Option Investor

Daily Newsletter, Tuesday, 8/23/2016

Table of Contents

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

Market Wrap

Russell 2000 Leads

by Jim Brown

Click here to email Jim Brown

The Russell 2000 surged +9 points to a new 52-week high and provided a sentiment boost for the market.

Market Statistics

The small cap Russell 2000 continued its steady climb and posted a new 52-week high at 1,248 and well over the prior high at 1,241. The semiconductors, biotechs and the energy sector provided support for the Russell and none of those appear to be weakening.

The surge in the Russell suggests fund managers are already starting to nibble at stocks for their yearend portfolio restructuring push. The fiscal year end for most funds is October 31st and that makes the next 60 days critical for fund performance. Typically, they dump stocks in September and then buy stocks on the October lows. So far this season the market is not showing any weakness and managers appear to be putting some of their cash hoard to work in the small cap stocks where they can get the most bang for their bucks. This suggests there could be a healthy rally at some point in the future if managers are not worried about the most volatile six weeks of the year that started on Monday. Based on the chart below there is plenty of room for backing and filling to 1,238 or even 1,225 and still maintaining the uptrend bias.

The New Home Sales for July were off the charts with a 12.4% surge to 654,000. That was up from 582,000 in June, which was a 1.7% rise. Compared to July 2015, sales have risen 31.3% and still climbing. The months of inventory on the market fell to 4.3 compared to the 5.5 month high in March. There were 233,000 homes for sale at the end of July. There is some seasonality in those numbers since builders try to have a large supply of completed homes in the late spring months so shoppers have an assortment to choose from when the buying season begins. Now that summer is over we should see the pace of sales slow in coming months but the very low interest rates will still be a sales driver.

Sales were strongest in the South and Northeast. Sales in the Northeast rose 40% and +18.1% in the South. The Midwest increased only 1.2% and the West was flat. The median price for a new home was $355,800 and a +4.1% increase from July 2015.

Before investors could become too excited about the home sales, the Richmond Fed surveys knocked all the wind out of the market. The headline number on the manufacturing survey declined from +10 to -11, and the lowest reading since -13 in January 2013 and the second lowest reading since the financial crisis.

The internal components imploded with the gap between inventories and orders falling to -44, order backlogs -21 and new orders falling -35 to -20. This was a very ugly report. With the inv/ord gap at -44, this suggests the next couple months could also be very negative. The 35-point drop in new orders means manufacturers will have nothing to build and employment could decline as layoffs increase.

The headline number on the separate services survey fell from +8 to zero. The internal components were equally negative. Sales of big ticket items fell to -10, shopper traffic went negative at -4 and sales revenues fell deeper into negative territory at -26.

The SEMI Book-to-Bill ratio for North American manufacturers rose slightly from 1.00 to 1.05 for July. That means they received $1.05 in orders for every $1 they billed. Shipments declined from $1.715 billion to $1.705 billion. Bookings rose from $1.714 billion to $1.794 billon.

On Wednesday, we get the existing home sales for July and those numbers should be high as well although several analysts are looking for a decline from the 5.7 million pace from last month.

The big events for the week remain the GDP and Yellen speech on Friday. Both could be market movers but the Yellen speech is the real danger. She could either build a fire under the market with some dovish remarks or smother the smoldering rally with a bucket full of rate hike reality. It is widely believed she will try to maintain a cautious tone but suggest the Fed is ready to hike rates at any time if conditions warrant. A strong employment report in early September could be the trigger point but regional reports like the Richmond surveys could be the anchor that keeps them on the sidelines until 2017.

There were still a few companies reporting earnings and Best Buy knocked the ball out of the park. They reported earnings of 57 cents compared to estimates for 43 cents. That was a 16% increase over the same quarter in 2015. Revenue of $8.53 billion also beat estimates for $8.4 billion. Same store sales rose +0.8% compared to estimates for a -0.6% decline. The CFO said they expect same store sales to rise +1% in Q3.

Best Buy said higher demand for wearable technology, appliances, computers and home theater systems offset declines in mobile phones and video games. The big gains came from a 24% boost in online sales. This was an amazing report from a company that was left for dead back in late 2012 when it was trading for $11 and analysts were saying Amazon should buy them as a way to showroom products in brick and mortar locations. Since they compete head to head with Amazon, the spike in online sales is remarkable.

JM Smucker (SJM) reported earnings of $1.86 compared to estimates for $1.74. Revenue of $1.8 billion missed estimates of $1.9 billion and was well below the $1.95 billion from the year ago quarter. Revenue declined -7% on increased competition on sales of pet food and falling coffee prices. Smuckers is the largest coffee roaster with the Folgers and Dunkin Donuts brands in its portfolio. The company was forced to cut prices on coffee by 6% after bulk coffee prices fell. That was the second decline in 2016. Overall, the drop in coffee sales accounted for 4% of the 7% decline in revenue. Coffee revenue alone was down -9%.

