The market is in a decline despite the afternoon rebound on Friday. The sell in May cycle is in full bloom and should accelerate as we move closer to Memorial Day.
Bank of America said equity fund outflows were the largest since the sharp market drop last August/September. Net outflows from equity funds nearly tripled last week to $16.9 billion and the largest since China's big currency devaluation crashed the global markets. Bond funds saw inflows of $5.6 billion and precious metal funds saw inflows rise 500% to $1.7 billion. High yield bond funds saw outflows of $2 billion while investment grade funds saw inflows of $5 billion and the largest in 13 months. Clearly, a lot of investors are taking the sell in May cycle seriously with money flowing out of equities and into bonds.
The S&P dipped to support at 2,040 at the open and held there for more than an hour. When there was no further decline by 12:30 a rebound began that turned into a short squeeze. Since April 20th, every one of these afternoon rebounds have been erased the next day. While that may not repeat on Monday, we will likely see lower lows by the end of the week.
I am trying to increase our exposure to bearish plays in anticipation of the sell in May cycle accelerating. If support at 2,040 breaks the next target is 2,020 and then 1,990 and 1,975.
Current Position Changes
BLOX - Infoblox
The long position was stopped out at $16.00.
GPRO - GoPro
The short position remains unopened until a trade at $9.50.
Check the graphic above for any profit stops in green.
We need to always be prepared for a profit exit at resistance.
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.
BULLISH Play Updates
BLOX - Infoblox - Company Profile
No specific news. Starboard Value never mentioned BLOX and shares declined to hit our stop loss at $16.00.
Original Trade Description: May 2nd.
Infoblox designs, develops, manufactures and sells network control solutions worldwide. Their primary product manages domain servers handling the routing of Domain Name Systems (DNS). In order for the Internet to work a domain name like OptionInvestor.com has to be converted to an actual IP address by looking up the DNS in a domain server or appliance. Because of the security issues surrounding this process the DNS system is a high priority and highly dynamic process.
I know that sounds kind of wonky but Infoblox has created an entire suite of products that make the process easy and secure.
Earnings May 26th.
Activist investor Starboard Value is the same fund that attacked Yahoo, Depomed, Macys, Advance Auto Parts and Darden Restaurants to name a few. They were just awarded a four board seats on the Yahoo board.
Starboard announced a 7% stake in BLOX on the 22nd saying the shares were undervalued. This suggests Starboard is about to announce changes they would like to see to improve shareholder value at BLOX. With the Sohn conference later this week, Smith typically announces his new projects in hopes of seeing a bump in the stock price and instilling a little fear in the board of the company to be attacked.
Last week the head of sales for BLOX left the company and the CEO is filling his spot temporarily. That sounds like a possibility for Starboard to agitate for change.
I am proposing we take a position in BLOX ahead of the Sohn Conference in hopes Starboard touts his new position. The stock has rallied to $17 where it came to a dead stop. A breakout over $17 could be explosive.
Closed 5/6/16: Long BLOX shares @ $16.86, exit $16.00, -.86
TRN - Trinity Industries - Company Profile
No specific news. Minor rebound but support held.
We have a July call option so we have time to wait for a rally.
Original Trade Description: March 18th
Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.
Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.
They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.
The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.
Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.
They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.
This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.
At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.
Earnings April 21st.
Long July $20 call @ $1.50, no stop loss.
Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.
WIN - Windstream Holdings - Company Profile
Big dip at the open but shares rebounded back to close positive. I really like the relative strength.
Original Trade Description: March 11th
Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.
In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.
The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.
WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.
While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.
I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.
Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.
Long August $9.00 call @ .38 cents.(Adjusted) NO STOP LOSS
Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.
BEARISH Play Updates
GPRO - GoPro - Company Profile
Monster dip at the open to $9.81 but not enough to reach our entry point at $9.50. The rebound was likely profit taking by the shorts on the two week decline from $14. It does not cost us any money to watch.
