Option Investor

Daily Newsletter, Saturday, 8/6/2016

Table of Contents

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

Market Wrap

Welcome to August

by Jim Brown

Click here to email Jim Brown

August rarely turns in a level performance. Markets are either up strong or down hard in August.

Weekly Statistics

Friday Statistics

The Nasdaq was the market focus on Friday as the short squeeze pushed the index to a new high close at 5,221.12. The last new high on the Nasdaq was July 20th, 2015 at 5,218.86. It took a year and a lot of volatility before the Nasdaq was able to recover that level. I should also point out that the Nasdaq has rallied 14.1% since the 4,574 low on June 27th. That is only 28 trading days. Can you say, overextended?

The Friday short squeeze was caused by another blowout jobs report. Friday's buying was not because a hundred thousand investors suddenly decided a good payroll report was the reason to buy stocks on a summer Friday. Investors were heavily short in anticipation of a mediocre report at best and a market decline into late August. The big back to back job gains caused a kneejerk reaction and a monster short squeeze was born.

The Russell 2000 chart is a good example. There was a 14 point gap higher open to 1,227 and then the index went sideways to down the rest of the day to end with a gain of +17, only 3 points higher than the first hour of trading.

The Nonfarm Payrolls showed a job gain of +255,000 compared to the June total of +287,000. That 287K number was revised higher to 292,000 and the previously revised 11,000 for May was revised up to 24,000. The unemployment rate remained flat at 4.9% (7.8 million) as the labor force participation rate rose slightly to 62.8%. Another 407,000 people joined the workforce after the addition of 414,000 in June.

Analysts expected a gain of +175,000 jobs after the ADP report on Wednesday showed a gain of +179,000. Average hourly wages rose +0.3% to +2.6% year over year. The number of workers employed part time because they could not find a full time job was flat at 5.9 million. The broader U6 unemployment rose to 10.1% unadjusted at 16.1 million.

Professional and business services added 70,000 jobs. Health care added 43,000, financial sector 18,000, leisure and hospitality +45,000, food services 21,000 and government 38,000.

The conspiracy theorists were out in force on Friday. The headline number of +255,000 is seasonally adjusted. The unadjusted gain was only +85,000. There was a similar adjustment in the June numbers. SouthBay Research posted the following chart of the seasonal adjustment totals since 2006. The majority of the positive adjustments came over the last two months. Why do you think the adjustments suddenly exploded higher in an election year? It makes it a lot easier for the party in power to get reelected if the numbers suddenly look materially better and support the economic recovery claims. The jobs report is one report that consumers actually understand when they hear the two-sentence sound bite in the news. Of course, they have no clue that the numbers are heavily adjusted.

The jobs boom will put the Fed back on the calendar sooner rather than later. The percentage chance for a rate hike in September rose from 12% to 18% but the December meeting jumped to 47% and any additional positive data will put it over the 50% threshold.

There was another shocking data point released last week. The Atlanta Fed real time GDPNow forecast for Q3 rose to +3.8% and vastly over the +2.3% Blue Chip consensus average. This compares to the recently released Q2 GDP at only +1.2%. There are a lot of investors who would like to know what changed between Q2 and Q3 to triple the GDP growth. The majority of the monthly economic reports are just trudging along with only minor gains and losses each week so what happened? How did the Fed "adjust" this forecast and why?

The conspiracy theorists believe it is all election related. In the 8 years since the Financial Crisis, we have seen the slowest economic recovery since the Great Depression. Suddenly 5 months before the election the major economic numbers rocket higher for no particular reason. I have to agree that is a little unlikely just to be a random coincidence.

The calendar for next week is very light with no market moving reports. There are not even any Fed heads giving speeches. Welcome to the dog days of August. With school starting in two weeks the market volume is going to fall off drastically so it is a good thing there are no critical reports.

After the Q2 earnings cycle peaked last Thursday, the news flow this week has been slowing. Friday was almost devoid of any interesting reports.

Cognizant Technology (CTSH) reported earnings of 79 cents that beat estimates for 73 cents. Revenue of $3.37 billion nearly matched estimates for $3.371 billion. Financial services revenue rose 8.1%, healthcare 6.9% and retail/manufacturing/logistics rose 14.2%. Other revenues rose 11.2%. It looked like a good quarter and the company added $1 billion to its buyback authorization to raise the total authorized to $3 billion. They noted a onetime payment from India of $2.8 billion. That is a heck of receivable.

