT's market cap has declined $4 billion since the raid took place.

If there was a $1 trillion infrastructure plan put in place later this year it would greatly benefit CAT as a company since it takes big machines to build infrastructure. CAT shares rebounded 2% on the upgrade to conviction buy.


Amazon (AMZN) got another shot of rocket fuel today when BMO Markets raised its price target from $900 to $1200 and named the company a "top pick." The analyst said Amazon's ad business was gaining significant momentum and will reach $3.5 billion in revenue in 2017 for a spike of 65%. He said Amazon is rapidly gaining ground in voice-based search, which is a negative for Alphabet. BMO downgraded Alphabet (GOOGL) from buy to hold and cut the price target from $1,005 to $880.

Amazon announced a new way to shop without a credit card. The program is called Amazon Cash and targets the lower income consumer. It works basically like a preloaded debit card. Amazon will give you a barcode for your phone. You go to a participating partner like CVS, Speedway, etc and give them cash. They will load that cash to your Amazon account and you can shop with your personalized QR code in any participating store or online with Amazon. The debit account can be refilled over and over where simple gift cards cannot be refilled. Amazon's most recent demographic shift has been towards younger consumers and those without credit card accounts. Amazon has even given away Prime subscriptions to low income families.


Craig Hallum's Anthony Stoss, upgraded Skyworks Solutions (SWKS) from sector weight to overweight (buy) with a $110 price target. The analyst said the iPhone 8 expectations are growing daily and Skyworks will benefit significantly from the coming upgrade cycle. The analyst said indications of strong component orders were increasing expectations for iPhone sales. They also said the strong product cycle for the Samsung 8, due out this month would be another revenue boost for Skyworks. The company normally begins shipping components to Apple in the last week of June. There are indications that component orders have been stronger and targeted earlier dates this cycle to enable Apple to have more phones available to ship when sales begin.


Crude prices rose again on expectations for an inventory decline in the EIA report on Wednesday. With refiners sharply ramping up production the four-month inventory decline cycle should begin this week or next.


Markets

The lackluster rebound today came on light volume of 6.1 billion shares and suggested a lack of buyer conviction. With the treasury yields falling on stronger buying, and the disorganization in Washington, we could see some investors begin to pull back from their prior posture.

I looked at nearly 800 individual stock charts over the prior three days and there has been a monumental shift in direction. The big caps techs like Amazon, Apple, Tesla and others are still at or near their historic highs. However, the rest of the crowd appears to be fading. Of those 800 charts, I only found about 25 charts that could be potential long positions. There were easily a couple hundred charts that would have been decent short positions. Most of the charts were broken. They had tried to rally and failed and were chopping around in a sideways motion similar to the pattern on the Dow or Russell 2000 chart.

The Dow is still the weakest index. The resistance at 20,750 is still intact and the new support level is well below at 20,500. We have tested that level twice in the last two weeks. The Dow chart remains bearish until it moves back over 20,800 and above that downtrend resistance from March 1st.



The S&P has a similar pattern but the index came to rest exactly at support/resistance of 2,360 at today's close. Over that level and it becomes support, under that level it is resistance. The fact it closed exactly on 2,360 indicated buyers and sellers were evenly matched today. There was a slight uptick at the close when the White House killed the carbon tax rumor.

The S&P is only slightly more bullish than the Dow and both are still in negative trends. One more decent decline with a lower close under 2,350 could tip the indecision into a stronger bearish mindset.


The Nasdaq Composite and the Russell 2000 were the perfect examples of the window dressing/undressing scenario. The Nasdaq was pinned exactly to its highs from the last month with a minor new high on Thursday. Friday's loss of 2 points was textbook as managers kept the index exactly where they wanted it. On Monday, the Nasdaq declined -47 points intraday as those trades were reversed. Today saw a minor follow through dip at the open and then a consolidation process throughout the day. The index did close almost at its high for the day. With Apple, Amazon and Tesla setting new highs, it would have been hard for the index to post a decline.



