Like the little engine that could, the Dow huffed and puffed as it struggled higher but it failed to close back over 18,000. The Dow came back from an 89 point drop to almost close positive but selling at the close kept it at a 20 point loss. That 18,000 level remains solid resistance and it was the bears that gained a little confidence in the afternoon as they kept the index from piercing that level for more than 10 minutes.
The Biotech Index lost -2.5% to drag the Nasdaq and the Russell 2000 lower. This was expected and I wrote about it more than once in my commentaries. The post ASCO depression is settling in for traders.
The volume was very weak at 5.4 billion shares and it will only be weaker on Friday. The summer doldrums have arrived. I expect Monday/Tuesday to be positive ahead of the Fed announcement on Wednesday and then see a market decline into month-end.
Current Position Changes
HTZ - Hertz Global
The long position remains unopened until a trade at $11.75
ENDP - Endo Pharma
The long position remains unopened until a trade at $18.35
SWIR - Sierra Wireless
The long position remains unopened until a trade at $20.30.
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
ENDP - Endo Pharmaceuticals - Company Profile
No specific news.
The long position remains unopened until a trade at $18.35.
Original Trade Description: June 8th.
Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.
Shares have declined from $26 last week to $14 in mid May. The company slashed full year guidance by -11% on revenue and -23% on earnings. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.
The company also disclosed they were being investigated by the U.S. Attorney's Office for its relationship with pharmacy benefit managers or PBMs. In light of the improper relationship between Valeant and Philidor the USAO is investigating to see if the same problems exist at Endo. In November, Novartis had to pay a $390 million fine to settle charges it paid specialty pharmacies for illegal kickbacks in exchange for inducing patients to refill certain medications.
Endo was also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector. However, now that the Valeant disaster has turned into old news, analysts are starting to talk about price targets on Endo in the $40-$50 range.
Full year earnings are expected to be in the $4.50 range and that means their current PE is around 4.5. That is ridiculously cheap. That guidance was reduced from $5.85-$6.20 because of some generics going off patent, specifically Voltarena Gel and Percocet. Investor Wally Weitz believes there is significant upside in Endo and they probably reduced guidance conservatively so they would makes sure to hit future earnings.
Earnings are August 4th.
The shares have rebounded from the May lows at $12.50 and refused to decline after the ASCO conference ended. I am putting an entry trigger on this position to make sure we buy on a breakout rather than a breakdown.
With a ENDP trade at $18.35
Buy ENDP shares, currently $17.71. Initial stop loss $15.95.
No options recommended with $20 the closest OTM strike.
HPE - Hewlett Packard Enterprise - Company Profile
Brean Capital, formerly a bear on HPE, said there could really be a change in progress at HPE. The analyst retained a hold rating but she saw major changes occurring in server storage, networking and cloud security. "They seem to have a plan for the coming years in the context of future IT trends." He said HPE could be worth $18 to $25. The stock closed at $19.25.
Original Trade Description: June 2nd.
Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.
HPE reported adjusted Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.
For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.
The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.
This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.
They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.
Earnings Aug 23rd.
HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.
Long HPE shares @ $18.40, see portfolio graphic for stop loss.
Long August $20 call @ 40 cents. No stop loss.
HTZ - Hertz Global Holdings - Company Profile
No specific news.
This position remains unopened until a trade at $11.75.
Original Trade Description: June 8th.
Hertz engages in the rental and lease of cars and trucks worldwide. It operates through four segments: U.S. Car Rental, International Car Rental, Worldwide Equipment Rental, and All Other Operations. The company rents various makes and models of cars, crossovers, and light trucks under the Hertz, Dollar, Thrifty, and Firefly car rental brands on hourly, daily, weekend, weekly, monthly, or multi-month basis through a network of company-owned rental airport and off-airport locations, as well as franchise locations. They operate 9,980 corporate and franchise locations. They also rent industrial equipment like earthmovers, air compressors, power generators, etc.
Last week Hertz shareholders formally agreed to the proposed split of hertz into two companies. Hertz Global will remain a car rental company. Herc Holdings will be the equipment rental company and trade under the symbol HRI.
The HRI stock will be spun off on June 30th to shareholders on June 22nd as a dividend distribution and therefore taxed at a lower rate when sold.
Shareholders will receive one HRI share for every five HTZ shares they own. Further complicating the process the HRI shares will have a reverse split of 15:1 on July 1st. The HRI portion of Hertz is significantly smaller and the reverse split is to boost the initial share price.
Activist investor Carl Icahn filed a notice with the SEC last week that he had increased his stake in Hertz to 15.24%. The Herc Holdings company will add three Icahn affiliate directors when the spinoff occurs.
With Icahn remaining on board the company should continue to be shareholder friendly. Icahn was instrumental in forcing the company split.
Also, the Hertz CEO was instrumental in producing a boost in the stock earlier in the week when he said the tide had turned for pricing in the rental car market. The fleet sizes had been reduced, everyone was running very tight and rental prices were rising. That fueled the sector on hopes of better earnings.
I am recommending we add the stock now and then decide on June 21st if we want to hold over the spinoff. Shares are right at resistance from March at $11.50. I would like to see them move over that level before we jump in.
With HTZ trade at $11.75
Buy HTZ shares @ $11.75, initial stop loss $10.45.
No options recommended because of the spinoff.
P - Pandora Media - Company Profile
Axion Capital upgraded Pandora from hold to buy after being neutral on the stock for years and "skeptical" of the company to navigate in an increasingly competitive environment. "We now believe that there is a greater probability of Pandora building a successful and differentiated on-demand service while increasing the value of the core business." The analyst raised the price target to $16.
