Option Investor

Daily Newsletter, Monday, 4/4/2016

Table of Contents

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

Market Wrap

Equities Struggle

by Thomas Hughes

Click here to email Thomas Hughes


The equities market struggle for gains amid data, the Fed, the start of a new quarter and the onset of another earnings cycle. Last week's surge to 2016 highs, driven by a somewhat strong jobs report, did not see follow through today as a number of factors combined to weigh on sentiment. New economic data in the form of factory orders seems to point to ongoing weakness in the manufacturing sector and support a less aggressive rate hike timeline while comments from Fed president Rosengren seem to contradict that thought; according to him the market is miss-pricing the trajectory of rate hikes.

International markets were mixed. Japan's Nikkei was the largest decliner on the day, falling more than -0.25% on a strengthening yen despite the surge in dollar value we saw last Friday. New data shows that businesses are not confident the BOJ's use of negative rates will spur the economy and inflation. Chinese markets were closed due a holiday and will reopen tomorrow.

European indices ended the day positive, but well off the highs of the day. Early euphoria, likely driven by strong US labor data, was hindered by volatility in the oil markets and leaked documents suggesting that the IMF would try to push Greece into defaulting on bail-out terms.

Market Statistics

Futures trading was very light in the early part of the session, indicating a flat open for the major US indices. There was little to move the market in the pre-opening session so futures held steady up to and into the opening bell. After the open indices moved lower by a few tenths of a point until finding some support around 9:45AM and reversing the initial losses. By 10:15AM the indices had moved into positive territory, and reached the highs of the morning, at which time sellers stepped back into the market and drove them back to the initial low and then lower.

Another bottom was reached by 11:15AM, resulting in another bounce and move up to retest for resistance near break even levels. The bounce did not last long; falling oil prices, weak data, Rosengren's comments and concerns over the upcoming earnings cycle all helped to drive the indices back to the earlier lows and lower. However, even with the late day selling the indices only shed about a half percent on average and are holding very near to the highs set on Friday.

Economic Calendar

The Economy

Not much in the way of official economic data today and what we did get is fairly old. The final report on February factory orders showed a -1.7% decline, in line with expectations and erasing the +1.2% gain reported for January. Within the report shipments, unfilled orders, inventory and new orders all declined.

Moody's Survey of Business Confidence gained 0.5 to hit 31.2 in this week's report, the highest level since January. According to Mr. Zandi's commentary the survey shows business confidence is firming following the slump we saw at the end of last year/beginning of this year. Responses to all 9 of the questions asked by the survey are improving and many of the respondents say they see conditions on the mend. Despite the gains however sentiment remains low relative to last years peak, the data barely showing reversal.

According to data from FactSet the blended rate of earnings growth for the S&P 500 in the 1st quarter of 2016 is now -8.5%. This is slightly better than the -8.7% reported last week but still near the low of the cycle. So far 15 companies have reported, 13 have beaten earnings expectations and 9 have beaten revenue expectations; 7 are expected to report this week. On a sector by sector basis the telecoms are expected to lead with growth of 13.1%, followed by 10% among the consumer discretionary sector, while energy remains the laggard with expected earnings growth decline of -101.8%. Alcoa officially kicks off the season next Monday.

Looking forward nearer term expectations continue to decline but there is a brightening of sentiment the farther out you go. Projections for the 2nd and 3rd quarters all fell this week while those for the 4th quarter saw a noteworthy increase. Estimates are now -2.5%, 3.7% and 11% respectively, the 4th quarter upgraded by 2%. Full year 2016 expectations also fell, dropping two tenths to -2.2%, and full year 2017 expectations remain steady at 13.4%.

There is not much data due out the rest of the week either. Tomorrow we'll get Trade Balance and ISM Services, Wednesday is the FOMC minutes, Thursday is Consumer Credit and weekly Jobless Claims with Wholesale Inventories rounding out the week on Friday.

The Oil Index

Oil prices were volatile again today. Early action had prices down by about -1.25%, followed by a spike to about +1.25%, followed by a late day decline to -2.75% (at settlement) and then to -3.5% in after hours trading. Hope that oil producers will reach some agreement about capping production is still lending support but with the Saudi's now saying they won't agree unless Iran and other do as well the supply/demand picture is likely to take over. Supply, production and storage remain high and above demand levels so without additional catalyst a return to retest support near $35 or lower is very possible.

