The Russell 2000 is our market sentiment indicator and it closed positive on Friday. While this was probably just an oversold short squeeze, there is the possibility the selling has run its course. There is no immediate support in the area but the 200-day at 1,150 could act as a trip wire for anxious buyers.
I am anticipating some bargain hunting on Mon/Tue and then bedlam on Wednesday. We could be either rising or falling at a high rate of speed on Wednesday so we do not want to back up the truck until we know which direction the market is headed.
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.
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
If you are looking for a different type of trading strategy, try these newsletters:
Short term Calls and Puts on equities = Option Investor Newsletter
Credit spreads and naked puts = OptionWriter
Long term option investments = LEAPS Investor
3-6 month Option Trades = Ultimate Investor
Iron Condors = Couch Potato Trader
BULLISH Play Updates
MENT - Mentor Graphics - Company Profile
No specific news. New intraday high.
Original Trade Description: October 13th.
Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.
Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.
Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott'
s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.
Earnings Nov 17th.
A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.
Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.
Long Jan $30 call @ $1.35, see portfolio graphic for stop loss.
Previously Closed 11/1/16: Long MENT shares @ $28.54, exit $28.25, -.29 loss
BEARISH Play Updates
EBAY - Ebay Inc - Company Profile
The guidance raise after the close on Thursday did not help. Shares closed at a new 3-month low.
Original Trade Description: October 31st.
eBay Inc. operates e-commerce platforms that connect various buyers and sellers worldwide. Its platforms enable sellers to organize and offer inventory for sale; and buyers to find and buy it virtually anytime and anywhere. The company's Marketplace platforms include its online marketplace at ebay.com and the eBay mobile apps; and StubHub platforms comprise its online ticket platform at stubhub.com and the StubHub mobile apps, which enable fans to purchase tickets to the games, concerts, and theater shows. Its Classifieds platforms include a collection of brands, such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Classifieds, and others that offer online classifieds and help people find whatever they are looking for in their local communities. The company platforms enable users to find, buy, sell, and pay for items through various online, mobile, and offline channels, which include retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, commerce participants, shopping channels, and networks. Company description from FinViz.com.
For more than a decade Ebay has been the primary sales hub on the web but as Amazon and others grew, Ebay fell out of favor. There are very few new items left for sale on Ebay because you can buy they cheaper from Walmart, Target or Amazon. That left Ebay to struggle to increase sales on mostly used items.
In Q3 Ebay earnings fell from $545 million and 45 cents to $418 million and 36 cents. For Q4 they expect revenue of $2.36-$2.41 billion and earnings of 52-54 cents. Analysts were expecting $2.4 billion and 54 cents. For the full year, they are now guiding for $1.85-$1.90 and $8.95 to $9.0 billion. Analysts were expecting $1.89 and $8.95. For both Q3 and the full year analysts were expecting more than the Ebay guidance.
Shares fell 18% on the news to $28.61 then rebounded two days later to $29.71. That rebound has faded and EBAY closed at $28.51 on Monday with support well below at $24.
There is just no excitement surrounding EBAY today. Since they spun off PayPal they have been struggling to grow the business. I believe shares will retest the $24 level unless we get a runaway tech rally after the election. I am not holding my breath.
Short EBAY shares @ $28.51, see portfolio graphic for stop loss.
Long Dec $28 put @ .72, see portfolio graphic for stop loss.
SHLD - Sears Holdings - Company Profile
No specific news. Shares rose intraday but ended flat. Support at $11 is holding.
Original Trade Description: October 26th.
Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of the end of May, this segment operated approximately 833 Kmart stores.
The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.
After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced in mid September it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May, they warned the total store closings for the year would reach 170 so they are well on their way.
The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter.
Moody's warned that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.
In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.
In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.
Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.
Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.
The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long-term position.
