Option Investor
Newsletter

Daily Newsletter, Tuesday, 6/27/2017

Table of Contents

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

Market Wrap

Unexpected Headlines

by Jim Brown

Click here to email Jim Brown

I constantly warn that it is the headlines you do not expect that cause the most damage.

Market Statistics

The morning began with European markets negative on comments from Mario Draghi that "deflationary forces" were dead and he was seeing "reflationary forces" in the European economy. European markets declined sharply on the expectations for normalization of rates at a faster than expected pace. He said, "The central bank can accompany the recovery by adjusting the parameters of its policy instruments, not in order to tighten the policy stance but to keep it broadly unchanged." Traders did not understand how the ECB would "adjust" the parameters but "keep policy unchanged." Confusion reigned and bonds were sold off all over Europe and in the USA.

These comments brought up fears of a new "taper tantrum" which crashed the markets several years ago when the Fed began tapering its QE purchases. Since the ECB is still buying bonds under its QE program, there were all sorts of concerns about policy changes and how that would impact rates.

The confusing headlines out of Europe pushed our futures negative and the markets opened lower. There was a rally attempt ahead of Janet Yellen's speech but once she said asset valuations (stocks) are somewhat "rich" today by standard metrics, a new move lower quickly appeared.

Lastly, the late afternoon news that the Senate had cancelled the vote on healthcare until after the July 4th recess, weighed even more on the market. The multiple republican groups are a long way from securing an agreement that would allow the bill to pass into the next phase of consideration. Putting it off until after the holiday probably means it will not get a vote until just before the August recess and there are no guarantees it will pass. As of today, it appears dead in the water. If you change some provisions to please some holdouts then other factions will leave the consensus.

The problem is not so much the healthcare bill but the tax ramifications. A tax reform bill has no chance of passing until after a healthcare law has been completed. There is roughly $1 trillion in taxes embedded in Obamacare that need to be handled in a reform package but they cannot be handled until Obamacare is repealed and replaced. No healthcare, no tax reform and that is the big carrot for investors. The Trump agenda is slipping farther into the future every day and the delay on the vote probably means tax reform and infrastructure spending will not happen until 2018. That is a major disappointment for investors and the market decline reflected that disappointment.

On the economic front, the Richmond Fed Manufacturing Survey for June rose from 1 to 7 on the headline number. As you can tell by the chart, there is a lot of noise in this number as it tends to be volatile. On the positive side shipments rebounded from -2 to +11. However, the order backlog improved slightly but not enough to lift it back into expansion territory. The inventory/order gap improved only fractionally from -15 to -14. New orders were up slightly but well under the numbers from early this year.

The separate Richmond Services Survey declined sharply from 34.0 to 19.0 and analysts blamed it on the very rainy spring depressing outdoor events.


There were expectations for the headline number to continue lower into contraction territory so even though the rebound from 1 to 7 was minor, it did avoid going negative.


The Consumer Confidence for June rose 1.3 points from 117.6 to 118.9 to end the two-month slide. The present conditions component rose from 140.6 to 146.3 but the expectations component declined from 102.3 to 100.6. That is the lowest level since January. Relatively speaking confidence is still strong, now up 21.5 points over June 2016. The optimism peaked in March at 124.9 but the decline has been shallow. There is still plenty of post election optimism.

The respondents who think jobs are plentiful rose from 30.0% to 32.8%. Those expecting an increase in income rose from 19.1% to 22.2%. Those planning on buying a car slipped slightly from 12.5% to 12.2%. Homebuyers declined from 6.1% to 5.9% but appliance/TV buyers rose from 48.5% to 50.5%.


The rest of the week is lacking any material reports and even if there were headliners, there will be nobody around to read them. The volume is already declining and it will only slow from here.

Unless there is a significant miss of expectations, the remaining reports will not move the market.


The earnings calendar is just as lackluster with the exception of Dow component Nike on Thursday along with Micron Technology and American Outdoor Brands, formerly known as Smith & Wesson.


