Option Investor
Newsletter

Daily Newsletter, Thursday, 6/29/2017

Table of Contents

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

Market Wrap

Correction, It's In The Air

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Equity indices fell hard on profit taking in the tech sector. Considering the amount of gains made by tech since the end of the year and the fact that tomorrow is the last trading day of the 2nd quarter and 1st half today's action isn't too surprising. The market is in sector rotation ahead of 2nd quarter earnings, it's only right to take profits and redeploy, the question now is how low will the market go? With the next earnings cycle gearing up and expectations as strong as they are my initial reaction is not to low.

Asian indices close the day with gains following the US led rally of Wednesday and a round of semi-positive central bank comments. It seems that bankers around the world are beginning to change their tune, not just the ECB, as economic activity continues to stabilize. European indices were higher during the first half of the session but fell in the second, weighed down by bearish sentiment here in the US.

Market Statistics

Futures trading was positive all morning. Most indices except the NASDAQ were positive with some upward pressure after the release of economic data. The NASDAQ itself turned positive for a brief time but spent most of the morning hovering just below break even. The open was positive as expected but what was not expected was the steady and continuous downdraft in prices that lasted until early afternoon. The market hit bottom near 1:30 and bounced, recovering a little less than half the days losses by the close.


ATTENTION: In order to let our staff enjoy the holiday weekend, there will be no Option Investor or Premier Investor newsletter on Monday July 3rd. The market is only open a half day and volume will only be a trickle. We will resume normal publication on Wednesday July 3rd. Thank you in advance for your understanding.


Economic Calendar

The Economy

The 3rd and final revision to 1st quarter GDP was released alongside this week's jobless claims. The number came in at 1.4%, up from the previous and above expectations, as spending and exports grow. Looking forward 2nd quarter growth is expected to come in around 2.9% according to the St. Louis Federal Reserve's GDPNow tool.


Initial claims gained 2,000 on top of an upward revision of +1,000 to hit 244,000. The four week moving average of claims fell however, shedding -2,750 to hit 242,250. On a not adjusted basis claims rose 4.5% versus an expectation of 3.6% for the week. On a year over year basis not adjusted claims are down -9.2% and consistent with ongoing labor market tightening.


Continuing claims rose by 6,000 from a downward revision of -2,000 to hit 1.948 million. The four week moving average of claims rose 7,250 to hit 1.938. Despite these gains continuing claims remains low relative to historic levels, trending near the 44 year and consistent with labor market tightening.

The total number of claims for unemployment benefits rose by 11,835 to hit 1.828 million. This gain is in line with seasonal trends and expectations so no surprise. On a year over year basis claims are down -10.0% and consistent with ongoing labor market tightening.


The Dollar Index

The Dollar Index fell to new lows today as global central banks begin to change tack. The Bank Of England and Bank of Canada have both come out in favor of raising interest rates in their respective countries, adding their weight to the ECB and pushing the dollar lower. The index fell another -0.40% breaking below the $96 level to trade near $95.60. The index appears to be headed lower and that moe is supported by the indicators. Downside targets are $95 and $94.25. Looking to the calendar the next week could do a lot to help that. Tomorrow's data is Personal Income and Spending along with PCE Prices, the Fed's preferred gauge of inflation, a release that will surely affect FOMC outlook. Next week is the FOMC minutes and the monthly jobless numbers.


The Gold Index

Gold prices continue to hold steady in the face of falling dollar value. With the dollar falling as it is I would expect to see gold shooting higher which leads me to think there is some other force, perhaps declining political risk, working against it. Today's action saw spot prices hover just below break even and the $1250 level with no sign of breaking out of the near-term range. In the near-term support is in the range of $1,245, resistance near $1,255, a break of either may indicate new direction but I'd be very cautious until the gold/dollar correlation starts working again.

The Gold Miners ETF GDX fell -1.80% to trade at support along the $22 level. The ETF remains inside its short-term range with little to no sign of breaking out. The indicators are consistent with range bound trading and do not indicate strong movement in either direction. I expect this range will persist into the near-term unless and until gold breaks out of its range.


