Option Investor

Daily Newsletter, Saturday, 3/26/2016

Table of Contents

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

Market Wrap

Consecutive String Broken

by Jim Brown

Click here to email Jim Brown

After five consecutive weekly gains the major indexes posted losses for the week. They were very minor and the Thursday rebound could setup another gain next week.

Market Statistics

Friday Statistics

The S&P dipped nearly to support at 2,020 on Thursday before rebounding +13 points to close with a minor loss. The Thursday low was -34 points from the Tuesday high at 2,056. Is that enough of a decline to neutralize the overbought conditions? Back on March 10th, the S&P completed a similar dip of -37 points before rebounding for the next seven days.

Over that same period, ending on March 10th the Dow declined -244 points compared to -249 points last week. Is that good enough to relieve the overbought conditions?

Typically a multi-week 13% rally on the S&P results in a 3-5% decline for profit taking. Last week the S&P almost reached a -2% decline from the high.

In theory, this week should be bullish as funds window dress for the end of the quarter. With multiple weeks of market gains, they will want to pad their portfolios with winners to suggest they were along for the ride.

In economic news, there was only one report that mattered on Friday. The final revision for the Q4 GDP rose slightly from 1.0% to 1.39% growth. Consumer spending, residential investment and government spending contributed to growth while inventories, exports and nonresidential fixed investment spending were a drag on the totals. Corporate profits declined -7.8% after a -1.6% decline in Q3. This was the largest drop in profits since Q1 2011. Estimates for Q1-2016 are even worse. The boost from consumer spending came from recreational services suggesting consumers were finally spending that money they are saving on gasoline.

Personal consumption expenditures (PCE) inflation rose only +0.3% in Q4 compared to +1.3% in Q3.

The Atlanta Fed real time GDPNow forecast for Q1 is dropping like a rock. The forecast fell from +1.9% to +1.4% on Thursday after the durable goods report declined -2.8% for February. The forecast for real equipment investment declined from +0.9% to -1.4%. Monday's drop in existing home sales also pushed the forecast lower. The next update will be on Monday after Personal Income report. With corporate earnings expected to decline -8.7% according to FactSet in the Thursday update this will also weigh on the final Q1 GDP report.

There are a lot of events on the calendar for next week but the highlights will be the March employment reports. The ADP report on Wednesday is expecting a decline of about -24,000 to a gain of +190,000. The Nonfarm Payrolls on Friday are expected to show a decline of -42,000 from the February level at 242,000 jobs to 200,000 for March. Any numbers over 175,000 would be seen as further strong job growth even if they are mostly part time as in the February report.

March is a tough month for payroll estimates. Since 2008, March has missed estimates in 7 of 8 years by an average of 53,000 jobs according to Bloomberg. Since 2000, March has missed estimates 67% of the time by an average of 69,000 jobs. In March 2015, the miss was 119,000 below estimates.

Closing the week will be the national ISM Manufacturing Index, which is expected to rise slightly from 49.5 to 49.9 but remain in contraction territory. I would not be surprised to see it return to expansion territory with a number over 50 because of improvements in the regional surveys.

Since the market was closed on Friday, there was very little stock news. Accenture was a big mover on Thursday after reporting earnings of $1.34 that rose +24%. That beat estimates for $1.18. They booked more than $9.5 billion in new orders in the quarter. Encouraged by strong sales they raised full year guidance to as much as 9% in revenue growth and $6.00 per share in earnings. That was up from prior guidance of $5.17. Shares rallied 6% in a slow market.

Buffalo Wild Wings (BWLD) gained $2.35 after Goldman Sachs added the company to its conviction buy list citing a compelling valuation. Goldman has a $187 price target and said "near term risk-reward is favorable as perceived risks related to the top-line and/or wing prices are priced in and/or overstated." In other words, the rise in wing prices from the bird flu last summer is already priced in and current wing prices are declining. Shares closed at $145.

PVH Corp (PVH) reported earnings of $1.52 and beat estimates for $1.45. That also exceeded the company's own forecast for $1.37-$1.47. The strong dollar knocked nearly 14% off earnings. On a constant currency basis, earnings would have been $1.88 and that was a real surprise. Revenue rose +2.1% to $2.112 billion and beat estimates for $2.073 billion. On a constant currency basis, revenue would have risen 7% and well over estimates.

