Option Investor
Newsletter

Daily Newsletter, Tuesday, 4/18/2017

Table of Contents

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

Market Wrap

Rotten Eggs

by Jim Brown

Click here to email Jim Brown

Sometimes there are some bad eggs in the basket and two appeared this morning.

Market Statistics

The earnings miss by Goldman Sachs and Johnson & Johnson knocked the Dow to a -173 point decline intraday. The dip buyers appeared but in far less volume than normal. They tried to buy the opening dip and were hit with another sell cycle. That one held at 20,475 for 2 hours before they were able to lift the Dow off its lows but it still lost -113 points.

Goldman was a big hit accounting for -73 Dow points. JNJ subtracted another 26 points so the -113 point decline at the close was almost all because of those two stocks. Unfortunately, IBM shares died after the close with a 9-point drop that will be -63 Dow points at the open on Wednesday.



Goldman Sachs (GS) reported earnings of $5.15 that missed estimates for $5.31. Revenue rose 27% to $8.03 billion but missed estimates for $8.45 billion. Investment banking revenues rose 16% to $1.7 billion, led by a surge in equity and debt underwriting. At the same time, a decline in merger activity led to a 2% decline in advisory revenues. Overall trading revenue fell -2% to $3.36 billion. Goldman's stock trading business saw a 6% decline in revenue. The bank blamed it on low levels of volatility over the first three months of the year. Operating expenses rose 15% to $5.49 billion. The bank repurchased 6.2 million shares for $1.5 billion in Q1.


Johnson & Johnson (JNJ) reported earnings of $1.83 that beat estimates for $1.77. Revenue of $17.77 billion missed estimates for $18.02 billion and caused the sharp decline in the stock. A decline in drugs sales offset a rise in medical device sales. The company raised its full year guidance to $7.00-$7.15, up from $6.93-$7.08. Analysts were expecting $7.05. Revenue guidance rose from $74.1-$74.8 billion to $75.4-$76.1 billion.

Sales of Remicade, a blockbuster drug for arthritis, fell -6% because of a copycat drug hitting the market and it is only going to get worse as the biosimilar drug gains traction. Other drugs, Xarelto and Invokana, also saw sales decline. Cowen & Co called the overall earnings an "underwhelming performance." Shares fell $4 on the report.


The last Dow component reporting before the open was UnitedHealth (UNH). The company reported earnings of $2.37 that rose 35% and easily beat estimates for $2.17. Revenue rose 9.4% to $48.73 billion. The company said it added 2.5 million subscribers but that was offset by a loss of 900,000 who were in individual Obamacare plans. The losses from Obamacare removed $1.6 billion in revenue. Profits rose sharply after UNH cut participation in Obamacare from 34 states to 3 states for 2017. Last year they warned they expected to lose $800 million on Obamacare plans. UNH said it was planning for the 3% Obamacare tax on all healthcare premiums to restart for 2018. The tax had been halted temporarily because of losses for Obamacare insurers but restarts for 2018.


On the economic front, the new residential construction for March declined sharply from 1.303 million to 1.215 million. With the warmer weather in February, builders got a jumpstart on the season meaning fewer starts in March. Single-family starts declined from 875,000 to 821,000 and multifamily fell from 428,000 to 394,000. Housing completions rose from 1.168 million to 1.205 million.

April could show good numbers because permits rose from 1.216 million to 1.260 million. Multifamily construction has begun to slow as markets reach saturation points. Single-family homes continue to rise at a slow but steady pace overall.

Industrial production for March rose 0.5% after a +0.1% rise in February. The numbers were skewed due to weather patterns with low utility output in January and February followed by an 8.6% spike in March as some winter weather returned. The report was ignored.

The calendar for the rest of the week is highlighted by the Fed Beige Book, Philly Fed Manufacturing Survey and Existing Home Sales. None of those should be market movers.

The French election on Sunday and the government funding fight all next week will be the market drivers.


Other stocks reporting earnings this morning included Bank of America (BAC). The bank reported earnings that rose 44% to 41 cents. Analysts were expecting 35 cents. Revenue rose 7% to $22.25 billion and beat estimates for $21.5 billion. Investment banking fees rose 37% to $1.6 billion. Sales and trading revenue rose 23%. Provisions for credit losses declined 16% to $835 million. Shares ended the day fractionally negative.


