Option Investor

Daily Newsletter, Thursday, 8/11/2016

Table of Contents

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

Market Wrap

Party Like it is 1999

by Jim Brown

Click here to email Jim Brown

This was the first time all three major indexes closed at a new high on the same day since December 1999.

Market Statistics

The markets roared back from Wednesday's minor decline thanks to some strong earnings from the consumer retail sector and the tech giants. Stocks are rotating out of defensive sectors and into momentum techs, biotechs, and even energy stocks. The Dow closed 18 points over its prior high and the Nasdaq stretched its high by 3 points and the S&P by 3 points. While the three major indexes all closed at new highs, it was not a major breakout. We will always take a new high whenever it is offered but it would be far more bullish if the gain were more than 3 points.

There was very little in the way of economic news today. Import prices rose unexpectedly by +0.1% in July despite a -2.5% decline in petroleum prices. This came after an upward revision for June from +0.2% to +0.6%. The consensus estimate for July was for a -0.5% decline. Nonfuel import prices were surprisingly strong at +0.3%. Export prices rose +0.2%. On a trailing 12 month basis import prices are down -3.7% and -1.2% excluding fuels. Export prices are down -3.0%. The report was ignored.

The calendar for Friday has the two most important reports for the week. Those are the Producer Price Index and Retail Sales. The inflation at the producer level is expected to have risen +0.2%. The Retail Sales for July is expected to rise only 0.3% compared to the 0.6% gain in June. After the various retail earnings this week that missed revenue estimates we could see sales even weaker.

In earnings news, Kohl's (KSS) reported earnings of $1.22 that rose +14% and easily beat estimates for $1.04. Revenue of $4.182 billion beat estimates for $4.158 billion but sales did decline -2%. Same store sales fell -1.8% compared to the prior quarter at -3.9%. The company remains cautious about U.S. consumer spending and will close 18 stores. At the end of the quarter, there were 1,150 Kohl's stores, 12 FILA Outlet stores and 3 Off/Aisle clearance stores. The total store count was down -14 from the same period in 2015. They cut their full year earnings guidance from $4.05-$4.25 to $3.80-$4.00. On August 9th, Kohl's declared a dividend of 50 cents payable on Sept 21st to holders on Sept 7th. Despite the guidance cut Kohl's shares spiked $6.40.

Alibaba (BABA) reported earnings of 74 cents that beat estimates for 62 cents. Revenue of $4.84 billion rose 59% and beat estimates for $4.52 billion. Cloud computing revenue rose +156% to $187 million. While that is still a small portion of the enterprise, Alibaba is trying to copy Amazon Web Services and cloud revenue is expected to soar significantly, as the company's offerings are better understood and accepted. Revenue from the digital media and entertainment business spiked +286% to $472 million. That is due to the recently acquired Youku Tudou video streaming company and addition of news feeds from UCWeb. Retail revenue rose 49% to $3.52 billion and mobile revenue rose +119% to $2.64 billion. Alibaba is firing on all cylinders but the company was quiet about the SEC probe into its accounting practices. Shares spiked over $5 on the news.

Burger chain Shake Shack (SHAK) reported earnings of 14 cents that beat estimates for 13 cents. Revenue of $66.47 million beat estimates for $63 million. Same store sales rose 4.5% compared to 12.9% in the year ago quarter. The company raised guidance for 2016 revenues from $245-$249 million to $253-$256 million. The conference call turned contentious with analysts arguing with management about the economic metrics. The skepticism about the model is increasing. Shake Shack stores are valued at roughly $14 million each while a comparable store from Panera is only $5 million. Shake Shack only has 23 stores and it is more of a regional fad. Shares fell more than 7% on the earnings.

Retailer Macy's (M) reported earnings of 54 cents that beat estimates for 48 cents. Revenue declined from $6.1 billion to $5.87 billion but still beat estimates for $5.77 billion. Same store sales fell -2% but that was better than estimates for a 4.7% decline. They also announced plans to close 100 stores out of its fleet of 728 stores. The retailer is conceding that shoppers are increasingly more likely to shop online rather than go to a mall store. Macy's is also negotiating to sell some of its flagship stores that occupy premium real estate locations in an effort to capitalize on those values. Shares rallied 18% on the news. That was the most since December 2008.

