Option Investor

Daily Newsletter, Saturday, 4/23/2016

Table of Contents

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

Market Wrap

Nice Recovery

by Jim Brown

Click here to email Jim Brown

Tech stocks were an anchor for the market on Friday as disappointing earnings knocked the Dow and Nasdaq down about 75 points at the open. The Dow recovered to close positive.

Market Statistics

Friday Statistics

A combination of negative earnings from Google, Starbucks, Microsoft and Visa knocked the markets lower at the open. GOOGL lost -42 for the day, SBUX -3 and MSFT -4 to push the Nasdaq 100 down -67 at the close.

The Dow shook off the $4 drop in Microsoft and a nearly 75-point drop at the open to close with a gain of 21 points. The Russell 2000, S&P-600 and the Dow Transports were the biggest gainers with a 1% gain each.

The strength in those indexes suggests we could see the markets try to rebound again next week.

There were no economic reports on Friday. I would like to review the Philly Fed Manufacturing Survey from Thursday. Analysts were all excited after the positive +12.4 print in the headline number for March. Some of the components were also positive. For April the headline number reversed to -1.6 and the material components turned deeper into negative territory with the exception of new orders. Everything in orange is negative. This represents the manufacturing sector in the Philadelphia region. It has been negative for most of the last year. We care about the Philly Fed because it is a proxy for the national ISM report due out in two weeks.

The two components that actually rose were prices paid and received. That means inflation is finally filtering through the system but the actual business components are falling deeper into contraction. This brings back fears of stagflation where the economy is stagnant but inflation rises. That is very tough for the Fed to combat because raising rates to slow inflation also slows economic activity.

The Atlanta Fed GDPNow is forecasting growth at 0.3% for Q1. Note the shaded blue line and the rapid decline. This is the average of 20 forecasters and their outlook is dropping fast.

The Fed cannot raise rates with GDP at zero regardless of how much they think they should. Moody's is predicting a -0.1% decline in GDP for Q1.

The Fed meets this week and they are expected to be neutral for the short term but still claim they intend to raise rates later in the year. They have to say this or there would be no volatility in the bond market and actual interest rates would sink even farther. The market expects a rate hike in June but analysts believe there is only a minimal chance. The CME Fed Watch Tool is showing only a 21% chance of a hike in June.

There is a full calendar of economic reports next week but other than the Fed and the GDP, the most important is the numbers from Japan. We get the full boat of data on Wednesday and then the BOJ monetary policy on Thursday. Last time they met the rates went negative but the yen spiked contrary to what they thought would happen. Analysts believe they may try to tune the negative rates at this meeting or even apply them to bank loans. More than likely, they will ramp up purchases of Japanese equity ETFs in an effort to enhance the wealth effect and make the Japanese consumer fell better about spending money.

If the Fed produces a dovish statement and the BOJ goes even deeper into negative territory and ETF purchases we could see the flight to quality trade on U.S. Treasuries continue to reverse. With fears over China easing, we have seen selling in treasuries with the yield on the ten-year rising from 1.68% to 1.89% over the last two weeks.

The market recovered from some of the bad earnings on Friday partly because of comments from the Caterpillar CEO. He said do not expect a hockey stick rebound like in 2010 but sales in China actually improved in Q1. This is the first time in three-years that sales have improved. He believes the global economic bottom is either behind us or occurring now but the rebound out of the trough will be slow.

Despite his optimism, the company posted a 68% decline in earnings to 67 cents that was in line with estimates and in the middle of CAT's guidance of 65-70 cents. Revenue fell -26% to $9.461 billion and missed estimates for $9.499 billion as a result of currency translation issues. Latin America is crashing with a -43% decline in sales there. This is the second company that warned on an implosion in Latin American economics. CAT still made $1.04 billion in profits even with the sharp declines in sales. They ended the quarter with $5.9 billion in cash. Order backlogs at the end of the quarter were $13.1 billion.

CAT guided slightly lower for all of 2016 with revenue estimates declining from $42 billion to $41 billion. Earnings are now projected to be $3.70 compared to earlier projections for $4.00. CAT shares declined slightly from resistance at $80. If you are a long-term investor with the CEO calling a bottom in the Asian economy, I would look to buy CAT with a move over $80. CAT shares already posted a 35% rebound from the January low so I would wait for any post earnings depression to fade before adding it to the portfolio.

Who knew breakfast was such a powerful marketing tool? McDonalds (MCD) saw same store sales rise +5.4% in the U.S. because of 24-hour breakfast menu. This is the third consecutive quarter that sales have risen. MCD also introduced the McPick 2 value deal to attract cost conscious consumers. They abandoned the dollar menu because the margins were too small. The McPick 2 is any two premium items for $5. The company also raised prices by 3% during the quarter. McDonalds now has 14,200 domestic stores and they are currently selecting underperforming stores to be closed.

