Option Investor
Newsletter

Daily Newsletter, Monday, 10/30/2017

Table of Contents

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

Market Wrap

Tax Talk Tanks Stocks

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

An idea was floated that tax reform would be phased in and the market wasn't happy about it. Soon after White House Press Secretary Sarah Huckabee Sanders came out with statements to the effect a phase-in wasn't going to happen. Regardless, we are expecting to hear more specific details sometime this week. We're also expecting to hear Trumps pick for Fed Chair on Thursday, as well as policy statements from the BOJ, FOMC and BOE.

International markets were mixed at best. In Asia Japan, Korea and Australia all moved higher while indices in China fell on consolidation within the market. The Nikkei closed up 0.1%, the Shang Hai composite fell -0.77%. European indices closed mixed as well as traders eye earnings and a big week for central bank meetings. Fortunately for them they also closed before the tax talk hit the market. Moves were small regardless of direction with none closing up or down more than 0.40%.

Market Statistics

Futures trading was weak all morning but did not indicate a major sell off. At most the SPX was indicated to open down about -6 points for the better part of the morning but moderated that to about -3 points by the open. The open was not too exciting, the SPX began the day down by roughly -3 points and quickly began moving higher. By 10:45 the index was flirting with break even but soon after that the tax reform news hit the market and drove them lower. The sell off was sharp and steep but found bottom by 12:15PM. The rest of the day saw the indices bounce from mid day lows and trend sideways within a narrow range.

Economic Calendar

The Economy

Personal Income and Spending data was released before the bell and came in fairly strong. Income is up 0.4% with spending up 1.0%. Income is in line with expectations while spending beat by a tenth. The really important data is the PCE which rose a mild 0.1% on the month and remains well below the FOMC's 2.0% target at +1.3% YOY.


Moody's Survey of Business Confidence regained 0.4% to hit 27.8% in this week's print. Despite the gain the index remains near lows not seen since before last year's elections. Despite this Mr. Zandi says the survey indicates a global economy growing at the high end of its potential. He adds that the recent hurricanes may have something to do with the recent fall in confidence but I don't see that in any other data, specifically the labor data. Quick reminder, this week is the first of the month again which means ADP, Challenger, NFP, Unemployment and Average Hourly Earnings data will be coming out over the next 4 days.


With 55% of the S&P reporting earnings for the 3rd quarter things are starting to look a little better. The blended rate rose 3% to 4.7% and a 2 month high. There are still only 6 sectors showing growth although the rate of earnings beat is well above average at 76%. Of those who have reported there are only 29 issuing negative guidance which is below average.


Looking forward the estimates have shifted a bit but remains positive and robust with double digit earnings growth expected for the next 5 quarters at least. Next quarter fell to 10.7% while full year 2017 edged up a tenth to 9.3%. Next year the first and second quarter are both still expected to show growth near 10.5% while full year expectations fell a tenth to 11.4%.


The Dollar Index

The dollar fell a bit in today's trade but held steady near Friday's close with a loss of roughly -0.20%. The index remains above resistance-turned-support at the $94 level and setting up to move higher. Last week's break above $94 was bullish and an early confirmation of a head and shoulders reversal. A move down to retest $94 with an accompanying bounce would be a stronger confirmation. This could come over the next few days as the BOJ and FOMC meetings come and pass. The BOJ is not likely to strengthen the yen, the FOMC is not expected to weaken the dollar. If the reversal is confirmed with a bounce from support upside target is near $97 in the near to short term.


The Gold Index

Gold prices also held steady and near Friday's close, edging up 0.4% on a slightly weaker dollar. In light of my DXY analysis I can't help but be bearish on gold, that being said it does look like the metal is bouncing from support. Support appears to be near $1,265 and the one month low. A further move higher may confirm this bounce if it is supported by central bank action, a break below would be bearish with target near $1,250 and below.

