Option Investor
Newsletter

Daily Newsletter, Monday, 8/21/2017

Table of Contents

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

Market Wrap

Eclipses And Portents Of Doom

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The Great Eclipse of 2017 has come and gone and no market shaking events came with it. While fantastic to imagine what did get reported was a boost to tourist economics in a broad swatch across America, from coast to coast.

Other than that today was relatively event free as is the week; earnings season is all but over and there is very little in the way of economic data. What we do have to look forward to this week is the FOMC, and more specifically Janet Yellen and a speech she is set to give Friday at Jackson Hole.

Asian indices were flat and mixed with one index up a half percent and another down a half percent. Sentiment was downbeat regardless the index as traders wait to see what happens with Trump, the Trump Agenda, Trump's scandal's, fallout from Bannon's banning and the NAFTA negotiations. European indices were mixed as well but most closed with losses.

Market Statistics

Futures were flat and mildly positive for most of the morning. With little economic data and no earnings or fresh political news to speak of trading was tame and held within a tight range. The open was calm and without direction, price action on the indices moved sideways within a fairly narrow range before dipping lower to hit the intraday low just before 10:30AM. The SPX was down as much as -7 points at the low and then bounced back to break even levels and even a little higher before the move sideways resumed. The daily range held from then until the close leaving the indices hovering near the mid-points of their ranges and break even for the day.

Economic Calendar

The Economy

The Chicago Federal Reserve's Activity Index shows stabilization within the economy and activity moving in line with trends. The index is a gauge of 85 market indicators and came in at -0.01% in July after rising to 0.13% in June. The index shows economic conditions moving in line with trend with it hovers near zero. The 85 indicators are broken up into 4 broad categories, 3 of which have been falling over the last 2 months.


Moody's Survey of Business Confidence rose 0.1% to 32.1% and a 6 week high. The index is consistent with broad confidence within the global business economy but still well off the highs set in 2015. Mr. Zandi says the index shows business remains strong and an economy expanding above potential.


With just under 98% of the S&P 2nd quarter earnings reports in the bag the stats remain the same. The blended rate of growth for the 2nd quarter is 10.2%. This is 3.7% above the rate estimated at the start of the reporting season and slightly below the 4% to 5% increase predicted by the averages. Regardless, 10 of the 11 S&P sectors performed better than expected. Full year 2017 outlook remains constant as well, holding steady at 9.4%.


Forward outlook remains positive although greatly diminished from only a month or two ago. The decline in forward outlook is on the one hand concerning but on the other not as it is primarily due to falling oil prices. When oil prices they took a big bite out of forward earnings outlook for the energy sector. The next two quarters should growth dip to 5.2% and then grow to 11.2% with final growth rates in the range of 9%-10% in the 3rd quarter and 15%-16% in the 4th. Beyond that 2018 is expected to come in at 11.5% for the year which means growth expansion may peak but likely to remain strong through the end of the period.


The Dollar Index

The Dollar Index held near perfectly flat for the day posting no gain and no loss. The index is hovering above a long term low and just below resistance while in down trend. Last week's FOMC/ECB minutes did little to alter the balance between the world's most important currencies leaving the index in limbo. A fall from resistance at $94 looks likely and would be trend following with little in the way of news expected to support it. The indicators are bearish and firing a strong sell within the down trend. The risk is Yellen's speech on Friday and to a much lesser extent this week's data, hawkishness will support, and of course political risk.


The Gold Index

Gold prices edged higher on simmering fears. The North Korea situation has been back-burnered but still a hot issue as is the apparent meltdown of Trump's advisory support system. Between them and the downward slope on which the dollar is trading gold is likely to retest the highs set last week, just above $1,300. Again the risk is Janet Yellen and her speech on Friday, if she makes any mention or is leaning toward hawkishness the dollar could jump higher and send gold down in reaction.

The Gold Miners ETF GDX gained 0.35% as it continues to try and break out from the narrowing short term trading range. Today's action fell short of the intraday high set Friday but is a move higher and closes at/above my down sloping resistance line. The indicators are bullish but weak suggesting no more than a rise with a trading range at this time. If the ETF is able to move higher next resistance is near $24. Looking back along the 150 day moving average there is evidence f long term buyers in the market so I would not count on a move lower at this time.


The Oil Index

Oil fell more than -2% as prices move lower with the trading range. Today's action was influenced by signs of high supply and growing US/global production but likely will be supported near $35 if not sooner. Last week's rig count shows the largest drop in US rigs in months and likely to influence prices in the near future. WTI closed the day below $47.50.

