Option Investor

Daily Newsletter, Monday, 5/23/2016

Table of Contents

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

Market Wrap

Market Says What?!?

by Thomas Hughes

Click here to email Thomas Hughes


Federal Reserve and FOMC members keep telling us that June is a live meeting, the market does not quite believe them. Last week's Fed minutes were a bit of a shock; I don't think anyone was expecting them to say June was a "live meeting". Since then a number of Fed officials, both voting members and non, have come out in support of the sentiment. Many of them are now calling for at least 2, if not 3, rate hikes this year and yet the market still thinks they're blowing wind. According to the CME's Fed Watch Tool there is only a 26% chance of a June hike. This is up from last Monday, 8%, but down from 30% at the end of last week.

CME's Fed Watch Tool

Simply speaking to the idea that June is a live meeting, Janet Yellen has said time and time again, since the end of the Taper, that ALL meetings should be considered "live" so this may just be another case of Fed-Speak spooking the market. When you read into the minutes it is clear that yes, June could see a rate hike, but that decision is mired in the data and highly conditional.

Market Statistics

International markets had a bit of a rough Monday as well. In Asia indices closed flat to negative in the wake of Japanese economic data and a strengthening yen. The data, both last week's GDP figure and this week's trade data, show the Japanese economy doing better than expected and belaying expectations for the BOJ to further QE efforts. In addition, the BOJ may be constrained by political issues, namely the warning from Jack Lew that it was too soon for them to act.

European indices also fell, by about -0.5% on average, on falling oil prices and weaker than expected PMI. The composite PMI, both services and manufacturing, came in at an expansionary 52.9 but was below expectations and a 16 month low.

Futures trading here at home was weak to say the least. The early indications were for a flat to negative open and this held true for most of the morning. There was little drift to the downside pre-opening but this did not hold going into the start of today's session. After the opening bell the indices held very near to flat line. The SPX opened with a loss of about 1 point, moved about 1 point lower, reversed and moved up by 1 or two points, and then proceeded to trade in this tight range until just before lunch time. Shortly after 11:30AM the indices took a turn lower, extending the intraday low to about -3 points, and then returned to its earlier range where it remained until late in the day. The final half hour of trading saw selling pressure increase, if slightly, and pushed the market back to the low of the day.

Economic Calendar

The Economy

Not much in the way of economic today, no official reports for the US, and not too much this week. Tomorrow we'll get New Home Sales, Wednesday will be dominated by oil inventories, Thursday is jobless claims, Durable Goods and Pending Home Sales and then Friday the 2nd estimate for 1st quarter GDP. The consensus is for GDP to be revised up by 0.4% to 0.9%, if it is so it could increase the chances of the June rate hike.

Moody's weekly Survey of Business Confidence gained 0.1% to hit 30.7%. This is the second week of sub-31 reading since hitting a peak two weeks ago. In his summary Mr. Zandi says that business confidence has recovered from the swoon seen at the beginning of the year but I'm not seeing it in the chart. Sentiment remains strongest in the US and weakest in South America, the EU is holding steady and no mention of sentiment in Asia.

According to FactSet 95% of the S&P 500 has reported earnings so far this season, there are 13 due to report this week. Of those that have reported 71% have beaten EPS projections, 53% have beaten on the revenue side. The blended rate for 1st quarter earnings growth now stands at -6.8% with 7 sectors outperforming projections. This week's blended rate is an improvement from last week, and an improvement from the start of the cycle, but is still the largest decline in earnings growth since the earnings recession started.

Looking forward outlook is still mixed. Second quarter projections fell by a tenth to -4.7%, matching a low set 2 weeks ago, as did 3rd quarter projections, down to 1.3% from 1.4%. Fourth quarter projections held steady at 7.5% for the 4th week running, full year 2016 projections also held steady at 0.9%. Full year 2017 projections are also steady at 13.5%. For now, it still looks like the 2nd quarter will be the last one to post negative growth but that is not guaranteed. I'm bullish on earnings into the end of the year but remain cautious and waiting for concrete sign of rising expectations. The way things stand now the 2nd quarter is more than likely to be a 5th quarter of negative growth, and the 3rd quarter could easily become the 6th.

