Option Investor
Newsletter

Daily Newsletter, Saturday, 5/27/2017

Table of Contents

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

Market Wrap

Quiet Market

by Jim Brown

Click here to email Jim Brown

The Dow traded in only a 42-point range and the S&P in a 5-point range ahead of the holiday weekend.

Weekly Statistics

Friday Statistics

The S&P and Nasdaq succeeded in remaining positive and both made new closing highs. The Dow declined nearly 30 points intraday but rebounded to end with only a 2-point loss. Volume was very light at 5.2 billion shares. That was the lowest volume since December 29th.


The economic reports were about as lackluster as the market. The first GDP revision for Q1 was slightly better than the +0.7% growth in the first release. The revision raised that number to 1.15% thanks to a 1.85% contribution from fixed investments. Inventories removed -1.07% and government -.2%. Consumption contributed 0.44% but was way down from the 2.4% contribution in Q4. This is why retailers had such a bad Q1. Consumers were not consuming. Corporate profits declined -1.2% in Q1 after a +0.5% rise in Q4.


The Atlanta Fed real time GDPNow forecast for Q2 fell from 4.1% to 3.7% after the forecast for real residential investment growth declined from 8.3% to 3.1% because of the two housing reports last week. Both came in less than expected. Because this is a real time number, it vacillates with every economic report that impacts GDP. I am sure everyone would be happy with a 3.7% quarter but we have a long way to go before that number is finalized.


The Durable Goods Orders for April declined -0.7% after a +0.7% rise in March. This was the first decline in five months. Orders for core capital goods were flat and nondefense capital goods declined -1.9%. Total shipments declined -0.3%. This report was ignored.

The final consumer sentiment revision for May declined from 97.7 to 97.1 but that was still slightly better than the 97.0 in April. The present conditions component declined from 112.7 to 111.7 and the expectations component rose from 87.0 to 87.7. This report was about as lackluster as Friday's stock market. However, sentiment remains at its highest levels since before the financial crisis.


The economic calendar for the holiday-shortened week is very active. This is payroll week and the holiday pushed the ADP report to Thursday so the big numbers will be back to back this month with the Nonfarm Payrolls on Friday. The ISM Manufacturing Index is also on Thursday.

There are a lot of reports but those listed above are the most important. The Fed Beige Book on Wednesday is expected to say growth remains moderate. They are running out of ways to say "no change but the outlook is good."

President Trump returned to Washington on Saturday and he probably wishes he could spend a couple more weeks overseas. His return will put the Russian collusion headlines back in the news and his son in law, Jared Kushner, is going to be in the hot seat. Apparently, he met with the Russian ambassador and tried to organize some secret back channel communication method that could not be overheard by U.S. security agencies. This is just unsubstantiated headline fodder at present but he has said he would cooperate with the investigation. As President Trump's top adviser and family, it would be ugly if he has done something illegal with Russia. I am only reporting this here because we have gone a week without any presidential headlines impacting the market and that threat will be back next week.


The Q1 earnings cycle is over. There will be a few stragglers but very few. For Q1 earnings rose 15.4% with 489 S&P companies reporting. Of those there were 75.1% who beat on earnings and 62.5% that beat on revenue. There were 77 companies issuing negative guidance and 37 with positive guidance. The forward PE is now 17.9. Only 6 S&P companies report earnings this week.

Broadcom (AVGO) and Hewlett Packard Enterprise (HPE) will be the most watched companies. Palo Alto Networks (PANW), Ciena (CIEN) and VMWare (VMW) will be the second string.


Big Lots (BIG) was the only major company reporting on Friday. They had earnings of $1.15 compared to estimates for $1.00. Revenue of $1.30 billion barely missed estimates for $1.31 billion. Same store sales fell -0.9% and missed estimates for an increase of +0.9%. They guided for full year earnings of $4.05-$4.20, up from $3.95-$4.10. They guided for Q2 earnings of 58-63 cents and analysts were expecting 57 cents. Shares rose 3% on the news.


The big stock moves came from earnings reporters after the close on Thursday. Veeva Systems (VEEV) reported earnings of 22 cents that beat estimates for 18 cents. Revenue of $157.9 million also beat. Shares spiked 8% on the news.


Ulta Beauty (ULTA) shares spiked 9% after reporting earnings of $1.91 that beat estimates for $1.79. Revenue of $1.31 billion beat estimates for $1.28 billion. Revenue guidance for Q2 was in line with analyst estimates at $1.27 billion. Shares completely erased their three declines from early in the week and closed at a new high.


Costco (COST) reported earnings of $1.59 that beat estimates for $1.30 and year ago earnings of $1.24. Revenue rose 8% to $28.22 billion. That missed estimates for $28.6 billion but shares rose anyway because of the strong earnings. Same store sales rose 5% compared to expectations for 4%. They just paid a $7 special dividend in May and that accounts for the drop in the stock price.


