Option Investor
Newsletter

Daily Newsletter, Saturday, 8/5/2017

Table of Contents

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

Market Wrap

Winner and Sinners

by Jim Brown

Click here to email Jim Brown

The Dow was the clear winner for the week and the Nasdaq was the sinner.

Weekly Statistics

Friday Statistics

The Dow gained over 250 points for the second consecutive week and has now closed up for 9 consecutive days with 8 consecutive record highs. Every day saw a different group of stocks leading the charge while the others rested. This was textbook rotation but this scenario cannot last forever. Streaks of consecutive anything are always broken and the August weakness typically begins in the second week of the month.

The Nasdaq did finish positive on Friday thanks to some weekend short covering but the index is still poised for disaster. The Nasdaq is holding over support at 6,335 but the pattern of lower highs and daily support tests suggests there could be a failure soon and the 6,100 level will be the next target.

The FAANG stocks were leading to the downside with the exception of Apple. Amazon lost -3.2% for the week, Facebook -2.2%, Netflix -2.6%, Alphabet/Google -1.9% and Apple gained 4.1% on their earnings.


The markets moved up at the open after the Nonfarm Payrolls for July came in above estimates. The headline number was a gain of 209,000 compared to estimates for 183,000 and 231,000 in June. The prior two months were revised with a net gain of only 2,000. Private employment rose 205,000 and the unemployment rate dropped one tenth to 4.3% (6.981 million) and a 16-year low. The larger U6 unemployment rate was unchanged at 8.6% (13.962 million).

Goods producing industries gained 22,000 jobs, manufacturing employment rose 16,000, service industries rose 187,000. Professional services rose 49,000, education and healthcare 54,000, leisure and hospitality gained 62,000. The government sector posted only a minor gain of 4,000 after a big jump of 37,000 in June. Average hourly earnings rose 0.3%. Another 349,000 people joined the workforce after a big addition of 361,000 in June. The labor force participation rate rose one tenth to 62.9%. The separate household survey showed a gain of 345,000 jobs.

With job growth averaging just under 200,000 per month and about twice the number required to absorb new immigrants and graduates, the country is on pace for sub 4.0% unemployment in 2018.


The strong jobs numbers will allow the Fed to remain on its path for policy normalization. They are more than likely going to announce the beginning of QE tapering and the reduction of the balance sheet. There is currently only a 1.4% chance of a rate hike at the next meeting in September. That jumps to only a 48% chance of a hike at the December meeting.


The trade deficit declined slightly from the -$46.4 billion in May to -$43.6 billion in June. Exports rose $2.4 billion and imports declined -$400 million. Automotive imports rose 2.9% after a 4.9% rise in May. Exports of food and beverages rose 5.9%. This is a lagging report for June and it was ignored.

The Dollar rebounded from a 12-month low on the strength of the jobs report. The declining dollar was good for the market because it would raise earnings for companies doing business overseas. The losses for currency conversion would decline and U.S. products would be cheaper overseas. This is more than likely a temporary bounce.


Treasuries sold off on expectations for higher rates as a result of Fed policy changes.


The calendar for next week is devoid of any market moving events. The Producer and Consumer price indexes will be the most watched of the group because of the inflation considerations. We are still three weeks away from the Fed's Jackson Hole conference and Yellen's keynote speech where she is likely to set the stage for the QE taper announcement at the September FOMC meeting. That speech could be a market mover depending on the tone and terminology but it is too soon to worry about it.


The earnings calendar will again take precedence but the number of high profile reporters is dwindling fast. During the coming week only 32 S&P 500 companies report and one Dow component (DIS). More than 420 S&P companies have reported. The current projection for Q2 earnings is a rise of 12.0%. Of those 420 companies, 72.9% have beaten on earnings and 68.5% have beaten on revenue. That is above the long-term averages of 64% and 56% respectively. There have been 44 guidance warnings and 33 positive guidance upgrades. The 12 month forward PE is currently 17.9 and slightly elevated. The Shiller cyclically adjusted PE or CAPE 10 is now 30.29 and the second highest level in history.


The highlights for next week are Priceline, Nvidia and Jack in the Box. Also of interest are Blue Apron and Snap Inc. They are both poorly performing IPOs for 2017 and earnings could be ugly. This is the first quarterly earnings for Blue Apron since coming public in late June. Snap has reported once since they went public in March and it was not good.


Blue Apron announced on Friday they were cutting 1,270 jobs only a month after their IPO. There was an initial furor in the market over how a company could go public as a high growth enterprise and then cut 20% of their staff a month later. However, it was later learned they were closing a plant in New Jersey at Jersey City and consolidating into a new fulfillment center in Linden, NJ about 15 miles away. Of the 1,270 jobs being eliminated, about 800 workers have agreed to move to the Linden location leaving only 470 job losses. They employ about 5,100 in total. Shares fell 6.3% on the news. They have fallen nearly 50% from their IPO high at $11.


