Option Investor

Daily Newsletter, Monday, 1/12/2015

Table of Contents

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

Market Wrap

Bulls Slip On Oil Prices

by Thomas Hughes

Click here to email Thomas Hughes
The bulls were set for a positive open but another downgrade for oil sent it lower, and the market followed.


Futures were up in early trading, the S&P 500 and Dow Jones both indicated up by near a half percent in the early electronic session. Earnings, economic data and the FOMC were all in focus but a surprise down grade for oil from Goldman Sachs sent the market ducking for cover. Goldman now sees oil prices near $40 and expects that level to hold until it drives the shale players out of the market. This caused oil to begin another plunge, dropping more than 4% at the low point of the day. The drop in oil caused a sell off in oil stocks, led by shale producers, that in turn caused the equity markets to seek support levels.

Market Statistics

Other news impacting trading were a flurry of upgrade and downgrades, positive and negative guidance revisions, early earnings reports and economic data due out later this week. A number of high profile names either received or produced a revision as the market gears up for earnings season. The season started today with Alcoa who reported after the bell.

Asian and European markets were up, though the Asian indices were more mixed than anything. European indices were as high as 1.5% above last week's closing prices before weakness in our markets caused some volatility later in their day.

The market tried to rally once the opening bell sounded. The indices opened up by a few points but were heading lower within the first five minutes of trading. The SPX lost a little more than 1% before hitting bottom and bouncing higher. The market drifted sideways the rest of the morning and into the afternoon. The lows were tested late in the day but produced another bounce that lifted stocks into the close. The indices were able to recover some of today's losses and are now sitting just above long term support levels.

Economic Calendar

The Economy

No economic data was released today although there was plenty to talk about. Labor data released last week including the NFP, Unemployment Level and Hourly Earnings show that job creation remains strong, unemployment is falling and that average earnings fell. The NFP was strong and shows momentum in positive revision to the previous month that brings it up over 350K. The strength in job creation and other factors contributed to a surprise decline in unemployment to 5.6%. The negative of the report is that hourly earnings fell but my take is this; if we added a lot of entry level/lower paying jobs then it is not surprising the average rate would dip. More important is that the average workweek remained steady.

Other data due out, and there is a lot, includes manufacturing, retail, inflation, housing and industrial figures. Perhaps the biggest item on the list is the Feds Beige Book, scheduled for release on Wednesday, revealing the state of the economy and outlook for the future. Also up this week are Michigan Sentiment, Philly Fed Survey, Empire Manufacturing, CPI, PPI, Retail Sales, Industrial Production, Capacity Utilization and others.

Moody's Survey of Business Confidence rebounded this week, from a revision to last week's release. The index rose to 38.2 and remains near all time highs set at the end of last year. Survey administrator Mark Zandi reports in his summary that US business confidence remains upbeat and that hiring, sales and spending are all strong. Improvements in credit availability are still being noted which I see as a good sign, along with expectations for this year which also remain strong.

The Oil Index

Oil prices fell to hit another new low. Prices which began to fall on supply/demand imbalance are gaining momentum on downgrades to price expectation. Today's downgrade from Goldman Sachs is only the latest and forecasts oil to trade at or near $40 for a good part of 2015. This is supposed to drive the shale players out of the market... at which time supply imbalances will correct and prices can go back up. This is indeed a problem for shale producers and energy in general but I just can't help getting excited about gas that is $2 a gallon or lower.

The Oil Index fell as well but is still above near term support, unlike the underlying commodity which as at a +5 ½ year low. The index is falling from the four month down trend line and approaching potential support. There is a chance for support near $1,250 but a more likely target is below that near $1,212 and the current low. The indicators are bearish but very weak and currently suggest that support may exist at these levels. Support will need to be watched, if oil prices keep falling then I don't expect it to hold. A break below support would present an opportunity for bearish plays.