Global same store sales rose +6.2% with China rising +3.6%. Earnings were $1.23 and beat estimates by 7 cents. Revenue of $5.9 billion also beat estimates. Shares declined slightly but they have been rising steadily since August last year. Expect some further profit taking.

General Electric (GE) reported earnings of 21 cents that beat estimates for 19 cents. They have 9.3 billion shares outstanding so it takes a lot to add a penny to earnings. Revenue rose 6% to $27.6 billion and in line with estimates. However, GE met estimates because they completed the acquisition of Alstom during the quarter. Without that acquisition revenue would have declined -5.3% to $23.1 billion. Order backlogs increased 18% to $316 billion. GE returned $8.3 billion to shareholders in dividends and buybacks in Q1.

GE is on track to exit the financial services business with $166 billion in deals signed and $146 billion closed. The company has already submitted an application to be removed as a "systemically important financial institution" or SIFI and expects that to be granted soon.

The biggest problem for GE in the quarter was the oil and gas division, where profits are expected to decline 30% in 2016. Despite that drop, the company reaffirmed full year guidance of $1.45-$1.55 with 2-4% organic growth. They plan to return $26 billion to shareholders this year.

AutoNation (AN) reported earnings of 90 cents compared to estimates for 93 cents. The earnings miss came from a $6.8 million loss from "epic biblical hail" that damaged vehicles in Texas. Revenue of $5.1 billion missed forecasts for $5.29 billion because thousands of cars could not be sold because of hail damage. The Insurance Council of Texas said there was more than $1 billion in damage from a couple of major hail storms that produced hail as big as cantaloupes. The company also said 25% of sales come from markets that depend on energy and profits were down 20% in those areas because of depressed oil prices.

The CEO said automobile manufacturing has to be cut back significantly. The low gas prices has seen consumers flood into pickups and SUVs and there is a shortage in that category. AutoNation cut back on orders for cars in Q1 and is reducing orders again for Q2.

Shares dipped sharply at the open to $45.50 but rebounded $4.00 after the CEO said he was still optimistic on the business pointing to a recent acquisition and $371 million spent on buybacks in Q1. He still expects the U.S. to sell more than 17 million vehicles in 2016.

Google and Microsoft reported earnings on Thursday after the close and Friday was a bad day. Eight firms cut their price targets for Google and four cut targets on Microsoft. Google lost $42 on Friday and Microsoft lost $4. Combined, those drops erased $53 billion in market cap.

Earnings just kicked into high gear with close to 750 companies reporting next week. The highlights are Apple, Facebook and Amazon. On the second tier are Twitter, Linkedin and Ebay followed by the major oil stocks, BP, Exxon, Conoco and Chevron. Dow components include AAPL, DD, MMM, PG, BA, UTX, CVX and XOM.

Apple had a bad week after being downgraded more than once and news broke they were cutting production by 30% in Q2 following a similar cut in Q1. According to researcher TrendForce, Apple is now expected to have shipped only 42 million iPhones in Q1, down from 61.2 million in the year ago quarter. That is a 31% drop in shipments and suggests Apple is going to have an ugly earnings report.

For the full year, TrendForce expects Apple to ship 213 million phones, down -10% from 2015. At the same time Samsung is expected to ship 316 million units and about the same as 2015. The Apple Watch has been a flop even though they are expected to sell about 4 million. The iPhone grew to 68.1% of Apple's revenue last quarter and while the watch may be producing some nice pocket change, it is the iPhones that drive the bus.

Part of the problem for Apple and Samsung is that the global smartphone market has reached a saturation point. Phones are lasting longer and the refresh cycle is becoming stretched. Consumers do not need to buy another expensive phone every two years and the upgraded feature list is not enough to convince them their old phone is obsolete. A $700 phone is a huge expense for consumers outside the U.S. and sometimes it equates to several months wages.

Credit Suisse is not expecting as dire a quarter but cut their iPhone estimates from 55 million to 48 million. Piper Jaffray cut estimates from 62.5 million to 55 million. TrendForce is more bearish because they are deeply involved in the entire market where bank analysts have other tasks besides predicting iPhone sales.

We also learned on Friday that Apple's mobile entertainment services in China had been blocked. The online book and film service was censored by the Chinese government for providing access to content that might promote some independent thinking by consumers. China is Apple's second biggest market by revenue and this is a blow to Apple. In March, China introduced strict rules for online publishing, especially by foreign companies.

Much of these negative expectations have already been baked into the price on Apple shares but depending on the actual units sold, we could retest the support at $92. The guidance is also critical since they have already ordered production cuts for Q2.

