Option Investor

Daily Newsletter, Tuesday, 7/29/2014

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Market Sanctioned

by Jim Brown

Click here to email Jim Brown

The announcement of stronger Russian sanctions by the EU and the U.S. knocked the markets into negative territory after a positive open.

Market Statistics

The expectations for painful sanctions by the U.S. and EU sent the markets lower for multiple reasons. Russia is a major trading partner for Europe and reducing that trade through sanctions will lower profits for international companies and slow economies all over Europe. There is also the threat of reverse sanctions by Russia against the U.S. and EU.

Sanctions were increased on the Russian banking sector restricting access to bank financing and equity markets for Russian companies. Russian state-owned banks can no longer sell shares or bonds in Europe. The EU also restricted the export of oil equipment and technology necessary for Russian's energy sector. New contracts to sell arms, machinery, electronics and other civilian products with potential military uses will also be banned.

The U.S. slapped sanctions on three state owned banks prohibiting them from selling shares or bonds in the U.S. or receiving financing from U.S. firms. The U.S. also sanctioned United Shipbuilding of St Petersburg and said their assets in the U.S. would be frozen and U.S. companies would be prohibited from doing any business with them.

Russian lawmakers have reportedly drafted amendments that would brand countries that impose sanctions on Russia as "aggressor countries." The amendments would create a mechanism for restricting companies from those countries from doing business in Russia. They specifically included Deloitte, KPMG, Ernst and Young, Boston Consulting Group and McKinsey from supplying auditing and consulting services in Russia. It is theorized they singled out the auditing companies because those companies frequently find evidence of government bribes, payments and corruption and cause problems for the Russian companies. Kicking those auditors out of the country allows Russian companies to legitimately use a Russian auditor that will look the other way when that corruption is found. However, some of the public companies have covenants that require them to use U.S. or European based auditors for exactly those reasons. Prohibiting them from using a reputable firm will further prevent them from selling shares or being traded on the global markets. This could backfire against Russia.

The government has already started attacking companies like McDonalds, Tyson Foods and others. McDonalds was told they could not sell certain menu items because they were illegal. Russia said the nutrition information on the menu did not conform to the rules even though they had been previously approved by authorities.

This is a typical tactic by the Russian government. They come up with some bogus claim to prevent the company from operating but not one that would produce blowback from consumers. Telling consumers the nutrition content was misstated and illegal makes it seem like the government is looking out for its citizens. When it is an oil company they claim they violated EPA regulations and revoke their license. This has happened to more than one company and Russia took them over and gave their assets to a Russian owned energy company.

Russia said it may ban imports of chicken from the U.S. and fruit from Europe if additional sanctions were imposed by those countries. Russia said it may be forced to ban those items for "food safety" reasons. Russia was the second largest market for U.S. chickens behind Mexico in 2013. Russia said it was also considering a ban of U.S. media. Clearly Russia does not want the truth disclosed to Russian citizens.

The equity markets are concerned this will turn into an economic war with each side continuing to ratchet up sanctions and counter sanctions until Putin is forced to increase his military efforts to save face at home. Putin is not concerned about sanctions that only scratch the surface. He knows he has the trump card because Europe depends on Russia's gas and oil supplies. If he cut off the gas and oil Europe's united front would crumble within weeks. Putin is a bully and he has a strangle hold on Europe. This may not turn out well in the months ahead. Europe's economy is struggling with 1% growth and the U.S. is not far behind.

The U.S. warned that Russia broke the 1987 anti-missile treaty when it test fired a ground launched cruise missile with a range between 300-3,400 miles last week. Why do you think Putin chose last week to break the treaty and test new missile technology? It was a warning that he still holds the military cards and could ratchet up the conflict in the Ukraine to include other border states and there is nothing the U.S. or NATO can do about it. This is a dangerous situation and Putin has no fear of reprisals from any European country. He knows President Obama is not going to war to stop Russia's land grab. Putin is so sure nobody is going to stop him that Russian forces have been firing artillery into the Ukraine from Russia for the last two weeks. Basically that is an act of war but nobody can do anything about it.

