Option Investor

Daily Newsletter, Monday, 4/25/2016

Table of Contents

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

Market Wrap

Weak Market Waits On FOMC

by Thomas Hughes

Click here to email Thomas Hughes


Weak earnings and another FOMC meeting have the market moving lower. The FOMC meeting starts tomorrow with a policy announcement on Wednesday; there is no expectation for change, the statement and what it says about the state of the economy and future rate hikes will have far reaching affect. Adding to today's instability in equity prices are a raft of expected economic data, a meeting of the BOJ and instability in the oil market.

International markets were equally cautious in today's trading. Asian indices fell across the board as traders in that region wait on both the FOMC and the BOJ, led by a -0.76% drop in the Nikkei 225. The BOJ is feared to increase QE in the form of additional negative rates on loans. European indices began the day lower, driven by weakness in global sentiment. The FTSE 100 led the European market lower with a loss of -0.76%.

Market Statistics

Early trading in the futures market indicated a lower open for US indices although not a major decline. Global sentiment along with weak earnings, declining earnings projections and the FOMC gave plenty of reason for pause. There was no economic data before the bell, and very little in the way of earnings, to move futures so trading held fairly steady into the opening bell. At the bell the indices did indeed open lower, about 3 points for the SPX, and then proceeded to move lower, not hitting bottom until shortly after 11AM. At that point a narrow trading, near the early low, was entered and lasted until early afternoon. Around 1PM the indices moved up off the low to trade near the middle of the day's range and held that level into the closing bell.

Economic Calendar

The Economy

Very little economic data today other than the weekly Moody's Survey and earnings insight from FactSet. The data we did get, New Home Sales, was negative on the headline but comes with a bit of a silver lining. Home sales fell by -1.5% from last month to an annualized rate of 511,000. This is slightly below the analysts estimates of 519,000 but mitigated by last months upward revision. February New Home Sales were revised up to 519,000 from 512,000, wiping out most of the losses posted for this month. Within the report sales in the west were weakest suggesting that the market remains healthy and expanding in the rest of the country. On a year over year basis New Home Sales are up 5.4%.

Moody's Survey Of Business Confidence gain 0.2% this week, the 11th week of upwardly trending sentiment. This week's reading is another positive sign for the economy moving forward although the index is still -25% below last years high. Mr. Zandi says the reading reveals an economy expanding above potential and that global markets, US and Europe in particular, have been able to shrug off market volatility seen earlier in the year.

Earnings continue to roll in, this week will be the biggest of the season with more than 37% of S&P 500 companies scheduled to report. The blended rate for the 1st quarter improved slightly over the past week, to -8.9% from -9.3%, but projections for the rest of the year and the full year fell. To date, 26% of the index has reported with 76% beating on EPS and only 55% beating on the revenue end.

Full year 2016 projections have fallen to 1.1%, the lowest of the series, shedding nearly a full percent from last week. All three forward quarters have had their projections cut in the last week although growth is still expected to return by the 3rd quarter. The 2nd quarter was revised down by nearly a full percent, the 3rd quarter by -0.4% and the 4th quarter by a whopping -2.4%. The only good news in earnings this week is that 2017 projections gained a tenth but I'll not put too much trust in that number until much later in the year.

Data will be light tomorrow, only Consumer Confidence and Durable Goods, but the next day we will get the FOMC decisions, and then on Thursday 1st quarter GDP and the BOJ. Earnings reports were relatively light today, only about 60 or so, but tomorrow the schedule heats up with over 125 reports including Apple, AT&T, Barrick Gold, Ebay, Fiat-Chrylser, JetBlue, Proctor & Gamble and Chipotle Mexican Grill.

The Dollar Index

The Dollar Index fell today, dropping about -0.5% from last week's peak. The index has met resistance, ahead of the FOMC and the BOJ, at the short term moving average and remains in downtrend. The FOMC is not expected to raise rates, the CME Fed Watch Tool shows a 0% expectation for rate hike at this meeting (only 25% for June) so it will be the statements, data and whatever it is the BOJ does, which will move markets this week. A dovish Fed will likely weaken the dollar although risks lie in the BOJ which could weaken the yen more. Resistance is at the short term moving average, about $95, with first target for support near $94. A break of either line could cause a quick move in the index with downside target near $93 and upside target near $96.

The Oil Index

Oil prices fell in a volatile session driven by supply/demand imbalance and profit taking. WTI fell from near a 5 month high to trade near $43. There are signs of rebalance in the market, helping to support prices, while short to long term fundamentals remains skewed to the supply side. Another factor affecting oil markets today may have been the announced reforms Saudi Arabi expects will alleviate the kingdoms dependence on oil. The reforms include regulatory, policy and economic changes intended to increase non-oil GDP from 16% to 50%. Regardless, global production remains high and outpaces demand so until this changes the risk in oil is to the downside.

