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Newsletter

Daily Newsletter, Saturday, 8/26/2017

Table of Contents

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

Market Wrap

No Volume, No Conviction

by Jim Brown

Click here to email Jim Brown

Market volume averaged only 5.17 billion shares for the week with a low of 4.8 billion on Friday.

Weekly Statistics

Friday Statistics

This was the lowest volume for a non-holiday week in recent memory. Traders were either on vacation, avoiding the Yellen/Draghi speeches or are simply waiting for the normal buying opportunity in September. The lack of volume suggests there is no conviction in either direction. These minimal market moves suggest investors are just passing time ahead of the September volatility. Investors are showing no interest in selling but they are not buying either.

The Dow gained +123 at the open but it was quickly erased. The minor buying in the afternoon was also erased at the close as weekend event risk caused positions to be sold.


The only economic report on Friday was the Durable Goods for July. After a 6.5% gain in June, orders fell -6.8% in July. Analysts were expecting a -5.6% decline. Excluding transportation, orders were up +0.5%. Excluding defense, orders declined -7.8%. The decline in orders came mostly from non-defense aircraft, autos and machinery. Non-defense capital goods orders declined -20.2%. The inventory to sales ratio remained flat at 1.7 as where it has been for the last 7 months.

Janet Yellen's speech on Friday was a non-event. She said nothing about monetary policy or tapering QE. She said the financial system was safer today than during the financial crisis although some regulations needed to be adjusted. She warned that future crises are inevitable but the recent crash taught regulators some important lessons.

She said, "A broader set of changes to the new financial regulatory framework may deserve consideration. Such changes include adjustments that may simplify regulations applying to small and medium-sized banks and enhance resolution planning." She suggested the Volcker rule, which limits the ability of banks to trade for their own account, may need some "simplifying." She cautioned against broad changes when it came to risk taking in the market.

After her speech, the Dollar Index fell nearly 1% to 92.74 and the lowest close since January 16th, 2015. Adding to the decline was comments from Draghi about the strengthening of European economy. Comments earlier in the week from President Trump about ending NAFTA and potentially shutting down the government in a budget battle in September, also contributed to the decline for the week.

The Euro had an opposite reaction to the Draghi speech with a 1.08% rise to a new 30-month high.



The economic calendar for next week is chock full of important events. It is payroll week with the ADP on Wednesday and the Nonfarm Payrolls on Friday. The revision of the Q2 GDP is on Wednesday. Analysts are expecting no change to the initial 2.6% reading but we could be surprised.

The Atlanta Fed real time GDPNow is still projecting a 3.4% rise in Q3.


The national ISM Manufacturing Index is on Friday and it is expected to decline slightly but not enough to be a market mover. There are lots of other reports but none are expected to cause a market hiccup.


Twitter (TWTR) shares were downgraded by Jefferies from buy to hold saying despite the companies broad engagement with users, the monetization is slipping. Jefferies warned having a "strong brand" was not enough and they cut the price target from $20 to $16. In the last earnings report, revenue declined -6% and they added zero monthly active users. Jefferies said the ROI on Twitter ads was falling and advertising revenue fell -6% despite a 15% increase across all social media sites. Shares fell slightly on the downgrade. There is no future in owning TWTR shares. It has become a trading stock rather than an investment. The only reason to hold TWTR shares would be if you were expecting a buyout. However, with declining metrics, that is not likely to happen at the recent price ranges.


Amazon (AMZN) announced on Thursday they were going to close the Whole Foods Market (WFM) acquisition on Monday. On Wednesday, the FTC cleared the $13.7 billion acquisition. Amazon said shoppers would immediately see cheaper prices on the best selling grocery and produce items including salmon, eggs, produce, meat, etc. The company also said they would begin implementing a Prime loyalty program in the stores. Survey's claim about 60% of Whole Foods shoppers are also Amazon Prime subscribers. This will be a match made in heaven for Prime members. In addition, the Whole Foods brands like 365, Whole Foods Market, Whole Paws and Whole Catch will be available on Amazon.com, AmazonFresh, Prime Pantry and Prime Now.

Here is the key point. Amazon has a history of selling below cost to capture market share. Once they have that share, they raise prices to just over breakeven and turn up the volume. It only makes sense that Amazon is going to use the first six months of the Whole Foods operation to sell products really cheap to capture market share from people who always thought Whole Foods was expensive. If Amazon can lure them back with low prices and specials, that would also bring them into the Amazon ecosystem. With just over three months until the holiday shopping season, you can bet Amazon will be making a full court press to capture those shoppers before the holidays.