Back on July 27th, Automatic Data Processing (ADP) shares spiked from $103 to $121 over three days after news broke that Bill Ackman was adding a stake. On Friday, news broke that Ackman had accumulated more than 8% and was still adding to that stake as of Friday morning. He said he was going to ask for 5 board seats, out of the existing 10 and would push the company to cut costs and improve returns. He also wants to oust the current CEO, Carlos Rodriquez. Later in the day, Ackman said he was willing to work with current management OR a new external CEO. Ackman must nominate his slate of directors by August 10th or wait until the 2018 shareholder meeting.

Shares declined because ADP came out in full support of Rodriquez with a strong anti-Ackman position. Ackman said he had accumulated the stake using derivatives (options) and that means ADP can cause him a lot of grief if they can delay any actions for 12-18 months.


Cigna (CI) reported earnings of $2.91 that rose 47% and beat estimates for $2.48. Revenue of $10.3 billion rose 4% and beat estimates for $9.98 billion. Company medical enrollments rose from 15.1 million to 15.7 million. Their company benefit programs provided the majority of their earnings growth. They guided for the full year to earnings of $9.75-$10.05, up from $9.35-$9.85. The company said it had $7-$14 billion in capital it could use in 2017 on mergers and acquisitions, including Medicare Advantage for older people. Shares declined -$3.50 despite the good earnings and guidance.


Medicare and Medicaid provider WellCare Health Plans (WCG) reported earnings of $2.52 compared to estimates for $2.23. Revenue of $4.31 billion beat estimates for $4.27 billion. They guided for the full year for earnings of $6.75-$6.95. Earnings were boosted by higher enrollments in those health programs. Memberships in the government backed Medicaid plans increased 16.6% to 2.83 million as of June 1st. Membership in WellCare's Medicare business rose 46% and 10.3% in their Medicare prescription drug plans. The company paid out 86.8% of every dollar received for Medicaid and 86.4% for Medicare. Despite the good earnings, shares crashed $9.31.


Yelp (YELP) shares spiked 28% after the company said it was selling its Eat24 business to Grubhub (GRUB) for $287.5 million in cash. They also said they would use $200 million of the proceeds to buy back stock. In addition, Yelp is partnering with Grubhub in a long-term strategic partnership which would integrate online ordering from restaurants on Grubhub's website.

Yelp reported earnings of 9 cents on a 20% rise in revenue to $209 million. Analysts were expecting a loss of 8 cents and revenue of $205 million. They guided for Q3 to revenue of $217-$222 million and analysts were expecting $219.67 million.


A company rarely mentioned in the news, Aerojet Rocketdyne (AJRD), reported earnings of 32 cents that beat estimates for 14 cents. Revenue of $459.6 million beat estimates for $426.5 million. Aerojet makes the booster motors for the THAAD missile interceptor and the Exoatmospheric Kill Vehicle used in the latest interception. They were also selected by Boeing as the main propulsion provider for the new XS-1 experimental space plane. Order backlogs are now $2.1 billion. Shares spiked 14% on the earnings.


Arista Networks (ANET) shares spiked 19.4% on better than expected earnings. The company reported earnings of $1.34 compared to estimates for 95 cents. Revenue rose 50.8% to $405 million and analysts were expecting $361 million. They guided for the current quarter for revenue of $405-$420 million and analysts expected $378 million. Their gross profit margin rose to 64.4%.


Crude prices were flat for the week and held just under $50. Declining inventories, falling rig counts and the Saudi sleight of hand on cutting exports by 1.0 mmbpd, kept prices from falling. The $50 level is likely to be a top since we only have four weeks left in the summer driving season. Oil demand will fall off a cliff the week after Labor Day and inventories will begin to rebuild again.


Active rigs appear to be peaking, which matched what Halliburton said a couple weeks ago about a rig plateau unless prices rose well above $50 a barrel. Active onshore rigs declined -4 last week with oil down -1 and gas -3. However, the big news was the giant 7-rig drop in the offshore category to 17 rigs. I do not have a historical chart on offshore rigs but that is the lowest since the same week in 2016.




Markets

Three weeks ago on July 20th, the S&P closed at 2,476 and that is where it closed on Friday as well. While the Dow is benefitting from spikes in individual stocks, the S&P is suffering from the early stages of post earnings depression. There is no trend other than sideways consolidation but there has not been any serious attempt at profit taking either. The low volume, averaging about 6.3 billion shares for the week, is evenly divided with daily gains and losses of 3-5 points. There is no conviction by the sellers but traders are buying every minor dip. They are just not chasing prices higher.

