Option Investor

Daily Newsletter, Tuesday, 4/5/2016

Table of Contents

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

Market Wrap

Welcome to April

by Jim Brown

Click here to email Jim Brown

In the weekend commentary, I spoke about the lack of a catalyst to power the market out of its dormant phase. Who knew the Treasury Dept would provide that event.

Market Statistics

In case you have not heard, the Treasury Department took specific aim at a "serial inverter" and said it was implementing rules to prevent these types of transactions. An inversion is when a U.S. company buys a foreign company and then announces it will move its corporate headquarters to that other country while much of its operations remain in the USA. Typically, the other country has a much lower tax rate.

The target of the new rules was the $160 billion Pfizer (PFE) acquisition of Allergan (AGN). One of the new rules requires the overseas company to be of a certain size relative to the U.S. company. Allergan has been a serial acquirer. Actavis bought Warner Chilcott in 2013 for $5 billion. In 2014 Actavis bought Forest Labs for $25 billion. In 2015 Actavis bought Allergan for $66 billion and then changed the name of the company to Allergan. That combination of moves lifted Allergan's market cap to roughly $120 billion. Pfizers CEO has been working for several years to find a merger partner overseas that would qualify under the inversion strategy because Pfizer pays billions in taxes every year since the U.S. has the highest tax rate of any industrialized country. After Allergan bulked up to qualify for a deal, Pfizer and Allergan announced their merger. They specifically crafted the merger to fit under the inversion rules in effect at the time.

A new Treasury Dept rule they announced on Monday requires a three year look back provision to prevent this "bulking up" to qualify for an inversion. That means Allergan cannot count the market cap they gained in the Forest Labs or Allergan acquisitions in qualifying for an inversion until the three-year window expires at the end of 2018.

I am all for passing laws that make it advantageous to keep companies in the U.S. and paying taxes. However, I am against passing laws that target specific companies in order to prevent that company from moving. If you want to keep companies in the U.S., it needs to be a restructuring of the tax rate for everyone rather than using the power of the government to attack an individual company. This is what soured the market. Investors do not like government interference, especially targeted attacks.

Reportedly Pfizer and Allergan are about to announce the cancellation of their merger. There is a $400 million breakup fee to be paid by the party that terminates the transaction but given the circumstances that could be modified.

Hedge funds were big holders of Allergan shares and they had a bad day. Viking, Elliott, Third Point, Blue Ridge Capital and Paulson & Co were all big holders.

Allergan shares fell -15% on the news to $235 and Pfizer shares rallied +2.5%.

Dow component Disney (DIS) was also impacting the Dow with a -2% decline after COO Tom Staggs, the heir apparent to CEO Bob Iger, said he was leaving the company in May. Iger was planning on leaving in 2018 and now analysts believe he will stay until 2020 to give the board time to groom a new succession candidate. Staggs had been the assumed replacement for several years. For the board to suddenly dump Staggs caused a wave of confusion among analysts and sharp drop in Disney shares.

Ford Motors (F) also created a cloud over the market with news they were going to build a $1.6 billion manufacturing plant in Mexico. Normally this could not be a big deal since the passage of NAFTA has seen dozens if not hundreds of companies move operations to Mexico where wages are closer to $2.50 an hour instead of $25 an hour in the U.S. manufacturing sector. However, in the current political climate the announcement was a lightning rod for candidates and Trump wasted no time warning this would not happen if he were president. Analysts immediately wondered if the current administration would suddenly change the laws to target Ford's plan like they did with the Pfizer/Allergan plan.

To be fair, Ford is not moving a plant to Mexico. They are building a completely new plant to produce small cars that can be exported all over the world. Cars produced in the U.S. cannot be exported to a lot of companies because of trade laws. For instance, U.S. cars cannot be exported to Brazil and that is a rapidly expanding market. Mexico has more favorable export laws and trade agreements than the USA and cars can be exported from Mexico to most other countries.

Those facts did not ease the worry over the potential for new regulations in the current environment. Mexico had refrained from announcing or discussing the new plant in order to avoid being in the campaign spotlight. News leaked out and Ford finally announced the plans.

On the economic front, our friends overseas were not helping. IMF's managing director, Christine Lagarde, warned this morning that "the global recovery was too slow, too fragile and the risks to its durability are increasing." While she did not say anything new, the comments acted to depress the European markets and that depression carried over into the U.S. markets. The IMF cut its global growth outlook for 2016 to 3.4% in January and her comments today suggest there is another downgrade ahead. She warned "the global outlook has weakened further over the last six months, exacerbated by the slowdown in China, lower commodity prices and the prospect of financial tightening for many countries." "In the euro area low investment, high unemployment and weak balance sheets weigh on growth. In Japan, both growth and inflation are weaker than expected." Longstanding "crisis legacies" including high debt, low inflation, low investment, low productivity, and, for some, high unemployment, posed a risk for advanced economies. Emerging economies meanwhile were at risk from lower commodity prices, higher corporate debt and volatile capital flows."

