Option Investor

Daily Newsletter, Saturday, 5/28/2016

Table of Contents

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

Market Wrap

Melting Up

by Jim Brown

Click here to email Jim Brown

With very little news on Friday, investors passed time while they waited for Yellen to speak. The post Yellen decline was lackluster and shorts covered at the close.

Market Statistics

Friday Statistics

When Yellen spoke in the early afternoon she was asked about a rate hike and she said, "It's appropriate, and I have said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate." That was the end of the conversation about rates and the market was underwhelmed.

Sellers tried to take the market lower after her comments but the S&P stopped falling at 2,092 and after 30 minutes of no decline the shorts began to cover and the market melted up into the close with the S&P ending the day at 2,099.

This was a holiday Friday and volume was very light at 5.5 billion shares and the second slowest day of the year. The Dow traded in a very narrow 49-point range. That was the narrowest for a full day of trading in the last 18 months.

Traders were absent and the meltup was more a lack of sellers than an abundance of buyers. Advancers were 2:1 over decliners and advancing volume was 3:2 over declining volume.

The economics for the day were positive but not stimulating.

The Q1 GDP revision saw the initial 0.5% number revised up to +0.8%. That is hardly a roaring economy despite what the Fed would have you believe. This was the slowest growth in a year. That compares to 1.4% in 2015-Q4, 2.0% in Q3 and 3.92% in Q2. The trend is going in the wrong direction.

Housing was the biggest contribution with consumer spending rising 1.29%, down from 1.66% in Q4 and 2.04% in Q3. Government added -.2% while inventories removed -0.2% and exports -0.21%. Nonresidential investment was the biggest loser at -0.81%. One bright point was a +1.94% increase in after tax profits compared to -8.08% in Q4 and -3.3% in Q3.

Consumer sentiment for May was revised lower from 95.8 to 94.7 but that was still well above the 89.0 in April. The present conditions component rose from 106.7 to 109.9 and the expectations component rose from 77.6 to 84.9.

This was the highest level for the headline number since last June. Gasoline prices have risen but are still well below the average for this time of year. Consumers are glad winter is over and summer has arrived.

The calendar for next week is very busy. The ISM Manufacturing, Fed Beige Book, ADP Employment and Nonfarm Payrolls head the list as the most important items but there is plenty of filler in the form of other reports.

The OPEC production meeting starts on Thursday and the ASCO cancer conference opens a 4-day run on Friday. That should continue to support biotech stocks next week.

Stock news was also muted with only a handful of companies making headlines. Big Lots (BIG) reported earnings of 82 cents that beat estimates for 71 cents. Revenue of $1.31 billion beat estimates of $1.30 billion. They guided for the current quarter to earnings of 42-47 cents and for the full year to earnings of $3.35-$3.50. Analysts were expecting $3.30. Same store sales were +3%. The CEO said their core customer continued to respond positively to improved merchandise selection and better in-store execution. Shares exploded higher by 14% to $51.

Ulta Salon (ULTA) reported earnings of $1.45 compared to estimates for $1.29. Revenue of $1.07 billion beat estimates for $1.03 billion. They guided for the current quarter to revenue of $1.04-$1.06 billion and analysts were expecting $1.03 billion. Earnings are expected to grow in the low 20% range and slightly higher than the prior 18-20% forecast. Same store sales rose a whopping 15.2% and beating estimates for 10.7%. The CEO said their consumers were healthy and demand was strong thanks to their unique format and offerings. Shares rose 9% on the news.

Palo Alto Networks (PANW) really stunk up the sector after they reported a loss of 86 cents that was significantly more than the 28-cent estimate. Revenue surged 47.7% to $345.8 million, which easily beat estimates for $339 million. However, expenses rose 50%. All of the revenue metrics were very positive for their various products but they are not making any money. They did guide for Q2 for revenue to rise 36% to $388 million and for earnings of 48-50 cents. Analysts were expecting a loss of 23 cents. Analysts did see the revenue growth as a guide down from the 47.7% in the last quarter. Shares fell -12% on the news.