The equity markets have been relatively tame as the Ukrainian crisis grew from disturbances to protests to slicing off Crimea and now trying to carve up Ukraine even further. At some point the markets will take notice if the situation appears to be increasing in severity.

The markets opened higher after the Consumer Confidence for July spiked +4.5 points from 86.4 to 90.9 and a seven year high. Economists had only expected a +1 point gain. The number for June was revised up from 85.2 to 86.4. Consumers said the job market had improved and that buoyed the long term outlook.

The current conditions component rose from 86.3 to 88.3 but the expectations component spiked from 86.4 to 92.7, a whopping 6.3 points. Those respondents that felt jobs were plentiful rose from 14.6% to 15.9% and a six-year high. This could point to higher employment numbers later this week.

Contrary to the soaring confidence the buying plans declined. Those planning on buying a car fell from 12.2% to 11.6%, home 5.4% to 4.4% and a major appliance from 50.4% to 46.5%.

The Case Shiller home prices for May rose +9.3% year over year compared to +10.8% in April. This is a lagging number and was ignored.

The Texas Service Sector Outlook for July rose from 21.1 to 22.4. The gain in the headline number was due to a sharp jump in the revenue component from 16.9 to 21.5. That is the highest reading since February 2012. However, the employment component declined sharply from 16.5 to 4.6. Hours worked declined from 7.3 to 3.9. Unlike the positive employment growth in the Consumer Confidence these numbers suggest a decline in hiring in Texas.

Foreclosure filings in June fell -2.4% from May to 107,145. This is down -16.1% from the same period in 2013. Bank repossessions declined -5.2%. Foreclosure inventories were up +10.5% for the month but are down -7% over June 2013.

The market has been rather calm the last two days because the fireworks are about to start tomorrow. The early week economic reports were just sound bites but the big guns come out on Wednesday. The ADP Employment is looking for a drop in new jobs from 281,000 to 200,000. The GDP could be in the range of 2.5% to 3.0% or it could miss that range by 2% in either direction. The whisper numbers are all over the map. The lowest I have heard was +1.5% growth. We have had numerous companies complain about weather impacting their Q2 earnings so there may have been some lingering impact from Q1. Just remember that initial estimates are normally revised lower in the revision next month.

The Fed meeting announcement could also be a wild card. With confidence soaring and the potential for another strong payroll number the Fed heads could tweak their comments to suggest a quicker end to QE or a faster move to the first rate hike. Many analysts think the Fed is behind the curve and the Fed heads do read the news. This could make them more agreeable to accelerating the time table.

What we should see is a slightly improved statement saying the economy is still recovering modestly and another $10 billion cut in QE. They may say something about ending it at the October meeting since Yellen alluded to that in her last testimony.

The Nonfarm Payrolls on Friday are expected to decline from 288,000 new jobs to 247,000 new jobs. This is just educated speculation since there are 154 million people in the workforce and 4.5 million quit every month and 4.5 million are hired. There is no way to accurately count the number of new workers in the month it happened. They know three months from now because they have the payroll records. Far too much importance is placed on the monthly Nonfarm Payroll guesses.

The ISM Manufacturing index for July will be important because it is a broader look at the health of the manufacturing economy on a national basis. Expectations are for a fractional improvement.

UPS stirred up the market this morning when they reported a -58% decline in profits and they cut their full year outlook. Adjusted earnings were $1.21 per share compared to estimates for $1.24. UPS had to take a charge of $665 million for a transfer of liabilities for Teamster employees to a defined contribution health care plan.

UPS also lowered full year forecasts from $5.05 to $4.90-$5.00 as a result of spending $175 million to improve infrastructure ahead of the holiday season. A late December surge last year had UPS and FDX backlogged and delivering packages several days late after Christmas. UPS is adding 50 new sorting facilities, which will increase capacity by 5% and accelerating implementation of new software that will more effectively route delivery trucks. They are also going to operate on Black Friday, a traditional holiday for UPS employees. Shares fell -4% on the news.