The Oil Index fell about -0.9% in today's action. The index is sitting on support levels near 1050 and the short term moving average and looks like it will continue, if not break through. The indicators are pointing lower, with bearish momentum on the rise, with nothing to provide support should oil prices continue to fall. A break below 1050 could take the index to 1015 or lower provided no bullish news/rumors hit the market. The risk remains with global producers, and in particular those countries who rely on oil for their budgets, any one of them could make a statement that may prop up prices regardless of fundamentals or reality.

The Gold Index

Gold prices held fairly steady today around $1220. Spot prices fell last week after the NFP report which increased the chances of a rate hike despite comments from Yellen earlier in the week. Today's data helped to alleviate some of that concern, weakening the dollar a bit, but did not provide enough support to send gold prices higher. This week there is little in the way of data to move gold but the FOMC minutes on Wednesday could do it; a hawkish tone could send gold lower, a dovish tone higher.

The gold miners continue to consolidate near recent highs despite today's weakness in gold. The miners ETF GDX fell about -2.9% but found support above $19.50 along the short term moving average. The indicators continue to weaken but with the ETF consolidating at relative high levels this appears to be setting up for another move higher rather than for correction. Over the past two weeks the 30 day EMA has been providing support, this may continue, however a break of this support would find next support near $19, a break below $19 could be bearish for the near to short term. Resistance is near $21.

In The News, Story Stocks and Earnings

The dollar moved lower on today's economic data. Data shows that the manufacturing economy is still struggling and helped to alleviate rate hike fears stirred up by the NFP. The Dollar Index fell about a tenth of a percent to close at a near 6 month low. The index is now sitting on potential support, near $94.25, with hints of confirmation from the indicators. Both MACD and stochastic are diverging from this low although there is no guarantee this is the bottom. This week the FOMC minutes could affect forward looking sentiment, as will CPI and PPI data next week. Regardless, the dollar is -6% below the December high and trading near the bottom of the 2 year range which should take some pressure off of companies whose earnings are suffering from currency conversion.

Alaska Airlines announced this morning that it would be buying Virgin America. The deal is worth about $2.6 billion, $57 per share, in cash and creates an airline with 280 aircraft servicing from hubs located in LA, San Francisco, Seattle, Portland and Anchorage. The deal was unanimously approved by both boards, the CEO of Virgin America was pleased with the deal but Richard Branson made a statement to the effect he tried to stop the deal. Shares of Alaska Airlines fell a little more than -4%.

Tesla announced more than a quarter million pre-orders for its yet to be released Model 3. The model is Tesla's mass market vehicle with a price tag in the range of $30K to $40K. Each registered pre-order comes with a refundable $1000 deposit. The demand for the model is so strong that now the speculation is whether or not Tesla will be able to produce the cars in a timely manner, first shipments are not expected until late next year. Shares of Tesla jumped more than 5% on the news and traded 11% off the all-time high. . . until after the bell and Q1 deliveries were announced. The company announced delivery of 14,820 vehicles, shy of expectations, sending the stock down in after hours trading.

The Indices

The indices basically held flat in today's trading. News and data gave reason for pause but not so much for full blown reversal. Today's leader was the Dow Jones Transportation Average which fell about -0.9%, more than double the other indices. Price action brought the index down to support just above the short term moving average, a support level that could prove to be fairly strong as it is also coincident with a previous support line near 7,800. The indicators have rolled over into a bearish signal so support is likely to be reached and tested as we move into earnings season next week. Earnings for this cycle are likely to be lack luster at best, it will be the forward guidance I think that provides catalyst for the index to move higher or lower.

The next largest decliner in today's session was the NASDAQ Composite. The tech heavy index did not get much help from Tesla's big move, dropping to near term support level near 4,890. The index has been riding high on a wave of momentum that may have run its course. It is now within a potentially strong resistance zone between 4,890 and 5,000, with weakening indicators. The indicators remain bullish but have been diverging from the new highs for at least two weeks, a sign of growing weakness in the market. These divergences may simply be a sign of a quieting market, ahead of earnings season, but may also indicate a growing possibility of correction with earnings season as catalyst.