Everyone appears to be waiting to see if the typical August weakness is going to appear next week. The Aug/Sep weakness normally begins in the second week of August. However, the market has completely ignored every seasonal trend in 2017. With the lack of sellers on the S&P, this may be another departure from normal.

The S&P has been down in August on 5 of the last 7 years. The S&P has only risen in August in 5 of the last 20 years. The historical odds are pretty convincing for a decline but there is never a guarantee.

Current support is around 2,465 with resistance solid at 2,483. That is an 18-point range and the S&P has used every bit of it over the last three weeks but closed right in the middle on Friday.

You cannot tell by looking at the chart but the S&P closed exactly 1 point from a new high. On July 26th, the close was 2,477.83. The August 2nd close was 2,477.57 and Friday's close was 2,476.83. Despite the sideways trend, the S&P continues to hold right below breakout levels.


The Dow benefitted from a surge in Goldman Sachs to add 39 points to the index with Home Depot and JP Morgan providing the assist. There are 30 components in the Dow and over the last two weeks, we have seen 2-3 rotate to the top of the leader board every day. It is not the same ones back to back but a clear rotation pattern that could continue. The Dow has posted 9 consecutive days of gains and 8 consecutive record highs. Strings will be broken but that does not mean the break will instantly drop 500 points.

The index is severely overbought but you may remember back in February the index closed up for 14 out of 18 days and those 4 declining days were only minimal declines. If the August weakness does not appear, the Dow could break its streak with a minor decline and continue higher. While I do not expect that, it is entirely possible.



The Nasdaq Composite is the weakest big cap index. The tech index is poised right on the edge of a 250-point cliff. If the current support at 6,335-6,350 breaks on a closing basis, there could be a significant drop to the 6,100 level. The FAANG stocks are already weak but they could weaken even further. If an index rallies on the backs of a few stocks on the way up, those same stocks can take it lower just as easily. Priceline, Nvidia and Jack in the Box report this week and they could be critical for the daily sentiment and movement.




The Russell 2000 retraced -3.3% since the prior Wednesday high at 1,452 and rebounded only 0.5% on Friday. That was a lackluster performance and powered by the financials with the sector up 1% intraday on Friday. Critical support is 1,400 and the index dipped to 1,402 on Thursday. If the index falls below that level it would be a major blow to market sentiment. I am surprised the 3% decline has not had a larger impact on the market already.


Unless you owned one of a dozen Dow stocks, you probably had a frustrating week. With the other indexes either flat or declining, the majority of normal stocks were flat to down. I cannot tell you that is going to change next week. If the typical August weakness arrives on schedule, then we could be having a different discussion next weekend. However, if the Dow leaders continue to rotate and the S&P closes at a new high, there could be another round of short covering and price chasing.

What I can tell you is that there is no reason to jump into the market. Be patient and see if a new trend develops. Buying stocks just because one index is in rally mode is not a strategy. Watch the Nasdaq for a support break and watch the S&P to see if it picks a vertical direction.

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Random Thoughts


There was a big change last week despite a tame market. Bearish sentiment shot up nearly 8% and neutral sentiment crashed -9.4%. The bulls managed to convert a couple percent to their side but the direction was clearly bearish. 64% still believe the market is not going higher.



Bank of America chief investment strategist, Michael Hartnett, is dead set on letting everyone know of his market call. It seems like every other week for the last six weeks he has warned of an impending market correction but the market continues to move higher. To be fair, he is not expecting it until the September-October period. Unfortunately, in his best imitation of Chicken Little, he is losing credibility with each refresh of the warning. Obviously, if he turns out to be right, he will get the credit and he can say for years that he made the big call when the market was going higher.

Hartnett believes the markets are going to correct and "correct quiet meaningfully." He said his warning about an "Icarus"-like run up in stocks this year and then a letdown appears ready to play out. He bases this on the bank's Bull and Bear sentiment indicator. It is currently flashing a 7.6 on a scale of 0-10 where 10 is extremely bullish. Reaching the 8 level triggers a sell call for risk assets. He said the indicator has hit the sell signal 11 times since 2002. The last time there was a buy signal was February 2016 when it went to zero. That was the end of the last correction. The indicator is made up of 18 components.

He warns this will not be an "average correction" but something a little more meaningful. He is not calling for a new bear market, because there is no recession in sight. He expects a 10% to 15% decline in equities.