They just signed a new partnership deal with G-III Apparel (GIII) and I would be a buyer on any decent dip.

KB Homes (KBH) reported earnings of 14 cents that rose +68% and beat estimates for 11 cents. Revenue rose +17% to $678.4 million also beating estimates for $633 million. Home deliveries rose +23% to 1,953 homes and the average selling price rose +5% to $344,400. Order backlogs rose +29% to $1.43 billion and homes in the backlog rose +22% to 4,285. The CEO was bullish on the conference call saying the builder had good momentum going into the summer selling season.

Raytheon (RTN) raised its annual dividend +9.3% from $2.68 to $2.93. The 73.25 cent quarterly dividend will be paid May 12th to holders on April 6th. Shares failed to move on the news.

Washington said it cancelled a Lockheed mine-hunting system after the Navy said the system was unreliable, prone to dropping communications and missed mines it was supposed to find. The system had been in development for 17 years but Lockheed had only delivered 10 of them. Lockheed (LMT) dropped -1.4% on the news.

Hedge fund Starboard Value has launched an all out attack on Yahoo. The company is trying to replace Yahoo's entire board with nine directors of its own choosing. Starboard CEO Jeffrey Smith sent a letter to Yahoo shareholders saying the company's management and board "have repeatedly failed shareholders." Starboard accused Yahoo of "lackadaisically engaging with potential bidders." Over the years since Starboard was spun off from Ramius in 2011 the $3 billion hedge fund has waged 46 proxy fights and gained 66 board seats according to FactSet.

Many of the activist fights end without board seats when the companies agreed to many of their demands to keep from losing control. In the case of Yahoo about the only demand is to get busy and sell the core business. Yahoo CEO Marissa Myer became CEO after Dan Loeb's Third Point waged a proxy fight in 2012 that gave him two seats on the board and forced that CEO change. Today, starboard wants Marissa out as well saying she has had plenty of time to make changes but the only change has been the decline in asset value.

Microsoft has met with possible bidders for Yahoo and is interested in providing funds under the right conditions. Microsoft would like to have a future relationship with Yahoo in order to retain their partnership in search. Those potential bidders were Verizon, AT&T, Bain Capital Partners, KKR and TPG Capital.

FactSet is predicting an 8.7% decline in Q1 earnings and the fourth consecutive quarterly decline since Q3-2009. Revenue is expected to decline -1.1% compared to expectations for 2.6% growth at the beginning of the quarter. To date 93 S&P companies (78% of those giving guidance) have warned on earnings and 26 have issued positive guidance.

The next two weeks are earnings warnings weeks. It is the end of the quarter and those hoping for a big end of quarter sales surge will have to face the facts and spit out a warning if those sales did not close. With expectations already so low, it is likely we will not see a big surge in warnings. With consumer spending improving in March there is always the possibility companies could beat the already low expectations.

Gasoline prices are rising ahead of the summer driving season because crude prices continue to defy gravity. WTI traded up to $41.90 on Wednesday on misunderstood headlines about a production freeze by OPEC suppliers. Saudi Arabia said they would participate in a freeze even if Iran did not. This has absolutely zero impact on current and future production but was simply another headline to support prices.

Crude inventories continued to build with a 9.4 million barrel rise to 532.5 million barrels and a new record high. This deflated the price balloon slightly with crude slipping back to $38.33 intraday on Thursday. That depressed the equity market at the open. Analysts believe oil in storage will reach 550 million barrels and will weigh on prices long term until it is sold. That oil costs the owners rent every day it remains in storage so the total cost of ownership goes up every day. The recent rise in prices should slow the rise in inventories. Speculators and refiners will not be so eager to store oil at $40 as they were at $30. Imports reached a three-month high at 8.38 mbpd while U.S. production dropped -30,000 bpd to 9.038 mbpd and the lowest level since November 2014. That is -572,000 bpd below the peak of 9.61 mbpd in June 2015.

Active rigs declined -12 last week to 464 and a 67-year low. Oil rigs declined -15 to 372 and gas rigs rose +3 to 92. Canadian rigs declined -14 to 55 and now -65 rigs below year ago levels.


We expected Thursday to follow the historical trend to close positive before the Easter weekend. I actually expected a little more in the way of gains but the sharp drop in oil prices hammered the open and the Dow was down triple digits. The rebound in oil prices was instrumental is supporting the market gains. If reality ever returns to the oil market, the equity market could be in for some tough sledding.