The next largest decliner was the S&P 500 with a drop of -0.32%. The broad market created a small bodied candle, more of a spinning top than anything else, that closed near the low of the day. The indicators are bullish but like with the NASDAQ are showing divergences that may indicate a growing weakness in the market. The wave of momentum that has brought the index to current levels is petering out and with a weak earnings season on tap there is little reason to expect it or the market to move much higher, unless of course earnings are much better than expected. If it continues higher next target for strong resistance is near 2,100, first target for support is near 2,050.

The smallest drop was posted by the Dow Jones Industrial Average, about -0.31%. The blue chips created a small bodied white candle that, like the other indices, appears to be approaching the end of a run. The indicators here too remain bullish but are showing divergences from the rally indicative of slowing momentum and a weakening market. This could lead to a period of consolidation as easily as a correction but will be dependent on earnings. Near term support is between 17,500 and 17,650 with next target for resistance near 18,000.

Today's action was very mild, especially when considering the amount of volatility that a -3.5% in drop in oil would have caused only a month ago. The rally from January/February lows is not over yet, although there is reason to suspect the end may be near, but it is also not time to begin entering new bullish positions. This week may see the indices continue their march higher, with a possible test of resistance at or near precious long term/all-time highs. The FOMC minutes on Wednesday is a possible catalyst for such a move but with the earnings season set to start next week I am very leery of just how high the market can go before profit taking, re-positioning or outright selling begins to set in.

This earnings season is not likely to be very good. S&P 500 companies will have to blow away the projections to even post a 0% gain over the last quarter and that is far from likely. The best we can hope for is that businesses and analysts will start to be a little more upbeat about forward earnings. That being said I think we may be in for another earnings driven decline in the indices, but one that will set us up for a strong rally into the end of the year as the broader market returns to earnings growth.

I remain bullish for the long term, cautious in the near, waiting for the next entry.

Until then, remember the trend!

Thomas Hughes

New Plays

I Am Here to Help

by Jim Brown

Click here to email Jim Brown
Editor's Note

I am from the government and I am here to help. That was the news after the close today. The Treasury Dept announced some new rules to prevent tax inversion acquisitions. Supposedly they were targeted at "serial inverters" but that was a politically correct way of enacting new regulations so the public at large would think they were doing us a favor.

Unfortunately the news knocked $60 off Allergan shares and put a cloud over the market in afterhours. The S&P futures dropped to -7.50 as I am typing this.

With the market weak on Monday and now this cloud over equities, the outlook for Tuesday is starting off negative. I could not find any good shorts to recommend today and normally recommending shorts in a down market has the opposite reaction. Weak stocks are bought on down days as already beaten up.

I am recommending we stand aside on Tuesday and see what the market gives us.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Russell Falling

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 lost more than 1% on Monday with the big cap indexes down only 0.3%. In the last newsletter, I pointed out that the Russell was on the verge of a breakout but struggling. Today's decline was three times the loss of the big cap indexes and knocked it back to support.

The biotech sector was the only sector positive today and that should have helped the Russell but there was no evidence of that help.

The overall market rally is looking weaker as each day passes. Since the big cap indexes were up against resistance this was not unexpected.

There was news from Washington after the close with the Treasury Dept implementing rules to impact inversion deals. Several stocks with inversions in progress were down hard in afterhours. Allergan (AGN) lost -$60. This is pressuring the S&P futures, which are down -5 points as I type these comments.

Current Portfolio

Current Position Changes

AMLP - Alerian MLP ETF

The position was closed at the open at $10.58.

FGEN - Fibrogen

The position was opened with a trade at $21.75. <

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


The position was closed at the open on Monday. It was a good thing since oil prices continued lower and could return to $30.

Prior Weekend Update: After the news from Saudi Arabia and the Middle East on Friday, I am giving up on AMLP. While I have no doubt that it will rise long term it may be REALLY long term and I want to use the capital in some other play. I am recommending we close the position.

The Saudi Arabian oil minister said they would not be a part of the production freeze to be discussed in Doha Qatar on April 17th unless everyone was part of it. Since Iran, Libya, Nigeria and even the UAE have said they would not cap production that killed the potential agreement. They may continue to talk about a potential agreement in hopes of keeping prices from crashing but there will not be any positive impact on production.