The Oil Index fell -1.5% from a 4.5 month high and the 1170 resistance target. The index has been trending higher for just over 3 months, driven by the production-cap-rumor, expectations for 2017 market rebalance and little else. The indicators remain bullish, consistent with this trend, but are showing signs of weakness not limited to the oil market. MACD momentum is highly divergent from the new highs while stochastic is high in overbought territory with both showing nearer term weakness. MACD is moving lower, off of its peak, and stochastic is making a bearish crossover high in the upper signal zone, a set up consistent with potential correction. A move lower would likely find near term support between 1,100 and 1,120, a break below this level could take it down to 1,000. If some other bullish catalyst emerges and is able to move oil prices higher, above 1,170 resistance targets, 1,235 becomes next upside target.

The Gold Index

Gold prices moved up by 1% in anticipation of the FOMC meeting, and today's move lower for the dollar. This move is consistent with recent price action and the 3 month trading range. This range could be broken this week; between the FOMC the BOJ and the data there are quite a few potential catalysts for the dollar. A weakened dollar should lend additional support for gold and push it above $1250, perhaps to the top of the range near $1270. A stronger dollar will push gold back to the low end of the range near $1220.

The gold miners continue to consolidate near 1.5 year highs while gold prices hover within the trading range. Today's action saw the miners ETF GDX move lower to briefly test the $22.50 level before finding support. The ETF lost about 0.5% on the day and is above support levels although the indicators have been weakening. Both MACD and stochastic indicate further testing of support which may occur over the next couple of days. A break below $22.50 could take the index down to $21.25 or lower, depending heavily on the FOMC/BOJ, dollar value and gold prices. Regardless of the exact price of gold, prices are well above the 2015 levels and conducive to improved balance sheets, earnings and dividend health among the miners which could lend support to the group.

In The News, Story Stocks and Earnings

Apple hit the news today in two separate articles focused on China. In one, Chinese billionaire Jia Yueting CEO of LeEco, says Apple is outdated and losing momentum in China. At a conference in China Jia said Apple's innovation is slowing, a sentiment echoed by many analysts and evidenced by the recent product release where new models of the same old products launched. The other article suggests that Apple may be shut out of the Chinese market, a move that would greatly diminish the companies current earnings and hopes for future growth. In both cases the news has little bearing on the company today but raises additional hurdles the company may have to jump in order to maintain its dominance. Shares of the stock fell about a half percent to trade at $105, near the middle of the 5 month trading range. Apple is expected to post earnings of $2.00 tomorrow, after the close, a decline of 15% from last year at this same time. A miss on earnings could take the stock back to the low end of the range, near $95.

Xerox reported earnings before the bell. The document technology company reported GAAP earnings of $0.03, down from $0.19 last year, and adjusted earnings of $0.22, just shy of expectations. The company reports it is on track to complete the split into two publicly traded companies by end of year and has made significant process on its 3year restructuring program. The services segment of business was able to post year over gains in revenue and earnings, the document technology side was not and posted a -10% decline in year over year revenue, due primarily to weakness in the emerging markets. Company execs reaffirmed full year guidance but this was not enough to support prices. Shares of the stock fell more than 13% on the news to trade at a 2 month low.

The Container Store released earnings after the bell and, though results were on the weak side with only marginally better guidance, the stock shot higher in after hours trading. Earnings per share were in line with expectations on slightly lower than expected revenue, the silver lining is that comp store sales increased more than expected. Comps were expected to fall by nearly -2% but surprised the market with growth of 0.2%, which is what led investors to shrug off guidance. Guidance for revenue came in under consensus but EPS is now expected in the range of $0.20 to $0.30, above the consensus expected $0.21. Shares of the stock gained more than 20% in the after hours session to trade above $7.10.

The Indices

Today's action was to the downside but with the exception of the Dow Jones Transportation Average was relatively light. The transports fell nearly -1.2%, a full percent more than the other major indices, but remains near the recent high. Today's move is additional sign of market weakness but, with the week so full of events, not to alarming yet. The index is hanging near a 5 month high, above the short term moving average, and could easily continue to move higher if earnings results improve or the FOMC pleases, the data looks good or oil prices rise. The indicators are consistent with a possible top and pull back to stronger support, MACD and stochastic are both divergent while stochastic is moving toward a bearish crossover, so extreme caution is necessary when considering bullish positions. A move lower may find support along the short term moving average, near 7,775, but if not next support target is just below this level near 7,750.

The next largest loss in today's action was posted by the the NASDAQ Composite. The tech heavy index fell a little more than-0.20% and created a small spinning top candle, just above the support of the short term moving average. Today's action is a sign of wariness in the market, a wariness that could turn into outright selling should the week's news fail to inspire confidence. The indicators continue to weaken however, and are suggesting a decline in index value is at least very possible, if not likely. Both MACD and stochastic have diverged from the recent high, as I have been noting over the past few weeks, and are now confirming this divergence with bearish crossovers. A break below near term support, near 4,890, could take the index down to 4,800 or 4,650 in the near term.

