Option Investor

Daily Newsletter, Tuesday, 5/24/2016

Table of Contents

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

Market Wrap

The Day the Brexit Died

by Jim Brown

Click here to email Jim Brown

A new survey of potential voters suggests the support is collapsing for those wishing to leave the EU.

Market Statistics

A new survey found that 55% of likely conservative voters are planning on voting to stay in the EU while only 42% will vote to leave the union. Among all voters, the Remain campaign now has a 20-point lead with 58% planning on voting to remain in the EU. The new survey found that men, Tory voters and people over 65 are increasingly moving to the Remain side of the issue.

This suggests the worry over a Brexit has run its course. The European markets had a monster rally with several up more than 2%. The European rally carried over into the U.S. and our markets exploded at the open in yet another short squeeze.

Helping to push the U.S. markets higher was a larger than expected spike in new home sales. The April sales came in at an annualized pace of 619,000 compared to the March pace of 511,000 homes. Consensus estimates were for a rise to 522,500 homes.

The spike was a 16.6% increase and put April at 23.8% above April 2015. February and March sales were also adjusted significantly higher. March was raised from 511,000 to 531,000 and February rose from 519,000 to 538,000.

Sales in the Northeast rose by 52.8%, South by 15.8% and West by 18.8%. Sales in the Midwest declined -4.8%. The months of supply on the market fell from 5.5 to 4.7 months. The median home price rose from $295,200 to $321,700 and a record high. That was a 9% rise. The average price of a new home rose 13.5% to $379,800. There were 243,000 listings of new homes in April, up 17.5% from April 2015. The number of new homes sold but not yet under construction rose 29% from March and was 33.8% of the total sales.

The big surprise in home sales helped juice the market even higher when the numbers were released.

Unfortunately, not all the economic news was good. The Richmond Fed Manufacturing Survey declined sharply from April's +14 to -1 for May. The spike from -4 to +22 in March has been completely erased and the outlook is not positive. The order backlog declined to -13 and new orders were flat at zero. The gap between orders and inventories declined from +4 to -19.

With the index now in contraction territory along with the Philly Fed Survey, there is even greater likelihood the national ISM report on June 1st will also be in contraction. This is going to put a lot of pressure on the Fed to not hike rates with the manufacturing sector declining.

In this case, bad news may be good news for those hoping the Fed does not hike rates.

I am including the data from the Philly Fed Manufacturing Survey from last week for comparison. The shaded numbers are all negative.

Wednesday does not have any reports of market interest other than possibly the oil inventory report. The Trade Deficit is not a market mover. Thursday has the Kansas Fed Manufacturing Survey and it was in contraction last month at -4 so the outlook there is still negative. The pending home sales report should be positive since we are in the home selling season.

The big events are still the GDP and the Yellen speech on Friday. Yellen could calm the markets by disagreeing with the recent Fed presidents that are talking up rate hikes. In just the last weeks John Williams said, "2-3 hikes in 2016 is appropriate." Dennis Lockhart said to expect, "2-3 hikes this year." Eric Rosengren said, multiple "rate hikes are absolutely appropriate." Last but not least William Dudley said, multiple rate hikes "would be a reasonable assumption." If Yellen says something similar, we are going to have a rocky first week of June.

In stock news, Twitter (TWTR) was downgraded to a sell from neutral by MoffettNathanson saying hope is not a strategy. Monness Crespi Hardt slashed the price target from $22 to $18 but kept a buy rating. The analyst said "Twitter has been frustrating to cover, not only because of its declining share value, but more so because of its vast potential that is eroding by the day." Shares fell -2.6% on the news.

On a positive note, the company announced changes to its format to make it less confusing and erode the 140-character limit. In the future users will be able to retweet themselves if they felt the first post was ignored or they want to add additional comments. Media attachments such as photos, GIFs, videos and polls, will no longer count as characters in the 140-character limit. If you want to have a conversation with several people, their usernames will no longer count against your character limit.