In stock news, Google (GOOGL) was hit with a $2.7 billion fine from European regulators over its shopping comparison feature. Google was accused of favoring its own products over those being sold by other retailers. The company has 90 days to shut down the comparison shopping feature or face additional fines. Google said it respectively disagrees with the ruling and plans to appeal. Under the existing feature retailers can pay Google to highlight their products rather than hoping they will appear in the listing organically. This was the largest single fine to date. Intel was fined $1.2 billion in 2009. Apple is fighting an attempt to collect $14.7 billion in back taxes the EU says it owes but its domicile country, Ireland, says it does not. Ireland cut a sweetheart tax deal with Apple to get the company to put its operations in that country. The EU says that is illegal and is trying to force collection.

Google shares fell from Monday's $990 to $948 on Tuesday and erased $19.7 billion from its market cap. Google shares are approaching critical support at $942. Today's share decline was a major impact to the Nasdaq.


Darden Restaurants (DRI) reported earnings of $1.18 that beat estimates for $1.15. Revenue of $1.93 billion also beat estimates for $1.87 billion. The big news came from same store sales. The overall company rose 3.3% with Olive Garden up 4.4%, Longhorn Steakhouse +3.5% and Eddie V's +3.3%. Yard House was flat and Seasons 52 fell -1.3%. The company guided for 1.0% to 2.0% for the full year. They are expecting full year earnings of $4.38-$4.50 and analysts were projecting $4.41. Shares rallied $2.61 in a very bad market. The CEO was asked how the sudden expansion of delivery services at competing restaurants was affecting his business. He pointed to the sales and said millennials still enjoy a quiet meal in a restaurant setting.


Homebuilder KB Homes (KBH) reported earnings of 33 cents compared to estimates for 26 cents. Revenue of $1.0 billion beat estimates for $922.1 million. The builder said its net order value increased 15% to $1.4 billion and its order backlogs rose 19% to 2.2 billion. Deliveries rose 11% to 2,580 homes. Shares rose initially in afterhours but then faded back to breakeven.


T-Mobile (TMUS) shares fell sharply after the talks with Sprint (S) over a possible merger were put on hold while Sprint negotiates with Comcast and Charter Communications over a potential wireless deal. Sprint majority owner, Softbank, put the discussions on hold until the end of July. Comcast and Charter entered into a wireless partnership in May in hopes of doing a deal with some wireless carriers to deliver broadband to customers over wireless networks. If they could include Sprint in the partnership, it would be beneficial for all parties. T-Mobile's CEO John Legere said if Sprint did a deal with a cable company, he would push for T-Mobile to team up with Dish.


Energy company Chicago Bridge and Iron (CBI) won a decision in the Delaware Supreme Court reversing a lower court ruling on a dispute with Westinghouse. In 2015, Westinghouse bought the nuclear power business from CBI. Westinghouse is owned by Toshiba and the deal was a nightmare and has caused major problems for Toshiba and forcing the sale of their memory business to raise cash. In today's ruling, the court reversed a $2 billion verdict from a lower court. Westinghouse had sued CBI for $2 billion claiming the purchase price of two unfinished nuclear power plants was supposed to be adjusted after the closing. CBI sold the plants and its nuclear business to Westinghouse for zero. They just wanted to be free of the anchor around their neck. Once Westinghouse realized it was a bad deal, they tried to reverse it. The court said no deal and the claim was without merit. Shares of CBI rallied 39% on the news.


While on the topic of Toshiba, the company has agreed to talk to Western Digital about the sale of their jointly owned chip business. Toshiba had rejected WDC's bid and awarded the deal to a consortium of investors including Hynix and Bain Capital. WDC sent the consortium a cease and desist letter warning them Toshiba did not have the right to sell the asset because it was jointly owned with Western Digital. WDC threatened them with legal action if they tried to close the transaction. The consortium told Toshiba the company would have to settle the dispute with WDC before they would proceed with any transaction. Toshiba needs the $19 billion in cash today to avoid bankruptcy from the Westinghouse nuclear problem. WDC has filed an arbitration claim that could take up to a year to be heard and they have asked for a court injunction to prevent a sale until then. Basically, WDC has the leverage.

