The big drop in Asia and Europe led to a drop in the USA and futures are very negative for Tuesday. The Nikkei fell -3.5% and the Shanghai Composite fell -3.2%. Europe was down -1.8% on average. The Dow and S&P both closed under critical support and the S&P futures are down -5 in the afterhours session. The outlook for Tuesday is not good.
Historically, the market has an upward bias in the 36 hours before a Fed announcement. The bias will have to reverse for it to be positive tomorrow. The weak economics in China and Japan and the impending Brexit vote in the UK and the Fed meeting in the U.S. has put an ominous cloud over the U.S. markets.
The Dow closed under support at 17,750 and the S&P closed under support at 2,085. The three-week rally may be on its way towards being erased.
Current Position Changes
GOGO - Gogo Inc
The Short position was entered at the open with a trade at $8.99
HTZ - Hertz Global
The long recommendation has been cancelled.
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
HPE - Hewlett Packard Enterprise - Company Profile
No specific news. Down on profit taking in a weak market.
Original Trade Description: June 2nd.
Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.
HPE reported adjusted Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.
For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.
The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.
This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.
They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.
Earnings Aug 23rd.
HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.
Long HPE shares @ $18.40, see portfolio graphic for stop loss.
Long August $20 call @ 40 cents. No stop loss.
HTZ - Hertz Global Holdings - Company Profile
No specific news. With only five days left before the spinoff and the stock moving lower instead of higher, I am cancelling this recommendation. The concept was to ride HTZ higher into the spin and then decide if we wanted to hold over and end up with the new shares as well. Apparently everyone else is bailing before the spin as well.
Original Trade Description: June 8th.
Hertz engages in the rental and lease of cars and trucks worldwide. It operates through four segments: U.S. Car Rental, International Car Rental, Worldwide Equipment Rental, and All Other Operations. The company rents various makes and models of cars, crossovers, and light trucks under the Hertz, Dollar, Thrifty, and Firefly car rental brands on hourly, daily, weekend, weekly, monthly, or multi-month basis through a network of company-owned rental airport and off-airport locations, as well as franchise locations. They operate 9,980 corporate and franchise locations. They also rent industrial equipment like earthmovers, air compressors, power generators, etc.
Last week Hertz shareholders formally agreed to the proposed split of hertz into two companies. Hertz Global will remain a car rental company. Herc Holdings will be the equipment rental company and trade under the symbol HRI.
The HRI stock will be spun off on June 30th to shareholders on June 22nd as a dividend distribution and therefore taxed at a lower rate when sold.
Shareholders will receive one HRI share for every five HTZ shares they own. Further complicating the process the HRI shares will have a reverse split of 15:1 on July 1st. The HRI portion of Hertz is significantly smaller and the reverse split is to boost the initial share price.
Activist investor Carl Icahn filed a notice with the SEC last week that he had increased his stake in Hertz to 15.24%. The Herc Holdings company will add three Icahn affiliate directors when the spinoff occurs.
With Icahn remaining on board the company should continue to be shareholder friendly. Icahn was instrumental in forcing the company split.
Also, the Hertz CEO was instrumental in producing a boost in the stock earlier in the week when he said the tide had turned for pricing in the rental car market. The fleet sizes had been reduced, everyone was running very tight and rental prices were rising. That fueled the sector on hopes of better earnings.
I am recommending we add the stock now and then decide on June 21st if we want to hold over the spinoff. Shares are right at resistance from March at $11.50. I would like to see them move over that level before we jump in.
UIS - Unisys Corp - Company Profile
Unisys announced it was expanding a global alliance with Microsoft on cloud management and security services. They are going to cooperate to increase cyber security in the cloud. Shares were only down a nickel in a very weak market.
Original Trade Description: June 6th.
Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segments product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. The company serves commercial, financial services, public sector, and the U.S. federal government through direct sales force, distributors, resellers, and alliance partners.
Unisys has morphed in its 143 years of operation into a global cloud, IT and infrastructure services company. That is a long way from the original company that produced the first commercially viable typewriters and adding machines under the name Burroughs, Sperry and Remington Rand.
Today one of their main products is Unisys Stealth for protection of digital and physical assets. Stealth Mobile protects secur emobile applications and Stealth Cloud expands that protection to the cloud.
Just before their recent earnings they announced a deal with Mitel to provide the Unisys stealth technology to protect their 60 million mobile and enterprise customers. Business is booming but it has been a long time coming. In Q1 revenue declined -3% and services declined -2%. However, the company said its "lumpy" quarter-to-quarter strategy was changing with a stronger focus on the Stealth products and their rapid wide scale adoption. They expect the amount of money spent on cybersecurity to more than double from the $75 billion in 2015 to more than $170 billion in 2020. The cost of data breaches will rise to $2.1 trillion annually by 2019 and more than four times the cost in 2015.