In late September, Fitch warned that Sears had a high risk of bankruptcy within a year. The 114 page report showed a heightened risk of bankruptcy with Sears, Claire's Stores and Nine West Holdings. Fitch said consumers are abandoning the shopping mall in favor of online shopping or local boutique stores. Fitch also said a Sears bankruptcy would obliterate Seritage, the REIT spun off from Sears last year to generate $2.8 billion in cash. Seritage has 266 retail properties with 170 leased to Sears and 82 leased to Kmart. About 79% of Seritage's rental income comes from Sears. The retailer has already filed notice of termination for 17 stores totaling 1.7 million square feet at the end of January.
Last week Detwiler Fenton warned that Sears was apparently working on monetizing its real estate. DF said the number of Kmart closures was going to accelerate in order for Sears to raise cash and offset the burn rate. DF said Sears had sent directives to a large number of stores telling them to clear backroom inventories. They also began cutting prices on appliances by 50% and using heavy promotions to reduce inventory. They also noted that Sears was moving appliance inventories from Kmart stores into certain locations suggesting a new round of store closures was coming.
Also making headlines last week was Jakks Pacific halting shipments of much needed toys to Kmart for fear of not being paid. Multiple reports suggested a potential post holiday bankruptcy filing. BMO Capital Markets said it had been asked repeatedly by other suppliers if they should continue shipping merchandise to Sears and Kmart. This news could not come at a worse time for Kmart ahead of the holiday shopping season. Once the news spreads of one supplier halting shipments, it is sure to spread to other suppliers as well. This could be Kmart's last Christmas.
Earnings December 1st.
Shares bounced on a suggestion they might be preparing a real estate sale but are returning to the lows. A trade under $10.50 would be a 13-year low.
Short SHLD shares @ $10.92, see portfolio graphic for stop loss.
SSYS - Stratasys Ltd - Company Profile
No specific news. New 8-month low.
Original Trade Description: October 22nd.
Stratasys Ltd. provides three-dimensional (3D) printing and additive manufacturing (AM) solutions for the creation of parts used in the processes of designing and manufacturing products; and for the direct manufacture of end parts. Its 3D printing systems utilize its patented fused deposition modeling (FDM) and inkjet-based PolyJet technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. The company offers entry-level desktop 3D printers to systems for rapid prototyping, and production systems for direct digital manufacturing under the Dimension, Objet, Fortus, Polyjet, SolidScape, and MakerBot brands, as well as MoJo and uPrint product families, and Dental Series products. It also provides 3D printing consumable materials, including FDM, cartridge-based materials, Polyjet cartridge-based materials, Smooth Curvature Printing inkjet-based materials, and non-color digital materials, as well as provides color variation services. In addition, the company offers customer support, basic warranty, and extended support programs; leases or rents 3D printers and 3D production systems; produces prototypes and end-use parts for customers from a customer-provided CAD file; and provides plastic and metal parts for rapid prototyping and production processes, as well as related professional services. Further, it operates Thingiverse, an online community for sharing downloadable, digital 3D designs; and GrabCAD Community for mechanical engineers and designers. The company's products and services are used in aerospace, automotive, consumer electronics, consumer goods, medical processes and medical devices, education, dental, jewelry, and other industries. Company description from FinViz.com.
Stratasys does not report earnings until Nov 15th. Piper Jaffray believes they will miss on revenue because of a recent survey of 68 firms showed "extremely discouraging" demand for SSYS and 3D Systems (DDD) products. Stratasys is expected to post its first year over year profit in 8 quarters because of extensive cost cutting but revenue is expected to fall short of the $174.5 million consensus estimate.
The challenge is the entry of the 800 pound gorilla into the 3D market. That gorilla is Hewlett Packard. They announced their entry into the market five months ago and will begin shipping products over the next two months. Piper and some other analysts said buyers are waiting to commit to purchases until they actually see the HP products. The HP product line is expected to be robust and priced competitively. Another manufacturer, privately held Carbon 3D, is also drawing attention and suddenly buyers have an entire array of 3D printers and manufacturers to choose from. GE just bought a 3D printing company in Europe and is expected to expand the offering in a big way given their available cash and manufacturing experience. Because of the expense on some of these printers, buyers are taking the extra time to make sure they buy the one that fits their needs the best.
