Despite the minor gain in the S&P the market is still moving sideways. The Nasdaq posted a decent gain but remains under resistance at 5,160. The Dow closed negative and the Russell 2000 and S&P-600 closed negative. There is no direction.
The blowout earnings on Amazon and Google after the close failed to energize the S&P futures and they are only up about 1.5 points as I type this. Today was the peak of the Q2 earnings cycle and next week starts the seasonally weak months of August and September. We could be facing the start of a market decline over the next couple of days.
We were stopped out of two positions because of earnings disappointments by other stocks in their sector. With earnings quality likely to weaken next week, this could become a trend.
Current Position Changes
HOV - Hovnanian
The long-term HOV position was opened at $1.86.
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. Profit taking from Wednesday's 4% spike removed 50 cents.
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.
ANF - Abercrombie & Fitch - Company Profile
No specific news. Minor decline after a 2-month high.
Original Trade Description: July 20th.
Abercrombie & Fitch Co. operates as a specialty retailer of casual apparel. The company sells knit and woven shirts, graphic T-shirts, fleece, jeans and woven pants, shorts, sweaters, and outerwear; personal care products; and accessories for men, women, and kids under the Abercrombie & Fitch, Abercrombie kids, and Hollister brand names. As of March 2, 2016, it operated through 754 stores in the United States; and 178 stores in Canada, Europe, Asia, and the Middle East. The company sells its products through its stores and direct-to-consumer sales.
Abercrombie has been pounded from the highs at $33 back in March after some disappointing earnings and weak outlook for the retail sector. Since then they have cleaned up their inventory levels and dumped a ton of bad product choices. Now they are heading into their heavy selling season and ready to go head to head with other stores.
The company has been in a restructuring period for over a year where they remodeled stores, dumped inventory and closed unprofitable locations. The drop from $33 to $16 took all the fluff out of the stock price and shares are moving higher today. They closed at a 2-month high on Wednesday.
If the market begins to roll over, these previously oversold stocks will look like a safe haven for investors looking for a bargain. This is Abercrombie's biggest selling season so sentiment should remain positive through Labor Day. The National Retail Federation said back-to-school spending will rise by 11.4% to $75.8 billion this year of which $9.54 billion will be on clothes. Apparel retailers like ANF get about 15% of their annual sales in the back-to-school season.
Earnings August 25th.
Position 7/21/16 with a ANF trade at $20.10
Long ANF shares @ $20.10, see portfolio graphic for stop loss.
No options recommended.
CIEN - Ciena Corporation - Company Profile
Ciena crashed on the Infinera (INFN) earnings that knocked -34% of that stock. The company reported a softening of demand across the industry. While most of the INFN problem was company specific they did say pricing was becoming more competitive and CIEN, JNPR and CSCO would see some pressure. This caused a 5% drop in CIEN at the open to stop us out at $18.84 and well below our stop loss of $19.85. The long October call is still open.
Original Trade Description: July 23ed.
Ciena Corporation provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. The company's Converged Packet Optical segment offers networking solutions optimized for the convergence of coherent optical transport, OTN switching, and packet switching. The company's Optical Transport segment transports voice, video, and data traffic at high transmission speeds. Its Software and Services segment offers network management solutions, including the OneControl Unified Management System, ON-Center Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release, and Planet Operate; Blue Planet software platform; and SDN Multilayer WAN Controller and its related applications. This segment also provides consulting and network design, installation and deployment, maintenance support, and training services. The company sells its products through direct and indirect sales channels to network operators.
On June 3rd Ciena reported adjusted earnings of 34 cents that beat estimates for 27 cents. Revenue rose 3.1% to $640.7 million. Software and services revenue rose 27%, global services rose 3.2% and networking platforms 1.9%. International customers accounted for 43% of revenues. Latin America and Asia Pacific both rose more than 20%. They guided for the current quarter to revenue of $655-$685 million. Analysts were expecting $670 million.