Priceline (PCLN) reported earnings of $13.93 that beat estimates of $12.67. Revenue of $2.56 billion missed estimates for $2.6 billion. They guided for Q3 earnings of $28.30 to $29.80 per share. Analysts were expecting $28.99. They guided for revenue to rise between 12-17%. Hotel bookings rose 24.4% in Q2 while car rental bookings rose 7.6%. Shares rallied $54 on the news.

After the bell, Berkshire Hathaway (BRK.B) reported earnings that rose +25% to $5 billion or $3,042 per class A share. That compares to $2,442 in the year ago quarter. However, adjusted operating earnings of $2,803 per share missed estimated for $2,911 per share. Revenue rose 6% to $54.46 billion but also missed estimates for $56.47 billion. The class B shares declined about $1 after the bell after being up $2.50 in the regular session. Berkshire shares rarely trade in afterhours.

Linkedin (LNKD) reported earnings of $1.13 compared to estimates for 78 cents. Revenue of $933 million rose 31% and easily beat estimates for $898 million. Premium subscriptions revenue rose 21% to $155 million. Shares did not move since the company is being acquired by Microsoft for $26.2 billion or $196 per share in cash.

Virgin America (VA) reported earnings of 93 cents that missed estimates for $1.17 by a mile. Revenue was $425.7 million. Shares did not react because VA is being acquired by Alaska Airlines (AKLS) for $57 in cash on Sept 30th.

Dentsply International (XRAY) reported earnings of 76 cents that beat estimates for 70 cents. Revenue of $1.02 billion matched estimates. They guided for the full year to earnings of $2.70-$2.80 per share. Shares declined on a sell the news trade.

Earnings for next week include one Dow component on Tuesday and that is Disney. Valeant Pharmaceutical (VRX) will also report on Tuesday and will be the headline leader in the biotech space. On Thursday, Alibaba and Nvidia will report. The Nvidia earnings are going to be highly watched because shares continue to hit new highs almost every day. New products are being announced almost weekly and they are the bleeding edge of computing/graphics technology.

With 86% of the companies in the S&P already reported, 69% have beaten on earnings and 54% have beaten on revenue. The blended earnings decline is now -3.5% and revenue is flat with the year ago quarter. Fifty-three companies have issued negative guidance and 26 have issued positive guidance. The earnings forecast for Q3 is -1.7% and +5.7% earnings growth for Q4.

Tesla reported earnings earlier in the week and Elon Musk spent most of the conference call assuring analysts they really were going to produce 50,000 cars in the second half of 2016 and 500,000 in 2018.

Musk said he went through "production hell" in June as they were trying to upgrade the production line to accommodate the faster rate of production. He said he spent many nights sleeping by the production line so he could be there anytime something went wrong.

Musk reaffirmed they still had 373,000 Model 3 reservations and he threatened suppliers that might be short on component deliveries that he would cut them off and they would get no more business from Tesla. He also said despite the huge waiting list for the Model 3, they were still seeing orders increase for the Model S and the Model X. He also said the next vehicle would be the Model Y, which will be a smaller SUV built on the Model 3 platform. He also said Tesla would unveil the Tesla semi and minibus within 6-9 months and put them into production following the Model Y.

Analysts were unhappy about the $1.06 per share loss compared to the 59 cents analysts had forecast. However, in order to make more cars faster, Tesla had to spend more to beef up the manufacturing process and that is investing for the future and investors were ok with that.

A potential blockbuster cancer treatment from Bristol-Myers Squibb (BMY) failed in a key study as the company tried to further extend its use to lung cancer patients. Bristol's drug Opdivo is already approved to treat melanoma and lung cancer but only after chemotherapy. The study involved 541 patients that had received no prior treatment. The study failed to produce any material results. Shares of BMY fell -16% and the biggest one-day drop in 15 years. Competitor Merck (MRK) markets the drug Keytruda and shares of MRK soared $6 as the biggest gainer on the Dow.

The strong jobs numbers caused a corresponding spike in the dollar from a six week low. The low dollar had helped offset the drop in oil prices and then the strong jobs suggested we were consuming more oil and prices rebounded again on Friday to close at the high for the week. The low for the week came on Wednesday at $39.19 after crude inventories rose for the second consecutive week in a month where we normally see declines.

However, we did see a spike in refinery utilization to 93.3% as refiners ramp up production ahead of the Labor Day weekend and the last surge of driving until Thanksgiving. They will probably produce more gasoline for the next four weeks and then drop back into maintenance mode for a month as they prepare to switch over to the winter blend fuels. Production will begin to increase in mid October as they ramp up winter fuels ahead of that Thanksgiving weekend.

