After a week or more of outperformance and contributing positive sentiment to the market the Russell 2000 was the biggest loser today. That is not good news for us because our small cap portfolio depends on that market capitalization sector being positive.
If the Russell is going to roll over, we will get hurt. For example, Conn's and Akorn both dropped sharply on no news. Both had made some strong gains over the last couple weeks and suddenly traders were taking profits. That suggests the market may be weakening.
The Akorn position was entered at the open and immediately sold off nearly $2 on no news to stop us out. That erased five days of gains in that stock in only one session.
The Apple earnings on Tuesday night could be a severe roadblock for tech stocks and the market in general. I would be surprised to see the markets post big gains ahead of that event and ahead of the Fed announcement on Wednesday.
Crude oil declined -2% on worries the recent rally on no fundamentals had gone too far. I believe energy traders should worry about that. If oil has finally decided to cool off that could be a drag on the market a well.
The prior downtrend resistance on the S&P has become light support. However, the morning dip knocked the S&P all the way back to the 2,075 level, which is stronger support than the prior downtrend resistance. A break under 2,075 targets 2,050.
The problem is that we are not going up or down. The bullish plays have no traction to the upside in this market and the afternoon rebounds are keeping the bearish plays from breaking down. We need a directional trend to appear.
Current Position Changes
AKRX - Akorn Inc
The long position was entered at the open and the stock crashed -6.5% on no news to stop us out at the close.
NTAP - NetApp
The short position remains unopened until NTAP trades at $23.95.
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
AKRX - Akorn - Company Profile
That was not fun. Shares opened at $28.35 then collapsed to drop -6.5% or $1.84 on absolutely no news. That was the biggest one-day drop since April 5th and we were stopped out at $26.45 at the close. I repeat, there was zero news to explain it.
Original Trade Description: April 23rd.
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.
Closed 4/25/16: Long AKRX shares at $28.35, stopped $26.45, -1.90 loss.
CONN - Conns Inc - Company Profile
Shares dropped -8.4% on zero news. It was not a good day for small cap stocks.
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.
Long HALO shares @ $11.99, see portfolio graphic for stop loss.
No options recommended.
KKD - Krispy Kreme - Company Profile
Still holding at the highs after addition to the S&P-600. They announced a new line of edible coffee treats available at Wal-Mart, Food Lion, Southeast Grocers and Circle K convenience stores. I raised the stop loss because we got a bad fill on that spike on the S&P news and should that spike begin to fade I want to exit quickly.
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
Up strong one day, down the next. No directional trend. 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.
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. No movement.
Original Trade Description: March 11th
Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.
In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.
The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.
WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.
While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.
I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.
Long 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. The company licensed 100 titles to the Steam Digital distribution platform for download at $3.99 each. The shares declined and showed no reaction to the news.
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
Company put out a sales blurb on their new SolidFire product and the stock rose 28 cents. 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
No movement on a lack of news in the banking sector. This ETF reacts to the markets just as much as it does to financial news.
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.
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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