Marvel (MRVL) beat on earnings on Thursday and was upgraded by Oppenheimer from neutral to buy on Friday. Storage revenue rose to 53% of total and networking to 25% and expected to move higher with a "multitude of new products" hitting the market. Wireless revenue is expected to rise 30% with a new wave of technology being implemented.


Web.com (WEB) spiked 9% on Friday after a Reuters report they were buyout talks with private equity firms. Sector related domain name seller GoDaddy.com (GDDY) was also up. They have been seeking an acquirer ever since they went public. The activity in the private equity space is almost at a feeding frenzy with new rumors or deals announced every week. WEB has a market cap of only $1 billion and revenue rose from $543 million in 2015 to $710 million in 2016. That kind of early stage growth is attractive to PE firms.


I do not want my commentary to turn into the weekly update on Nvidia (NVDA) but they cannot stay out of the headlines. Recently Softbank bought a 4.9% stake worth $4.1 billion making them the 4th largest holder. News broke this week their new $100 billion Vision technology fund is thinking about increasing that stake. They said they would raise the stake over time and begin to work more closely with Nvidia on future developments. That prompted Nvidia to note in a regulatory filing that Microsoft has the right of first refusal to buy the shares if another company tries to acquire more than 30% of Nvidia. I do not think that was public knowledge or maybe everyone had just forgotten it. I looked up the top holders and Microsoft was not listed. The list is a who's who of big names. The top ten includes FMR, LLC, Vanguard Group, BlackRock, State Street, JP Morgan and Morgan Stanley.

Noted investor Louis Navellier said on Friday that Nvidia is going to $300 over the next couple of years because their technology is far ahead of Intel and Qualcomm. That would be more than a 100% gain from here.

I have had NVDA in the LEAPS Newsletter portfolio for a long time and I keep waiting for a decent pullback to add it to some other newsletters. Unfortunately, there has been no pullback. Options are so expensive you cannot just buy them outright.


Amazon is poised to beat Alphabet to the $1000 level after gaining $39 during the week. On Thursday, the stock topped at exactly $999 and on Friday at $998.65. Clearly, there are sellers waiting at that $999 level. GOOGL peaked at $996.39 on Friday so the race to $1,000 is neck and neck. Amazon's market cap is approaching $500 billion. Analysts now believe Amazon has more than 80 million Prime members and everything it is doing is geared to generating more Prime subscribers.

Amazon opened a brick and mortar bookstore in NYC but everyone that has been there called it a Prime Store. The only books for sale are best sellers or books rated 4 stars and above by Amazon customers that have read the book. They have a "page turner" section where books are ranked by how fast readers on a Kindle turn the pages signifying an interesting read. There is more space dedicated to the Echo, Kindles, Fire tablets, etc than there is for books. Amazon is trying to hook customers into their eco system where they will become long time customers. It will also propel Jeff Bezos into the position of the world's richest man.



While the U.S. markets have been wandering sideways over the last several months the overseas markets are on fire. The iShares Asia ETF (AIA) is up 26% since December. That low was on worries President Trump was going to enact harsh trade policies. As it became apparent that was not going to happen, the Asian market exploded higher. That was also the peak in the dollar. As the dollar declined on lowered expectations for policy action, it helped power the Asian markets.

The European markets are also soaring after the post election bottom. The Brexit is no longer expected to cause a major upheaval in European economics and the falling dollar has lifted those markets as well. The VGK ETF is also up 26% since the election.




OPEC announced they were going to extend the current production cuts through March 2018. The instant the Saudi Oil minister announced that to the press the oil market began to collapse. Crude prices fell -5% on Thursday because that news was already priced into the gains over the prior two weeks. Traders were hoping for deeper cuts and longer cuts, both of which had been teased by several ministers from OPEC countries over the prior week. It is dangerous to over promise and under deliver.

The production cuts are a good thing and they will succeed in reducing global inventories. Wood Mackenzie said at the current rate inventories are declining 700,000 bpd and global demand is expected to rise 1.2 million bpd in 2017. The combination of those two events over the next nine months is expected to bring reduce global inventories by more than 300 million barrels. Analysts believe we could see $60 oil in Q3/Q4 as the summer driving season helps to increase short-term demand.


The decline in oil prices in early May slowed the reactivation of rigs. Only 2 oil rigs were activated last week along with 5 gas rigs. The seven new rigs tied for the lowest per week since the 2 rigs on March 3rd. The week of May 5th also had 7 rig activations. Since the beginning of February, drillers have reactivated 196 rigs.


U.S. production rose 15,000 bpd last week to 9.32 million bpd and the highest level since the 8.428 million bpd low on July 1st last year. By the end of July, the U.S. will have added one million bpd in production and by year-end, we could reach a new peak over the 9.61 million bpd high set on June 5th, 2015.

Gasoline demand has been weak in 2017 but it could set a new record next week. Demand was 9.7 million bpd last week and the record was 9.815 million bpd on June 17th, last year. With mild temperatures and the holiday weekend driving, everyone should be going somewhere this weekend. There is a delay of one week in the EIA numbers below so this graphic is current as of the 19th.


