Option Investor

Daily Newsletter, Saturday, 5/7/2016

Table of Contents

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

Market Wrap

Fed Window Closed

by Jim Brown

Click here to email Jim Brown

The drop in the number of new jobs slammed shut the Fed's window for a June rate hike.

Market Statistics

Friday Statistics

The Fed is probably not going to admit it outright because that would take the volatility out of interest rates but they will have a tough time raising rates in June. The market initially took the bad news on jobs as bad news but then decided differently about 12:30 and another short squeeze began. The gains were not enough to bring the indexes back into positive territory for the week.

The April Nonfarm Payrolls showed a gain of +160,000 jobs compared to the initially reported 215,000 in March and estimates for 200,000. That is the slowest job creation since September. The March number was revised -7,000 lower to 208,000 and the February number was revised -12,000 lower to 233,000.

Analysts blamed the drop on a decline in the retail sector plus another 7,000 jobs lost in the energy/mining sector. The unemployment rate remained steady at 5.0% but the labor force participation rate fell from 63.0% to 62.8% with 562,000 people dropping out of the workforce. The broader U6 measure of unemployment declined slightly from 9.8% to 9.7%. Currently 94,044,000 people are unemployed. Private payrolls rose +171,000 and government jobs dropped -11,000.

Adding to the gains were professional/business services with 65,000 jobs, education and healthcare +54,000 and financial services added 20,000.

The energy/mining sector has now lost 192,000 jobs over the last 19 months. Manufacturing barely posted a gain of 4,000 jobs, mostly in auto production.

Average hourly earnings rose +0.3% to 2.5% for the trailing 12 months and suggests the labor market is firming if employers have to raise wages.

This follows the drop in the ADP Employment report from 200,000 in March to 156,000 in April. It also came after the weekly jobless claims spiked to the highest level in five weeks at 274,000. However, the prior week's 257,000 print was the lowest since December 8th, 1973. I believe this week's rise was just equalization in the reporting.

The Challenger Layoff report showed 65,141 layoffs were announced in April. That brings the year to date total to 250,061 and the highest since the financial crisis.

With all the payroll reports turning sharply lower, we should believe what they are saying. It is not just one report suddenly reversing course but all of them. This calls into question what the economy is doing in Q2 after only 0.5% growth in Q1.

After the jobs report, Goldman Sachs, Bank of America and Barclays changed their forecast on the next rate hike from June to September. However, I do not believe it will happen in September, only five weeks ahead of the election. The Fed is not political and tries to stay out of the political crossfire. Hiking rates that close to an election would bring both parties down on them. If a rate hike crashed the market ahead of the election, it would be even worse. If they pass on a June hike, the earliest they could hike safely would be December.

The economic calendar for next week is relatively flat. The only report that could shake up the market is the Retail Sales for April on Friday. After several retailers reported lower than expected April sales last week the outlook for the entire sector is not good. I believe the consensus estimate for a +0.5% rise in sales is wishful thinking.

We have a full calendar of Fed speakers and they are probably going to try and keep the idea of a potential June rate hike alive. This is their only hope for keeping some volatility in the market and keeping rates from collapsing.

The yield on the ten-year treasury dipped to 1.7% at the open on the weak jobs report. The yield rebounded to close positive at 1.779% but I cannot tell you why. Investors should have been buying bonds on Friday rather than selling them. The afternoon rebound correlated with the bounce in equities so maybe investors felt we had reached a support level on equities and it was time to buy. The dollar shot up at the same time.

The Dollar Index has rallied for the last four days after making a 16-month low on Tuesday morning. Gold had declined for three days until the jobs report spiked it back to the $1,300 range.

It was a relatively tame day for earnings. The biggest mover was Endo International (ENDP). The shares fell -39% after the company cut revenue guidance by 11% to around $4 billion and earnings guidance by 23% from $5.85-$6.20 to $4.50-$4.80. The problem was patent expirations on Voltaren Gel and increasing competition from generics. The company reported Q1 earnings of $1.08 that beat estimates for $1.05 but revenue of $963.5 million missed estimates. However, with the big guidance cut the actual earnings were immaterial.

The company announced layoffs of 740 workers and a restructuring to save $15 million a quarter by the end of 2017. Shares fell -39% and the worst decline since June 2002 when it dropped -46%.

The drop impacted Valeant as well since Endo was considered something of a "baby" Valeant with a roll up strategy to acquire drugs and raise the prices. Valeant shares lost -13% on the weak ENDP guidance. They were guilty by association.