Harley-Davidson (HOG) reported earnings of $1.05 compared to estimates for 99 cents. Revenue of $1.33 billion missed estimates for $1.35 billion. The company guided for Q2 shipments of 80,000-85,000 and analysts were expecting 91,025. Shares fell 4% on the news.


United Continental (UAL) reported earnings of 41 cents that beat estimates for 37 cents. Revenues of $8.42 billion rose 2.7% and beat estimates for $8.362 billion. Passenger revenues rose 2.6% to $7.174 billion while cargo revenues rose 13.4%. Average fuel costs rose 41.3% to $1.71 per gallon. The odds are good the Q2 earnings are going to be lower than expected because of the boycotting of United after the passenger was forcibly removed. Shares fell 4% on the earnings.


Cardinal Health (CAH) said it agreed to buy certain Medtronic (MDT) businesses for $6.1 billion. The business has 23 product categories and include brands found in nearly every U.S. hospital. The negotiations have been in progress for some time. As a result, they updated their 2017 guidance for earnings of $5.35-$5.50 and analysts were expecting $5.42. The company blamed the guidance on deflation in the pharmaceutical business caused by a surge in generics. Cardinal said the deal should close by early 2018 and would add at least 21 cents in earnings in 2018. The company still guided for flat earnings in 2018 due to some "company specific discrete items" that it did not identify plus generic deflation. Shares collapsed 11% on the weak guidance.


After the bell, IBM reported earnings of $2.38 compared to estimates for $2.35. Revenue of $18.16 billion missed estimates for $18.39 billion. This is the fifth year of declining quarterly revenues. The company guided for full year earnings of "at least 13.80" per share. Cloud computing revenue on a trailing 12-month basis was $14.6 billion while "Cloud as a Service" revenue was approaching an annualized rate of $8.6 billion. Shares fell from the $170 close to $160.90 in afterhours. That will be a 63-point drag on the Dow on Wednesday.


Intuitive Surgical (ISRG) reported adjusted earnings of $5.09 compared to estimates for $4.90. Revenue of $674.2 million beat estimates for $660.6 million. The company shipped 133 Da Vinci robotic surgery systems in Q1 compared to 110 in the year ago quarter. Shares rallied about $30 in afterhours.


Ultragenyx Pharmaceutical (RARE) spiked sharply in afterhours after reporting positive Phase III results for Burosumab for X-linked hypophosphatemia, leading to bone deformity. Patients reported significant improvements in stiffness, physical function and pain.


Lam Research (LRCX) reported adjusted earnings of $2.80 that beat estimates for $2.54. Revenue of $2.15 billion beat estimates for $2.13 billion. The company guided for the current quarter to earnings of $2.88-$3.12 and analysts were expecting $2.63. Revenue guidance of $2.2-$2.4 billion also beat estimates for $2.18 billion.


Crude prices declined slightly in the regular session ahead of the EIA inventories on Wednesday. Expectations are for a decline in inventories but apparently, traders were taking profits from the big rally just to be safe. They are also fighting a forecast from the EIA for U.S. oil production in May to rise by 124,000 bpd.


The yield on the ten-year treasury just keeps moving lower with a close at 2.179% and a five-month low. The geopolitical concerns have not gone away and there is an increasing number of headlines about a possible government shutdown next week. Stocks rarely rise when bond yields are falling sharply.


Markets

Volume was a little stronger today at 6.1 billion shares but that is still considered light. It was significantly better than the very light 5.3 billion shares on Monday's big +180 point Dow rally. Investors are being cautious ahead of the funding battle and potential government shutdown.

The big cap indexes posted losses and gave back about half their gains from Monday. The small cap indexes posted fractional gains but we should not read too much into that divergence. The big cap indexes are influenced by only a few stocks while the Russell 2000 has 2,000 stocks.

When Goldman and JNJ tanked at the open, they dragged the index ETFs down with them. That causes selling in the other stocks in those ETFs. Overall, I am pleasantly surprised that the selling in those individual stocks did not spread to the broader indexes. The day was tame even though the Volatility Index spiked to 15.5 at the open.