This means oil prices are likely to go lower in the weeks ahead. I seriously doubt they will fall much under $40 but we could see some days in the high $30s until that maintenance period is over.

Active rigs rose only +1 to 464 but that total is misleading. Oil rigs rose +7 and gas rigs fell -5. Offshore rigs fell -2 to 17 and a new low for this energy cycle. We saw a decline in gas inventories with a draw of -4 Bcf from storage. That is well below the average injection of 58 Bcf for this period. The lack of new wells being drilled and the hot summer weather combined to a shortage of new supply. Gas prices did not rise on the news but they should have.


The short squeeze on Friday produced a lot of new highs but the Dow, NYSE Composite and the Russell 2000 did not complete the task. The S&P-100, S&P-400 Midcap, S&P-500, S&P-600 Smallcap, Vanguard Total stock Market Index (VTI), Russell 1000 and Russell 3000 all made new historic highs. Every one of those indexes had one giant short squeeze candle that dwarfed the mediocre moves of the last three weeks.

There were a lot of traders caught leaning the wrong way. This was not a case of a hundred thousand investors suddenly deciding to buy stocks on a summer Friday because the jobs report was better than expected. It was purely a short squeeze.

On the positive side, a lot of market rallies begin with a major short squeeze. Traders get caught leaning the wrong way and they cover, short, cover, short and cover again as fund managers race to chase prices so the market does not run away from them. Whether this will be one of those instances is of course unknown. It is such a clearly recognizable short squeeze that everybody may stand aside and let the market settle and wait for a new direction to form.

The fly in the rally soup is still the volume. Friday's volume of 6.8 billion shares was slightly higher than a normal summer Friday BUT compared to the 6.4 billion shares on Thursday it was nowhere close to the kind of volume you would need as confirmation a real rally had suddenly broken out. The volume increase from 6.4 to 6.8 billion shares was negligible, expecially given the +191 gain on the Dow and the new highs across most of the indexes.

It will take more volume confirmation next week to keep the rally going. Without that volume the odds are good the rally will either be lackluster or fail entirely.

The S&P surged to close at the exact high of the day at 2,182.87. Despite the three weeks of low volume consolidation the index is still very over extended and is not likely to continue much higher without some decent profit taking. The intraday decline to support at 2,150 last Tuesday should not have been enough profit taking to let traders on the sidelines feel comfortable about opening new positions. If anything, it encouraged the shorts to increase their positions and that is what caused the Friday squeeze.

The Dow was helped significantly on Friday by the $6 bounce in Merck shares and the $4 gain in Goldman Sachs. Those two stocks accounted for nearly 80 Dow points. The odds are very good they will not repeat their gains next week. Disney is the only Dow component reporting and it is not likely to have a significant impact on the Dow. With 23 Dow stocks gaining less than $1 or not gaining at all we can see the limited breadth in the rally. Only 7 Dow stocks gained more than $1.

The Dow chart has an interesting pattern repeating from late 2014. The one big rebound was the Ebola bounce when it appeared the contagion had been stopped. It was followed by a couple months of volatility and after a drop back to support at 17,050 it suddenly surged to a new high at 18,213 before moving sideways for several months and finally collapsing. Fast forward to January 2016 and we saw an equivalent bounce from 15,500 to 18,167 and then two months of consolidation. The sudden dip back to support at 17,050 was followed by a similar rebound back to new highs. Markets do have a memory but it is not reliable.

If the pattern were to continue, we should trade sideways from here for a couple months and then have a new support test in October. I am not saying this is going to happen but we can see one consistent pattern in the two-year chart. Every time there was a prolonged sprint higher, it was always followed by consolidation and then a decline. Given the extent of the recent gains, I would be very surprised if we did not see one more decline before we see a ramp into Q4 earnings, which are expected to be the strongest in the last two years.

The Nasdaq sprinted to a new high at 5,221 and just 3 points over the prior high from July 2015 at 5,218. That is hardly a breakout and more of a resistance test. There is nothing stopping the Nasdaq from moving higher as long as the chip stocks and biotech stocks continue to participate. The biotech sector is at a 6-month high. The Semiconductor Index is only 2 points from a new high. The Nasdaq also benefitted from a 55 point earnings gain in Priceline.

If the Nasdaq can continue pushing higher it would be a strong motivating force that could push fund managers to chase prices higher. One other factor is resurgence of the FANG stocks. Facebook, Amazon, Netflix and Google all posted strong gains last week. There are momentum players active in the market and those big cap stocks have a big influence on the Nasdaq.