The Gold Miners ETF GDX moved higher on gold's strength, adding 0.84% in today's action. However, the ETF remains below support-turned-resistance with mixed indications. The moving averages and stochastic suggest that there may be support at current levels, near $22.50, while MACD suggests that bearish momentum is getting stronger. A bounce from here would be bullish within the range with upside target near $23.25 and the long term moving average, a move down would be bearish with targets along my down trend line and near $22.00.


The Oil Index

Oil prices moved higher today as a raft of what-if's propped up the market. The biggest what-if is what if OPEC really does extend and expand the production cap. Others include what-if supply is disrupted in Iraq, Libya, Nigeria, Venezuela or some other place where oil is produced and geo-political turmoil dominate daily life. Today's move saw the oil price gain nearly a half percent to close at an 8 month high and above $54. Near term outlook is bullish simply on the fact that expectations are likely to drive the market until the OPEC meeting, upside target is near $55.50.

The Oil Index 0.64% in today's action, extending Friday's bounce from the short term moving average and break the index out of the near term consolidation range. This is a bullish continuation signal within the current up trend and supported by earnings outlook. The energy sector is, to date, leading the market with 3rd quarter earnings growth and with forward outlook for earnings growth. Current target is equal in magnitude to the first leg of rally which puts it near 1,330.


In The News, Story Stocks and Earnings

Sprint and T-Mobile, along with most others in the telecom space, fell hard on news the proposed merger was going to be called off. This news was reported by Nikkei. Later in the day reports came out that the news was erroneous but no official word has been given. Details are sketchy for now but it seems as if there are some issues over governance and pricing. T-Mobile fell a little more than -5% to hit a short term support level while Sprint fell nearly -10% and hit a new 1 year low.


Mondelez reported after the bell beating on the top and bottom lines. The company reports that organic revenue is up 2.8% worldwide with particular strength in the Latin America segment. Revenue from the power brands rose more than 5.5%. Shares of the stock jumped more than 3.5% to bounce back from a new 52 week low set just today.


The VIX gained about 15% in today's action, moving back above the $10 level but also exhibiting signs of resistance to higher prices. Regardless, the fear index remains near long term lows and trending within a range at those lows, consistent with bull market conditions. The indicators are a bit mixed which leads me to believe there may be a bit more volatility to the volatility index, possibly related to the FOMC meeting, earnings, this week's data or more likely a combination of all three.


The Indices

Action across the indices was a bit mixed if to the downside. They all tanked on the tax reform rumors but not all the losses were large. Today's leader was the Dow Jones Transportation Average. The transports fell -1.29% creating a medium sized red bodied candle sitting on the short term moving average. Price action is a little iffy but does not yet break trend or indicate reversal. Action over the past couple of weeks is forming a consolidation pattern and, so long as support holds at the previous all time high, setting the index up for a trend following bounce. The indicators are both bearish so caution is due but again, so long as support holds this is setting up for trend following crossovers. A break below 9,800 would be bearish with target near the long term moving average. A bounce would be bullish and trend following.


The Dow Jones Industrial Average posted the 2nd largest decline, -0.36%. The blue chips created a small red bodied candle and the 5th in a row of candles forming a potentially bullish flag pattern. The indicators are a bit weak but remain bullish and consistent with consolidation within a strong trend. A move up from this level would be bullish and confirm the current trend, upside target is very near to 24,000 in the near to short term. A fall from this level would be bearish in the near term and could take the index down to 23,000.


The S&P 500 made the next smallest decline, -0.31%. The broad market created a small red bodied candle to the side of Friday's candle and within a consolidation which began a week or so ago. The indicators remain mixed but show some sign of support at this level and are consistent with consolidation within an up trend. A move higher, especially with a break to new all time highs, would be bullish and trend following with target at 2,600. A fall from this level would be bearish in the near term and may take it down to first support target of 2,550.


The NASDAQ Composite posted the smallest loss and may even have closed with a gain if not for today's D.C. based rumors. The index created a small doji candle near the top of Friday's candle and set a new all time intraday high. Price action is bullish although today's candle shows a bit of indecision, indecision that could soon pass should this week's earnings reports resemble the run of reports we received last week. The indicators are still weak but both showing bullish crossovers in line with the prevailing trend. A fall from this level may find support near 6,600. A move higher would be bullish and trend following.