Shares are trading at a 3-month low and only about 50 cents above an 8-month low. If support at $19.35 fails we could see $15 in a hurry as investors flee before the mid November earnings.
Short SSYS shares @ $19.97, see portfolio graphic for stop loss.
No options recommended because of distance from the strike and short time frame.
VXX - Volatility Index Futures - ETF Description
Shares only gained 6 cents after a 9 day drop by the S&P. They will fall faster than they went up once a positive market returns. Look at the drop after the spike in September for an example.
Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.
Original Trade Description: September 6th.
The VXX is a short term volatility product 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 down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.
After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.
Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.
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 as some are expecting we could see strong gains in 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. We could keep this play in the portfolio on a trading basis permanently.
Short VXX shares @ $33.88, no initial stop loss.
No options recommended because of price.
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.
HOV - Hovnanian Enterprises - Company Profile
No specific news. Our Feb $2 call only cost 20 cents so we can afford to wait for a recovery.
Original Trade Description: July 27th.
Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.
Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.
For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.
They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.
CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."
With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.
Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.
Update 9/9/16: HOV reported Q2 earnings of zero compared to estimates for 6 cents. Revenue rose +32.6% to $716.9 million. For the full year the company guided to revenue of $2.7 to $2.9 billion and analysts were expecting $2.75 billion. The sold or joint ventured 21 communities to reduce their active selling communities from 214 to 193. This impacted revenue as the older communities were culled from the active business. They sold 1,467 homes in Q2 and slightly less than the 1,658 in the same period in 2015, also the result of selling some communities. Their order backlog rose 7.7% to $1.48 billion. There are 3,232 homes currently contracted to be built. They delivered 1,574 homes in the quarter, a +11.8% rise. After paying off $320 million in debt their cash position was $187.7 million. They acquired about 900 lots in the quarter in 20 different communities. They guided for a solid profit in the current quarter of $32-$42 million before some expenses including land acquisitions.
Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.
Long February $2 call @ 20 cents. No stop loss.
Previously Closed 10/17/16: Long HOV shares @ $1.86, closed $1.61, -.25 loss.
HUN - Huntsman Corp - Company Profile
No specific news. Huntsman is stuck under the 52-week high at $18. Mo material movement.
We were stopped out of the long position on HUN shares on Sept 8th. We have a left over November $19 call.
Original Trade Description: August 23rd.
Huntsman Corporation manufactures and sells differentiated organic and inorganic chemical products worldwide. The company operates in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. The company's products are used in various applications, including adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Huntsman Corporation was founded in 1970.
They reported Q2 earnings of 53 cents that beat estimates for 52 cents. Revenue of $2.54 billion matched estimates. They generated more than $350 million in free cash flow and made an early repayment of $100 million in debt. They also announced they were selling some of its European facilities and would use the proceeds to repay debt. They sold a manufacturing facility to Innospec Inc for $225 million and the transaction is expected to close in Q4. Huntsman will remain a raw materials supplier to the facilities once the transaction is completed.
They are also planning to close their titanium dioxide manufacturing (TiO2) facility in South Africa in addition to spinning off their remaining TiO2 business in early 2017. The closure/spinoff will save $200 million.
Update 10/28/16: Huntsman reported earnings of 38 cents that beat estimates for 35 cents. Revenue of $2.36 billion missed estimates for $2.49 billion. Free cash flow was $300 million after an early repayment of $100 million in debt. The announced the filing of a Form 10 registration statement for a spinoff og the Pigments, Additives and Textile Effects businesses expected to occur in the first half of 2017.
The earnings, restructuring and debt repayment plans have given the stock a positive bias. Shares broke over resistance on Tuesday to trade at a 52-week high. The next material resistance is $23.
Earnings Oct 26th.
Position 8/30/16 with a HUN trade at $17.65
Long Nov $19 call @ 54 cents. No stop loss.
Previously Closed 9/8/16: Long HUN shares @ $17.65, exit $16.65, -$1.00 loss.
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.