GameStop (GME) reported earnings of 66 cents compared to estimates for 62 cents. Revenue fell -4.3% to $1.97 billion but matched estimates. However, shares declined on the guidance. Sales of game consoles and accessories declined -28.8% in Q1. They guided for earnings of 23-30 cents in Q2 and analysts were expecting 33 cents. The company said the gaming business would continue to decline in 2016 so it is expanding its technology brands business, which sells cellphones, tablets, computers and other computer electronics. While game sales declined -28.8% revenue from the technology brands business rose +62.2%. Shares fell -4%.

Deckers (DECK) reported earnings of 11 cents that beat estimates for 6 cents. Revenue of $378.6 million beat estimated for $363.4 million. They guided for full year earnings in the range of $4.05 to $4.40 per share. That missed analyst estimates for $4.60. The CEO said the warmer than normal weather impacted sales of their Uggs brand. They projected sales to be down -3% over the next fiscal year. They are looking for a loss of $2.10 to $2.20 for the current quarter with sales falling 20%-25%. This is traditionally a weak quarter because boot sales are very slow. The company was downgraded from buy to neutral by Citigroup. Strangely, shares rallied 8%.

More than 98% of the S&P-500 have reported earnings. The blended earnings through Friday were down -6.7%. Eighty companies have issued negative guidance and 31 companies issued positive guidance. Revenue declined -1.5%. This the fourth consecutive quarter of earnings declines and Q2 is also projected to be negative. This was the fifth consecutive quarter of revenue declines. This is the worst string of earnings since the financial crisis.

The earnings for next week are very light with Broadcom (AVGO) the highlight for the week followed by Kors, Ctrip.com and WorkDay.

Valeant Pharmaceuticals (VRX) shares rose 9% intraday before falling back to +5% after news broke that TPG and Takeda had made a takeover offer for the company. The offer was made several weeks ago before Joe Papa became CEO. There was talk on how an acquisition would work but a firm price was never discussed. The parties are no longer holding discussions. Valeant has about $30 billion in debt but they also have a lot of assets. Any acquisition would probably try to sell off non-core asset quickly to pay down the Debt. Papa has said Valeant expects to pay down $1.5 billion in 2016 and increase the amounts in future years.

Thermo Fisher (TMO) is buying FEI (FEIC) for $107.50 a share of roughly $4.2 billion. FEI is a microscope technology specialist company. Thermo Fisher CEO Marc Casper said the growing adoption of electron microscopy to study the structure of proteins is an important field in life sciences. FRI will complement our mass spectrometry leadership. The acquisition will add 30 cents to TMO earnings in the first year. Shares spiked to more than $108. I wonder if traders expect a competing offer?

Freeport McMoran (FCX) will pay Rowan Companies (RDC) $215 million to cancel another drilling rig contract. The lease on the Rowan Relentless drillship was scheduled to terminate in June 2017. Freeport could be liable for another $10-$20 million in contingent payments depending on the price of oil over the next 12 months. The ship had already moved to out of service mode because Freeport was not involved in any drilling.

Freeport has significant assets in the Gulf of Mexico and it said it was negotiating with several firms over "North American" assets. They bought some deepwater assets from Apache for $1.4 billion in 2014 just before the oil crash began. They own non-operated interests in the Lucius and Heidelberg developments along with 11 primary exploration blocks. The deepwater assets have an estimated 55 million barrels of oil reserves and several hundred million BOE of gas and liquids.

Freeport bought the assets after it sold Encana $3.1 billion in Eagle Ford Shale assets. Freeport also owns the gulf assets of McMoran Exploration that they took over in 2014 along with the $6.9 billion in assets from Plains Exploration & Production they bought at the same time.

Freeport's problem is their big shopping spree just before the oil crash. Now they have all these assets acquired when oil was $110 and they are worth less than half what they paid for them. Reportedly, they are in talks with China's Citic Metals to sell a stake in the North American and South American mining operations. The stake under discussion could be up to 20% and the reported price is $2 billion. They are also in talks with another "investor group" but no decisions have been made. Freeport is trying to reduce its debt by 50%.

Western Digital (WDC) revised its guidance to reflect the completion of the SanDisk acquisition. They now expect current quarter revenue in the range of $3.35-$3.45 billion compared to the prior forecast of $2.6-$2.7 billion. Earnings are expected to be between $.65-$.70 cents compared to the prior forecast for $1.05. The new guidance now includes interest costs of about $220 million. They incurred $30 million in debt issuance costs and $50 million in interest prior to closing on the acquisition. I believe WDC is going to rally off the recent lows and through resistance at $51. The combined companies are much stronger with a wider range of products than Seagate and sales late this year and in 2017 are going to be much stronger.