The markets are in up trend regardless of today's declines. Today's declines are nothing more than knee-jerk reaction to rumor and, in light of the trend, a likely entry point for new short term positions for those who may have missed out last week, or simply wanted to add to current positions. This week may prove to kill the rally but I don't think it will, not unless earnings fall far short of expectations, which they are not likely to do. I remain bullish.

Until then, remember the trend!

Thomas Hughes


New Plays

Creating Value

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company creates value out of raw commodities, one part at a time. Arconic manufactures high tech, high value parts from aluminum.



NEW BULLISH Plays

ARNC - Arconic - Company Profile

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Company description from Arconic.

Arconic is the old Alcoa. The aluminum mining company was split off as Alcoa Corp and the original Alcoa was renamed Arconic. This company manufactures parts and complicated assemblies from aluminum. They take the raw aluminum and add value to it by creating high tech, high value parts like turbine blades for engines and gas turbines. They are moving into 3D printing of aluminum parts. They have dozens of remote offices close to large industrial clusters where they can provide immediate service to large manufacturing companies.

Shares fell after earnings because they announced the appointment of a new CEO with their earnings report. Charles Blankenship will replace David Hess on January 15th.

The company reported earnings of 25 cents that missed estimates for 27 cents. Revenue of $3.24 billion beat estimates for $3.09 billion. The company guided for the full year for revenue of $12.6-$12.8 billion, up from prior guidane of $12.3-$12.7 billion. Full year earnings are now expected to be $1.15-$1.20 per share.

Expected earnings January 22nd.

Shares fell $3 on the earnings miss and CEO change. After bottoming at $24, they are trying to move higher with resistance at $25.15. I believe ARNC will return to pre earnings levels at $28.

Buy ARNC shares currently $24.78, initial stop loss $23.65.
Alternate position: Buy Jan $26 call, currently 99 cents. Initial stop loss $23.65.



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.


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Tax Trouble

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 fell 24-points intraday on a possible hiccup in the tax reform plan. Small caps fell sharply on the news that the tax cuts could be phased in over the next five years with corporate taxes not declining to 20% until 2022. Small businesses have the most to gain from tax cuts and the prospect of delaying the cuts for 5 years caused a major dislocation in the small cap market.

The Russell rebounded slightly as the talking heads on CNBC stressed the proposal may not be in the final version to be released on Wednesday but that makes the announcement even more problematic. There could be other gotcha's in the actual details that could derail the broader market. This could be a rocky week.





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


CONN - Conn's Inc
The long stock position was stopped at $30.65.

MRVL - Marvel Technology
The long stock position was stopped at $18.10.

TTS - The Tile Shop
The long stock position was closed at $8.85.



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Iron Condors = Couch Potato Trader



BULLISH Play Updates

BOTZ - Global X Robotics AI - Company Profile

Comments:

No specific news. Nice gain as it recovers from the Thursday drop.

Original Trade Description: October 4th.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

Update 10/26: Shares of BOTZ fell 50 cents for the biggest one-day drop since the ETF began in September 2016. There was no news but volume of 4.16 million shares was the largest ever and well over the 964,000 historical average.

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.



CONN - Conn's Inc - Company Profile

Comments:

No specific news. Two other retailers were cut to a sell by Citi and Bank of America and the downgrades weighed on the entire retail sector. We were stopped for a nice gain at $30.65.

Original Trade Description: Sept 23rd

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through two segments, Retail and Credit. The company's stores provide furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; and home office products consisting of computers, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. The company also provides short- and medium-term financing to its retail customers, as well as offers product support services, such as product repair services, repair service agreements, and various credit insurance products. As of January 31, 2017, it operated 113 retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Conn's, Inc. was founded in 1890 and is based in The Woodlands, Texas. Company description from FinViz.com.