In the U.S., the ISM Nonmanufacturing Index rose slightly from 53.4 to 54.5 and ahead of consensus estimates for 54.0. New orders rose from 55.5 to 56.7 but backorders were flat at 52.0. The employment component increased slightly from 49.7 to 50.3.

Overall, the report was slightly improved but it would be hard to class it as bullish. The gain on the headline number was only the second gain in the last eight months. The component with the biggest gain was exports with a jump from 53.5 to 58.5. That was a real plus because it means the impact of the strong dollar may be fading. Ten industries reported improving conditions while only three reported declining conditions.

The International Trade numbers were worse than expected. The February deficit rose to -$47.1 billion compared to -$45.7 billion in January. Analysts were expecting -$46.2 billion. Exports rose +1% with consumer goods rising +6.7%. However, that barely erased the -5% decline from January. Imports rose +1.3% with consumer goods also leading at +7.5%. Oil imports declined -6% to 275 million barrels.

Moody's Chart

The Atlanta Fed GDPNow real time GDP forecast for Q1 declined from 0.7% to 0.4% growth. Slowing vehicle sales and a decline in consumer spending weighed on the outlook. With a month to go before the March data is reported we could end up with a no growth quarter. The Fed is not going to raise rates in April with the GDP forecast so low.

The economic news for Wednesday is headlined by the FOMC minutes for the March meeting. Given the Christine Lagarde comments today and the six Fed heads over the last week talking about raising rates sooner rather than later, this will be an important insight as to how the meeting went and what to expect in April.

The Fed roundtable discussion after the close on Thursday with Yellen, Bernanke, Greenspan and Volcker is going to be the focus on Thursday and could provide a seriously directional market on Friday depending on what is said and how it is reported.

Crude prices started the day off weak at $35.30 and then improved on comments from a Kuwait official suggesting the production freeze agreement would still be implemented without Iran joining the party. Whether that will actually happen or the deal self-destruct before the April 17th meeting is still in doubt. Regardless, it will have no impact on the actual production and the current glut of oil.

Midday there was a report of an explosion at an Iraqi oil well and prices rose again. Later it was learned that the well was a mothballed natural gas well and had no impact on Iraqi oil production.

After the close the API inventory report said crude levels declined -4.3 million barrels last week compared to expectations for a 3.2 million barrel gain. Prices rose again on the news. However, the API numbers rarely match the EIA numbers on Wednesday morning so prices may have firmed at $36.60 but they are not moving any higher until after the EIA report.

Wynn Resorts (WYNN) shares declined -$2 in afterhours. The company guided to revenue from Macau for Q1 to be in the range of $603-$613 million and down from the $705 million in the year ago quarter. Earnings are expected to decline from $212.3 million to $187-$195 million. Macau gaming revenue has slowed its decline but remains at two-year lows.

Cree Inc (CREE) warned after the close that revenue would come in around $367 million compared to prior forecasts of $400-$430 million. Earnings would be in the range of 13-15 cents compared to prior guidance for 22-29 cents. Shares fell -$6 in afterhours to $23.60.

Darden Restaurants (DRI) shares fell -4% after they reported earnings of $1.21 that beat estimates by 2 cents. Revenue rose +6.7% to $1.85 billion. Sales at Olive Garden stores rose 6.6%, Longhorn Steakhouses 5.4%, fine dining locations 5.4% and other businesses 10.7%.

The chairman of Darden resigned saying he was proud of what he accomplished but he was done. Jeffrey Smith, CEO of the Starboard Value activist hedge fund had taken over as Chairman of Darden after Starboard successfully replaced all of the board after Darden sold off the Red Lobster chain against shareholder wishes in 2014. Shares are up 60% since he took over.

Tesla (TSLA) shares rallied despite missing production estimates in Q1. The company delivered 12,420 Model S cars and 2,400 Model X SUVs. Analysts were expecting 15,000 to 16,000 cars. Musk said the weak deliveries were prompted by a parts shortage on the Model X. He said about 6 of the 8,000 unique parts used in the Model X were delayed by third party manufacturers. Musk said Tesla failed to adequately validate supplier capabilities and producers were running behind. According to Musk, the shortages have been solved and by the last week of March, they were delivering about 750 Model X cars per week. The company said it was still on track to deliver 80,000-90,000 cars in 2016.