Jack Dorsey's Square (SQ) was knocked for a 22% decline after reporting a Q1 loss of 14 cents compared to estimates for 9 cents. Revenue rose +51% to $379.2 million and beat estimates for $343.6 million. However, operating expenses rose +72% to $207 million. G&A costs rose from $28 million to $96 million because of a $50 million charge for a lawsuit against Robert Morley, who claims to be the creator of the Square card reader.

With Twitter disappointing on earnings last week, Dorsey is suffering from a 1-2 punch. His stock holdings declined about $355 million since April 27th. He still owns about 94 million shares of the combined companies so he is still doing ok.

He is also facing a share lockup expiration on Square on May 17th. About 64 million shares will be unlocked and the float will increase nearly three times. A lot of early investors including Visa, Starbucks, Sequoia Capital (5%) and Khosla Ventures (17%) will be able to sell their shares. Given the reduced guidance and rapid decline there may be a race to the exits.

According to the Wall Street Journal, a whopping 69.48% of the shares (14.6 million) are short as of March 15th. The public float is only 21.01 million shares. Source They only sold 27 million shares in the IPO and there are 295.9 million shares still restricted.

Activision Blizzard (ATVI) reported earnings of 23 cents that rose +44% after giving guidance in January for 11 cents. Analysts were expecting 13 cents. Revenue of $908 million easily beat estimates for $818 million. They guided for the current quarter to earnings of 38 cents and revenue of $1.38 billion, which was above estimates. More than 10 billion (with a B) hours were spent playing Activision Blizzard games in Q1 and 42 billion hours in the prior year. Monthly active users rose 10% to 55 million at Activision, 23% to 26 million at Blizzard and +3% to 463 million at King Digital. Cash on hand rose from $1.0 billion to $2.9 billion. Shares spiked more than 8% on the news.

Wynn Resorts (WYNN) reported operating earnings of $1.07 compared to estimates for 83 cents. Revenue was $997.7 million. Revenues ay Wynn Macau declined -14% to $608 million. The Macau property has been suffering for over two years because of a corruption crackdown in China that prevented many high rollers from making frequent trips to Macau because they did not want to be on the government radar. In April Macau gaming revenue declined -9.5%. That is actually a slower decline than we have seen in many months over the last two years. The company is preparing to open the $4 billion Wynn Palace in Q3 and that will make Wynn even more dependent on Macau where they already get 60% of their revenues. Shares posted only a minor gain on the earnings news.

Yelp (YELP) reported operating earnings of 8 cents on revenue of $158.6 million, a 34% increase. Analysts were expecting 3 cents on revenue of $155.6 million. They guided for Q2 revenue of $167-$171 million and 26% growth. They raised full year guidance slightly from $685-$700 million to $690-$702 million. Shares spiked 24% on the news.

Herbalife (HLF) made Bill Ackman's life a little more miserable on Friday. The company reported earnings of $1.36 compared to estimates for $1.07 and well over the prior guidance of $.97-$1.07 per share. Earnings were negatively impacted by a 32 cent hit from currency translation issues tied to Venezuela. Revenue rose +11% to $1.119 billion and well over prior guidance of 2.5% to 5.5% growth. They also raised full year guidance from $4.05-$4.50 to $4.40-$4.75.

The big news was a potential settlement with the government over its MLM business practices. Herbalife said they were getting close to a settlement that could require a payment of $200 million or less. Any settlement kills Ackman's chances for a big win on his short. He believes the company should get a cease and desist order from the FTC and be put out of business.

Shares spiked 9% to a two-year high on the earnings and settlement news. This means Ackman's $1 billion short took another major hit.

Berkshire Hathaway (BRK.A) reported operating earnings of $2,274 per share, down from $2,543 in the comparison quarter. Analysts were expecting $2,759 per share. The lower demand for coal caused a 25% decline in profits at BNSF to $784 million as volume declined -5.5%. BNSF revenue from industrial products fell -18% and coal fell -39%. Monster hailstorms in Texas caused Geico profits to fall 56% to $213 million. Berkshire ended the quarter with $58.34 billion in cash, down from $71.73 billion because of the acquisition of Precision Cast Parts. Berkshire also holds $106.4 billion in stock in companies like Wells Fargo and IBM. The earnings came after the bell on Friday and the stock did not trade after the results. Buffett had preannounced most of the numbers before the shareholder meeting so the big decline came on Tuesday.