Hewlett Packard Enterprise (HPE) reported earnings of 42 cents that matched estimates. Revenue of $12.71 billion beat estimates for $12.42 billion. They guided for the current quarter for earnings in the 42-46 cent range and for the full year at $1.85-$1.95 range.

The bigger news was the announcement of a spinoff of its IT services business and merge it with Computer Sciences Corp (CSC) in a merger of equals. After the spinoff, HPE expects to have $33 billion in annual revenue. HPE said the expected synergies of the spin/merger will exceed $1 billion in the first year after it closes. After the spinoff, 50% of CSC will be held by HPE shareholders. The company said there will be $900 million in separation charges and $300 million will be incurred in 2016. The spinoff is expected to be completed in early 2017.

The HP services division has about 100,000 employees and contributes more than a third of HPE revenue but lags in terms of growth and profit. By eliminating this division, HPE will be stronger and more profitable. After the merger, CSC should have revenue around $26 billion. HPE shareholders will get a special dividend of $1.5 billion and the 50% stake in CSC.

Shares of HPE rose 10% in afterhours and CSC shares rose 27%.

Intuit (INTU) reported earnings of $3.43 compared to estimates for $3.19. Revenue of $2.3 billion also beat estimates for $2.25 billion. The company guided for the current quarter to revenue of $720 to $740 million and analysts were expecting $718 million. Full year earnings are now forecasted for $3.63 to $3.65 per share with revenue of $4.66 to $4.68 billion. Shares declined -$2 in afterhours trading.

Apple (AAPL) shares rallied to $98 after suppliers said Apple had requested enough components to make 72-78 million iPhone 7s this year. Since analysts were modeling 55-65 million that was a significant increase. Rumors continue to swirl that there will be multiple cameras, more speakers and a faster processor but nobody knows for sure.

Apple is reportedly working on a smart device for the home like Amazon's Echo device. The device would be "Siri powered" but a lot smarter. Apple is reportedly opening the Siri app up to third party developers to give it more capabilities. The Siri development kit is expected to be released in June at the annual WWDC conference. The Siri speaker device has reportedly been in development long before the arrival of the Echo. The new device will be able to turn on/off any device supported by Apple's HomeKit platform.

Monsanto (MON) has rejected the unsolicited $62 billion offer from Bayer but said it was open to more talks. Bayer went public with the $122 per share cash offer on Monday and Monsanto said it "significantly" undervalued the company and was "incomplete and financially inadequate." That would be the largest all cash deal on record if it occurs. Monsanto said an integrated strategy would have substantial benefits to growers and broader society. The company said there could also be significant regulatory risks to the proposed transaction.

Bayer responded saying the $122 offer represents "full and certain value" for Monsanto shareholders but looks forward to engaging in constructive discussions with the company. "We are confident we can address any potential financing or regulatory matters." Analysts believe it would take something in the $135 range to entice Monsanto to agree to a deal. Previously Monsanto approached Bayer to see if they wanted to sell their crop science unit. ChemChina is buying Syngenta for $43 billion after Syngenta rejected an offer from Monsanto. Dow Chemical and DuPont are merging in a $130 billion deal. With those other mergers, it might make a Bayer/Monsanto combination easier to get regulatory approval.

Monsanto shares are trading at $109 so there is plenty of room for expansion into a $125-$135 offer.

Herbalife (HLF) shares were volatile today after the NY Post reported they had an agreement in principle with the FTC over their marketing program. The Post said an announcement could come as soon as Tuesday. Terms of the settlement were unknown other than there would be a significant financial penalty and no material change to the business model.

However, about midday other sources said there was no deal and discussions were ongoing. The FTC was meeting in Washington on Tuesday on an undisclosed law enforcement matter believed to be the Herbalife probe. Shares spiked $5 on the original news but gave back half the gains on the denial.

