Option Investor
Newsletter

Daily Newsletter, Saturday, 6/3/2017

Table of Contents

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

Market Wrap

Price Chasing

by Jim Brown

Click here to email Jim Brown

After nearly three months of relative dormancy, traders have awakened to see the train leaving the station.

Weekly Statistics

Friday Statistics

Sometimes when a stock or index breaks out to a new high by a couple points we say, yes a new high but there was no conviction, I would be cautious. This time there is conviction and there is no doubt we have a real breakout in progress. While there is no way to know if it will last a few days, weeks or months, what we do know is that investors are paying attention and they are chasing prices. Shorts are being covered and investors are biting the proverbial bullet to buy something even if they do not believe it will last. The market has failed to decline on a multitude of events and now all of that base building is paying off.


Some of the credit for Friday's gains should be given to Tom Lee of Fundstrat, who made a bullish call on the FANG stocks. He said hang onto those stocks and we could see another 20% to 40% gains in the second half of 2017. Not only are those companies blessed with soaring earnings, they historically rise in the second half of the year since 2009. In 2015, the FANG stocks rose 29% through May and then surged another 43% by year-end. Since 2009, they have averaged 17.7% gains from May 31st through year-end.

Lee's call is even more surprising because he is the biggest bear on Wall Street. His year-end S&P target is 2,275 and 7% below Friday's close. Year to date, Facebook is up 33%, Amazon 34%, Netflix 32% and Alphabet/Google +26%.

The four original FANG stocks have deviated from the same path over the prior four months but the last two weeks they have been in lock step. They have been responsible for lifting the Nasdaq and the S&P to new highs and we thank them for it.


The morning market started strong despite a big miss on the Nonfarm Payrolls. The headline gain for May slipped to 138,000 from 211,000 and missed estimates for 185,000. The 211,000 from April was revised lower to 174,000 and the 79,000 from March was revised lower again to only 50,000. The rise in May was still the 80th consecutive month of gains and the longest string since the 1930s.

Goods producing firms added 16,000 jobs and service industries added 122,000. Retailers suffered the biggest decline with a loss of -6,100 jobs. Personal and business services added 38,000, finance 11,000, transportation 3,600 and mining/energy 6,000.

The U3 unemployment rate fell from 4.4% to 4.3% and the broader U6 rate fell from 8.6% to 8.4%.

There were still 94.983 million people shown as not in the labor force. The labor force declined by 429,000 and the labor force participation rate declined from 62.9% to 62.7%.

Despite the decline in unemployment the number of workers being laid off declined sharply and there were fewer workers taking part time jobs because they could not find full time work. This suggests the labor market is doing just fine and the minor 0.2% gain in the average hourly wage is not showing any upward pressure from a lack of workers. That said, there are nearly six million unfilled positions in the US. Employers claim they cannot find qualified workers or they cannot find people willing to do the work.


The decline in the growth rate of employment suggests future weakness in consumer spending and that knocked the Atlanta Fed real time GDPNow forecast down from 4% to only 3.4% growth.


The "adequate" jobs numbers and comments from Fed officials helped to raise the expectations for a rate hike at the June meeting next week. There is now a 94.6% chance of a quarter-point rate hike, which is as close to a guaranteed hike as you can get. The July meeting probability is only 4.7% and September has risen slightly to 29.3%. December probabilities have risen to 49% and should increase based on the Fed statement next week.


Also on Friday was the ISM for NY. The current conditions index declined from 55.8 to 46.7 and back into contraction territory for the first time in eight months. The employment component fell from 45.1 to 40.3 and the six-month outlook from 73.2 to 70.6.

Moody's Chart

The economic calendar for next week is very short. The biggest events come on Monday with the ISM Services and Factory Orders. The rest of the week is tame with the Wholesale Trade on Friday normally ignored.


The big event that traders are probably ignoring is the snap election in the UK. Prime Minister Theresa May called the snap election ahead of the Brexit negotiations thinking she could expand her majority in Parliament. When she called the election, she thought it would be an easy victory and add to the conservative majority. Today, according to polling by YouGov, her lead in the polls has fallen from 15% to 5% with Jeremy Corbyn, leader of the Labor Party, surging in the polls. YouGov believes May is now 13 seats short of the 326 seats needed for a majority in Parliament.

