Small cap stocks are a wasteland of broken dreams. The category has fewer green shoots than a hike through Death Valley. I looked at several hundred small cap charts today and there were more smoking hulks than you would see in a Mad Max movie. Some of these stocks are down 15-20% in just the last two days. Sellers did not just sell they were running for their lives. I cannot remember when I have seen so many broken charts in only a two day period.
NEW BULLISH Plays
HPE - Hewlett Packard Enterprise - Company Profile
We were stopped out of our stock position on the initial market drop on Friday. The pending earnings, buybacks and dividends are so strong I am recommending we buy the dip.
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.
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.
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 August 23rd.
Shares hit a historic high last week at $19.85 and have crashed back to $17 today. All of today's loss came at the open and the $17 level was strong support all day. I am recommending we buy the open and hang on. If the open is positive, we should develop a cushion rather quickly. If shares go down again there is stronger support at $16.
Buy HPE shares, currently $17.21, no initial stop loss to avoid the volatility.
SCTY - Solar City - Company Profile
SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; mypower loan agreements; grid control/energy storage systems; zep solar mounting systems; and proprietary software, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. It also sells electricity generated by solar energy systems to customers.
SolarCity has had a troubled past with the rise and fall of solar based on the whims of governments and the on again-off again investment credits and tax rebates. SolarCity is still humming right along and building up their base of installed systems into one giant annuity that will pay for decades to come. The problem is that it takes cash to build and install those systems that they sell to customers. Cash up front for a long and profitable payout.
SolarCity was co-founded by Elon Musk. He also started Paypal, SpaceX and Tesla. Last week he (Tesla) offered to buy SolarCity, where he is the largest stockholder and Chairman of the board, for $26-$28. Tesla shares cratered. SolarCity shares spiked for one day then fell back again. Numerous analysts were against the plan. Now shares are rising again.
Elon Musk believes he can marry his battery business with the solar business and have a winning combination. He already makes battery backups for your home but they run off regular utility company power. With SolarCity he can power those battery systems with solar and it makes a lot more sense for customers.
Shares have established a base at $21 and with the $26-$28 offer under consideration along with "other strategic alternatives" it would appear there is limited downside.
Earnings August 8th.
Buy SCTY shares, currently $22.62, no initial stop loss to avoid the current market volatility.
No options recommended because of price.
NEW BEARISH Plays
No New Bearish Plays