Under Armour (UA) has reportedly signed a $280 million, 15-year deal with the University of California, Los Angeles (UCLA). If true, this would be the largest college sports apparel deal in history. Footwear and apparel manufacturers are paying obscene amounts of money to put their logos on teams and sports. Nike recently signed a 15-year deal with Ohio State for $252 million, which was the largest ever at the time. They also signed Texas to a 15-year deal for $250 million and Michigan to an 11-year deal for $169 million. Nike also reportedly signed LeBron James to a $1 billion lifetime endorsement contract.

UCLA has 43,000 students and a large international population, which appeals to Under Armour. California has been a Nike controlled stronghold but the UCLA deal gives Under Armour a foothold in the state. The deal replaces Adidas, which has been the school's sponsor for twenty years. In the deal, all 25 of UCLA's varsity programs, the band and the spirit dancers will wear Under Armour apparel and footwear. UA will also open more retail locations all across Los Angeles.

Crude oil rallied to $49.25 in afterhours when the API inventories showed a decline of -5.1 million barrels for last week compared to estimates for a -2.5 million barrel decline. The EIA inventories out Wednesday morning are the numbers traders watch the most but the API decline has pushed WTI ever closer to that magic $50 level. I would be really surprised if we did not see a sell the news event when that level is reached.

Also lifting prices was news that demand was at the highest level in five years. Oil discoveries outside the U.S. in 2015 were the lowest since 1952 at 2.8 billion barrels. Iraq warned that production slowed from a record 4.78 mbpd in April to 4.5 mbpd because of infrastructure issues that could be resolved next month. The IEA believes there could be more than 3.0 mbpd of production offline because of numerous types of outages from fires to rebel militants to economic reasons. Venezuela oil production has declined 7% in 2016 as that country's economy self-destructs.

Oil is rising on the various outages despite the spike in the dollar to a new two-month high. Unfortunately, gold is crashing as the dollar gets stronger. The rising dollar is another problem for the Fed because it weakens the economy and makes our exports more costly overseas.


It was a short squeeze. Deal with it. I get emails asking me why the market surged so unexpectedly. Things happen unexpectedly. When everyone expects the market to go in a particular direction they plan accordingly in their trades. Over the last month all of that planning has been to add more short positions in anticipation of the sell in May cycle. That means everyone is leaning to the downside and when an unexpected headline appears we all get caught in the squeeze that follows. It is not fun but it is a fact of life when you invest.

The big news today was the impending death of the Brexit movement and the rally in the European markets. When the new home sales came out that threw gas on an already roaring fire. While Monday's volume of 5.7 billion shares was the lightest non-holiday volume of the year, today's volume of 6.9 billion shares was moderate. This was not the same short squeeze we are seen in the four prior events in May that occurred on low volume. That means either that there were more people short this time or there was more buying from funds that were relieved the Brexit issue was going to be resolved in the best possible way.

We cannot just assume that Wednesday's market will erase this squeeze like the last four were erased. There is the risk for the bears that more buyers will appear now that the Brexit roadblock has been dismantled.

The S&P stopped right at solid resistance and this would be the perfect place for the short squeeze to fail. While we cannot count on it, we should be prepared for a retracement. At the same time, we should be prepared for another retest of 2,100 if more buyers appear. I still do not believe we are going to set new highs ahead of the summer doldrums but we could retest resistance at 2,100.

Support remains 2,040 but that seems like a long way off tonight. I do believe if we test that support again it will fail convincingly. You can only test support and resistance levels so many times before they fail. Every test chips away at that level and eventually it breaks.

Like the S&P, the Dow stopped exactly at strong resistance at 17,750 and could be poised to roll over on Wednesday. If you have any doubt this was a short squeeze you only need to look at the American Express chart. All the gains were in the first 30 minutes and shares went sideways the rest of the day. AXP is a Dow component and they all look pretty much the same.

The Nasdaq was the hottest of the big cap indexes with a monster 95 point gain. The gainers list below is filed with the big cap stocks plus a healthy dose of biotech stocks. That sector rallied nearly 2% again to move closer to resistance at 3,250. The biotechs are in rally mode ahead of next week's ASCO cancer conference but they will more than likely fade once it starts.