The Russell 2000 broke out to a 52-week high at 1,231 but it has a ways to go to make a new high over 1,295. The Russell gained +1.44% and was the second biggest gainer behind the Dow Transports at +1.89%. Both of those indexes were heavily shorted and that is the reason they were the biggest gainers.

The target on the Russell 2000 is probably 1,275 and the last major resistance before the 1,295 high. The 1200-1205 level was perfect support on the midweek decline and the Russell could continue to be a strong performer because of the sector constitution of the index. However, should oil weaken it could be an anchor on the index.

While I am not convinced the new highs will last given the weak volume, I am not going to bet against them, again. The trend is your friend until it ends. This trend refuses to die.

The next three weeks will see the lowest volume of the summer. The earnings cycle is in decline and there are very few high profile earnings events to power the market. Continue to raise your stop losses. Remain long until you are stopped out and try not to buy the first dip.

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

Bullish sentiment continues to decline despite the new highs last week. This survey ends on Wednesday and the market was going lower at that time. Bullish sentiment fell another -1.5% but so did bearish sentiment. Neutral sentiment continues to increase at 43.4%. Neutral sentiment has been above the historical average of 31% for 27 consecutive weeks. Bearish sentiment declined to 26.8% and the fifth consecutive week under the historical average of 30.5%. Bullish sentiment at 29.8% has been below the historical average of 38.5% for 39 consecutive weeks and for 72 of the last 74 weeks but the market is setting new highs.

Goldman Sachs penned a piece last week titled, "Does the Treasury Market Still Care about Economic Data?" They talked about the decline in treasury yields as the sensitivity of yields to data has faded. Goldman said the markets are only paying attention to central bank communication and policies. In other words, "Don't fight the Fed" remains the age-old adage in the stock market.

One analyst last week commented on the Fed's constant warning about impending rate hikes and the lack of follow through on those warnings. Given the current global environment, the Fed is actually tightening by non-action. When the majority of the other central banks are cutting rates and doling out stimulus like crack cocaine, the Fed has kept rates flat, which is actually an implied tightening. While other countries are seeing rates go deeper into negative territory, the U.S. treasuries have become the safe harbor for the world's liquidity. One analyst suggested the demand for U.S. treasuries was so strong the Fed should use this opportunity to start liquidating some of those on its balance sheet. That would allow real rates to drift slightly higher without the Fed actually having to hike. Plus it would free up the Fed's balance sheet for future action when a recession eventually appears.

Bank of America pointed out that global central banks have now cut rates 666 times since the Lehman crash.

They also warned again that fund flows were negative. Equity funds saw outflows last week of $4.6 billion while bond funds saw monster inflows of $10.2 billion. That is the largest inflow into bonds since February 2015. This came as the BoJ, BoE and RBA all cut rates. More than $1 trillion has flowed into bond funds since Lehman. The Swiss National Bank and he GPIF upped their allocation of equities and continue to buy using their government printing presses.

Should we worry that money is still flowing out of equity funds even when the market is making new highs? I would think that would be relative to intelligent investors.

Citigroup called the S&P rally "unstoppable" saying this "U.S. bull market just won't die" and urging clients "don't underweight the S&P." Citi said on a fundamental basis since 2011 the U.S. market has risen from a trailing PE of 17x to 23x and remains very overextended.

"The S&P Composite is now 38% above its prior 2007 high. The FTSE 100 has been flat for 16 years. The Nikkei 225 is down 59% below its 1989 peak. Emerging market equities are down 35% from prior highs. The Eurostoxx is 29% lower. Since 2010, U.S. equities have returned 123% compared to 23% for the rest of the world."

IDI is a one-year-old company that has built a database on every adult in the USA. They have compiled a database of public information along with every other piece of private information they can collect. If you use a loyalty card at the grocery store, they know what you buy. If you have a rewards card with your bank they know what you buy and how much you spend. They know what car you drive, who insures it and in some cases where you drive it.

The company said the personal profiles contain "all known addresses, phone numbers, and e-mail addresses; every piece of property ever bought or sold, plus related mortgages; past and present vehicles owned; criminal citations, from speeding tickets on up; voter registration; hunting permits; and names and phone numbers of neighbors. The reports also include photos of cars taken by private companies using automated license plate readers—billions of snapshots tagged with GPS coordinates and time stamps." They operate multiple coupon websites where they collect personal information to "supply you with better offers" but that information includes things like your birth date, home address, email address and even your health history so they can offer you discounts on over the counter medicine. However, the real reason for the personal questions is to fill in the blanks on your record in their database.