Markets

The S&P closed at a new high for the second consecutive day. The 2,400 level that took so long to break through should now be support and a springboard for higher highs. The next material resistance is 2,435 and then 2,445. The S&P took three months to consolidate the post election gains and break through that 2,400 level first hit on March 1st. There is a saying in the trader community, "The wider the base, the higher in space." That means the longer the index/stock takes to consolidate and then finally break through a critical level the farther the breakout will go before failing.

The ideal situation would be for the S&P to pause and fall back to retest 2,400 as support and then rebound to make new highs again. That would give investors confidence in the rally and give them a chance to enter new long positions.

You may remember my constant warning from late April about filling gaps. The larger the gap the more likely they are to be filled. Note that the dip the prior week completely filled the short squeeze gaps from April 24/25th. Gaps are almost always filled.


The Dow did not post a gain on Friday but more importantly, it held the gains from Thursday that propelled it well over 21,000. The index is only 35 points away from a new closing high and that could come at any time. Support is well back at 20,900 and once over the prior high at 21,115 it will be in blue-sky territory.



The Nasdaq closed at a new high despite the relatively small 5 point gain. The index is over long-term resistance and as long as the FAANG stocks continue making new highs, the Nasdaq will also be making new highs. Support is well back at 6,000 and testing it again would be very traumatic.




The small cap stocks are definitely lagging. The Russell is well below its highs and well below resistance at 1,400. The impending Russell rebalance is probably weighing on the index. The first rebalance list drops on June 9th and that could produce another selling dip as stocks leaving the index are sold.


The markets continue to defy problems of all types and unending analyst warnings of a clear and present danger. Paul Singer, CEO of Elliott Management, said in his most recent note to investors, "We think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose." A couple weeks ago, the fund raised $5 billion in less than 24 hours for use when the market turmoil hits.

Singer said they used all the remaining capital they had to invest during the financial crisis and also raised an additional $800 million. Singer said they could have deployed 10 times that amount in what turned out to be an amazing opportunity. This time he is planning on being ready with that $5 billion in a market volatility fund. Singer believes the market will react badly if President Trump is unable to pass tax reform, health care and deregulation as he promised.

So far, the market has survived a large number of potential crisis points and investors seem unconcerned about the potential for future problems. Until the market becomes concerned, we should continue to follow that trend higher. There will come a moment when the trend ends but it could be weeks or months into the future. As long as the economy does not tank and earnings growth is in double digits, that covers over a lot of political problems.

If last week was the calm before the storm, I do not see the storm clouds. However, it is the sudden storms that we do not see approaching that cause the most trouble.



Random Thoughts


Investors rushed back to the bullish camp after an 8.9% drop in bullish sentiment the prior week, we saw a 9% rebound last week. The declines in the neutral and bearish camps mirrored the gains the prior week. How quickly traders jump on and off the fence.

Last week results


Thank a shale oil driller for your cheap gasoline this weekend. The AAA said the average price for gasoline on Friday was $2.37 per gallon. The low prices are due to the surplus of ultra light shale oil that best suitable for refining into gasoline. The average gasoline price over the last five years is just over $3 per gallon. Refiners processed 17.3 million bpd of oil last week and the second highest ever based on EIA data that began in 1982.

Recent Memorial Day prices:

2011 $3.81
2012 $3.65
2013 $3.63
2014 $3.66
2015 $2.74
2016 $2.32
2017 $2.37


Only five stocks have contributed 50% of the recent S&P gains. Those stocks are Apple, Facebook, Amazon, Microsoft and Alphabet. Together they have a combined market cap of nearly $3 trillion. In 2016, they generated $555 billion in revenue and more than $94 billion in earnings and they will do considerably better in 2017. Those five stocks have gained a total of 636 points since the election and represent 50% of the S&P gains.

FB $39
AAPL $49
MSFT $13
AMZN $285
GOOGL $250


Bitcoin rose more than 12% on Thursday alone to an all time high of $2,791.70. The spike in price came on rising demand out of Asia. Bitcoin is the ideal method of transferring money out of a country without being traced. The high did not hold and it fell $315 to close lower. Bitcoin began the month around $1,250 but the WannaCry malware demanding payments in Bitcoin started a rush to accumulate some of the electronic currency as an emergency precaution. Some companies were actually buying Bitcoin as insurance. If they were hacked and files encrypted they could have the Bitcoins on hand to quickly pay the hackers.

In Thursday's spike 31% of the purchasers of Bitcoin used Japanese yen, 16% Chinese yuan and 12% Korean won. Since the Japanese government authorized Bitcoin as a legal payment, the yen trade has been strong. Over the prior weekend, more than 50% of the trades were in Yen.

