Last week I pondered on whether 19,999.63 was the market top. So far, that is still the high.

The major averages with the exception of the Nasdaq moved sideways again as the November gains are consolidated and we wait for the inauguration event risk to pass. This was the fifth week of sideways movement.

If you look at the charts on individual charts there has actually be a lot of volatility over the last several weeks. There are big down days followed in some instances by big gains but the overall trend has been slightly lower. There are a few big cap stocks that have kept the indexes from declining. The big cap techs stocks went from losers in late December and early January to winners for a week, flat for a week and then winners gain last week. Those ten or so stocks powered the Nasdaq to a new high and lifted the S&P to the top of its recent range. Add in a few biotech stocks recovering from the Trump dump and a few semiconductors and the Nasdaq avoided the lackluster performance of the rest of the market.

The S&P futures are down -7 points on Monday night after the Asian markets declined and the pound crashed again on talks about a hard brexit rather than a peacefully negotiated divorce. The futures could change by morning but that is just one more warning this could be a volatile week.

ISIS is calling the inauguration event "Bloody Friday" and urging attacks in every way possible. However, with 35,000 police and security personnel and 7,500 National Guard troops, the capital has become an armed camp and locked down tighter than Fort Knox. The threat remains but the potential for a real disaster has been minimized.

The market may take comfort in the preparations and fail to sell off in advance. Any minor attack could be devastating for those involved but the market is likely to shake it off very quickly.

Nearly all the analysts are expecting a post inauguration decline as the election honeymoon will be over and the hard work will begin. Until now the president elect has had no official duties and a few tweets and photo ops are a lot different than actual governing, which begins next week. The rubber will meet the road and there may be a lot of skid marks. The republicans in congress seem to have a different set of ideas than the commander in chief and the first 90 days could be chaos.

It is the anticipation of this chaos that would produce a post inauguration decline. At the same time we will be well into the Q4 earnings cycle and based on the number of earnings warnings, there could be a high number of disappointments. The strong dollar and a weak consumer in Q4 could be a volatile mix.

The S&P is showing a slightly bullish chart with the candles for the last week clustered right at resistance as though there was about to be a breakout. If the futures hold in negative territory overnight we could see that index knocked back away from the potential breakout BUT there was a 20 point dip to 2,254 on Thursday that was completely erased by Friday's close. The dip buyers are alive and well.


The Dow chart is the perfectly flat index with the 19,900 middle of the range seeing all the traffic. The dips have been bought and the rallies sold. Early in the week we came within 27 points of 20,000 but that gain was immediately erased. There is still strong resistance and strong support. Until one side loses conviction we are doomed to purgatory at 19,900.


The Nasdaq benefitted from a select few big cap tech stocks that powered it to a new high. The index is now up 8 of the last 9 days and should be due for a rest. The Nasdaq futures are down -10 on Monday evening. That is not a big deal.

The problem for the Nasdaq is the potential for some additional Trump comments in his inauguration speech about bring down drug prices and taxes on imported drugs. The biotech sector was down hard on Wednesday after his last press conference touched on those subjects.


The small caps are also moving sideways and the Russell candles are clustering just above support. That either makes a good launch point or the potential for a breakdown. However, the Russell futures are only down -3 points tonight and that is just an inconvenience rather than a direction.


There are five Dow components reporting earnings this week and Goldman and IBM the most likely to be market movers. Netflix will be the tech highlight on Wednesday after the close.


The economic calendar will be overshadowed by the constant headlines about the inauguration. The two most important reports are the Beige Book and the Philly Fed Survey. They will probably be ignored.


What we have here is a failure of the market to communicate its next directional move. We could easily move sharply in either direction given the right headline stimulation. Investors do not know which way to bet so they are doing nothing until a dip appears.

There is no reason to put money at risk ahead of Friday. Waiting until next week will not alter your financial future. Patience is hard but not as hard as losing money because we were impatient.

Jim Brown

Send Jim an email



NEW DIRECTIONAL CALL PLAY

No New Plays

I looked at more than 600 charts this weekend but the hunt was fruitless. There are more than 700 companies reporting earnings next week and more than 800 the week after that. With no trend in the market the majority of the charts also have no trend. There was definitely nothing worth betting on a week before they announce earnings.

With the event risk coming on Friday, the best course of action is to remain on the sidelines. We will get some high profile earnings and the market will have a chance to pick a post inauguration direction.

The object of the game is not to just trade but to place a trade when there is a reasonably fundamental basis and a good chance of a gain. That does not exist this week.