The Dollar Index

The Dollar Index held steady near the 2 month high as FOMC outlook sent the dollar higher versus the euro and BOJ outlook strengthened the Yen. The index created a small doji candle in today's session, just below the 61.8% retracement level, and may have reached a near term top. The indicators are consistent with such a top, MACD is peaking while stochastic enters overbought conditions, but further testing of resistance may be on the way. If the FOMC does indeed raise rates in June and/or the BOJ acts in favor of QE the dollar could easily shoot through this level, if one or the other fails to act the dollar could just as easily fall back to retest support. First target for support is near $94.25-$94.50, a break below this level would be dollar bearish. Resistance is near $95.50, a break above this level would be dollar bullish.

The Oil Index

Oil prices retreat from their 6 month high in today's session. WTI had been down as much as -2% on high storage and production levels but managed to close the session with a loss of only about -1%. Outlook remains tilted to the upside, market balance is projected for sometime in 2017, and that is helping to support prices. In the meantime supply and demand remains skewed to the supply side which may keep prices from advancing much further. Iran has taken production caps off the table so it does seem as if OPEC will continue to pump, regardless of what happens elsewhere in the world.

The Oil Index opened lower today but managed to regain most of the loss. The index closed with a decline of about -0.15% while creating a white bodied candle, but did not managed to move above resistance. Resistance is at the short term moving average and the 61.8% retracement level, near 1,120, and may continue to cap prices into the near term. The indicators are mixed and may be rolling into a bullish signal but a break above resistance will be required for confirmation. Failing to break above resistance could result in a pull back to support. First target for support should the index pull back is near 1,050, if the index is able to break above resistance first upside target is between 1,175 and 1,200.

The Gold Index

Gold traded in a tight range around $1250, driven by the dollar's inability to find direction. The spot price remains above support, at or just below $1250, and may remain there until the FOMC meeting in 3 weeks. However, there is some substantial data due out next week, the NFP/unemployment bundle fo one, that could influence FOMC outlook and by extension the dollar and gold prices. A move below $1250 would be bearish in the near term at least, with downside target in the $1210 to $1220 range. Any weakness in the data, and/or dovish spin to FOMC outlook, could send it back to retest resistance near $1275.

The gold miners managed to trade up despite the lack luster performance in the underlying metal. The miners ETF GDX did not make gains on the day but it was able to confirm near term support along the short term support along the short term moving average. Today's candle is not significant in its size or scope but is the third day in a row in which the moving average has been tested with prices closing above it. The indicators remain weak and indicative of potentially lower prices, at least a testing of support, so today's support level bears close watching. If gold prices are not able to stabilize a break of support may follow with a possible move down to the $21.25 level.

In The News, Story Stocks and Earnings

The Consumer Discretionary sector has been the top performer this cycle in terms of earnings growth. According to FactSet the sector has posted earnings growth of 19.5% for the calendar 1st quarter, slightly more than double the expectation. Within the sector 21 of the 31 sub-sectors are showing positive earnings growth, led by Internet Retail (+143%) and Auto Manufacturers (+101%). The XLY Consumer Discretionary SPDR has gained more than 18% since hitting bottom just prior to the start of the current earnings cycle and fallen roughly 4% since hitting its peak 3 weeks ago. Today the XLY traded flat in a day of low volume to close with a small loss. The ETF appears to be reversing, although forward outlook for earnings growth is positive through the end of the year and next year, as it is now below the short term moving average with bearish indications. If support is not found at the current level, near $77.50, a drop to $75 may be on the way. Since growth is expected to run above 11% for 2016 and 2017 I would expect any pull backs that happen now to provide attractive entry for long term positions into the end of the year and next.