Original Trade Description: May 5th.
GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.
GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.
They reported earnings on Thursday after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.
The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold and estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.
Shares fell slightly in afterhours but I expect them to make a new low in the weeks ahead. They closed the afterhours session at $10.16 and the historic low is $9.01. The afterhours low was $9.57.
With a GPRO trade at $9.50
Short GPRO shares, initial stop loss $11.50. I will lower that stop once we get past Friday.
INSY - Insys Therapeutics - Company Profile
The Biotech Index failed to close positive on Friday and that suggests the weakness will continue.
Original Trade Description: May 4th.
Insys is a specialty pharmaceutical company that develops and commercializes supportive care products. Their main drug (Subsys) is a sublingual fentanyl spray for cancer pain in opioid-tolerant patients.
They warned before earnings that Q1 sales of Subsys would only be in the range of $61-$62 million after Q4 sales were in the $91 million range, up +38%. In the year ago quarter Subsys sales were $70.5 million.
The problem is what the FDA said was improper off-label marketing that expanded the use of the drug last year. With that practice halted analysts believe the drug's best days are over.
Compounding the revenue problem was a decision by the FDA to move an approval date for Syndros from April 1st to July 1st. Syndros is a reformulation of the marijuana based drug marinol. Insys believes this could be a big seller in the hundreds of millions of dollars.
While that may be good for Insys in the future the trader community is leaving the stock until we get closer to the approval date.
Insys reported earnings of 11 cents that beat estimates for 8 cents. Revenue from Subsys was $62 million. Shares have been declining since the earnings report because of the revenue warning.
Earnings July 28th.
Position 5/5/16 with an INSY trade at $13.60
Short INSY shares @ $13.60, initial stop loss $14.60
NTAP - NetApp - Company Profile
No specific news. Bank of America Savita Subramanian recommended selling the five S&P-500 stocks most owned by active fund managers. She said massive redemptions from equity funds were forcing managers to lighten up on positions and those big holdings not performing well were the most likely to be sold. NTAP was at the top of the list.
NTAP missed our stop loss at $23.25 by a penny.
Original Trade Description: April 25th.
NetApp provides software, systems and services to manage and store computer data worldwide. Data ONTAP storage operating system that delivers integrated data protection, comprehensive data management, and built-in software for virtualized, shared infrastructures, cloud computing, and mixed workload business applications; E-Series storage systems for storage area network workloads (SAN); all-flash arrays that deliver input/output operations per second and ultralow latency to drive speed, responsiveness, and value from the applications that control key business operations; and hybrid arrays for mainstream business applications.
About two weeks ago the stock trend turned negative and has started accelerating downward after Sterne Agee and Macquarie both downgraded from neutral to sell. Sterne Agee said the downgrade came after the Q1 IT survey. The survey showed weakness in end-user budgeting for storage systems and upgrades. Spending had declined 10% year-over-year and was negatively weighted towards incumbent vendors. Agee said they did not expect revenue from ONTAP8 and SolidFire to offset enough share loss potential over the next year. The analyst said valuation appears compressed and the stock should underperform its peers.
Another analyst said deteriorating net income would keep the stock depressed.
Earnings May 25th.
Based on the chart shares may not find support until $21. The last two days shares have stalled the decline at just over $24. I am recommending we short NTAP with a trade at $23.95 and target $21 for an exit.
Position 4/29/16 with a NTAP trade at $23.95
Short NTAP shares @ $23.95, initial stop loss $24.95
Long June $24 put @ $1.17, initial stop loss $24.95.
XLF - Financial ETF - ETF Profile
The ETF rebounded despite Goldman Sachs being the biggest lower on the Dow. You would have thought the banks would react negatively to the payroll numbers because it means the Fed will not be raising rates soon.
This ETF reacts to the markets just as much as it does to financial news.
Original Trade Description: April 11th.
The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.
We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slowly and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.
I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.
I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.
Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.
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