The Oil Index

Oil prices continue to drift higher as signs of slackening production in the US. The weekly production figures show a slight dip in production that alleviated oversupply fears but the decline is not expected to last. Analysts have pointed out that production was slowed due to Tropical Storm Cindy in the Gulf of Mexico and maintenance outages in Alaska, both one-off factors. WTI moved up by more than a half percent to test resistance at $45 but was rejected. Price below $45 by the close and appears to confirm resistance.

The Oil Index moved in tandem with oil prices, gaining about 1.0% intraday to test resistance and fall from it. Today's action saw the index move up toward resistance at 1,120 and fall back, creating a medium sized doji and possible shooting star. Resistance is confirmed by the short-term moving average and may prove to be strong. A fall from this level would further confirm resistance and the short-term down trend with downside target near 1,050.


In The News, Story Stocks and Earnings

Walgreen's and Rite Aid made headlines this morning when they announced earnings and the suspension of their merger agreement. Walgreen's announced better than expected earnings on slightly weaker than expected revenue along with a new plan to purchase stores from Rite Aid rather than merge with it. Walgreens will acquire a few more than 2,100 stores from Riteaid for $5.175 billion. The move is expected to result in nearly a half billion in annual synergies and helped to boost share prices in premarket trading.


Rite Aid will get a $325 million termination fee for its trouble but is left with a smaller footprint and increased competition from larger Walgreens. This company reported a top and bottom line miss that sent shares tumbling nearly -20% in the premarket to trade at a 4 year low.


Fred's, a smaller discount drug store chain operating in the southeast, was supposed to purchase a number of Rite Aid stores as part of the original Walgreen's/Rite Aid merger agreement. They get nothing now and expansion plans are scrapped. Based on adoption of poison-pill measures the company is not interested in a take over so their next move is unclear. Shares of the stock fell more than -23% to trade at an 6 month low.


The Indices

The indices looked like they were going to extend yesterday's rebound and then the market opened. At that point sellers took over to drive the indices to 1 month lows but the action was not all bearish. Support levels were reached and bargain hunters snapped up good deals. Action was led by the tech sector and the NASDAQ Composite. Intraday losses were in the range of -2.5% but the index managed to claw its way back to close with a loss of only -1.44%. Today's candle is long and red, the longest since early June, and comes with mixed signals. Its length and color suggest more downside to come, the long lower shadow a sign of support. The indicators are weak and confirming a sell so I expect to see downside pressure with a chance of finding strong support just below today's lows. Downside target is near the long-term up trend line just above 6,000, a break below there would bring additional targets.


The broad market closed with a loss of -0.85% and created a medium size red candle with long lower shadow. The fall from the long-term trend line confirms resistance at the all-time highs, the long lower shadow support below the short-term moving average. The indicators confirm the move lower and suggest a further test of support is likely. Today's action closed below the short-term moving average so downside target for near-term support is 2,400 and then 2,350 should the first level fail.


The Dow Jones Industrial Average closed with a of -0.78% after hitting lows near -1.5% intraday. The blue chips created a long red candle with visible lower shadow, falling from resistance at the long-term up trend line. This move confirms signals fired by the indicators but was halted at support along the short-term moving average. The indicators persist in moving lower so I expect to see support tested further. A break below the moving average would be bearish with downside target near 21,000 and then 20,500 should a deeper move ensue.


The Dow Jones Transportation Average closed with the smallest losses of the day, -0.37%. The transports created a small red candle just below the current all-time high. The index appears to be drifting up to test the all-time high and the indicators are consistent with this. MACD momentum is bullish and stochastic is rolling over into bullishness which together do not make a buy signal but at the same time do not indicate lower prices. Resistance is at the all-time high, a break above that would be bullish.