Bayer announced some details of its proposed take-over of Monsanto. The company says the deal is worth $62 billion in cash and stock and values Monsanto at $122. Bayer would finance the deal through Bank of America and other banks but faces regulatory approval that many see not forthcoming. Today Monsanto gained more than 5% after gapping upward for the third time in three weeks, to trade near $110. If the deal goes through as stated today's closing price leaves more than 10% on the table.

Shares of Apple gained nearly 2% to trade above the $95 support/resistance line on a report that the company has requested suppliers make more iPhone 7's than first ordered. The news comes from the Taiwan Economic Daily which reports Apple has requested between 72 and 78 million 7's, roughly 20% more than Wall Street analysts have forecast. Today's action is a positive for the stock, which has been under pressure of late, but does not yet indicate reversal in prices. The candle is small and met resistance at the short term moving average which could keep it from moving higher. Also, the most recent bearish MACD peak is a long term extreme and convergent with the recent low, indicative of a likely retest of support levels near $90.

The Indices

Today's action was very light, and without much direction. The indices traded in very tight ranges, barely moving more than a tenth of a percent in either direction in most cases, and closing very near their opening prices. That being said there was one index which moved a little more than the rest, the Dow Jones Transportation Average, which closed with a loss near -0.4%. Today's candle is small and black, and not too close to either support or resistance, so is more than likely a spinning top and indicative of indecision more than anything else. The indicators are mixed, MACD momentum is consistent with a support bounce but has not turned bullish while stochastic has turned upward but not yet confirming support. Support is near 7,500, resistance near 7,750, and could keep the index range bound into the near term. A break above would be bullish, a break below would be bearish, and either move could take the index as much as 500 points in the direction of the break out.

The next largest decline was made by the S&P 500, about -0.2%. The broad market created a small black bodied candle, closing near the low of the day and below the 2,050 support/resistance line. The index may be building support at this level as evidenced by a slow uptick in stochastic and decline in bearish momentum but without a significant move above 2,050 and break above the short term moving average could just as easily be setting up for further pull back. Should it move lower from here first target for support is near 2,020. Should it break above the moving average first upside target is near 2,080.

The tech heavy NASDAQ Composite made the next largest decline, about -0.08%. The index created a very small candle, doji-like, that shows resistance at the short term moving average and the 4,790 resistance line. Today's action is not definitive for resistance but is suggestive, the indicators however may be telling another tale. MACD is very close to crossing over into bullishness which would confirm rising stochastic providing the index breaks above resistance. IF so upside target would be near 5,000, if not downside target is near 4,650.

Today's smallest decline was posted by the Dow Jones Industrial Average, about -0.05%. The blue chips created a very small candle, a spinning top with very low volume, appearing near the middle of a range demarcated by resistance at the short term moving average and support along the long term up trend line. The index may find support at the long term up trend line but there is little sign of it now. The indicators are weak and trending flat but not yet showing signs of a bounce. This range may hold over the next few days while we wait on the data. A break above resistance, near 17,600, could take it up to retest 18,000. A break below support, near 17,250, could take it down to 17,000 or 16,500 if the move gathers strength.

Today's action is indicative of hesitation, indecision and pause, not too surprising given the issues facing the market today. Top of the list, at least in the nearer term, is the FOMC and the possibility of a June rate hike. A close second is earnings expectations which are still negative for the next quarter, and weak for the quarter beyond that. These two issues alone could keep the market in check over the next few week, and easily spark a sell-off if the market does not like the way things develop. Bottom line, I just can't think of a reason for rally right now. The indicators may be rolling into a signal but without positive catalyst I just don't see them taking the market very high.

I am still very, very cautious in the near term and prepared for, if not expecting, a correction. Longer term, I remain bullish provided the economic data remains consistent with recovery and growth into the end of the year.

Until then, remember the trend!

