The Dow posted only a minor gain of 16 points and has remained under resistance at 18,550 for three days. The rally spring is compressing and a breakout over that resistance could be strong. It will all be due to earnings. After the bell tonight IBM beat and rallied $5 in afterhours. That is good for nearly a 40 point gain in the Dow at the open and the Dow futures are up +52 but it is still early.
The major indexes with the exception of the Nasdaq have moved sideways over the last four days. With 11 Dow components reporting this week we have the potential for a new leg higher if the earnings are at least decent.
Current Position Changes
AAOI - Applied OptoElectronics
The long position in AAOI was opened at $12.00.
DDD - 3D Systems
The long position in DDD was stopped at $13.90 on the gap down open.
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
AAOI - Applied Optoelectronics - Company Profile
No specific news. No gain. Dead stop on resistance.
Original Trade Description: July 16th.
Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide.
This is a small but growing company. The share price has been volatile over the last year with a big drop on Q1 earnings that knocked it down from $16 to $8. They had a problem with lower than anticipated yields on a new 40 Gb light engine and had to redesign it and modify the manufacturing process. That was a onetime event that cost them 30 cents a share in Q1 despite record shipments. They saw a 30% increase in shipments of 100 Gb products.
Immediately after the earnings drop shares began to recover and reached $11.80 last week, which is decent resistance. With expectations for a return to profitability in Q2 I expect the $12 level to be broken and some short covering begin.
Earnings are August 4th. They did not warn for this quarter. We have a short window of about two weeks in this position.
Position 7/18/16 with an AAOI trade at $12.00
Long AAOI shares @ $12, initial stop loss $10.85.
No options recommended because of short duration trade.
DDD - 3D Systems - Company Profile
Downgraded by Piper Jaffray to sell from hold with a price target at $10.25. The analyst said channel checks showed a notable slowdown in 3D printer demand in Q2. He also warned the introduction of the new HP Multi Jet Fusion 3D printer would be negative for DDD and SSYS. We were stopped out for a minor loss on the gap down open. Downgrade Note
Original Trade Description: July 9th.
3D Systems Corporation, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, metal, nylon, rubber, wax, and composite materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, colorjet printing, and plasticjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications.
The 3D printing sector crashed and burned in 2014 when the expectations for the technology got way ahead of reality. Shares of DDD peaked at $97.28 before starting the long slide to $6 in January 2016. Shares recovered from that low as the sector began to actually provide some amazing technology. Shares rebounded to $19.50 in April before another round of weakness pushed them back to $12. After chopping around in the $12-$14 range they appear ready to breakout.
The new CFO was given a compensation package of $2.1 million a year. He must be really good. If the stock rises to $30 and maintains that level for 90 consecutive days he can exercise options to buy shares at $12.92, which will give him $10.4 million if sold. If the stock prices rises to $40 for 90 days he has another bonus that would give him shares he could sell for a $8.9 million profit. Another bonus awards him $9.4 million if shares reach $30 in year one of his contract and $40 in year two and holds it for 90 days. He has an extreme incentive to get that stock price moving higher.
Hardly a week goes by that 3D does not announce some new process or software enhancement that comes closer to achieving the original expectations for the 3D printing technology. The ability to print parts out of metal has revolutionized the manufacturing environment. Many large corporations are buying printers by the dozens to print parts that previously had to be ordered from the source with long lead times.
Earnings August 3rd.
Shares closed at $14.12 on Friday and that is a two-month high and slightly over resistance. The next resistance level is the April highs at $18.25. If DDD is about to breakout like it did in Feb/Mar then we want to go along for the ride.
Position 7/11/16 with a DDD trade at $14.25
Closed 7/18/16: Long DDD shares @ $14.25, exit $13.90, -.35 loss.
EXAS - Exact Sciences - Company Profile
No specific news. The uptrend has definitely slowed. I raised the stop loss again. Earnings are next week and we need to be out.
Original Trade Description: June 25th.
Exact Sciences Corporation, a molecular diagnostics company, focuses on developing products for the early detection and prevention of various cancers. The company develops the Cologuard, a non-invasive stool-based DNA screening test for the early detection of colorectal cancer and pre-cancer. Its Cologuard test includes a protein marker to detect blood in the stool, utilizing an antibody-based fecal immunochemical test. The company has a collaboration, license, and purchase agreement with Genzyme Corporation, as well as with MAYO Foundation for Medical Education and Research for developing tests to detect lung, pancreatic, and esophageal cancers.
Shares of EXAS fell from $18.50 to $7 in October after the U.S. Preventative Services Task Force, an independent panel of health care experts, issued preliminary screening test recommendations that did not include Cologuard as a recommended product. The draft listed Cologuard as an "alternative" screening test. Exact Sciences protested strongly about the classification.
On June 14th, the same task force issued its final cancer screening recommendations and clarified the inclusion of Cologuard. The information was accidentally leaked and the panel had to release the report earlier than the planned June 21st date. With the final recommendation for Cologuard the company has begun advertising strongly and sales should increase. Cologuard is now an A-rated preventative service under the Affordable Care Act.
Earnings July 26th.
Shares have broken out of their 9-month consolidation base and could close the gap back to $18 in the coming weeks.
Long EXAS shares @ $11.50, stop loss $9.45.
No options recommended.
HPE - Hewlett Packard Enterprise - Company Profile
No specific news. HPE cannot seem to hold over the $20 level but at least it is not declining.
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.
Position 6/28/16: Long HPE shares @ $17.50, see portfolio graphic for stop loss.
Position 6/3/16: Long August $20 call @ 40 cents. No stop loss.