Conditions are going to be tough in the coming months for Sprouts Farmers Market (SFM), Fresh Market (TFM) and Natural Grocers (NGVC). Kroger (KR) and Wal-Mart (WMT) will see the eventual impact but it will be farther down the road. Those stores have a lower dollar customer and far more saturation as a neighborhood store. Whole Foods only has 450 stores. Kroger has close to 3,000 stores. Wal-Mart has 17,000 stores. Whole Foods will have a local impact on Kroger but it will only be minimal. In neighborhoods where both stores exist, they each have their own demographic clientele. There will not be that much bleed over initially.

Costco will see no impact from the acquisition. Some 82% of Costco customers are already Prime subscribers. The Costco stores and merchandising methods are completely different than a Whole Foods. This sell off hysteria on Costco is ridiculous. This is a definite buying opportunity on COST. Claiming Amazon/Whole Foods is going to cause a significant impact is like saying a sale on Harley-Davidson motorcycles is going to impact Cadillac sales. The businesses are just not the same.



Big Lots (BIG) reported earnings of 67 cents that beat estimates for 62 cents. Revenue of $1.22 billion beat estimates for $1.21 billion. They guided for the current quarter to earnings of 1-5 cents and full year earnings of $4.15-$4.25. Same store sales rose 1.8%. The CEO said the closing of thousands of retail stores was giving Big Lots numerous opportunities to open new stores or relocate existing stores in better locations at favorable rates. The store closures are also redirecting consumer traffic to other stores in the area including the Big Lot stores. Shares dipped sharply at the open but recovered to lose only 48 cents.


Autodesk (ADSK) reported a loss of 11 cents that was a penny better than expected. Revenue of $501.8 million beat estimates for $494.8 million. They guided for the current quarter for a loss of 12-16 cents and revenue of $505-$515 million. Analysts were expecting $515.7 million. For the full year, they guided for a loss of 54-61 cents with revenue of $2.03-$2.05 billion. The losses are the result of shifting from a one-time software sale retail model to a cloud subscription model. For the first 24 months of a conversion, revenue declines but long term revenue rises and becomes more predictable. Shares spiked on the news.


Pure Storage (PSTG) reported a loss of 11 cents that beat estimates for a loss of 14 cents. Revenue of $224.5 million beat estimates for $218.8 million. They guided for the current quarter for revenue of $267-$275 million and $985 million to $1.02 billion for the full year. Shares spiked $19% on the guidance.


Ulta Beauty (ULTA) was suffering from an earnings hangover on Friday. The company reported earnings of $1.83 that beat estimates for $1.78. Revenue of $1.29 billion, rose 20.6% and beat estimates for $1.28 billion. Same store sales rose 11.7% but that was down from the 14.4% rise in the year ago quarter. They raised earnings guidance to grow in the "high 20% range" up from prior guidance of "mid 20% range." Same stores sales guidance was raised from 9% to 10%-11%. They opened 20 new stores in Q2 and plan to open 100 in 2017. Ecommerce revenue rose 72%.

Overall, this was an incredible earnings report. However, it may have been too good. BMO Capital downgraded them from outperform to market perform and cut the price target from $345 to $235. Telsey Advisory Group reiterated an outperform but cut the price target from $360 to $300. RBC warned continued high expectations may be ignoring the competition. One analyst said Ulta was a perfect target for Amazon because they have high margins and ship products in boxes. Another said the makeup business cannot continue to grow at the current rate because of the flood of copy cat cosmetics currently hitting the market. However, RBC pointed out that despite all the perceived negatives, Ulta's customer base rose 23% to 25.4 million. That is hardly a weak gain.

I believe this is simple profit taking in a weak market. ULTA had more than tripled over the last three years and there was a lot of profit to be captured. The slight slowing in same store sales was blamed but ULTA said it was because they were less promotional in Q2. So when is making a decision to expand margins a bad thing? They had a blowout quarter without giving away the store in promotions. If by chance the stock declined to $150, I think it would be a major buying opportunity. I am not expecting that but would love to see it.


Earnings for next week include Best Buy, Ctrip.com and Costco. The pace continues to slow with only 7 S&P companies reporting to bring the total to 498. Q2 earnings have risen 12.1% with 73.5% of companies beating estimates and 69% beating revenue estimates. For Q3 there have been 64 guidance warnings and 42 companies issuing positive guidance. The forward PE is now 17.6.