Dillard's (DDS) reported earnings of 35 cents that beat estimates of 31 cents. However, that was a decline of 50% from the year ago quarter. Revenue of $1.45 billion misses estimates for $1.48 billion. Total merchandise sales fell -4% and same store sales fell -5%. Shares fell -$3 in afterhours. The big spike at the open was on the Macy's news and was immediately sold.

Nordstrom (JWN) reported earnings of 67 cents compared to estimates for 56 cents. However, that was down from $1.11 in the year ago quarter. Revenue of $3.6 billion missed estimates of $3.7 billion. The CEO said the company had made major progress in actively addressing inventory levels, expenses and capital expenditures. Shares rallied strongly on the news.

Nvidia (NVDA) reported a 23.9% jump in revenue to $1.43 billion. Earnings rose from 5 cents to 53 cents. Analysts expected 37 cents and $1.35 billion. It was a strong report. The company guided to revenue of $1.68 billion and well above consensus of $1.45 billion. The CEO said earnings were powered by "strong demand for the Pascal generation GPUs and surging interest in AI and deep learning." Nvidia makes the most powerful GPUs for super servers and giant computing clusters. The speed and capability of these GPU enabled computers is truly off the scale of human comprehension. They also make the fastest video graphics for gamers and professional use. Their top of the line card was just announced a $1249 and sold out immediately. Revenue from the gaming graphics rose 18.3% in the quarter. Nvidia shares have been making new highs almost every day since June and today was no exception.

The only material earnings on Friday come from JC Penny's. After the flurry of retail earnings on Thursday, their report will be mostly ignored in the rush to leave work early and enjoy another summer weekend. The number of companies reporting next week will decline significantly.

Valeant Pharmaceuticals (VRX) rallied sharply on Wednesday for more than $5 after their earnings and guidance. The stock fell -10% or -$3 today on news a U.S. attorney in Manhattan was spearheading a probe into the relationship between Valeant and Philador that could lead to criminal charges for securities fraud, mail fraud and wire fraud. The probe could lead to criminal charges against the company and against its officers at the time. Valeant had previously disclosed the probe along with about a dozen others from various regulatory agencies.

The probe is focused on whether Valeant used its relationship with drug marketer Philidor to inflate sales by shipping large quantities of unsold drugs to Philador and Philador then "paper sold" them to another handful of shell companies it had opened for the purpose. When the scandal broke, Valeant was forced to take a charge for unsold inventory but it was only a few million dollars and was minor compared to the billions in Valeant revenue. You can bet an aggressive attorney is going to find something to charge Valeant with but it is not likely to be the end of the world for Valeant. They will have to cop a plea and pay an enormous fine. However, if they do that for the 10-12 individual probes it would be very expensive. There is a potential argument here for combining all the cases together in one universal settlement.

Oil prices exploded higher after comments from the Saudi Arabian oil minister that the country would do what it could to help balance supply and demand. Prices spiked because short interest is very high at more than 300,000 contracts on WTI and Brent. The Venezuelan president has been actively trying to stir up support for another production freeze meeting in order to stabilize oil prices. Most analysts believe prices are going to see another sharp decline in Sept/Oct as summer demand slows while production is ramping up again.

Venezuelan president Maduro is dying politically and economically because of the crisis in his country. His oil production is falling and he needs every dollar he can get on every barrel he produces. The only way for that to happen is for OPEC to slow production so that prices will rise. He almost pulled off a production freeze last time around but the Iran/Saudi Arabia conflict killed the process when Saudi and Iran both refused to halt new production. Prices rose sharply during the two months before the meeting and that helped everyone. The various oil ministers from OPEC countries realized they could spike prices by simply talking about a production freeze. The comments were repeated over and over in the press and prices rose.

Now Maduro is trying to repeat that scenario as he begins his Middle East tour to talk up prices. He wants OPEC to force prices back to $70 per barrel. OPEC helped his cause this week by announcing it would hold an informal meeting on the sidelines of the Algerian energy conference in late September.

Offsetting this production freeze talk was news Saudi Arabia produced a record 10.67 million barrels per day in July. Iran said it produced 3.85 mbpd and the EIA had not expected that until mid 2017. If prices did spike to $70 there would be 500 rigs put back to work in the U.S. almost immediately. Production that has declined 1.15 mbpd in the U.S. would begin to surge and 6-9 months from now that drop would be well on its way to being erased. Saudi Arabia does not want that production back on the market and that is a good reason for Saudi to drag its feet and try to discourage any future production freeze.