The Brexit decision is still a hotly contested topic and the election could go either way. If May loses or wins by only a small amount it will put her in a much weaker position to negotiate the terms of Brexit with the EU Commission. The pound would be hit hard. Bank of America sent a note to clients on Friday warning that currency markets appeared "overly complacent" given recent polling data. Brown Brothers Harriman said the activity in the options market showed some investors were buying downside protection against a currency event.

This will probably play out like all the other critical events over the last three months and nothing will happen to the markets. Of course, once we begin to expect that to happen we are setting ourselves up for a disappointment.


Meanwhile the dollar is at 8-month lows as the U.S. economy slowed in Q4 and 24 economic data points in May came in lower than expected. Add in the firestorms surrounding the current administration in Washington and the dollar is losing its clout.


The yield on the ten-year treasury fell to 2.159% and the lowest level since the election. The rising geopolitical concerns, troubles in Washington and weakening economics are turning treasuries back into a safety trade. That is fine if you are comfortable with a 2% return but with equities in breakout mode it will be interesting to see if bonds continue higher and yields lower. Some analysts believe this is strictly the result of a lack of securities in the market. Companies with little to no credit are able to sell billions in debt because the demand is so high the risk is ignored. With the Fed holding $4.5 trillion in treasuries, that keeps a lot of paper out of the market.


There were no material earnings reports on Friday. Companies celebrating from their earnings on Thursday included Broadcom (AVGO). The company reported earnings of $3.69 compared to estimates for $3.36. Revenue of $4.19 billion beat estimates for $4.11 billion. They guided for the current quarter for revenue of $4.37 to $4.52 billion and analysts were expecting $4.23 billion.

RBC Capital said the "stable to better demand" and "impressive execution" led to the earnings beat. Broadcom said "anticipating that end markets will remain healthy, we expect current quarter revenue growth of 6% sequentially" because of a later than normal production ramp for iPhone 8 and then into double digits in the October quarter. The CEO also said a pending smartphone ramp by a "large North American customer" an implied reference to Apple, would feature a 40% increase in the dollar content of the RF and Wi-Fi/Bluetooth combo chips Broadcom is supplying compared to the last iPhone cycle. As phones become more complicated and required to communicate at faster speeds over more frequencies, the chips become more complicated in order to support those capabilities.

Also helping the stock was news that Broadcom was not bidding on the Toshiba memory assets. Analysts were afraid they were going to pay too much. They are already in the midst of acquiring Brocade (BRCD) for $4.5 billion.

Shares exploded higher with a $20 gain.


Lululemon (LULU) rocketed 11% higher after reporting earnings of 32 cents compared to estimates for 28 cents. Revenue of $513 million missed estimates for $520.3 million. The company guided for the full year for earnings of $2.28-$2.32, a 2-cent higher range, but reduced revenue expectations to $2.53-$2.58 billion. The big earnings disappointment the prior quarter appeared to be a one-time event BUT the beat this quarter was against lowered expectations.


Restoration Hardware (RH) reported earnings of 5 cents on revenue of $562 million. Expectations were for 4 cents on sales of $556 million. The company raised full year revenue guidance from $2.3-$2.4 billion to $2.4-$2.45 billion. However, they cut earnings guidance from $1.78-$2.19 to $1.67-$1.94. RH is shifting to a Costco model where members will be charged $100 a year and that gives them access to special prices when they shop and advance notice of sales. Shares fell 25% on the news.


Workday (WDAY) reported adjusted earnings of 29 cents that beat estimates for 16 cents. Revenue of $479.9 million beat estimates for $466.8 million. Subscription revenue rose 42.7% to $399.7 million. Services revenue rose 18.7% to $67.5 million. They generated $149.4 million in free cash flow and ended the quarter with $2.1 billion in cash. They raised revenue guidance for the quarter and full year. Shares rose $3 on the news to a new high.


VMWare (VMW) reported earnings of 99 cents that beat estimates for 95 cents. Revenue of $1.74 billion beat estimates for $1.71 billion. The company guided for the current quarter for revenue of $1.84-$1.89 billion and analysts were expecting $1.81 billion. Earnings guidance of $1.11-$1.14 was above analyst estimates for $1.09. Shares declined $2 despite the good news.