The S&P failed to move over prior support at 2,350, which has become resistance. The S&P chart is still bearish even if we have a couple more days of minor gains. Until the index moves back over 2,370, the short-term bearish trend will remain intact.

I would expect Tuesday's Goldman related decline to be bought on Wednesday assuming there are no adverse headlines overnight.


The Dow almost made a new low intraday with the dip to 20,462 when Thursday's two-month low was 20,453. That would have been a serious sell signal. It is hard to derive much market direction from the Dow during earnings season. The GS/JNJ earnings this morning were a prime example. When two stocks can knock 100 points off the index, it gives a false picture of the rest of the market.

The market was not as weak as the -113 close would indicate. Unfortunately, the declines in those two stocks may not be over and IBM is going to add to the weakness on Wednesday.

Support is now 20,450 and resistance 20,600 and 20,750.


The Nasdaq Composite lost only 7 points and that was mostly due to the biotech sector which fell -1.3%. Amazon was the only one of the FAANG stocks to post a gain. Apple is starting to weaken. Shares have been trending lower since the high at $146 on April 5th. Support has formed at $141 but the rebound attempts are slowing. With Apple earnings not until May 2nd, it is a little early to be running for cover. I suspect funds have a lot of built up profit in Apple and they are afraid of the potential government shutdown next week. They are slowly trimming positions. Where Apple shares go, the market follows.


The Nasdaq avoided a decline below support at 5,800 last week but it has not rebounded sufficiently to keep that from happening at any time. Mild resistance has formed at 5,850 and the index is still safely inside its congestion pattern. If that 5,800 level were to break, we could see a lot of sell stops hit.



The Russell 2000 remains in a sideways pattern as it has been for the last four months. There is a short-term downtrend but until/if it breaks below 1,340 the sideways consolidation trend takes precedence. If I had to predict the market, it would be difficult to do from the Russell chart. It is showing us exactly how flat and choppy the market has been but giving no clue as to future direction other than the recent decline to support.


This week should be neutral for market direction because of the money being withdrawn from the market to pay taxes and the dark clouds hovering over next week's funding battle. This "should" give it a bearish bias by Friday but as we saw today, the dip buyers are alive and well.

Even if the unthinkable happens again on April 29th and there is a partial government shutdown that craters the market, I expect that dip to be a buying opportunity. I suspect nearly everyone else see it the same way. That means they will not be putting new money to work this week in hopes of a better opportunity in the weeks ahead.

Also lingering in the back of everyone's mind is the problem with North Korea. There were reports this afternoon that the USS Ronald Regan and USS Nimitz carrier strike forces have been ordered to the region to meet up with the USS Carl Vinson. Source The U.S. has not put three carrier strike forces in the same region since WWII. This appears to be at least a strong bluff suggesting that little Kim pack up his toys and begin behaving in a civilized manner. That is not likely to happen. When you push a crazy person into a corner, you better be prepared for a violent reaction. The other leader with small man syndrome, Putin, sent Russian bombers to overfly Alaska today and they were escorted away by U.S. fighters. Putin sent bombers to Japan a couple days ago and it took 14 scrambled fighters to convince them to leave.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

 


New Plays

Patience, Grasshopper

by Jim Brown

Click here to email Jim Brown
Editor's Note

We must strike when the time is right rather than strike out swinging at every pitch. The Dow reversed its 180-point gain from Monday with a -170 point intraday drop. About the only guarantee we have for the next 8 trading days is increasing volatility. The closer we get to next week's funding battle, the more skittish the market will become. I am going to err on the side of caution this week rather than just add positions that could be stopped out when the battle begins.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Good Relative Strength

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes posted gains while the big cap indexes sank. This was a big cap disaster day and the small caps traded flat to slightly higher. Whether this will hold for the rest of the week is unknown. Investors bailing from the big caps may have nibbled on the Russell stocks.

With a lot more earnings reports scheduled over the next several days there is always the potential for market movement. With next week expected to be volatile, any rebound could be lackluster.

The geopolitical worries may be over but we will be bogged down with fiscal worries later in the week over the government funding and debt ceiling battle scheduled for next week.





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


JUNO - Juno Therapeutics
The long stock play remains unopened until a trade at $24.55.



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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

ECA - Encana Corporation - Company Profile

Comments:

No specific news. Minor gain despite drop in oil 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.