The Gold Index

Gold moved sharply higher today as safety seekers fled equities. Spot gold rose more than 1.5% to trade above $1,230 for the first time in over a month. Today's move extends the break above $1200 resistance and takes it another step closer to the next targets near $1245 and $1,250. The bottom may be in, but the trend is still not set so I expect volatility centered around economic data, oil prices and Fed expectations.

The GDX Gold Miners ETF has formed a bottom and today broke out of the pattern. The ETF surged more than 4.5%, breaking above resistance at $20.50. This may be a whipsaw but the indicators are bullish and on the rise, consistent with a strong market. The MACD peak is convergent with the new high, signaling that new highs are probable, while stochastic is moving higher and about to cross the upper signal line. This set up looks strong and could carry the ETF up to $22.50 or higher in the near term. If gold prices can hold at or near current levels the miners could keep rallying with a target on this ETF near $25 and $27.50.

In The News, Story Stocks and Earnings

Earnings season kicked off today with Alcoa. The aluminum giant reported after the bell so I'll get to that one last. According to FactSet the average earnings expectation for the S&P 500 has fallen to 1.1% over the last week. This is down from 8.4% at the beginning of the quarter and driven by massive reductions in earnings expectations from the energy sector. To date, 87 companies have issued negative guidance with a few more added to the list today; Tiffany's and Sandisk both lowered guidance outlook this morning. However, over the past few years an average of 72% of companies beat the average each quarter with an average increase of 2.1%. This means that the quarter will likely end up much better than expected around 3.7% or higher.

Rail carrier CSX reports earnings tomorrow. The company is expected to earn $0.49 per share and is likely to beat based on strength in the shipping sector. Of concern will be forward outlook and how low oil will impact volumes. Lower oil is good for input costs but much of what the rails are loaded with is oil products from the shale regions so falling prices could be a negative factor. Today the stock lost a little over 1.65% and approached potential support near $23.25. The stock is indicated lower at this time but both MACD and stochastic suggest support could be near this level as well. Tomorrow's earnings report will be the tell and may be as important to the market as Alcoa in terms of gauging specific sectors as indicators of the overall market.

KBHomes is also scheduled to report earnings tomorrow. The home builder is expected to earn $0.52 per share, nearly double the previous quarter. Earnings will be key but as always it will be the “what can you do for me next” attitude toward earnings that will likely drive prices and oil is behind a lot of the speculation. On the one hand low oil is a discount for consumers and may lead to more free cash flow and possibly increases in the housing sector. On the other hand housing projects in key oil producing areas are likely to slump due to lower activity. Today KBH traded in a wild range creating a near-doji candle in the middle of a 9 month trading range. The stock is currently moving up from the lower end of that range, is above the 30 day moving average and accompanied by bullish/neutral indicators.

Bristol Meyers Squibb was one of few stocks to trade to the upside today. The company announced positive results for a cancer drug test that may prove to become a new product. The stock jumped more than 7.5% in today's action but was not immune to the bears. The stock gapped up at the open then fell the rest of the day to close with a gain closer to 3%.

Alcoa received an upgrade from Nomura this morning in anticipation of a strong report after the bell. The aluminum giant was expected to report $0.26 for the quarter with a full year projection of $1.13. The company shocked the market with earnings that were above expectations. Alcoa reported earnings of $0.33, much better than expected on revenue that was above projections and 14% higher than last year. 2015 expectations are good as well with high single digit growth projected in aerospace and single digit growth in autos. Aluminum demand is also expected to rise globally. This report is not to surprising due to the high number of new contracts announced by Alcoa last year, particularly in the airline industry. Another indication may be Ford's use of aluminum in the new F-150's, which won Truck of the Year once again. The stock traded up in after hours action.