OPEC is like the Fed. They talk a lot but can rarely agree on a solution. In this case, the talk can raise prices but it would only be temporary. U.S. refiners will reduce production after Labor Day for a month of maintenance before they begin producing winter blend fuels. This will allow crude inventories to rise but also allow excess refined product inventories to recede.


The S&P rallied +10 points to put it +3 points into new high territory. The index came back from the dip to support at 2,175 on Wednesday. I wrote last night it was just minor profit taking and nothing to be worried about. The market breadth is expanding despite no material increase in volume. For the last four days, volume had been right at 6.0 billion shares.

The new high close came on strong gains in the consumer sector and new highs for Amazon (AMZN) and Google (GOOGL). I do not want to be too bullish here but the trend is our friend until it ends. What we need is a real breakout that wakes up those cautious investors waiting patiently on the sidelines. Money has been flowing routinely out of the market over the last 17 weeks and we need a real breakout to make those investors reverse course. They need to wake up in the morning and say "Dang, this is a real rally. I need to buy stocks before it runs away from me."

Currently we have fund managers buying defensively just to make sure no other fund surges ahead of them in performance. Once the markets actually start a new leg higher by more than 3 points a day, the race for performance could push it significantly higher.

For Friday, the support is clearly defined as 2,175 and resistance 2,188 and the high for the day.

The new high on the Dow is barely discernible on chart. A new high by only 18 points on an index of 18,600 points is a rounding error. It is far from a "breakout" and the dead stop at that prior resistance suggests there are still sellers waiting. There was a real mix of winners with 3M surging 2 points on no news after two weeks of flat trading at $178. The declared a $1.11 dividend on Wednesday, so why did the stock spike today? That move is not likely to continue on Friday.

I would love to see the Dow post a big gain on Friday but until it does, I will continue to be skeptical of the rally.

The Nasdaq increased its historic high from 5,225 to 5,228. Like the Dow, a 3-point move on that index is a rounding error. We need a 20-40 point move to new highs to really shake up cautious investors. The biotech sector was the driving force again with a 1% gain but there was a broad range of contributors. However, when the 30th highest gainer on the Nasdaq only rose $2 that has got to give you some cause for concern. You would like to see a lot more big gainers.

The Nasdaq has traded in a 30 point range since the end of the short squeeze last Friday morning. That is very narrow given the trend for tech stocks to be more volatile. Resistance is now 5,235 and support 5,195.

The Russell 2000 small cap index only gained 6 points and is well below the new high level of 1,295. While the Russell is at a 12-month high is has not been as bullish as the big cap indexes. This is the case of a few big caps leading the charge higher and the troops are lagging.

I would be very skeptical about buying the market on Friday. We need to reevaluate after Friday and make plans for next week. There is always another day to trade if you do not make stupid decisions and rush into the market.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Bet or Check

by Jim Brown

Click here to email Jim Brown
Editor's Note

If you were holding these market cards would you bet on Friday or check to see the next card? I am recommending we check and see what card is turned over on Friday.

The minor breakout on the major indexes was high fived all around but S&P and Nasdaq only stretched existing highs by 3 points. The Nasdaq had very few "big" gainers and the S&P was powered by a couple of retail names with big earnings beats. There are no material earnings on Friday. Volume is going to be the lowest in weeks and we are right in the middle of the August doldrums. If the market is going to follow the seasonal norms for a decline into the end of August it should start soon. Next week is option expiration and Friday's move could have been related to that event. Professional traders typically exit positions the week ahead of expiration. I think we should be cautious for Friday and see what the market gives us. Monday could be a different market.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

No Excitement

by Jim Brown

Click here to email Jim Brown

Editors Note:

The minor new highs on the three major indexes came on no excitement and low volume. The S&P and Nasdaq added only 3 points to their prior highs and the Dow added 18. That is hardly an exciting close even though the indexes were up with solid numbers from Wednesday's low. Volume was barely 6.03 billion shares and Friday's volume is going to be even worse.

Unless the markets can generate some excitement that produces conviction for the buyers, it is going to be a long August.

Current Portfolio

Current Position Changes

FDC - First Data
The long position remains unopened until $13.50. High today was $13.41

CUDA - Barracuda Networks
The long position remains unopened until $22.50. High today was $22.38

RDN - Radian Group
The long position remains unopened until $13.15. High today was $12.89

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


Minor gain on no news.