Currently the number of Bitcoins is limited to 21 million by the software used to generate (mine) them so the price could continue to move higher indefinitely. Source

The first known use of Bitcoins in commerce was May 22nd, 2010 when Laszio Hanyecz paid 10,000 Bitcoins to buy two Papa John's Pizzas worth $25. Obviously, this was back before the concept had caught on and they were cheap. At today's Bitcoin prices those would be some expensive pizzas. Now, May 22nd has become known as Bitcoin Pizza Day. Today more than 70,000 merchants accept Bitcoins. Source



 

Enter passively and exit aggressively!

Jim Brown

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Now it's our turn to do great things. I know, you are probably thinking: I don't know how to build a dam or get a million people involved in anything.

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New Plays

Drone Driver

by Jim Brown

Click here to email Jim Brown
Editor's Note

The future of combat both air to air and air to ground is drones. That is good news for Kratos Defense.



NEW BULLISH Plays

KTOS - Kratos Defense - ETF Profile

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.


Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense department spending.

I am not recommending a stock position given the sharp gains already.

Buy August $12.50 call, currently 55 cents, no initial stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Troops are Retreating

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap stocks, the generals in this war, are setting new highs but the rank and file troops are retreating. The S&P and Nasdaq set new closing highs and the Dow only lost 2 points. However, the small cap stocks traded lower intraday and only thanks to an afternoon rebound did they close near positive territory. The small caps, for whatever reason, are struggling to stay afloat.

The Dow traded in a very narrow 43 point range because nobody was trading. Volume was low at 5.2 billion shares but the Nasdaq and S&P managed to find afternoon buyers. The S&P traded in only a 4 point range. Next week will be a different story.





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.




Lottery Ticket Plays - Updated only on Weekends


Current Position Changes


FOSL - Fossil Group
The short position was entered at the open.

IWM - Russell 2000 ETF
The long position was stopped at $137.15.



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

BBRY - Blackberry - Company Profile

Comments:

Blackberry and Qualcomm reached a final agreement on the arbitration award on overpaid royalties. The final award will be $940 million and wil be paid to Blackberry on May 31st. Qualcomm will deduct some royalties due from 2016 and Q1-2017 but Blackberry will receive most of the money. That includes $125 million in interest and attorney's fees. Qualcomm had originally agreed to cap certain royalties under their original licensing deal years ago but then demanded Blackberry pay anyway. In this case Blackberry prevailed.

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Update 5/15/17: Blackberry is actually profiting from the WannaCry malware. The company pivoted to a software security firm a couple years ago and they offer security for both mobile and enterprise applications.

Update 5/16/17: Blackberry is working with at least two automakers on security software that would monitor the car's operating system and warn the driver if the system has been hacked. This is going to be very important in the future as self-driving cars become more plentiful. The system is currently being tested by Aston Martin and Range Rover. The virus software would cost drivers $10 a month. Blackberry software is already running in millions of cars. Shares exploded higher.

Update 5/17/17: Blackberry announced new mobile software to allow crisis managers, police forces, fleet managers, etc, to always know where their personnel are located. The AtHoc Account is an authorized solution for Federal government FedRAMP applications. The software merges inputs from managers, call center operators, data streams from HR and travel systems as well as self reporting by individuals.

Update 5/22/17: BBRY is exploding higher. I am not going to raise the stop loss because I think they have turned the corner and we could be looking at $20 in the future. $11.25 is two-year resistance and it closed just over that level today. Three-year resistance is $16. The next step up from there is $30. BlackBerry has completely changed its business model and is no longer a phone company. People are finally catching on and I am sure there are plenty of shorts left to cover. Now that a monster move has begun there will probably be a lot of price chasers as well.

Update 5/24/17: BlackBerry currently has more than 60 million QNX operating systems installed in late model cars and expects to license another 36 million in 2017. With U.S. auto rates around 18 million a year, that shows how BlackBerry has infiltrated the overseas markets as well. Shares were down slightly after an article in Forbes suggested Microsoft and Apple could compete for this marketplace in the years ahead.

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.



IWM - Russell 2000 ETF - ETF Profile

Comments:

The Russell traded down intraday and stopped us out of this position for a minor gain.

Original Trade Description: May 17th.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. Description from iShares.com

The Russell 2000 has been moving sideways since early December and has tested both sides of its range multiple times. The spike to a new high at the end of April was sold when the cat fight started in Washington. Fund managers were concerned the tax reform package would be delayed.

Unfortunately, that happened and the political headlines turned deadly with the selling climax on Wednesday.

Now that a special prosecutor has been appointed many months will pass before there is any material news out of that office. For all practical purposes the press and the democrats have lost a rallying cry. Now they have to wait like the rest of us. The market should rebound.

However, there could be volatility on Thr/Fri as margin calls are covered and weekend event risk causes traders to take profits in a shaky market.

I am bringing back the IWM option trade we tried to put on in the middle of April but could not get an entry point. I am recommending we go long at the open on Thursday and hang on through the volatility.

Position 5/18/17:

Closed 5/26/17: Long IWM July $138 call @ $2.00, exit $2.56. +$.56 gain.