The National Oceanic and Atmospheric Administration (NOAA) released its predictions for this summer. They are predicting a hotter than normal summer primarily in the west and the Northeast. They also predicted a stronger hurricane season than in recent years. They expect a 70% likelihood of 10-16 named storms, 4-8 hurricanes and 1-8 major hurricanes. Over the last three years, we have averaged only four hurricanes per year. The second storm of the season could form this weekend. Tropical depression TWO is moving off the coast of Florida but is expected to move northwest and strengthen as it hits the warmer water off the coasts. The storm will be named Bonnie. This should produce some significant waves for the holiday beach goers in that area.

Holiday travelers are expected to spend $12 billion on gasoline this weekend. It would be worse but with the average gas price at $2.32 that is 40 cents less than in 2015. The ten-year average is $3.15. The average road trip this weekend is around 400 miles. With oil prices rising, we should expect to see gasoline prices rise as well. For every $1 gain in oil prices, we will see about a 2.3 cent rise in gasoline prices.


Do you remember how cheap gasoline was in January? The futures price set an 8-year low at 98 cents a gallon. We have rebounded a long way since then but compared to the last ten years we should be very grateful.

Crude prices touched the magic $50 level on Thursday and as expected, there was some instant selling. That was the target price for many traders. The new target is $55 but there is far less conviction that it will be hit.

The OPEC production meeting is Thursday and nothing is expected to change. There will be the obligatory headlines as every oil minister tries to grab his 5 minutes of fame by making some comment to the press. However, the outlook calls for more production and the end to a lot of current production outages. The oil sands in Canada are starting to come back online and Libya has worked out a deal with the various factions to start shipping oil again. Nigeria is still down about 800,000 bpd to a 20-year low and there is no immediate fix in sight. Venezuela is circling the drain with production down about 7% YTD and still falling as the economy implodes. Columbia is down about 200,000 bpd on pipeline problems. Iraq is down from 4.7 mbpd to 4.5 mbpd because of infrastructure problems. These problems will be fixed eventually and some OPEC countries are increasing production to take advantage of the $50 oil.

The decline in oil rigs has slowed. Active oil rigs declined only -2 last week after being flat the prior week. With oil at $50 there may not be any further declines. Most U.S. drillers can come close to breakeven at $50 and several including Pioneer (PXD) can even be profitable at that level. Pioneer said they would add 5-10 oil rigs if it appeared the price has stabilized at the $50 level. Saudi Arabia does not want to see this. We have not had enough companies go out of business to prevent production from accelerating if prices remain over $50. This is why I expect no production freeze at the OPEC meeting and more than likely promises of production increases. More than 60 U.S. oil companies have filed bankruptcy. That number rises to more than 100 if you count service companies. More than 185,000 workers have lost their jobs.


The Dow added 372 points last week and the Nasdaq +163. The S&P gained 47 points and the Russell 2000 added 38. It was a good week all around with the semiconductors adding 4.6%, biotechs 4.2% and a sector you do not see often, the brokers adding 4.5%.

The S&P halted its climb on Friday at 2,099 and right on the edge of critical resistance. The S&P is poised to blow through that resistance if we have positive news from the Asian and European markets over the weekend. The 2,111 intraday high from April 20th and the 2,116 high from November are the critical numbers to watch if we do get further gains.

We are well above support at 2,040 but we are not out of the woods yet. The next 15 points should be difficult once everyone is back at work next week.

The Dow is lagging the S&P in relative performance. The major resistance at 17,925 has not yet been retested and Friday's intraday high was lower than the prior two days. While the Dow added 372 points that may have been the last gasp for the index. Tuesday's market action will be the key. If the Dow rolls over after touching 17,925 then we could be targeting the support at 17,500 again.

With no further Dow earnings there is little in the way of headlines to push the stocks higher ahead of the summer doldrums. It can happen and traders are normally surprised when a summer rally breaks out.