After the earnings, somebody bought 20,000 of the October $23 calls for $1.12 with the stock at $20. On July 16th, there was a rumor of a pending acquisition bid for Ciena but analysts dismissed the rumor rather quickly.
Shares are holding at resistance at $20. The next resistance is $22 and then a potential sprint to $25.50. If the holder of those October calls knows something we do not then an acquisition bid is possible. That is a huge buy since the average daily option volume in all strikes is less than 1,200 contracts. Sometimes hedge funds buy a large quantity of calls when they know they will be buying shares of the stock. When they report their stock purchase it can cause the stock to spike and make the calls profitable.
Earnings are Sept 1st.
I am looking to buy CIEN shares with a trade at $20.35, which would be a five-week high. I am also going to recommend we piggyback on those 20,000 calls and buy the same strike for a long-term hold.
Position 7/25/16 with a CIEN trade at $20.35
Closed 7/28/16: Long CIEN shares@ $20.35, exit $18.84, -1.51 loss.
Still Open: Long Oct $23 call @ 70 cents. No stop loss.
CUDA - Barracuda Networks - Company Profile
No specific news. Big 4% gain and a 10-month high close.
Original Trade Description: July 21st.
Barracuda Networks, Inc. designs and delivers security and data protection solutions. The company offers cloud-enabled solutions that enable customers address security threats, improve network performance, and protect and store their data. It provides various security solutions and Barracuda Web Security Gateway, a solution to protect users from Web-based threats. The company's security solutions also comprise Barracuda NextGen Firewalls to secure the network and optimize traffic flows; Barracuda Web Application Firewall to protect Web applications and websites from data breaches and downtime; and Barracuda Load Balancer ADC to optimize application performance, availability, and security. In addition, it offers data protection solutions, such as Barracuda Backup, Barracuda Message Archiver, and CudaSign, an eSignature platform. The company sells its appliances, services, and software products to education, government, financial services, healthcare, professional services, telecommunications, retail, and manufacturing industries through its sales personnel, distribution partners, and value added resellers in approximately 100 countries.
On July 7th the company reported adjusted earnings of 20 cents that easily beat analysts for 11 cents. Revenue of $86.7 million rose 11% and also beat estimates for $83.8 million. Recurring subscription revenue rose 20% to $65.3 million because of the success in moving to a cloud subscription model rather than appliance sales. Subscription revenue now represents 75% of all revenue. Active subscriptions rose 14% to over 286,000 customers and the renewal rate was 93%.
Earnings Sept 27th.
After the earnings shares spiked to $18.50 from $15. A day later they spiked again to $19.50 as analysts raised their guidance. Shares consolidated for about three days before beginning to trend higher. Thursday's close was a 9-month high with a 1.7% gain in a weak market.
Shares are about to move over resistance at $21.25 from last November with the next major resistance at $30.
Position 7/22/16 with a CUDA trade at $21.45
Long CUDA shares @ $21.45, see portfolio graphic for stop loss.
FLXN - Flexion Therapeutics - Company Profile
After a two-month high close on Wednesday there was a big gap down open from $17.09 to $15.69 that stopped us out at $16.35 for a small gain. There was no news.
Original Trade Description: July 18th.
Flexion Therapeutics, Inc. is a specialty pharmaceutical company that focuses on the development and commercialization of anti-inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions. It lead product candidate includes Zilretta, a sustained-release intra-articular steroid, which is in clinical trials to treat the patients with moderate to severe osteoarthritis (OA) pain. The company is also developing FX007, a preclinical, small-molecule TrkA receptor antagonist to address post-operative pain; and FX005, a sustained-release intra-articular p38 MAP kinase inhibitor for patients with end-stage OA pain.
In clinical trials the drug Zilretta reduced knee pain by 50% from the baseline from week 1 through week 12. The FDA said the results were enough to support a filing for U.S. approval. The current treatment is a corticosteriod injection that wears off quickly so Zilretta has a good chance of becoming the treatment of choice for current sufferers. Those over the counter drug patients would also be candidates.