He is the first to admit that nobody believes him and his warning. "Everybody has gone to Goldilocks mode rather than Humpty Dumpty." He warned a change in QE or monetary policy could be the trigger.



Paul Singer, CEO of Elliott Management, said passive investing is "destructive to the growth-creating and consensus-building prospects of free market capitalism." Global ETFs now have more than $1 trillion more in assets than hedge funds. Approximately $2.2 trillion is indexed to the S&P-500 alone. Not counting index funds there are $4.17 trillion in ETFs. It should be noted that Elliott manages $32.8 billion.

"In a passive investing world, small shareholders have little-to-no voice and no realistic possibility of banding together, while the biggest shareholders have no (repeat, no) skin in the game so long as the money manager does not underperform the index."

In 2016, passive funds saw inflows of $504.8 billion while actively managed funds saw outflows of $340.1 billion. We are seeing similar money trends in 2017.


The S&P has gone for 72 sessions without a gain of 1% or more. That is the longest streak since early 2007. The CBOE's Russell Rhoads, said this is the least volatile market since the 1960s. The trend for the last 18 months has been declining volatility. There will be an eventual eruption.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong."

Thomas Sowell


 


New Plays

Lost Patience

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sabre Corp, has been restructuring in some form for years and they are still lowering guidance.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

SABR - Sabre Corp - Company Profile

Sabre Corporation, through its subsidiary, Sabre Holdings Corporation, provides technology solutions to the travel and tourism industry worldwide. It operates through two segments, Travel Network, and Airline and Hospitality Solutions. The Travel Network segment operates as a business-to-business travel marketplace that offers travel content, such as inventory, prices, and availability from a range of travel suppliers, including airlines, hotels, car rental brands, rail carriers, cruise lines, and tour operators with a network of travel buyers comprising online and offline travel agencies, travel management companies, and corporate travel departments. The Airline and Hospitality Solutions segment provides a portfolio of software technology products and solutions through software-as-a-service and hosted delivery models to airlines, hoteliers, and other travel suppliers. This segment offers SabreSonic Customer Sales & Service, a reservation system that provides capabilities around managing sales and customer service across an airline's diverse touch points; Sabre AirVision Marketing & Planning, a set of airline commercial planning solutions; and Sabre AirCentre Enterprise Operations, a set of solutions for planning and management of airline, airport, and customer operations. The Airline and Hospitality Solutions segment also provides software and solutions to hoteliers through SynXis, a central reservation system; SynXis Property Manager Solution for property management; and marketing, professional, and revenue management services. Company description from FinViz.com.

American Airlines founded the company in 1960 and spun it off in 2000. Texas Pacific Group and Silver Lake Partners acquired it in 2007. They listed on the Nasdaq in 2014. Sabre is the largest global distributions systems provider for air bookings in North America.

Sabre closed its first week of trading at $16.50 in April 2014. The odds are good we are going to see that level again soon. They recently reported earnings of 35 cents that matched estimates. Revenue rose 6.6% to $900.7 million and beat estimates for $895 million.

The company announced a new "cost reduction and business alignment program" with the goal of saving $110 million a year in expenses. They are going to reduce global headcount by 9%. They reiterated their full year guidance of $3.54-$3.62 billion and earnings of $1.31-$1.45. However, they said earnings would likely come in at the lower half of guidance. Think about that for a minute. We are going to affirm our guidance but earnings will be at the low end of that guidance. Did they actually affirm guidance of lower guidance?

They said the poor results were related to multiple factors. They halted work on the implementation of their new SabreSonic reservation system, no reason given but clearly it was not going well. They said they were seeing higher stability, security and technology costs related to a "security incident" in their Sabre Hospitality central reservation system during the quarter. Were they hacked? They did not say. Lastly, they said they were dealing with accounting changes for revenue collected from customer Alitalia, which is going through a bankruptcy process. Typically that means you get pennies on the dollar for receivables. The guidance was not good. Shares crashed from $22 to $19.50.

There was a dead cat bounce over the next couple days and now they are heading lower again. I do not see any reason why anyone would want to own Sabre when there are much better companies like Priceline, Tripadvisor, Trivago, Expedia, etc.

Expected earnings Oct 31st.

Shares closed at a two-year low on Friday at $19.73 and could be headed for a retest of the post IPO low at $15.

In addition to the short on the shares we have two ways to play the option. We can buy the October $17.50 put for 10 cents and forget about it. It will expire before earnings so it will have to be in the money at some point in the future to make any money. It is $2 OTM now and October has 75 days until expiration. If we want to roll the dice, the January $17.50 put is only 45 cents. That lets us hold over the October earnings, which should be disappointing. And gives us an extra 90 days to profit. The difference is $35 in cost. The key here is that January is well out of our normal 30-45 day play scenario. I am going to recommend the October option but you should choose the one that best suits your risk reward profile.