HABT - Habit Restaurants - Company Profile

Comments:

No specific news. Tied the three-month high from Wednesday intraday. 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.



ILG - ILG Inc - Company Profile

Comments:

No specific news. Excellent gain to a new 52-week high in a weak market.

Original Trade Description: April 8th.

ILG, Inc., together with its subsidiaries, provides non-traditional lodging covering a portfolio of leisure businesses from vacation exchange and rental to vacation ownership. The company operates through two segments, Exchange and Rental, and Vacation Ownership. The Exchange and Rental segment offers leisure and travel-related products and services to owners of vacation interests and others primarily through various membership programs, as well as related services to resort developer clients; and allows owners of vacation ownership interests to exchange their occupancy rights for alternative accommodations at another resort and/or occupancy period. This segment also provides vacation property rental services for condominium owners, hotel owners, and homeowners' associations. The Vacation Ownership segment engages in the management of vacation ownership resorts; and the sale, marketing, and financing of vacation ownership interests, as well as in the provision of related services to owners and associations. As of December 31, 2016, it provided management services to approximately 250 vacation ownership properties and/or their associations. The company was formerly known as Interval Leisure Group, Inc. and changed its name to ILG, Inc. Company description from FinViz.com.

ILG reported earnings of 48 cents on revenue of $455 million. Net income rose from $16 million to $61 million. Earnings rose from 27 cents to 48 cents. Free cash flow was $180 million. Analysts had expected revenue of $464 million and shares fell sharply over the next week. The company guided for full year revenue of $1.72 to $1.86 billion.

They repurchased 6.5 million shares and paid $52 million in dividends to return $153 million to shareholders. They currently pay a 2.83% dividend.

The company has been on an acquisition and renovation binge. They sometimes acquire properties in great locations that have issues and then spend a few million on renovations to turn them into star attractions. In May they completed the acquisition of Vistana Signature Experiences, formerly known as Starwood Vacation Ownership for $1.15 billion in cash and stock. With the transaction, they acquired an 80-year global license for the use of the Westin and Sheraton brands.

Despite their vast holdings and strong revenue they are still a relative unknown in the investment community. However, with their Vistana acquisition along with the Hyatt and St Regis vacation brands they are starting to become known.

Shares have risen $3 in the last four weeks and have begun to accelerate. The company is a member of the S&P-600 but with the acquisition of Vistana it has a market cap over $3 billion and is eligible for inclusion into the S&P-500. That could provide a nice boost to the stock price but it would be pure speculation.There are many companies with a higher market cap that have not been included.

Earnings May 30th.

Position 4/10/17:

Long ILG shares @ $21.28, see portfolio graphic for stop loss.

Optional: Long June $22 call @ 60 cents.



JUNO - Juno Therapeutics - Company Profile

Comments:

No specific news. Shares posted a minor decline in a weak market.

The position remains unopened until a trade at $24.55.

Original Trade Description: April 17th.

Juno Therapeutics, Inc., a biopharmaceutical company, engages in developing cell-based cancer immunotherapies. The company develops cell-based cancer immunotherapies based on its chimeric antigen receptor and T cell receptor technologies to genetically engineer T cells to recognize and kill cancer cells. Its CD19 product candidates include JCAR017 that is in Phase I/II trials for adults with relapsed or refractory (r/r) B cell aggressive non-Hodgkin lymphoma (NHL) and pediatric patients with r/r B cell acute lymphoblastic leukemia (ALL); JCAR014, which is in Phase I/II trials to treat various B cell malignancies in patients relapsed or refractory to standard therapies; and JCAR015 that is in Phase II trials for adult patients with r/r ALL. The company's CD22 product candidate comprise JCAR018, which is in Phase I trial for pediatric and young adult patients with CD22-positive r/r ALL or r/r NHL. Its additional product candidates include CD171, a cell-surface adhesion molecule to treat neuroblastoma; Lewis Y for the treatment of lung cancer; JCAR023, which is in Phase I trial for patients with refractory or recurrent pediatric neuroblastoma; MUC-16, a protein for treating ovarian cancers; IL-12, a cytokine to overcome the inhibitory effects; ROR-1, a protein for the treatment of non-small cell lung, triple negative breast, pancreatic, and prostate cancers; WT-1, an intracellular protein that is in Phase I/II clinical trials to treat adult myeloid leukemia and non-small cell lung, breast, pancreatic, ovarian, and colorectal cancers; and IL13ra2 for treating glioblastoma. Juno Therapeutics, Inc. has collaboration agreements with Celgene Corporation, Fate Therapeutics, Inc., Editas Medicine, Inc., MedImmune Limited, and Memorial Sloan Kettering Cancer Center. Company description from FinViz.com.