Thomas Hughes

New Plays

Cheap Furniture

by Jim Brown

Click here to email Jim Brown
Editor's Note

Buying furniture is always a hassle. It is expensive and finding that right piece is always a problem and cost is always an issue. However, for the blue-collar working class that is less of a problem. They can always go to Rent-A-Center and rent to own and fill their apartment from wall to wall.


No New Bullish Plays


RCII - Rent-A-Center - Company Profile

Rent-A-Center leases household durable goods to customers on a rent to own basis. They offer products including consumer electronics, appliances, computers, tablets, smartphones and furniture. They also offer the products on an installment sale basis.

Their recent earnings of 48 cents fell -7.7% but they did beat estimates of 40 cents. Unfortunately, revenue declined -4.8% to $835.7 million and missed estimates for $851.1 million. Same store sales declined -2.5% overall and U.S. stores fell -3.8%.

The CEO said improving cost controls helped them beat on the top line. Unfortunately, when sales are falling you cannot continue to cut costs indefinitely. Sales have to rise in order to succeed.

The Acceptance Now division saw a zero increase in sales after rising sharply in the prior quarter. That division takes credit application at more than 1,400 kiosks in the U.S. and once approved the customer can shop at a large number of dealers that partner with RCII. The drop in revenue growth is due to higher numbers of credit declines.

Management also said rentals of computers, tablets and smartphones were also declining.

With same store sales declining and credit approvals harder to get, the company could continue to decline until those problems are reversed. I am targeting $10 on this position.

Earnings July 27th.

Sell short RCII shares, currently $12.21, initial stop loss $12.95.

No options recommended because of wide spreads.

In Play Updates and Reviews

Lower Close

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow only lost 8 points but it closed 58 points off the intraday highs. The Dow sank back below prior support at 17,500 and remains poised to move significantly lower. The volume was very anemic at 5.7 billion shares and the lowest non-holiday volume in 2016. This was settlement day for option expiration and is not normally a highly directional day but today was very slow with a very tight range.

The S&P only traded in a 5 point range until 10 min before the close when it suddenly dropped -4 points. Advancers and decliners were almost perfectly flat with 1,525 advancers and 1,560 decliners.

Volume may pickup on Tuesday but it will only be temporary with the holiday weekend ahead and the beginning of the summer doldrums.

The market is still poised to decline but the choppy trading over the last several days is playing havoc with directionality. We were stopped out of three positions on the Nasdaq bounce at the open plus a weekend story on FDC.

Crude oil declined as the new front month contract faded to $48 and closer to the level where the June contract expired on Friday.

Current Portfolio

Current Position Changes

OMED - OncoMed Pharma

The long position was entered at the open at $12.80.

HDP - Hortonworks

The short position was stopped out at $11.25.

GPRO - GoPro

The short position was stopped out at $9.45.

FDC - First Data

The short position was stopped out at $11.55.
The long put position is still open.

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

OMED - OncoMed Pharmaceuticals -
Company Profile


No specific news. Shares close at a four-week high.

Original Trade Description: May 21st.

OncoMed Pharmaceuticals is a clinical-stage company focused on discovering and developing novel anti-cancer stem cell and immuno-oncology therapeutics. OncoMed has seven anti-cancer therapeutic candidates in clinical development, where each target key cancer stem cell signaling pathways including Notch, Wnt and R-spondin LGR. OncoMed is advancing its wholly owned GITRL-Fc candidate and an undisclosed immuno-oncology candidate (IO#2) toward clinical trials in the 2016-2017 timeframe. OncoMed has formed strategic alliances with Celgene Corporation, Bayer Pharma AG and GlaxoSmithKline (GSK).

OncoMed is making six presentations at ASCO related to six oncology drug candidates, including robust preclinical anti-tumor activity data for its wholly owned GITRL-Fc candidate and from clinical trials of vantictumab, ipafricept, demcizumab and tarextumab.