The company said it has addressed the producer shortcomings and they will not occur on the Model 3. As of Saturday evening, the company had received more than 276,000 orders.

Amazon (AMZN) and Sprint (S) reached a deal to allow Sprint subscribers to add Amazon Prime service to their Sprint account for $10.99 a month. Yes, that adds up to more than the $99 a year that Amazon charges but customers can pay by the month and cancel at any time.

Twitter (TWTR) beat out Amazon, Verizon, Facebook, Google, Yahoo and Apple to stream live the NFL's Thursday night football games this year. Twitter will pay $10 million to stream 10 of the 16 games CBS and NBC will broadcast. Last year Yahoo paid $20 million for a single game. You will not even have to have a Twitter account to view the games. Twitter has 320 million monthly average users (MAU) and 500 million "additional" users that do not have accounts but view the content from Twitter's website. Many of those users are not in the USA so the deal makes the ten games available worldwide. Apparently, Twitter was not the low bidder but the NFL thought Twitter's user base would be a good place to advertise the NFL by streaming the games. You have to wonder what prices those other tech giants were offering and how much the NFL gave up in awarding the deal to Twitter. Unfortunately, it did not help Twitter shares and they were fractionally negative for the day.

With a steady stream of earnings warnings, the outlook for Q1 earnings has not improved. FactSet is still predicting an 8.5% decline in Q1 earnings and the first time since 2009 for four consecutive quarters of declines. For Q1, 94 S&P companies have warned and 27 have issued positive guidance. The current S&P PE ratio is 16.6 and neither under or overvalued.

Despite the uptick in the Manufacturing ISM and the Services ISM and the drop in oil prices the Dow Transports ($TRAN) have declined for 9 of the last 11 days. Resistance at 8,000 held and today's close was a three week low. This does not bode well for the broader markets. The Dow Transports typically lead the Dow industrials.

The Biotech Index posted another gain in a weak market. That is the fourth consecutive daily gain and this was in spite of the $41 loss in Allergan. This appears to suggest the biotech crash may be over. It will take a rebound above the resistance at 3,250 to confirm but there are green shoots forming.


The S&P never tested real resistance at 2,075 before rolling over to fall back to 2,045. That high at 2,075.07 on Friday was only for an instant and the selling was immediate. However, that lower 2,045 level now appears to be new support. It has been tested multiple times since March 29th and has held each time. This could be a sign the selloff has run its course.

If the 2,045 level fails, the next obvious target is 2,020. However, if you note the 7 weeks of S&P gains in the chart below there have been multiple occasions where there was a 2-3 day pause. The S&P has been trading in a range between 2025-2072 since the middle of March. Because of the short hang time for the S&P at 2,075 on Friday, I believe the next test will be slightly higher high but have the same result.

With the FOMC minutes on Wednesday and worry over the Fed round table on Thursday, traders are not likely to have enough conviction to push through resistance.

The Dow fell back to light support at 17,585 and closed almost at the lows for the day. The stocks that were the biggest losers were from a variety of sectors and there was no rhyme or reason. It was simply a day of profit taking. Pfizer was at the top of the list of winners because of the potential for the Allergan merger to be cancelled. Boeing was the biggest gainer after winning a contract for (20) F16s to be used as target practice at a cost of $34.4 million. The planes can be flown manned or unmanned. They also won a $275 million contract for space work and $235 million for 11 P-8A surveillance aircraft. It was a good day for Boeing.

The Dow could retest support at 17,400 and resistance is strong starting at 17,750. That could provide a range for trading over the next couple of weeks.

The Nasdaq is challenged by the resistance at 4,900 and closed well back at 4,843. Biotechs were the big gainers but the leaders list is a jumble of different sectors. Amazon and Google were big losers, Facebook lost a whopping 33 cents and Netflix gained $1 to round out the FANG contingent.

There was no trend on the Nasdaq other than profit taking from some recent gainers.

The Russell 2000 closed under support at 1,100 and the biggest loser for the day. The small caps have lost their momentum and their volume. It appears fund managers have decided to reduce their small cap holdings and that is not good news for the market. The Russell struggled for 3 days to make any gains over 1,110 and finally failed at that level. If the selling continues, we could see a retest of 1,065.

I am neutral on the market for Wednesday. The dead stop on 2,045 on the S&P decline is somewhat positive and futures are up +6 as I type this. However, the weakness in the Russell and the Dow Transports suggests there could be additional problems. The FOMC minutes could give the market a boost or a shove off the cliff depending on their contents.