Juno shares were hammered in March after they reported they were ending a trial early on a hot new CAR-T drug they had expected to do well. The Phase II Rocket Trial of JCAR015 was paused twice and finally ended early after two patients died from swelling in the brain. The CAR-T process involves removing T-cells from their blood and reengineering them to recognize cancer cells from acute lymphoblastic leukemia and kill them. Once the modification is complete, they are re-injected into the patient so they can go to work. In this particular case the brain swelling was a side effect.

However, that is not the only drug in process at Juno. They will have more than 20 trials in progress by the end of 2017 on a variety of anticancer drugs. The company has nearly $1 billion in cash and a burn rate of about $200 million a year. They are in no danger of running out of money and they have dozens of partnerships and collaborations contributing money for research.

Earnings May 31st.

Over the last three weeks Juno has not declined. The stock is continuing to move slowly higher with resistance currently at $25. Once through that level the next resistance is $33.

With the biotech sector selling off every other day you would have expected JUNO to be reactive to those moves but the stock continues to climb.

With a JUNO trade at $24.55

Buy JUNO shares, initial stop loss $22.50.

No options due to price and strike availability.



KRNT - Kornit Digital - Company Profile

Comments:

No specific news. Only a 5 cent decline from Monday's new high.

Original Trade Description: April 5th.

Kornit Digital develops, manufactures and markets industrial digital printing technologies for the garment, apparel and textile industries. Kornit delivers complete solutions, including digital printing systems, inks, consumables, software and after-sales support. Leading the digital direct-to-garment printing market with its exclusive eco-friendly NeoPigment printing process, Kornit caters directly to the changing needs of the textile printing value chain. Kornit’s technology enables innovative business models based on web-to-print, on-demand and mass customization concepts. With its immense experience in the direct-to-garment market, Kornit also offers a revolutionary approach to the roll-to-roll textile printing industry: Digitally printing with a single ink set onto multiple types of fabric with no additional finishing processes. Founded in 2003, Kornit Digital is a global company, headquartered in Israel with offices in the USA, Europe and Asia Pacific, and serves customers in more than 100 countries worldwide. Company description from Kornit.

The company description pretty much says it all. They have developed a process to print on fabric that is fast and cheap and the company is setting new highs as the demand for their product increases.

The company reported earnings of 16 cents on a 33.4% increase in revenue to $34 million. There was a secondary offering in January that raised $38 million for the company and was very oversubscribed.

The big spike in early January was news the company granted Amazon warrants to buy up to 2.9 million shares at $13. Since KRNT only has 31 million shares outstanding that is nearly a 10% position in the company. The warrants came after Amazon placed an order for a "large number" of textile production systems for Amazon's own use in the Merch by Amazon program.

Earnings May 16th.

Shares made a new high on March 31st and they closed within 10 cents of that high on Thursday. Shares have risen over the available option strikes so this will be a stock only position.

Position 4/7/17:

Long KRNT shares @ $19.00, see portfolio graphic for stop loss.




BEARISH Play Updates

FSLR - First Solar - Company Profile

Comments:

No specific news. Shares have now declined for four consecutive days.

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.

Update 4/7/17: Reportedly FSLR wants to exit its joint venture with Sunpower (SPWR). The two companies package completed utility scale solar farms into a "Yield Co" for sale to investors. Yield Cos have lost favor with the investing public after SunEdison filed bankruptcy in 2016. Shares posted a minor gain.

Update 4/10/17: Despite a negative article on Bloomberg shares still posted a strong gain of $1.16.

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.



VXX - Volatility Index Futures - ETF Description

Comments:

The VXX declined -1% even though the market was sharply lower.

Original Trade Description: April 12th.

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

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

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

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

We know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.





If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now