With Toshiba agreeing to talk to WDC about a resolution it appears WDC could end up with the unit. WDC and KKR submitted a new bid, even though bidding is closed. The new bid is expected to appease Toshiba and could break the deadlock. Toshiba was trying to sign a deal before their shareholder meeting on Wednesday but that does not look like it is going to happen.


Nvidia (NVDA) is nearing another buying opportunity. Shares fell -$5.57 today despite news they had partnered with Volvo and Swedish auto supplier Autoliv to jointly develop self-driving vehicle technology. They have already partnered with Tesla, Toyota and others. They are going to be a major force in the self-driving car market in years to come.


Crude prices were ticking slowly higher over the last three days but that ended after the bell tonight. The weekly API inventory report showed an unexpected build in crude of 851,000 barrels. Analysts were expecting a -3.25 million barrel decline. Gasoline inventories rose 1.351 million barrels compared to estimates for a 900,000 barrel decline. Distillate inventories also rose 678,000 barrels. This is not a good sign for oil prices. Libya said production rose from 885,000 to 935,000 bpd over just the last week. Global inventories are no longer declining.



 

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Markets

The end of quarter window dressing took a wrong turn on the way to month end. If you want to break a historical trend, all you have to do is bet on it. The setup was perfect as of Friday's close but the outlook is significantly different today. The only window dressing occurring today was in the form of raising cash. The confluence of unexpected events combined to add to the minor selling pressure we saw on Monday. Now we could be looking at a race to the exits for any traders still in the market.

With the market on shaky ground and a four-day holiday weekend ahead, the event risk may be too much for investors to bear. Futures are down only slightly tonight and Asian markets are poised to move lower. If the market declines make a full circle through Asia and Europe and back to the U.S. on Wednesday, we could be setting up for some support tests.

The majority of selling was in the tech sector and that includes the biotech sector. The biotech index lost -3.2% after making almost a two-year high on Friday. The selling was strong in those stocks with the most gains, as is usually the case.


The Semiconductor Index also joined the party with a -2.71% decline to uptrend support. This should be a buying opportunity there as well but I would want to see it rebound before I added a new position.

The chip stocks normally lead the Nasdaq so a break of support on the $SOX is a bearish signal for the Nasdaq.



The Nasdaq rallied to resistance at 6,300 on Monday and failed. The index dropped back to support at 6,245 at the close. That support failed at the open on Tuesday and the index is now in danger of retesting critical support at 6,100. Rarely, does a third support test hold. Anything is possible but a break below 6,100 should easily test 6,000 and the May lows.



The S&P touched the year-end price target of 2,450 on Monday and was immediately rejected. The close last night just above 2,430 was only light support and that broke at the open today. Critical support from June at 2,420 technically failed at the close at 2,419.38 but that is close enough for me to claim success unless there are further declines. This is a 2,400-point index. I am not going to quibble over 62 hundredths of a point. A breakdown here should target 2,400 but it would be a significant break of sentiment and I would expect a lower low.


The Dow actually held up rather well. Despite breaking critical support at 21,400, there were only a couple of big losers and those losses were not that big. This was more of a lack of bidders than a surplus of sellers. The index is below critical levels and could easily retest the 21,125 breakout point from June 1st.



The small cap Russell was doing ok until the Nasdaq crashed. The lingering rebalance buying was keeping it positive but once the market rolled over this morning, it was a decent drop. Support at 1,400 needs to hold.


I missed the boat on the end of quarter window dressing. That was a historical trend and it failed. That is now past tense. I would recommend remaining in cash until after the holiday. We do not know what direction the market will take in the very low volume we are likely to see over the next five trading days. Don't bet the farm and then find yourself at the beach with the kids, wondering more about what the market is going to do than who is going to eat the most hotdogs.