Another stock that could face problem next week is Twitter (TWTR). The company is expected to report earnings of 10 cents but that will be of less importance than the monthly average users (MAU). Revenues are expected to increase 39% to $605 million. The MAUs are expected to come in at 317 million. Last quarter users were flat at 320 million. Twitters problem is that it cannot grow the user base. You are either a tech savvy extrovert or you are not. Twitter is an instant gratification or instant embarrassment tool depending on which side of the tweet you are on. Twitter is having trouble keeping users after they are deluged by negative tweets responding to something they said. There are more than 500 million inactive users that only view tweets without actually logging in. Twitter has been changing its ad format to capture more revenue from these "drive by" readers.

Marketbeat.com reports there are 17 buy ratings, 25 hold and 3 sell ratings. CEO Jack Dorsey is under the gun to do something that will revolutionize Twitter and make it more "sticky." Earnings are not the problem. They beat estimates by 46% last quarter and have averaged a 28% beat over the last four quarters. If Dorsey has been able to significantly increase the MAUs in Q1, he will be a hero and the stock will react strongly. Most investors believe Twitter will be successful but their patience is wearing thin.

Linkedin (LNKD) reports on Thursday and they need some love too. They were crushed after guiding for revenue of $820 million in Q1 and significantly under the $867 million analysts were expecting. They guided for the full year to $3.60-$3.65 billion and analysts were expecting $3.91 billion. The company said online ad revenue growth slowed from 56% to 20% for the quarter. More than $11 billion in market cap was erased from the stock. At least nine brokers cut the stock from buy to hold saying the lofty valuation was no longer justified. More than 36 brokers cut their price targets. Pacific Crest cut their target in half to $190. The analyst average is now $188. Shares closed Friday at $119. The weekly options that expire on Friday are extreme with near the money puts/calls trading at $8. Obviously, some traders are betting on a big move.

Contrary to reports last Tuesday that Yahoo (YHOO) received only two bids from Verizon and YP Holdings, Bloomberg reported at the close on Friday that the company received 10 bids ranging from $4 billion to $8 billion for the core business. Yahoo executives are spending the weekend working on the list and will narrow the second round to 7 buyers. Those selected will receive access to internal documents and access to management.

Reportedly, some of the higher bids were from PE firms and companies that had not spent much time with Yahoo and executives are trying to find out how much analysis they did and how did it in order to come up with a number. Secondly, Yahoo executives are trying to understand all the various deal structures to decide which makes sense and has the best chance of succeeding. Bidders are not allowed to talk to other bidders because of non-disclosure agreements they signed.

SoftBank has said it has no interest in making a bid but it does want to talk to prospective bidders about buying back its stake in Yahoo Japan from whoever wins. Verizon has already held talks with SoftBank.

Yahoo said a decision on a winner is probably at least a month away.

More than 26% of the S&P have already reported earnings and 76% have beaten estimates with 55% beating on revenue. The current blended earnings growth is -8.9%, a slight improvement from the -9.4% a week ago. Of those companies that have reported, 10 have issued negative guidance and 10 issued positive guidance. FactSet said Apple is projected to be the largest contributor to the decline in S&P earnings. Earnings are expected to decline from $2.33 to $2.00 with several estimates sharply lower than the consensus.

Despite the high profile declines in the Nasdaq stocks on Friday the market has been rewarding those companies that beat even slightly and not punishing those that have missed estimates slightly. There are examples in both directions but mostly investors just seemed relieved the earnings have not been worse.

Currently the decline in revenue growth is -1.2%. If the quarter ends negative it will be the first time FactSet has seen five consecutive quarters of revenue declines since they began tracking the data in 2008.

In the strange but true section today, oil prices rose after there was no agreement in Doha despite very high short interest ahead of the meeting. I wrote several times that the expiration of futures on Wednesday would give those shorts only two days to cover before expiration and we could see prices rise. However, I expected prices to decline once the futures rolled over. Instead, prices continued to rise to touch $44.45 on Friday.

Since Russia, Kuwait, Saudi Arabia, Iraq, Iran, the UAE and Libya have all stated their intent to increase production and therefore increase the current glut, the rise in prices makes no sense. Last week we had a flurry of analysts, CEOs and "experts" all making calls for $65 to $85 oil by the end of 2016. Each had their own reason but none made much sense. I guess it is possible for all the producers to get together and continually "say" the glut is disappearing and prices will be $100 in December. There is a large contingent of traders that would believe them and buy oil regardless of whether it was true. Some of our political candidates have been making a lot of wild claims about what they will do when elected. Those claims have no basis in fact and no chance of happening but voters are delirious in their support. The same thing can happen in the oil market. Say something enough and maybe enough traders will believe you and oil prices will rise.