The Russell chart is probably the closest example of the 800 individual stock charts I viewed over the weekend. There is no direction other than sideways. The six days of gains heading into Friday pinned the Russell right at resistance and those gains were removed on Monday. Today was consolidation like the one we saw on the other indexes.


When the futures opened tonight, they were up about 3 points. While I typed this commentary, they have declined back into negative territory. The lack of bullish conviction intraday, the falling treasury yields and the disorganization in Washington, could be setting the stage for a larger decline.

I know I have discussed the potential for a correction numerous times and it has never arrived. That does not mean it will never come. April is known for being choppy over the first two weeks, negative in the third week and positive in the fourth week. We may not get that fourth week of gains in 2017. The budget and debt ceiling battle starting on the 23rd is going to be ugly. Government funding runs out on the 28th so there is a deadline.

I would recommend not being overly long over the next several weeks. The potential for an end of month decline seems to be growing as each day passes. I hope I am wrong and everything turns positive. Unfortunately, hope is not a strategy.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Lack of Conviction

by Jim Brown

Click here to email Jim Brown
Editor's Note

The indexes posted minimal gains on Tuesday despite the rebound from Monday's lows. The lack of buyers today and the dead stop on S&P resistance suggests a lack of bullish conviction. Futures opened positive again at +3 but have declined into negative territory. We are already overly long in our positions and with futures dropping, I am not going to add any new plays tonight. There is no rush to add positions only to have them stopped out in an uncertain market.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Looking for a Catalyst

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market traded flat at the close after some early morning weakness. There was a little follow on window undressing at the open but it faded as the day progressed. The major averages closed barely in the green with the Russell 2000 and the S&P-400 Midcap the only indexes in negative territory. There was a lack of buyers as everyone waits for the payroll numbers starting on Wednesday.

We took a couple hits today. Newlink gapped down on a Phase II drug test that sounded very positive. Analysts pondered whether it would follow the path of a competitor and shares fell. Finisar also fell through support and stopped us out for a loss.

With the small cap sector not showing any leadership this week the individual stocks are likely to be volatile. We need the market to pick a direction and stick with it for the next 8 days.





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


CPE - Callon Petroleum
The long stock position was entered at the open.

FNSR - Finisar
The long stock position was stopped out at $26.45.

ITCI - Intra Cellular
The long stock position was stopped out at $15.45.

NLNK - Newlink Genetics
The long stock position was stopped out at $19.46.



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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

BCRX - Biocryst Pharmaceuticals - Company Profile

Comments:

No specific news and no movement.

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.

Update 3/24/17: News broke Friday that the bird flu had been detected in three new farms in Alabama. The state issued a "stop movement" order for birds and eggs in Alabama. The prior week three farms in Tennessee had to slaughter and dispose of all their chickens after testing positive.

Update 4/3/17: Biocryst said Mundipharms had obtained approval of Mundesine in Japan. The cancer drug was developed and licensed by Biocryst.

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.



CPE - Callon Petroleum Company - Company Profile

Comments:

No specific news. Positive gain on the first day in this position.

Original Trade Description: April 3rd.

Callon Petroleum Company, an independent oil and natural gas company, acquires, explores for, develops, and produces oil and natural gas properties in the Permian Basin in West Texas. As of December 31, 2016, its estimated net proved reserves totaled 91.6 million barrel of oil equivalent. The company was founded in 1950 and is headquartered in Natchez, Mississippi. Company description from FinViz.com.

This is a small oil producer with 66 years of experience. They reported Q4 earnings of 8 cents that missed estimates for 10 cents. Revenue of $69.1 million also missed estimates for $71.8 million. However, that is not the real picture.

Production for the full year increased 59% with 77% oil. Q4 production increased 11% with 76% oil. Reserves increased 69% to 91.6 million Boe with 78% oil. They replaced 311% of production with new wells and new discoveries. Their finding and developing costs are very low at $8.77 per barrel. They increased their Permian acreage by 41,000 acres through multiple acquisitions. They raised 2017 production guidance by 60% to 24,000 Boepd. Callon ended the quarter with $653 million in cash.

