Option Investor
Newsletter

Daily Newsletter, Tuesday, 8/15/2017

Table of Contents

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

Market Wrap

Retail Train Wreck

by Jim Brown

Click here to email Jim Brown

The S&P futures were up sharply before Home Depot released its earnings. It was all downhill from there.

Market Statistics

Home Depot beat on earnings and revenue and raised guidance but the stock was knocked for a $4 loss to erase 28 Dow points. Adding to the retail disaster was Advanced Auto Parts, Coach and Dick's Sporting Goods. It was a cross section of retailers and the entire sector crashed, even stocks that were not even remotely related to those specific retail categories. G-III Apparel (GIII) fell -9% on no news. They just happened to be in the wrong sector.


The economic reports were positive across the board. The NY Empire Manufacturing Survey for August rose from 9.8 to 25.2 and well over the 10.0 consensus. That is the strongest reading since September 2014. New orders rose 7.3 points to 20.6 and a five-month high. Backorders were still a drag at -4.7 after an identical reading in July. Employment rose slightly from 3.9 to 6.2.


Retail sales for July rose +0.6% after a revised 0.3% rise in June. Previously the June number showed a decline of -0.2%. Strength was broad based with nonstore retailers seeing a 1.3% rise and motor vehicles and parts a 1.2% rise. Building materials were up 1.2%, food and beverages +0.4%, sporting goods +0.3% and food service and bars +0.3%. The decliners were electronics and appliances -0.5%, gasoline stations -0.4% and clothing -0.2%. This was good news but it was ignored because of the retail earnings disaster in progress.

The NAHB Housing Market Index rose from 64 to 68 with buyer traffic component edging up slightly from 48 to 49. The component for current single-family sales rose from 70 to 74 and the six-month outlook rose from 73 to 78. Despite the high prices for homes, there are still a lot of buyers.

Low mortgage rates and strong employment are the main drivers. Builders are having trouble keeping up with demand because they do not want to end up with a lot of excess inventory if the trend changes. They are managing their production, which is smart because that allows prices and profits to rise.


Business inventories rose 0.5% in June after a 0.3% rise in May. Analysts were expecting 0.4%. Because the report is lagging for the June period, it was ignored.

Import and export prices rose +0.1% in July after a -0.2% decline in June. The gain matched estimates. This was the first gain in 3 months and second in five months. Transportation fuels rose 0.5% after a -2.6% decline in June. This was due to a 2.5% rise in prices for imported oil. The report was ignored.

After the bell, the API Crude Inventories were released and showed a decline of -3.6 million barrels for the week ended on the 11th. Gasoline inventories rose 301,000 compared to expectations for a decline of -1.5 million.

Oil prices declined for the day because OPEC production rose 172,600 bpd in July. Total daily production rose from 32.696 mmbpd to 32.869 mmbpd. If the EIA numbers on Wednesday show a big decline we could see prices rise slightly. Libya reported some of their production was offline due to worker stoppages. That should help the overall glut if it last for several weeks.


The calendar for Wednesday is headlined by the FOMC minutes at 2:PM. Analysts will be combing over them with a fine toothcomb looking for clues about potential actions at the September meeting. Quantitative tapering is sure to be mentioned.


Dow component Cisco Systems reports after the close and Wal-Mart reports before the open on Thursday. That suggests there could be some Dow volatility on Thursday. Alibaba also reports before the open on Thursday and that report is already generating a lot of buzz.


Alibaba is growing faster than Amazon. Alibaba ships an average of 12 million packages a day compared to Amazon's 3 million. China has 143 cities with a population of more than 10 million and the U.S. only has 10 cities. Those stats came from David Seaburg at Cowen & Co. Twice in the last months I have tried to initiate a position on Alibaba and both times, I was stopped out on the dips below $150. I seriously considered adding another one tonight to hold over earnings but the premiums are too expensive and the risk too great. Alibaba traded more than 150,000 option contracts per day.


The biggest hit to the market came from Home Depot even though they beat on earnings, revenue and guidance. The company reported earnings of $2.25 compared to estimates for $2.22. Record revenue of $28.11 billion beat estimates for $27.83 billion. Same store sales rose 6.3% and easily beating estimates for 6.3%. They guided for full year revenues to rise 5.3% and earnings growth to rise 13% to $7.29. Back in May, they raised guidance for an 11% earnings increase to $7.15. The company is also in the middle of a $7 billion share buyback program. Home Depot is regarded as Amazon proof because you can't order plywood, concrete and roofing materials and have Prime deliver it to your jobsite for free in two days. The number of customer transactions rose 2.7% and the average ticket rose 3.6% to $63.05.