The Oil Index fell a half percent today in action that is sideways from Friday's candle. Today's candle is small and red and possibly part of a small bearish flag within a sharp near term down trend. Price action looks to be consolidating at my 1,080 support line with a chance of moving lower. The indicators are bearish if a bit mixed, momentum is bearish and moving lower while stochastic is possibly rolling over while deep in overbought territory. If the index does move lower the next likely target for support is near 1,000. The bottom I have been anticipating may not be coming, not yet anyway. Until then the sector looks set to fall.


In The News, Story Stocks and Earnings

Commodity giant BHP Billiton released earnings before the bell. The company reported that it returned to profit in 2017 reversing losses made a year ago. Revenue is up nearly 20% YOY with EBITDA up nearly 60% in the same time. Results were driven by strong revenues as well as cost savings above company expectations leading to an increase of the dividend. The dividend was hiked more than 300% from $0.16 to $60 leading shares to rise in the premarket session. Shares opened with a small gain and then extended that to 1.25%, moving up from the short term moving average.


The VIX fell -7.50% to trade below 13.00 but is still elevated relative to recent trends. The index is not indicating a major change in reversal but at these levels suggests that there may be correction or at least consolidation within the market. The indicators are mixed but generally consistent with a move lower with a trading range so a drop back to support looks likely. Support is near 12.00 and confirmed by the short and long term moving averages. This level may prove strong support in the near to short term as we make our way through the earnings doldrums and into the fall trading season.


The Indices

The indices held stead in today's action, the eclipse didn't precipitate the end-times or anything like that. Today's action, while tepid, was mostly positive and led by the Dow Jones Transportation Average. The index gained 0.29% and created a small green bodied candle. The candle is sitting on the long term up trend line but beneath the long term moving average so the next few days could be crucial. A break below the trend line would be bearish with downside target near 8,750, a bounce from the trend line would be bullish with upside target near 9,300.


The Dow Jones Industrial Average gained 0.13% and created a small green candle. The candle is beneath resistance at the long term moving average and up trend line, set to make a move lower. The indicators are both bearish and moving lower suggesting the same. A drop from this level could take the index down to just above 21,000. A move to this level would be about -10% from the recent peak and a very healthy move for the long term bull market.


The S&P 500 made the smallest gain, only 0.11%. The broad market created a small green candle sitting on a potential line of support but the indications are not supportive. MACD is making bearish peaks convergent with near term lows suggesting that sellers are gaining strength while stochastic confirms downside with an additional bearish signal. These indications are near term in nature, support targets are close at 2,400. A move below there would be more firmly bearish.


The NASDAQ Composite made the only decline today, -0.05%, and looks set to fall a little further. The index made a new one month low with today's action and the indicators are don't look bullish. MACD for one is gaining strength with successive bearish peaks near term suggesting that selling is not over, stochastic confirms this with a strong bearish crossover. That being said downside potential is limited due to strong support targets between 6,000 and 6,100.


The indices are set up for a fall and chatter makes it sound like the market is expecting it. That being said I don't expect to see the market fall too far, and when it finds support I expect that support to be strong. The long term trends remain up and outlook remains positive this is very likely, if it comes to pass, the lead in to the next great entry for the secular bull market. The indices have already shed -1 to -3%, another few more percentage points will put them all at strong support and levels where the market can begin to ratchet higher. I am bullish for the long term, cautiously bearish for the near.

Until then, remember the trend!

Thomas Hughes


New Plays

Heading for Single Digits

by Jim Brown

Click here to email Jim Brown
Editor's Note

The communications space is increasing dominated by the big caps leaving no room for anyone else. Frontier Communications is rapidly heading for penny stock status.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

FTR - Frontier Communications - Company Profile

Frontier Communications Corporation provides communications services to residential, business, and wholesale customers in the United States. It offers broadband, video, voice, and other services and products through a combination of fiber and copper based networks to residential customers. The company also provides broadband, Ethernet, traditional circuit-based, data and optical transport, and voice services, as well as Multiprotocol Label Switching and Time Division Multiplexing services to small business, medium business, and larger enterprises, as well as sells customer premise equipment. In addition, it offers 24/7 technical support; wireless broadband services in selected markets; and frontier secure suite of products, including computer security, cloud backup and sharing, identity protection, and equipment insurance. Further, the company provides satellite TV video services; voice services, including data-based VoIP, and long distance and voice messaging services; and a package of communications services. Additionally, it offers a range of access services that allow other carriers to use facilities to originate and terminate their local and long distance voice traffic. As of December 31, 2016, it served approximately 5.4 million customers and 4.3 million broadband subscribers in 29 states. The company was formerly known as Citizens Communications Company and changed its name to Frontier Communications Corporation in July 2008. Company description from FinViz.com.