The company guided for the full year to earnings of $7.60-$7.75 and below estimates for $7.70. They also guided for sales to be flat to down by -1% or more compared to prior forecasts for a 1% gain. Shares fell -8% on the earnings.

Homebuilder Toll Brothers (TOL) reported earnings of 61 cents that matched estimates. They sold 1,507 homes in Q2 and a nine-year high. The average selling price declined slightly from $834,000 to $831,000. Order backlogs rose 19%. Shares had been locked in a range in 2016 but the earnings were enough to power a 9% gain.

Shares of La-Z-Boy (LZB) crashed -15% in afterhours after reporting earnings of 28 cents that missed estimates for 29 cents. Revenue of $340.1 million also missed estimates for $359 million. The company blamed the flat sales on "weaker demand" and "inconsistent" foot traffic. Same store sales fell -1.9% compared to a rise of +5.5% in the year ago quarter.

Zoes Kitchen (ZOES) shares fell -17% after reporting earnings of 6 cents that matched estimates. Revenue rose +27% to $66.3 million but missed estimates for $67.3 million. Same store sales rose +4% but that was driven by a 3.1% price increase. This compares to a sales rise of 8.1% in the first quarter. This caused a lot of analyst grief because adjusted sales had fallen off a cliff. For the full year, the company guided to $277-$280 million and only $1 million below prior guidance. Analysts were expecting $280 million. They guided to same store sales growth between 4-5%. Based on the guidance and the minor miss on revenue I did not think it was that bad of a report to cause a 17% drop in the stock. Buy the dip?

Lannett (LCI) reported earnings of 73 cents that easily beat estimates for 60 cents. Revenue of $168.9 million also beat estimates for $161.8 million. That was a 70% increase in revenue and a sales record. Lannett is a generic drug manufacturer.

The big dog on the calendar for Wednesday is Hewlett Packard. The headliner on Thursday is Sears along with Gamestop and Ulta Salon. It will be hard for these companies to provide any market lift.

Elon Musk tweeted this morning that Tesla would make a new product announcement in the afternoon. Shares of Tesla immediately rallied from $222 to $228 as shorts ran for cover. Musk is a twitterholic and his tweets do move the stock price. When the announcement was finally made it was a larger 100 kWh battery pack for the Model S and the Model X. Musk said it would make the Model S the fastest production car in the world with a 0-60 time of 2.5 seconds in Ludicrous mode. The Model X would not be a slouch at 2.9 seconds. The new battery would provide a 315-mile range for the Model S and 285 miles for the Model X, assuming you are not racing off every stoplight.

The new high performance version will be called the P100D and will cost $134,500 with the SUV starting at $135,500. A normal Model S starts at $75,000 and can go roughly 200 miles on a charge. Musk said there have been faster production cars from Porsche and Ferrari but they are no longer produced and they cost $1 million each. Musk said demand is expected to be strong but they can only make 200 of the P100D battery packs a week due to production constraints. Shares gave back about half of the gains by the close.

Delphi (DLPH) and MobilEye (MBLY) announced a partnership to develop an autonomous driving technology package for automakers. They plan to develop the market's first turnkey Level 4/5 automated driving solution, which carmakers could begin integrating into vehicles by 2019. Level 5 is totally self-driving while Level 4 is close to complete autonomy.

Nearly all the automakers are working to develop the technology. GM is already testing self-driving cars and Ford plans to have a fully autonomous car in five years. Google has already made giant inroads into the process with more than one million miles of actual driving already completed. Google and Fiat are jointly producing a fleet of 100 self-driving minivans to further test the technology. With Delphi and MobilEye partnering to make an off the shelf package it could free up the various automakers to simply produce the cars and not spend billions developing their own technology. MobilEye was instrumental in Tesla's initial self-driving efforts.

Crude prices came back from an opening dip to trade at $48 intraday after Iran signaled a willingness to participate in a potential production freeze discussion at the end of September. Iran is OPEC's third largest producer. While the comments came from the Venezuelan oil minister after his visits to the Middle Eastern OPEC members, Iran did confirm it was going to participate in the late September talks in Algeria. The Venezuelan minister said "Iran is reaching its pre-sanctions production level soon and after that it can cooperate with others." Iran did not participate in the prior talks. Oil prices rallied from an early morning drop on the Iran news to close at $48.

Unfortunately, after the close the weekly API oil inventory report showed a 4.5 million barrel build in oil inventories. Expectations were for a decline of 500,000 barrels. Crude prices fell back to $47.68 on the news.

Goldman Sachs warned this morning the current rally in crude prices would fail. They said the rally was built on talk from nations known for saying anything to boost prices. There was no fundamental basis for the rally and Goldman was seeing increasing bearishness in the actual fundamentals. They retained their yearend price range of $45-$50 but warned there could be volatility ahead.


