Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/5/2017

Table of Contents

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

Market Wrap

Bull Trap

by Keene Little

Click here to email Keene Little
The stock market was in rally mode this morning following the stronger-than-expected ADP report but then ran into trouble following the FOMC minutes this afternoon. It was the worst reversal since February 2016.

Today's Market Stats

The morning started with a big gap up and rally following the 08:30 release of the ADP report, which showed a gain of 263K jobs vs. the 175K that had been expected (although February was revised lower from 298K to 245K). Even the US$ was rallying until the FOMC minutes were released at 14:00, at which time the balloon popped and all came tumbling back down. The end result was a strong rally that reversed into the red, creating the worst intraday reversal since February 2016.

At 10:00 the ISM Services number was released and at 55.2 it was a decline from February's 57.6 and less than the expected 57.0. That took a little wind out of the bull's sails and then at 10:30 the Crude Inventories report showed an unexpected increase of 1.57M barrels. Oil's price tanked after 10:30 and that put a damper on the stock market. But the stock indexes pushed back up in the afternoon to test their morning highs and into the 14:00 release of the FOMC minutes.

The FOMC minutes revealed a Fed that's talking about the possibility of starting to trim its bloated $4.5T balance sheet this year. That idea of course scared the market that's been dependent on the Fed's easy-money policies and lots of liquidity in the markets. Not helping the stock market were some comments by some Fed members who thought the stock market prices were "quite high relative to standard valuation measures."

The FOMC minutes created more questions than answers and the market of course hates uncertainty. The plan to start reducing the Fed's balance sheet might change the Fed's plans about raising rates. The expectation has been for two more rate increases this year and while their dot-plot of likely rate changes still reflects this, now the discussion is that the Fed could pause while it looks for a way to reduce its balance sheet.

Reducing their balance sheet would mean the Fed will not roll over all expiring Treasuries, the big nut of which matures in 2018-2019, and by reducing their purchases it would lower overall demand for Treasuries. Lower demand would drive prices lower and in turn yields would turn higher. Therefore reducing their balance sheet and raising the discount rate would both depress the market and possibly the economy. Trapped between a rock and a hard place are we?

Interestingly, the bond market didn't move much this morning nor this afternoon so it seems we simply had a volatile stock market trying to figure out what's going to be important as it looks forward. Treasury yields actually pulled back a little this afternoon after the FOMC minutes were released, showing there's not much fear about the Fed becoming more active with rate increases and/or balance-sheet reduction efforts.

The resulting afternoon turnaround created a loss for the stock market indexes with SPX swinging 25 points from about 18 in the black to 7 in the red. It was the worst bearish reversal since February 2016 and that kind of headline is not going to inspire bulls to buy this dip, even though that is clearly a possibility in this market. Many could look at this afternoon's selloff as an overreaction and therefore a good buying opportunity. SPX remains above its 50-dma, which is what many are basing their buying decisions on.


S&P 500, SPX, Weekly chart

The SPX weekly chart shows last week's decline back below the trend line along the highs from April-August 2016, which it had rallied above in mid-February. Friday's close was essentially on the trend line, saving it for the week, but so far it's back below the line, currently near 2370. I continue to show upside potential to the 2450 area by the end of the month, primarily because of the choppy pullback from March 1st, but at the moment it's looking like the higher-odds scenario is for at least a larger pullback before heading back up (weekly oscillators confirming the rollover).


S&P 500, SPX, Daily chart

The trend line along the highs from April-August 2016 is shown as the purple line on the daily chart below. Both it and a downtrend line from March 1-15 are now near 2370 so that's the first level the bulls need to get through, which would likely lead to a rally above this morning's high at 2378 and then potentially above 2400 in a new rally leg. But following today's reversal, if the bears get some follow through from here, which has been lacking in both directions since March 1st, a break of the 50-dma, near 2346, and the uptrend line from November 4 - March 27, near 2343, would likely trigger stops on long positions.

Key Levels for SPX:
- bullish above 2390
- bearish below 2322


S&P 500, SPX, 60-min chart

The 60-min chart shows the choppy nature of the price pattern since the March 1st high. We have a 3-wave move down into the March 27th low and that's been followed by a 3-wave bounce into this morning's high. When you get 3-wave moves in both directions it leaves the larger pattern questionable since it could literally go anywhere from here, including remaining inside a flat correction. I show the potential for a leg down to a price projection at 2300, for two equal legs down from March 1st and a test of price-level S/R, but at this point it's just a guess that we'll see at least a larger pullback.