Conn's reported earnings of 26 cents and analysts were expecting a loss of 2 cents. Revenue of $366.6 million missed estimates for $371.9 million. They are located outside of Houston and were forced to close 23 stores, distribution and service centers in Beaumont and Houston. They lost 100 selling days as a result of the storm.

The company said collections from customer financings would be impacted and sales were slow after the stores reopened. However, once utilities and transportation systems were restored, the business saw a large uptick in activity. People who were flooded out have to replace all of their furniture and electronics. Because the company is located in and has a heavy presence in Houston, they will benefit from the surge in replacing household items for months into the future. Shares are rebounding on this outlook.

Earnings Dec 7th.

I profiled this as a long position on Sept 28th but the stock gapped higher on the 29th on an analyst upgraded and that cancelled the entry. Oppenheimer raised their rating to an outperform with a $56 price target. He said investors were under appreciating the resurgence of the Conn's business model and credit portfolio. The crisis of confidence from September 2016 has long passed.

Late Monday an SEC Form 4 was filed showing Harriet Stevens, a 10% owner, purchased another 42,000 shares for $1,066,800 on Oct 13th. This is a strong vote of confidence in the stock. She already owns 5.984 million shares worth $152 million. She did not need to buy more unless she really felt the stock was going higher.

Update 10/18: KeyBanc reiterated and overweight rating and raised their price target from $24 to $42. Shares spiked to $28.35 on a short squeeze related to the upgraded but faded back to $26.85 at the close. That was still a 5.5% gain.

Update 10/23: The company issued an operational update after the bell. They see the impact from the hurricanes as limited. Same store sales were impacted because of 100 lost selling days and reduced traffic associated with Harvey. However, starting in mid September they saw increased traffic and sales as consumers began to rebuild and replace everything they lost in the flood. October same store sales are up 15%. There were both positive and negative factors in the update and shares did not move in afterhours because the update was not released until 5:24 PM after the session closed.

I am recommending we close the long call position. It is a November call and any decline from the operational update would see the premium evaporate quickly.

Update 10/24/17: Yesterday after the bell CONN provided an operational update that contained some mixed details. October same store sales in hurricane areas was up 15% but nationwide sales were down -7%. I was worried about how this would play in today's market and recommended we close the November option position at the open because a drop in CONN shares could have negatively impacted that short-term option.

Hindsight is always 20:20 and CONN shares exploded higher with a $4.45 gain. We exited the option for a double so we cannot complain but the high for the day was double that. Fortunately, we kept the stock position and were richly rewarded.

Position 10/17/17:

Closed 10/30: Long CONN shares @ $26.00, exit $30.65, +4.65 gain.
Closed 10/24: Long Nov $28 call @ $1.06. Exit $2.00, +.94 gain.



FINL - Finish Line - Company Profile

Comments:

No specific news. Shares posted another minor decline in a weak market.

Original Trade Description: October 21st

The Finish Line, Inc., together with its subsidiaries, operates as a retailer of athletic shoes, apparel, and accessories for men, women, and kids in the United States. The company offers athletic shoes, as well as an assortment of apparel and accessories of Nike, Brand Jordan, adidas, Under Armour, Puma, and other brands. It engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. As of April 2, 2017, the company operated 573 Finish Line stores in 44 states in the United States and Puerto Rico. It also operates e-commerce site, finishline.com and mobile commerce site, m.finishline.com. The company was founded in 1976 and is based in Indianapolis, Indiana. Company description from FinViz.com.

This is a simple scenario. UK retailer Sports Direct has acquired an 8% interest in Finish Line as it tries to expand its presence in the USA. Sports Direct was acquiring additional shares through third parties in order to force an acquisition. In late August, Finish Line adopted a poison pill to prevent a forced takeover. Since that pill was enacted, the companies have been in discussions and insiders claim the deal is moving along nicely towards completion.

Wells Fargo said there was at least a 50% probability the deal would happen and they are targeting a sale in the $14 - $16 range. Shares are currently trading at $10.50 and EBITDA of 4.5. Wells Fargo said that would be the cheapest takeout in years. Staples was bought by Sycamore for 5.5 times in September. Since Staples had not posted positive comps in 10 years they believe Finish Line will be sold for more than the Staples rate.