There will always be another day to trade if you have capital in your account.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Ignorance is Bliss

by Jim Brown

Click here to email Jim Brown
Editor's Note

Vacations are times to put aside the cares of the world and relax without worrying about the market. For the next seven days, the amount of sunscreen you have is more important than market direction. Today's market hiccup put the indexes at risk and given the extreme low volume expected over the next five trading days, anything is possible. We should never put new capital at risk unless we have a good understanding of potential market direction. That direction is no longer clear and the most likely path is bearish. There is no reason to add new plays ahead of the coming uncertainty.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Nasty Surprise

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes accelerated lower on Yellen's comments and the cancelled Senate vote. The markets opened weak as they followed the European markets lower. The tech sector was the weakest but the Nasdaq held about 25-30 points down until Yellen said stocks were overvalued and the Senate cancelled the vote on health care. That killed the support and the Nasdaq accelerated into the close.

The Russell lost 13 points but given the severity of the Nasdaq decline that is actually not bad. We only lost one position where the Option Investor portfolio lost half its positions due to the tech slide.

With the week starting out badly, the next three days could have a negative bias.





Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


PPC - Pilgrim's Price Corp
The short stock position was entered at the open.

MYGN - Myriad Genetics
The long stock position was entered at $25.75.



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

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3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

ACOR - Acordia Therapeutics - Company Profile

Comments:

No specific news. Very minor decline from Friday's 3-month high.

Original Trade Description: June 21st.

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

Acordia took a fall at the end of March when two Multiple Sclerosis patents were invalidated by a court. This is normal stuff and happens all the time to biotech companies when competitors want to introduce a generic. Shares crashed but the outlook for Acordia did not.

They fell another 5% in late April when revenue of $112 million missed estimates for $121 million. The company did reaffirm guidance for ful lyear Ampyra sales in the range of $525-$545 million.

Recently, their experimental Parkinsons drug CVT-301 was named Inbrija. In early June they presented Phase III data which met its primary endpoint of improvement in motor function compared to a placebo. Multiple secondary endpoints were also met. The company plans to file a new drug application with the FDA by the end of this quarter.

Expected earnings July 27th.

Shares have been rebounding sharply and cleared resistance from the April/May decline. They have a long way to go to recover their highs and that is a potential for profit.

Position 6/22/17:

Long ACOR shares @ $18.80, see portfolio graphic for stop loss.



KTOS - Kratos Defense - Company Profile

Comments:

KTOS received $16 million in radar and system contract awards from a national security systems provider. Due to the classified nature of the program, on additional information was given. Shares showed very good relative strength in an ugly market.

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.

Update 6/13/17: Kratos said it was going to unveil its newest high performance class of military unmanned aerial system technology at the Paris Air Show next week. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Position 5/30/17:

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



LXRX - Lexicom Pharmaceuticals - Company Profile

Comments:

No specific news. Major decline but it was not stock related. Just a weak market.

Original Trade Description: June 19th.

Lexicon Pharmaceuticals, Inc., a biopharmaceutical company, focuses on the development and commercialization of pharmaceutical products for the treatment of human diseases. The company offers XERMELO, an orally-delivered small molecule drug candidate for the treatment of carcinoid syndrome diarrhea in combination with SSA therapy in adults. Its orally-delivered small molecule drug candidates under development comprise Sotagliflozin that is in Phase 3 clinical trials for use in the treatment of type 1 and type 2 diabetes; LX2761, which is in Phase 1 development for use in the treatment of diabetes; and LX9211 for use as a treatment for neuropathic pain. The company has license and collaboration agreements with Sanofi; Ipsen Pharma SAS; Bristol-Myers Squibb Company; and Genentech, Inc. Company description from FinViz.com.

Lexicon reported a loss of 31 cents that easily beat estimates for a loss of 44 cents. Revenue of $18.3 million beat estimates for $14.8 million. Small developmental drug companies rarely have earnings until their drugs reach the market.

Estimates earnings August 1st.