IDI sells this data to private investigators, law firms, debt collectors and government agencies. They are also targeting consumer marketers. The company continues to spend millions to acquire existing databases from other companies to combine with its own. They spent $100 million in December to acquire market profiler Fluent and the 120 million profiles it had accumulated. In June, they spent $21 million to buy Q Interactive and their database. Big brother is watching. Source

I have to admit I am a data junkie. I read literally hundreds of articles on dozens of websites almost every day. The common thread on a lot of investing websites is the failure of the market to make a meaningful correction. It seems there are a lot of frustrated bears trolling the message boards and comments fields under articles on this topic. I sometimes read the comments looking for a referenced source to some new article. I got a good laugh out of the reader comment below. This was on ZeroHedge.com, which has a permanently bearish outlook on the market. Enjoy!

BillHilly Aug 5, 2016 4:05 PM

That's it ! I am capitulating, I am done, I am finished with holding on to a picture of reality that will seemingly never be allowed to happen. I have been bearish for 6+ years now (coincidentally coinciding with my embrace of ZH) and I have been beaten into submission by TPTB. (The Powers That Be) I can no longer stand the losses, financial and emotional, that come along with a view which will not conform to the reality which exists, agree with it or not.

I am not bashing ZH here. I am a long time fan and reader. I agree in heart/mind with much of what is posted by the Tyler's, yet their views do not/have not borne sweet fruit, in fact it has been a sour, gut-retching meal that has left me emaciated and weak. Following their take on the economic conditions "as they are/should be" has led nowhere but to the depths of confusion and exhaustion. I wish to be neither confused nor exhausted any longer.

So fare-thee-well all you "red-pill" poppers, I am ready to explore the promised land of bliss and prosperity that is offered so generously by our magnificent political/financial benefactors. I am ready to bow to the highly educated and intelligent members of our leadership. I will listen attentively to their bullish message on all their colorful and glossy media channels. I will praise the 1%-ers and stand aside as they pass by, genuflecting in their presence. I will build a golden idol of the mighty "printing press" and worship it daily with reverence.

I will no longer doubt. I will no longer distrust. I throw away my tin foil hat. My leaders have proven themselves worthy in mine eyes. They would not deceive nor mislead me - they love me, as they do all of us.

Ahh, what a glorious future I now have to look forward to. Unlimited "growth", vibrant economic recovery(s), abundant job creation, government largess where "debt does not matter", and the power and farsightedness of an honest, caring, and all-embracing political/military/corporate complex.

What took me so long to find this glorious path? Why did I fight the system? Why did I not pay heed to all the wisdom offered by "Million Dollar Bonus"? I will finally listen to my handlers and know the True reality which can exist with the proper mindset. I will now be set free !!!

Hand me the Blue Pill please !


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The man who does not read has no advantage over a man who does not know how to read."

Mark Twain

New Plays

Navigating with Low Interest

by Jim Brown

Click here to email Jim Brown
Editor's Note

Navient was spun off from Sallie Mae in 2014 to specialize in student loan debt and they have made a profitable business out of servicing that debt for colleges and state institutions.


NAVI - Navient - Company Profile

Navient Corporation provides financial products and services in the United States. The company offers Federal Family Education Loan Program (FFELP) Loans, Private Education Loans, and Business Services. It holds the portfolio of education loans insured or guaranteed under the FFELP, as well as the portfolio of private education loans. The company also provides asset recovery services for loans and receivables on behalf of guarantors of FFELP loans, and higher education institutions, as well as federal, state, court, and municipal clients. They also offer business processing services on behalf of municipalities, public authorities, and hospitals. Navient was spun off from Sallie Mae in April 2014.

Adjusted earnings for Q2 rose 17.5% to 47 cents and beat estimates for 45 cents. Helping produce the earnings beat was a 44.4% decline in provisions for credit losses to $110 million.

During the quarter Navient acquired FFELP loans of $623 million bringing their total under management to $92.6 billion.

The private education loan segment reported earnings of $57 million. During the quarter Navient acquired another $23 million to bring their total under management to $24.7 billion. The spread on the private loans was stable at 3.66%. The charge off rate was only 2.2%.

During the quarter they retires $255 million in senior unsecured debt and they completed three ABS placements totaling $2.278 billion to raise liquidity. They repurchased 13.6 million shares for $175 million and had $360 million outstanding under the current authorization.

Earnings Oct 18th.

Although Navient is not a high flying investment like Apple or Netflix it is a good solid business. Friday's close at $14.50 was a 52-week high and a breakout over prior resistance. The next resistance will be a gap fill around $17 from last July.