As I outlined at the start of this commentary the S&P has now duplicated the same dip we saw at the March 10th low. Whether that is enough to ease the overbought pressures or not is unclear. If fund managers do turn to window dressing to mark up their portfolios for quarter end, it will happen on Monday/Tuesday. The latter portion of the week is a tossup. The first three days of the quarter are normally bullish and that starts on Friday. The Nonfarm Payrolls should not be a challenge unless they come in really hot as in 250,000 or more jobs.

Last week no less than four Fed heads implied there could be a rate hike as early as April. Yellen went out of her way to push expectations well into the future and these four bozos went out of their way to pull those expectations back. You have to wonder what conversations are held in those hallowed halls of the Federal Reserve. Can Janet be heard yelling up and down those halls every time one of the rogue Fed heads goes on TV with some pompous prognostication of rampant inflation and the need for immediate rate hikes?

As long as the jobs numbers are tame, the expectations for hikes will probably be ignored by the market. Otherwise we could have a rocky few days.

The S&P rebounded from support at 2,020 but is still facing initial resistance at 2,050. That resistance becomes stronger starting at 2,075.

We have had a flurry of analysts out with forecasts for market declines in recent weeks. Mohamed El-Erian warned on Thursday the market could swing dramatically and overshoot with a 10% drop from a range bound market. He said we have had two 10% declines in 2016 and regardless of which way the market goes he expects a wider range in the coming months.

He said while central bank stimulus and buybacks can push rising markets higher, falling markets can "amplify" the effects of weakening fundamentals. He warned the market has not yet priced in the emergence of anti-establishment republican front-runner Donald Trump. He believes that will add significant uncertainty from the political side.

The February-March period is the heaviest time of the year for stock buybacks. More than 35% of purchases take place in that period. The average monthly buyback for the year is about $140 billion or $1.68 trillion for the year. Thirty-five percent of that is nearly $600 billion and that money is spent in the Feb-Mar period. Over the next five months, about 25% of the annual buyback funds are spent. That equates to $420 billion or roughly $84 billion a month. That is significantly less than the nearly $300 billion a month in February and March. Since 2010, the market has risen on average in Feb/Mar helped a lot by those buybacks. From April through August the market has averaged a decline. Companies also have a black out period for buybacks ahead of earnings so that means we cannot expect any further uplift from buybacks in the coming weeks.

Q1 earnings are normally stronger than Q2 so there is a little less excitement in the Q2 earnings cycle. With earnings expected to decline -8.7% for Q2 it would be tough to get excited about those results.

For these reasons, I am bearish on the market after the next couple of weeks. I believe it is entirely possible we will see another surge higher but that rally will fail as the Dow and S&P reach that strong resistance. We may not go straight down but volatility should increase and the overall trend will decline into the summer months. I could be completely wrong and we surge to new highs but my conviction is to the downside by summer. Bank of America is now predicting S&P 2000 for the end of 2016 with significant volatility between now and the end of December.

The Dow has the same overhead resistance problem. Once it reaches 17,750, it should become very difficult to move higher. Everyone that was trapped at that level in early January when the market crashed to 15,450 is going to want to close their positions and thank their lucky stars they were able to recover those losses. This is the same thing that happened from Nov-Dec when the market stalled at that level after rebounding from the August crash. Since hitting that resistance over the next couple weeks will be just before the Sell in May cycle there will be some urgency on their minds as those resistance levels are hit.

The Nasdaq is no different except that it has not rebounded as high as the Dow and S&P. The Nasdaq failed at the 61.8% retracement level and has not reached downtrend resistance or the horizontal resistance at 4,926. The wreck in the biotech sector has kept the Nasdaq rebound under check. So far the Nasdaq has made a lower high off of a lower low to the negative pattern is reinforcing. The Dow and S&P made nearly identical lows that gave the appearance of a double bottom. The Nasdaq did not.

The Biotech Index is trading in a narrow range between 2800-3000 and a breakout would be bullish but a break down is more likely given the political situation. A return to 2,600 and rebound could produce a double bottom but it would need to be a firm bottom over several days rather than a one-day wonder.

The Russell 2000 has been moving in lock step with the biotech sector. A break below 2,800 on the $BTK would equate to a break below 1,065 on the Russell. The oil volatility over the last two days has also provided some instability to the Russell. There is significant resistance at 1110-1120 and then again at 1,161.