According to FactSet 87% of the S&P-500 companies have reported as of the close on Friday. More than 71% have beaten earnings estimates and 53% have beaten on revenues. The blended earnings decline for Q1 is now -7.1% and the fourth consecutive quarter of declines. That has not happened since the financial crisis. On March 31st, the estimate was for an -8.7% decline. To date 55 S&P companies have issued negative guidance and 24 have issued positive guidance. The forward 12-month PE is 16.5 based on the current $124.64 EPS forecast.

Next week is the last week of the Q1 earnings cycle. Most of the major companies have already reported and the volume of releases drops off significantly after this week. Dow component Disney is the biggest report for the week after the bell on Tuesday. This is also retail week with Macys, Nordstrom, Dillards, Kohls, Fossil and JC Penny. Elon Musk's SolarCity will report on Monday. There have been some persistent rumors about him taking the company private but so far no real news.

Drug company Medivation (MDVN) rejected Sanofi's (SFY) $52.50 offer again and it may be getting some help from Pfizer and Amgen. Sanofi is trying to "bear hug" Medivation to the bargaining table by going public with the $52.50 offer. They are also hinting they could raise that offer if Medivation's board would agree to meet with them and disclose some financial information. The board rejected the offer to talk. Sanofi said it would go "hostile" if Medivation did not agree to talk. That means taking the offer directly to the shareholders in an effort to force a takeover.

Medivation is in the driver's seat. They have a major prostate drug on the market, which is expected to bring in $5.7 billion a year and more cancer drugs in the pipeline. If they were going to agree to be sold, there are plenty of other companies that would be eager bidders. Analysts believe the company is easily worth $70 a share rather than the $52.50 from Sanofi. Amgen (AMGN) and Pfizer (PFE) have reportedly made contact with Medivation to request talks to see if there is some common ground. Novartis (NVS) is also rumored to be interested. Pfizer just cancelled a $160 billion deal with Allergan and it has the cash and the desire to make a deal. Amgen has four of its top selling drugs going off patent and they need to buy some new drugs soon or revenue is going to plunge. AstraZeneca (AZN) has also been talking to Medivation for about 6 months.

It remains to be seen if Medivation will agree to be bought but should they make that decision there is likely to be a bidding war. Shares are already well over the $52.50 Sanofi offer but they could go higher.

A Bank of America analyst pointed out the massive outflows in equity funds and suggested selling the top five most widely held S&P stocks that are underperforming. Those are the ones that will be sold to cover redemption requests. The top 5 stock to sell according to her research are:

APA - Apache
TXN - Texas Instruments
NTAP - NetApp
ALXN - Alexion Pharmaceuticals
SCHW - Charles Schwab

Bank of America said equity fund outflows were the largest since the sharp market drop last August/September. Net outflows from equity funds nearly tripled last week to $16.9 billion and the largest since China's big currency devaluation crashed the global markets. Bond funds saw inflows of $5.6 billion and precious metal funds saw inflows rise 500% to $1.7 billion. High yield bond funds saw outflows of $2 billion while investment grade funds saw inflows of $5 billion and the largest in 13 months. Municipal bond funds saw their 33rd week of gains with $1 billion of inflows.

Clearly, a lot of investors are taking the sell in May cycle seriously with money flowing out of equities and into bonds.

Hulu, originally a service that offered on demand reruns of broadcast TV shows, is bulking up to deliver a more robust menu of programs. They are planning to stream entire broadcast and cable channels to consumers for a monthly fee. In effect, they are turning themselves into a cable content company that is delivered over the internet. The new "skinny bundle" service is expected to debut in early 2017 and cost about $40 a month. They will start out with content from Disney, Comcast NBCUniversal and 21st Century Fox. Those three companies all own a piece of Hulu. Hulu is doing this to compete with Sling TV at $20 a month and PlayStation Vue at $40 a month.

YouTube is also working on a paid subscription TV service called Unplugged, that would offer customers a bundle of cable TV channels streamed over the internet. The service is expected to start in early 2017 and would supply content from Comcast NBCUniversal, Viacom, 21st Century Fox and CBS. They already offer a subscription service on the web called YouTube Red that allows users to watch unlimited videos without commercial advertisements for $9.95 a month. I would expect Alphabet to spin off YouTube in the future in order to raise cash to pay for content.