The Nasdaq broke through resistance at 4,900 thanks to the biotechs and semiconductor sectors. The biotechs can continue their upward movement for the next week because the ASCO cancer conference does not start until Friday. The expectations of stock movement from presentations there could keep a bid under the sector. The semiconductor sector has broken out to an 11-month high and nearly a 10% gain over the last two weeks. Jeff Bailey used to call semis the "head of the snake." The direction of the semis was a leading indicator for the Nasdaq. Whether the semis can keep up this torrid pace is the $64 question.

The Nasdaq has resistance at 4,968 from the April highs then again at 5,000 from Q4. Those levels could be the end of the road for the Nasdaq rally.

The Russell 2000 is nearing the 1,150-1,156 resistance high from April. The index never tested real resistance at 1,165 so that range from 1150-1165 is going to be a real question for traders. Should it get though that level there is very strong resistance at 1,200.

The Russell is being powered by the same sectors as the Nasdaq with the addition of the energy sector as powerful support. However, with oil likely to peak around $50 that sector could begin to take profits and produce a drag on the Russell.

I am neutral for next week. Volume should be very light on Tuesday unless there is some event over the weekend that powers the markets. The meltup could continue due to the lack of volume assuming no major headlines. Once traders begin to return to work on Wednesday, they will be setting up for the barrage of late week economic reports and Yellen's economics speech on the 6th.

However, as one reader emailed me on Friday, "I don't get it. Earnings suck; guidance sucks; economic reports suck; commodities are in the tank; the dollar is rising; oil will probably be declining again. For six years, the Market has been terrified of another rate increase. In fact, all they wanted was more "stimulus". Now that there is a possibility of another rate hike in June/July they are cheering. Go figure. Bizarro World."

Rallies are strange market events. Sometimes when things seem the most bleak, the markets suddenly rebound. The bad news becomes good news and shorts get crushed over and over again because they cannot adjust to the new reality.

I do not know which reality we will get next week. We just need to follow the trend, whichever direction it decides to go. The trend is your friend, until it ends.

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

The bullish sentiment in the AAII Investor Sentiment Survey for last week fell to 17.8% and the lowest level since April 14, 2005 when it was 16.5%. This was the 29th consecutive week and the 62nd out of 64 weeks, that bullish sentiment has been below the average of 39.0%. Neutral sentiment rose to 52.9% and the highest level in 16 years. The last time neutral sentiment was higher was in April 1990 at 56%. Neutral sentiment has now been above 40% for 12 consecutive weeks and above its average of 31% for 17 weeks. However, bearish sentiment at 29.4% is right at the historical average of 30%.

In the 28 times neutral sentiment has been above 50% only TWICE did the S&P decline over the next 26 weeks and it was only down once in the following 52 weeks. In fact, the 52-week return on the S&P averaged about 20.5% and the 26-week return was 8.4%. However, the AAII survey began in June 1987 and since 1989 neutral sentiment over 50% has only occurred 6 times in 27 years. The other 22 times were clustered in 1988-1989.

This is only the sixth time in 29 years that bullish sentiment has been under 20% and neutral sentiment over 50% in the same week. Five of those weeks were in 1988 and 1989. That means in 27 years this has only happened once before. In the 26 weeks that followed, the S&P averaged an 11.2% gain and over 52 weeks a 25.76% gain. There were no losses.

AAII Source

The CME FedWatch Tool is showing a 28% chance of a rate hike at the June meeting. This is up from a 4% chance just a couple weeks ago. The July meeting has risen from about 10% to a whopping 48% chance for a rate hike. The September chart shows a 68% chance of rates rising to .75% and a 21% chance of rates rising to 1%. November rises to a 71% chance for higher rates, December 81% and February an 83% chance.

Immigrants from Latin America are flooding across the Mexican border in a desperate race to get into the USA before Trump becomes president and tightens down on border crossings. Reportedly in 2015 there were 332,430 people detained trying to cross the border. Authorities on both sides of the border claim the numbers are much higher than in 2015 and U.S. border patrol agents have run out of space to house them. The Sacred Heart Catholic Church shelter in McAllen has been taking in more than 200 per day and that quantity has never happened before.

One 26 yr old mother of 3, Viude de Cruz, paid $2,800 in fees to smugglers and bribes to Mexican officials to reach the U.S. and avoid her 9-yr old son being drafted into a Salvadorian gang. As she was getting on a bus for Maryland, where she was to be housed until her court date nearly two years from now, she said, "There is not another country where you can provide something better for your children, where you will not get harmed. The only one is the United States."