Readers sometimes say I am not clear in my summations. That is because the market is never clear in its intentions. The best-laid plans can always go astray. I am slightly bullish for the next week or maybe two. However, I am bearish for the latter half of April and all of May. That could change based on the market action next week. Nothing is ever cast in concrete. We need to do the best we can in analyzing the situation, make plans that follow that analysis and then be ready to change those plans if the market does not cooperate.

If market analysis was fool proof we would all own islands and private jets. Since analysis is never guaranteed we scratch out a living one position at a time. The object of the game is to win more than you lose. If anyone ever tells you they never lose they are lying. A successful trader wins about 65% of the time. As long as your losers are smaller than your winners you will be successful.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

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Random Thoughts

Over the last five days, volume in put options has lagged call option volume by 23.63%. That means investors are making more bullish bets than bearish. However, put volume is still close to the highest in the last two years so investors are still either concerned or expecting a decline.

The McClellan Oscillator Ratio ($NYMO) for the NYSE has rolled over and is heading lower. Note the levels in January and February when the market was correcting. The bullishness rebounded to 105.77 on the MO the prior week and that is the highest level since January 2009 and the second highest level since 1998. That is the farthest I could look back on StockCharts.com.

The corresponding NYSE McClellan Summation Index is nearly off the chart with a reading of 1,000. This is extreme oscillation and suggests we are going to roll over in the weeks ahead. The Summation Index measures advancing and declining volume on the NYSE. Over the last month, there has been about 5.83% more declining volume than advancing volume and this covered the period where the markets were up for five consecutive weeks.

Disney just hit $1 billion in the international box office for 2016 thanks to Star Wars and Zootopia. This is the earliest ever for Disney. Zootopia hit $415.9 million in its international release and Star Wars took in $447 million internationally as the two largest grossing movies this year. Zootopia is now the second largest movie ever in Russia, behind only Avatar, with $26.5 million. It has taken in $184.7 million in China and second only to the Avengers: Age of Ultron. Globally Zootopia has grossed $633 million and Star Wars has grossed $2.06 billion.

While the bulls gained some converts the investor sentiment survey did not change materially. Bullish sentiment rose +3.8% and bearish declined -3.1%. The survey closes on Wednesday so the end of week decline was not factored in.

Fortune Magazine just published its list of the world's 50 greatest leaders. Jeff Bezos was number 1 and his third year on the list. Apple's Tim Cook, Pope Francis, Paul Ryan, Angela Merkel, Stephen Curry, Ruth Bader Ginsburg, Melinda Gates and Bono were on the list. Absent from the list were President Obama and Donald Trump. 50 Greatest Leaders

Batman vs Superman? Really? My son asked me if I wanted to go see it this weekend and I turned him down. I cannot get past the absurdity of the contest. The man of steel against a flesh and blood human. Hey, batboy, here I am. Take your best shot. Take your 100 best shots but when you are done, I am sending you to the moon. I am sure the writers have come up with some clever way of making the match more realistic but it is still absurd. The movie only has a 30% rating on Rotten Tomatoes but it reportedly took in $27.7 million on Thursday night's open. It is expected to total $170 million for the weekend. Globally they expect $300 million. Apparently, the twin super heroes can still draw a crowd and for that reason alone they will both survive the battle. We cannot have either one of the golden geese killed off or the money would stop flowing.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"If you torture the data long enough, it will confess to anything."

Darrell Huff (How to Lie With Statistics, 1954)


New Plays

Insider Buying

by Jim Brown

Click here to email Jim Brown
Editor's Note

When insiders buy their own stock that is normally a good indication of things to come. For KapStone Paper and Packaging, director Robert Bahash bought 20,000 shares to increases his stake to 27,000 shares. Basically he bought three times what he already owned and he is just a director. Hedge fund DE Shaw reported a 2.35 million share stake in their latest 13F.


KS - KapStone Paper - Company Profile

KapStone manufactures and sells containerboard, corrugated Products and specialty paper products in the U.S. and internationally. They are the 5th largest producer in the USA. The purchased Victory Packaging L.P. and its subsidiaries for $615 million back in June. As a result of the acquisition revenue for 2015 rose from $2.3 billion to $2.8 billion thanks to $582.9 million in revenue from Victory.

They own four paper mills, 21 plants and 65 distribution centers.