We are approaching the magic number where rigs will be put back to work in the USA. That number is $45. It will take more than a couple weeks at that level but once cash starved producers believe the number will stick they will give the orders and rig activity will spike. I seriously doubt OPEC leaders want to see that activity but they need the higher price for oil so maybe they take a deep breath and let it happen.

We are approaching that part of the year where inventories begin to decline as gasoline production increases. Oil prices typically rise in May through August and maybe this historical trend is encouraging investors to buy crude.

Goldman Sachs changed from bearish to neutral on crude prices. They said the lows are behind us. Of course, the lows were $26 so we could fall significantly and not retest the lows. Goldman said, "While this recent rally has the potential to run further to the upside, we believe that it is not yet driven by a sustainable shift in fundamentals. It is premature to embrace these green shoots."

Analysts said producers would not hesitate to hedge future production once prices rise enough. That will provide them some cash and some comfort for their banks. However, even with the rebound in current prices to $44 the price for December 2017 crude is only $48. That is hardly a strong incentive to rush out and hedge a million barrels when they really need $60-$65 to make it worthwhile. If they hedge at $48 and prices really did rally over $70 by December they would be looking to take a dive off a high bridge.

Active rigs declined -9 to 431 last week. Active oil rigs fell -8 to 343 and gas rigs dropped -1 to 88. Those are new 65-year lows.


It was not a big week in the markets. The first three days were positive and the last two days negative and the Dow only gained .6% for the week and S&P .5%. The Nasdaq lost .6%. Those numbers do not indicate that the Dow hit a nine-month high and the S&P traded at a 5 month high. Resistance in both cases held and two days of declines appeared.

The S&P came to a dead stop at 2,111 at 3:PM on Wednesday and the decline was sharp. The low on Friday was 2,081 for a -30 point drop from the high.

In reality, this is just a normal hiccup. We should not try to assign too much importance to the minor decline. With the S&P rebounding +10 points on Friday to close positive, we should be looking it as a potential short-term buying opportunity. This is even more appropriate given the gains in the small and midcap indexes.

However, just because the S&P paused and rebounded slightly ahead of weekend event risk does not mean there is a new rally ahead. We may be assigning too much value to the late Friday short covering that brought the S&P back to positive territory.

Keith Bliss from the Cuttone Company was interviewed on Friday and he said their research had shown that last week was the strongest week in Q2 dating all the way back to 1957. This is the ramp up into the first surge of earnings from the bluest of the blue chips. After last week, the market tends to fade into June as the sell in May cycle takes hold. He said the markets "ebb" into June, not crash into June.

The remaining earnings cycle will still provide sticking power for the markets. The coming week is the busiest week of this cycle and a lot of investors placed their bets over the prior weeks. It is after the peak in earnings in the coming week that excitement begins to fade. We call it "post earnings depression." Stocks typically fade after they report earnings as traders take profits from an earnings run and move on to something else. This is true even when the company posts an earnings beat. Sometimes a major disaster like Starbucks or Netflix attracts buyers at the bargain price but shares could linger at the lows for days to weeks before rebounding. Those who were holding when the disaster occurred are looking for any bounce to sell at a better price.

The purpose for explaining the earnings reactions is to enforce the reason the market may begin to fade soon. Add in the strong resistance and the seasonal factors and we could see some weakness.

Offsetting that post earnings depression this year is the new high syndrome. We are close enough to new highs that traders may want to stick around until those highs are hit. Whether we continue to make higher highs is another problem. Then you have to take into account the Fed's potential rate hikes, the Brexit vote in June, the quality of the earnings, the price of oil and the political campaigns leading up to the summer conventions. All those things can and will impact the market. One analyst said this could be an especially severe sell in May cycle.

The S&P needs to exceed 2,134.72 to make a new intraday high and 2,130.82 for a new closing high. We still have some significant resistance to cross to get to those levels.

The Dow was the closest to a new high on a relative basis with a print at 18,167 and right at the top of the current resistance band. At Friday's low, the Dow had declined -258 points from that Wednesday high. With half the Dow components already reported, there will be less uplift from future releases but it is always possible for somebody to blowout earnings and rocket the Dow higher for a single day. Dow components reporting this week include AAPL, DD, MMM, PG, BA, UTX, CVX and XOM. Apple could be a major drag ahead of Tuesday's night's release and afterwards if they gap down significantly.

Chevron and Exxon have such low expectations they could actually beat and possibly provide some lift.

Dow support is about 17900-17875 and then it drops a lot lower to about 17,500 and 17,400. Resistance remains the band from 18,110 to 18,165.