Lexicon recently reported positive results for two pivotal studies of the diabetes drug sotagliflozin. The Tandem1 and Tandem2 studies showed significant reduction in A1C and a lower rate of ketoacidosos than patients on insulin pumps. A new oral diabetes drug would be in high demand.

In Q1, they received approval for marketing for Xermelo a drug for carcinoid syndrome diarrhea. Patients were receiving the drug within days of the approval.

Shares closed at a 7 month high on Monday and just over resistance. This company could be ready for a breakout.

Options have very wide spreads so there will not be an option recommendation.

Position 6/2017:

Long LXRX shares @ $17.00, see portfolio graphic for stop loss.



MYGN - Myriad Genetics - Company Profile

Comments:

No specific news. The Nasdaq weakness finally triggered profit taking and we were stopped out.

Original Trade Description: June 17th.

Myriad Genetics, Inc., a personalized medicine company, focuses on the development and marketing of predictive, personalized, and prognostic medicine tests worldwide. It operates through two segments, Diagnostics and Other. The Diagnostics segment primarily provides testing and collaborative development of testing that is designed to assess an individual's risk for developing disease; identify a patient's likelihood of responding to drug therapy; guide a patient's dosing to ensure optimal treatment; and assess a patient's risk of disease progression and disease recurrence. The Other segment provides testing products and services to the pharmaceutical, biotechnology, and medical research industries; and research and development, and clinical services for patients. Its molecular diagnostic DNA sequencing tests include myRisk Hereditary cancer, a test for hereditary cancers; BRACAnalysis and BART, which are tests for hereditary breast and ovarian cancers; BRACAnalysis CDx test for use in identifying ovarian cancer patients with suspected deleterious germline; and Tumor BRACAnalysis CDx test that is used to predict DNA damaging agents, such as platinum based chemotherapy agents and poly ADP ribose inhibitors. The company also provides COLARIS test for colorectal and uterine cancers; COLARIS AP test for colorectal cancer; Vectra DA protein detection test for assessing the disease activity of rheumatoid arthritis; Prolaris, a RNA expression test for prostate cancer; EndoPredict RNA expression test for breast cancer; myPath Melanoma RNA expression test for diagnosing melanoma; myChoice homologous recombination deficiency (HRD) test to measure three modes of HRD; and myPlan lung cancer, an RNA expression test for lung cancer. Myriad Genetics, Inc. has collaboration with AstraZeneca for the development of an indication for BRACAnalysis CDx. Company description from FinViz.com.

In early June Myriad announced that EndoPredict, the novel new breast cancer test, had been approved for reimbursement by nearly all the medical plans in the USA. As of July 1st, public plans representing more than 35 million covered lives will join the private plans representing more than 109 million covered lives will have positive coverage of EndoPredict.

Medicare and Medicaid have posted a positive draft local coverage determination (LCD) for EndoPredict. If this LCD is approved as expected it would bring plan coverage to more than 75% of breast cancer patients in the USA. The ramp to coverage has been extremely fast as a result of the positive test results that showed EndoPredict "markedly outperformed prior generations of accepted tests" for breast cancer diagnosis.

Myriad has other breast cancer tests in the pipeline and in late stage trials. The company is rapidly becoming a powerhouse in the breast cancer field.

Earnings are already starting to rise as a result. In the Q1 update, they reported earnings of 27 cents that beat estimates for 24 cents. Revenue of $196.9 million beat estimates for $188.9 million. They guided for the current quarter to earnings of 26-28 cents and revenue of $192-$194 million. For the full year, they guided for $1.01-$1.03 and revenue of $763-$765 million.

Estimates earnings August 1st.

Position 6/19/17:

Closed 6/27/17: Long MYGN shares @ $24.03, exit $25.75, +$1.72 gain.
Alternate position:
Closed 6/27/17: Long Aug $25 call @ $1.20, exit $2.20, +$1.00 gain.



TWLO - Twilio Inc - Company Profile

Comments:

No specific news. The 34 cent decline was minimal considering this is a Nasdaq tech stock.

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.