Medical device maker Cooper Companies (COO) reported earnings of $2.50 that beat estimates by 25 cents and rose 25% from the year ago quarter. Revenue of $522.4 million beat estimates of $522 million. They raised full year earnings guidance from $9.10-$9.30 to $9.50-$9.65. Shares spiked $18 on the news.


Earnings for Q1 have increased 15.4% with 496 S&P-500 companies reported. Over 75% have beaten expectations and above the four quarter average of 71%. More than 62% beat on revenue and above the 53% average for the last four quarters. There have been 78 earnings warnings for Q2 and 40 companies issued positive guidance.

For next week, there are still a few stragglers. Dell (DVMT) will report on Thursday and be the highlight for the week. Softbank (SFTBY) is the biggest company reporting but they are not widely followed in the US.


Western Digital (WDC) is still trying to buy the Toshiba memory unit. The CEO of WDC is traveling to Tokyo next week to meet with Toshiba president Satoshi Tsunakawa about a new offer for the memory unit. The companies have been dueling in the press over the WDC offers and claims. WDC has filed an arbitration complaint against Toshiba and since that will take up to a year to be processed, Toshiba must work out a deal with WDC or forgo receiving any money from a sale for that period. Toshiba is desperate for cash and that puts WDC back in the picture. According to their prior joint venture agreements, WDC has sole right of refusal on any sale or transfer of assets out of the joint venture. In theory, that means WDC can block any sale. In practice, it just means any attempted sale without WDC approval is going to be messy and when you are talking about a $20 billion deal, it may be hard for alternate buyers to turn loose of the money unless they know they are getting clear title.

I believe WDC has a good chance of ending up with the business. I just hope they do not pay too much. WDC claims the fair value is $16-$18 billion but Chinese company Foxconn has reportedly bid well over $20 billion. The Japanese government does not want Toshiba to sell to a Chinese company so that bid is simply noise.


BlackBerry (BBRY) is at new 52-week highs after Citron Research said the stock could double ($20) because of their shift away from a hardware company to security software and automotive software. Citron said the change in company focus could be a game changer. Citron said Blackberry could be the next Nvidia. While I applaud their reach in comparisons, there is little to no chance of that coming to pass. Citron said Blackberry has become a real takeover target. Macquarie Research wrote an investor note in late May saying BBRY shares could hit $45, by 2020. That time horizon is out of my ballpark.


Crude prices fell again despite a larger than expected decline in U.S. inventory levels. Goldman warned that they were reducing their outlook for crude prices for the rest of the year to average $52.92. Some analysts had been targeting $55-$60 later this year but that view is fading fast.

With crude production rising almost to the point of negating the 1.8 million barrel OPEC cut by the end of 2017, traders are worried about OPEC's next move. They certainly cannot just end the cuts in March as projected. That would flood the market with a surplus of oil and ruin any 2017 effort to normalize inventories. The only thing we can always count on is that traders will never be happy regardless of what OPEC says or does.


Producers activated 11 oil rigs last week despite the drop in crude prices. However, since it takes weeks to months to unstack, move and crew an out of service rig, these have more than likely been in motion for some time and just now began drilling.

U.S. production is up more than 500,000 bpd in 2017 and is expected to rise another 500,000 bpd by the end of the year. Consumers should be thrilled because summer gas prices should remain low.



Markets

It is hard not to be optimistic or at least hopeful for the markets next week. The magnitude of the breakout on the S&P leaves no doubt about whether it is a breakout or just a minor push through resistance. In theory, this rally should continue because of the sudden strength. We have been talking for weeks about "if resistance breaks" or "it was only a minor break on low volume and there was no conviction." On Friday, volume was moderate at 6.4 billion shares but there was plenty of conviction.

Advancers beat decliners 4,710 to 2,418. New 52-week highs were 1,180 and the highest in 2017. It may have been led by the FAANG stocks and Tom Lee's bullish call but once the train started to leave the station everybody raced to climb on board.

This was a Friday when weekend event risk normally keeps markets in check. There was no sign of that caution anywhere except the Russell 2000 where the index peaked at 1,415 at 11:30 and then fell -10 points in the afternoon to close at 1,405. All the rest of the major indexes closed at or near their highs.