STM - STMicroelectronics - Company Profile

Comments:

No specific news. Minor gain and still holding over support.

Original Trade Description: May 6th.

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

Position 5/08/17: Long July $17.50 call @ 65 cents, no initial stop loss.

Position 5/18/17: Long STM shares @ $16.25, see portfolio graphic for stop loss.

Previously closed 5/17/17: Long STM shares @ $16.34, exit $16.25, -0.09 loss.



TWLO - Twilio Inc - ETF Profile

Comments:

No specific news. Only a minor gain.

Original Trade Description: May 20th.

Twilio Inc. provides cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces. The company also provides use case products, such as a two-factor authentication solution. Twilio Inc. was founded in 2008 and is headquartered San Francisco, California. Company description from FinViz.com.

Twilio has a messaging application that is built in to dozens of apps you probably use every day. When tech startups try to decide how to engineer a solution they normally find that imbedding Twilio messaging is much simpler in the beginning. The thought process is that once the company is running and profitable they will go back and build their own platform. For most businesses that never happens and they end up paying for Twilio forever.

When they reported earnings on May 3rd, they said revenue growth would slow because Uber was finally taking that step of engineering their own messaging platform and would be phasing out Twilio. When a company reaches the size of Uber they can afford to build their own interface. Only a few companies ever make the switch. Other major customers on their network with no plans to change are Nordstrom, Airbnb, Amazon, Facebook, WhatsApp to name a few.

Uber accounts for 12% of Twilio revenue so the exit is painful. Pacific Crest downgraded the stock saying they had underestimated the risk from Uber. JP Morgan reiterated its overweight rating and $36 price target saying Twilio would continue riding Amazon's coattails to success with Amazon Web Services. Their price target is $33.

Shares fell after Twilio guided for an adjusted loss of 10-11 cents on revenue of $86.5 million. Analysts were expecting 8 cents and $87.8 million.

Last week CEO Jeff Lawson bought 100,000 shares at an average price of $23.43 ($2.34 million). Board member Jim McGeever, VP of Oracle's Netsuite unit, bought 10,000 shares at $23.19. They do not appear to be worried about the business slowing.

Earnings August 1st.

Shares are ticking higher and closed at a three week high on Friday.

Position 5/22/17:

Long TWLO shares @ $25.01, see portfolio graphic for stop loss.

Alternate: Long July $28 call @ $.75, see portfolio graphic for stop loss.



UCTT - Ultra Clean Holdings - ETF Profile

Comments:

No specific news. Nice $1 gain! Ultraclean will present at the Stifel Technology conference on June 6th at 10:55 PT.

Original Trade Description: May 22nd.

Ultra Clean Holdings, Inc. designs, develops, prototypes, engineers, manufactures, and tests production tools, modules, and subsystems for the semiconductor capital equipment and equipment industry segments primarily in North America, Asia, and Europe. It offers precision robotic systems that are used when accurate controlled motion is required; gas delivery systems, which include one or more gas lines consisting of small diameter internally polished stainless steel tubing products, filters, mass flow controllers, regulators, pressure transducers and valves, component heaters, and an integrated electronic and/or pneumatic control system; and various industrial and automation production equipment products. The company also provides subsystems, such as wafer cleaning sub-systems; chemical delivery modules that deliver gases and reactive chemicals in a liquid or gaseous form from a centralized subsystem to the reaction chamber; frame assemblies, which are support structures fabricated from steel tubing or folded sheet metal; and top-plate assemblies. In addition, it offers liquid delivery systems; process modules, which are the subsystems of semiconductor manufacturing tools that process integrated circuits onto wafers; and other high level assemblies. The company primarily serves original equipment manufacturing customers in the semiconductor capital equipment, consumer, medical, energy, industrial, flat panel, and research industries. Company description from FinViz.com.

The company reported earnings of 47 cents that beat estimates for 42 cents. Revenue of $204.6 million also beat estimates for $192.1 million. They guided higher for the current quarter to earnings of 49 to 55 cents and revenue of $210 to $220 million.

Earnings July 26th.

The company said it was seeing "extraordinary demand" and they were ramping up production to meet this demand.

Shares had been moving up steadily and I wanted to add them as a play multiple times but kept waiting for a pullback. That happened last week with a 10% decline and now they are surging again. Any further gain from Monday's close will be a new high.

Poaition 5/23/17:

Long UCTT shares @ $22.60, see portfolio graphic for stop loss.

Alternate position:

Long July $25 call @ .59, see portfolio graphic for stop loss.



WTW - Weight Watchers - Company Profile

Comments:

No specific news. Only a minor decline from the new closing high.

Original Trade Description: May 13th.