If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.

Jim Brown

Send Jim an email



Current Portfolio


Open Positions

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.




Current Position Changes


SRG - Seritage Properties

The long put recommendation was entered at the open on Tuesday.

IWM Russell 2000 ETF

The long call recommendation remains unopened until a trade at $126.


Original Play Recommendations (Alpha by Symbol)


No Updates This Weekend

BMY - Bristol-Myers Squibb- Company Profile

Comments:

No specific news. Shares were testing resistance at $60 until Trump dumped on drug prices again and crashed the sector.

The March option has been nearly worthless since the big drop in October. There is no reason to close the position just to gain a few cents. We have a March $65 call and the stock is at $59. March is a very long way off in biotech terms. This stock could be at $40 or $75 by then.

Original Trade Description: August 8th.

Bristol-Myers Squibb Company discovers, develops, licenses, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. It offers chemically-synthesized drugs or small molecule, and biologic in various therapeutic areas, including virology comprising human immunodeficiency virus infection (HIV); oncology; immunoscience; cardiovascular; and neuroscience. Its products include Baraclude for the treatment of chronic hepatitis B virus infection; Daklinza and Sunvepra for the treatment of hepatitis C virus infection; Reyataz and Sustiva for the treatment of HIV; Empliciti, a humanized monoclonal antibody for the treatment of multiple myeloma; Erbitux, an IgG1 monoclonal antibody that targets and blocks the epidermal growth factor receptor; Opdivo, a fully human monoclonal antibody for non-small cell lung cancer, renal cell cancer, and melanoma; Sprycel, a multi-targeted tyrosine kinase inhibitor for the treatment of adults with Philadelphia chromosome-positive chronic myeloid leukemia; Yervoy, a monoclonal antibody for the treatment of patients with metastatic melanoma; Abilify, an antipsychotic agent for adult patients with schizophrenia, bipolar mania disorder, and major depressive disorder; Orencia to treat rheumatoid arthritis; and Eliquis, an oral factor Xa inhibitor targeted at stroke prevention in atrial fibrillation, and the prevention and treatment of venous thromboembolic disorders. Its products pipeline includes Beclabuvir, a non-nucleoside NS5B inhibitor that is in regulatory review for the treatment of HCV; BMS-663068, an investigational compound that is being studied in HIV-1; and Prostvac, a Phase III prostate-specific antigen to treat asymptomatic or minimally symptomatic metastatic castration-resistant prostate cancer.

BMY is NOT a one drug company. On Friday, the stock fell from $75 to $62 on news a clinical trial on Opdivo for lung cancer without chemotherapy had ended without the desired results. More than $20 billion in market cap was erased from the stock because of one trial on a drug that is already successful in lung cancer with chemotherapy and in treating renal cell cancer.

This was not a case where all the patients in the trial died. It was simply a trial that did not work. Specifically this particular trial was hoping to prove the drug would be successful in patients with more than 5% of the PD-L1 protein in the tumors and had not received chemotherapy. This is a very broad trial. They hoped to be able to avoid the expensive chemotherapy process and the very painful side effects. It did not work in that application BUT it has already been approved for use with chemotherapy. The competitor drug from Merck, Keytruda, was tested in a smaller subset of patients with more than 50% of the PD-L1 protein. If BMY had copied that trial for Opdivo, the drug may have worked.

Bristol-Myers has a very strong portfolio of cancer drugs, HIV drugs, etc. Revenue is NOT going to change because the drug had never been prescribed for this specific patient demographic. Nothing changed financially for BMY. They had hoped a successful test would have added billions to annual revenue several years into the future but that was just wishful thinking.

There is an existing Phase 3 trial with Opdivo in conjunction with the drug Yervoy for PF-L1 positive patients. If that trial is successful, the Checkmate-026 trial will be immediately forgotten.

BMY is a good company. There is no material reason for a $20 billion market cap haircut. I am recommending we buy a rebound, not the dip because the dip could continue. We do not know where this panic selling will end although the $58-$60 level is strong support.

I am also recommending we buy a long-term option so this scenario can play out. If we are not filled at $62 then we can reevaluate next week and possible buy support at $58.

Position 8/9/16 with a BMY trade at $62

Long March $65 call @ $3.50, see portfolio graphic for stop loss.

Position 8/16/16:

Closed 9/13/16: Long Sept $57.50 put @ 63 cents, exit $2.01, +$1.38 gain.