The S&P blew through resistance at 2,420 on Thursday and continued to climb on Friday to close 19 points above that prior resistance. Last Sunday I said the next material resistance was between 2,435 and 2,445. The S&P stopped right in the middle at 2,439. Any further gains could produce a runaway market. The last time we had a sprint like this was in February when the S&P spiked 130 points in 18 trading days to end with new highs on March 1st. it took us three months of consolidation to equalize those overbought pressures. I would gladly trade another three months of sideways summer movement for a second 130-point gain. The S&P has already rebounded 88 points from the May 18th low. For a market with no prior direction, this has been a monster rally.

I read some other commentaries and most analysts are now targeting 2,450 to 2,465 with some as high as 2,475. Most are just confused and are grabbing at major numbers as resistance points. When markets breakout well into blue-sky territory there is no really accurate way to predict a top.

I do not want to try and predict a top. I would rather just keep a running commentary of support points and look to buy the dips as they appear.

There is so much money on the sidelines because of the normal summer weakness and the various bearish market calls by big name investors, that this rally could continue farther than any expect.

Obviously, I am going to be very disappointed next week if 2,440 proves to be a climax top but I will still be appreciative for the gains we made last week. Investors are always trying to get positioned for the next move higher and those who were long last week were richly rewarded.

Current support should be 2,420 and then 2,400. This is the point where short covering and price chasing become major market movers. Shorts are in disbelief and anyone in cash is racing to chase stocks they believe are going to run away from them.


Fortunately, the Dow did not spike a couple hundred points. The 62-point gain on Friday was not enough to suggest there will be a multitude of sellers on Monday morning and several days of good solid gains are exactly what the market needs. Those big spike and die gains like those that we saw on March 1st are not conducive to a long-term rally. We need several days like Friday with solid 60-point gains and no drama.

I am not holding my breath since we have been conditioned over the last three months for sideways movement and no volatility.

There was a broad cross section of gainers on Friday with banks and energy the weakest. Defense, tech, consumer discretionary and even a couple of drug companies combined to lift the Dow.

I do not think the Dow is far enough over that prior resistance for it to be effective as support on a decline. That means support is still in the 21,000 range and that is 200 points below Friday's close.



The Nasdaq Composite surged 59 points on Friday to extend its breakout over the long-term uptrend resistance. The 6,200 level was support from the last rebound and provided a launching pad for the Thr/Fri sprint higher. The biggest news on Friday was the lack of decliners. Note in the winners and sinners list below how few Nasdaq stocks there were with losses over $1. Only 21 stocks lost $1 or more.

I have to put in the obligatory "Nasdaq is overbought" message after the 300-point gain in the last two+ weeks but there may be room to run. The Nasdaq is powered by earnings and those earnings have been strong.

Support remains 6,200 and I have no resistance on my chart until around the 6,500 level. While I seriously doubt we will just sprint up to that level that is the next line on the chart.




The Russell 2000 blew through resistance at 1,388 and 1,400 but hit a brick wall at 1,415 and closed 10 points off the intraday high on Friday. Next Friday is when the first rebalance list is released showing the dozens of stocks being removed from the Russell indexes. This typically causes a headwind the following week as retail investors try to jump in front of the actual rebalance selling later in the month.


The market had a good week after a slow start. It was driven by the big cap tech stocks but the enthusiasm was contagious. If we could just get the banks to recover next week, they could provide some additional lift. With interest rates rising, the banks should be recovering but the falling treasury yields, weaker economics, weaker dollar and low trading volumes are taking their toll. Most of the big banks closed near their 2017 lows last week.

The trend is our friend until it ends and the rally in the big cap techs could keep the current trend alive. There will eventually be a day of reckoning but without a major negative headline, I do not see a market decline for next week. Unfortunately, it is the ones we do not see coming that hurt the worst.

The terrorist attack in London on Saturday is depressing but it should not have any material impact on the U.S. markets on Monday.



Random Thoughts


The bulls cannot make up their mind. The +9% gain from last week was followed with a -5.9% decline this week. Most went back to the undecided column. The week-to-week results of this survey continue to show the lack of conviction by quite a few traders. Currently 73% are not bullish and the market is at new highs. That should/could provide more fuel for the rally if they become converts.