Buy NAVI shares, currently $14.53, Iniital stop loss $13.35.

Optional: Buy Oct $15 call, currently 65 cents. No initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Leaning the Wrong Way

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nonfarm Payroll report caught a lot of traders leaning the wrong way. There was a massive short squeeze that caught a lot of traders off guard. With so many people expecting the market to sink in August the short interest was very high and the blowout jobs numbers caused a kneejerk reaction that spiked the markets.

The S&P closed at a new high along with the Nasdaq but the Dow fell short and did not even make it back to the prior resistance at 18,550. This suggests there could be further weakness next week now that the Nasdaq has closed at its high but the Dow has not.

Current Portfolio

Current Position Changes

INFY - Infosys Ltd
The short position remains unopened until $15.75. Low today was $16.04

CUDA - Barracuda Networks
The long position remains unopened until $22.50. High today was $22.34

RDN - Radian Group
The long position remains unopened until $13.15. High today was $13.00

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

CDNS - Cadence Design System - Company Profile


No specific news. Shares rose 1.4% to $24.68.

Original Trade Description: August 3rd.

Cadence Design Systems, Inc. develops, sells, leases, and licenses electronic design automation (EDA) software, emulation and prototyping hardware, verification intellectual property (VIP), and design intellectual property (IP) for semiconductor and electronics systems industries worldwide. It offers functional verification products, including logic verification software that enables customers to coordinate verification activities across multiple teams and various specialists for verification planning and closure; and system design and verification products for hardware-software verification, as well as for system power exploration, analysis, and optimization. The company also provides digital integrated circuit (IC) design products, such as logic design products for chip planning, design, verification, and test technologies and services; physical implementation tools, including place and route, signal integrity, optimization, and double patterning preparation; and signoff products to signoff the design as ready for manufacture by a silicon foundry, as well as design for manufacturing products for use in the product development process.

Basically, Cadence is a software company that specializes in software to design chips and validate designs. They reported earnings of 29 cents compared to estimates for 28 cents. Revenue of $453 million beat estimates for $449.7 million. They guided for Q3 for revenue of $440-$450 million and earnings of 27-29 cents. Unfortunately, that was slightly lower than the $457 million and 31 cents analysts expected. They guided for the full year for revenue of $1.8 - $1.83 billion and earnings of $1.17 to $1.23. Analysts were expecting $1.824 billion and $1.21 per share.

The stock was knocked back from $26 to $24 after a strong run since January. Shares have stabilized at $24 and I expect their prior trend to continue. The guidance was conservative and analysts always over estimate.

Earnings Oct 25th.

Position 8/4/16 with a CDNS trade at $24.35

Long CDNS shares @ $24.35, see portfolio graphic for stop loss.

Optional: Long Sept $25 call @ 35 cents, no stop loss.

CUDA - Barracuda Networks - Company Profile


No specific news. This position remains unopened until CUDA trades at $22.50. The high today was $22.34.

Original Trade Description: July 21st., August 3rd

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.

We were stopped out of long position on 8/3 because I had the stop loss too tight. I believe CUDA will move higher after a period of consolidation at the current level. I am putting an entry point just over the current consolidation range.

With a CUDA trade at $22.50

Buy CUDA shares, initial stop loss $21.00.

RDN - Radian Group - Company Profile


No specific news.

Position remains unopened until a trade above resistance at $13.15. High today was $13.00.

Original Trade Description: July 30th.

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

With a RDN trade at $13.15

Buy RDN shares, initial stop loss $11.85.


Buy Sept $14 call, currently .20, no stop loss.

TWTR - Twitter - Company Profile


Twitter rose slightly and closed over $18 again as the acquisition rumors began to dissipate. Monday is acquisition day so look for more rumors. If they can push the stock over $19 is should trigger some additional short covering.

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.

Position 8/1/16:

Long TWTR shares @ $16.64, see portfolio graphic for stop loss.

Previously closed 7/28/16: Long TWTR shares @ $17.24, exit $15.89, -1.35 loss.
Previously closed 8/1/16: Long Aug $17 put @ 62 cents, exit .85, +.23 gain.

BEARISH Play Updates

INFY - Infosys - Company Profile


No specific news. Support at $16 is in play. It could take several days for this position to be tiggered, if at all. However, if we are triggered at $15.75 the stock could continue to single digits.

Original Trade Description: August 4th.

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. The company offers business information technology (IT) services comprising application development and maintenance, independent validation services, infrastructure management, business process management, and engineering services consisting of product engineering and life cycle solutions; and consulting and systems integration services, including consulting, enterprise solutions, systems integration, and advanced technologies.