Shares jumped on Friday after the company declared an 11-cent dividend.

I am recommending as own this stock ahead of earnings on Dec 22nd. If there is going to be a deal announced it should happen on or before earnings.

Position 10/23/17:

Long FINL shares @ $10.49, see portfolio graphic for stop loss.
Alternate position: Long Feb $12 call @ 75 cents, see portfolio graphic for stop loss.



MRVL - Marvel Technology - Company Profile

Comments:

No specific news. Shares dipped to a 4-week low intraday to stop us out for a minor gain at $18.10.

Original Trade Description: August 30th.

Marvell Technology Group Ltd. designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a range of storage products, such as hard disk drive (HDD) and solid-state drive controllers, as well as HDD components, such as HDD preamps components; and develops software enabled silicon solutions consisting of serial advanced technology attachment port multipliers, bridges, serial attached SCSI, and non-volatile memory express redundant array of independent disks controllers and converged storage processors for enterprise, data centers, and cloud computing businesses. The company also provides networking products comprising Ethernet solutions comprising Ethernet switches, Ethernet physical-layer transceivers, and single-chip network interface devices; and embedded communication processors. In addition, it offers a portfolio of connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated system-on-a-chip products, which are integrated into a variety of end devices, such as enterprise access points, home gateways, multimedia devices, gaming products, printers, automotive infotainment and telematics units, and smart industrial devices. Further, the company provides printer-specific standard products, as well as full-custom application-specific integrated circuits; and communications and applications processors. Company description from FinViz.com.

Marvel reported earnings of 30 cents that beat estimates for 28 cents. Revenue of $605 million beat estimates for $601 million. Free cash flow more than doubled from $38 million to $89 million. Core revenues rose 6%, storage controller revenues rose 13%. SSD chips rose from 20% to 25% or revenue. The new SSD products are rapidly gaining market share and remain a high profit item. Gross margin was 60.4%. They guided for Q3 for revenue of $595-$625 million with earnings of 30-34 cents per share.

Expected earnings Nov 28th.

The company is in the midst of a restructuring process while they are changing their product mix for the better. Apparently it is working.

Shares spiked from $15.75 to $17.25 after earnings then pulled back slightly on post earnings depression. They rebounded today to a new 2-month high and very close to a new high.

Position 8/31:

Closed 10/30: Long MRVL shares @ $17.79, exit $18.10, +.31 gain.
Alternate position:
Closed 10/9: Long Oct $18 call @ 64 cents, exit 64 cents, breakeven.



ON - ON Semiconductor - Company Profile

Comments:

No specific news. Another new record high close.

Original Trade Description: Oct 9th.

ON Semiconductor Corporation manufactures and sells semiconductor components for various electronic devices worldwide. It operates through three segments: Power Solutions Group, Analog Solutions Group, and Image Sensor Group. The Power Solutions Group segment offers discrete, module, and integrated semiconductor products for various applications, such as power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference. The Analog Solutions Group segment designs and develops analog, mixed-signal, and logic application specific integrated circuits and standard products, as well as power solutions for a range of end-users in the automotive, consumer, computing, industrial, communications, medical, and aerospace/defense markets. This segment also provides trusted foundry, trusted design, and manufacturing services, as well as integrated passive devices technology. The Image Sensor Group segment offers complementary metal oxide semiconductors and charge-coupled device image sensors, as well as proximity sensors, image signal processors, and actuator drivers for autofocus and image stabilization for a range of customers in automotive, industrial, consumer, wireless, medical, and aerospace/defense markets. The company serves original equipment manufacturers, distributors, and electronic manufacturing service providers. Company description from FinViz.com.

Earnings Nov 6th, unconfirmed.

ON continues to power higher on a surge of new products as the IoT boom continues. The company completed the acquisition of Fairchild Semiconductor in September.