Aetna (AET) fell -3.5% after the insurer reported a rise in medical costs. The benefit from a bunch of new drugs that are conquering existing diseases is being felt by insurers as the cost of these drugs is rising. The Hep C drug Sovaldi marketed by Gilead Sciences (GILD) cures Hep C in 97% of patients and prevents the need for liver transplants and patient deaths but it costs $84,000 for a 12 week course of treatment. More than 80,000 patients have been treated but the CDC said there are 2.7 million people in the U.S. with the disease. The World Health Organization said there are 130 million people around the world with the disease. That is a huge market for Gilead but here at home it is a major blow to costs for insurers. WellCare (WCG) reported a hit to earnings due to higher drug costs as well. This is likely to be seen all across the insurance sector.

Twitter (TWTR) reported earnings after the bell of +2 cents compared to estimates for a loss of a penny. Revenue rose to $312 million compared to estimates for $283 million. They raised guidance for the full year from $1.2-1.25 billion to a range of $1.3-$1.33 billion. There revenue per active user rose to $1.02 compared to estimates of 96 cents. The number of monthly active users rose to 271 million, a +24% increase, compared to estimates for 267 million. TWTR shares rallied +29% or +$12 in afterhours.

American Express (AXP) reported earnings of $8.66 that was in line with estimates but revenue of $1.43 billion beat estimates of $1.38 billion. Shares were flat after the report.

Amgen (AMGN) reported earnings after the close that rose +23% to $2.37 that beat estimates by 30 cents. Revenue rose +11% to $5.18 billion compared to estimates of $4.92 billion. The company said it will lay off 12-15% of its workforce and close four sites to reduce expenses. This will reduce its real estate footprint by -23%. They will take a charge of up to $950 million through 2015.

Buffalo Wild Wings (BWLD) reported earnings that rose +43% to $1.25 and beat forecasts by a nickel. Lower chicken prices helped grow operating margins from 7.9% to 9.6%. Revenue rose +20% to $366 million beating estimates of $359.5 million. Same store sales rose +7.7% at company owned stores. BWLD said the World Cup added a full percent to same store sales.

However, the company sees full year earnings growth of 25-30% and Wall Street was expecting 35.8%. This led to a sharp decline of -$18 in afterhours.

The rest of the week is peppered with earnings from some big companies. So far the earnings cycle has been far better than expected with earnings growth of +8.3%. There are still abnormally high revenue misses at 37% but overall it has been a good reporting cycle.

The stream of earnings news after the bell pushed the S&P futures up +2 points. The S&P cash closed at 1,970 in regular trading and close to breaking Monday's low at 1,967. It would be hard to make a reasonable judgment on market direction from the trading activity so far this week. This has been the calm before the storm of economic events. Once we get to the weekend we should have a much better read on direction.

The S&P support is still in the 1950-1960 range and resistance at 1985 and 1990.

The Dow rose to +75 at the open but as the sanction headlines began to hit the wires it began to fade. After the president's speech just after 3:PM the decline accelerated. The rising support from February was broken on Monday and that became resistance today at 17,000. The Dow closed at 16,917 and -133 points off its high for the day.

If the Dow continues lower the next material support is 16,720 and 16,800. The Dow has put in a pattern of lower highs since the 16th.

The four biggest losers were companies that have already reported earnings and are experiencing post earnings depression.

The Nasdaq Composite has failed for three days to return to the resistance high at 4,485 from last Thursday. It is not that tech stocks have really sold off but they are definitely not performing. They are still well above support at 4,344-4,350 so we could see several more days of declines without breaking the trend. The Nasdaq would have to break below 4,344 to turn bearish.

The Russell 2000 was actually the best performer today with a minor gain of +2 points. That is significant because it did not turn negative when the Dow was falling -133 points from its high. This suggests fund managers are not afraid of the small caps and may actually be nibbling at some stocks. However, it is far too small a movement to draw any real conclusions. The Russell declined to 1,132 on Monday and just above the 1,131 low from the 18th. This could have been seen as a double bottom by some investors. I would not jump to that conclusion just yet. We knew there would be some support there but it did not produce a giant rebound. We need to get past the next three days and see if that support holds in the face of some potentially negative economics. However, if those economics were positive this would be a perfect spot for a bounce.