DIS - Walt Disney - Company Profile

Comments:

Disney hit a new 52-week high at $109 as the rebound continues. The market chatter about a Disney acquisition of Netflix refuses to die and Netflix said Disney is the only media company that is on the right track. They already have an exclusive deal to stream Disney content. There are rumors that Reed Hastings could take over as CEO when Bob Iger retires in 2018.

Original Trade Description: November 28th.

The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. The company operates broadcast and cable television networks, domestic television stations, and radio networks and stations; and is involved in the television production and television distribution operations. Its cable networks include ESPN, Disney Channels, and ABC Family, as well as UTV/Bindass and Hungama. The company owns eight domestic television stations. It also owns and operates the Walt Disney World Resort in Florida that includes theme parks; hotels; vacation club properties; a retail, dining, and entertainment complex; a sports complex; conference centers; campgrounds; golf courses; water parks; and other recreational facilities. In addition, the company operates Disneyland Resort in California; Disney Resort & Spa in Hawaii; Disney Vacation Club, Disney Cruise Line, and Adventures by Disney; and Disneyland Paris, Hong Kong Disneyland Resort, and Shanghai Disney Resort, as well as licenses its intellectual property to a third party for the operations of the Tokyo Disney Resort in Japan. Further, it produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings, and live stage plays; licenses trade names, characters, and visual and literary properties to retailers and publishers; publishes entertainment and educational books, magazines, and comic books; and operates English language learning centers in China. Additionally, the company is involved in the sale of merchandise through its retail stores, Internet shopping sites, and wholesale business. In addition, it creates and distributes entertainment and lifestyle content for interactive media platforms. Company description from FinViz.com

We have played Disney before with mixed results. The cord cutting at ESPN has been a problem for the last year. However, Disney is now bullish on ESPN again thanks to all the skinny bundles being sold by various cable and set top box providers.

Disney has a strong menu of movies in the pipeline. Moana was released last week and received great reviews. The tickets have already gone on sale for the Star Wars movie "Rogue One" that starts in mid December.

Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

Shanghai Disney has already had more than 4 million visitors in less than a year.

Earnings February 9th.

Things are going great for the entertainment company and the ESPN woes are being forgotten. Shares of Disney appear to be on the verge of a breakout over $99 and given the long advance ticket sales on Rogue One, the stock could see multiple weeks of gains in December.

Update 12/18/16: Shares spiked to a new 7-month high after Rogue One brought in $155 million over the weekend. The film is now expected to gross over $1 billion. This expands the Star Wars franchise into an entirely new spectrum similar to the Marvel movies. Disney can now produce a "Star Wars" movie every year with multiple story lines making their own direction. They have essentially doubled their Star Wars revenue stream. Bank of America named them to their U.S. 1 list on Monday of their best investment picks.

Position 11/29/16:

Long February $100 call @ $2.40, see portfolio graphic for stop loss.



HAIN - Hain Celestial Group - Company Profile

Comments:

No specific news. Still no earnings date. The shares are holding their gains from the accounting announcement but they are not moving higher. Funds holding shares have risen from 23 to 32.

Once they announce an earnings date, we should see the shares begin to move higher. The stock spiked 12% on the "no wrongdoing" news.

Original Trade Description: September 5th.

The Hain Celestial Group, Inc. manufactures, markets, distributes, and sells organic and natural products in the United States, the United Kingdom, Canada, and Europe. It offers grocery products include everything from infant formula to instant soups. They offer yogurt, snack chips, pastas, organic products of all types, specialty teas, baby care, personal care items and hundreds of other products. The company sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, and drug and convenience stores in approximately 70 countries worldwide. Company description from FinViz.com

When Hain was scheduled to report Q2 results on August 15th, they warned they would miss prior full year guidance and they were going to postpone their actual Q2 earnings because of an accounting issue. The issue was the timing of revenue recognition. Normally they book sales as revenue when the products are actually shipped to the distributor. However, in the past quarter, they had made some concessions to some U.S. distributors that made them question if they should have recognized the income when the product was shipped or when it was actually sold.

They did not describe the concessions but from the comments above it sounds like they may have given them longer terms on payment or possibly offered distributors a discount if they would order more products. A concession could be similar to "If you take 25% more product we can lower the price 10% and give you an extra six months to pay." Instead of booking that sale when it is shipped they may have to wait until it is actually paid because distributors can, in some circumstances, send product back that they previously ordered. Hain could have done a consignment deal. "We will ship you X tons of stuff and you pay us when you sell it."