Earnings were a challenge for Q4 due to a 12-day strike at one of their paper mills. This reduced revenue because of a lack of product. Shares dropped from $14 to $9 on the news on February 10th. Shares have recovered from that dip and were up 70 cents on Thursday in a weak market. They failed to sell off earlier in the week when the market was down.

On March 10th they announced a 10 cent quarterly dividend payable April 13th to holders on March 30th. Earnings are May 2nd.

Shares are in a pretty decent uptrend and closed at $13.20 on Thursday. Resistance is $15.20. The high in November was $25. I believe they will at least reach resistance at $15 and with a decent market will move through that level to $17.

Buy KS shares, currently $13.20, initial stop loss $11.30

No option because of wide strikes.


No New Bearish Plays

In Play Updates and Reviews

Poised to Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

After a stop clearing dip at the open the market rebounded to close positive as shorts covered and traders looked for a rally on Monday. The Dow declined triple digits at the open to stop exactly at 17,399 and the 300-day average. That is not normally a trigger point for the Dow so it was probably the 17,400 round number that halted the decline.

The Dow, Nasdaq and Russell closed positive but the S&P lost 1 point. If there are no terrorist attacks over the weekend we could see some fund buying on Monday/Tuesday to window dress for the end of the quarter.

We lost the CDW, SGI and BBOX positions to stop losses on the gap down market open. I lowered the entry trigger on FTNT because of intraday movement over the last couple days. It appears to have found a bottom and a break over $28.50 could start a new rebound.

The Dow stopped right at downtrend resistance and that could be a challenge if the end of quarter fund buying turns into selling instead.

Current Portfolio

Current Position Changes

FTNT - Fortinet

The long position remains unopened until FTNT trades at $28.75.

BBOX - Black Box Corp

The long position was stopped out with a trade at $13.35.

CDW - CDW Corp

The long position was stopped out with a trade at $40.35.

SGI - Silicon Graphics

The long position was stopped out with a trade at $6.30.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

AMLP - Alerian MLP ETF - ETF Profile


AMLP will continue to rise and fall with the price of oil. Long term the trend will be up.

Original Trade Description: March 2nd.

The MLP sector has been trashed along with the producers even though they have almost no risk. A pipeline MLP is a toll collector. They get paid a fee for every barrel of oil or cubic foot of gas that travel through their pipelines.

The vast majority of the pipelines in the country are full. They are so full that producers are having to resort to truck and rail shipments to get their oil to market. The pipelines are not in any material danger of a sudden drop in petroleum products flowing through their pipelines. Many contracts are take or pay. Producers commit to ship a certain amount of product and they pay for that commitment.

I am recommending the Alerian MLP ETF. This is an ETF that owns an entire basket of MLP securities and they all pay dividends. The AMLP is currently yielding 11.4%. They have raised their dividend every quarter since Q1-2012. They are not likely to break that string and if they did I suspect it would only be by a small amount. The Q1 dividend they announced on Feb 10th was 29.9 cents, payable on February 18th.

There are analysts that believe the MLP model is at risk. They believe the cost of capital will rise with the Fed rate hikes and the crash in the oil market. That means existing MLPs will have to pay more for new assets. That does not affect existing MLPs that already have their assets in place. They do not have to grow in the current energy environment. They can be content to sit on their assets and continue to pay dividends on their existing pipelines.

AMLP Holdings

I believe the risk at the current price level is minimal. The MLP panic has run its course with several cutting their dividends and causing the sharp drops in the ETFs. Now that oil prices are firming and expected to firm even more beginning in April when inventories begin to decline, the MLP ETF buyers will return. Just a year ago AMLP was trading over $20 and could be there again by this time next year.

There is no scenario where oil prices remain low long term. This is a normal boom/bust cycle and they will recover and will trade significantly higher in the years ahead.

This is a LONG-TERM position. Oil prices should rebound starting this summer and then rise sharply in 2017 and you need to be content to collect the 11.4% while we wait for those prices to move higher.

You do not have to hold long term. My initial target would be $14 and that would be a 40% return and we could see that by July.

Tuesday 3/8 comments: AMLP declined -6.7% after a court verdict appeared to allow bankrupt Sabine Energy to renegotiate contracts with midstream transporters of natural gas. U.S. Bankruptcy judge Shelly Chapman in Manhattan said Sabine should be able to reject the current transmission contracts with HPIP Gonzales Holdings and Nordheim Eagle Ford Gathering LLC, an affiliate of Cheniere Energy. AMLP was not involved in the case.