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, activity, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges. In addition, it offers various digital subscription products, including Weight Watchers OnlinePlus and a weight management companion for Weight Watchers meeting members to digitally manage the day-to-day aspects of their weight management plan, as well as provides interactive and personalized resources that allow users to follow weight management plan. Further, the company provides Personal Coaching, an online subscription product that offers one-on-one telephonic, e-mail, and text support and personalized planning from a Weight Watchers-certified coach, as well as offers access to other online tools. Additionally it offers various products, including bars, snacks, cookbooks, food, and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators, and fitness kits, as well as third-party products, such as activity-tracking monitors. The company also licenses the Weight Watchers brand and other intellectual property in frozen foods, baked goods, and other consumer products, as well as endorses selected branded consumer products; and engages in publishing magazines, as well issues other publications, such as cookbooks, and food and restaurant guides with SmartPoints values. It offers products through its meeting and franchisee business, as well as online. Weight Watchers International, Inc. was founded in 1961. Company description from FinViz.com.

Weight Watchers posted a Q1 profit of 16 cents compared to estimates for a 4-cent loss. Revenue of $329.1 million rose 7.2% and beat estimates for $323 million.

Subscribers rose 16% to 3.6 million. Subscribers have now risen for 5 straight quarters. This is the first time since 2011 that they gained subscribers for a full year. The company raised guidance for the full year to $1.40-$1.50. Analysts were expecting $1.27. They said they were off to a strong start thanks to the Oprah Effect. The TV personality joined the brand late in 2016.

Earnings August 1st.

The stock has been a rocket since Oprah began pitching for the brand but it is showing no signs of fading. The post earnings spike to $25 saw some post earnings depression but shares are already moving back to that post earnings level. I believe female investors are betting on the Oprah Effect to continue driving profits. Even at this level the stock is not overly expensive with a PE of 17.

I am recommending it because it has refused to decline in a weak market. The risk is less with the option position.

Position 5/15/17:

Long WTW shares @ $24.48, see portfolio graphic for stop loss.
Alternate: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

ERA - Era Group - Company Profile

Comments:

No specific news. Minor rebound from Thursday's big decline. Support is $7.25.

Original Trade Description: May 8th.

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Position 5/9/17:

Short ERA shares @ $10.69, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



FOSL - Fossil Group - Company Profile

Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, MISFIT, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, CHAPS, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of December 31, 2016, it owned and operated 94 retail stores and 129 outlet stores located in the United States, as well as 230 retail stores and 132 outlet stores internationally. Company description from FinViz.com.

Fossil reported an adjusted loss of 35 cents compared to estimates for a loss of 21 cents. Revenue of $581.8 million missed estimates for $596.5 million. For Q2 they guided for a loss of 23 to 40 cents.

Analyst expectations for Q2 have declined from a loss of 6 cents to a loss of 25 cents and has declined three times in the last couple of weeks. For the full year analysts are now expecting earnings of 90 cents, down from $1.11 a month ago.

Earnings August 8th.

Fossil is struggling despite the decent revenue. Costs and marketing are too high and they are losing market share to the rapidly expanding number of brands.

Shares closed at an 8-year low on Thursday and under $11.30 would be a 14 year low. I believe Fossil is going to single digits with $6 the likely target.

Position 5/26/17:

Short FOSL shares @ $11.78, see portfolio graphic for stop loss.

Alternate position:
Long July $11 put @ 55 cents, see portfolio graphic for stop loss.



VSI - Vitamin Shoppe - ETF Profile

Comments:

No specific news. No movement after Wednesday's historic low.

Original Trade Description: May 24th.

Vitamin Shoppe, Inc., through its subsidiaries, operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States and internationally. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 900 brands, such as own brands comprising Vitamin Shoppe, BodyTech, True Athlete, Mytrition, plnt, ProBioCare, Next Step, and Betancourt Nutrition; and national brands, including Optimum Nutrition, Cellucor, Garden of Life, Quest Nutrition, Solaray, Solgar, and Nature's Way. The company sells its products through Vitamin Shoppe and Super Supplements retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of December 31, 2016, it operated 775 company-operated retail stores; and 7 franchise stores in Panama, 5 franchise stores in Guatemala, 3 franchise stores in Costa Rica, and 2 franchise stores in Paraguay. Company description from FinViz.com.

Vitamin Shoppe reported earnings of 37 cents that missed estimates for 58 cents. Revenue of $316.9 million missed estimates for $326.7 million. Same store sales fell -6.3% while e-Commerce sales fell -9.1%. The stock fell 32% on the news.

Bad earnings happen all the time to many companies. However, they normally try to be upbeat about the future. That was not the case at VSI. The company warned that weak traffic and sales would continue because of changes to their loyalty program and intensifying promotional environment in the Sports nutrition category.

The best thing they could say was that they could continue their cost reduction initiatives. They Guided for the full year for sales to decline in mid single-digits and earnings of $1.50-$1.75. They guided for the quarter to earnings of 32-42 cents. Analysts were expecting $1.76 and 42 cents. The odds are good VSI will come in at the low end of their guidance and that is weighing on the stock.

Earnings August 9th.