Short SABR shares, currently $19.73, initial stop loss $21.25.
Alternate position: Buy Oct $17.50 put, currently 10 cents, no stop loss.




In Play Updates and Reviews

Minor Short Covering

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell rebounded 0.5% after a -3.3% decline. This was more than likely end of week short covering rather than hold shorts over the weekend. The Dow was powered higher by Goldman Sachs and the banking sector was on fire. That is another reason the Russell was up since 17% of the index weighting is financials.

The dow completed 9 days of gains and 8 consecutive record closes. This will eventually come to an end but until it does the short positions are going to suffer. With the Russell weak the small cap positions are not performing. We treading water and waiting for the market, other than the Dow, to pick a direction.





Current Portfolio


Stop Loss Updates

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


Profit Targets

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




Lottery Ticket Plays - Updated only on Weekends


Current Position Changes


BOX - Box Inc
The long position was stopped at $18.85.



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BULLISH Play Updates

GIII - G-III Apparel - Company Profile

Comments:

No specific news. Another nice gain to extend the move over resistance.

Original Trade Description: June 29th.

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates in two segments, Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under the G.H. Bass brand; and proprietary products under the DKNY, Donna Karan, Andrew Marc, Marc New York, Black Rivet, Wilsons, Eliza J, Jessica Howard, G-III Sports by Carl Banks, and G-III for Her brands. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, Tommy Hilfiger, Karl Lagerfeld Paris, Guess?, Kenneth Cole NY, Cole Haan, Levi's, Vince Camuto, Ivanka Trump, Ellen Tracy, Kensie, and Jessica Simpson brands, as well as has licenses with the National Football League, National Basketball Association, Major League Baseball, National Hockey League, Hands High, Touch by Alyssa Milano, Collegiate Licensing Company, Major League Soccer, Starter, and Warrior by Danica Patrick, as well as approximately 140 U.S. colleges and universities. The company offers its products to department, specialty, and mass merchant retail stores in the United States and internationally. As of January 31, 2017, it operated 411 leased retail stores, which included 190 Wilsons Leather stores, 163 G.H. Bass stores, 50 DKNY stores, 5 Calvin Klein Performance stores, and 3 Karl Lagerfeld Paris stores. The company also operates Wilsons Leather, G.H. Bass, and DKNY branded online stores. Company description from FinViz.com.

G-III shares were pressured in May by the weakness in the retail sector in general. They rebounded in early June on better than expected earnings but were hit again in early July by the next wave of retailer warnings.

In the last quarter, G-III saw sales rise 16% to $529 million. Because of costs associated with the acquisition of Donna Karan they posted a loss of 18 cents but analysts were expecting a loss of 37 cents. Wholesale sales are growing by double digits in most brands. The Wilsons Leather and Bass Stores are the exception and they said they were closing some stores and repurposing some others. The Donna Karan brand is rapidly expanding with new merchandise and G-III thinks it could eventually be their biggest brand. The company is expected to earn $1.27 in 2017 and $1.72 in 2018.

Expected earnings September 5th.

Shares have risen over the last three weeks despite the market volatility. They closed only 20 cents below a five-month high on Friday. A breakout could trigger short covering and additional buying.

Position 7/31/17:

Long GIII shares @ $26.10, see portfolio graphic for stop loss.
Alternate position:
Long Sept $30 call @ 72 cents, see portfolio graphic for stop loss.



INFY - Infosys - Company Profile

Comments:

No specific news. Shares declined 10 cents. Still fighting resistance at $15.80.

Original Trade Description: June 26th.

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. It provides business information technology services, including application development and maintenance, independent validation, infrastructure management, and business process management services, as well as engineering services, such as engineering and life cycle solutions; and consulting and systems integration services comprising consulting, enterprise solutions, systems integration, and advanced technologies. The company's products include Finacle, a banking solution that provides analytics, core banking, consumer e-banking, corporate e-banking, Islamic banking, mobile banking, origination, payments, SME enable, treasury, wealth management, and youth banking solutions. Its products also comprise Infosys Mana, a knowledge-based AI platform; Infosys Information Platform, an analytics platform that enables to get insights from various data sources for decisions across industries; AssistEdge, CreditFinanceEdge, ProcureEdge, and TradeEdge that are cloud-hosted business platforms; Panaya that enables various SAP and Oracle EBS changes; and Skava, which are digital experience solutions, as well as analytics, cloud, and digital transformation services. The company serves clients in the financial services, manufacturing, retail, consumer packaged goods and logistics, energy and utilities, communication and services, hi-tech, life sciences, healthcare and insurance, and other industries. Company description from FinViz.com.