The Indices

The market fell today and just couldn't get its mojo back. The declines were not large but along with the drop on Friday erased most if not all of the gains made last week. The NASDAQ Composite was today's biggest loser. The tech heavy index fell 0.84% despite a positive pre-announcement from software provider SAP. Today's action erased all of the gains made last week and more, closing the gap formed at the open on Thursday. The indicators are bearish, but very weak, and suggest that the index could move down to support near 4,600 and the long term trend line. The long term trend is up and has proven support exists several times. With this in mind any move lower would be a buying opportunity provided economic data, the Beige Book and earnings are enough to fuel the rally.

The S&P 500 was another big decliner. The broad market got hit hard by the plunge in oil prices but was able to close off of the lows of the day. Today's action brings the index down to levels just above long term support. The indicators are weak and suggest that support may be reached, if not tested. Support includes the September all time high and the long term trend line near 2,000.

The Dow Jones Industrial and Transportation Averages experienced similar losses today, although the transports were a touch lower. Today's action carried the index down by 0.58% and nearly erased the gains made in last Thursday's monster rally. The index is now down near potential support with indicators that are weak in the near term but still consistent with support in the longer term. The index could move lower to test support at 8,750 or 8,500 in the near term.

The Dow Jones Industrial Average was today's best performer, losing only 0.54%. Today move took the blue chips down near support comparable to the other indices with indicators equally bearish and weak. The index looks like it may dip down to test support at 17,500 but this may not happen. I say this because today's drop was based on oil, a near term fear. When long term economic data and earnings outlook start coming out things may look different. The long term trend is up and I remain bullish.

The market fell today on plunging oil prices. Plunging prices led to diminished earnings outlook and that led to selling in the oil market. Now earnings expectations are so low it would be hard for the average S&P 500 company not to beat them. With this in mind, economic trends positive and outlook for 2015 good the dips still look like attractive places to buy. Caution is due as always, the prospect of Fed policy tightening may serve to reverse the market but I don't think it's happening yet.

Until then, remember the trend!

Thomas Hughes

New Plays

Significant Underperformance

by James Brown

Click here to email James Brown


Altisource Portfolio Solutions - ASPS - close: 26.94 change: -1.96

Stop Loss: 30.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 12, 2015
Time Frame: exit prior to earnings in mid February
Average Daily Volume = 473 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
ASPS is part of the services sector. They provide a host of services to the mortgage, real estate, and financial industries; including collections, payments and servicing non-performing residential mortgage loans. According to a company press release, "Altisource Portfolio Solutions S.A. is a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries offering both distribution and content. Altisource leverages proprietary business process, vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants."

The stock saw tremendous rise from its beginning back in 2009 near $6.00 a share. By December 2013 ASPS was trading above $170.00. That proved to be a peak. It's been a long and painful decline. ASPS is associated with Ocwen Financial (OCN). It looks like ASPS was spun off from OCN years ago. They are both financial services companies. Both are probably affected by government investigations. OCN was hit with an investigation by the U.S. Consumer Financial Protection Bureau (CFPB) and was handed a $2.1 billion fine from the government. Meanwhile ASPS has been dealing with an investigation from regulators in New York. At the same time earnings for ASPS have been volatile. After big beats earlier in 2014 their most recent earnings report, on October 23rd, was a big miss. Analysts have started downgrading the stock.

Investors are bearish too. The most recent data listed short interest at 23% of the very small 10.6 million share float. With that much short interest it does raise the risk of a short squeeze.

Technically ASPS looks terrible. The recent sideways consolidation has failed and ASPS just broke down to new multi-year lows. Tonight we're suggesting a trigger to open bearish positions at $26.45.

Trigger @ $26.45

- Suggested Positions -

Short ASPS stock @ (trigger)

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

Buy the FEB $25 PUT (ASPS150220P25) current ask $3.60

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

Daily Chart:

In Play Updates and Reviews

Widespread Losses For Equities

by James Brown

Click here to email James Brown

Editor's Note:
The major U.S. indices were down across the board on Monday.