Despite the judges comments she also said she did not want to decide an underlying legal dispute in a binding way. The problem is that companies contract with the owner of gathering systems for a field that can consist of tens of thousands of acres with production coming from a dozen different producers. Those producers contract for 10 years or more with the gathering system to ship their gas/oil through the gathering pipeline to a larger pipeline, rail car loading facility, refinery, etc.

For Sabine to reject the contract to ship its gas through the gathering system makes no sense. They have no other way to get it to market. Sabine admitted they were having to flare all their gas because HPIP was not accepting it for nonpayment of the agreed fees. Sabine said they were not paying because HPIP never completed construction of the pipelines. HPIP said Sabine never paid them the agreed construction fee.

The pipeline operators claim that once they contract with a group of producers to construct a system of pipelines to gather production that those contract rights and obligations pass from owner to owner if the leases are sold. Sabine wants to void its portion of the gathering agreement.

All the midstream MLPs were down on the judges comments because it has always been understood that once a pipeline is in place in a field that operator has the right to collect and transport the gas/oil from that field regardless of who owns it.

The judges comments are not law. She called the attorneys to her chamber after the court event and told them to "come to a commercial resolution of your issues" because she did not want to be put in a position of having to rule on the legality of the broader issue that could impact the entire pipeline sector in the USA.

While this does not have any immediate impact on AMLP and an adverse ruling may not impact them for years into the future, the stock was down because the sector recoiled in horror at the possibilities. I suspect calmer heads will prevail in the days to come.

Position 3/3/16:

Long AMLP shares @ $10.40. No stop loss.


Long July $12 call, entry 55 cents. No stop loss.

BBOX - Black Box Corp - Company Profile


BBOX dropped back to $13.18 at the open to stop us out at $13.35 for a loss of 90 cents. Shares rebounded after the opening drop to close positive and back at resistance.

Original Trade Description: March 9th.

Black Box is a leading technology solutions provider dedicated to helping customers build, manage, optimize and secure their IT infrastructure. They operate globally with more than 3,500 team members.

Black Box provides data centers, control rooms, contact centers, networking infrastructure while maintaining the highest security protocols and real time monitoring. With 70% of businesses reporting security breaches over the past 12 months it is critical to have somebody that understands the risk to manage your IT assets in all areas. The average security breach costs $3.5 million to repair and recover.

Shares rallied after they reported earnings on January 26th of 37 cents that rose +9% and beat estimates. They reported revenue of $222.5 million. They guided for the current quarter for earnings in a range of 25-30 cents and revenue of $220 million.

The company declared an 11-cent dividend payable April 14th to holders on March 31st. The company also increased the share buyback program by 1 million shares with $7 million to be purchased in March.

BBOX shares are undervalued to their peers by about 50%. The price to book multiple is .68 compared to the peer average of 2.06. They trade at a negative PE of -1.73.

This is a simple play. BBOX rallied from $8 to $13 in the days following earnings. Shares have plateaued at the $13.50 level with a slight upward trajectory. Recent intraday highs over the last two weeks have been from $13.85 to $14.11. When an eventual breakout occurs we could see a spike to $2-$3 as shorts cover and others add to their positions.

I am recommending we buy BBOX shares with a trade at $14.25 and target $16.25 for an exit.

Earnings are May 5th.

Position 3/18/6 with a BBOX trade at $14.25

Stopped 3/24/16: Long BBOX shares @ $14.25, exit $13,35, -.90 loss.

CDW - CDW Corp - Company Profile


Dropped back to support at $40 at the open and stopped us out for a minor gain.

Original Trade Description: February 29th.

CDW distributes IT solutions in the U.S. and Canada through its website CDW.com. They offer hardware and software products to integrated IT solutions including mobile, security, data center optimization, cloud computing, virtualization and collaboration. They offer a full line of IT products of every size, shape, brand, model and configuration. They also offer customization, installation, warranty and repair services as well as infrastructure as a service. This is the IT distributor for the home office, company datacenter or the datacenter as a service for those companies that do not have an extensive IT staff.

CDW has more than 250,000 corporate customers and 1,000 supply partners.

They reported Q4 earnings of 73 cents that rose +23% and matched estimates on revenue that rose +12.1% to $3.42 billion, which beat estimates slightly. For the full year they earned $2.35 on revenue of $12.99 billion.