Infosys reported earnings of 24 cents that rose 5.8% and beat estimates by a penny. Revenues of $2.651 billion beat estimates for $2.629 billion. Revenues rose 6.3% on a constant currency basis. The company announced numerous wins of high profile contracts.

The company is dilligently following its "Renew Now" program with three offerings. Those are Artificial Intelligence, Knowledge-based IT and Design Thinking. During the reported quarter, Infosys continued to renew traditional services and rolled out others in areas such as Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Cyber Security, and IoT Engineering Services. Also, during the quarter, Infosys launched Boundaryless Data Lake, an offering powered by the Information Grid Solution on Amazon Web Services (AWS).

The company raised 2018 guidance with revenue growth in the range of 7.1% to 9.1%, up from 6.1%-8.1%.

Earnings October 13th.

Shares rebounded over the last week to close at a new 9-month high on Wednesday.

Position 7/27/17:

Long INFY shares @ $15.66, see portfolio graphic for stop loss.
Alternate position: Long Oct $17 call @ 25 cents. See portfolio graphic for stop loss.



KR - Kroger - Company Profile

Comments:

No specific news. Shares dipped on Thursday to wipe out several days of gains but closed positive again on Friday.

Original Trade Description: July 31st.

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of January 28, 2017, the company operated 2,796 retail food stores, including 1,445 fuel centers; 784 convenience stores; and 319 fine jewelry stores and an online retail store, as well as franchised 69 convenience stores. The Kroger Co. was founded in 1883. Company description from FinViz.com.

Expected earnings September 14th.

Shares crashed from $30 to $20 on the Amazon announcement but over the last week a strong rebound has begun. Whole Foods has 340 stores. Kroger has 2,796 stores. Whole Foods sells to a high dollar consumer, thus the nickname Whole Paycheck Foods. They have an estimates 12 million potential customers. Kroger sells to everyone with a potential customer base of more than 200 million. Amazon is not going to be a threat to Kroger for a long time even if the acquisition gets approved and that is still an unknown with multiple committees researching antitrust issues and the current administration clearly anti-Amazon.

I am recommending we ride the stock back up until reality returns to the price.

Position 8/1/17:

Long KR shares @ $24.50, see portfolio graphic for stop loss.
Alternate position: Long Sept $25 call @ $.98, see portfolio graphic for stop loss.



RCII - Rent A Center - Company Profile

Comments:

No specific news. Shares closed flat but over resistance.

Original Trade Description: August 2nd.

Rent-A-Center, Inc., together with its subsidiaries, leases household durable goods to customers on a rent-to-own basis. The company operates through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. It offers durable products, such as consumer electronics; appliances; computers, including tablets; smartphones; and furniture, including accessories under rental purchase agreements. The company also provides merchandise on an installment sales basis; and offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks within retailer's locations. It operates retail installment sales stores under the Get It Now and Home Choice names; and rent-to-own and franchised rent-to-own stores under the Rent-A-Centre, ColorTyme, and RimTyme names. As of December 31, 2016, the company owned and operated approximately 2,463 stores in the United States, Canada, and Puerto Rico, including 45 retail installment sales stores; 1,431 Acceptance Now kiosk locations in 40 states and Puerto Rico; 478 Acceptance Now virtual (direct) locations; and 130 stores in Mexico, as well as franchised 229 rent-to-own stores in 31 states under the Rent-A-Center, ColorTyme, and RimTyme names. Company description from FinViz.com.

Earnings were not good. The company posted a loss of 1 cents compared to estimates for earnings of 7 cents. Revenue of $677.6 million did beat estimates for $664.7 million. The problem was a number of new initiatives that take time to manifest into gains. This is a company with a portfolio of loans on household goods and there is not much they can do to change that on a qtr to qtr basis. The new initiatives only apply to new business so it takes a while to generate a large portfolio under the new rate plan. Core U.S. sales rose 230 basis points in Q2. Acceptance Now, a new initiative, saw sales rose 380 basis points. The average monthly rate of new finance agreements rose 5.7%. Higher end products now compromise 65% of store inventory. Same store sales in existing stores rose 6.7%.

Expected earnings Oct 25th.

Hedge fund Marcato Capital Management demanded the company sell itself or it would start a proxy war to replace the entire board. Hedge fund Engaged Capital has already been demanding a company sale arguing that a restructuring could best be done by new owners. Engaged won a proxy fight and now has 3 board members. RCII turned down offers from HIG Capital, Lone Star Funds and Vintage Capital over the last several months. Marcato said the $15 offer from Vintage was the opening offer and would rise if RCII would negotiate with Vintage and open its books.