DuPont (DD) will be replaced in the Dow Industrial Average by a new company created when it mergers with Dow Chemical. The new company will be called DowDuPont with the ticker DWDP. The change will occur on Sept 1st.


In years past the appearance of a hurricane in the Gulf of Mexico would send oil prices higher and everyone would be panic stricken that some disaster would befall the production platforms. Since there has not been a major hurricane in the Gulf since Katrina in August 2005, that worry seems to have evaporated. I think the new crop of energy traders did not live through the major outages in the 1990s. With the current surplus of inventories we are not as susceptible to shortages if a storm did blow though the oil patch.

Corpus Christi has five refineries with capacity of about one million bpd or 4% of our total. The Houston area has 35 refineries with capacity of 9.0 million bpd or 46% of our capacity. Currently about 10% of Gulf production is offline. The hurricane's path took it up the Texas coast and it missed the majority of the oil patch south of Louisiana.

While there appears to be no imminent danger to the energy sector there will always be the unexpected. If Harvey rebounds back over the Gulf and makes landfall in the Houston area or farther east, the biggest damage potential is flooding. The refineries are built strong to be immune to storms. However, the 6-12 foot storm surge and forecasts for up to 36 inches of rain, could overpower the drain pumps and shutdown the facilities for weeks. With the driving season ending on Labor Day weekend, it would take a monster facility outage to cause any real problems.

Crude prices are reflecting this fact with no material movement and stuck in the $47-$48 range.


Active rigs declined by 6 to bring the total decline to 18 over the last 4 weeks. Producers are getting ready for what could be another drop in prices in Sep/Oct.




Markets

The S&P posted a big rebound on Tuesday that got everyone excited but it stalled right at 2,450 and that was resistance the rest of the week. The very low volume is going to be even lower next week and it is going to be harder to generate an upside move.

Bank of America said on Friday that equities have seen the biggest outflows since 2004. Since that period covers the financial crisis, that is a strong statement. Over the last 10 weeks, investors have pulled $30 billion from U.S. stock funds. With this lasting streak, it is even more amazing that the major averages are still only down about 2% from their highs from August 8th.

The bank said internal positioning showed investors were becoming more defensive in their equity allocations. Over the last week, $600 million fled technology stock funds, the largest outflow in 49 weeks. Financials lost $35 million for the second consecutive week. Consumer stocks lost $1.5 billion, the third largest weekly outflow ever. Utilities were the only sector to see inflows last week.


On Friday, the Transports were the best performers out of all 11 S&P sectors.


As we move into September, the potential for volatility increases. I will be very surprised if we do not retest the 2,400 level or lower. Even if we did test 2,400, that is only a 3.3% decline and definitely not a major market event. The S&P would have to dip below 2,380 to make investors nervous.


The Dow rallied 123 points at the open but gave back all but 30 by the close. The A/D breadth was still good for the Dow with only six stocks negative. The Dow's mix of different companies and sectors is helping keep it afloat.

The 21,900 level appeared as resistance on Tuesday's short squeeze and that level was still in play on Friday's early rally with a 21,906 high. The Dow chart is giving us no clue as to future direction but we are moving into a weaker period on the calendar so the odds of a continued rally are slim but not zero. The 22,000 level would be the next resistance point.



The Nasdaq has an uphill battle in the weeks ahead. I wrote last Tuesday that the big cap tech stocks were on the verge of a breakdown. That has not changed. Amazon has broken support. Netflix, Google, Priceline and Facebook are very close to critical support breaks. If one of the big cap stocks suffers a significant breakdown, it could poison sentiment for the rest and they could follow. It is highly unusual for all of them to be right on the edge of the cliff at the same time. The potential for a chain reaction decline is very high.








The Nasdaq is only down just over 2% from its highs but is in danger of a bigger decline. The 6,200 level was short-term support last week but the real target for this decline is 6,100. Unless the big cap stocks suddenly rebound out of danger, we could see that level soon.


The Russell posted some consecutive gains but they were minimal compared to the recent decline. The 1,350-1,340 levels need to hold or we could be in for a major change in sentiment. That is a lot of white space between 1,340 and 1,150.


The market was just passing time last week ahead of the Yellen and Draghi speeches. Next week we have the twin payroll reports and while they are not expected to move the market, any material surprise in either direction could upset the idea that the Fed is on hold.