All of that is Greek to me but this is a cancer conference and OncoMed is an up and coming cancer drug company. They should be right at home and the notes I have read suggest several of their drugs are very promising. They have milestone payments coming from GSK, Bayer and Celgene coming in 2016-2017 of more than $270 million.

Shares have risen steadily since the earnings miss on May 5th. As a preclinical company they do not have retail revenues and depend on funding from their partners. They will have operating losses until their drugs are in the marketplace.

Shares spiked on the 28th after AbbVie said they were buying cancer drug company Stemcentrx for $10.2 billion. That company is in the same stem cell research sector as OMED.

Earnings August 4th.

With the ASCO meeting still 10 days away we could benefit from some of the building excitement and hopefully the company's presentations at the meeting will increase the interest in the stock.

Position 5/23/16:

Long OMED shares @ $12.80, initial stop loss $10.85

No options recommended because of wide spreads.

SQ - Square - Company Profile


Shares rallied slightly after CLSA upgraded the stock from outperform to buy saying the lockup dip was over. More than 18 million shares traded on the two days after expiration. Normal volume is about 3.1 million shares.

Original Trade Description: May 7th.

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.

Position 5/9/16:

Long Jun $11 call @ 55 cents. See portfolio graphic for stop loss.

Previously closed 5/17/16: Long May $10 put @ 60 cents. Exit $1.00, +.40 gain.

BEARISH Play Updates

AMAG - AMAG Pharmaceuticals - Company Profile


No specific news. Resistance at $19 still holding. Analyst meeting announced for June 1st.

Original Trade Description: May 14th.

AMAG Pharmaceuticals, Inc., a specialty pharmaceutical company, provides products and services with a focus on maternal health, anemia management, and cancer supportive care in the United States. They also own Cord Blood Registry. This company collects, processes and stores umbilical cord blood and cord tissue for use in fighting chronic diseases in later childhood.

In their recent earnings they reported 94 cents that beat estimates for 89 cents. However, revenue of $109.3 million missed estimates for $123 million. Service revenues at Cord Blood were $19.5 million. However, R&D expenses rose +103.6% to $14.2 million and SG&A expenses rose 96.7% to $63.2 million.

With revenue well under estimates and expenses rising dramatically, the outlook for earnings weakened. While the company reiterated guidance for full year revenue in the $520-$570 million range that would require a significant rise in drug sales from the $109 million in Q1. Shares were downgraded to hold by Raymond James.

Earnings August 2nd.

Shares are at a 52-week low and they did not rally on Friday when the entire biotech sector was up more than 1%. They also failed to rally on the 9th when the biotech sector was up +3%. Apparently investors are not convinced they are going to be able to meet their revenue targets and earnings are going to suffer.

Position 5/16/16:

Short AMAG shares @ $18.33, see portfolio graphic for stop loss.


Long August $17 put @ $1.08, see portfolio graphic for stop loss.

DB - Deutsche Bank - Company Profile


The SEC said it is investigating DB for problems in its mortgage bond business. The SEC believes DB hid losses and assets in the years after the financial crisis. The SEC believes the bank delayed reporting losses for an extended period of time until there were profits to mask the losses. Another class action suit was filed by Levi & Korsinsky LLP on a different issue. Another five law firms are preparing to file a group of five banks over alleged collusion in bond trading and price fixing on $9 trillion in bonds. The DOJ is already investigating DB on these charges as well as the FCA in the UK.

Original Trade Description: May 14th.