The stock appears to be rising on takeover interest. Resistance is $16 and the stock traded as high as $37 in the last couple of years. If Vintage does raise their offer it would probably be in the $16-$16.50 range. Whether RCII would accept it is unknown.

With multiple sharks circling and two hedge funds demanding a sale, there could actually be competing offers once RCII decides to negotiate. The downside would appear limited.

Position 8/3/17:

Long RCII shares @ $13.63, see portfolio graphic for stop loss.
Alternate position: Long Sept $15 call @ 30 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

The Dow continues to reduce expectations for a material decline.

The CBOE's Russell Rhoads, said this is the least volatile market since the 1960s. The VIX historical low close was 9.31 on Dec 22nd, 1993. We are at those levels now.

Fundstrat said "go long volatility" because there is a 50% chance of a 10% correction in the S&P over the next three months.

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.

Shortsqueeze.com is reporting current short interest at 63 million shares out of 88 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.




Left Over Lottery Tickets

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

These positions are only updated on the weekend.


AOBC - American Outdoor Brands - Company Profile

Comments:

No specific news about AOBC but competitor RGR reported earnings and it was ugly. RGR reported 57 cents compared to estimates for $1.11. Sales fell -22% as gun sales imploded with a pro gun president in the White House. Background checks were down -9% in July. RGR shares collapsed and AOBC followed them lower. AOBC does not report earnings until Sept 24th and we will be out of the position before then. Support is $18.50 and we should see that next week.

Original Trade Description: July 22nd.

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

Smith and Wesson saw the future when they changed names to American Outdoor Brands. President Obama was the best firearms salesman ever. He never missed an opportunity to talk down firearms and talk up gun control. Consumers, worried there would be a change in policy, rushed out to buy guns every time there was a new verbal assault on the second amendment. Gun sales hit record levels year after year.

When President Trump was elected as a pro-gun president, the urgency to buy more guns, faded. 2017 is still going to be another record year but only by a thin margin.

Smith & Wesson realized while President Obama was in power they needed to rebrand themselves to avoid the curse of being a prominent gun company in case the laws changed. They changed names to American Outdoor Brands and began a concentrated campaign to acquire a bunch of outdoor brands for products that had nothing to do with the shooting sports but they acquired some of those as well. Scopes, knives, safes, reloading, camping supplies, etc. Unfortunately, their main product line still depended on a continuing rise in firearms sales.

They reported earnings in late June of 57 cents that easily beat estimates for 37 cents. Revenue of $229.2 million beat estimates for $211 million. However, they guided for the current quarter for earnings of 7-12 cents and revenue in the $140-$150 million range. For the full year, they guided for $1.42 to $1.62 and revenue of $750-$790 million. Analysts were expecting $1.61 and $827.8 million. They said gun sales had slowed because of the new president. Secondly, they said they were going to use their unused portion of their $500 million line of credit to acquire additional growth opportunities. That means they were going to leverage up to their max debt to acquire new brands.

The CEO said, "Although good for the long-term viability of the industry, we believe that the election results coupled with a Republican Congress and choice of Supreme Court justice(s) could be a net-negative for [American Brands] as it eliminates any realistic fear of gun regulation, which has been a major driver of gun sales over the past eight years."

Shares declined sharply to $21. Over the last three weeks they have tried to rebound from that level but there is no excitement left. There have been a series of lower highs and Friday's close was below support and a three-month low.

Expected earnings September 24th.

I believe AOBC is going to retest the March lows at $18 if not lower. There are no positive catalysts on the horizon.

Position 7/24/17:

Long Sept $20 put @ $1.00, see portfolio graphic for stop loss.

Previously closed 8/1: Short AOBC shares @ $20.78, exit $20.95, -.17 loss.



BOX - Box Inc - Company Profile

Comments:

No specific news. Shares declined with the Nasdaq and some weakness in the tech sector. We were stopped out on Monday for a minor gain.

Original Trade Description: July 17th.

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Company description from FinViz.com.

Expected earnings August 30th.

Box is making a lot os smart moves lately. The recently partnered with Microsoft to jointly offer Box cloud management to Azure enterprise customers. Box will use Azure as a strategic public cloud platform and the companies have committed to share go-to-market investments, including initiatives to co-sell Box with Azure. Any time you can get Microsoft to partner with you, share the expenses and market your product, it was a good move.

Last week Box appointed Stephanie Carullo as the new COO. Carullo led U.S. sales for Apple's education business. Before that whe led the data center and virtualization architecture group at Cisco Systems. That is a good pedigree.