Infosys is an Indian company that does business all over the world but it does have a heavy presence in Europe and the UK. Just before the company released disappointing earnings in July they issued a press release saying, "We do not know how Brexit will play out" but we are cutting our guidance anyway. At the same time, they warned they would miss prior estimates for Q2 "even though there was no Brexit impact so far." This would appear to be a case of using a convenient headline as an excuse for poor performance.

The company cut full year revenue growth guidance from 11.5% to 13.5% to 10.5% to $12.0%. They blamed a lack of visibility by banks as a potential reason they may see growth decline. When they reported earnings of 22 cents they missed estimates for 23 cents. Revenue of $2.5 billion also missed estimates for $2.55 billion. Remember, they said there had been no impact from Brexit so far so this was just a miss and they were setting up analysts for a future miss with the guidance cut.

Earnings Oct 14th.

Analysts were quick to downgrade the stock with Nomura cutting it from buy to neutral and Credit Suisse cutting from outperform to neutral.

Shares fell from $18.50 to $16.50 on the announcement and then traded sideways for two weeks. This week they have begun to decline and are only slightly above a new 52-week low. If they punch through the support at $16 they could go to single digits.

With a INFY trade at $15.75

Sell short INFY shares, initial stop loss $16.65

No options recommended because of wide spreads.

SKX - Skechers - Company Profile


No specific news. Shares rebounded only slightly in a strong market.

Original Trade Description: August 1st.

Skechers U.S.A., Inc. designs, develops, markets, and distributes footwear for men, women, and children; and performance footwear for men and women under the Skechers GO brand name worldwide. It operates through three segments: Domestic Wholesale Sales, International Wholesale Sales, and Retail Sales. The company offers casual footwear, including boots, shoes, and sandals for men, as well as oxfords and slip-ons, lug outsole and fashion boots, and casual sandals for women; dress casuals, seasonal sandals and boots, and relaxed fit casuals for men and women; and casual fusion line for young men and women under the Skechers USA brand. It also provides footwear collection for men and women, including lightweight sport athletic lifestyle products, classic athletic-inspired styles, and sport sandals and boots under the Skechers Sport brand name; casual and sporty styles sneakers for females under the Skechers Active and Skechers Sport Active brand; and footwear for women and girls under the BOBS from Skechers name. They operate 1,548 stores with 1,144 outside the USA. They plan to increase that total count by adding another 200 stores before the end of 2016. They opened 133 stores in Q2.

In the recent Q2 cycle they reported earnings of 48 cents that missed estimates for 51 cents. Revenue rose 9.6% to $877.8 million. The revenue was a bigger problem than the missed earnings. Over the last three quarters they averaged a 27% increase in sales. The 9.6% rise was the worst quarter since Q3-2012. In the U.S. revenue actually declined -5.4% with most of the gains coming from overseas. Sales internationally rose 40% but the stronger dollar took a big bite out of profits. They also complained about a warehouse fire in Malaysia and additional VAT taxes in Brazil.

However, the biggest problem is the increased competition from Under Armour and Nike. UA is rapidly expanding its line of running shoes and Nike is increasing the variety of less expensive shoes after their $200+ offerings did poorly over the last two quarters. Under Armour announced it was going to launch a shoe dept in 1,100 Kohl's stores. That gives them broader exposure and it will be at a lower price point.

Skechers has a tough road ahead. They are trying to break into the highly competitive U.S. running shoe market and have been doing rather well but the big guys are determined to push SKX back to the sidelines.

Earnings Oct 20th.

Shares fell from $32 to $25 on the earnings and have continued to move to lower lows in a positive market. If the broader market rolls over the decline could accelerate.

Update 8/3/16: Skechers earned the "Bear of the Day" strong sell call from Zacks. The analyst said the consensus estimate for 2016 earnings had fallen from $2.11 to $1.81 in the last 60 days. The 2017 estimates had fallen from $2.53 to $2.05.

Position 8/2/16:

Short SKX shares @ $23.75, see portfolio graphic for stop loss.

Optional: Long Sept $22 put @ .55, see portfolio graphic for stop loss.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible.

These positions are only updated on the weekend.

CIEN - Ciena Corporation - Company Profile


We were stopped out on CIEN on July 28th after INFN posted ugly earnings and warned that demand was falling across the sector. This was mostly company specific to INFN but it did knock CIEN, JNPR and CSCO lower. There was no stop loss on the optional October call so we have retained it as a lottery play that CIEN moves back to the June highs by October expiration.