The key to all those scenarios is who owns the product while it is sitting in the distributor warehouse. If Hain still owns it because of a special deal with terms, then they cannot recognize the revenue until it is sold.

The timing of the revenue recognition does not alter the amount of the revenue, only the quarter when it is recognized. Hain said they did not expect any restatement to be material but the stock was crushed.

The company reported there was an independent review being conducted by the board's audit committee. The new earnings date was moved from August 15th to September 15th.

Whenever the term "accounting issue" is mentioned, everyone runs for the sidelines. Investors do not know if somebody just misplaced a decimal point somewhere or suddenly the company is going to admit it is another Enron.

I believe the sell off was way overdone. Look at the chart for the last seven months. The stock was up 65% and there was a lot of profit at risk. Investors were in such a state of shock the ran for the exits.

Hain has strong support at $35 and shares have fallen from $56 to $36. There is little risk unless disaster really strikes. I am recommending we buy a February call to give the shares time to recover and a September put, just in case there is more bad news. The September put expires the day after earnings so we will need to close it expiration Friday morning. If they have more bad news the stock will gap lower and the put will inflate. I doubt we will need it.

Update 11/22/16: We are one step closer to a big move in HAIN. The company said they had completed their review of accounting practices for the period in question and found no wrongdoing. The audit committee recommended some measures for future accounting to handle the issues in question. The company said it was moving forward to bring its reporting up to date and there would be a further announcement regarding the timing of the quarterly earnings report.

Position 9/6/16

Long Feb $38 call @ $3.90, see portfolio graphic for stop loss.
Closed 9/16/16: Long Sept $35 put @ $.60, expired, -.60 loss.



HD - Home Depot - Company Profile

Comments:

No specific news. Shares are volatile on post election profit taking and the Dow's sideways trend.

Original Trade Description: October 3rd.

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself (DIY), do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves home owners; and renovators/remodelers, general contractors, repairmen, installers, small business owners, and tradesmen. The company also sells its products through online. As of December 31, 2015, it had 2,274 stores. Company description from FinViz.com

Home Depot is insulated from the Amazon competition. You cannot buy 2x4 boards, carpet or a 5 gallon bucket of stain on Amazon. With the housing recovery in full swing Home Depot has been fueling a massive remodeling binge. Customers trying to spruce up their homes so they can sell, go to Home Depot for the supplies. Customers that have just bought a home shop at Home Depot for items to remodel to fit their tastes. Customers just remodeling their own home to bring it up to date shop there as well. Home Depot now has online ordering with shipping to you on the smaller items or in store pickup for larger items. About 42% of online orders are now picked up in local stores. That also provides an opportunity to sell the customer something else as he wanders around the store. I am living proof that you cannot go into a Home Depot without buying something.

Same store sales have risen 4% or more in 15 of the last 16 quarters. In an interview with the CFO she said property managers were 3% of their customers but 40% of sales. That is an amazing statistic because once those professional managers are locked into a supplier like Home Depot they rarely change. The only other comparable big box is Lowes and they are always more expensive.

The CFO said the addressable market for their products in the U.S. is $550 billon and Home Depot only has 20% of that market. There is plenty of opportunity for additional growth. More than 50% of U.S. homes are over 40 years old. The company is targeting $100 billion in annual revenue in 2018.

Home Depot has bought back $2.6 billion in stock in 2016 with $2.4 billion to go. Their capital spending plans called for $5 billion for stock purchases. The company will also pay $3.4 billion in dividends. They have not added a new store in the U.S. in more than three years. They are using the expansion money to remodel one-third of each store every year. These "resets" are critical to keeping the stores fresh and implementing new marketing strategies.

Earnings Nov 15th.

Update 11/22/16: The company reported earnings of $1.60 compared to estimates for $1.58. Revenue of $23.15 billion bet estimates for $23.05 billion. Same store sales were +5.5% overall and +5.9% in the USA. HD guided for the full year for revenue growth of 6.3% and same store sales of 4.9% with earnings rising 15.9% to $6.33. Consensus estimates were $6.33 and $94.16 billion. The company had $3.59 billion in cash at the end of the quarter.

Shares declined after the news because investors expected stronger guidance because of Hurricane Matthew reconstruction. After two days of declines, the stock rebounded to nearly erase the loss.

Position 10/11/16:

Long Feb $135 call @ $2.15, see portfolio graphic for stop loss.



IWM - Russell 2000 ETF (LONG PUT) - ETF Profile

Comments:

The Russell broke support on Thursday but immediately rebounded. However, it is holding on lower side of its recent range. Tuesday could be the day with the S&P futures down -7.25 on Monday evening.