Shares have ticked up since both of those events last week and could be headed for a breakout over $19.50.

Position 7/18/17:

Closed 7/31: Long Sept $20 call @ 90 cents, exit $1.35, +.45 gain.

Previously closed 7/27: Long BOX shares @ $19.21, exit $19.25, +0.04 gain.



ECA - Encana Corporation - Company Profile

Comments:

No specific news. Shares retraced some gains after some ugly earnings in the energy sector.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compared to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex will be funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings July 27th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

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

Update 6/10/17: Encana agreed to sell its Piceance natural gas assets to Caerus Oil for $735 million. There are 3,100 operated wells that produce 240 million cubic feet of gas and 2,178 barrels of natural gas liquids every day.

Update 7/21/17: Encana reported earnings of 18 cents that easily beat analyst estimates for 4 cents. Revenue of $1.08 billion also beat estimates for $773.2 billion. The outlook and long-term projections were also strong. Shares closed positive but were hampered by a -1.32 drop in oil that tanked the sector.

Position 3/14/17:

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

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



FRGI - Fiesta Restaurant Group - Company Profile

Comments:

No specific news. Shares tested new support at $16.70 multiple times and it did not break. The outlook is still grim. Earnings this week. We will hold over because they are not expected to be good.

Original Trade Description: July 12th.

Fiesta Restaurant Group, Inc., through its subsidiaries, owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana brand names. The company's Pollo Tropical restaurants offer various Caribbean inspired food, and Taco Cabana restaurants offer a selection of Mexican food. As of January 1, 2017, it had 177 company-owned Pollo Tropical restaurants, 166 company-owned Taco Cabana restaurants, and 29 franchised Pollo Tropical restaurants in the United States, Puerto Rico, Panama, Trinidad & Tobago, Guatemala, the Bahamas, Venezuela, and Guyana, as well as 5 franchised Taco Cabana restaurants located in New Mexico, 2 non-traditional Taco Cabana licensed locations on college campuses in Texas, and 1 location in a hospital in Florida. Company description from FinViz.com.

Expected earnings August 7th.

On May 8th, Fiesta reported earnings of 25 cents compared to estimates for 30 cents. Revenue of $175.6 million missed estimates for $178.2 million. Same store sales declined -6.7% at Pollo Tropical and transactions declined -8.9%. Sales at Taco Cabana decreased 4.5% and sales transactions fell -4.0%. The company closed 30 stores that were losing money.

The company is under attack by JCP Investment Management, which has a 3% stake. JCP had lobied for changes to be voted at the June shareholder meeting. The company and JCP have been trading hostile press releases. The shareholder meeting went in favor of Fiesta but JCP is not giving up. Shares began to decline further when JCP did not gain control of the board.

Shares closed at a 4-year low on Wednesday at $18.80 and the IPO price in 2012 was $11. Shares had traded as high as $69. With the chain closing stores at a rapid pace, their long term future is in doubt.

Position 7/13/17:

Long September $17.50 put @ $1.05, see portfolio graphic for stop loss.

Previously closed 7/21/17: Short FRGI shares @ $18.75, exit $18.85, -.20 loss.



HZNP - Horizon Pharma - Company Profile

Comments:

No specific news. Shares are recovering from the prior week's dip. Earnings this week and we will hold over.

Original Trade Description: July 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Expected earnings August 7th.

Horizon posted and earnings disappointment in May that saw the stock collapse from $15.50 to $9.50. They reported earnings of 21 cents that missed estimates for 25 cents. Revenue was $220.9 million and missed estimates for $248 million. They guided for the full year for revenue of $1.0 to $1.03 billion. The problem was a shift in the contracting model with pharmacy benefit managers that was not performed in accordance with expectations.

That contracting problem has been solved. They also announced that three patents cases against Dr Reddy's, Lupin Ltd and Mylan Labs were upheld by a US District Court, which will prevent generics for VIMOVO until 2022 at the earliest.

Horizon is small company with numerous drugs in the pipeline and in trials. Shares are recovering from the May disaster and there is still $2.50 to gain to fill the gap from the post earnings crash.

Position 7/17: Alternate position:
Long Aug $14 call @ $.50, see portfolio graphic for stop loss.



NGVC - Natural Grocers Vitamin Cottage - Company Profile

Comments:

NGVC reported earnings that disappointed after the bell on Thursday and shareholders woke up to a 34% drop in the stock on Friday. Since we are holding puts, that was a lottery win for us. This is why we keep these inexpensive options once the stock positions are closed.

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.

Update 6/29/17: 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.

Position 6/26/17:

Long August $7.50 put @ 28 cents, see portfolio graphic for stop loss.

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





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