Dow Industrials, INDU, Daily chart

The Dow's daily chart looks virtually identical to SPX but with different trend lines. Like SPX, it's been trapped between its 50-dma as support and 20-dma as resistance. It tried to break free of its 20-dma this morning, currently near 20743, but the reversal left a failed breakout attempt. At about 20595 the 50-dma is less than 50 points below today's close and we could see that tested on Thursday if the bears get some follow through selling. Between the 20- and 50-dma's is the uptrend line from October 2011 - November 2012, currently near 20700 (using arithmetic price scale)

Key Levels for DOW:
- bullish above 21,000
- bearish below 20,412


Nasdaq-100, NDX, Daily chart

NDX finally reached the top of a possible megaphone pattern that's been building since March 1st. Today's high was a minor poke above the top of the pattern and the failure to hold left a sell signal that can only be reversed with a rally above today's high near 5480. The megaphone pattern is a topping pattern and the risk for bulls from here is that today's rally completed the leg up from November. That's obviously a very early call but it's the current risk for those wanting to hold long positions through a "correction."

Key Levels for NDX:
- bullish above 5480
- bearish below 5316


Russell-2000, RUT, Daily chart

Following the initial blast to the upside this morning the RUT gave in to selling much earlier than the rest of the market. When the market turns weak it has been the RUT that has consistently led to the downside and today was no different. It was the first one in the red and should lead us lower if that's what's in store for the market in the coming week.

What the bears really need to see is a strong break of price-level support near 1347. The first downside target in that event would be a price projection near 1310 and its uptrend line from February-November 2016, currently nearing 1300. The bulls need a rally above last Friday's high near 1390 to once again open the door to its trend line along the highs from 2007-2015, near 1422.

Key Levels for RUT:
- bullish above 1390
- bearish below 1335


10-year Yield, TNX, Daily chart

As mentioned earlier, when the stock market blasted higher this morning, the bond market gave a ho-hum response and that was the first indication the stock market might be overreacting to the upside. When the FOMC minutes came out and spooked the stock market into giving up all of its gains, and then some more, the bond market still didn't react much and even rallied a little this afternoon. This has most bond watchers confused since a Fed that is raising rates and/or trimming its balance sheet should be causing the bond market to sell off and yet it's been doing the opposite.

TNX shows a sideways consolidation since its December 15th high and is only back down to the bottom of the trading range near 2.3%. At the moment it's now back-testing its broken trend line along the highs from July-November 2016 and could be setting up another rally leg. But following the March 10th high I've been thinking we're going to get at least a larger pullback correction, one that should see a test of the 200-dma, currently near 2.02%. A drop below support near 2.3% would likely trigger buy stops in the 10-year Treasuries, which would further lower yields. For the moment one could say TNX remains bullish above 2.3 and then would turn bearish below 2.3.


KBW Bank index, BKX, Daily chart

The banks have been relatively weak since March 1st, which has been a warning sign for bulls. We like to see the banks leading a rally, which they did following last November's election. Last week BKX back-tested support at its broken trend line along the highs from 2010-2015 but this morning's high was only a test of its downtrend line from March 1-15. The resulting selloff looks bearish and points to a break of support near 88. The bulls would be in better shape with a rally above the downtrend line, near today's high at 92.98, and then its broken 50-dma, at 94.18.


Transportation Index, TRAN, Daily chart

Like the banks, the transports have been warning us that not all is well with the economy. Most everyone keeps looking for evidence of an economy that is doing well but they've turned their backs on indications of an economic slowdown. The TRAN is one of those warning signs and its chart shows a failed attempt to regain its broken uptrend line from June-October 2016, which it dropped below on March 21st. It managed to close back above the line last Thursday when it closed on its broken 20-dma but that was followed by a drop back below the line and it has not been able to close above its declining 20-dma, which will be near 9090 on Thursday.


U.S. Dollar contract, DX, Daily chart

The US$ pushed higher all day today and then got volatile at the release of the FOMC minutes before giving up all of the day's gains into the close. The resulting price action was an intraday rally above both its 20- and 50-dma's but a close in between them, which are currently at 100.27 and 100.60, respectively. Today's candle looks like a shooting star at MA resistance and it drops further on Thursday it would confirm the reversal candlestick pattern.


Gold continuous contract, GC, Daily chart

When the dollar tanked this afternoon gold did the opposite and rallied about $13. But it wasn't good enough for another test of its broken 200-dma, which was tested on Tuesday. Currently near 1261, the 200-dma is now near its downtrend line from last August and for this reason gold would be more bullish above 1263. There's a small bearish divergence the bulls need to negate and a rally above 1263 would do it. But with a longer-term price pattern that suggests another leg down for gold, the risk for gold bulls is for the current bounce to fail at any time.


Oil continuous contract, CL, Daily chart

Oil's intraday reversal from an early-morning high left a failed attempt to get back above its broken 50-dma near 51.50. It also closed marginally back below price-level S/R at its October 2015 high at 50.92. If today's reversal is followed by more selling on Thursday it could be the start of the next leg down for oil.


Economic reports

There are no market-moving economic reports Thursday morning but Friday we'll get the NFP report and other employment data. Based on this morning's reaction to the ADP report we could have some more volatility Friday morning.