Saudi Arabia said they were planning annual production increases through 2020. The UAE is raising production by 400,000 bpd by the end of 2017. Iran is adding 1.0 mbpd by the end of 2017. Libya is expected to add 400,000 bpd by the end of 2017. Oil prices may remain lower for longer than anyone thought.

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:

Closed 4/4/16: Long AMLP shares @ $10.40, exit $10.58, +.18 gain


Closed 4/4/16: Long July $12 call, entry .55, exit .30, -.25 loss.

DDD - 3-D Systems Corp - Company Profile


3D posted nearly a 5% gain after the company named former HP executive as CEO effective immediately. Vyomesh Joshi formerly led HP's printing division. This was a good acquisition by 3D.

Original Trade Description: March 29th.

3D Systems provides 3D printing products and services worldwide. The printers use input from 3D design software, CAD software and other design tools using a range of print materials including plastic, metal, nylon, rubber, wax and composite materials.

3D crashed and burned after a couple of horrific earnings reports in 2015 and shares declined from $33 to $7 at the January lows. The entire sector saw a reset of stock prices and expectations.

For Q4 3D posted earnings of 16 cents that blew away estimates for 3 cents. 3D is the industry leader and appears to be roaring out of the darkness that enveloped the sector in 2015. Three-dimensional printing revenues are expected to grow from $3.07 billion annually in 2013 to $12.8 billion in 2018 and $21 billion by 2020 with a consolidated average growth rate of 34%.

On Monday 3D Systems announced several new software products that overcome prior limitations weighing on all printer companies. The product suite called Geomagic Freeform has multiple products that will power a jump forward in the 3D technology capability and greatly reduce the time needed to go from concept to printed article.

Under Armour (UA) just announced it used 3D Systems selective laser-sintering technology to produce the UA Architech shoe. This is the world's first performance training shoe with a 3D-printed midsole that is available to the general consumer market. Under Armour plans to release an entire line of 3D printed shoes in 2016. Late last year New Balance also partnered with 3D to make a commercially available running shoe with a 3D-printed midsole.

DDD shares are rallying on the multiple announcements and the appearance that all is well in 3D land. Resistance is $15.45.

Earnings are May 5th.

Position 3/30/16 with a DDD trade at $15.60

Long DDD shares @ $15.60, See portfolio graphic for stop loss.

Long May $17 call @ $1.05, See portfolio graphic for stop loss.

DRII - Diamond Resorts Intl - Company Profile


No specific news. Rally appears to be fading. I will give it one more day and then close if it does not recover.

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.

FGEN - Fibrogen - Company Profile


The position was opened this morning with a trade at $21.75. Shares faded with the market decline after the opening spike.

Original Trade Description: April 2nd.

FibroGen is a research-based pharmaceutical company that discovers, develops and commercializes therapeutic agents to treat serious unmet medical needs. They have multiple drugs in the pipeline and they have collaboration agreements with Astellas Pharma and AstraZenaca (AZN).

Some of the drugs in process include roxadustat, or FG-4592, an oral small molecule inhibitor of hypoxia inducible factor prolyl hydroxylases (HIF-PHs) that is in Phase III clinical development for the treatment of anemia in chronic kidney disease; FG-3019, a monoclonal antibody in Phase II clinical development for the treatment of idiopathic pulmonary fibrosis, pancreatic cancer, and liver fibrosis; and FG-5200 for the treatment of corneal blindness resulting from partial thickness corneal damage.

Fibrogen and its partners are currently conducting seven Phase 3 trials on roxadustat for registration in the US, EU, China and other countries. A Phase 2 study for FG-3019 is underway on patients with inoperable Stage 3 pancreatic cancer. The company has completed funding its portion of research on roxadustat and AstraZenaca and Astellas are responsible for all further expenses until the drug is approved. This reduces significantly the drain on cash from Fibrogen. Cash on hand at the end of the quarter was $337 million. Fibrogen has multiple pathways to success with the multiple drugs in progress.

Earnings are May 10th.

Shares plunged on January 1st with the biotech sector and have traced almost exactly the same chart pattern as the Biotech Index. Friday's close on FGEN was a two-month high. Resistance at $21 appears to be breaking.

I am recommending we buy FGEN shares on a move over Friday's high. Once over that level there is limited resistance until the $30 range.

Position 4/4/16 with a FGEN trade at $21.75

Long FGEN shares @ $21.75, initial stop loss $18.00.