Original Trade Description: June 1st.
Pandora provides internet music streaming services in North America. Listeners can create personalized stations to access free music and comedy catalogs as well as personalized play lists. They offer Pandora One, a paid subscription based service for listeners. They sell audio, video and display advertising for delivery on connected platforms. They also offer a ticketing platform for promoters and advertising to promote their events.
In Q1 active listeners rose to 79.4 million and hours streamed rose 4% to 5.52 billion. They reported a loss of 20 cents but that was 19 cents better than the 39 cent estimate.
Pandora's chairman Jim Hill bought 250,000 shares at $10.97 per share and then another 250,000 shares at $11.33 each. That is close to $6 million in purchases. CFO Mike Herring bought 225,000 shares a couple weeks earlier. Last week somebody bought 12,000 contracts of the September $12 call options. Today somebody bought 1,000 contracts of the July $13 calls and there was another trade for 2,500 of the September $10 calls.
So what is powering this sudden interest in Pandora? In May the hedge fund Corvex Management announced it had acquired a 9.9% stake and demanded the company be sold to the highest bidder. Keith Meister runs the fund and he believes there should be an auction and Facebook should buy the company. Since Pandora has only a $3 billion market cap that should be attractive to Facebook because it would get those 79 million listeners to further spread its advertising reach across the internet.
Apple, Google and Amazon already have some type of streaming app and that leaves Facebook as the likely candidate. Barron's suggested Verizon or Liberty Media could buy them. Sirius XM was also mentioned as a possible buyer.
With plenty of potential acquirers and insiders buying huge amounts of stock there may be some discussions in progress.
Update 6/3/16: Board member, Timothy Lelweke, bought 10,000 shares on Wednesday at about $11.63 each. He now owns 43,768 shares so that was almost a 30% increase in his holdings. Something is definitely going on behind the scenes to generate all this insider buying.
Long Pandora shares @ $12.08. See portfolio graphic for stop loss.
No option recommended but the July $13 is only 62 cents.
SWIR - Sierra Wireless - Company Profile
No specific news. Shares fell back below $20. The longer it holds here the more likely we will see a breakout. It does not cost us any money to watch this unopened play until a breakout occurs.
The position remains unopened until a trade at $20.30. High today was $20.10.
Original Trade Description: May 26th.
Sierra Wireless engages in building the Internet of Things with intelligent wireless solutions. They operate in three segments, Original Equipment Manafacturer, Enterprise Solutions, and Cloud Connectivity Services. They offer cellular embedded modules, software and tools to integrate wireless connectivity into various products and solutions.
In their recent earnings they reported an adjusted profit of 8 cents. Revenue declined -5.1% because of previously reported softness in orders from several existing automotive customers. For Q2 they expect earnings in the range of 9-17 cents on revenue of $150-$160 million. For the full year they guided to earnings of 60-90 cents on revenue of $630-$670 million. They bought back 549,583 shares in the quarter.
The revenue in the OEM solutions segment declined -9.1% due to softness in auto production in Q1. Enterprise solutions revenue rose 9% and cloud and connectivity systems revenue rose 92%. They began upgrading their global LTE core network to provide additional connectivity for wholesale operators.
In their guidance, they said business should improve significantly because of more than 40 new customer programs moving into production on new IoT products. They manufacture to customer specifications when the customer adds a new product.
Earnings Aug 4th.
To go from an 8 cent profit in Q1 to 60-90 cents for the full year is a major gain in profitability. Shares have been rising since the earnings report and showing no weakness when the market was down.
With a SWIR trade at $20.30
Buy SWIR shares, currently $19.90, initial stop loss $18.45.
No options recommended due to wide spreads.
UIS - Unisys Corp - Company Profile
No specific news.
Original Trade Description: June 6th.
Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segments product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. The company serves commercial, financial services, public sector, and the U.S. federal government through direct sales force, distributors, resellers, and alliance partners.
Unisys has morphed in its 143 years of operation into a global cloud, IT and infrastructure services company. That is a long way from the original company that produced the first commercially viable typewriters and adding machines under the name Burroughs, Sperry and Remington Rand.
Today one of their main products is Unisys Stealth for protection of digital and physical assets. Stealth Mobile protects secur emobile applications and Stealth Cloud expands that protection to the cloud.
Just before their recent earnings they announced a deal with Mitel to provide the Unisys stealth technology to protect their 60 million mobile and enterprise customers. Business is booming but it has been a long time coming. In Q1 revenue declined -3% and services declined -2%. However, the company said its "lumpy" quarter-to-quarter strategy was changing with a stronger focus on the Stealth products and their rapid wide scale adoption. They expect the amount of money spent on cybersecurity to more than double from the $75 billion in 2015 to more than $170 billion in 2020. The cost of data breaches will rise to $2.1 trillion annually by 2019 and more than four times the cost in 2015.
Unisys has been a stealth company for the last year with shares declining from $30 to $7. With their new products and the rapid acceptance of those products their stock is rebounding off the three month consolidation pattern.
Earnings July 28th.
Shares moved over resistance at $8.25 last week and are preparing to move higher. The big decline in March was a $190 million offering of convertible senior notes due 2021 with a conversion price of $9.76. That was a 20% premium to the stock price post announcement.
If the current rebound continues the next material resistance is $12.
Long UIS shares @ $8.47, no initial stop loss.
Long October $9 call @ 80 cents. No stop loss.
BEARISH Play Updates
No Bearish Positions
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