Investors must be comatose after gorging on pounds of Easter eggs over the weekend. Volume was very low. This was one of those days where we needed a couple extra cups of coffee to stay awake while watching the charts. With the S&P moving a point an hour and each hour in the opposite direction, it was like watching grass grow.
Investors are waiting on a catalyst and I am not sure they will like one when it appears. Janet Yellen will speak at 11:30 on Tuesday and the ADP Employment will be out on Wednesday. The Nonfarm Payrolls will be out on Friday. Low numbers are good, as long as they are not too low. March has a bad history of missing estimates by a wide margin of about 69,000 jobs. A super strong report would be market negative because it would put the Fed back into play for April.
The Dow posted a minor 20-point gain, which is almost invisible on the chart with the day's range only 90 points. The lack of a continued rebound after Thursday's intraday bounce is technically negative. Keep your fingers crossed Janet Yellen has her dove dress on tomorrow.
Current Position Changes
FTNT - Fortinet
The long position remains unopened until FTNT trades at $28.75.
KS - KapStone paper
The long position was entered at the open with a trade at $13.15.
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.
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.
Long AMLP shares @ $10.40. No stop loss.
Long July $12 call, entry 55 cents. No stop loss.
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 again this morning. The high in the afternoon was $28.74 and one penny below our entry trigger.
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.
Long HPE shares @ $16.36, see portfolio graphic for stop loss.
KS - KapStone Paper - Company Profile
No specific news.
Original Trade Description: March 26th.
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.
Long KS shares @ $13.15, initial stop loss $11.30
No option because of wide strikes.
TRN - Trinity Industries - Company Profile
No specific news. Low only 11 cents above the stop before shares rebounded.
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.
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 loss.
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.
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
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. That failed to carry over into today's trading with the high at $13.56. Shares are flirting with a new closing low.
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
No movement in either direction but every spike is quickly sold.
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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