Current Portfolio:

BULLISH Play Updates

Covenant Transportation Group - CVTI - close: 28.61 change: +0.30

Stop Loss: 25.45
Target(s): To Be Determined
Current Option Gain/Loss: +2.0%
Entry on January 05 at $28.05
Listed on January 03, 2015
Time Frame: Exit prior to earnings in late January or early February
Average Daily Volume = 203 thousand
New Positions: see below

01/12/15: CVTI outperformed the major indices again with a +1.0% gain on Monday. I don't see any changes from my recent comments. I would still consider new positions now.

Earlier Comments: January 3, 2015:
Last year the S&P 500 added +11.3%. The Dow Jones Transportation Average doubled that with a gain of +23%. Yet CVTI's performance is light years ahead of the major indices with a +230% gain in 2014.

According to the company, "Covenant Transportation Group, Inc. is the holding company for several transportation providers that offer premium transportation services for customers throughout the United States. The consolidated group includes operations from Covenant Transport and Covenant Transport Solutions of Chattanooga, Tennessee; Southern Refrigerated Transport of Texarkana, Arkansas; and Star Transportation of Nashville, Tennessee. In addition, Transport Enterprise Leasing, of Chattanooga, Tennessee is an integral affiliated company providing revenue equipment sales and leasing services to the trucking industry."

Why are shares of CVTI surging? The simple answer seems to be business is booming. The company has raised its guidance twice in the last four months. The most recent time was December 11th. Now you might think the stronger profit picture is due to falling gasoline prices. CVTI confessed they hedge some of their fuel costs so the drop in gas prices actually has little impact on its current outlook. They're raising guidance because demand is so strong. Anecdotally this is a pretty optimistic sign on the strength of the U.S. economy.

Technically shares of CVTI have been consistently rising with a bullish trend of higher lows and higher highs. Shares are just starting to bounce from support again. This is our chance to jump on board. Friday's high was $27.80. I'm suggesting a trigger to open bullish positions at $28.05. Earnings are expected in late January or early February. We will most likely exit prior to their announcement. I will note that the point & figure chart is bullish and forecasting at $34.50 target.

- Suggested Positions -

Long CVTI stock @ $28.05

01/05/15 triggered @ 28.05

Sprouts Farmers Market - SFM - close: 34.90 change: +0.95

Stop Loss: 31.85
Target(s): To Be Determined
Current Option Gain/Loss: + 5.6%
Entry on December 29 at $33.05
Listed on December 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: see below

01/12/15: Stocks like SFM and WFM were big winners on Monday. Both stocks shot higher and outperformed the market although I don't see any specific news to account for the relative strength. Tonight we'll raise the stop loss up to $31.85.

Earlier Comments: December 23, 2014:
SFM is in the services sector. They operate in the grocery store industry. According to the company, "Sprouts Farmers Market, Inc. is a healthy grocery store offering fresh, natural and organic foods at great prices. The Company offers a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, baked goods, dairy products, frozen foods, natural body care and household items catering to consumers' growing interest in health and wellness. Headquartered in Phoenix, Arizona, the Company employs more than 17,000 team members and operates more than 190 stores in ten states."

Back in the fourth quarter of 2013 the health food and natural grocery stores saw their stocks peak and begin a multi-month decline. The market was worried about growing competition. The organic and "natural" trend had allowed companies like SFM and WFM to enjoy wider margins than traditional grocery stores. Now everyone seems to be trying to cash in on the organic trend.

Shares of SFM were almost cut in half with their drop from its 2013 peak to the 2013 low this past spring. Since then it appears that SFM has found a bottom. That might be thanks to steady earnings growth. SFM has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Back in May they guided higher but since then their guidance has only been in-line with consensus estimates.

The recent strength in the stock is encouraging. Shares are now challenging resistance in the $32-33 area. Should SFM breakout it could see some short covering. The most recent data listed short interest at 12.9% of the 124 million share float.

Tonight we are listing a trigger to launch bullish positions at $33.05.