Frontier is simply being squeezed out by the competition. The CEO said with their recent earnings, they were facing "severe competition" in the telecom space. Revenue declined -12% in Q2 to $2.3 billion and missed estimates for $2.4 billion. They have missed revenue targets in 3 of the last 4 quarters. They posted an operating loss of $662 million, compared to $75 million in the year ago quarter. The loss this year was accelerated by a forced write down of goodwill for $532 million. Operating costs rose by $500 million to $2.8 billion for the quarter. The per share loss for the quarter was $1.10 and slightly better than the $1.10 analysts expected. Shares spiked temporarily but then resumed their downward trend.

Charter (CHTR), Comcast (CMCSA), AT&T (T) and Windstream (WIN) are eating their lunch. Bigger is better in the telecom space and Frontier is shrinking.

Shares are down 81% over the last year from a 52-week high of $75. On Monday they closed at a historic low. My charts only go back to 1972 and today's close was the lowest on record. I think Frontier is going to single digits. There is no light at the end of this competitive tunnel. Their only hope will be a takeout at some point. Free cash flow is shrinking from $250 to $205 million for the quarter. Liquidity is falling from $522 million to $387 million. They have a market cap of $995 million and debt of $17.8 billion. That is not a desirable picture of a takeout candidate. The more likely path is a continue slide into single digits.

Expected earnings Oct 31st.

Sell short FTR shares, currently $12.72, initial stop loss $14.15.
Alternate position: Buy Oct $11 put, currently 90 cents. No initial stop loss.



Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps more than $1.00 at the market open.



In Play Updates and Reviews

Support Tested Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P, Russell and Nasdaq tested support intraday and it held. Given the weak volume this rebound to the flat line was surprising. The Russell tested 1,350 again, the Nasdaq 6,200 and the S&P 2,420. The Dow fell -75 points at the open but rebounded to close the most positive at +29 points.

This was a throwaway day because of the eclipse and the settlement of expired options. There were too many distractions and not enough traders. Tuesday will be a crucial day for market direction. Do we continue the multi-week decline or attempt to rebound ahead of Yellen's speech on Friday? Only time will tell.





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


HIBB - Hibbett Sports
The long put position was entered at the open.



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BULLISH Play Updates

KTOS - Kratos Defense - Company Profile

Comments:

No specific news. A minor decline in a weak 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 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.



UCTT - Ultra Clean - Company Profile

Comments:

No specific news. Minor decline and break of recent support.

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. Holding at the 52-week lows. 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. Minor decline but nice pattern of lower highs.

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.



HIBB - Hibbett Sports - Company Profile

Comments:

No specific news. Shares tried to rebound but failed when they closed 65 cents off the intraday highs. Now we should see the sellers begin to appear.

Original Trade Description: August 19th.

Hibbett Sports, Inc., together with its subsidiaries, operates athletic specialty stores in small and mid-sized markets primarily in the South, Southwest, Mid-Atlantic, and the Midwest regions of the United States. Its stores offer a range of merchandise, including athletic footwear, team sports equipment, athletic and fashion apparel, and related accessories. The company also sells merchandise directly to educational institutions and youth associations. As of January 28, 2017, it operated 1,059 Hibbett Sports stores and 19 Sports Additions athletic shoe stores. Company description from FinViz.com.

Hibbett Sports shares hit a 14-year low after reporting a loss of 15 cents that actually beat estimates for a 20-cent loss. However, revenue declined from $206.9 million to $188 million and missed estimates for $190.3 million. Same store sales fell -11.7% and worse than estimates for a -10.0% drop. The carnage in the stock price came after they cut full year guidance from $2.35-$2.55 to $1.25-$1.35 and same store sales guidance from flat to down mid to high single digits.

The CEO said, "We experienced a very difficult retail environment in the quarter, with a significant decline in transactions and resulting pressure on gross margin." The drop in margins was driven by the increasingly promotional environment, markdowns taken to liquidate excess and aged inventory and logistics and store occupancy expenses associated with lower comparable store sales.

For the rest of 2017 Hibbett expects "the external environment to remain challenging."

Earnings expected Nov 15th.

HIBB shares actually rebounded significantly from their opening low on Friday. I suspect the rebound was due to the single sentence in the earnings release that said, "online sales appear promising and exceeded expectations." While the may be "promising" they did not prevent a dramatic cut to guidance. I believe this rebound attempt will fail.

Until it does fail, I am only recommending a put option and not a short on the stock. I am willing to risk 60 cents until the downtrend continues.

Position 8/21/17:

Long Oct $10 put @ 60 cents, see portfolio graphic for stop loss.



SABR - Sabre Corp - Company Profile

Comments:

No specific news. Only a minor rebound after the 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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