A major factor in the boom is the Advanced Driver-Assistance Systems. This market is expected to reach $42 billion by 2021 according to MarketsandMarkets. This is giving ON a tremendous boost in earnings and forecasts.

However, they missed earnings for Q2. They reported 26 cents and estimates were 33 cents. Revenue of $1.34 billion beat estimates for $1.31 billion. The company guided for the current quarter for $1.34-$1.39 billion.

Somebody believes they are going to beat those estimates by a mile. On Monday, somebody bought 11,000 of the November $20 calls at 65 cents. That is a $715,000 bet. I suggest we follow them.

Because of the steep gains over the last month, I am not recommending a stock position. We will do this with options only.

Update 10/11/17: ON and Fujitsu announced an agreement where ON will purchase 40% of Fujitsu's 8-inch wafer fabrication plant in Aizu-Wakamatsu. The purchase will be completed by April 1st. ON already had a 10% share and will acquire another 30%. ON said it planned to increase ownership to 80% in the second half of 2018 and 100% in the first half of 2020. By scaling into the ownership it will allow ON to add capacity as demand increases.

Update 10/12/17: ON announced to new System on a Chip (SOC) 1.0 Megapixel CMOS image sensing products for the automotive imaging sector. The company said annual shipments of cameras for use in cars will easily surpass 80 million units by 2020.

Update 10/25/17: ON announced a CMOS image sensor platform that brings new levels of performance and image quality to automotive applications such as ADAS, mirror replacement, rear and surround view systems, and autonomous driving. The Hayabusa platform features a ground-breaking 3.0-micron backside illuminated pixel design that delivers a charge capacity of 100,000 electrons, the highest in the industry, with other key automotive features such as simultaneous on-chip high dynamic range (HDR) with LED flicker mitigation (LFM), plus real-time functional safety and automotive grade qualification. Shares declined only 15 cents in a weak market.

Update 10/26/17: ON announced a new 1/2.7-inch 2.3 Megapixel (Mp) CMOS digital image sensor with an active-pixel array of 1936H x 1188V. The AR0239 produces extraordinarily clear and sharp digital images in challenging bright and low light conditions. This, along with its ability to capture continuous video and single frames, makes it an ideal choice for many applications, including security and surveillance systems, body cameras and vehicle DVRs (dash cameras).

Position 10/10/17:

Long Nov $20 call @ 80 cents, see portfolio graphic for stop loss.



SVU - Supervalu - Company Profile

Comments:

No specific news. Minor 6 cent decline in a weak market.

Original Trade Description: October 28th

SUPERVALU INC., together with its subsidiaries, operates as a grocery wholesaler and retailer in the United States. The company operates through two segments, Wholesale and Retail. The Wholesale segment engages in the wholesale distribution of various food and non-food products to independent retail customers, such as single and multiple grocery store operators, regional chains, and the military. This segment also provides various services, such as retail store support, advertising, couponing, e-commerce, network and data hosting solutions, and training and certification classes, as well as administrative back-office solutions. As of February 25, 2017, this segment operated approximately 1,902 stores with a network spanning 40 states. The Retail segment operates retail stores that provide groceries and various additional products, including general merchandise, home, health and beauty care, and pharmacy products. This segment operated 217 stores under the Cub Foods, Shoppers Food & Pharmacy, Shop 'n Save, Farm Fresh, and Hornbacher's banners, as well as 2 Rainbow stores. The company's stores offer a range of branded and private-label products comprising perishable and nonperishable grocery products. SUPERVALU INC. was founded in 1871 and is headquartered in Eden Prairie, Minnesota. Company description from FinViz.com.

Supervalu has morphed into more of a wholesaler of groceries than a retailer. Given the movement by Amazon and Walmart into online groceries that may be the way to go.

For Q3 they reported adjusted earnings of 46 cents that beat estimates for 36 cents. Revenue of $3.8 billion narrowly beat estimates for $3.79 billion. Wholesale sales rose 63% from $1.7 billion to $2.7 billion while retail and corporate sales were flat. They announced the acquisition of Associated Grocers of Florida for $180 million. Associated had revenue of $650 million for the trailing 12 months. This is a major bolt on acquisition where they can add value and scale and increase their presence in Florida, the Caribbean, South America and Asia. In June they completed the acquisition of Unified Grocers, an active distributer on the West Coast for $390 million. Unified had revenue of $3.8 billion in 2016.