On the flipside the Dow Transports are in a tail spin. The Transports hit a new high of 8,515 on Wednesday and Thursday and then crashed back to 8,218 today. This was the second day of significant declines with a -115 point loss and nearly -300 points since Thursday's high. This is a negative signal since the Transports and Dow tend to move in sync in rallies with the Transports leading to the downside. The 100-day average at 7,895 is support with a round number bump in the road at 8,000.

The Russell 3000, a broad market index of the largest 3,000 stocks in the market tends to revert to its 100-day average about once every three months. It has been 2.5 months since the last test. The index has not been able to move up since the new high on July 3rd. This suggests the breadth of the market is fading and we could see some weakness in August.

I believe the earnings news still has some spark left for the market although the quantity and quality of earnings will decline starting next week. The economics over the next three days are the key for market direction in August. I would continue to be careful about buying the dips because we could see a deeper decline at any time now. I don't think the market is going to crash but probably just consolidate at a lower level in August.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

Click the advertisement below for a free trial to the Ultimate Investor newsletter.


New Plays

Earnings Warnings Galore

by James Brown

Click here to email James Brown


Aaron's Inc. - AAN - close: 27.94 change: -0.35

Stop Loss: 30.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 809 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of AAN are down -3.7% for the year. Honestly, I'm surprised it's not down a lot more. The company is in the lease-to-own space for residential furniture, consumer electronics, home appliances and more. They have over 2,000 locations in the U.S. and Canada.

Back in February this year AAN reported earnings and guided lower. On April 15th AAN issued a new earnings warning and blamed it on the harsh winter weather. AAN reported earnings just a couple of weeks later and lowered guidance again. AAN issued yet another earnings warning on July 15th. Then when the company reported earnings on July 25th they lowered guidance yet again. With this many warnings I'm surprised investors have not left this stock like rats fleeing a sinking ship.

So why in the world were shares of AAN surging in May and June? Management has been battling with its second largest shareholder for months. In May they moved to declassify the board of directors. This means shareholders can remove all of the board members all at once if they choose to, on an annual basis. Naturally board members who want to keep their job tend to produce more shareholder friendly policies in a situation like this. I suspect this was the driving force behind the May-June rally.

Then the latest round of earnings warnings in July have completely erased all of their gains. Today shares of AAN are sitting near support at the $28.00 mark. The $27.85 level appears to be the level to watch. Tonight we're suggesting a trigger to launch bearish positions at $27.75.

I would consider this more aggressive trade. AAN is down significantly this month and could see another oversold bounce. Just because the path of least resistance is now down doesn't mean AAN can't ricochet higher once in a while.

NOTE: AAN does have options, which might be a way to limit your risk instead of shorting the stock. Unfortunately the option spreads look a bit too wide to actually trade them.

- Suggested Positions -

Short AAN @ $27.75

Annotated Chart:

In Play Updates and Reviews

Early Morning Rally Fades

by James Brown

Click here to email James Brown

Editor's Note:
The stock market's early morning rally faded on Tuesday as investors digested new sanctions on Russia.

FIVE has been removed. FRGI hit our stop loss.

Current Portfolio:

BULLISH Play Updates

Hewlett-Packard Co. - HPQ - close: 35.94 change: +0.34

Stop Loss: 33.20
Target(s): To Be Determined
Current Option Gain/Loss: +1.7%
Listed on July 19, 2014
Entry on July 23 at $35.35
Time Frame: 8 to 12 weeks
Average Daily Volume = 8.9 million
New Positions: see below

07/29/14: The relative strength in shares of HPQ continues. The stock raced higher this morning and traded above $36.00. HPQ eventually pared advanced and settled with a +0.95% gain.

After a decent three-day rally investors may want to wait for a pullback before considering new positions.

Earlier Comments: July 22, 2014:
Hewlett-Packard was famously started by two Stanford University students back in 1939 in a rented garage. The business that started inside a one-car garage has grown into a massive $65 billion company. Today the company makes printers, personal computers, software, IT services and infrastructure.

It has been a good year for old school technology companies. Microsoft (MSFT) is up +19.8% this year. Intel (INTC) is up +31.2%. HPQ is currently up +23.3%. All three of them are outperforming the major U.S. indices. What's also noteworthy is that all three appear to be benefitting from MSFT's decision to discontinue technical support for its Windows XP operating system.