Earnings May 29th.

Shares hit a low of $11 on March 14th and began to rebound. That rebound has begun to accelerate over the last week with oil prices rising back over $50. With refiners restarting after the Feb/March maintenance cycle, oil inventories should begin to decline. That always lifts prices in the spring and summer months and rising oil prices lifts equities.

Position 4/4/17:

Long CPE shares @ $13.31, see portfolio graphic for stop loss.

Optional: Long May $14 call @ .55, see portfolio graphic for stop loss.



ECA - Encana Corporation - Company Profile

Comments:

No specific news. Oil prices were up slightly and energy equities followed suit.

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.



FNSR - Finisar - Company Profile

Comments:

No specific news. Shares broke below support to stop us out on the long stock position. The call option is still open and this position wil lmove to the Lottery Play section.

Original Trade Description: March 25th.

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, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless 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. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

Finisar reported earnings of 59 cents that rose 136% but missed estimates for 62 cents. Revenue rose 23% to $380.6 million but also missed estimates for $389.5 million. They guided for Q1 earnings of 53 cents and revenue of $370 million. Analysts were expecting 58 cents and $393 million.

Despite the enormous improvement in sales and earnings the stock was crushed for a 25% decline from $35 to $26. The damage was worse because competitor Ciena (CIEN) had also reported a weaker quarter the day before. Panic gripped traders that optical networking was somehow slowing down. The pace of sales "growth" in China slowed slightly and that sent investors running for cover. China is building out its 100 gigabit network technology in metropolitan areas and they are consuming enormous amounts of networking equipment.

Earnings June 9th.

Good article in Barrons very positive on Finisar. Read it here.

Finisar is not a one trick pony. They are also pushing into the smartphone market and will be competing on the 3D sensor components in the next version of smartphones. They are also building out massive networks in the cloud computing datacenters that require miles of fiber and very fast connections.

After the drop, multiple analysts reiterated buys and outperforms on FNSR saying this was just a hiccup and there are far greater earnings in the future. Raymond James upgraded them from outperform to strong buy. Jefferies upgraded from hold to buy. MKM reiterated a buy rating and $41 price target. Needham reiterated a strong buy and $44 target. Stifel, Raymond James and William Blair all reiterated a buy rating.

Shares have rebounded $2 off the lows from last week and should continue to accelerate higher in the days ahead.

The Optical Networking and Communications Conference was last week and there were numerous positive comments about Finisar and Lumentum. This should help lift this stock.

I know FNSR is pressing our $30 limit in this newsletter and that means higher risk of loss if a disaster appears. Readers may want to buy the option instead on this position.

Position 3/17/17:

Closed 4/4/17: Long FNSR shares @ $27.89, exit $26.45, -1.44 loss.

Still Long May $30 call @ $.85, see portfolio graphic for stop loss.



HABT - Habit Restaurants - Company Profile

Comments:

No specific news. A very minor 5 cent decline. Habit is nearing resistance at $18. If we can get through that level, the next challenge would be $21 and then $24. The historic high in 2014 was $44.

Original Trade Description: March 22nd.

The Habit Restaurants, Inc., a holding company, operates fast casual restaurants under The Habit Burger Grill name. It specializes in offering fresh made-to-order char-grilled burgers and sandwiches featuring choice tri-tip steak, grilled chicken, and sushi-grade albacore tuna cooked over an open flame; and salads, as well as sides, shakes, and malts. As of March 2, 2017, the company operated approximately 170 restaurants in 15 locations in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Nevada, Washington, and Maryland, the United States; and the United Arab Emirates. The Habit Restaurants, Inc. was founded in 1969 and is headquartered in Irvine, California. Company description from FinViz.com.