I believe we are going to chop around under resistance for a few more days until fund managers decide what they want to do. While April is normally a positive month, all Aprils do not normally have as many negative conditions weighing on the market. If the EIA oil inventories decline on Wednesday that could lift oil prices and equities.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Biotech Rebound

by Jim Brown

Click here to email Jim Brown
Editor's Note

Many biotech stocks are severely oversold and a sector rebound could be an opportunity. I believe that is the case with Celldex. They were crushed by trials results in one drug but they have many others farther along in the trials process.


CLDX - Celldex Therapeutics - Company Profile

Celldex Therapeutics is a biopharmaceutical company that develops, manufactures, and commercializes novel therapeutics for human health care in the United States.

That could be the opening sentence for almost any biotech company in the USA. They have multiple cancer drugs in trials and they have a drug for breast cancer in a registration trials after already passing through the gauntlet of multiple clinical trials.

Earnings are May 4th.

The stock was starting to recover from a long-term decline until a brain cancer drug failed a clinical trial and shares collapsed from $8 to $3. Now after a month of consolidation shares are starting to move higher again.

In biotech stocks with bad news, traders tend to over sell the news. The stock crashes to some ridiculous low and then languishes there for a while until all the existing owners get fed up due to the lack of a bounce and leave. New investors seeing a bargain and the opportunity to get in at a ridiculous low begin to accumulate the stock. I believe that is what we are seeing now.

This is really a play on the potential for a rebound in the biotech sector rather than some outstanding CLDX quality. I believe the stock is oversold and it has been rising for the last four days along with the biotech sector. If the sector continues to rise as I expect we should see CLDX rise as well as the penny stock investors begin to load up on an oversold opportunity.

Shares hit $4.65 today before fading with the market. I am recommending we buy a trade at $4.75 with a stop at $3.25. I will raise that stop rapidly if the trade begins to stall.

With a CLDX trade at $4.75

Buy CLDX shares, initial stop loss $3.25.


Buy May $5 call, currently 50 cents. No stop loss.


No New Bearish Plays

In Play Updates and Reviews

Gap Down

by Jim Brown

Click here to email Jim Brown

Editors Note:

Whenever the Dow gaps down -140 points at the open, you know there are some stocks that follow suit. Tuesday's gap lower at the open knocked us out of three more positions. It is the knee jerk reaction that always painful and there is no way to avoid it unless you remove the stop losses. Many times the gap lower clears the weak holders and the stock rebounds to end the day with a gain. That happened with TRN today. The gap down to $17.36 hit out stop and shares rebounded to $18.17 shortly thereafter.

The decline today followed the Treasury Dept action after the close on Monday, some weak economics and a new warning from the IMF on global economic weakness. Add in falling oil prices and the lower open was assured.

The S&P decline stalled at 2,045 three separate times today and that suggests this could be a potential rebound point. Futures are up strongly after the close on rising oil prices after an unexpected decline in crude inventories after the bell.

Even if we do open higher on Wednesday there is no guarantee that we are going higher. The volume is lackluster and fundamentals are week. After today there could be a short squeeze because I am sure a lot of traders loaded up on shorts today after the failure at resistance.

Current Portfolio

Current Position Changes

DRII - Diamond Resorts

The position was stopped out at $22.50.

KS - Kapstone Paper

The position was stopped out at $13.25.

TRN - Trinity Industries

The position was stopped out at $17.50.

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

DDD - 3-D Systems Corp - Company Profile


Only a minor decline after appointing that new CEO from Hewlett Packard on Monday.

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


DRII dipped at the open to stop us out at $22.50. There was no 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

Closed 4/5/16: Long DRII shares @ $24.25, exit $22.50, -1.75 loss.

FGEN - Fibrogen - Company Profile


No material decline in a weak market. Good relative strength. No news.

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


Very minor decline. Still holding the gains over resistance from Friday.

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


Another day of profit taking but still holding over prior resistance.

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


A -5% drop stopped us out after I raised the stop loss on Monday.

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:

Closed 4/5/16: Long KS shares @ $13.15, exit $13.25, +.10 gain.

SPXC - SPX Corporation - Company Profile


No decline, no news. Good relative strength.

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


The gap down market open caused a gap down on the shares to $17.36 and stopped us out of the stock at $17.50. The long July call is still open with no stop loss.

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:

Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss


Long July $20 call @ $1.50, no stop loss. Keep it until June even if stopped out of the TRN shares.

WIN - Windstream Holdings - Company Profile


Only a 5 cent loss 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. 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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