In April this year Microsoft announced they would stop providing support for XP after 13 years. Instead of upgrading their software the data suggests that many consumers and business have chosen to upgrade their entire computer. Why is that significant? As of April over 25% of computers connected to the Internet were still using XP.

This upgrade cycle was definitely a boon for Intel (INTC). INTC recently reported significantly better than expected earnings and a lot of that was due to stronger PC sales, especially from business clients. This same story will probably be bullish for HPQ as well.

Shares of HPQ have been slowly marching higher and currently sit at two and a half year highs. The stock looks poised to breakout past its mid-June peak. Today's high was $35.29. We are suggesting a trigger to open bullish positions at $35.35.

The Point & Figure chart is forecasting a long-term target of $47.00. We probably won't hold on to HPQ that long since the company is scheduled to report earnings on August 20th.

- Suggested Positions -

Long HPQ stock @ $35.35

- or -

Long Sep $35 call (HPQ140920C35) entry $1.49*

07/23/14 triggered @ 35.35
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

SoftBank Corp. - SFTBY - close: 37.03 change: +0.04

Stop Loss: 35.75
Target(s): To Be Determined
Current Gain/Loss: +0.9%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

07/29/14: SFTBY is virtually unchanged on the session after retreating from its 100-dma intraday. The stock remains inside its $36.00-38.50 trading range.

I would hesitate to open new positions at this time.

Alibaba IPO -- Previously there was hope that Alibaba might IPO in July. Then there was speculation that they might IPO on August 8th since the number eight is a lucky number in China. Now the most recent update suggests that Alibaba will not IPO until September.

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

Current Position: Long SFTBY stock @ $36.68

07/24/14 new stop @ 35.75
07/11/14 News hits that SFTBY might buy T-Mobile soon.
06/30/14 new stop $ 35.35
06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.

BEARISH Play Updates

DSW Inc. - DSW - close: 26.21 change: -0.13

Stop Loss: 28.25
Target(s): To Be Determined
Current Gain/Loss: + 2.6%

Entry on July 16 at $26.90
Listed on July 12, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.5 million
New Positions: see below

07/29/14: Jim Cramer thinks DSW could be a takeover candidate. Thus far the stock is not acting like it. No one seems to be rushing in to buy it on speculation DSW will be acquired. Instead DSW followed the S&P 500 lower today.

Earlier Comments: July 12, 2014:
DSW Designer Shoe Warehouse runs over 400 company-owned stores. They also participate in hundreds of other shoe departments in regional department stores through their Affiliated Business Group.

There appears to be a bear market in designer shoes. At least that is the picture if you're looking at shares of DSW Inc. The stock has actually been a big winner for investors if you have owned it the past few years. On a post 2-for-1 split adjusted basis DSW traded down to $3.33 in 2009. It peaked in 2013 with a close at $47.22 in November last year. That's a huge run (more than 1,400%). Unfortunately last November was indeed the peak. DSW has been stuck in a bearish trend of lower highs and lower lows since then.

DSW lowered its earnings guidance back in February 2014. Of course back then just about all of the retail companies were warning about lack of sales and blaming it on the extremely cold winter weather. That was after weeks of worry over the 2013 holiday shopping season.

The U.S. economy is slowly recovering but consumer spending has not. There are still large chunks of the consumer who continue to struggle. The sharp rise in food prices this year combined with elevated gasoline prices has not helped. There seems to be a bifurcation in the consumer spending. There has been strong demand for big ticket items like housing and cars. Yet smaller discretionary spending is just not there.

The overall retail industry saw some improvement in May. There was hope that June same-store sales would come in better than expected. Analysts and investors were a bit disappointed when the retail industry delivered June numbers that were only in-line with estimates.

Meanwhile DSW continues to struggle. The company reported earnings on May 28th. Wall Street was expecting a profit of $0.48 per share on revenues of $622.9 million. DSW announced earnings of 42 cents on revenues of $599 million. A miss on both counts. Management then lowered their 2015 guidance. The company blamed the weather (again) and said they were facing an intense promotional retail environment. The Container Store (TCS) has a completely different product mix but recently mirrored DSW's troubles and said they were experiencing a retail "funk" (i.e. lack of sales).