- Suggested Positions -

Long SFM stock @ $33.05

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

Long MAR $35 CALL (SFM150320C35) entry $1.10

12/29/14 triggered @ 33.05
Option Format: symbol-year-month-day-call-strike

TASER Intl. - TASR - close: 25.84 change: -0.43

Stop Loss: 24.70
Target(s): To Be Determined
Current Option Gain/Loss: - 2.5%
Entry on January 08 at $26.50
Listed on January 07, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 3.4 million
New Positions: see below

01/12/15: The widespread market weakness fueled some profit taking in TASR and shares lost -1.6%. Yet the stock remains inside its bullish channel. I am reiterating my suggestion that investors might want to wait for a rise to $26.75 before initiating new positions.

Earlier Comments: January 7, 2015:
50,000 volts. That's what a Taser electro-muscular disruption (EMD) device shoots through your body to override the central nervous system. Your body freezes as all the muscles contract.

Their website describes the company as "TASER International makes communities safer with innovative public safety technologies. Founded in 1993, TASER first transformed law enforcement with its electrical weapons. TASER continues to define smarter policing with its growing suite of technology solutions, including AXON body-worn video cameras and EVIDENCE.com, a secure digital evidence management platform."

They may have started with electrical weapons but now the company is expanding to mobile video cameras worn on a law enforcement officer's gear. The company has been in the news lately thanks to President Obama. On Monday this week Obama wants to spent $75 million over the next three years to outfit the nation's police force with body-worn cameras.

The White House believes that body-worn cameras on police will help reduce violence and avoid another event like the one in Ferguson, MO. Current estimates suggest there are only 70,000 police wearing cameras now. Obama's plan would almost double that. Industry analysts are forecasting significant growth if the federal government approves Obama's plan. There are nearly 800,000 policemen in the U.S. There's plenty of room to grow. Plus TASR is expanding internationally.

The bears will argue that TASR's stock is expensive with a P/E near 63. There is no denying that. However, the body-camera business could soar. Currently it's less than 8% of their annual sales. The real winner could be TASR's Evidence.com ecosystem. This is a subscription service for law enforcement to back up and manage all the data from TASER electric weapons, body-worn cameras, and more.

The stock hit multi-year highs on back in December following President Obama's comments suggesting the federal government endorsing body cameras for cops.

I will caution investors that TASR can be a volatile stock. You may want to limit your position size. I will point out that the latest data lists short interest at almost 30% of the 51.3 million share float. If the rally continues TASR could see some short covering.

Technically shares of TASR just bounced near the bottom of its bullish channel. We think TASR will outperform if the rally resumes. The simple 10-dma is at $26.36. Tonight we are suggesting a trigger to open bullish positions at $26.50. We will plan on exiting prior to TASR's earnings announcement due in late February.

- Suggested Positions -

Long TASR stock @ $26.50

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

Long MAR $27 CALL (TASR150320C27) entry $2.50

01/08/15 triggered @ 26.50
Option Format: symbol-year-month-day-call-strike

Tree.com, Inc. - TREE - close: 48.47 change: -0.92

Stop Loss: 47.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 08, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 147 thousand
New Positions: Yes, see below

01/12/15: During Monday's session TREE turned lower and pierced its 10-dma before paring its losses. After the closing bell tonight the company updated its Q4 2014 guidance and issued 2015 guidance. Management expects Q4 revenues in the $40.5-42.5 million range. That's a bit light since Wall Street analysts are expecting $42.2 million. However, TREE is forecasting 2015 revenues of $185-190 million compared to Wall Street's estimate of $185 million. This 2015 guidance could fuel a rally tomorrow.

Our suggested entry point is $50.10.

Earlier Comments: January 8, 2015:
Do not go to Tree.com if you're looking for deciduous or coniferous trees or any plants for that matter. The deceptive name is part of a new marketing campaign. Tree.com started out as LendingTree.com, which is an online exchange for mortgage loans between consumers and lenders.