Walmart announced it was hiring 9,000 additional greeters to its more than 5,000 locations. The new position will be called "customer host" and they will be wearing a yellow jacket so they will stand out. Their jobs will be helping customers and deterring shoplifting. They will be outfitted with radios to report suspicious customers and call for help. They will also spot check receipts against the items in a cart. At two stores in Arlington Texas, having employees check receipts reduced calls to police by 40% over six-months. At some stores, police are called as many as 4 times a day to arrest shoplifters. Walmart raised minimum hourly wages to $10 earlier this year. Shares are currently fighting resistance at $70.

The wildfires in Canada have cut production by up to 1.0 million bpd. While no oil facilities have been destroyed, they have been shutdown and the employees evacuated. It could be weeks before the facilities are restarted. On Saturday, another oil sands facility was being threatened and was likely shutdown. These facilities are extremely fire proof but the employees are not.

Once the fires are out and that could take weeks, the biggest problem to restarting production will be repairing electrical transmission lines that were destroyed in the fire. You cannot produce oil from oil sands without electricity. Secondly, those employees with homes destroyed will be absent as they pick through the charred remains in hopes of finding something undamaged and then setting up housekeeping in some new location.

Oil production could be hampered for weeks but I doubt it will remain at the same reduced level as we have today. It will just take weeks to return to pre fire production.

Oil prices moved sideways most of the week between $43 and $46. The outages from Canada impacted prices but rising production in the Middle East offset those concerns. Most traders realize that the Canadian shortfall will be brief. There is still no fundamental reason for oil prices to move higher.

Active rigs declined -5 to another record low at 415. Oil rigs declined -4 to 328 and gas rigs fell -1 to 86. Baker Hughes recently said active rigs could decline another 30% in Q2 before stabilizing in the second half of the year. Oil production in the U.S. has finally begun to decline sharply. Production fell -113,000 bpd to 8.825 million bpd last week and it is down -183,000 bpd over the last four weeks.

The bulls are in panic mode. Bullish sentiment declined another 5% last week to 22.3% while neutral sentiment rose 3.3% to 47.3%. Bearish sentiment only rose slightly by 1.7% to 30.3% so we have not turned into a bear market yet but the drop in bullish sentiment is telling. That 22.3% is the lowest level since the February 11th market bottom at 19.24%.


The S&P touched critical support on Friday at 2,040 and the rebound appeared about an hour later. Once traders realized the rebound was going to stick, a short squeeze began at 12:30 that power into the close. However, the short-term resistance at the 2,057 level was solid.

The support test was critical but it may not be over. This rebound was short covering ahead of the weekend event risk. The 2,040 level was a new three week low and each prior new low was met with minor rebounds that failed the following day. This is a typical market decline from a topping process. Many traders do not want to accept that the market is in decline and keep buying the dips only to be stopped out on the next decline.

If the S&P breaks below 2,040 it will likely break this pattern of minor rebounds. A break of that support will convince traders the decline is real and they will give up trying to buy the dips.

Resistance is now 2,057, 2,080 and 2,100. A break of support at 2,040 would target 2,020 and then 1,975.

The Dow benefitted from some sudden bursts of buying in prior decliners including IBM, BA, MMM and WMT. This suggests there were shorts being covered rather than a bunch of investors suddenly deciding to go long these stocks. In the Walmart chart below, does that one-day spike look like normal buying? Definitely not.

It was actually a pretty good day for the Dow with the majority of the components rebounding back into the green from the opening dip. That dip took the Dow down to 17,580 and very close to the 17500-17550 support from early April. That is the critical level that is equal to the 2,040 level on the S&P. A breakdown under 17,500 targets 17400 and then 17,135. Friday's dip was a new three week low.

The Nasdaq rebounded to just under prior support at 4,750 before losing traction. The opening drop to 4,684 was a low not seen since March 10th. It was clearly a breakdown of support and that support should now be resistance.

The Nasdaq was held back on Friday by the biotech sector, semiconductors and networking/security stocks.

The Nasdaq 100 was helped by gains in Amazon, Google and Priceline but failed to rebound over the prior support at 4,335.

The Russell 2000 found support at 1,100 and that is a critical level followed by 1,090 and then 1,065. The Russell rebound was definitely short covering because numerous small cap stocks had the same spike as the Walmart chart above. Support was hit and traders took profits.

With multiple levels of near term support, the Russell is not likely to simply crash lower. It may be a choppy decline but the odds are good it will be a decline.