The market continues to churn and the charts look like more downside is possible. The caveat is that today's move and much of the volatility we've seen over the last few weeks is driven by sector rotation ahead of earnings season, the end of the quarter and the end of the half. After tomorrow we'll be in a new month, a new quarter and a new half with earnings season unfolding and outlook for double digit earnings growth over the next 18 months. Selling may continue tomorrow and even next week but I think it won't last long and won't drive the market too low unless the earnings season is a disappointment. I'm neutral for the near-term and still bullish for the long.

Until then, remember the trend!

Thomas Hughes


 

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New Plays

Contrarian Move

by Jim Brown

Click here to email Jim Brown
Editor's Note

The markets declined on monster volume on what should have been a boring day. Today's market hiccup put the indexes at risk again and given the very high 7.86 billion shares when volume was expected to be barely 5.0 billion, 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 weekend event risk.


ATTENTION: In order to let our staff enjoy the holiday weekend, there will be no Option Investor or Premier Investor newsletter on Monday July 3rd. The market is only open a half day and volume should only be a trickle. We will resume normal publication on Wednesday July 3rd. Thank you in advance for your understanding.




NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Reversal of Fortune

by Jim Brown

Click here to email Jim Brown

Editors Note:

Wednesday's rebound turned into a rout on Thursday. The market declined sharply on very high volume of 7.86 billion shares when traders only expected 5.0 billion. There was no major headline to send stocks crashing. Apparently fund managers took Yellen's words to heart when she said this week that stocks were richly valued at current levels.

With volume so strong, there is no telling what Friday will bring. I am not recommending any new positions until after July 4th and the weekend event risk has passed.





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


TWLO - Twilio
The long option position was stopped at $28.25.

WTW - Weight Watchers
The long option was stopped at $31.95.

FOSL - Fossil Group
The short position was entered at the open and stopped at $10.50.



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:

Acordia submitted a new drug application to the FDA on INBRIJATM.

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:

No specific news. Only a minor 23 cent decline.

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.

Update 6/28/17: 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.

Position 5/30/17:

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



TWLO - Twilio Inc - Company Profile

Comments:

No specific news. Resistance test at the open and then declined to hit our stop loss.

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:

Closed 6/29/17: Long July $28 call @ $.75, exit $1.45, +.70 gain.

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 were finally hit with enough profit taking to stop us out for an excellent gain.

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:

Closed 6/29/17: Long WTW shares @ $24.48, exit $31.95, +$7.47 gain.
Alternate:
Closed 6/29/17: Long July $26 call @ 90 cents, exit $5.90, +$5.00 gain




BEARISH Play Updates

FOSL - Fossil Group - Company Profile

Comments:

Absolutely no news but shares spiked over 7% shortly after the open to stop us out of the position. There were no clues as to what caused the spike. Volume was twice Wednesday's level. The high for the day was $10.50 and that was exactly our stop loss.

Original Trade Description: June 28th.

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.

Position 6/29/17:

Closed 6/29/17: Short FOSL shares @ $9.76, exit 10.50, -.74 loss.
Alternate position:
Closed 6/29/17: Long Aug $9 put @ 62 cents. Exit 35 cents, -.27 loss.



NGVC - Natural Grocers Vitamin Cottage - Company Profile

Comments:

NGVC won the "Good Egg Award" at the Good Farm Animal Awards Ceremony in London. Shares spiked to $8.60 at the open to stop us out of the stock position at $8.45. The option position remains open.

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:

Closed 6/29/17: Short NGVC shares @ $8.06, exit $8.45, -39 cent loss.

Alternate position:
Buy August $7.50 put, currently 50 cents, see portfolio graphic for stop loss.



PPC - Pilgrims Pride Corp - Company Profile

Comments:

No specific news. Big spike at the open but ended the day with a loss.

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.

Update 6/28/17: PPC was hit with two animal cruelty suits from Texas and Georgia following an investigation by the Humane Society.

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:

Big spike when the market was at the lows for the day but faded quickly as the market rebound began.

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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