Last week results


Marissa Mayer, now 42, left Google to be CEO of Yahoo (YHOO) in 2012. Since then she has made nearly a quarter of a billion dollars running a company that continues to decline. Facebook and Google stole their advertisers. Their Yahoo web pages lost market share after makeovers by an army of programmers that obviously did not have any real world experience actually using the pages. Everything became an ad and content became sparse. Yahoo was hit with two of the biggest cybersecurity breaches in history and they did not even report it for two years. More than 500 million accounts were hacked in 2014 and one billion in 2013. More than 50% of the staff left and Yahoo continued to see earnings decline.

For her efforts in running a failing business, Mayer received about $900,000 a week in compensation including stock and options. She will get $187 million in severance if shareholders approve the Verizon acquisition.

Yahoo shareholders will vote this week to approve the $4.5 billion acquisition by Verizon. The phone company will take over the actual operating company and Yahoo will become Altaba, a combination of the words alternative and Alibaba. The company will hold shares representing 15% of Alibaba worth about $35 billion. Altaba will also hold 35.5% of Yahoo Japan worth roughly $10 billion. Verizon is paying the reduced price of $4.5 billion for the operating assets and the combination of those three items equals the $50 billion in market cap for Yahoo stock today.




 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Sometimes people don't want to hear the truth because they don't want their illusions destroyed."

FRIEDRICH NIETZSCHE


 

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

Jack of All Trades

by Jim Brown

Click here to email Jim Brown
Editor's Note

Some companies start out in one field and end up profiting from several others. FLEX has been around for 27 years but I was surprised to see what they do now.



NEW BULLISH Plays

FLEX - Flex Ltd - Company Profile

Flex Ltd. provides design, engineering, manufacturing, and supply chain services and solutions to original equipment manufacturers worldwide. It offers innovation services, such as innovations labs for supporting customer design and product development services from early concept stages; collective innovation platform, an ecosystem of technology solutions; Lab IX, a startup accelerator program; centers of excellence solutions in critical areas; interconnect technology center for printed circuits; and CloudLabs that enables customers to accelerate a spectrum of cloud, converged infrastructure, and datacenter strategies. The company also provides design and engineering services, including contract design and joint development manufacturing services, which cover various technical competencies, such as system architecture, user interface and industrial design, mechanical engineering, technology, enclosure systems, thermal and tooling design, electronic system design, reliability and failure analysis, and component level development engineering; and systems assembly and manufacturing services. In addition, it provides component product solutions, including rigid and flexible printed circuit board fabrication, and power supplies; after-market supply chain logistics services; and reverse logistics and repair services, such as returns management, exchange programs, complex repair, asset recovery, recycling and e-waste management for consumer and midrange products, printers, smart phones, consumer medical devices, notebooks, PC's, set-top boxes, game consoles, and infrastructure products. The company was formerly known as Flextronics International Ltd. and changed its name to Flex Ltd. in September 2016. Flex Ltd. was founded in 1990 and is based in Singapore. Company description from FinViz.com.

FLEX surprised me. I have traded it numerous times over the last 20 years but it was named Flextronics. They were a manufacturer of circuit boards. If you look at their company description above they are doing far more than that today.

FLEX reported earnings of 29 cents that beat estimates for 28 cents. They posted revenue of $5.86 billion that beat estimates for $5.67 billion. They guided for the current quarter for revenue of $5.7 to $6.1 billion and earnings of 24 to 28 cents. Full year free cash flow was $660 million and cash flow from operations of $1.15 billion. They have expanded margins for 14 consecutive quarters. They repurchased $350 million in shares for the year ended in March. The company said it remained committed to return 50% of free cash flow to shareholders on an ongoing basis. They ended the quarter with $1.8 billion in cash and debt of $3.0 billion.

Earnings July 27th.

Their guidance for earnings was a little lighter than expected because they announced a capex spending project that would weigh on the quarter's earnings. The spending is to improve a process to further expand margins.

Shares are in a steady uptrend and making new highs almost daily.

Buy FLEX shares, currently $17.62, initial stop loss $16.75.

Alternate position: Buy July $18 call, currently 49 cents, no initial stop loss.


Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Russell Nearing Highs

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 high close in April was 1,419 and it ended the day on Friday at 1,408. The Russell has gained nearly 4% over the last three days and blew through resistance at 1,388 and 1,400. It has one more hurdle and that is the prior high close at 1,419. With the Russell rebalance list coming out next Friday, I would be surprised if we are going to see a new high next week.