Shares of DSW dropped from $32.50 to $23.60 on its earnings miss and earnings warning late May. Since then the stock has bounced but it has found new resistance in the $28.50 area. Now DSW looks like it is rolling over again.

Friday's low was $27.20. I am suggesting a trigger to open bearish positions at $26.90. If triggered I'm expecting DSW to at least test its May lows if not breakdown to new lows.

We will plan on exiting prior to DSW's late August earnings report.

current Position: short DSW stock @ $26.90

- (or for more adventurous traders, try this option) -

Long OCT $25 PUT (DSW141018P25) entry $1.05

07/18/14 new stop @ 28.25
07/16/14 triggered @ 26.90
Option Format: symbol-year-month-day-call-strike

Cepheid - CPHD - close: 39.50 change: +0.31

Stop Loss: 41.10
Target(s): To Be Determined
Current Option Gain/Loss: -0.8%
Entry on July 28 at $39.20
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 680 thousand
New Positions: see below

07/29/14: Shares of CPHD rallied this morning after the company issued a press release stating they just finished a record-setting shipment of 774 GeneXpert systems to one country in one quarter. That country is China. The country faces a serious issue with tuberculosis (TB) with one million new cases of TB each year. Altogether CPHD has sold 970 GeneXpert systems to China.

The stock briefly rallied above $40.00 on this news but retreated twice to settled back below $40.00. I would watch for a new drop under $39.25 as an entry point for bearish positions.

Earlier Comments: July 26, 2014:
CPHD is in the technology sector. If you look deeper the company operates in the scientific and technical instruments industry. According to the company's website, "Cepheid is a leading molecular diagnostics company that is dedicated to improving healthcare by developing, manufacturing, and marketing accurate yet easy-to-use molecular systems and tests. By automating highly complex and time-consuming manual procedures, the company's solutions deliver a better way for institutions of any size to perform sophisticated genetic testing for organisms and genetic-based diseases. Through its strong molecular biology capabilities, the company is focusing on those applications where accurate, rapid, and actionable test results are needed most, such as managing infectious diseases and cancer."

CPHD, like most of the U.S. stock market, had a great 2013. Unfortunately the rally peaked in February-March 2014. This stock set its all-time highs in the $55-56 zone. Market watchers already know that momentum and high-growth names were crushed during the March-April market pullback. CPHD was no exception. The stock corrected from $55 to $40. It looked like CPHD was on the path to recovery but then the stock collapsed again in the last two weeks.

The problem is CPHD's earnings. The company reported earnings on July 17th. Their adjusted results for the second quarter of 2014 was a loss of 10 cents a share. That was better than Wall Street's estimate for a loss of 13 cents a share. CPHD delivered pretty solid revenue growth. Sales in the second quarter surged +21.4% to $116.5 million. That came in better than analysts were expecting. Yet CPHD's net results were down -40% from a year ago.

Listening to the company's management paints an optimistic outlook. CPHD's CEO John Bishop said they sold a record-setting 1,084 of their GeneXpert systems last quarter. That's more than all of 2012. Gross margins improved as well with margins rising from 45% to 49%. So why did the stock fall?

Investors sold the stock on disappointing guidance. CPHD expects 2014 revenues in the 4452-461 million zone. That's relatively close to Wall Street's $459 million estimate. Yet CPHD is forecasting EPS of 10 cents to 13 cents. That is significantly lower than analysts' estimates of 20 cents. You can see the reaction in CPHD stock with the big drop on July 18th.

The post-earnings sell-off continues and now CPHD is breaking down under significant support at the $40.00 level. The next stop could be the $36-35 area or lower. Currently the point & figure chart is bearish and forecasting at $29.00 target.

I would consider this a more aggressive trade. The latest data listed short interest at 16.8% of the 68.9 million share float.

Friday's low was $39.26. We're suggesting a trigger to open bearish positions at $39.00.