Previously closed 6/24/16: Long HPE shares @ $18.40, exit $18.61, +.21 gain
SCTY - Solar City - Company Profile
SCTY raised $345 million in tax equity from four separate partners in June to finance new solar projects. The money will be used to fund new installations. The company also increased its operating line by $110 million by adding two new lenders to the facility. The SCTY capital team has raised more than $1.5 billion in project financing in 2016. They now have more than 30 different banks and corporate partners with financing available for customers.
This is another reason Tesla will have to pay more than the $26-$28 it has offered to buy the company. I am still expecting a counter offer in the $30-$32 range.
Original Trade Description: June 27th.
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, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. It also sells electricity generated by solar energy systems to customers.
SolarCity has had a troubled past with the rise and fall of solar based on the whims of governments and the on again-off again investment credits and tax rebates. SolarCity is still humming right along and building up their base of installed systems into one giant annuity that will pay for decades to come. The problem is that it takes cash to build and install those systems that they sell to customers. Cash up front for a long and profitable payout.
SolarCity was co-founded by Elon Musk. He also started Paypal, SpaceX and Tesla. Last week he (Tesla) offered to buy SolarCity, where he is the largest stockholder and Chairman of the board, for $26-$28. Tesla shares cratered. SolarCity shares spiked for one day then fell back again. Numerous analysts were against the plan. Now shares are rising again.
Elon Musk believes he can marry his battery business with the solar business and have a winning combination. He already makes battery backups for your home but they run off regular utility company power. With SolarCity he can power those battery systems with solar and it makes a lot more sense for customers.
Shares have established a base at $21 and with the $26-$28 offer under consideration along with "other strategic alternatives" it would appear there is limited downside.
Earnings August 8th.
Long SCTY shares @ $23.40, see portfolio graphic for stop loss.
TWTR - Twitter - Company Profile
Twitter shares saw a 3% spike after former Yahoo CEO Ross Levinsohn said Twitter would not be a public company two years from now. He believes Twitter will be acquired for the important news site it is. Twitter had Turkish coup alerts 25 minutes before CNN ever had a headline.
Original Trade Description: July 6th.
Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.
Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.
Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.
Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.
Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.
This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.
Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.
Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.
Earnings July 26th and we could hold over the event depending on the news flow and stock level.
Long TWTR shares @ $17.24, see portfolio graphic for stop loss.
I am not recommending an option because of the recent history of slow movement. However, a long-term option may be the correct way to play this position. Your risk is known in advance and the cost of entry is very low. Here are some examples.
Sep $19 Call $1.04
Dec $20 Call $1.51
Jan $20 Call $1.64
BEARISH Play Updates
JKS - Jinko Solar - Company Profile
No specific news. Minor rebound but $19 should now be resistance. The SCTY news lifted the entire sector.
Original Trade Description: July 13th.
JinkoSolar Holding Co., Ltd., engages in the design, development, production, and marketing of photovoltaic products in the People's Republic of China and internationally. The company operates through two segments, Manufacturing and Solar Power Projects. It offers solar modules, solar cells, silicon ingots, silicon wafers, and recovered silicon materials. The company is also involved in the solar power generation activities; engineering, procurement, and construction of solar power projects; connecting solar power projects to the grid; and operation and maintenance of the solar power projects, as well as provides solar system integration and processing services.
For Q1 the company reported earnings of $1.68 that easily beat estimates for $1.11. revenue of $848 million also beat estimates for $714 million. Shares spiked to a new two month high and immediately began to slide and that slide is continuing. Operating expenses rose 80.3% to $91.8 million. Interest expenses rose +101% as the company took on more debt to finance projects.
Only 4 analysts have current recommendations on JKS. Those are Jefferies, Roth capital, Morgan Stanley and Zacks. All are strong buys. The consensus price target is $31. If they begin to change their recommendations because of the falling stock price that should cause further declines.
Earnings August 18th.
In theory Jinko is positively positioned to continue growing. However, solar capacity in China is very over supplied. Selling prices are falling and new processes constantly make old manufacturing techniques outdated and overly expensive. Constant upgrading to new manufacturing requires capital and time that constrains output from the old processes.
Short interest is over 15% on JKS. Shares appear poised to break below support at $19. They traded as low as $14 last August. I am suggesting we short JKS but buy an August $21 call option just in case the analyst recommendations suddenly cause a reversal in the trend. If JKS shares do break under $19 we will recover the 75 cents paid for the option very quickly. If the stock reverses sharply we have upside protection.
Position 7/14/16 with a JKS trade at $19.35
Short JKS shares @ $19.35, see portfolio graphic for stop loss.
Long August $21 call @ 70 cents, no stop loss.
VXX - Ipath VIX Short Term Futues ETN - ETN Profile
The VXX closed at 11.48 and a new historic low.
We are probably going to be in this position for a long time as it declines to new lows well under $12 this summer. Around $10 and they will do another reverse 1:4 split. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.
Original Trade Description: June 22nd.
The VXX is a ETF type product that is based on the Volatility Index futures. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.
We have played the VXX before with big gains. The object is to short it on a bounce and then hold the position until the volatility fades again.
On the big declines last week the VXX spiked to $17. Back in January and February is spiked to $30 on the market corrections. While I do not expect that to happen from this lower level, I do expect some volatility to appear regardless of the vote outcome.
I am recommending we enter a short position with a return to $17. If it continues higher I would add to that short at $20 and again at $25 and then we wait for the post event decline in the volatility and the return to $13 or lower.
Because this is a flawed product, it will always go lower. It has already had several 1:4 reverse splits to keep it from being delisted back in November 2010, October 2012 and November 2013. If it falls under $10, they will do another reverse split and start the decline all over again.
6/24/15: With a VXX trade at $17, now short VXX @ $17, no stop loss.
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