The big cap markets are in full breakout mode. The S&P has pushed through resistance at 2,400 and 2,420 to close at 2,439 and rapidly moving into overbought territory.

However, this is a prime example of short covering and price chasing. Once the sellers capitulate the race higher begins.





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


SNCR - Synchronos Technology
The short position was entered at the open.

VSI - Vitamin Shoppe
The short option position was closed at the open.



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:

No specific news. Only a minor 10 cent decline after the big gain on Thursday.

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.

Update 5/27/17: 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.

Update 6/1/17: Short seller Citron Research issued a buy recommendation on Blackberry saying their automotive software is a game changer for the company. With an installed base of 60 million, QNX already has four times the number of cars as Mobileye when Intel bought them for $15 billion. Citron thinks BlackBerry shares could double and they could be an acquisition target now that their focus has changed to software. Shares rallied 8% to a new 52-week high.

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.



FRAC - Keane Group - Company Profile

Comments:

No specific news. Oil prices fell again and the sector declined with them.

Original Trade Description: May 31st.

Keane Group, Inc. provides full-service completions that include hydraulic fracturing, wireline, coiled tubing, and nitrogen units. It also offers drilling and well construction services that include top hole air rig packages and cementing. The company was founded in 1973 and is based in Houston, Texas. Company description from FinViz.com.

Investors are fleeing energy stocks and analysts are talking about $40 oil. This is ridiculous. All the major players, EIA, IEA, OPEC, Wood MacKenzie, etc all believe global inventory levels are declining by 700,000 bpd thanks to the OPEC production cuts. There are challenges where production is increasing. Libya is ramping up production after years of dormancy because of the civil war. The U.S. is ramping up production we well. These facts are constantly quoted by the bears. What they do not tell you is that global demand is expected to increase between 1.2 and 1.4 million bpd in 2017. With the summer driving season now underway, that demand will begin to surge. Inventory levels in the U.S. have declined -19 million barrels over the last 7 weeks. Now that driving season is here they will begin to decline at a faster rate.

In order for U.S. production to increase there needs to be an increase in fracking capacity. Much of that capacity was cold stacked in 2016 after the oil crash. Today there is not enough capacity and prices are surging.

Keane Group is an oil field service company that just came public in January. The dual oil crashes in March and May, crushed the stock back from $23 to $12. When they reported earnings in early May they were reactivating fracking capacity at a frantic pace. They went from 15 operating fleets to 19 fleets over the last quarter and are still in the progress of reactivating the rest.

In late May they announced the acquisition of RockPile Energy, another oilfield service company and fracking operator. The acquisition will increase Keane's fleet of frackers by 26% and it will be one of the largest and most modern pressure pumping fleets in North America. They will have about 1.2 million hydraulic fracturing horsepower available.

The evolution of hydraulic fracturing in the U.S. over the last three years has been remarkable. The horizontal laterals on the wells are longer with most now in the range of 10,000 feet. The amount of sand and chemicals forced into the wells have increase by a factor of four or more, which means more horsepower, bigger sand capability and better technology. The frackers are going to be in high demand for years to come because producers have figured out how to produce oil and be profitable under $50.

Keane's shares have declined from the IPO price but over the last month they have been rising while all the other energy stocks have been declining. This is proof that frackers are in high demand and investors are understanding the production curve.

Expected earnings August 1st.

Weekly inventories are due out on Thursday morning. If there is another big decline the oil price meltdown could end as quickly as it began.

Because this is a new stock, the option spreads are wide and dangerous. If FRAC performs as expected, we will be ok. If not there could be a substantial penalty in stopping out of an option position. For that reason the alternative option position will not have a stop loss.

Position 6/1/17:

Long FRAC shares @ $15.34, see portfolio graphic for stop loss.
Alternate position: Long July $17.50 call @ 45 cents. No stop loss.



KTOS - Kratos Defense - Company Profile

Comments:

No specific news. Minor rebound.

Original Trade Description: May 24th.

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 depart spending.

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

Position 5/30/17:

Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.



STM - STMicroelectronics - Company Profile

Comments:

No specific news. Back to a 2-week high.

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.



WTW - Weight Watchers - Company Profile

Comments:

No specific news. Minor gain to a new 52-week 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. Intraday bounce was sold. Missed our stop loss by 4 cents. 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.