Habit reported earnings of 7 cents that beat estimates for 3 cents. Revenue rose 21.8% to $73.9 million. Same store sales rose 1.7%. This was the 52nd consecutive quarter of positive same store sales. They opened 11 company stores and 2 franchises in Q4. The CEO said they were proud of their strong beat considering it is a fiercely competitive environment.

For full year 2017, they guided to revenue of $338 to $342 million, which represents 19.8% growth at the midpoint. The guided for 2% same store sales and the opening of 31 to 33 new company stores alony with 5 to 7 franchised stores. Analysts were expecting $339.2 million.

Earnings June 1st.

Shares spiked from $14 to $16 on the news and then pulled back for two weeks on post earnings depression. They have since recovered that $16 level and are about to break out to a new three month high. Shares dipped on Tuesday but very little and the rebound today erased the dip completely.

Position 3/23/17:

Long HABT shares, currently $15.95, see portfolio graphic for stop loss.
Optional: Long June $17 call @ 70 cents, no initial stop loss.



ITCI - Intercellular Therapies - Company Profile

Comments:

No specific news. Major breakdown with an 8% drop on no news. Support broke and we were stopped out for a 27 cent loss.

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:

Closed 4/4/17: Long ITCI shares @ $15.72, exit $15.45, -.27 loss.



NLNK - Newlink Genetics - Company Profile

Comments:

Very frustrating day for Newlink. The company released results for a new Phase II trial. The drug indoximod was being tested in combination with Merck's Keytruda. NewLink Genetics said that data on 60 patients found an objective response rate of 52% and a disease control rate of 73%, with rates slightly higher among patients with non-ocular melanoma, at a 59% objective response rate and an 80% disease control rate. Though the company described the results, which it is presenting at the American Association for Cancer Research's annual meeting on Tuesday, as impressive and emphasized that the cancer drug combination was well tolerated overall. That sounds like good news to me but the stock gapped lower to stop us out at $19.46 and well below our stop loss of $21.85. The play went from a $1 gain to a $1.54 loss in ana instant. This is the problem in buying biotech stocks. One headline can reverse the play in an instant.

Original Trade Description: March 20th.

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.

Update 3/30/17: Newlink was upgraded by SunTrust from hold to buy. The analyst said Newlink was "well positioned" as a takeover target with a strong pipeline of promising prospects in the IDO inhibitor space for cancer therapy. The price target was raised from $12 to $30.

Position 3/29/17 with a NLNK trade at $21.00

Closed 4/4/17: Long NLNK shares @ $21, exit $19.46, -1.54 loss.

Previously closed 3/21/17: Long NLNK shares @ $22.56, exit $20.65, -1.91 loss




BEARISH Play Updates

DEPO - Depomed Inc - Company Profile

Comments:

The company announced the prepayment of $100 million of its $475 million in secured debt. The loan facility matures in 2022 and Depomed is planning on refinancing the remaining $375 million later this year. Shares gained 25 cents on the news.

Original Trade Description: April 1st.

Depomed, Inc., a specialty pharmaceutical company, engages in the development, sale, and licensing of products for pain and other central nervous system conditions in the United States. It offers Gralise (gabapentin), an once-daily product for the management of postherpetic neuralgia; CAMBIA (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug indicated for acute treatment of migraine attacks in adults; Zipsor (diclofenac potassium) liquid filled capsule, a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain in adults; and Lazanda (fentanyl) nasal spray, an intranasal fentanyl drug used to manage breakthrough pain in adults. The company also provides NUCYNTA ER (tapentadol extended release tablets), a product for the management of pain severe enough to long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults; and NUCYNTA (tapentadol), a product for the management of moderate to severe acute pain in adults. In addition, it is involved in the clinical development of Cebranopadol for the treatment of chronic nociceptive and neuropathic pain. The company sells its products to wholesalers and retail pharmacies. It also has a portfolio of license agreements based on its proprietary Acuform gastroretentive drug delivery technology with Mallinckrodt Inc.; Ironwood Pharmaceuticals, Inc.; and Janssen Pharmaceuticals, Inc. Company description from FinViz.com.