The Nasdaq cannot seem to get away from the 4,950 level after spending 7 days trading in that range. Friday's 39-point drop took it back to 4,900 and a level that has been resistance in the past. The real resistance is still the 5,100 to 5,160 level and the index has not even come close since failing there in December.

If the tech stocks are going to continue missing earnings it may be really difficult to reach that level and even harder to punch through it. Critical earnings next week are FB, EBAY, AMZN, TWTR, AMGN, AAPL, AKAM, PNRA, SNDK, LNKD, SWKS and WYNN. The elephants in the room are Apple, Amazon and Facebook.

Real support on the Nasdaq is back at 4,831 and 75 points below Friday's close.

The Russell 2000 had a good week with a +1.4% gain and closed at a three-month high at 1,145. That is still 20 points below strong resistance at 1,165 but it is the relative strength that matters. The S&P-400 Midcap index closed at an eight-month high and just over resistance at 1,473. The S&P-600 Small cap index closed only 10 points below strong resistance at 712 but it was still a five-month high.

The relative strength in the lower end of the market capitalization is bullish for sentiment. These indexes are telling us the broader market could move higher.

The Dow Transports broke through resistance at 8,000 once again and this time the retracement used that 8,000 level as support. If the transports can mover 8,300 this would be another bullish event. The transports rose even though oil prices were rising.

The Volatility Index ($VIX) dipped to 12.50 on Wednesday and that is a level that equates to an overbought market. As you can tell by the chart, it can remain at that 12 level for some time before a volatility event sends it soaring. The 12 level also signals market complacency. Investors are so confident the market is going up they are no longer buying puts to protect their positions. This is dangerous when a volatility event appears because there is little downside protection in place and investors tend to hit the sell button quicker rather than ride it out.

The dollar halted its decline last week and rebounded to 95 on the Dollar Index. When the dollar was falling, equities and commodities were rising. If the dollar is done going down, those same sectors are not likely to rise. The dollar impacts earnings for the S&P-500 and reduces revenue by 3% to 12% depending on the company. With Japan likely to enact some more stimulus next week, the dollar could continue to rebound. However, if the Fed statement is ultra dovish that could weaken the dollar.

The Apple earnings are going to be the focus for the week. As the biggest stock in the Dow and the Nasdaq, any movement is going to be felt in the indexes. Because of the fear over Apple earnings there could be a cloud over the market on Monday/Tuesday. That goes double for fear of the Fed but at least you have the normal pre announcement bullish bias on Tuesday. That could offset some of the pre Apple announcement bias to the downside.

I think we need to be careful being "too long" over the next couple of weeks. With the potential for a retest of the highs, there is incentive to try and remain long. We just need to refrain from getting married to those long positions because of the historical May weakness. Everyone is looking for a top to appear so they can set up for the next directional move lower. Unfortunately, when everyone is looking for a particular direction to appear, a move in the opposite direction appears with annoying frequency.

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Random Thoughts

Baltic Dry Index

I have been having some running conversations with several readers about the sudden rebound in the $BDI. The shipping index has rallied +135% since mid February and there is no apparent reason. This is the cost to ship a freighter of dry goods like corn, coal, beans, iron ore, cement, etc, from one country to another. Analysts blame this on the Chinese New Year. In four of the last five years, the month of February was the weakest month for Chinese imports, especially iron ore.

Bloomberg pointed out that the low price for iron ore makes it less desirable to scrap the older antiquated freighters. However, 163 dry bulk freighters have been scrapped so far in 2016. That leaves 9,484 still in service.

When rates were high several years ago all the shipping companies ordered brand new ships. Rates fell and those ships are now being delivered. Since December about 2.8 million tons of shipping has been added or the equivalent of one Capesize freighter every five days. That size freighter is currently renting for about $6,000 a day and more than $1,000 below the cost to operate it. Bloomberg said shippers burned through $12 billion in cash in Jan/Feb and it will take 2.5 years for the excess capacity in the market to be eliminated.

Meanwhile, China has increased imports slightly. Copper and iron prices are rising. Maybe these are the green shoots of a rebound in the global economy.

The advance/decline line on the Dow has gone to extremes. This is the highest level since the financial crisis. The previous high was 188 back in December 2014. Exactly how much more overbought can this get?

The Carlucci indicators are all pinned to their upper maximums indicating extreme overbought. This is another graphic representation of our overextended market. Nothing prevents it from becoming more over extended but we are in nosebleed territory.

The bulls are starting to turn frisky but the bears are holding their own. The bullish sentiment rose +5.6% to 33.4% but most of it came out of the neutral camp. This is the new high syndrome at work. Investors do not want to be left out if the market breaks out to new highs and continues to rally.