SNCR - Synchronos Technologies - Company Profile

Comments:

No specific news. Minor rebound in a bullish market.

Original Trade Description: June 1st.

Synchronoss Technologies, Inc. provides cloud solutions and software-based activation for connected devices worldwide. The company's products and services include cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, and identity/access management that enable communications service providers, cable operators/multi-services operators, original equipment manufacturers with embedded connectivity, and multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices. It also provides Synchronoss Enterprise solutions, such as secure mobility management, data and analytics, and identity and access management solutions for the financial, telecommunications, healthcare, life sciences, and government sectors; and Synchronoss Personal Cloud platform that delivers an operator-branded experience for subscribers to backup, restore, synchronize, and share their personal content across smartphones, tablets, computers, and other connected devices. In addition, the company offers software as a service for the organizations to securely manage, control, track, search, exchange, and collaborate on sensitive information inside and outside the firewall. Its products and platforms are designed to enable multiple converged communication services to manage across a range of distribution channels, such as e-commerce, m-commerce, telesales, customer stores, indirect, and other retail outlets. The company markets and sells its services through direct sales force and strategic partners. Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey. Company description from FinViz.com.

SNCR was supposed to report earnings on May 9th. Instead, on April 27th they announced that the new CEO and CFO were leaving unexpectedly after only a few months on the job. The prior CEO and founder and the prior CFO would return to help get the company through some rough times.

The company also announced that expected revenue for Q1 would be $13-$14 million less than prior guidance. Operating margins of 8% to 10% would also be less than prior guidance. Earnings will be on May 9th and everything will be explained on the call.

On May 8th the company announced it was rescheduling the earnings date for May 15th.

On May 15th, they announced they would not be releasing earnings and they had no projected date. Apparently, the founder and CEO for 17 years along with his partner the prior CFO were having problems reconciling some items and the auditor Ernst & Young was "suggesting" additional reviews of critical accounting procedures.

This is just speculation but when a new CEO and CFO suddenly depart after only a few months, it may have been because they uncovered a hornets' nest of problems and determined they did not want to be associated with the company. We will never know if that is correct or not. However, when the prior CEO for 17 yrs and CFO for 13 yrs, cannot immediately reconcile the books after only being away for a few months, that suggests additional problems. These are the kinds of things that get auditors really interested and they start poking into things they glossed over before.

On May 22nd, the company received the warning of impending delisting by the Nasdaq. This is a boilerplate type event triggered by the failure to file and they have until November to correct the problem, but itis just one more thing on their plate.

Shares had already been falling since the weak earnings in January. They closed around $25 before the first announcement broke. They declined to $11 then rebounded to $19 on the hope that the prior CEO/CFO would quickly get the company back on track. Now the stock is back at 7 year lows and the bad news just keeps piling up.

If they had a projected earnings date, I would feel better about their recovery. We are now nearly a month late on the financials and no news is flowing. SNCR could be headed a lot lower because the eventual news could be bad. Rarely do earnings delays result in positive news.

This has to be a stock only play because the options are too expensive.

Position 6/2/17:

Short SNCR shares @ $12.64, see portfolio graphic for stop loss.



VSI - Vitamin Shoppe - Company Profile

Comments:

No specific news. Shaers rebounded slightly at the open then accelerated lower. Unfortunately, we closed the put position at the open.

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:

Previously closed 6/1/17: Short VSI shares @ $11.55, exit $11.85, -.30 loss.

Alternate position:
Closed 6/2/17: Long Aug $10 put @ 49 cents, exit 50 cents, +0.01 gain.



VXX - Volatility Index Futures - ETF Description

Comments:

Only a minor rebound from a historic low close. Must have been weekend event risk hedging.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

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.


ECA - Encana Corporation - Company Profile

Comments:

No specific news. 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 two weeks. This is a June option and we will close it next week if there are no further gains.

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 are struggling to move higher and not succeeding. I am recommending we close the position.

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:

Shares struggling and closed at a 5-week low. 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.



TWLO - Twilio Inc - Company Profile

Comments:

No specific news. Shares are moving sideways while we wait for buyers to appear.

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

Previously closed 5/31/17: Long TWLO shares @ $25.01, exit $23.85, -1.10 loss.





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