They also announced a quarterly dividend of 10.75 cents to be paid on March 10th to holders on Feb 25th.

Shares rebounded from the earnings and are trading at $39.50. CDW has a very clear relationship with moving averages, especially the 200-day and the 300-day. Every break of either average has resulted in a significant move. On Monday CDW closed 9 cents above the resistance of the 200-day after trading between the 200-300 for the last two weeks. A breakout over that 200-day should target the $43 level if not higher.

CDW shares posted a 77-cent gain today in a weak market.

The high today was $39.76 and I am going to use an entry trigger at $39.85. That will mean the option price could be a little higher than expected since I am using the $40 strike. The $45 strike is too far away and has no open interest.

Position 3/1/16 with a CDW trade at $39.85

Stopped 3/24/16: Long CDW shares @ $39.85, exit $40.35, +.50 gain


Stopped 3/24/16: Long Apr $40 call @ $1.50, exit $1.67, +.17 gain.

DRII - Diamond Resorts Intl - Company Profile


No specific news.

Original Trade Description: March 10th.

Diamond Resorts is rumored to be planning to take itself private in a leveraged buyout as the result of a previously announced strategic review. Analysts are expecting a deal price in the $32-$35 range. The company has a network of 375 vacation destinations in 35 countries. The firm hired Centerview Partners to evaluate all strategic alternatives after two major shareholders requested the board take action including an outright sale. Marriott Vacations Worldwide and Wyndham Worldwide could be suitors. More than 23% of DRII shares are sold short.

The company recently announced its 10th straight quarter of record financial performance and issued guidance for 2016 calling for another record year. Despite the record performance the share price had declined -25% in 2016. Apparently, this caused two large shareholders to turn up the heat and tell the company to get something done to increase the share price.

Starwood Hotels recently sold its timeshare business to Interval Leisure Group for $1.5 billion or 12 times trailing Ebitda. Diamond Resorts is only trading at 9.5 times with a forward multiple of 6.2 times or significantly undervalued to the Starwood sale. This suggests someone could pay $30 for Diamond and still be accretive to earnings in 2016 without accounting for synergies.

The Diamond CEO is also the founder and he owns 25% of the company. That suggests a LBO might be the most likely option so he can keep his stake.

Earnings May 25th.

Position 3/10/16 with a DRII trade at $24.25

Long DRII shares @ $24.25, see portfolio graphic for stop loss.

No option recommended because of wide spreads and high prices.

FTNT - Fortinet Inc - Company Profile


FTNT dropped back to support at $28 this morning and immediately rebounded back to resistance. I lowered the entry trigger to $28.75.

The position remains unopened until FTNT trades at $28.75.

Original Trade Description: March 22nd.

Fortinet provides cyber security solutions for enterprises, service providers and government organizations worldwide. They offer FortiGate physical and virtual appliance products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, web filtering, anti-spam, and wide area network accelerations.

Essentially they provide an enterprise level roadblock or firewall between the Internet and the organizations internal network and servers. If you can block the attacks at the primary entry into the network then the attackers cannot run rampant inside the network.

A couple weeks ago Fortinet signed a cyber security partnership agreement with NATO. We all realize NATO is facing cyber attacks all across Europe and the organization is a major target. Fortinet will help improve the cyber defense for the entire network. Implementing the Fortinet devices will raise awareness of the cyber threats to the network and allow early detection and elimination.

Fortinet has more than 210,000 enterprise customers worldwide including some of the largest and most complex organizations, corporations and governmental agencies.

This will be a short-term play because earnings are April 18th.

Shares are trying to break over resistance at $30 with the high at $30.36 today before the market rolled over.

With a FTNT trade at $28.75

Buy FTNT shares, currently $28.53, initial stop loss $27.65.


Buy May $31 call, currently $1.30. Initial stop loss $27.65.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news.

Original Trade Description: March 14th.

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.

HPE reported adjusted Q4 earnings of 41 cents compared to estimates for 40 cents. Revenue of $12.72 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.68 billion.

CEO Meg Whitman said, "We saw the progress that comes from being more focused and nimble. We delivered a third-consecutive quarter of year-over-year constant currency revenue growth, and excluding the impact of recent M&A activity, we saw revenue growth in constant currency across every business segment for the first time since 2010."