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

Long Oct $23 call @ 70 cents. No stop loss.

Previously closed 7/28/16: Long CIEN shares@ $20.35, exit $18.84, -1.51 loss.

HOV - Hovnanian Enterprises - Company Profile


This is a long term position on expectations HOV will return to profitability in Q3/Q4 as outlined by the CEO in the Q2 earnings.

Original Trade Description: July 27th.

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Position 7/28/16

Long HOV shares @ $1.86, no stop loss.


Long February $2 call @ 20 cents. No stop loss.

JKS - Jinko Solar - Company Profile


No specific news. We have a long August $21 call that we added as insurance to the short on JKS shares. Shares appear to have found support at $18.

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

Long August $21 call @ 70 cents, no stop loss.

Previously Closed 7/20/16: Short JKS shares @ $19.35, exit $19.05, +.30 gain.

SHLD - Sears Holding - Company Profile


No specific news. Shares up a whopping 9% on no news. They closed at a 3-month high.

We were stopped out on the long in SHLD shares on July 14th. The long call was optional and we are tracking it here with no stop loss.

Original Trade Description: July 11th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. As of October 31, 2015, this segment operated 735 Sears stores.

I probably did not need that big company description paragraph because everybody knows about Sears. They have fallen on hard times in recent years but they are struggling back. Sears is charging forward with "brand extensions" of its existing brands including Kenmore, Craftsman, DieHard, etc. What is a brand extension? Everybody knows about Kenmore appliances. They have been around for 75 years. But soon you will see Kenmore sinks, facets, and many more items carrying that name. Sears is preparing to market a DieHard line of tires because the DieHard brand is the leading brand for batteries. They are also reducing the store count and selling some real estate. They are also moving to stores within a store. This is where brand name companies rent a certain amount of floor space to sell their products. Sears gets a commission and does not have to order or inventory any products. This reduces overhead and allows for better management of the individual product sections.

Whether it will work or not remains to be seen but it appears they have stopped the bleeding and are now focusing on rebuilding the business.

Shares bottomed at $10 in May and Monday's close at $14.48 was a two-month high. Next resistance is around $18.50.

Earnings are August 18th.

Position 7/12/16 with a trade at $14.65

Long Sept $16 call @ .88, no stop loss.

Previously closed 7/14/16: Long SHLD shares @ $14.65, exit $13.75, -.90 loss.

VNET - 21Vianet Group - Company Profile


VNET shares have flat lined at $9.50 as the buyers and sellers jockey for position. It could go either way and we have a $9 put option.

Original Trade Description: July 2nd.

21Vianet Group, Inc. provides carrier-neutral Internet data center services to Internet companies, government entities, blue-chip enterprises, and small-to mid-sized enterprises in the Peoples Republic of China. It offers hosting and related services to house servers and networking equipment in its data centers, and connects them through a data transmission network; and other hosting related value-added services.

In June 2015 the Chairman of the board, Kingsoft Corporation and Tsinghua Unigroup International proposed a deal to take the company private. Shares were trading around $20 at the time. On Thursday the same group rescinded their "non-binding" go private offer. The group said "after careful consideration, the group had determined not to proceed with the proposal under the current circumstances." Those circumstances were not described.

After keeping the stock price around $20 for the last year based on this offer the group decided to pass on the deal. While it may have had something to do with the earnings, I suspect it had more to do with the current problems with taking companies private in China. Qihoo (QIHU) and YY (YY) are also struggling. The China Securities Regulatory Commission is considering limits on the numbers of reverse mergers from previously foreign listed companies. There are worries they could impose an outright ban.

In an attempt to counter the drop in the stock the company announced a $200 million share repurchase plan. However, in the first sentence reads, "The Board has authorized, but not obligated, to repurchase up to $200 million in outstanding shares within the next we months." The key words there are "not obligated" which means they do not have to buy the shares if they change their minds. This is a Chinese company and the generally accepted rules are rarely followed. This is just another ploy to try and support the stock price.

Earnings August 24th.

Position 7/5/16:

Long August $9 put @ 85 cents. No initial stop loss.

Previously Closed 7/11/16: Short VNET shares @ $9.57, exit 9.88, -.31 cent loss.

WIN - Windstream Holdings - Company Profile


Shares declined on an earning beat but a revenue miss. We were stopped out at $9.05 for a minor loss of 7 cents.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.

Position 3/11/16

Closed 8/2/16: Long August $9.00 call @ .38 cents.(Adjusted) Exit .31, -.07 loss.

Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.

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