According to the company website, "Tree.com, Inc. is the parent of several brands and businesses that provide information, advice, products and services for critical transactions in our customers' lives. Our family of brands includes LendingTree®, GetSmart®, DegreeTree®, LendingTreeAutos, DoneRight!® and ServiceTree ?. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans, home services, education, auto and other services from multiple businesses and professionals who will compete for their business."

DegreeTree.com helps consumers choose from hundreds of schools. InsuranceTree is a free to consumer service to find insurance. Done Right! is a home improvement professional directory for consumers. LendingTree Autos is designed to help consumers make smarter decisions about their vehicles. Meanwhile HealthTree sounds like a competitor to WebMD but I couldn't get the website to come up.

Earnings appear to be improving and the stock has more than doubled from its 2014 lows. In May 2014 the company raised their full year revenue guidance. They beat earnings estimates on both the top and bottom line last August. In November they beat the EPS estimate and raised their guidance again. That announcement sent the stock soaring (you can see the big rally on November 6th).

After a correction from its post-earnings rally shares of TREE have recovered. Now the stock is breaking out to new all-time highs. The P&F chart is very bullish and forecasting a long-term target above $90. The stock does have a very small float of less than six million shares. Daily volume is pretty low as well. For that reason I am labeling this a more aggressive, higher-risk trade.

Shares were showing relative strength today with a +2.1% gain and a breakout past recent resistance at $49.00. The $50.00 mark is potential round-number resistance. I am suggesting a trigger to open small bullish positions at $50.10.

Trigger @ $50.10 *small positions*

- Suggested Positions -

Buy TREE stock @ $50.10

01/12/15 After the closing bell TREE updated its revenue guidance.

BEARISH Play Updates

Seattle Genetics - SGEN - close: 32.03 change: +1.49

Stop Loss: 32.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on January -- at $---.--
Listed on January 10, 2015
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 1.2 million
New Positions: Yes, see below

01/12/15: Some M&A news in the biotech industry helped buoy the group. Plus SGEN announced a collaboration with Bristol-Myers Squibb (BMY) this morning. Shares of SGEN gapped open higher and closed up +4.8%. If this rebound continues we'll likely drop SGEN as a bearish candidate. Currently we're on the sidelines with a trigger at $29.85.

Earlier Comments: January 10, 2015:
What if you could create a treatment that could kill cancer cells while leaving non-targeted cells alive? That's what SGEN's antibody-drug conjugates are trying to accomplish. It's interesting technology.

The company describes itself as "Seattle Genetics is a biotechnology company focused on the development and commercialization of innovative antibody-based therapies for the treatment of cancer. Seattle Genetics is leading the field in developing antibody-drug conjugates (ADCs), a technology designed to harness the targeting ability of antibodies to deliver cell-killing agents directly to cancer cells. The company’s lead product, ADCETRIS® (brentuximab vedotin), is an ADC that, in collaboration with Takeda Pharmaceutical Company Limited, is commercially available for two indications in more than 45 countries."

Unfortunately the stock has not been a winner. Last year the biotech sector was up about +30%. That outperformed the S&P 500's +11% and the NASDAQ's +13% gains in 2014. Unfortunately, SGEN lost almost 20% last year.

SGEN also delivered better than expected earnings last year. Biotech earnings are always lumpy. One quarter they could soar while the next quarter the company could lose money. Many times revenues can depend on milestone payments by partners, etc. SGEN definitely saw its ups and downs for revenues last year. Yet the company has beaten Wall Street's estimates on both the top and bottom line the last four quarters in a row. Normally that's bullish. Yet the stock isn't responding to these results.

Another surprise is the company's pipeline. Wall Street loves biotechs with a big pipeline. According to SGEN they have 25 ADC's in clinical development. So why are shares underperforming. It would appear investors are worried about competition from other companies where SGEN is focused on the same treatment. Another issue seems to be a disappointing study on their AETHERA drug. The bear case would suggest that the most recent study on AETHERA was disappointing and SGEN could have a hard time convincing their treatment will work as a maintenance therapy for Hodgkin's lymphoma.