They have another problem because only 7 stockholders own 50% of the stock. If one of those stockholders decides to stop the bleeding and cut their losses, there is not enough daily volume to sustain a major exit. That could push shares significantly lower.

Shares are approaching $10 and are already at a historic low. The outlook is grim and once that $10 level is broken we could see a sharp decline as funds race to exit before the $5 level where most funds can no longer hold the shares.

Position 5/25/17:

Short VSI shares @ $11.55, see portfolio graphic for stop loss.

Alternate position:
Long Aug $10 put @ 49 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Minor decline but a new historic closing low.

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.




Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.


CX - Cemex - Company Profile

Comments:

Cemex shares are not moving. We have a July call that is currently worthless. I am going to drop it from the portfolio as worthless but I would not recommend closing it. July expiration is still 2 months away and anything can happen. If the stock moves back above $9 I will resume weekly coverage.

Original Trade Description: January 25th

CEMEX, S.A.B. de C.V. produces, markets, distributes, and sells cement, ready-mix concrete, aggregates, and other construction materials in Mexico and internationally. The company also offers various complementary construction products, including asphalt products; concrete blocks and roof tiles; architectural products; concrete pipes for storm and sanitary sewers applications; and other precast products comprising rail products, concrete floors, box culverts, bridges, drainage basins, barriers, and parking curbs. In addition, it provides building solutions for housing projects, pavement projects, and green building consultancy services; and information technology solutions and services. The company has operations in Mexico, the United States, Northern Europe, the Mediterranean, South America, the Caribbean, and Asia. Company description from FinViz.com.

Bernstein Research researched all the contractors that could supply materials for a border wall. In the Bernstein map below Cemex is represented by the red blocks. Building 1,000 miles of wall, which is what Trump has promised will take a lot of concrete.

Cemex is one of the world's largest suppliers of cement and readymix concrete. Analysts believe the wall will cost between $15 to $25 billion to build and concrete would be a major expense. Based on various comments about what Trump is asking for, analysts expect 7 feet deep and up to 40 ft high for 1,000 miles. That will take 7.1 million cubic meters of concrete worth $700 million. However, engineers believe it would be easier and cheaper to build precast panels like the wall in Israel and other places. That would allow the panels to be constructed close to Cemex locations and not have 1,000 concrete trucks rotating up and down the wall every day. The picture below is the Israeli wall made with concrete panels and it stretches 420 miles.

Regardless of how the wall is constructed, it will take a lot of concrete and Cemex is going to be a supplier. Cemex has a large presence in the U.S. so it is immune from the US First rule.

Update 2/2/17: The secretary of Homeland Security said they are planning to complete the border wall in less than two years. They plan on a crash construction project in the heavily traffic areas and then fill in the blanks over the next two years. That means once construction begins it could be in multiple locations at once and the velocity could be extreme in order to get most of it done before the 2018 elections.

Update 2/10/17: CX said sales rose 4% in Q4 to $3.2 billion. EBITDA rose 10% to $654 million and +15% for the full year to $2.7 billion. Free cash flow rose 91% to $1.7billion in 2016. Debt declined by $2.3billion. Asset sales reached $2 billion of which $1 billion will close in 2017. .

Update 3/17/17: Cemex did not bid on the border wall. The company said they felt it would be bad faith and they could face repercussions from their home company of Mexico even though they have multiple concrete plants on both side of the border. However, they did say if a contractor asked for prices for cement they would be obliged to provide those prices and supply the cement.

Cemex is reducing debt by as much as $4 billion through price hikes and asset sales. They expect revenue from the U.S. to rise by $550 million in 2017 without any impact from the wall. In their analyst meeting last week the tone was positive and they expect overall revenue to rise 4% to 6%. That would rise if any infrastructure spending programs were enacted.

Update 3/25/17: Mexico warned Mexican companies it would not be in their best interest to participate in building the border wall between the two countries. The government said it was not going to pass a sanctions law but consumers would know and they would likely boycott any company that participated.

Cemex has said they would not participate but did say they would provide raw materials if asked by the eventual bid winners. Competitor Grupo Cemantos has said they would participate in the project.

The U.S. government said they had received expressions of interest from 720 companies to build the wall or supply components and services.

Update 4/28/17: The company reported a ten-fold increase in quarterly profits aided by asset sales. Cemex earned $336 million in Q1 compared to the $35 million in the year ago quarter. They made $152 million on selling a concrete tube business in the U.S. and $98 million on selling part of a unit in the GCC. They have another $320 million in announced asset sales set to close. Revenue rose 6% on a constant currency basis and debt fell -3.7% to $12.16 billion. Shares are trying to push through resistance at $9.25.

Earnings May 2nd.

CX shares have already spiked in January once it became apparent the wall was actually going to happen. The stock broke out to a new high on Wednesday and probably has a long way to go.

Position 1/26/17:

Dropping 5/26/17: Long July $11 call @ 52 cents. Currently zero, -.52 loss.

Previously closed 2/6/17: Long CX shares @ $9.42, exit $9.05, -.37 loss.