I am seriously confused by the drop in HD shares. Some analysts were warning that the housing boom was going to slow and that would hurt HD sales. Currently there are supply shortages of construction materials and as I mentioned earlier in the NAHB report, builders are actually seeing a rise in sentiment. HD tried to talk down those fears saying spending on home improvement is actually rising. They also said the demand from contractors remained strong.

I would be a buyer of HD on any further decline. Support is $146 and should the market turn negative, we could see that level again.


Advanced Auto Parts (AAP) reported earnings of $1.58 and revenue of $2.26 billion. Analysts were expecting $1.67 and $226 billion. Same store sales were flat. For the same quarter last year, the company reported $1.90 in earnings and $2.26 billion in revenue. Apparently, the earnings juggernaut has lost an axle. They guided for the full year for same store sales to decline 1% to 3%. They also guided for a reduction in operating income of 200 to 300 basis points. Analysts were expecting $6.36 and $9.54 billion. Shares crashed 20% on the news.


Dick's Sporting Goods (DKS) reported earnings of 96 cents compared to estimates for $1.00. Revenue of $2.16 billion missed estimates for $2.17 billion. Same store sales rose +0.1% and missed their own guidance for 2%-3% growth. They guided or full year earnings of $2.80-$3.00 per share and well below estimates for $3.64. The CEO created an investor panic when he said the retail industry is in "panic mode" and currently undergoing the "perfect storm." With more than 6,300 retail store closures already announced in 2017, traditional retailers are struggling to maintain traffic to mall based stores. He said stores are trying to win over customers with "irrational prices" and "unpredictable promotions." He said Dick's was going to be aggressively promotional the rest of the year and double down on their best price guarantee. If anyone is selling it for less they will match those prices.


Coach (COH) reported earnings of 50 cents that beat estimates for 49 cents. Revenue of $1.13 billion missed year ago numbers and estimates for $1.15 billon. Same store sales increased in the "mid single digit range" and beat estimates for 3.6%. So why did they not just say what their SSS were? I do not trust these earnings number games. They guided for next year for earnings growth of 10-12% to $2.35-$2.40 and $5.8-$5.9 billion. Analysts were expecting $5.03 billion and $2.40 on earnings. Shares fell -23% on the questionable numbers.


Urban Outfitters (URBN) bucked the trend when they reported earnings of 44 cents compared to estimates for 37 cents. This report was still significantly below the 66 cents in the year ago quarter. Revenue was $873 million, down from $891 million but neat estimates for $862 million. Same store sales declined -4.9%, because of "negative retail store sales" but offset by online sales. Shares rose $3 in afterhours.




Markets

The major indexes opened the day higher but the selling was immediate. The Dow was up 35 points at the open but declined 67 points intraday before rebounding slightly to close with a 5-point gain. I would say there was a lack of conviction but actually conviction appears to be strong on both sides. Sellers are waiting in volume at the intraday highs but buyers are eagerly jumping into the dips. When the Dow can trade just under its recent high and only move 67 points intraday, the buyers and sellers appear equally matched.

The three big gainers offset the three big losers and traders fought to a draw. Real support is still 21,500 with short term resistance 22,000 and new high resistance at 22,120.



The S&P traded in a very narrow 7-point range and most of that came from the early morning futures spike. Like the Dow it is evenly matched between buyers and sellers. Even the retail implosion at the open failed to push it materially lower. Support is 2,463 and resistance 2,467. That is microscopic for the S&P and suggests any material event that pushes the index one way of another could trigger a directional move.


The Nasdaq Composite has declined from high to low, -247 points and rebounded to recover about half of those points. The FANG stocks mostly decline with the exception of Apple. I am not counting that 25-cent gain on Facebook.

Resistance remains about 6,340 and initial support just over 6,200 followed by 6,100.




The Russell 2000 was the weakest index once again and it is well below the critical support at 1,400. Retail stocks were the main reason the Russell declined but it has been the weakest index for the last couple weeks.


A Bank of America survey out today found that 46% of retail traders believe the market is overvalued. That means any future rally will be powered by the 54% who still believe there is life left.

The S&P futures are flat as I type this so there is no rush to sell overnight. With North Korea reconsidering its plans and saying it is no longer going to fire missile at Guam, the biggest risk for Wednesday is the FOMC minutes.

Even though the buyers and sellers are evenly matched, I am still concerned about the normal Aug/Sep weakness and the political battles in mid September over the budget and debt ceiling. If you can deal with that small of a window then trade away but try to trade in the direction the market is moving. Today there was no direction.