Technically shares look terrible with a clear trend of lower highs and lower lows. The point & figure chart is bearish with a $25.00 target. After consolidating sideways the last four weeks SGEN is on the verge of breaking down below round-number, psychological support at the $30.00 level.

Tonight we are suggesting a trigger to launch bearish positions at $29.85. However, I want to caution readers that this is a higher-risk, more aggressive trade. Biotechs can be very volatile and SGEN is no exception. The right or wrong headline can send the stock soaring or crashing. Plus, there is already a significant amount of bears in the stock. The most recent data listed short interest at almost 29% of the 93.3 million share float. You may want to use put options to limit your risk.

Trigger @ $29.85 *small positions to limit risk*

- Suggested Positions -

Short SGEN stock @ (trigger)

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

Buy the FEB $30 PUT (SGEN150220P30)

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

SodaStream Intl. - SODA - close: 19.04 change: -0.09

Stop Loss: 20.25
Target(s): To Be Determined
Current Option Gain/Loss: + 2.0%
Entry on January 05 at $19.42
Listed on January 03, 2015
Time Frame: Exit PRIOR to earnings in late February
Average Daily Volume = 946 thousand
New Positions: see below

01/12/15: SODA slowly drifted lower and posted a -0.4% decline. This is a new all-time closing low for the stock. Today is the second day in a row that SODA found support in the $18.86-18.88 area. Traders may want to look for a drop below $18.80 before initiating new positions.

Earlier Comments: January 3, 2015:
The excitement over shares of SODA has definitely fizzled out over the last couple of years. The stock peaked just below $80 a share back in 2011. Then in early 2013 the stock was soaring and looked like it might reach $80 again. The rally lost its buzz and SODA peaked near $78 in mid 2013. Since then shares have reversed and stuck in a bear market decline.

Who is SODA? According to the company's marketing material "SodaStream is the world's leading manufacturer and distributor of home beverage carbonation systems which enable consumers to easily transform ordinary tap water instantly into carbonated soft drinks and sparkling water. Soda makers offer a highly differentiated and innovative solution to consumers of bottled and canned carbonated soft drinks and sparkling water. Our products are environmentally friendly, cost effective, promote health and wellness, and are customizable and fun to use. In addition, our products offer convenience by eliminating the need to carry bottles home from the supermarket, to store bottles at home or to regularly dispose of empty bottles. Our products are available at more than 65,000 retail stores in 45 countries around the world, including 17,000 retail stores in the United States."

2014 was tough for SODA investors as the stock collapsed from about $50 to $20. The company guided lower when they reported earnings in July 2014. Then SODA shares gapped down sharply on October 7th when they issued another earnings warning. That big spike on October 24th was a story from Bloomberg that SODA was testing some Pepsi products. The rally was probably short covering as investors worried a partnership with Pepsi could turn things around. The rally quickly faded. Pepsi has already partnered with in-home beverage company Bevyz in Europe so any deal with SODA might be limited.

SODA's most recent earnings report was October 29th. Their EPS came in at $0.45, which beat estimates of $0.35. Yet revenues fell -12.9% in the third quarter to $125.9 million, which was significant below Wall Street's estimate. Gross margins are also sinking and fell 380 basis points to 50.5% in the third quarter. Management lowered their guidance again and announced they would stop providing annual guidance in 2015. That's never a good sign.

Like rats jumping off a sinking ship there have been stories that hedge fund managers are bailing out of their SODA positions. Plenty of investors are already bearish on SODA and short interest at about 17% of the small 20.8 million share float.

Friday's drop was significant because it's a bearish breakdown under major psychological support at $20.00. Tonight we are suggesting bearish positions immediately with a stop loss at $21.05. More conservative traders may want to wait for a new relative low under $19.33 before initiating positions.

NOTE: SODA has been rumored to be a takeover target for a long time. That hasn't stopped the stock from crashing over the last 18 months. You may want to limit your position or use the options to limit your risk just in case some M&A news happens to appear out of nowhere and send SODA higher.

