Option Investor
Newsletter

Daily Newsletter, Wednesday, 6/28/2017

Table of Contents

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

Market Wrap

Rebound!

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market rebound from tech driven selling. The move confirms support but near-term outlook remains cloudy. Today's action was driven in part by a clarification of yesterday's comments from Mario Draghi as well as speculative buying in the banking sector. Yesterday, Mario Draghi appeared to signal that policy would begin to change course in the near-term. Today those statements were clarified to the point the market believe easy money policy will continue in the EU for the foreseeable future. On the banking front shares were being scooped up ahead of the release of stress test results and the expectation many banks would be able to substantially increase their distributions.

International markets were mostly lower in today's session. In Asia indices fell roughly -0.5% on uncertainty over the US health care vote and Mario Draghi's comments. In Europe indices were also down but losses were minimal. Mario Draghi's comment had them on edge but today's addendum helped to soothe the stirring beast.

Market Statistics

Futures trading was a bit mixed this morning. The broad market was indicated higher despite weakness in the tech sector. This changed going into the open as all stocks began to rise following the mornings news cycle. The S&P 500 opened with a gain of nearly 8 points and then proceeded to extend that in steady trading. The day's top was hit around 2PM at which time the indices entered a narrow trading range where they remained for the rest of the day.

Economic Calendar

The Economy

Mortgage applications and Pending Home Sales both fell this week as tight inventory curbs activity. Economist at the NAR say there are plenty of buyers but a lack of homes for sale has prices on the rise. Mortgage apps fell -6.2% after rising 0.60% the previous week. Pending home sales fell -0.8% from a downward revision to the previous month. On a year over year basis pending sales are down -1.7% and negative for the second month in a row and the fourth month in the last 10.

The Dollar Index

Mario Draghi killed the dollar bull and today's comments did not help. The Dollar Index fell another -0.40% and is now sitting on long-term support. The indicators are consistent with this move although both MACD and stochastic are showing divergences from the new low. Support is now $96 and likely to be tested in the coming days. A break below this level would be bearish with targets near the 1 year low of $94.15. Looking forward it appears as if the ECB is in fact at a turning point and more likely to begin tightening than add to easing. With this in mind the euro is likely is to stabilize and counter balance any bullishness in the dollar. The Dollar Index may not move below support but I do not see any reason for it to move higher in more than a short-term kind of way.


The Gold Index

Gold prices have held remarkably steady in the face of the dollars massive decline. The spot price hovered around the $1,250 level as risk-on sentiment countered dollar weakness. Where gold goes from here is questionable and likely determined by the next major headline. A move higher has resistance at $1,260 and $1,280, a move lower has support targets at $1,235 and $1,220.

The Gold Miners ETF GDX continues to wind up within it's narrowing trading range. Today's action saw the ETF trade sideways from yesterday's close, at the mid-point of support and resistance and below the long-term moving average. The indicators remains consistent with range bound trading although bias is to the downside. Support is near $22, resistance near $22.95 and getting lower. Without some other catalyst to move it this may come down to time, sooner or later it will exit the triangle.


The Oil Index

Oil prices continued to rebound on a surprise draw in gasoline stocks. The draw led traders to believe in demand was picking up but the move is likely short-lived. This draw is in preparation for the 4th of July weekend which is expected to see record driving, after that the driving season will taper off as always. Crude stockpiles rose by 0.1% versus an expected draw adding to today's bullishness. WTI gained a little more than 1.1% to trade near $44. 75 and looks like it might continue to rise near-term.

The Oil Index gained a full percent to trade at a one week high. The index is rebounding from recently set lows on rising oil prices but the move does not look very strong at this time. The indicators are both pointing lower and trending bearish over the short to long-term so a test of the low is likely. Support may be at the low but it is too soon to tell. Upside target for resistance is 1,120 or lower, downside target is 1,090 or lower.


In The News, Story Stocks and Earnings

The bankers were at the forefront of today's rally as speculative/dividend investors loaded up ahead of the stress tests. The BKX Banking Index gained more than 1.65% on the action and is testing a 3 month high. The indicators are not in support of higher prices at this time but positive results could drive it higher nonetheless. There is the possibility of a buy-the-rumor-sell-the-news response should the news be priced into the market already. All 34 banks passed, the first time since the tests were begun and the increase announcements have already begun to roll in.


Caterpillar gained more than 2% on signs of improving business traffic. Last week the company announced it saw a rise in new equipment orders, this week Credit Suisse says dealer backlogs are growing. This news came along their reiterated outperform rating and $123 price target, a 15% premium to today's market prices. The company is scheduled to report earnings in 4 weeks and may surprise to the upside.


The VIX fell roughly -10% to close move below on an intraday basis and close very near to the 10 level. The move is the largest single day move in nearly 3 weeks and returns the index to near historic lows. The indicators continue to trend consistent with range bound markets and is biased to the downside. Near-term indications are bearish so the fear gauge may test recent lows.


The Indices

The indices rebound from yesterday's lows in a move that in most cases confirms support at a key level. Today's leader is the Dow Jones Transportation Average with a gain slightly more than 1.51%. The index created a large green candle moving up from support and approaching the all-time high. The indicators are firing a weak buy signal but is confirmed by both. A move higher would face resistance at the all-time high, a break above which would be trend following and bullish.


The NASDAQ Composite made the next largest gain, nearly 1.50%, and recovered much of yesterday's losses. Today's action created a medium sized green candle confirming support at the short-term moving average although the indicators do not agree. Stochastic is pointing higher but is giving a very weak signal while momentum continues to weaken. A continuation of the bounce faces resistance at 6,300 and 6,350, a break below the moving average may find support near 6,000.