I apologize for the shortness and the lateness of the commentary tonight. The grandkids spent the weekend with us and brought all their grade school bugs with them. I caught an ugly one.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Coin Toss

by Jim Brown

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Editor's Note

As we move farther into the normally weak Aug/Sep period there is no market direction. The Dow and S&P traded in very tight ranges on very weak volume of 5.3 billion shares. The market appears to be evenly matched between buyers and sellers but that could change in an instant. There is no reason to add plays when there is no direction.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Russell Was Biggest Loser

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 rolled over immediately on the opening spike and closed at the low of the day. It was the biggest loser and a minor buy program at 3:30 could not rescue the index from the low close. This "should" be bearish for market sentiment but nothing seems to be impacting the big cap market other than some weakness in the FANG stocks.

There was no follow through on Monday's short squeeze even though S&P futures were up more than 10 points overnight. The Home Depot, Coach, Dick's and Advanced Auto Parts earnings crushed the sector and many of those stocks are small caps. Futures are down slightly but not enough to predict the open.






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


GIII G-III Apparel
The long call position was reloaded at the open.

KTOS - Kratos
The long position was entered at the open.



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BULLISH Play Updates

GIII - G-III Apparel - Company Profile

Comments:

Retail hell hit this morning with multiple retail disasters. None were related to GIII but the entire sector was crushed. Fortunately, we reloaded the Sept call at a very low price of 30 cents so a failure to rebound will be inexpensive.

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 8/15/17:

Long Sept $30 call @ 30 cents, see portfolio graphic for stop loss.

Previously closed 8/14: Long GIII shares @ $26.10, exit $25.85, -.25 loss.
Previously closed 8/14: Long Sept $30 call @ 72 cents, exit .80, +.08 gain.



KTOS - Kratos Defense - Company Profile

Comments:

No specific news. Shares spiked to a new high at the open but faded with the market.

Original Trade Description: August 14th.

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 department spending.

Kratos unveiled its newest high performance class of military unmanned aerial system technology at the Paris Air Show. 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.

Just over the last couple weeks Kratos announced a $2.9 million order for an airborne communications system, a $10 million order for a ballistic missile defense system, $23 million for a military radar system and $8 million for a GPS Satellite protection system. Analysts are expecting a record $800 million in revenue for 2018. They expect to do $150 million in unmanned revenues in 2018.

Kratos posted earnings of 1 cent and a $10.4% increase in revenue to $186 million. They guided to be free cash flow positive by $25 million in 2017.

Expected earnings Oct 26th.

With the daily new contract awards shares have risen $1.50 in the last week and closed at a 5-week high on Monday. They are very close to breaking out to a new high.

Position 8/15/17:

Long KTOS shares @ $12.78, see portfolio graphic for stop loss.
Alternate position: Long Nov $15 call @ 65 cents, see portfolio graphic for stop loss.

With shares just crossing the $12.50 strike price, we had to reach out to $15 and a distant month.



RCII - Rent A Center - Company Profile

Comments:

No specific news. Shares tainted by the drop across the entire retail sector.

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.



UCTT - Ultra Clean - Company Profile

Comments:

No specific news. Shares held their big gains from Monday.

Original Trade Description: Augusy 12th.

Ultra Clean Holdings, Inc. designs, develops, prototypes, engineers, manufactures, and tests production tools, modules, and subsystems for the semiconductor capital equipment and equipment industry segments primarily in North America, Asia, and Europe. It offers precision robotic systems that are used when accurate controlled motion is required; gas delivery systems, which include one or more gas lines consisting of small diameter internally polished stainless steel tubing products, filters, mass flow controllers, regulators, pressure transducers and valves, component heaters, and an integrated electronic and/or pneumatic control system; and various industrial and automation production equipment products. The company also provides subsystems, such as wafer cleaning sub-systems; chemical delivery modules that deliver gases and reactive chemicals in a liquid or gaseous form from a centralized subsystem to the reaction chamber; frame assemblies, which are support structures fabricated from steel tubing or folded sheet metal; and top-plate assemblies. In addition, it offers liquid delivery systems; process modules, which are the subsystems of semiconductor manufacturing tools that process integrated circuits onto wafers; and other high level assemblies. The company primarily serves original equipment manufacturing customers in the semiconductor capital equipment, consumer, medical, energy, industrial, flat panel, and research industries. Company description from FinViz.com.

We have played UCTT several times before with varying results. The stock is volatile based on the direction of the chip sector. Since UCTT sells to chip makers, their good/bad fortune impacts UCTT. Fortunately, we are in a tech world where every year, more chips are required to make more gadgets including computers, tablets, phones, TVs and now the billions of IoT devices to be installed over the next several years.

The company reported earnings of 62 cents and analysts were expecting 51 cents. Revenues rose 75% to $228 million and beat estimates for $214 million.