Original Trade Description: December 12th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 13 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,180 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for an ugly inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

I have a similar put position in the Premier Investor Newsletter because every subscriber needs to be hedged against a potential market event over the next five weeks.

Initial support is in the $130 range.

Position 12/13/16:

Long Feb $134 put @ $3.37, see portfolio graphic for stop loss.



IWM - Russell 2000 ETF (LONG CALL)- ETF Profile

Comments:

Still no decline but the event risk is huge this week.

I am changing the entry trigger $130.50 from $126 and the strike to a $135 call.

Original Trade Description: Jan 3rd

The Russell ETF mimics the movements of the Russell 2000 Index with a 1:10 ratio.

The Russell 2000 has failed to break support but it was the strongest gainer in the post election rally. At one point, the Russell was up 20.1%. That suggests in a market decline it could also be the fastest decliner.

Analysts are in agreement that the markets will finish 2017 significantly higher with estimates as high as 25,000 for the Dow and 2,500 for the S&P. If the regulations currently stifling small business are removed and the tax rates changed to 15% as Trump has promised, this sector will show a major boom in earnings and could be the largest gainer in 2017.

I considered buying calls on the SPY, DIA, QQQ and IWM. I decided to use the IWM for the reasons stated above.

I am going to use a dip trigger on this position to enter the play. We already have a put position on the ISM and we will exit it at the same time this position is triggered. I am putting the trigger at $126 but there is no guarantee we will reach that level. The IWM traded at $115 just before the election.

I am using the August calls because they were only $1 more than the June strikes and we get two extra months. I do not expect to hold the position that long since the summer months are normally weak for the market. We can sell them in June with a lot of time premium left.

With an IWM trade at $130.50

Buy August $135 call, estimated premium $6, no initial stop loss.



NFLX - Netflix - Company Profile

Comments:

Netflix broke out to a new high on an upgrade from DB and positive comments from Mott Capital. Earnings are Wednesday. I have decided to hold over the event since we have a short call for protection. If you want to exit you have my blessing.

Original Trade Description: November 14th

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic streaming, International streaming and Domestic DVD. It offer members with the ability to receive TV shows and movies streaming content, including original series, documentaries, and feature films through a host of Internet-connected screens, such as TVs, digital video players, TV set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. As of October 17, 2016, it served approximately 86 million streaming members in 190 countries. Company description from FinViz.com

Netflix blew away earnings estimates on October 17th and spiked from $100 to $129 over the next week. Post earnings depression has been weighing on the sock but the decline was minimal until the Nasdaq 100 sell program on Thursday the 10th. Shares dipped to $115 but have held in that range for the last three days. I would like to think the sector rotation has run its course and portfolio managers still need some tech stocks in their portfolios.

I am recommending we risk $3 to see if Netflix can return to $130 by its next earnings report on January 16th. They opened in 130 countries last January and subscribership is finally exploding. Investors will be betting on another earnings beat.

I am using the March options because the strikes are round numbers. Most of the January strikes are odd numbers left over from the stock split. I am also using March so there will be some earnings expectation built into the premiums when we exit before the report. I am also using a wide stop loss because the net debit is only $3.25.

Update 12/18/16: Netflix announced that most of its shows are now available for downloading to a mobile device to be watched later when you are offline and not connected to the Internet. It requires the latest iOS or Android 4.4.0 operating system. You download the movies/shows before you travel and then watch them whenever.

Piper Jaffray increased their estimates for Netflix subscribers by 2020 by 35% from its earlier estimates for a 23% increase. In a survey 63% of subscribers said they would remain subscribers with 33% staying even if the prices rose 50% or more.

Position 11/14/16:

Long March $120 call @ $9.00, see portfolio graphic for stop loss.
Short March $130 call @ $5.63, see portfolio graphic for stop loss.
Net debit $3.37.



SRG - Seritage Growth Properties - ETF Profile

Comments:

The Seritage position was opened last Tuesday and it closed at an 11-month low on Friday. The weakness in Sears and the closure of another 200 stores is killing Seritage.

Original Trade Description: January 9th.