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. Shares are holding over prior resistance at $21.25 but cannot seem to make a higher move.

This position remains unopened until CUDA trades at $22.50. The high today was $22.38.

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.

FDC - First Data - Company Profile


No specific news.

This position remains unopened until FDC trades at $13.50. The high today was $13.41.

Original Trade Description: August 10th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

With a FDC trade at $13.50

Buy FDC shares, initial stop loss $12.65

Optional: Buy Oct $14 call, currently .55, no stop loss.

NAVI - Navient - Company Profile


No specific news. Shares held over support and we survived another day.

Original Trade Description: August 6th.

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.

Position 8/8/16:

Long NAVI shares @ 14.57, see portfolio graphic for stop loss.


Long Oct $15 call @ 50 cents. No initial stop loss.

RDN - Radian Group - Company Profile


Radian announced the redemption of $211 million in 9% senior notes due in 2017. Shares barely moved. Still stuck under $13.

Position remains unopened until a trade above resistance at $13.15. High today was $12.89.

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 continues to surge on takeover talk. Average daily volume has risen from 22 million to 28 million shares and hit 31 million today. July option volume was 44,000 contracts per day and August volume has risen to 95,000 contracts per day. Steve Ballmer and Prince Al-Waleed bin Talal are still rumored to be acquiring a larger position. Combined they reportedly own 11%.

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

SKX - Skechers - Company Profile


No specific news. Shares spiked 5% on the retail feeding frenzy sparked by Macy's and other retailers reporting earnings. We were stopped out of the short on the shares at $24.25 for a 50 cent loss. The September $22 put option will move to the lottery play section.

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:

Closed 8/11/16: Short SKX shares @ $23.75, exit $24.25, -.50 loss.

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

VSI - Vitamin Shoppe - Company Profile


No specific news. Spiked up at the open on the retail feeding frenzy. We were stopped out at $27.50. I am probably going to add this back in as a short in the weekend newsletter.

Original Trade Description: August 8th.

Vitamin Shoppe, Inc. operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 800 brands. The company sells its products through Vitamin Shoppe, Super Supplements, and Vitapath retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of March 1, 2016, it had approximately 700 company-operated retail stores.

The company reported Q2 earnings of 55 cents that missed estimates for 59 cents. Revenue of $332.7 million narrowly beat estimates for $331.6 million. The CEO warned, "The external environment was more promotional and volatile than we had anticipated and we responded by increasing our promotional activity. As a result, our performance for the quarter was mixed, with improved comps offset by lower margins. The positive comps in the quarter reflect the benefits of some of our new initiatives as well as stepped up promotional activity. In addition, our manufacturing business is performing below expectations with lower sales and margins, which also contributed to our overall weaker performance in the quarter." I was not a glowing report. He also said, "Given the current operating environment with variability from day to day, we have put in place a dedicated effort behind more aggressive cost controls and margin realization. Our goal will be to achieve the appropriate balance between revenue growth and profitability." That is a good example of a CEO trying to put a positive spin on a negative environment. Shares declined after his comments.

Earnings Nov 2nd.

I am a vitamin junkie. I cringe every time I have to buy a bottle of something that costs $50 to $75 and I am sure the normal consumer is also suffering from sticker shock when they see those prices. Obviously, you can buy the generic chemical equivalents for a lot less but if you are trying to buy the best quality formulations, it is expensive. Add in all the competition from the multilevels like Thrive and the vitamin boosted meal replacements from brands like Vega and the consumer has so many choices they can't make up their minds. All the chain stores like Kroger, Whole Foods, etc, are now carrying complete inventories from multiple competitive brands at discounted prices. This gets back to the "promotional environment" the CEO was talking about.

Since the earnings drop on July 28th shares have declined $5 and are currently struggling to hold support at $27.50 that dates back to May. A breakdown there targets $26.25 and the 52-week lows. If VSI does make a new low, I think we could see a significant drop. Vitamin Cottage (NGVC) is already at $12 and dropping after hitting highs over $40 at the same time VSI was hitting $65.

Position 8/9/16 with a VSI trade at $27

Closed 8/11/16: Short VSI shares @ $27.00, exit $27.50, -.50 loss.

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