Shares of SVU have been declining since their high of $84 in April 2015. With these two acquisitions and the sale of the Sav-A-Lot division in 2016, the company is turning the business around. I like that they are reducing their exposure to retail and all the expenses and employee related hassles that go with running a retail grocery store. By focusing on the wholesale business they can reduce overhead and expand their reach and their profit margins.

Who knows, maybe Amazon will decide they need to buy a wholesale grocery distributor.

Earnings Jan 17th.

Position 10/30/17:

Long SVU shares @ $16.13, see portfolio graphic for stop loss.
Alternate position: Long Jan $18 call @ $1.05, see portfolio graphic for stop loss.



TTS - Tile Shop Holdings - Company Profile

Comments:

No specific news. Shares were flat for the day. We exited the stock position at the open and the call position will move to the Lottery Play section.

Original Trade Description: October 23rd

The Tile Shop is a leading specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. The Company offers a wide selection of high quality products, exclusive designs, knowledgeable staff and exceptional customer service, in an extensive showroom environment with up to 50 full-room tiled displays which are enhanced by the complimentary Design Studio – a collaborative platform to create customized 3D design renderings to scale, allowing customers to bring their design ideas to life. The Tile Shop currently operates 134 stores in 31 states and the District of Columbia, with an average size of 20,500 square feet and sells products online.

The Tile Shop reported earnings of 5 cents and revenue of $84.4 million. Analysts were expecting 4 cents and $84.1 million. It was a minor beat but the company had warned on revenues back in early October and analysts reduced their forecasts.

Shares have been severely beaten up since July with a drop from $20 to $8. The company blamed the highly promotional environment and customers shopping for "entry level" products. The company has rectified this deficiency by adding some cheaper products and said they were adjusting their advertising and promotions to meet demand.

Shares have been flat all month but ticked up slightly on Friday and then accelerated on Monday. After a month of consolidation, it may have formed a bottom.

Earnings January 16th.

I am using February options to provide some earnings expectations in the premium. The December options are cheaper but will decay faster.

Update 10/27: The company announced the CEO was stepping down and the founder was taking over as interim CEO until a replacement could be found. This is not good news. I am tightening the stop loss on the call and recommending we close the long stock position.

Position 10/24/17:

Closed 10/30: Long TTS shares @ $9.65, exit $8.85, -.80 loss.
Alternate position: Long Feb $10 call @ 80 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

BBBY - Bed, Bath and Beyond - Company Profile

Comments:

No specific news. Citi and Bank of America cut to other retailers to sells on Monday and the entire retail sector declined sharply.

Original Trade Description: October 14th.

Bed Bath & Beyond Inc., together with its subsidiaries, operates a chain of retail stores. It sells a range of domestics merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and juvenile products. It also provides various textile products, amenities, and other goods to institutional customers in the hospitality, cruise line, healthcare, and other industries. As of February 25, 2017, the company had a total of 1,546 stores, includes 1,023 Bed Bath & Beyond stores in 50 states, the District of Columbia, Puerto Rico, and Canada; 276 stores under the names of World Market, Cost Plus World Market, or Cost Plus; 113 buybuy BABY stores in 35 states and Canada; 80 stores under the CTS name; and 54 stores under the Harmon name. It also offers products through various Websites and applications, such as bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, christmastreeshops.com, buybuybaby.com, buybuybaby.ca, harborlinen.com, t-ygroup.com, and worldmarket.com. In addition, the Company operates Of a Kind, an e-commerce Website that features specially commissioned limited edition items from emerging fashion and home designers; One Kings Lane, an online authority in home decor and design that offers a collection of selected home goods, and designer and vintage items; PersonalizationMall.com, an online retailer of personalized products; Chef Central, an online retailer of kitchenware, cookware, and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. Company description from FinViz.com.