Flexion said they can price the drug at $2,000 a year and that is well within normal insurance guidelines so getting insurance payments should not be a problem. Once Zilretta is in the market place and advertising has begun they expect it to produce more than $1 billion in annual revenue very quickly.
Last week they hired three new executives to prepare marketing plans and advertising so Flexion will be ready to go when the drug is approved. While there is no guarantee the drug will be approved, the FDA rarely suggests the clinical results are sufficient to apply for approval if it is not going to happen.
Recently hedge funds Millennium Management and Renaissance Technologies both bought 125,000 share positions.
Earnings are August 4th.
Shares spiked on May 26th to $17.35 on the news the FDA said they could submit the drug for approval. That excitement faded in June to $13 but shares have returned to a positive trend. If we only saw the shares return to $17.35 that would be a 10% gain but I believe they will pass that level on the potential for the approval of a billion dollar drug.
Closed 7/28/16: Long FLXN shares @ $15.89, exit $16.35, +.46 gain.
HPE - Hewlett Packard Enterprise - Company Profile
HPE declared a quarterly dividend of $0.055 per share payable Nov 2nd to holders on Oct 12th. No other news.
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
Earnings were not announced today as expected. EarningsWhisper.com is now saying August 4th but that date is not confirmed. Apparently, nobody knows when they are going to report.
We bought the July 29th $27 put this morning expecting earnings after the close. We need to close that put at the open on Friday and it will probably be nearly worthless unless SCTY gaps lower. Shares did close at $26.88 so that is very possible.
Close the July $27 week-5 put at the open. If SCTY opens lower, try not to sell the put on the opening tick. Let the stock sink first if it is going lower.
Musk said he had spoken with the largest investors in SolarCity and he expects a "super majority" to support the acquisition.
Shares are already nearing the $28 level and I expect 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.
Update 7/18/16: 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.
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.
Position 7/28/16: Long July $27 put @ .45.
TWTR - Twitter - Company Profile
Twitter shares rallied after they announced they were going to live stream the ELeague e-sports tournament. This is in addition to new deals to stream sports events from the NFL, NHL, MLB, NBA and Pac-12. This is no guarantee they will keep rising. We are still long the Aug $17 put.
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.
Closed 7/28/16: Long TWTR shares @ $17.24, exit $15.89, -1.35 loss.
Still Open: 7/25/16: Long Aug $17 put @ 62 cents, no stop loss.
BEARISH Play Updates
QURE - UniQure - Company Profile
No specific news. QURE is showing excessive intraday volatility and does not appear to want to move lower. I am recommending we close this position with the Biotech sector in rally mode.
CLOSE THIS POSITION
Original Trade Description: July 19th.
UniQure is a biopharmaceutical company, engages in the discovery, development, and commercialization of gene therapies in the Netherlands. The company offers Glybera, a gene therapy product for the treatment of patients with lipoprotein lipase deficiency. They have multiple drugs in development for a variety of illnesses.
In their recent earnings they reported a loss of 92 cents that missed estimates for a loss of 82 cents. Revenue of $4.3 million did beat estimates for $2.9 million. This is a very small company and since the ASCO conference their shares have been in crash mode.
Losses appear to be accelerating and they lost $22.69 million in Q1. Their market cap is only $204 million.
Earnings August 25th.
Shares have been declining for the last week and are very close to a new low. We played this back in June when it was making that low and were stopped out for a gain when it rebounded. I think it will set a new low this time and probably sink to $5.
They have only been public for 2 years and from the chart today it looks like they are going significantly lower. Normally when a stock hits the prior historic low there is a rebound or at least a pause.
Position 7/26/16 with a QURE trade at $7.00
Short QURE shares @ $7.00, see portfolio graphic for stop loss.
No options recommended.
VXX - Ipath VIX Short Term Futues ETN - ETN Profile
The VXX closed at 10.56 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 three 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. When a split is announced we will close the position and reenter after the split.
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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