There is nothing on the calendar for next week that "should" push the market up or down. The various Fed head speeches could cause some volatility and the Retail Sales could cause a market hiccup but that is not until Friday. The remaining earnings reporters are the equivalent of the horses at the end of a parade. You know why the horses are always last and they have a shovel brigade behind them. Some of these earnings reports will need the crew with shovels to clean up behind them.

There is not likely to be any sudden market rallies caused by earnings surprises. Only one Dow component reports and that is Disney on Tuesday. The earnings reports this week will be distractions rather than market movers.

In theory, this is a negative week on the market calendar as the sell in May followers accelerate their exits.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

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Random Thoughts

No Random Thoughts this weekend. I spent all day Friday in the ER with a family emergency.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Capitalism has been called a system of greed, yet it is the system that raised the standard of living of its poorest citizens to heights no collectivist system has ever begun to equal and no tribal gang can conceive of."

Ann Rand


New Plays

Circle, Rectangle, Triangle

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company is Square and it had the worst day of its public life on Friday.


No New Bullish Plays


SQ - Square - Company Profile

Square develops and provides payment processing, point-of-sale, financial and marketing services worldwide. It provides Square Register, a point-of-sale software application for iOS and Android, which enables sellers to process credit cards for multiple items through their smart device.

The company was knocked for a 22% loss after reporting a Q1 loss of 14 cents compared to estimates for 9 cents. Revenue rose +51% to $379.2 million and beat estimates for $343.6 million. However, operating expenses rose +72% to $207 million. G&A costs rose from $28 million to $96 million because of a $50 million charge for a lawsuit against Robert Morley, who claims to be the creator of the Square card reader.

Square also has a share lockup expiration on Square on May 17th. About 64 million shares will be unlocked and the float will increase nearly three times. A lot of early investors including Visa, Starbucks, Sequoia Capital (5%) and Khosla Ventures (17%) will be able to sell their shares. Given the reduced guidance and rapid decline there may be a race to the exits.

According to the Wall Street Journal, a whopping 69.48% of the shares (14.6 million) are short as of March 15th. Currently the public float is only 21.01 million shares. Source

I was going to recommend shorting the stock into the lockup expiration but the short interest is too high. The cost to borrow the shares would be prohibitive and with that much short interest it could be explosive. Also, I have seen many lockup expirations that have turned into the bottom for the stock. Expectations are so bearish that the stock declines to a ridiculous price before the actual expiration and then there is no selling. Anyone with shares in the lockup could have already shorted the stock to protect those declining shares. When the lockup expires they use their unlocked shares to cover their shorts.

I am proposing we use a combination strategy. I am recommending we buy a May $10 put, which expires three days after the lockup expiration. At the same time I am recommending we buy a June $11 call in expectation for a sharp post lockup rebound. Remember, revenue increased 51% in Q1 and they raised guidance.

If the stock declines we sell our put for a profit before expiration and that reduces the cost in the call.

Buy May $10 put, currently, 65 cents. No stop loss.
Buy June $11 call, currently 65 cents. No stop loss.

In Play Updates and Reviews

Sell in May

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market is in a decline despite the afternoon rebound on Friday. The sell in May cycle is in full bloom and should accelerate as we move closer to Memorial Day.

Bank of America said equity fund outflows were the largest since the sharp market drop last August/September. Net outflows from equity funds nearly tripled last week to $16.9 billion and the largest since China's big currency devaluation crashed the global markets. Bond funds saw inflows of $5.6 billion and precious metal funds saw inflows rise 500% to $1.7 billion. High yield bond funds saw outflows of $2 billion while investment grade funds saw inflows of $5 billion and the largest in 13 months. Clearly, a lot of investors are taking the sell in May cycle seriously with money flowing out of equities and into bonds.

The S&P dipped to support at 2,040 at the open and held there for more than an hour. When there was no further decline by 12:30 a rebound began that turned into a short squeeze. Since April 20th, every one of these afternoon rebounds have been erased the next day. While that may not repeat on Monday, we will likely see lower lows by the end of the week.

I am trying to increase our exposure to bearish plays in anticipation of the sell in May cycle accelerating. If support at 2,040 breaks the next target is 2,020 and then 1,990 and 1,975.

Current Portfolio

Current Position Changes

BLOX - Infoblox

The long position was stopped out at $16.00.

GPRO - GoPro

The short position remains unopened until a trade at $9.50.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

BLOX - Infoblox - Company Profile


No specific news. Starboard Value never mentioned BLOX and shares declined to hit our stop loss at $16.00.

Original Trade Description: May 2nd.