They guided for earnings in the current quarter of 62-68 cents and analyst estimates were only 39 cents. At the midpoint of 65 cents that would be 66% higher than estimates. Very few companies are growing earnings that fast. Shares declined after the CEO said he was taking two months off to addess a treatable medical condition.

Expected earnings Oct 26th.

Shares are starting to rebound from the post earnings dip.

This is a short-term call because the next option series is December and options are too expensive. We have to buy just out of the money because the next strike at $25 requires a 10% move in the stock in only 4 weeks. That is very possible but we are entering a weak market period.

Position 8/14/17:

Long UCTT shares $22.70, initial stop loss $20.55, see portfolio graphic for stop loss.
Alternate position: Long Sept $22.50 call @ $1.50, see portfolio graphic for stop loss.




BEARISH Play Updates

DDD - 3D Systems - Company Profile

Comments:

No specific news. Decent decline to a new 52-week low. Support still $12.

Original Trade Description: August 7th.

3D Systems Corporation, through its subsidiaries, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, and colorjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications. Additionally, the company provides warranty, maintenance, and training services; on-demand solutions; and software and healthcare services. Company description from FinViz.com.

3D reported adjusted earnings of 8 cents compared to 12 cents in the year ago quarter. Revenue rose less than 1% to $158.4 million but sales of 3D printers declined -4%. Analysts were expecting 12 cents and $162.5 million.

The company guided for the full year for revenue of $643-$671 million, down from $643-$684 million. They guided for earnings of 46 cents, down from 51-55 cents.

3D keeps talking about new products adding to revenue in 2018 but that is a long way off and could be wishful thinking.

Expected earnings November 1st.

Shares fell $5 on the earnings and guidance miss but I expect them to fall further. If shares break support at $12, they could fall to $6 and a 7-year low.

Position 8/8/17:

Short DDD shares @ $13.00, see portfolio graphic for stop loss.
Alternate position: Long Sept $12 put @ 44 cents, see portfolio graphic for stop loss.



DF - Dean Foods - Company Profile

Comments:

No specific news. Sellers returned to DF today.

Original Trade Description: August 9th.

Dean Foods Company, a food and beverage company, processes and distributes milk, and other dairy and dairy case products in the United States. The company manufactures, markets, and distributes various branded and private label dairy case products, such as fluid milk, ice creams, cultured dairy products, creamers, ice cream mixes, and other dairy products; and juices, teas, bottled water, and other products. It sell its products under approximately 50 national, regional, and local proprietary or licensed brands, and private labels, including DairyPure, TruMoo, Alta Dena, Berkeley Farms, Country Fresh, Dean's, Friendly's, Garelick Farms, LAND O LAKES, Lehigh Valley Dairy Farms, Mayfield, McArthur, Meadow Gold, Oak Farms, PET, T.G. Lee, Tuscan, and others. The company sells its products to retailers, distributors, foodservice outlets, educational institutions, and governmental entities through its sales forces. Company description from FinViz.com.

Dean Foods reported earnings of 21 cents that declined -47.1% and missed estimates for 31 cents. Revenue of $1.93 billion, which also missed forecasts. The lowered their full-year guidance from $1.35-$1.55 to 80-95 cents. That is a major haircut.

Expected earnings Nov 8th.

Dean Foods handles a lot of milk brands and the USDA said milk sales nationwide declined -2.9% in May alone. Management said competitive and volume pressures are hurting the company and the negative dynamics are expected to continue the rest of the year.

Milk has been found to cause diabetes or at least make it worse and the news is spreading fast. I have a friend that has been taking insulin for 20 years. I talked him into dropping milk from his diet and he was able to get off insulin within 3 weeks. A year later he backslid and began to drink milk again and he had to go back on insulin. He was quickly convinced and has sworn off forever and now leads a normal life with no diabetes meds.

Shares fell sharply to a 5-year low but given the severity of the guidance warning and the size of the earnings miss, the stock could continue to decline.

Position 8/10/17:

Short DF shares @ $11.37, see portfolio graphic for stop loss.
Alternate position: Long Sept $11 put @ 30 cents, see portfolio graphic for stop loss.



SABR - Sabre Corp - Company Profile

Comments:

No specific news. Big spike at the open but new 2-yr low close.

Original Trade Description: August 5th.

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.

Update 8/7/17: Bank of America downgraded the stock from neutral to underperform (sell) and shares fell sharply at the open. It would have been nice if they had waited until after we were in the position. Shares fell about $1 at the open, rebounded slightly and then rolled over again in the afternoon. I think BAC helped us overall since it will put added pressure on the stock.

Position 8/7/17:

Short SABR shares @ $19.02, see portfolio graphic for stop loss.
Alternate position: Long Oct $17.50 put @ 40 cents, see portfolio graphic for stop loss.





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