- Suggested Positions -

Short SODA stock @ $19.42

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

Long FEB $20 PUT (SODA150220P20) entry $2.05

01/08/15 new stop @ 20.25
01/05/15 trade begins. SODA gaps down 30 cents to $19.42
Option Format: symbol-year-month-day-call-strike

Zulily, Inc. - ZU - close: 21.56 change: -0.71

Stop Loss: 23.55
Target(s): To Be Determined
Current Option Gain/Loss: +16.8%
Entry on December 08 at $25.90
Listed on December 06, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.3 million
New Positions: see below

01/12/15: ZU continues to follow the bearish script. The latest oversold bounce is rolling over beneath technical resistance at its 10-dma. I am not suggesting new positions at this time.

Earlier Comments: December 6, 2014:
ZU is in the services sector. They're considered part of the discount variety store industry. Yet the company doesn't have any retail locations. Instead they operate online. ZU focuses on the "flash sales" model with 72 hour sales (and occasionally 24 hour sales).

The website describes the company as follows, "zulily (http://www.zulily.com) is a retailer obsessed with bringing moms special finds every day—all at incredible prices. We feature an always-fresh curated collection for the whole family, including clothing, home decor, toys, gifts and more. Unique products from up-and-coming brands are featured alongside favorites from top brands, giving customers something new to discover each morning. zulily was launched in 2010 and is headquartered in Seattle with offices in Reno, Columbus and London."

If you do any research on ZU you'll hear a lot about the business model. It makes sense. The company doesn't suffering from all the hassles and expenses of normal retail locations. The constantly rotating nature of their flash sales model generates a sense of urgency for the buyer. It seems like a great idea. The last couple of earnings reports have been better than Wall Street expected. Yet the stock is getting crushed.

ZU's most recent report was their Q3 results on November 4th. Wall Street was expecting ZU to lose between 3 to 4 cents per share on revenues of $285.4 million. ZU reported a profit of $0.02, which is up from $0.00 a year ago. Revenues soared +71.5% to $285.8 million.

Management said it was a good quarter for ZU. Darrell Cavens, CEO of zulily, said, "This was a strong quarter where we hit several key milestones— the business reached a billion dollars in revenue on a trailing 12 month basis and the majority of our North American orders now come from mobile." They also saw their active customers surge +72% from a year ago to 4.5 million. Their average purchase was up +4%. In spite of all the good news the stock plunged -20% the next day.

The reason appears to be guidance and valuations. ZU issued Q4 guidance, the critical holiday shopping season, that was below analysts' estimates. Another major issue is valuation. At current prices ZU is still valued at $2 billion for a company with a net income of only $11.5 million. Their current P/E is about 202. They do seem to be growing rapidly but evidently not enough to justify current valuations.

Eventually shares will get cheap enough that the selling stops. Where that bottom is no one knows yet. The point & figure chart is bearish and forecasting at $14.00 target. There are a lot of investors betting on new lows. The latest data listed short interest at 31% of the 41.7 million share float.

We think ZU heads lower but I consider this a more aggressive, higher-risk trade. The big short interest could make ZU volatile. Tonight we're suggesting small bearish positions if ZU can trade at $25.90. You may want to use the put options to limit your risk.

NOTE: ZU's IPO priced at $22.00. It's possible that $22 could be potential support.

*small positions to limit risk* - Suggested Positions -

Short ZU stock @ $25.90

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

Long Jan $25 PUT (ZU150117P25) entry $1.15

01/08/15 new stop @ 23.55
01/03/15 new stop @ 24.10
12/29/14 new stop @ 24.45
12/27/14 new stop @ 25.15
12/18/14 new stop @ 26.05
12/10/14 Caution! The recent action in shares of ZU could spell trouble.
12/08/14 triggered @ 25.90
Option Format: symbol-year-month-day-call-strike