For the current quarter HPE guided to earnings of 39-43 cents. For the full year they expect $1.85-$1.95 and that was more than analysts expected at $1.87.

Earnings are boring. The really good news came from the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. Last year they returned $1.3 billion to shareholders in the form of dividends and share buybacks. In 2016 HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

In May they expect to close their previously announced deal with China's Tsinghua and that will provide an additional $2 billion in cash that HPE said it would use to repurchase shares.

This means over the next couple of months we should see significant share activity as fund position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016.

Earnings June 2nd.

HPE shares have shaken off their post spinoff weakness and are now trading at a four-month high. I am recommending we buy this stock in anticipation of investors moving in ahead of future dividends and buybacks. I am not recommending an option because they are too expensive.

Position 3/15/16:

Long HPE shares @ $16.36, see portfolio graphic for stop loss.

SGI - Silicon Graphics Intl - Company Profile


Sharp drop below support to $6.19 and stopped us out at $6.30 for a minor gain.

Original Trade Description: February 19th

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

Position 2/26/16 with SGI trade at $6.05

Stopped 3/24/16: Long SGI shares @ $6.05, exit $6.30, +.25 gain.

TRN - Trinity Industries - Company Profile


No specific news.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings May 30th.

Position 3/21/16:

Long TRN shares @ $19.15, initial stop loss $17.50


Long July $20 call @ $1.50, no stop loss. Plan to keep it until June even if we are stopped out of the TRN shares.

WIN - Windstream Holdings - Company Profile


No specific news. Maintain that $7.10 stop and hopefully a rebound will appear.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Position 3/11/16

Long WIN shares @ $8.22, initial stop loss $7.10


Long August $9.00 call @ .40 cents. NO STOP LOSS

BEARISH Play Updates

DEPO - Depomed - Company Profile


New intraday low at the open. We are probably going to be stopped out at the open on Monday. After the close on Thursday a Federal Appeals Court affirmed their patents after the company sued Purdue University for infringement. Shares traded up to $14.24 in afterhours. Maintain the stop loss at $14.25.

Original Trade Description: March 21st

Depomed is a specialty pharmaceutical company engaged in the development, sale and licensing of products for pain and other central nervous system conditions in the USA.

The company reported adjusted earnings of 16 cents that missed estimates of 35 by a mile. Revenue of $111.2 million also missed estimates for $114 million. For the full year the company reported a loss of $1.26 per share or $75.7 million.

In late February the company reported the results of a 635 patient trial of pain drug GRT6005. While pain was reduced there were low levels of severe adverse events that were more frequent on higher doses of the drug. Shares declined on the news.

Shares have been trending lower since the 29th. There was a moderate short squeeze on the 11th that corresponded with a short squeeze in the entire biotech sector. Shares immediately rolled over and moved to new lows as soon as the sector index rolled over.

News flow has been very sparse on Depomed in March and shares are accelerating to the downside.

Earnings are May 10th.

Position 3/22/16 with DEPO opening trade at $13.11

Short DEPO shares @ $13.11, initial stop loss $14.25

No option recommendation because of wide spreads.

EGHT - 8X8 Inc - Company Profile


Minor gain after a large intraday spike faded.

Original Trade Description: March 16th

8X8 provides voice over internet protocol (VOIP) technology and software as a service (SaaS) communication solutions in the cloud for small and medium businesses and mid-market enterprises. They offer VOIP to in office subscribers, mobile devices, a virtual contact center and virtual meeting across its SaaS platform.

They reported Q4 earnings of 5 cents compared to estimates for 3 cents. Revenue of $53.2 million also meat estimates for $52 million. This is not a widely followed stock and the post earnings bounce was brief.

The stock rallied on an earnings beat in October and spent all of Q4 and early Q1 in the $11 range. Those gains are fading. Shares closed at $9.90 on Wednesday in a positive market. Shares appear poised to give back all those October gains and decline to $8.00.

This is a technical trade rather than something bearish in their business model or results. The company is simply not generating any excitement and investors are selling.

Earnings are May 18th.

Insiders have been net sellers over the last six months and institutions have sold nearly 8 million shares in the last quarter for a 16% drop in fund ownership. I am recommending we short the stock under today's low of $9.87 and target $8.25 for an exit. No options because of distance from a strike.

Position 3/17/16 with a EGHT trade at $9.80

Short EGHT shares @ $9.80, initial stop loss $10.25.

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