Unisys has been a stealth company for the last year with shares declining from $30 to $7. With their new products and the rapid acceptance of those products their stock is rebounding off the three month consolidation pattern.
Earnings July 28th.
Shares moved over resistance at $8.25 last week and are preparing to move higher. The big decline in March was a $190 million offering of convertible senior notes due 2021 with a conversion price of $9.76. That was a 20% premium to the stock price post announcement.
If the current rebound continues the next material resistance is $12.
Long UIS shares @ $8.47, no initial stop loss.
Long October $9 call @ 80 cents. No stop loss.
BEARISH Play Updates
GOGO - Gogo Inc - Company Profile
No specific news. New historic low at the close.
Original Trade Description: June 11th.
Gogo provided communication services to the commercial and business aviation markets in the U.S. and internationally. They provide in-flight connectivity and wireless digital entertainment solutions to commercial airline passengers to and from North America.
Gogo has had a rough few months as airlines complained about the service and some removed the Gogo service and replaced it with a competitor.
On May 23rd Gogo announced the pricing of $525 million in senior secured notes. On May 26th the stock spiked 20% after the company filed a notice with the SEC saying an unspecified airline had requested a proposal for service to cover its large domestic fleet. Under the proposal Gogo would provide Wi-Fi to a "meaningful" portion of the domestic fleet that is is currently serving. Gogo cancels the $525 million debt sale.
On June 3rd shares plunge as the unspecified airline turns out to be American Airlines and the proposal is far less than expected. American picked ViaSat (VSAT) to provide internet access on 100 new Boeing jets. Gogo updates its SEC filing to say it would provide service on 140 American planes and continue service on 400 others. However, American retained the option to remove Gogo equipment on any American planes at any time. Gogo said it now expects American to remove its equipment on the "mainline" planes over the next several years. American said it was planning on upgrading the service on its planes but had not picked a successor. That means the 100 ViaSat planes will be a live test and will likely replace Gogo. ViaSat provides 12 mbps of bandwidth to each seat while Gogo provides 70 mbps for the entire plane and that bandwidth has to be shared by all passengers. There is a significant difference.
On June 9th Gogo reinstates the $525 million debt offering and priced it at 12.5% after Moody's rated it a B3-PD (Probability of Default) credit.
Earnings Aug 4th.
The future is not bright for Gogo. They are trying to produce a faster service through satellite connections rather than ground based systems but the testing and roll out is not going smoothly. Several years of hostility between passengers and carrier over the slow bandwidth has poisoned the relationships and ViaSat appears poised to take over the market.
Shares closed at a historic low on Friday at $8.97 and the downward trend is likely to continue.
Short GOGO shares @ $8.99, initial stop loss $10.05.
I am not recommending an option but the August $8 put is $75 cents.
LE - Land's End - Company Profile
No specific news. Shares were flat and closed at Friday's new low.
Original Trade Description: June 9th.
Land's End operates as a multi-channel retailer. The company operates through two segments, Direct and Retail. It offers casual clothing, accessories, footwear, and home products. The company sells its products through its e-commerce Websites, direct mail catalogs, dedicated LandsÂ’ End Shops at Sears, stand-alone LandsÂ’ End Inlet stores, and international shop-in-shops. As of January 29, 2016, it operated 227 LandsÂ’ End Shops at Sears; and 14 LandsÂ’ End Inlet stores in the United States, as well as 5 United Kingdom based shop-in-shops.
Land's End operated in the world of Amazon and they are getting crushed. They use the term multi-channel because they retail a lot online. Unfortunately, in an Amazon dominated environment they are finding it hard to sell sheets, blankets, towels, shoes and apparel and still make a profit.
In their recent report they lost 18 cents compared to analyst estimates for 2 cents. Revenue of $273.4 million that was below the $299.4 million in the comparison quarter. Retail segment revenue declined -10.4% with same store sales falling -7.1%. Even worse, inventory rose 8.9% to $309.9 million up from $284.6 million. Cash balanced declined -$50 million. Stale inventory is rising, they are burning cash and sales are falling. That is not a recipe for earnings growth.
The retailer was forced to remove Gloria Steinem from their online website and from their catalog after the feminist made some comments on abortion rights. Customers, including numerous religions groups, promised a large scale boycott if Steinem was not removed from all advertising.
The summer months are not likely to be kind to Land's End. They will be forced to further discount products to move them out of inventory in a period where customers are vacationing rather than shopping.
Earnings Sept 1st.
When the market finally rolls over, we could see selling in LE accelerate due to a lack of interest in holding for a Q4 rebound. The historic closing low is $15.81.
Short LE shares @ $15.80, initial stop loss $17.25.
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