Ruben Villarreal, a Republican candidate for Congress, former mayor of Rio Grande City and Trump supporter, called the wall idea a "12th-century technical solution to a 21st-century problem. There is no such thing as a fence that is impenetrable. And all the talk of it is causing a draw of people." The migrant attitude is "hurry, hurry, hurry, get there." The campaign trail talk "is going to encourage people from here to November."

Everybody knows when a major publication makes a market call the opposite normally happens. The cover of Barron's is almost unbeatable for jinxing the market direction. That means this weekend cover is the straw that could break the market's back. The jinx is in. Sell everything.

The article points out that only one market crash in the last 35 years was not caused by a recession. Therefore, no recession today equals no crash.

Contrary to the Barron's article, Goldman claims the median stock has never been more overvalued. More Americans between the ages of 18-34 live with their parents than any time since the Great Depression. Despite the strong sales of homes and the rapidly rising price, the majority of Americans cannot afford a home. China injected more than $1 trillion in new loans into the economy in Q1 to prevent an economic crash. Lastly, nearly every recession since the Depression has been caused by Fed rate hikes, which the Fed is suddenly in a hurry to execute.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"An open mind leaves a chance for someone to drop a worthwhile thought into it."

Mark Twain


New Plays

One Week to ASCO

by Jim Brown

Click here to email Jim Brown
Editor's Note

The annual ASCO meeting is where important news breaks and companies get recognized for their research. The upcoming ASCO conference has supported the biotech sector for the last week but it is not over. What a great opportunity to be long a company that specializes in cancer drugs.


CLVS - Clovis Oncology - Company Profile

Clovis Oncology is a biopharmaceutical company that focuses on acquiring, developing and commercializing anti cancer agents worldwide. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers.

Clovis announced it would make three presentations at ASCO and one discusses the potential for using Rucaparib for treatment of a different cancer other than the drugs original intent. That presentation is on pancreatic cancer and the other two are on ovarian cancer.

These are promising drugs and any positive data that Clovis releases could give the stock a significant boost.

In their recent earnings they reported a loss of $1.98 compared to estimates for -$2.15. Because it is an experimental drug company, the earnings are not that material. Shares did decline about $1.50 after the report but have risen $4.50 in the last two weeks.

Earnings August 4th.

Resistance is $20.30 and shares closed at $16.70 on Friday. I would gladly take a $2 gain out of the middle over the next week and they tighten the stop loss as the multi-day conference begins next Friday.

Buy CLVS shares, currently $16.70, initial stop loss $15.35

No options recommendation because of wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Sellers Absent

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Friday before a long weekend is typically bullish with shorts covering before the close. Shorts that took positions when the S&P was at resistance at 2,095 saw the index sink to 2,092 after the Yellen comments. When it failed to move lower they were forced to cover or risk a big gap open on Tuesday. The day after a three day weekend typically sees a big move but the day after Memorial Day is normally very quiet. Still, the prudent move is to cover your shorts rather than risk disaster.

The Dow closed at 17,873 and the high of the day but that was a lower high than the prior two days. The S&P close at 2,099 was somewhat bullish but the Dow close was tentative and could be seen as lackluster. However, all the indexes were lackluster except for the Russell 2000 so closing at the highs of the day was positive for sentiment. It will be interesting to see how we open on Tuesday.

Current Portfolio

Current Position Changes

SCTY - Solarcity

The long recommendation has been cancelled.

SWIR - Sierra Wireless

The long position remains unopened until a trade at $20.30.

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. Major 8% gain on no news. I suspect this is related to the start of the ASCO cancer conference next Friday.

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.

SCTY - Solarcity - Company Profile


Deutsche Bank cut their price target from $49 to $32 but retained a buy rating. Shares fell -$1.47 on the news. Ironically, they were approved for a $485 million solar facility for NY state on Friday. If the shares recover, I will reinstate the recommendation.


Original Trade Description: May 25th.

SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; MyPower loan agreements; grid control/energy storage systems; zep solar mounting systems and proprietary software. It also sells electricity generated by solar energy systems to customers.