The bullish percent index on the S&P has broken out to two-year highs at 78.4%. This means 78.4% of the S&P-500 stocks have a buy signal on a Point and Figure chart. It also means the rally may be nearing a top.

The percentage of S&P stocks over their 50-day average reached 95% before the earnings cycle began. That has declined to 80% just since the beginning of April. Not all stocks are continuing to rise.

One final thought from Hedgeye ahead of the Fed meeting this week.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

Mark Twain


New Plays

Back from the Dead

by Jim Brown

Click here to email Jim Brown
Editor's Note

Akorn ran into some trouble in 2015 and had to restate their financials. That is always the tripwire that sends stocks plummeting to the bottom. Akorn is rising out of those ashes and has a promising future.


AKRX - Akorn - Company Profile

Akorn develops, manufactures and markets generic and branded prescription pharmaceuticals as well as animal and OTC consumer health products in the USA and internationally. The company was founded in 1971.

The accounting issues in 2015 that caused them to restate their earnings are almost over. They are going to file their 10K by May 9th and that will catch them up with the SEC and remove any lingering uncertainty.

This is not a small company although shares declined -50% after the accounting issues started. They are expected to post $1.93 in earnings for 2015 on $985 million in revenues. Morningstar's 2016 forecast is $2.15 and $1.07 billion.

The key here is that Akorn has 87 generic drug applications filed with the FDA. More than 50 of them have received complete response letters. Akorn expects more than half of the drugs that have letters will be approved over the next 12 months.

Akorn is a complex drug manufacturer. Most generic companies do the easy drugs because they are cheaper to make. Akorn likes the complex drugs because there is a larger barrier to entry for other companies and they retain their higher prices for longer. They also develop generic drugs that require approval after small clinical trials. The trials also inflate the cost of entry into the market and keeps other generic manufacturers away.

Interesting article by Morningstar

I would not be surprised to see someone acquire Akorn once the financial problems are resolved. Their large suite of existing drugs plus the 87 applications filed and more than 50 planning to be filed means this company will be very profitable in the years ahead.

This is a short-term play. I do not want to hold over the 10K filing on May 9th just in case there is another unforeseen problem. Other investors are taking a position with expectations that 10K will solve their problems and the stock will spike. With the stock at $28 today and rising steadily, I want to buy it and try to capture $3-$4 before the 9th. Once the 10K has been filed we will reevaluate for a longer term position.

Buy AKRX shares, initial stop loss $26.45.

No options recommended because of wide spreads and short duration.


No New Bearish Plays

In Play Updates and Reviews

Dow Shakes Off Tech Disaster

by Jim Brown

Click here to email Jim Brown

Editors Note:

Google, Microsoft and Starbucks knocked the Nasdaq 100 for a 67 point loss but the Dow shook off the $4 decline in Microsoft to close positive. The Nasdaq was down hard at -75 at the lows but struggled back to lose only 40 points. The Dow declined nearly 75 points at the open but clawed its way back to gain 21 points for the day.

Unfortunately the S&P-500 only gained .10 but at least it was a gain. The Russell 2000 was strongly positive at +11 to 1,147 but still below strong resistance at 1,163. In theory, the strong performance by the Russell and the Dow transports could be predicting a return to gains in the broad market next week.

The historic cycles are negative with the last week of April normally starting the slide into June and the beginning of the summer doldrums.

Trinity Industries reported earnings after the close yesterday and missed by a nickel. The CEO was very upbeat in the report and shares rebounded today with a 7% gain.

Conn's and Diplomat Pharmacy both had a good day even though they were Nasdaq stocks.

The NetApp position was not opened because the stock spiked at the open on no news befomre rolling over and falling back to only a fractional gain. We want support at $24 to break before we enter the position.

Current Portfolio

Current Position Changes

NTAP - NetApp

The short position remains unopened until NTAP trades at $23.95.

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

CONN - Conns Inc - Company Profile


No specific news. Shares gained +6% in a weak market.

Original Trade Description: April 20th.

Conn's operates as a specialty retailer of durable consumer goods and related services in the USA. The company stores offer refrigerators, freezers, washers, dryers, dishwashers, ranges, furniture, mattresses, home office products including computers, tablets, desks, printers, etc. They also sell consumer electronics including TVs, home theater equipment, etc. They operate more than 100 locations and were founded in 1890. Conn's is like a Best Buy with furniture and appliances.

Shares fell -23% after reporting earnings in late March and bottomes on April 8th. Revenue rose 7% and same store sales rose 3.6% excluding categories the company exited during the quarter. The furniture section saw same store sales rise +15.2% while electronics sales decline -13.3%. They reported earnings of 11 cents compared to estimates for 28 cents. The sharp earnings miss was caused by a major increase in loan loss reserves on their customer financing programs. The 60-day delinquency rate rose to 9.9%. Conn's finances 80% of its sales through its own in house financing plans. This is a short-term problem that will pass as they tighten up credit standards on future sales. They plan to open 10-15 new stores in 2016.