The S&P 500 comes in third today with a gain just shy of 1.0%. The broad market index created a medium sized green candle confirming support at the short-term moving average and capped at the bottom of the long-term up trend line. It looks like prices are bouncing higher in line with the trend but need to move above the trend line to confirm. The indicators are both showing weakness and pointing lower so it looks like a move significantly higher is not coming just yet. Upside resistance is the bottom of the trend line near 2,440 and rising, a fall from this level would be bearish.


The Dow Jones Industrial Average made the smallest move today but a move higher it made. The blue chips created a small green bodied candle moving up from yesterday's low and touching resistance at the long-term up trend line. The index appears to be moving up from a low in line with the trend but this move looks weak. The indicators are pointing lower and showing only the faintest signs of support so not a signal to trade on. A move higher would be bullish but also face resistance at the all-time high. A break above that level would be bullish. A move lower would find first support near 21,230 and the short-term moving average.


Frothy market action continues as sector rotation wears on. News and one-off events are moving the market within near-term ranges while we wait on the upcoming earnings cycle to ramp up. Expectations remain high despite falling oil prices so there is a good chance the market will hold near current levels until then. Between then and now volatility may persist. I remain cautious for the near-term and bullish for the long, waiting on earnings and the next good market signal.

Until then, remember the trend!

Thomas Hughes


 

INDEPENDENCE DAY SPECIAL!

Welcome to our mid-year Independence Day Subscription Special. Save 50% or more on your subscription!

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see until December! There isn’t a minute to spare.  Order now.

Renew for as little as $249
for six months,
ONLY $1.38 per day


 



New Plays

Reload

by Jim Brown

Click here to email Jim Brown
Editor's Note

We played this short a couple weeks ago, time to reload. We exited FOSL with slightly more than a $2 gain when it rebounded unexpectedly. Nothing has changed fundamentally and it was down today in a bullish market.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

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. The company was formerly known as Fossil, Inc. and changed its name to Fossil Group, Inc. in May 2013. 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.

Shares crashed in early June on news the CEO sold 520,000 shares in mid May and 1.074 million shares on May 30th. A Macquarie research note also said that 3.8 million shares were pledged as security for a note of around $75 million and they could be sold at any time. With FOSL shares at $11 the pledge was already in the red by $30 million. At the current price of $10 that value dropped by another $3.8 million. The CEO only has 4.426 million shares after his sales last week and with 3.8 million pledged, that leaves him with roughly 600,000. It appears the CEO is bailing on his holdings and that is never good for the stock price. If the price declines further he may be forced to sell his remaining 600,000 shares to make up the shortfall on the pledged shares.

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. Burberry is exiting the watch business this year and Fossil makes their watches. That means even lower revenue for Fossil.

Shares traded at a 16-year low in mid June before the recent rebound. I believe Fossil is going lower with $6 the likely target.

There was an upgrade by Buckingham Research on June 20th that stopped us out of the prior position. That was an upgrade from sell to neutral and hardly a reason to rush out and buy the stock. It did trigger some short covering. Shares are rolling over again after hitting resistance at $10.

Sell short FOSL shares, currently $9.75, initial stop loss $10.50.
Alternate position: Buy Aug $9 put, currently 65 cents. Initial stop loss $10.50.


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.



In Play Updates and Reviews

We Have a Winner

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 rebounded 22 points or 1.54% to post the largest index gain today. Apparently, fund managers jumped on Tuesday's market drop as a great entry point for their end of quarter window dressing. All the major indexes were up sharply but all of them closed just under resistance.

The Russell closed only .72 under its record close of 1,425.98 on June 13th. The leftover buying from the Russell rebalance is helping to lift the index. I would be thrilled if we were seeing some portfolio rotation out of large caps and into small caps but with all the indexes up sharply today we cannot make that claim.

The Russell was supposed to have a positive bias this week as a result of the rebalance and I am glad to see that trend has not failed.





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


LXRX - Lexicon Pharma
The long stock position was stopped at $16.75.



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

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

ACOR - Acordia Therapeutics - Company Profile

Comments:

No specific news. Nice rebound to a new 3-month high close.

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 announced the award of a $37 million initial production contract for subsonic target drones from the U.S. Navy. This is the initial annual order in a long term acquisition program so this represents a major win for KTOS. The company said the anticipated annual order for 2018 was expected to be 25% larger. The aircraft can carry electronic counter measures, active and passive radar augmentation, infrared, identification friend of foe, internal chaff and flare dispensing, threat emitter simulators, smoke and scoring devices. In addition, separate contracts for Peculiar Support Equipment, Initial Systems Spares, External Payload Systems and Flight Consumables will follow shortly.

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.

Update 6/27/17: 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.

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. Continued decline to stop us out at $16.75 for the loss of 25 cents.

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:

Closed 6/28/17: Long LXRX shares @ $17.00, exit $16.75, -25 cent loss.



TWLO - Twilio Inc - Company Profile

Comments:

No specific news. Nice rebound of nearly 3 times the 34 cents lost on Tuesday.

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 rebounded to erase two days of losses and close at a new 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

NGVC - Natural Grocers Vitamin Cottage - Company Profile

Comments:

No specific news. Shares moved slightly lower but it is the direction that counts.

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:

PPC was hit with two animal cruelty suits from Texas and Georgia following an investigation by the Humane Society. Shares declined slightly to continue their recent trend.

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:

Shares declined sharply to end only 4 cents above a new low.

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.





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