Q1 was a bad quarter for the solar stocks. Multiple companies have missed earnings and lowered guidance. Solar City was no exception. The company lost -$2.52 compared to estimates for -$2.32. However, revenue of $122.6 million easily beat estimates for $110 million. They guided for the current quarter for a loss of $2.70-$2.80 and analysts were expecting $2.13. The company cut estimates for full year installations to 1,000 to 1,100 megawatts compared to analyst estimates for 1,250 megawatts. Shares dropped -21% on the news to support at $16.50. Shares are down -65% in 2016.

The company said they were expanding into new states in the second half and that would increase sales. Also, sales are normally up in the summer months because roofs are not covered with snow.

They blamed the weak first quarter on regulatory challenges and increased prices that slowed sales. Nevada regulators said they were increasing fees to connect your solar installation to the grid and they were reducing the price the utility companies were going to pay for your power when it reaches the grid. That slowed installations in Nevada. I would think utility companies would like the extra power because they do not have to pay to generate it.

There was also some uncertainty about the extension of the investment tax credits for solar installations. The government did not extend the credits until last December.

Solar City actually installed much more wattage than expected. The company had forecasted it would install 180 megawatts in the quarter. They actually installed 214 megawatts, up 40% from year ago levels. The problem came from the bookings. They only booked 160 megawatts to add to the order backlogs. That meant their backlogs shrank for the quarter. However, the CEO said bookings were up +25% in March/April.

This play recommendation is a bet on Elon Musk as much as it is a bet that Solar City will continue to improve its sales and reduce expenses. There have been rumors that Musk was thinking about taking Solar City private for multiple reasons. Whether that happens or not is of course unknown. However, I do not expect Musk to let Solar City fail or continue to post negative results. He will direct the company and if the current CEO cannot post solid improvements, I am sure Musk can find somebody that will.

Earnings Aug 8th.

Recommendation cancelled.

SQ - Square - Company Profile


No specific news. The June call option has three weeks left and at 10 cents we have almost no risk to continue holding the position. However, rather than continue discussing it every day I am moving it to the hold portfolio and it will be updated a couple times a month. Lightning can strike at any time and for $10 today, this is a June lottery ticket.

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.

SWIR - Sierra Wireless - Company Profile


No specific news, no gain. Shares are still holding at resistance at $20. Eventually there will be a high volume breakout or break down.

The position remains unopened until a trade at $20.30.

Original Trade Description: May 26th.

Sierra Wireless engages in building the Internet of Things with intelligent wireless solutions. They operate in three segments, Original Equipment Manafacturer, Enterprise Solutions, and Cloud Connectivity Services. They offer cellular embedded modules, software and tools to integrate wireless connectivity into various products and solutions.

In their recent earnings they reported an adjusted profit of 8 cents. Revenue declined -5.1% because of previously reported softness in orders from several existing automotive customers. For Q2 they expect earnings in the range of 9-17 cents on revenue of $150-$160 million. For the full year they guided to earnings of 60-90 cents on revenue of $630-$670 million. They bought back 549,583 shares in the quarter.

The revenue in the OEM solutions segment declined -9.1% due to softness in auto production in Q1. Enterprise solutions revenue rose 9% and cloud and connectivity systems revenue rose 92%. They began upgrading their global LTE core network to provide additional connectivity for wholesale operators.

In their guidance, they said business should improve significantly because of more than 40 new customer programs moving into production on new IoT products. They manufacture to customer specifications when the customer adds a new product.

Earnings Aug 4th.

To go from an 8 cent profit in Q1 to 60-90 cents for the full year is a major gain in profitability. Shares have been rising since the earnings report and showing no weakness when the market was down.

With a SWIR trade at $20.30

Buy SWIR shares, currently $19.90, initial stop loss $18.45.
No options recommended due to wide spreads.

BEARISH Play Updates

ENDP - Endo Intl Plc - Company Description


Weitz Investment Management closed their entire position in ENDP. Waiting on ASCO to start next week.

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. Only a minor gain. We may have found the resistance level that will hold.

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:

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

Previously closed 5/23/16: Short FDC shares @ $10.69, exit $11.55, -.86 loss.

LOCO - El Pollo Loco - Company Profile


No specific news. Moving very slowly on no news.

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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