ECA - Encana Corporation - Company Profile

Comments:

No specific news. No material movement. Shares copying the volatility 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 compared 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 will be 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 July 27th.

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.

Update 5/5/17: Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.

Position 3/14/17:

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

Previously closed 4/19/17: Long ECA shares @ $10.43, exit $11.15, +.72 gain.



ETSY - ETSY Inc - Company Profile

Comments:

ETSY is holding its gains from the prior week despite news Amazon is starting a bridal section with handmade items. This is a June option so I added a stop to take us out on any weakness.

Original Trade Description: March 15th

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

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

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

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

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

Update 4/22/17: On Friday the Australian Tax Office warned overseas sellers their websites would be blocked if they did not comply with the GST LVG tax laws in Australia. Ebay, Alibaba, Amazon, Etsy and others have complained they are not sellers. They merely match buyers and sellers for a commission. Ebay and Etsy do not collect the money so they cannot pay the tax. The tax only applies to vendors that sell $75,000 a year and therefore any forced collection could not be implemented until a vendor reached that level. It would be impossible to then go back and collect the tax from the vendor for the first $75,000 sold.

Shares were trading at an 8-week high on Thursday. Major sell off on Friday's news. The company said it would report earnings on May 2nd.

Update 5/5/17: Etsy reported a breakeven quarter for earnings that matched estimates. Revenue of $97 million missed estimates for $98.4 million. They also announced a new CEO to replace Chad Dickerson who will be leaving at the end of May. They announced layoffs for 8% of their workforce. Shares plunged on the earnings to a low of $9.90 but rallied on Thr/Fri back to $11.67 and a 10% move on Friday alone to close at a 2-month high.

Update 5/19/17: Shares spiked again last week to $13.31 after two private equity firms took large stakes. TPG Group revealed a 4.3% stake and Dragoneer Investment Group holds a 3.7% stake. In filings, both revealed they had asked ETSY to explore strategic alternatives including a sale. ETSY responded saying the company is reviewing "strategic and operational plans" while the board "will carefully consider all options to increase shareholder value."

Earnings May 2nd.

Position 3/16/17:

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

Previously Closed 3/27/17: Long ETSY shares @ $10.25, exit $9.75, -.50 loss.



FNSR - Finisar Corp - Company Profile

Comments:

No specific news. Shares spiked to a 6-week high on strong news about orders of networking equipment from China. Shares are holding the gains. This is a June option so I raised the stop to take us out on any weakness.

Original Trade Description: April 24th.

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.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Update 5/5/17: Nice gain on unusual option activity. More than 6,800 May $24 calls traded against an open interest of 2,800, which means they were bought at around 75 cents each. Another 2,000 May $25 calls were bought at 45 cents. That is a total of $600,000 in premium when the normal volume is only a couple hundred contracts. Somebody is betting big on a short fuse with only two weeks to go.

Position 4/25/17:

Long June $25 call @ $1.20, see portfolio graphic for stop loss.

Previously closed 5/17/17: Long FNSR shares @ $23.10, exit $23.95, +.85 gain.



HABT - Habit Restaurants - Company Profile

Comments:

Habit remains in consolidation mode just under breakout resistance. The company said they will present at three investment conferences on June 6th, 7th and 13th. That should help energize the stock.

Original Trade Description: May 10th.

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 revenue of $78.6 million that increased 17.4%. Earnings were 9 cents. Same store sales rose +0.9% despite the flooding in California in Q1. That is where they have the most stores. This was their 53rd quarter of consecutive same store sales growth. They opened 3 new stores in the quarter to total 165 company operated locations and 13 franchised locations.

They guided for the full year for revenue of $338-$342 million. Same store sales of 2%. They will open 31-33 company operated stores and 5-7 franchised stores.

The company had $49.5 million in cash and no debt other than $9 million in short term lease-financing costs for stores under construction.

Earnings August 2nd.

Habit dies not suffer from the same discounting problem afflicting other QSR chains. Habit has a solid repeat customer base and they keep this base faithful by offering new premium menu items on a limited time basis every few weeks. By introducing short term premium specials they attract customers back into the stores every time. That creates repeat business between the announcement of new menu items. By not continuing them on the menu, it keeps their inventory costs lower and causes people to rush in to get the next special because they know it is going away.

They implemented digital advertising program during the quarter and expanded their email mailing list from 278,000 to 538,000 using a promotion for a free Charburger. The redemption rate was 49%, which is unheard of in fast food retailing. The average amount spent when customers redeemed the special was $3.85, which consisted of additional high profit items like fries and drinks. In reality, the special had no material cost and doubled the size of their email list.

It appears HABT shares are about to break out to a new leg higher after the two week pause for earnings.

Position 5/11/17:

Closed 5/16/17: Long HABT shares @ $19.50, exit $18.75, -.75 loss.

Still open: Long Sept $21 call @ $1.15, see portfolio graphic for stop loss.





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