The broad market S&P 500 made the third largest decline today, about -0.18%. Today's action created a very small spinning top candle just above the 2,075 support line. Today's candle has a small amount of lower shadow, consistent with support, but not enough to market this line as strong support at this time. The indicators persist in diverging from the latest high and are now confirming that divergence with bearish crossovers. At the least we can expect to see support at 2,075 tested again, at worst a pull-back to stronger support is on the way. A break below 2,075 could take the index down to 2,050, near the short term moving average, or lower if the moving average is broken. Strong resistance, should the index move higher, is just above last week's high near the 2130 level.

The Dow Jones Industrial Average made the smallest decline in today's session, only -0.14%. The blue chips created a very small spinning top candle just below the 18,000 resistance line and above the short term moving average. The index appears to be at a top with growing sign of market weakness, the indicators remain divergent with bearish crossovers now confirming. A failure to regain the 18,000 level could take the index down to the short term moving average, about -1.5% below today's close. A break below this level could take it down to the long term up trend line near 17,250, about -3% from today's close. Upside potential remains, this week's news could surprise, but the market remains weak with next resistance target only about 1.5% above today's close, near 18,300.

Today's action was weak and without direction, basically indicating a market waiting on big news and there is big news due out this week. Not only is there a large amount of data, including Q1 GDP, it is the biggest week of earnings for the season and there are central banks to consider.

In terms of central banks the BOJ is a wildcard, there is no telling what they may do or how the market will react. The FOMC a little less so, it is not expected to raise rates and so far the data is not compelling enough to expect one at the next meeting either. A dovish sounding Fed is likely to weaken the dollar, a hawkish sounding one to strengthen it; a dovish Fed may support the equities and a hawkish one not. The data is a concern but more so in light of FOMC expectations than anything else at this time; trends support continued slow growth so any deviation of that will play into FOMC speculation.

The real risk, in my opinion, remains earnings. Earnings outlook for this year has dimmed to new lows and is not likely to inspire a lot of buying across the broad market. If we don't see earnings and revenue come in better than expected and/or a brightening of forward outlook into the end of the year, there will be little reason for buyers to step into the market at today's levels. I remain bullish for the long term, earnings growth is coming, but increasingly wary of the near term and prepared for market correction.

Until then, remember the trend!

Thomas Hughes

New Plays

Volatility Return

by Jim Brown

Click here to email Jim Brown
Editor's Note

Despite today's decline, the volatility indicators are still at multi month lows. With major earnings releases this week that could derail the market it might pay to be long some volatility.


No New Bullish Plays


VXX - VIX Futures ETF - ETF Profile

The VXX ETF tracks one-month futures contracts on the Volatility Index of $VIX. The VXX is actually less volatile than the VIX but travels in the same direction. The VXX is highly liquid with average volume of roughly 75 million shares.

The VXX or any volatility ETP or leveraged ETF should not be held for long periods of time because the futures roll over every month will reduce the value of the position. However, it is suitable for short-term tactical trades. We closed a short on the VXX a couple weeks ago for a decent profit.

With the potential for another bout of market volatility I am recommending we go long the VXX this time. Long the VXX is the equivalent of a short position since it rises with a decline in the market.

Last Tuesday the VXX declined to 15.56 and the lowest level since August 10th. We had been long the VXX and that stopped us out of the position.

Since then the market has failed at resistance and spent several days in decline. With Apple's earnings likely to disappoint, it could cement the decline and lead us into the sell in May cycle.

Keith Bliss of the Cuttone Company, said research back to 1957 showed that last week was normally the best week of the entire second quarter. After last week the markets tended to "ebb" into June as the sell in May cycle takes hold as the earnings cycle wanes.

This year we have the Brexit vote in June, a likely Fed rate hike in June, the possibility for riots at the Republican convention in July, and many other factors that could weigh on the market.

I am proposing we get long the VXX and hold it because it is only a matter of time before we see another bout of volatility that could push it back to the 26-30 level. This means we could see some short-term bouts of calm if the markets try to make a new high again. Therefore, I am putting a stop loss on the position but I plan to reenter it the instant it appears volatility is starting to heat up. Hopefully the first long will be the only long we need.

Historically, there is very little long term risk with the VXX because the market will always have volatility spikes, but because it is a futures product there is a premium bleed if the ETF is held for a long time. If it were a regular stock we could just hold it until an event occurred. Since it is futures related, we have to have a stop loss.

With a VXX trade at 16.75

Buy VXX shares. Initial stop loss $15.25 and a new historic low.

In Play Updates and Reviews

Small Caps Weaken

by Jim Brown

Click here to email Jim Brown

Editors Note:

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 Portfolio

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.

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

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.

Position 4/25/16

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.

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 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.

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. 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.

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. 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.

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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