WTW - Weight Watchers - Company Profile

Comments:

No specific news. Shares declined only slightly in a weak market. Hopefully somebody will think it is a buying opportunity.

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

NGVC - Natural Grocers Vitamin Cottage - Company Profile

Comments:

No specific news. Shares traded flat at the close with no gain.

Original Trade Description: June 24th.

Natural Grocers by Vitamin Cottage, Inc., together with its subsidiaries, operates natural and organic groceries, and dietary supplement retail stores in the United States. Its stores offer natural and organic grocery products, such as organic produce; bulk food and private label products; dry, frozen, and canned groceries; meat and seafood products; dairy products, dairy substitutes, and eggs; prepared foods; bread and baked products; and beverages. The company's stores also provide private label dietary supplements; body care products comprising cosmetics, skin care, hair care, fragrance, and personal care products containing natural and organic ingredients; pet care and food products; household and general merchandise, including cleaning supplies, paper products, dish and laundry soap, and other common household products; and books and handouts. As of June 6, 2017, it operated 138 stores in 19 states. The company operates its retail stores under the Natural Grocers by Vitamin Cottage trademark. Natural Grocers by Vitamin Cottage, Inc. was founded in 1955 and is headquartered in Lakewood, Colorado. Company description from FinViz.com.

The company reported earnings of 13 cents that missed estimates for 16 cents. Revenue of $192.2 million missed estimates for $197.3 million. Same store sales declined -1.7%. They narrowed their full year guidance to earnings of 50-54 cents. They said they were cutting back on the number of new stores previously announced. That is a sure sign they are seeing competitive pressures on the business. The CEO warned that "the food retailing environment remains challenging."

The Amazon announcement just made their retailing environment significantly more challenging. NGVC has a very nice produce section of organic produce and a small grocery department roughly one fourth the size of a Whole Foods Market. Another 25% of their space is dedicated to vitamins. I visit one about once a week for a couple items. I have long ago switched my vitamin buying to Amazon because of the significantly reduced cost. I ran out of something a couple weeks ago and thought I will just swing by NGVC and get a bottle. The price was so high compared to Amazon, the sticker shock had me leaving the store empty handed. I had it from Amazon two days later.

I am afraid that is what many people are learning. It is hard to beat Amazon prices and the selection is much larger. NGVC was a niche store 10 years ago and did well. Now that Safeway, Walmart and Kroger carry so much organic food, NGVC is having trouble competing.

Expected earnings August 3rd.

NGVC shares are in free fall after their earnings. The Amazon announcement just greased the slide a little more.

Position 6/26/17:

Short NGVC shares @ $8.06, see portfolio graphic for stop loss.
Alternate position: Buy August $7.50 put, currently 50 cents. No initial stop loss.



PPC - Pilgrims Pride Corp - Company Profile

Comments:

No specific news. Shares continued their free fall.

Original Trade Description: June 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, prepackaged case-ready chicken, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to Mexico, the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946 and is headquartered in Greeley, Colorado. Company description from FinViz.com.

I have started to play PPC several times because it is definitely directional. Every time I would read the headlines and the analyst commentary and everyone is saying good things and how the stock should rise. Apparently, nobody is listening.

Florida is currently probing PPC and Tyson (TSN) on price fixing on chicken. The initial review was broadened after the initial probe suggested there might be fire behind that smoke. There are currently civil lawsuits in progress claiming prices were fixed.

PPC reported earnings of 38 cents that missed estimates for 43 cents and the year ago earnings of 46 cents. Revenue of $2.020 billion did beat estimates for $2.014 billion. Margins shrank and costs rose. Cash on hand fell from $120.3 million to $30.8 million.

Expected earnings August 2nd.

Shares just broke below the May support at $23 and the next material support is $20. If the antitrust probe is going to continue, that support may not hold.

Position 6/27/17:

Short PPC shares @ $22.30, see portfolio graphic for stop loss.
Alternate position: Long Aug $21 put @ .60, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Only a minor rebound considering how badly the markets declined in the afternoon.

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.

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.





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