Earnings are May 31st.

An insider bought 250,000 additional shares last week for roughly $3 million. That is a huge vote of confidence.

The sell off was overdone. Shares have now rebounded above the consolidation highs for the last four weeks where the sellers were exiting. Wednesday's close was a four-week high.

I believe we can take a long position in Conn's and ride it up to the $16 level or possibly higher.

Position 4/21/16 with a CONN trade at $13.80

Long CONN shares @ $13.80, see portfolio graphic for stop loss.

No options recommended.
The June $14 is $1.45 and I think that is too expensive if we are only targeting $17 on the long position.

DPLO - Diplomat Pharmacy - Company Profile


No specific news. The company scheduled an investor day for May 18th.

Original Trade Description: April 15th.

Diplomat Pharmacy operated as an independent specialty pharmacy in the USA. The company stocks, dispenses and distributes prescriptions for various biotechnology and specialty pharmaceutical manufacturers. A specialty pharmacy does more than just dispense pills. The provide other services for the patients like infusion, patient financial assistance, risk evaluation and medication strategies. Many of their patients are on complex programs with multiple high dollar drugs. The company has 16 locations and was founded in 1975.

DPLO had a rough six months. The Valeant problem with specialty pharmacy Philidor put a cloud over the entire sector. After DPLO reported robust earnings back in March, JP Morgan downgraded them saying they could decline 15%. The company guided below expectations but remained bullish. The analyst said he could not bridge the gap between the guidance and management bullishness. Shares dropped from $36 to $26 on the downgrade.

Fortunately, that was the bottom and shares have been moving up steadily. They accelerated last week after the company announced the availability of a new Lilly drug for Plaque Psoriasis. This confidence in DPLO by Lilly seemed to encourage investors.

Earnings are May 9th.

Shares are just over $30 with resistance at $35. With the potential for a market meltdown on Monday if the OPEC meeting in Doha does not go well, I am putting an entry trigger on the position.

Position 4/18/16 with a DPLO trade at $30.35

Long DPLO shares @$30.35, see portfolio graphic for stop loss.

No options because of wide spreads.

HALO - Halozyme Therapeutics - Company Profile


No specific news. Holding at three-month highs.

Original Trade Description: April 13th.

HALO is a biotechnology company that researches, develops and commercializes human enzymes. Its human enzymes are used to facilitate the delivery of injected drugs and fluids, enhancing the efficacy and the convenience of other drugs or can be used to alter tissue structures for clinical benefit. The company is also developing PEGylated recombinant human hyaluronidase (PEGPH20) for the treatment of metastatic pancreatic cancer, non-small cell lung cancer, gastric cancer, metastatic breast cancer, and other cancers in combination with various cancer therapies.

This is an easy play. The company is presenting data from multiple trials at the American Association of Cancer Research meeting that will take place April 17-20th. They will release five different abstracts detailing drug interactions at this conference. At the same time they will host an investor/analyst meeting on April 18th at 4:PM.

They reported earnings of 3 cents compares to expectations for a loss of 11 cents. Revenue was $52.2 million.

HALO has partnerships with Roche, Baxalta, Pfizer, Janssen, AbbVie and Lilly. This is not a pipsqueak company.

HALO broke over recent resistance at $11.25 on Wednesday and could run if the data presented is positive. I am recommending we take a long position with a tight stop at $10.50.

Position 4/14/16

Long HALO shares @ $11.99, see portfolio graphic for stop loss.

No options recommended.

KKD - Krispy Kreme - Company Profile


Still holding at the highs on the news of addition to the S&P-600.

Original Trade Description: April 18th.

Krispy Kreme operates as a branded retailer and wholesaler of doughnuts, coffee, treats and packaged sweets. Who would have thought that Krispy Kreme Donuts would be impacted by falling oil prices and currency translation issues? They are a donut store headquartered in the USA. Unfortunately, not all their stores are in the U.S. KKD only has 297 stores in 41 states but they have more than 825 stores in 25 other countries.

There are 105 stores in Saudi Arabia, 136 in Mexico, 19 in the UAE, 14 in Kuwait and 12 in Russia. All of those countries have been impacted by the drop in oil prices and spike in the dollar.

In the last quarter sales at locations outside the U.S. fell -7.1% and expectations are for a continued decline in sales. The strong dollar caused revenue to decline -3.4% to $7.4 million in last quarter.