Seritage Growth Properties (Seritage) is a self-administered and self-managed real estate investment trust (REIT). The Company is engaged in the acquisition, ownership, development, redevelopment, and management and leasing of diversified retail real estate across the United States. The Company's assets are held by and its operations are primarily conducted through directly or indirectly, by Seritage Growth Properties, L.P. Its portfolio include approximately 42.4 million square feet of gross leasable area (GLA), which consists of approximately 230 owned properties totaling over 37.0 million square feet of GLA across approximately 49 states and Puerto Rico and interests in approximately 30 joint venture properties totaling over 5.4 million square feet of GLA across approximately 17 states. Its portfolio includes over 3,000 acres of land, or approximately 10 acres per site for its owned properties. Company description from finance.google.com

Seritage was spun off from Sears Holdings in July 2015 and given 230 Sears properties in the spinoff. This was a gambit to raise money for Sears and capitalize on their unleveraged real estate. Unfortunately, Sears is terminating leases on those stores at a rapid pace. They terminated a couple dozen in January 2016 and Seritage filed a notice with the SEC last week that Sears had given notice of termination on another 19 leases. These are major holdings as the company description explains above. However, if Sears terminates a lease it is because the store is unprofitable and more than likely is located in a dying mall. Finding a new retailer to take over a monster Sears location in a dying mall is a major problem.

Seritage has been successful in several locations but Sears is terminating leases faster than Seritage can remodel and remarket the empty buildings. With Sears likely to file bankruptcy in the near future, Seritage could get the majority of its existing portfolio vacated at one time.

Sears is obligated to pay a year's rent as a termination penalty but in a bankruptcy filing those penalties would be voided. That means Seritage would not have the benefit of Sears essentially paying for the remodel and remarketing.

Seritage shares are sinking fast because the investing public has caught on to the harsh reality that Seritage could be in trouble.

Earnings are Feb 2nd and they could contain some unpleasant details.

I am using the February options and plan to hold over the event in case there is a disappointment. At $1.45 for the option, we have little risk.

Position 1/10/17:

Long February $40 put @ $1.60, see portfolio graphic for stop loss.



ZBRA - Zebra Technology - Company Profile

Comments:

No specific news. Big $3 drop on Thursday stopped us out. I could not find anything related but Thursday was the big market decline of -181 points on the Dow intraday, so the drop in ZBRA shares was probably due to the market.

Original Trade Description: December 5th.

Zebra Technologies Corporation, together with its subsidiaries, designs, manufactures, sells, and supports direct thermal and thermal transfer label printers, radio frequency identification (RFID) printer/encoders, dye sublimation card printers, real-time locating solutions, related accessories, and support software worldwide. Its products are used principally in automatic identification (auto ID), data collection, and personal identification applications. The company also provides mobile computing and advanced data capture technologies and services, which include rugged and enterprise-grade mobile computers; laser, imaging, and radio frequency identification based data capture products; wireless LAN (WLAN) solutions and software; and applications that are associated with these products and services. In addition, it offers barcode scanners; specialty printers for barcode labeling and personal identification; real-time location systems; and related accessories and supplies, such as self-adhesive labels and other consumables, utilities, and application software. Further, the company provides maintenance, repair, product support, system installation and integration services, and other services. It serves retail, transportation and logistics, manufacturing, healthcare, and other end markets. Company description from FinViz.com

Zebra has been through a rough patch over the last year with shares falling from $120 to $46. They struggled with earnings and went through a restructuring process. During that process they had to restate earnings and reallocate expenses. Now that the process is over they are well on their way to being successful again.

Over the last quarter they paid off $90 million in debt and plan to pay down $300 million for the full year. In November they announced the shareholder friendly Western Digital CFO, Olivier Leonetti, had joined Zebra. That is a big plus for Zebra in both expectations for capital return to shareholders and confirmation there are no lingering problems in the accounting department.

Zebra was originally focused on bar code printers. They have expanded into readers, RFID tags and scanners, networking equipment and dozens of other products. Last week Zebra was named by The Channel Company to their 2016 Internet of Things Top 50 list. This shows how far Zebra has come from being just a printer company.

They reported earnings in mid November of $1.43 that beat estimates by 2 cents. Revenue of $904 million barely missed estimates for $906.4 million. For the current quarter, they guided for earnings of $1.65 to $1.85 and that was above analyst estimates.

Earnings February 14th.

Shares closed at a 52-week high on Monday with a 3% gain. Normally that would spike option premiums but Zebra is not a high profile tech company and the option I am recommending only rose 40 cents.

With a lot of blank space on the chart to return to the 2015 highs, we could see a sustained move as funds hunt for stocks that are not already overbought.

Position 12/6/16:

Closed 1/12/17: Long February $85 call @ $2.80, exit $2.65, -.15 loss.



Prices Quoted in Newsletter

At Option Investor, we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.