Deutsche Bank AG provides investment, financial, and related products and services worldwide. The company operates through Global Markets; Corporate & Investment Banking; Private, Wealth and Commercial Clients; Postbank, Deutsche Asset Management; and Non-Core Operations Unit segments. It offers a range of financial markets products, including bonds, equities and equity-linked products, exchange-traded and over-the-counter derivatives, foreign exchange, money market instruments, and securitized products, as well as mergers and acquisitions, and debt and equity advisory and origination services; and commercial banking, advisory banking, and financial services. The company also provides investment and insurance, mortgages, business products, consumer finance, payments, cards and accounts, deposits, and mid-cap related products, as well as life and non-life insurance products, and corporate pension schemes; payments, financing for international trade, lending, trust, agency, depositary, custody, and related services; invests in a range of asset classes, including equities, fixed income, real estate, infrastructure, private equity, and hedge funds. As of December 31, 2015, it operated 2,790 branches in 70 countries. Deutsche Bank AG was founded in 1870. Unfortunately, DB may be in serious trouble. There are numerous rumors of financial problems of all types. The bank reported a record loss for 2015 and is being buried by a mountain of litigation related to subprime loans, manipulation of foreign exchange rates and gold and silver prices. They are under attack for rigging the Libor and Euribor interest rates used to set the prices for mortgage loans and derivatives. DB has paid more than $3 billion in fines already but that is a drop in the proverbial bucket compared to what is coming. There are numerous class action suits for multiple offenses, many of which DB has already admitted it committed.

DB debt yields are soaring as investors race to get out of positions before the bank crashes. Last week DB offered customers a 5% yield if they would deposit 10,000 to 50,000 euros and leave the money in the bank for 90 days. With the ECB willing to lend an unlimited number of euros to any European bank on almost any collateral, why is the bank offering customers 5% interest for 90 day money? It appears there is a massive liquidity squeeze underway and money is rapidly flowing out of DB accounts.

In the fine print on the offer DB says, "In case of bankruptcy or risk of bankruptcy of financial institution, the saver is at risk of losing their savings or may be subject to a reduction / conversion into shares (bail-in) of the amount of the claim that he has the financial setting on top of the amount covered by the double German guarantee scheme for deposits". I doubt savers are rushing to deposit money that can be confiscated by a bail-in for the bank like we saw in Greece.

Position 5/16/16:

Short DB shares @ $16.37, see portfolio graphic for stop loss.


Long July $16 put @ $1.10, see portfolio graphic for stop loss.

ENDP - Endo Intl Plc - Company Description


No specific news.

Resistance is 15.85 to 16.15 and I recommend we stay with it until we see if that resistance will hold. The current stop loss of $16.45.

Original Trade Description: May 11th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $26 last week to $14 today. The company slashed full year guidance by -11% on revenue and -23% on earnings. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also disclosed they were being investigated by the U.S. Attorney's Office for its relationship with pharmacy benefit managers or PBMs. In light of the improper relationship between Valeant and Philidor the USAO is investigating to see if the same problems exist at Endo. In November, Novartis had to pay a $390 million fine to settle charges it paid specialty pharmacies for illegal kickbacks in exchange for inducing patients to refill certain medications.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are August 4th.

Even though shares are down significantly from the May 6th news, I believe they will continue falling and could go into single digits. The similarities to Valeant's pharmacy problems and the impact to Valeant's stock are too close and should weigh on Endo.

Position 5/12/16:

Short ENDP shares @ $13.81, see portfolio graphic for stop loss.


Long June $12.50 put @ $1.05, see portfolio graphic for stop loss.

FDC - First Data - Company Profile


An article in Barron's over the weekend praised FDC and said there was 70% upside in the stock. Shares gapped open to stop us out at $11.55 on the short position. However, there was no stop loss on the option and that position remains open. At the current 15 cent price that is a lottery ticket that the headlines will fade and the original direction will return.

Original Trade Description: May 16th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions.

In their Q1 earnings, they grew revenue 3% and operating income rose from $185 to $220 million. Earnings of 24 cents were slightly above expectations for 21 cents. Revenue of $1.69 billion was below estimates for $1.71 billion. Unfortunately, FDC has $19 billion in debt compared to its $3 billion market cap. Interest expense in the first quarter was $263 million or more than $1 billion a year.

Global business solutions revenue declined in the quarter while financial solutions and security solutions showed only marginal growth.

Earnings July 21st.