With lawmakers still out on recess until after Labor Day, the political risk should be minimal, but given the current administrations fondness for random tweets, there is always some risk.

This is a holiday week and volume will be very low. That means the averages could be dormant or they could experience significant volatility on an unexpected headline.

Why buy? There is no reason to rush into the market this week. There will more than likely be a better buying opportunity in September. Be patient and keep some cash in your account.

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Random Thoughts


This survey ended on Wednesday the day after the big short squeeze. Bulls lost a lot of recent converts and they went all the way to bearish instead of just neutral. 72% still believe the market is not going higher.



When the iPhone 8 arrives, there will be some unhappy users. According to Sensor Tower, more than 187,000 apps will no longer work. Apple has been signaling they were dropping support for 32-bit apps for a long time. They first introduced a 64-bit processor in the iPhone 5s. The new Apple iOS 11 will no longer support these applications. Users are going to be getting messages like these that show the incompatibility.


Apple said it removed popular Iranian apps from the App Store on Friday. Apple cited new U.S. sanctions against Iran as the reason. "Under the U.S. sanctions regulations, the App Store cannot host, distribute or do business with apps or developers connected to certain U.S. embargoed countries." Apple has an 11% share of the smartphone market in Iran. Needless to say, Iranian users were not happy. The iPhone 8 may not sell well in Iran this year.


Everybody knows one of the main reasons for using Bitcoin is the lack of transparency. In theory you can buy and sell items and nobody knows who is conducting the transaction. Unfortunately, the IRS is preparing to crack down on Bitcoin users. With the astronomical price rise over the last several years, there are thousands of Bitcoin millionaires. There are also thousands of money launderers, drug deals and terror related transactions.

Using a customized software program from Chainalysis, the IRS is planning on tracking transactions and the inflation in the price of coins held for investment. Chainalysis says it is able to track more than 50% of the Bitcoin activity.

The problem is that nobody has ever legislated Bitcoin's description. Is it a currency, is it a derivative or is it a security? Depending on what regulation is passed to define it, the IRS will tax it accordingly.


The hermit kingdom is playing with fireworks again. North Korea launched 3 missiles on Saturday and went 0 for 3 on the tests. Two of the missiles reportedly blew up in flight after roughly 150 miles. The U.S. later revised their analysis of those two missiles, saying there was no confirmation they were a failure. I guess it is possible they could have been planned to blow up rather than fall into the sea. The third blew up almost immediately after it left the launch pad.

It was just last week that U.S. officials had praised Kim Jong-Un for showing restraint and not launching any new missiles since July. On Wednesday of last week, Kim ordered the production of more rocket engines and missile warheads during a visit to a missile research center. North Korean state media published some diagrams that suggested the DPRK was pressing ahead to develop even longer range ICBMs. Publishing the pictures of Kim and the diagrams were obviously intended to be an implied threat.

North Korea has been caught twice in the last six months shipping chemical weapons to Syria. Sanctions do not appear to be holding them back.

Did you ever notice that pictures of North Korean military officers always seem to show them very thin, almost skin and bones? Their uniforms are always baggy.



Germany's Bundesbank said it completed the shipping of 674 tonnes of gold bars ($27.9 billion) back to Germany from France and the US. They announced the plan to bring the gold home in 2013 and it was expected to take until 2020 to move it. The 53,780 bars, each weighing 27.5 pounds, have been moved to the basement under the headquarters of the Bundesbank. Now just over 50% of their reserves are stored in Germany with the remainder split between the USA and Britain. The Federal Reserve is holding 36.6% of Germany's gold and the Bank of England is holding 12.8%. If Germany were to encounter an economic emergency, those reserves could quickly be converted into dollars or euros by the two central banks.

Bank of England Gold Vault 4,600 tons


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Diplomacy is the art of saying "nice doggie" while you are looking for a rock."

Will Rogers


 


New Plays

Cyber Attacks Rising

by Jim Brown

Click here to email Jim Brown
Editor's Note

This may be a holiday week but cyber criminals will still be working. Symantec is announcing new products and new revenue streams.