The Nasdaq blew through resistance at 4,800 and is closing in on 4,900 and the highs from April at 4,965. It will not be a cakewalk for the Nasdaq to move higher but as long as the chip stocks, Apple component suppliers and the biotechs continue to rise there is always the potential for a Nasdaq rally.

The Russell 2000 exploded higher and moved significantly above the congestive resistance but it is far from out of danger. The same factors pushing the Nasdaq higher are also pushing the Russell. Plus, the small cap Russell stocks are normally heavily shorted going into the summer months. Today's squeeze was murder for those investors with small cap shorts. Critical resistance is now 1,150.

Wednesday should be interesting. It could be a directional indicator day. If we continue higher, there will be an entirely new round of short covering and a lot of price chasing by those investors and funds that are holding cash. The funds are facing the end of the month and they may try to mark up their holdings by investing in the market leaders in hopes of pushing prices higher. This is not a quarter end so that practice would not be very strong but it still exists.

If the market rolls over again and heads back to support, I would expect those shorts that were blown out today to jump back in with a vengeance. Volume is going to fall off a cliff starting tomorrow as traders get an early start on the holiday weekend. That means most of the action could start early and then dwindle in the afternoon. If anything the slowing volume could reduce the velocity of any directional move and we could simply wander between todays close and support for the next three days.

If you do not have to be in the market, I would probably recommend remaining in cash until next week. We could see a new directional move begin next Tuesday and I would rather not be on the wrong side of that move. Wednesday's market direction could give us a clue for next week but I would not bet the farm on it.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Up or Down?

by Jim Brown

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Editor's Note

Four times in May the short squeezes have been erased the next day. Is the fifth time the charm? Will Wednesday be the reversal of the trend where the market screams higher or will the trend continue and we close back on the lows from Monday? Obviously, nobody knows for sure and with volume expected to fall off a cliff ahead of the holiday weekend we would be at higher risk of being wrong if we enter a new position at the open tomorrow. No new plays tonight.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Squeeze Me One More Time

by Jim Brown

Click here to email Jim Brown

Editors Note:

These weekly short squeezes are getting to be a nuisance. Just as our short positions are on the verge of a real breakdown we get another short squeeze that resets everyone's expectations. Today was a combination of the end of Brexit worries, new home sales and bad news from the Richmond Survey's that suggest the Fed will not raise rates. Short were squeezed from every angle.

We only lost one position than that was AMAG Pharma. However, because of the end of Brexit worries I am recommending we close the Deutsche Bank position. With support collapsing for those wanting to leave the Eurozone it should be positive for European banks for the next several weeks.

The Dow shot up to resistance at 17,750 and then sold off into the close. Art Cashin said there was $400 million in sell on close orders on the NYSE. I do not know if this short squeeze will fail like the others but we are at solid resistance.

Current Portfolio

Current Position Changes

RCII - Rent-A-Center

The short position was entered at the open at $12.58.

AMAG - Amag Pharma

The short position was stopped out at $19.25.

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-month 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, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

SQ - Square - Company Profile


Shares rallied again after BTIG upgraded the stock from neutral to buy with a price target of $12.

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. Short squeeze in biotechs stopped us out.

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:

Closed 5/24/16: Short AMAG shares @ $18.33, exit 19.25, -.92 loss.


Closed 5/24/16: Long August $17 put @ $1.08, exit 1.15, +.07 gain.

DB - Deutsche Bank - Company Profile


Despite increasingly bad news for DB, the end of Brexit is going to be a temporary positive for all European banks. I am recommending we close the position.


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


No specific news. The market short squeeze added another 42 cents to FDC.

While we were stopped out on the short on 5/23 there was no stop loss on the option and that position remains open. At the current 10-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.

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.

RCII - Rent-A-Center - Company Profile


Good timing on the entry. Coverage was initiated with a buy rating by Topeka Capital markets. Shares spiked at the open to give us a better entry point.

Original Trade Description: May 23rd.

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.

Position 5/24/16:

Short RCII shares @ $12.58, initial stop loss $12.95.

No options recommended because of wide spreads.

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