Infoblox designs, develops, manufactures and sells network control solutions worldwide. Their primary product manages domain servers handling the routing of Domain Name Systems (DNS). In order for the Internet to work a domain name like OptionInvestor.com has to be converted to an actual IP address by looking up the DNS in a domain server or appliance. Because of the security issues surrounding this process the DNS system is a high priority and highly dynamic process.

I know that sounds kind of wonky but Infoblox has created an entire suite of products that make the process easy and secure.

Earnings May 26th.

Activist investor Starboard Value is the same fund that attacked Yahoo, Depomed, Macys, Advance Auto Parts and Darden Restaurants to name a few. They were just awarded a four board seats on the Yahoo board.

Starboard announced a 7% stake in BLOX on the 22nd saying the shares were undervalued. This suggests Starboard is about to announce changes they would like to see to improve shareholder value at BLOX. With the Sohn conference later this week, Smith typically announces his new projects in hopes of seeing a bump in the stock price and instilling a little fear in the board of the company to be attacked.

Last week the head of sales for BLOX left the company and the CEO is filling his spot temporarily. That sounds like a possibility for Starboard to agitate for change.

I am proposing we take a position in BLOX ahead of the Sohn Conference in hopes Starboard touts his new position. The stock has rallied to $17 where it came to a dead stop. A breakout over $17 could be explosive.

Position 5/3/16

Closed 5/6/16: Long BLOX shares @ $16.86, exit $16.00, -.86

TRN - Trinity Industries - Company Profile


No specific news. Minor rebound but support held.

We have a July call option so we have time to wait for a rally.

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


Big dip at the open but shares rebounded back to close positive. I really like the relative strength.

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.

Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.

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

GPRO - GoPro - Company Profile


Monster dip at the open to $9.81 but not enough to reach our entry point at $9.50. The rebound was likely profit taking by the shorts on the two week decline from $14. It does not cost us any money to watch.

Original Trade Description: May 5th.

GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.

GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.

They reported earnings on Thursday after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.

The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold and estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.

Shares fell slightly in afterhours but I expect them to make a new low in the weeks ahead. They closed the afterhours session at $10.16 and the historic low is $9.01. The afterhours low was $9.57.

With a GPRO trade at $9.50

Short GPRO shares, initial stop loss $11.50. I will lower that stop once we get past Friday.

INSY - Insys Therapeutics - Company Profile


The Biotech Index failed to close positive on Friday and that suggests the weakness will continue.

Original Trade Description: May 4th.

Insys is a specialty pharmaceutical company that develops and commercializes supportive care products. Their main drug (Subsys) is a sublingual fentanyl spray for cancer pain in opioid-tolerant patients.

They warned before earnings that Q1 sales of Subsys would only be in the range of $61-$62 million after Q4 sales were in the $91 million range, up +38%. In the year ago quarter Subsys sales were $70.5 million.

The problem is what the FDA said was improper off-label marketing that expanded the use of the drug last year. With that practice halted analysts believe the drug's best days are over.

Compounding the revenue problem was a decision by the FDA to move an approval date for Syndros from April 1st to July 1st. Syndros is a reformulation of the marijuana based drug marinol. Insys believes this could be a big seller in the hundreds of millions of dollars.

While that may be good for Insys in the future the trader community is leaving the stock until we get closer to the approval date.

Insys reported earnings of 11 cents that beat estimates for 8 cents. Revenue from Subsys was $62 million. Shares have been declining since the earnings report because of the revenue warning.

Earnings July 28th.

Position 5/5/16 with an INSY trade at $13.60

Short INSY shares @ $13.60, initial stop loss $14.60

NTAP - NetApp - Company Profile


No specific news. Bank of America Savita Subramanian recommended selling the five S&P-500 stocks most owned by active fund managers. She said massive redemptions from equity funds were forcing managers to lighten up on positions and those big holdings not performing well were the most likely to be sold. NTAP was at the top of the list.

NTAP missed our stop loss at $23.25 by a penny.

Original Trade Description: April 25th.

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.

Position 4/29/16 with a NTAP trade at $23.95

Short NTAP shares @ $23.95, initial stop loss $24.95


Long June $24 put @ $1.17, initial stop loss $24.95.

XLF - Financial ETF - ETF Profile


The ETF rebounded despite Goldman Sachs being the biggest lower on the Dow. You would have thought the banks would react negatively to the payroll numbers because it means the Fed will not be raising rates soon.

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

Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.

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