While the company tried to put a positive face on the future by projecting revenue growth, it appears investors were not impressed. Shares have fallen from $13.50 to $10.50 over the last three weeks since earnings. FDC does not provide guidance and that is troubling to some investors.

I am anticipating a retest of the post IPO low at $8.50 or even worse, depending on the market.

Position 5/17/16:

Short FDC shares @ $10.69, exit $11.55, -.86 loss.


Long July $10 put @ $.60, no stop loss.

GPRO - GoPro - Company Profile


No specific news. GoPro spiked 45 cents at the open to stop us out at $9.45. There was no news. This was market related with the Nasdaq gapping higher at the open.

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.

Here is an interesting article on GoPro competitors. We could see this stock reach low single digits. GoPro Competition

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.

Position 5/19/16

Closed 5/23/16: Short GPRO shares at $8.75, exit $9.45, 70 cent loss.

Previously Closed 5/13/16: Short GPRO shares @ $9.65. Exit $9.35, +.30 gain.

HDP - Hortonworks - Company Profile


The HDP short was reentered at the open at $10.69 but shares continued to move higher and we were stopped out again at $11.25 for a 46-cent loss. We are done with HDP. Two spike stops in two days is two too many.

Original Trade Description: May 19th.

Hortonworks, Inc. focuses on the development, distribution, and support of Hadoop open source project in the United States and internationally. It offers Hortonworks Data Platform (HDP), an enterprise-grade data management platform that enables its customers to capture, store, process, and analyze increasing amounts of existing and new data types without the need to replace their existing data center infrastructure.

In March Hortonworks and Hewlett Packard Labs announced a collaboration to enhance Apache Spark. Hewlett & Hortonworks

Apparently, they are not setting the world on fire. They reported a Q1 loss of 68 cents that missed estimates by a penny. Revenue rose to $41.3 million and beat estimates slightly. They guided for the current quarter for revenue of $45 million that was in line with estimates.

Investors were not excited about the lackluster earnings and the prospect for continued losses. Shares fell from $12 to $10 after the earnings and after a small dead cat bounce back to $11 the trend has been lower. The stock closed at $9.89 today and a three-month low. The historic low is $7.12 and the odds are good it will be tested if the overall market remains weak.

Position 5/23/16:

Closed 5/23/16: Short HDP shares @ $10.79, exit $11.55, -.46 loss.

Previously Closed 5/20/16: Short HDP shares @ $10.18, exit $10.75, -.57 loss.

LOCO - El Pollo Loco - Company Profile


No specific news. Shares spiked at the open with the market but faded into the close.

Original Trade Description: May 18th.

El Pollo Loco develops, franchises, licenses and operates quick service restaurants in the USA. The company offers individual and family sized chicken meals, Mexican inspired entrees and sides. They currently have 430 company owned and franchised restaurants. They are planning opening 16-20 additional stores in 2016.

The big spike on the IPO came on name recognition, a successful roadshow and a small number of shares initially offered. They later waived the lockup period and allowed insiders to sell their shares on November 19th, 2014, two months earlier than stated in the IPO documents. Shares crashed from $33 on the news and have never recovered that level.

The reported earnings on May 5th of 17 cents that missed estimates for 18 cents. Revenue of $94.4 million also missed estimates for $96.9 million. They guided for full year earnings of 70-74 cents, which was almost zero growth from the Q1 numbers. That suggests the competition is fierce and they are having trouble gaining market share. Earnings in 2015 were 71 cents.

Net income declined -19.8% in Q1. Same store sales declined -0.6% for company operated restaurants. That is not a good track record to use when selling new franchises.

Next earnings August 4th.

I think the crazy chicken is dying. Their moment in the sun is fading along with their stock price. Shares are rapidly approaching their post IPO low of $9.58 and once you break under that $10 level it is very hard to recover.

Position 5/19/16

Short LOCO shares @ $10.61, see portfolio graphic for stop loss.
No options recommended.

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