It is a tough world when nearly every one of your products is listed on Amazon along with a dozen competitive products with free 2-day delivery. Bed, Bath and Beyond is stuck in that rut and it is painful.

In their recent earnings they reported 67 cents, down from $1.11 in the year ago quarter and missed estimates for 93 cents. Revenue of $2.9 billion also missed estimates for $3 billion. Same store sales declined -1.7%. The retailer said it was undertaking a number of "transformational initiatives." One of those initiatives was the termination of 880 manager positions. Shares fell 18% on the earnings.

With Toys-R-Us filing bankruptcy, there are now concerns about other stores possibly following suit. BBBY is in trouble even though they are buying back shares and paying a dividend. With sales and earnings declining those shareholder friendly efforts may have to be curtailed. They have 65,000 employees and 1,550 stores.

This is simply a case of a large brick and mortar retailer trying to compete with an all powerful Amazon and we know who is going to win this battle in the long run.

Expected earnings Dec 19th.

I am reaching out to January on the option because we can buy an extra 40 days of time for 21 cents. We can buy time but we do not have to use it.

Position 10/16/17:

Short BBBY shares @ $21.20, see portfolio graphic for stop loss.
Alternate position: Long Jan $20 put @ $1.10, see portfolio graphic for stop loss.



HAWK - Blackhawk Network Hldgs - Company Profile

Comments:

No specific news. Shares continuing to fade. The bounce from the prior week is slowly eroding away.

Original Trade Description: October 18th.

Blackhawk Network Holdings, Inc. provides a range of prepaid gift, telecom, and debit cards in physical and electronic forms; and related prepaid products and payment services in the United States and internationally. It operates through three segments: U.S. Retail, International, and Incentives & Rewards. The company distributes closed loop gift cards in the areas of digital media and e-commerce, dining, electronics, entertainment, fashion, transportation, home improvement, and travel; non-reloadable open loop gift cards; and prepaid wireless or cellular cards that are used to load airtime onto the prepaid handsets, as well as sells handsets. It also offers general purpose reloadable (GPR) cards; and Reloadit, a GPR reload network product that allows consumers to reload funds onto their previously purchased third-party GPR cards. In addition, the company provides incentives solutions comprising solutions, which allow businesses to manage consumer incentive programs, including in-store, online, or mail-in rebate processing; a hosted software platform for managing sales person and sales channel incentive programs; bulk prepaid card ordering systems and Websites to allow business and incentive program clients to use prepaid cards as part of their incentive and reward programs; and direct-to-participant fulfillment services for prepaid cards, checks, and merchandise. Further, it offers Cardpool that provides an online marketplace and various retail locations to sell unused gift cards; digital services for online and mobile applications; and card production and processing services to its prepaid gift and telecom content providers. The company distributes its products through grocery, convenience, specialty, and online retailers. Company description from FinViz.com.

Blackhawk is in trouble. The company reported Q3 earnings of 18 cents that beat estimates for 10 cents but revenue of $208.1 million missed estimates for $216.5 million. The company guided for the full year for earnings of $1.56-$1.70 and analysts were expecting $1.68. They cut revenue guidance to $940-$981 million and analysts were expecting $1.1 billion.

The CEO said, "We have recently seen increasing competitive pressures in some retail markets and believe this will result in lower growth in our U.S. retail physical channels going forward."

PayPal, Visa and MasterCard are making a big push into prepaid cards. Blackhawk is fighting the three giants in the market and apparently, they are losing market share.

Shares fell $10 on the earnings and have continued to bleed points in the days that followed. They are at a 52-week low and are approaching a 3-year low at $30. Investors tend to flee when companies warn of increased competition and falling market share. If the $30 level breaks, the next support is around $23.

Earnings January 10th.

Because the stock is over $30 this will be an option only position.

Position 10/19/17:

Long Dec $30 put @ .50, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Since this is a long-term slow moving ETF position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally into year-end we could see a sharp decline in the VXX over the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.





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