- Suggested Positions -

Short CPHD stock @ $39.20

- (or for more adventurous traders, try this option) -

Long SEP $40 PUT (CPHD140920P40) entry $2.35

07/28/14 triggered @ 39.20
Option Format: symbol-year-month-day-call-strike

Voxeljet AG - VJET - close: 18.33 change: +0.66

Stop Loss: 19.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 28, 2014
Time Frame: 2 to 3 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

07/29/14: Something sparked a rally in the 3-D printing stocks. What that something is remains a mystery since I couldn't find any specific news for VJET, XONE, DDD, and SSYS. All of these stocks were outperforming the market today.

Currently we are waiting for a new relative low in VJET to launch new bearish positions (trigger: 17.45).

Earlier Comments: July 28, 2014:
Supporters of 3-D printing believe the technology will revolutionize the manufacturing industry. The technology is spreading. Normally 3D printers work with plastics and metals. Now there are companies trying to use 3D printers to make food. One company even hopes to 3D print human organs.

VJET is a German technology company that makes 3D printers on an industrial scale. A normal 3D printer can sit on your desk. VJET's largest printer has a workspace of 4x2x1 meters and is about the size of a garage.

This stock went public in 2013 during the initial 3D printing craze. Unfortunately the euphoria has worn off. VJET has tumbled from $70.00 in late 2013 to $13.00 just a couple of months ago. This industry saw a significant rally in June but it peaked in early August. Now VJET is retreating lower again.

VJET's latest earnings report in May was a disappointment. Wall Street was hoping for a loss of 6 cents with revenues of $3.79 million for the March quarter. VJET reported a loss of 22 cents and revenues only hit $2.7 million.

The 3D printing stocks stumbled again today after Amazon.com (AMZN) announced their 3D printing online store. This could spell trouble for 3D companies. AMZN is a tough competitor. Now it looks like AMZN's initial foray into 3D printing is small nicknacks for consumers. They're selling the end product and not printers. This is unlikely to affect VJET's business.

The bigger threat might be Hewlett-Packard (HPQ), which announced earlier this year that they were entering the 3D printing market and planned to build printers for businesses, not the consumer. That's not good news for VJET.

Today shares of VJET are breaking support near $18.00. We think the decline continues. I do want to point out that investors should consider this a more aggressive, higher-risk trade. That is because the short interest in VJET is up to 44% of the very small 9.6 million share float. That does pose a risk of a short squeeze (just like the rally VJET saw in June).

Tonight we're suggesting a trigger to open bearish positions at $17.45. We are not setting a target yet but the point & figure chart is bearish with a $14.00 target.

Considering buying the put option instead of shorting the stock. Buying a put will limit your risk to the cost of the put.

Traders should also keep in mind our time frame. This trade may only last two or three weeks. The company reports earnings in mid August but there is no confirmed announcement date yet.

Trigger @ $17.45

- Suggested Positions -

Short VJET stock @ $17.45

- (or for more adventurous traders, try this option) -

Buy the Sep $17 PUT (VJET140920P17)

Option Format: symbol-year-month-day-call-strike


Five Below, Inc. - FIVE - close: 36.10 change: +0.83

Stop Loss: 36.10
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
Entry on July -- at $---.--
Average Daily Volume = 1.0 million
Listed on July 21, 2014
New Positions: see below

07/29/14: Shares of FIVE are not cooperating. The stock displayed relative strength today with a +2.3% gain. Maybe support at $34.00 will hold again this time.

Our trade has not opened. Tonight we are removing FIVE as a candidate.

Trade did not open.

07/29/14 removed from the newsletter, suggested trigger was $33.75


Fiesta Restaurant Group Inc. - FRGI - close: 46.09 change: +1.41

Stop Loss: 45.10
Target(s): To Be Determined
Current Gain/Loss: -3.1%

Entry on July 21 at $43.75
Listed on July 19, 2014
Time Frame: Exit PRIOR to earnings on Aug 5th
Average Daily Volume = 271 thousand
New Positions: see below

07/29/14: The bounce in FRGI has turned into a reversal although only the market gods know why. You would think that the new IPO of El Pollo Loco would be sucking up all the investor money looking for food franchise trades.

FRGI outperformed the market with a +3.1% gain today and hit our stop loss at $45.10.

closed Position: short FRGI stock @ $43.75 exit $45.10 (-3.1%)

07/29/14 stopped out
07/24/14 new stop @ 45.10
07/21/14 triggered @ 43.75