In late March they warned earnings would be in the range of 87-91 cents and analysts were expecting 93 cents. Shares fell -10% on the news. However, within four days the stock had rebounded to more than the level before the warning and have continued higher. Monday's close was an 8-month high.

They are running promotions to boost sales in the U.S. and they appear to be succeeding. On April 1st they gave away a free donut to anyone walking in their door, no purchase necessary. The stores were packed.

KKD only has $11 million in debt and $51 million in cash. They bought back 2.8 million shares in 2015. They have an authorized buyback for up to $144 million in shares for 2016.

Earnings are June 21st.

I am recommending we buy KKD shares with a trade at $16.50, just over today's high using a tight stop loss.

Position 4/20/16 with KKD trade at $16.50

Long KKD shares @ $17.05, see portfolio graphic for stop loss.

Optional: Long May $17 call @ .30, no stop loss.

TRN - Trinity Industries - Company Profile


Trinity posted a huge +7% gain after reporting earnings to close at a two-month high. Let's hope this continues. We have a July call option so plenty of time.

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 April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

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

WIN - Windstream Holdings - Company Profile


No specific news. Nice recovery from the prior day's decline.

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 @ .38 cents.(Adjusted) NO STOP LOSS

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

BEARISH Play Updates

LGF - Lions Gate Entertainment - Company Profile


Shares held at support at $20 again. No specific news. Came within 7 cents of our stop loss.

Original Trade Description: April 12th.

Lions Gate Entertainment engages in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution and sales activities. They produced the series Twilight, Hunger Games and Divergent along with dozens of other films.

Shares have been falling since the Hunger Games and Divergent movies have run their course. The last Divergent movie, "Allegiant" only produced $137 million in worldwide ticket sales and was considered a disappointment.

The company has other films in progress but none are expected to be the box office draws like the ones mentioned above. There was a report last week that Lions Gate may be looking to partner with another studio and may be looking at buying a minority interest in Paramount. That would be a good deal for Lions Gate since Paramount owns Transformers, Mission Impossible and Star Trek. However at the 25-35% stake being discussed that would be roughly $2 billion and a big bite for Lions Gate at a time when future cash flows may be shrinking.

Lions Gate has not been one to shy away from acquisitions. They have done several in the past and that is how they got the Hunger Games and Twilight franchises when they purchased Summit Entertainment. They even tried to buy MGM in 2010 but failed.

Knowing that Lions Gate is on the prowl for an acquisition and has no major movies in the pipeline has put the stock into a slide.

Earnings are May 10th.

I am recommending we short LGF with a trade at $19.65 and look for them to set a new low on any acquisition announcement. Normally the acquirer shares go down. Even if they do not make an acquisition we know they are looking so investors are getting out of the way now.

Position 4/20/16 with a LGF trade at $19.65

Short LGF shares @ $19.65, see portfolio graphic for stop loss.


Long May $19 put @ 75 cents, see portfolio graphic for stop loss.

NTAP - NetApp - Company Profile


No specific news. Spike at the open was immediately sold. Support at $24 holding.

This position remains unopened until NTAP trades at $23.95.

Original Trade Description: April 5th.

NetApp provides software, systems and services to manage and store computer data worldwide. Data ONTAP storage operating system that delivers integrated data protection, comprehensive data management, and built-in software for virtualized, shared infrastructures, cloud computing, and mixed workload business applications; E-Series storage systems for storage area network workloads (SAN); all-flash arrays that deliver input/output operations per second and ultralow latency to drive speed, responsiveness, and value from the applications that control key business operations; and hybrid arrays for mainstream business applications.

About two weeks ago the stock trend turned negative and has started accelerating downward after Sterne Agee and Macquarie both downgraded from neutral to sell. Sterne Agee said the downgrade came after the Q1 IT survey. The survey showed weakness in end-user budgeting for storage systems and upgrades. Spending had declined 10% year-over-year and was negatively weighted towards incumbent vendors. Agee said they did not expect revenue from ONTAP8 and SolidFire to offset enough share loss potential over the next year. The analyst said valuation appears compressed and the stock should underperform its peers.

Another analyst said deteriorating net income would keep the stock depressed.

Earnings May 25th.

Based on the chart shares may not find support until $21. The last two days shares have stalled the decline at just over $24. I am recommending we short NTAP with a trade at $23.95 and target $21 for an exit.

With a NTAP trade at $23.95

Sell short NTAP shares, initial stop loss $24.95


Buy long June $24 put, currently $1.25, initial stop loss $24.95.

XLF - Financial ETF - ETF Profile


Back up to four-month highs on strong gains in Goldman, Wells Fargo and Citigroup.

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slowly and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Long May $23 call, @ 19 cents, no stop loss.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.

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