The company is under attack by activist investor Starboard Value. Starboard wants to own the company for a potential M&A move at some point in the future. Last week, the company said they had reached an agreement with Starboard to replace the CEO and add two new Starboard nominated members to the board.

Normally when an activist investor gains control of a company it suggests the stock will go up. However, analysts at Cantor Fitzgerald say it is not currently a buy. They believe there will be continued weakness in the shares once investors realize it could be a long time before a merger/acquisition is accomplished.

CF said existing problems include "softness" in the opioid market and the potential attack on opioid drugs by the new administration. There needs to be a realignment in Depomed's sales force. They need to explore the exit opportunities in Opana. They also need to supply clarity relating to Depomed's debt refinancing.

CF said all those factors should continue to pressure the stock. Starboard will also have to create some additional value before they can market the company for a profit. The analyst thought this would take the better part of 2017.

Depomed guided for Q1 revenue of $95-$100 million and analysts were expecting $114.6 million.

Earnings May 23rd.

Shares broke support at $14.75 on the news of the agreement with Starboard. Shares are dropping like a rock on the Cantor Fitzgerald analysis.

Position 4/3/17:

Short DEPO shares @ $12.52, see portfolio graphic for stop loss.

Optional: Long May $12 put @ 80 cents, see portfolio graphic for stop loss.



FSLR - First Solar - Company Profile

Comments:

Shares spiked sharply early in the day on rumors the White House was considering a carbon tax to raise money for tax cuts. Shares retraced their gains later in the day when that rumor was proven false with a White House denial.

Original Trade Description: March 30th.

First Solar, Inc. provides solar energy solutions in the United States and internationally. It operates through two segments, Components and Systems. The Components segment designs, manufactures, and sells cadmium telluride solar modules that convert sunlight into electricity. This segment offers its products to solar power systems integrators and operators. The Systems segment provides turn-key photovoltaic solar power systems or solar solutions, such as project development; engineering, procurement, and construction; and operating and maintenance services to utilities, independent power producers, commercial and industrial companies, and other system owners. The company was formerly known as First Solar Holdings, Inc. and changed its name to First Solar, Inc. in 2006. Company description from FinViz.com.

First Solar shares have been under pressure for months. On March 20th they were removed from the S&P-500 and investors are still selling the shares.

They reported a Q4 loss of $6.92 per share compared to estimates for $1.00 in earnings. The earnings included a $729 million restructuring charge compared to only $4 million in Q3. If we back out the restructuring charges the company would have earned $1.24 and shown a sizeable beat. However, revenue declined from $480 million in Q3 to $208 million in Q4.

Earnings May 23rd.

First Solar is building quality projects but they are facing a stiff headwind. Tax incentives around the world are shrinking and it is becoming increasingly harder to make a profit. Whenever they get a big power generation facility completed they are forced to sell it to recover their money rather than sit back and let the long term profits roll in.

On Thursday, March 30th, they sold the 250-megawatt Moapa Southern Pauite Solar Project in Nevade to Capital Dynamics, a Swiss private equity firm. The facility supplies power to the Los Angles Dept of Water and Power. They did not disclose the terms of the sale and the stock tanked again. By not disclosing the terms, investors always fear the worst, that they were forced to sell at a big discount.

The stance taken by the new Trump administration on EPA restrictions on coal and gas fired electric generation plants will make power cheap again and these massive solar developments will find it harder to break even. Solar power generation is getting cheaper to build but it cannot compete with gas fired plants at $3 or coal fired plants that operate even cheaper.

Shares broke to a five-year low last week and today's decline is a lower low. The prior low back in 2012 was $11.50 and we could be headed to that level long term.

Position 3/31/17:

Short FSLR shares @ $27.50, see portfolio graphic for stop loss.

Optional: Long June $25 put @ $1.15, see portfolio graphic for stop loss.





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