The stop will be raised promptly on further gains.

No options due to wide spreads.

FTNT - Fortinet Inc - Company Profile


Dead flat for the day with no gain or loss. That is an interesting way to avoid a weak market. No news.

Close the position with a FTNT trade at $32.10.

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.

Position 3/29/16 with a FTNT trade at $28.75

Long FTNT shares @ 28.75, see portfolio graphic for stop loss.


Long May $31 call @ $1.10, see portfolio graphic for stop loss.

HPE - Hewlett Packard Enterprise - Company Profile


HPE gave back about half of the Friday gains. They announced the sale of their interest in Mphasis to Blackstone for $825 million. This is the Indian subsidiary HPE acquired from EDS in 2008.

Don't forget there is $2 billion in dividends and buybacks coming in June.

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.

KS - KapStone Paper - Company Profile


No move, no 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.

Position 3/28/16:

Long KS shares @ $13.15, see portfolio graphic for stop loss.

No option because of wide strikes.

SPXC - SPX Corporation - Company Profile


No move, no news.

Original Trade Description: March 30th

SPX provides specialized heating, ventilation and air conditioning (HVAC) solutions worldwide. They also provide instrumentation, detection and measurement for industrial markets. They offer detection and inspection equipment for underground pipes and cables, specialty lighting products, communications technologies and bus fare collection systems. Their power segment provides all types of equipment and technology for the power generation, transmission and distribution market.

As part of a companywide restructuring process in December they agreed to sell their dry-cooling tower business. On the Q4 conference call they also announced plans to sell portions of the power division. They hired an outside advisor to provide strategic alternatives as they sell off the low margin and poorly performing portions of the business. They spun off the flow food and power portion into a new company SPX Flow (FLOW) in September.

They reported earnings of 52 cents that missed estimates of 57 cents. However, shares rebounded on the news of the various restructuring efforts. Shares rallied to resistance at $14.85 at the close today. A break over that resistance could hit $17 in the days ahead.

Earnings are May 26th.

Position 3/31/16 with a trade at $15.05

Long SPXC shares @15.05, see portfolio graphic for stop loss.

No options because of wide spreads.

TRN - Trinity Industries - Company Profile


No specific news. Declining on falling oil prices. Could be stopped out tomorrow.

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, see portfolio graphic for stop loss.


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


Windstream announced 1 gigabit internet in four markets. At this speed you can download a HD movie in 7 seconds. Shares posted a minor gain in a weak market. No stop loss on the option.

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

Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.

BEARISH Play Updates

GPRO - GoPro - Company Profile


Support at $11.50 still holding. Minor gain in a weak market. Maintain the stop loss at $12.55.

Original Trade Description: March 28th

GoPro develops hardware and software solutions associated with capturing, managing, sharing and enjoying engaging video content. Basically they make action cameras and had the market cornered for several years. That is no longer the case.

Analysts expect GoPro sales to decline -16% in 2016 compared to 15% growth in 2015 and 41% growth in 2014. The company has made numerous mistakes in execution and competitors caught up with them and some have passed GoPro in technology. The company expects to fix their sagging sales by discontinuing three cheaper models in 2016 and introduce the new Hero 5 camera sometime this year. They will also release the Karma drone and the Omni VR rig later this summer.

However, Kodak, Nikon, Ricoh, Nokia and 360Fly have already launched similar devices at cheaper prices than GoPro normally charges. Analysts claim the streamlined cameras from those manufacturers make GoPro cameras look bulky and clumsy. Nokia is selling an 8 camera VR device for $60,000 to professional filmmakers. GoPro is trying to market a 16 camera setup for $15,000 but the software is clunky and hard to use.

The bottom line here is that GoPro had the lead spot in the market and is in danger of losing it to major, well-funded competitors. Secondly, many analysts say the action camera market has become saturated and anyone that wanted one now has one.

Shares fell 7% today on the Nokia VR news. The closed at $11.50 with support at $10. That looks like a done deal given the choppy market and the downward trajectory on GoPro shares. With competition mounting, I would not be surprised to see GoPro set a new low.

Earnings are April 28th.

Position 3/29/16 with a GPRO trade at $11.40

Short GPRO shares @ $11.40, see portfolio graphic for stop loss.


Long May $11 put @ $1.17, see portfolio graphic for stop loss.

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