NEW BULLISH Plays

SYMC - Symantec - Company Profile

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Digital Safety and Enterprise Security. The Consumer Digital Safety segment provides Norton-branded services that provide multi-layer security services across desktop and mobile operating systems, public Wi-Fi connections, and home networks to defend against online threats to individuals, families, and small businesses. This segment also offers LifeLock-branded identity protection services, such as identifying and notifying users of identity-related and other events, and assisting users in remediating their impact; and digital safety platform designed to protect information across devices, customer identities, and the connected homes and families. The Enterprise Security segment provides endpoint protection products, endpoint management, messaging protection products, information protection products, cyber security services, Website security, and advanced Web and cloud security offerings. Its enterprise endpoint, network security, and management offerings supports evolving endpoints and networks, as well as provides an integrated cyber defense platform. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. Company description from FinViz.com.

Symantec is the largest provider of security products for retail buyers. They have an excellent suite of firewalls and antivirus programs. I have used everyone in the market at one time or another and Symantec has always been the best for me.

Last week they announced something different. They announced a secure router that handles everything in your house. It has special security for smartphones, tablets, PCs, IoT devices, etc. It has a handy user friendly interface and you can set at the router level, individual passwords for everyone in the family with individual settings by password. Say you have a 12 year old boy in the house. You can set different parental exclusions for him than you would for an 8 year old in the same house. You are in charge of everyone's access regardless of what device they are using.

The secure router blocks attacks before they get to your PC and before Windows has to deal with them. The router is not cheap but compared to what it does, it is cheap for the number of functions. How much does it cost to have your PC compromised? The router is $300 and comes with a year of service. After the year is up it goes to $10 a month. That is an entirely new revenue stream for Symantec. Obviously, it will not show up in their earnings for several quarters but the stock is rising on the news.

You can read the full press release HERE.

Expected earnings Nov 1st.

The stock is at the upper end of the range that I recommend in Premier Investor. With the potential for volatility in September, I am not recommending we go long the shares. This will be an option only position so we can try and ride out some of the volatility with minimum risk.

Buy Oct $31 call, currently 46 cents, no stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Well Off the Highs

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P closed 10 points off its intraday high with only a 4-point gain. However, the Russell closed only 3 points off its high with a 3 point gain. The small caps are trying to recover from the four-week beating. However, the individual stock movement was minimal. The biggest move across all out positions as only 17 cents.

The Dow gapped up 123 points but ended with only a 30-point gain. This is typical low volume, end of August trading. Next week should be even worseas volume dies completely.





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


No Changes



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BULLISH Play Updates

KTOS - Kratos Defense - Company Profile

Comments:

No specific news. Retraced some of Thursday's gains.

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 but holding over 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. Only a minor gain.

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. Closed at a 5-year low on Thursday, minor 8 cent rebound on Friday.

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.



FTR - Frontier Communications - Company Profile

Comments:

No specific news. Three days of minor gains after Tuesday's 45-yr low close.

Original Trade Description: August 21st.

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.

Position 8/22/17:

Short FTR shares @ $12.72, see portfolio graphic for stop loss.
Alternate position: Long Oct $11 put @ 90 cents, see portfolio graphic for stop loss.



SABR - Sabre Corp - Company Profile

Comments:

No specific news. Shares are testing resistance at $18.50.

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.

Update 8/23/17: Shares were up slightly after the company announced the refinancing of their $570 million Term A and $1.89 billion Term B credit facilities and $400 million revolving credit facility. The interest rates were lowered and the due date on the Term A facility was extended 12 months.

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.




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:

I recommended last week that we close the position on Monday because shares were rebounding from the mid-August dip. Monday was the high for the week and shares dipped another $1 through Thursday's close.

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 7th.

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:

Closed 8/21: Long Sept $20 put @ $1.00, exit $1.60, +.60 gain.

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



ECA - Encana Corporation - Company Profile

Comments:

No specific news. Shares continue to be volatile with oil trading between $47-$48.50.

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.



INFY - Infosys - Company Profile

Comments:

Lots if infighting between the founders and board but they named an ex-CEO as the Chairman to turn the company around and find a new CEO. Shares are rebounding.

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.

Update 8/18/17: Shares spiked to a new 9-month high on Thursday then collapsed -7% on Friday. The drop came after the CEO quit because of a fight with the founders. CEO Vishal Sikka, resigned as CEO but will remain as executive vice chairman. Interim CEO Pravin Rao will report to Sikka until a new CEO can be found. Sikka had been praised for the transformational changes he was trying to put in place but the founders continually put roadblocks in his path. This was probably the kiss of death for this position but for 25 cents, we will let it ride.

Position 7/27/17:

Long Oct $17 call @ 25 cents. See portfolio graphic for stop loss.

Previously closed 8/7: Long INFY shares @ $15.66, exit $15.55, -.11 loss.





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