Conclusion

Following a corrective pullback in March we have so far just a corrective bounce into today's high and it appears we could see another leg down for at least a larger pullback from the March 1st highs. But paradoxically, the strong techs could be the weak link here. The Nasdaq and NDX each have a megaphone topping pattern off their March 1st highs and both tested the tops of their patterns with today's highs. The relatively strong reversal leaves me with the impression that their rallies might have completed today.

If the techs have topped out and the RUT continues to lead to the downside in any further selloff it could turn things uglier for the bulls. We might get just a larger whippy corrective pullback, one that could last most of April, before starting another rally leg to new highs. But the risk for a larger decline is something that needs to be respected, especially if the "Trump" rally gets trumped by the bears who start talking about the failed policy changes Trump was going to try to ram through Congress.

Our hope-filled rally could quickly turn into disappointment and now with the Fed talking about reducing its balance sheet earlier than expected there is the potential for the Fed to create additional worry. If the Fed is becoming worried about another stock market bubble and wants to avoid being blamed for yet another one, they could be saying some things now to cool the rally. I'm sure they believe they can create a "small" pullback that would then lead to another rally. They could be correct but then again they have a habit of thinking they're actually in control of things.

All of which is to say it could be close to the time where you'll need to buckle yourselves in for what could turn into a more volatile market than we've seen in a while. Even the VIX is starting to show greater volatility in the past few weeks.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT


New Plays

Party is Over

by Jim Brown

Click here to email Jim Brown
Editor's Note

When a court decision invalidates 90% of a company's revenue, the outlook is grim. Acordia lost a patent fight on four key patents that generate 90% of their revenue.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

ACOR - Acordia Therapeutics - Company Profile

Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.

It has not been a good four days for Acordia. The company reported on Friday a U.S. District Court had ruled that four key patents for their primary drug Ampyra were invalid. This clears the way for Mylan, Teva and Roxane to immediately begin producing a generic version. Those companies have already applied to the FDA for permission. Seven other companies had sought to copy the drug but agreed to delay settlements with Acordia.

The problem for Acordia is that Ampyra produced 90% of the $519 million in Acordia revenues in 2016. With multiple generic competitors hitting the market very soon, that number will be significantly lower for 2017. Acordia said they were going to appeal the verdict but that is a long shot at best and those larger companies have more money to defend their case.

Acordia said on Wednesday they were cutting 20% of the workforce to save $21 million a year. Unfortunately, that will not be near enough to save the company. They ended 2016 with $153 million in cash and revenue guidance for $540 million in 2017. If that is cut in half they will be forced to raise money with a secondary offering. If they are smart they should already have it queued up and ready to go before the stock falls into single digits. Obviously that will further depress the stock price but they have no other alternative.

Shares have fallen significantly over the last four days but the patent decision is the equivalent of a death sentence if they cannot raise money quickly.

Earnings are April 27th and the expectations for guidance could be ugly.

Sell short ACOR shares, currently $17.05, initial stop loss $18.25.
No options recommended because of price.




In Play Updates and Reviews

Not the Catalyst We Wanted

by Jim Brown

Click here to email Jim Brown

Editors Note:

We were looking for a headline to boost stocks and the ADP was great but the FOMC was not. The Dow was up +198 at the high and the S&P +20. The Dow fell -248 points intraday to close with a 40 point loss. That kind of intraday reversal is normally damaging to investor sentiment.

The Russell fell nearly 29 points from its intraday high because higher interest rates would be negative for small cap stocks. The S&P-600 closed below critical support at 825 and appears to be in danger of a bigger decline.

The S&P futures opened lower and dipped to -2.50 before returning to positive territory but then settled back to the flat line in early trading. Needless to say, the futures are likely to be very volatile overnight as the overseas markets react to the FOMC news.





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 Pharma
The long stock position was stopped out at $8.15.



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BULLISH Play Updates

BCRX - Biocryst Pharmaceuticals - Company Profile

Comments:

No specific news but the stock crashed 9% as the biotech sector imploded with a 2% decline. We were stopped out at $8.15.

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:

Closed 4/5/17: Long BCRX shares @ $8.82, exit $8.15, -.67 loss.



CPE - Callon Petroleum Company - Company Profile

Comments:

No specific news. Big gain at the open but faded with the market.

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. Shares up sharply at the open but faded with the market.

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.



HABT - Habit Restaurants - Company Profile

Comments:

No specific news. Shares opened higher but faded with the market. Support has formed at $17.25. 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.




BEARISH Play Updates

DEPO - Depomed Inc - Company Profile

Comments:

Trump's pick for the FDA dumped on the opioid makers today saying the addiction is out of control. Shares fell to a new 3-year low.

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.

Update 4/4/17: 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.

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 rose slightly at the open but faded with the market. I am surprised there was not a bigger decline.

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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