While the Nasdaq was breaking out to a new high this morning, Bank of America was warning of an impending correction back to 2,000 on the S&P. Dan Suzuki, senior investment strategist, said there were multiple factors that could cause the correction. He said short interest had moved from near record levels to the lowest point in 2016. Stocks were now expensive given the five quarters of earnings recession. He said if you adjust for currency impact and energy, the S&P revenue growth was the lowest in three years.

He warned the market was likely to suffer from stimulus disappointment as central banks pulled back from the brink. The Fed is on the verge of changing policy again and the ECB is no longer expected to cut rates at the next meeting. The European PMI out this morning was an 8-month high. He also warned the leverage in the market was very high and current earnings estimates for 2017 were unsustainable and would have to be revised lower soon. Goldman Sachs has a 2,100 year end target, JP Morgan 2,000 and HSBC 1,960.

Suzuki said we were experiencing the calm before the storm with the calm in the markets at 20-year lows. He was referring to the very tight ranges and extremely low volatility.

The S&P spiked to 2,193 at the open and came to a dead stop. That was also the high from the big short squeeze on August 15th. Note the nearly identical candles from those two days. We had a big gap open followed by an immediate decline. The S&P closed at the low for the day.

In theory, this is a bearish pattern and suggests strong resistance and the potential for a drop back to 2,175 ahead of the Yellen speech on Friday. Theory has not worked well lately so anything is possible. The problem is the lack of a catalyst to break through that resistance. There is nothing on the horizon that could produce a move strong enough until the Yellen speech. If she is strongly dovish, that could be the catalyst. If she is turning hawkish that could be a downside catalyst.

The Dow chart has a similar pattern with an opening gap higher to the resistance from the July 20th and August 11th tops. The August 15th short squeeze did trade higher but the index immediately fell back into the consolidation channel. The opening spike today was immediately sold and the Dow closed nearly -100 points off its high and at the low for the day. There are no leaders in the Dow components. There is a new set of winners/losers every day and none are consistently higher but some are consistently lower like MCD, WMT, TRV, etc. The path of least resistance for the Dow is bearish.

The Nasdaq did not close at a new high despite trading at one intraday. The close at 5,260 was -2 points below the August 15th high. The Nasdaq is benefitting from the semiconductors, biotechs and energy stocks. Any of those could retreat at any time. With the furor over high priced drugs seeming to grow stronger each week, we could see a crack in the biotech armor at any time.

Current support is 5,225 and resistance 5,270.

The Russell 2000 has the most bullish chart but it is not without challenges. The top of the short-term resistance of 1,250 and the longer-term channel is about 1,255. The Russell is trading at the top of the channel and could easily see some backing and filling and decline to the bottom of the channel without harming the overall trend. That would be around 1,225.

The market has survived for several years with a steady morphine like drip of global economic stimulus. The punchbowl of stimulus has been continuously refilled. Eventually that will stop. As I mentioned earlier the Fed, the ECB and even the BoJ are starting to make noises that could be interpreted as a prelude to turning off the stimulus spigot. It is not going to happen all at once. The ECB is committed to QE through March. The Fed will continue buying replacement securities for those that mature so interest rates are not going up in the near future. While they will probably hike by 25 basis points over the next five months, there is always the danger they could become more hawkish. Yellen's speech on Friday could be a turning point in Fed policy, or not. She may retain her dovish bias and the uncertainty will continue for another two months.

The market is not declining. That means it is not letting buyers into new positions. If this continues past Labor Day, the portfolio managers will be forced to chase prices higher. If we could choose market direction over the next 8 sessions, I would like to see a 3-5% decline. That would open the door to a major rally as the fund managers all tried to squeeze through the door at once in September. A decline of that magnitude would be painful because everyone is long. However, it would be a vaccination against a bigger decline later.

Wednesday is the anniversary of the mini Flash Crash from last August. The Chinese markets suddenly began to implode and that carried over into the U.S. markets with the Dow losing more than 2,000 points in only five days. Could Yellen cause another August implosion? Absolutely, but I seriously doubt it. The wealth effect from the market is a major plank in the Fed's economic support although they will not admit it.

The key point here is that a catalyst can come from anywhere. Nobody expected that Chinese implosion and its impact on the U.S. markets. We need to remain long but keep our stop losses in place as we enter the six most volatile weeks of the year, which started on Monday. The market never needs a reason to correct but it tends to move faster when an unexpected event appears in a normally volatile period.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Chemical Conglomerate

by Jim Brown

Click here to email Jim Brown
Editor's Note

Huntsman is reducing its global footprint and rapidly paying down debt. They are streamlining the company to make it more profitable. Who would not be happy with that?


HUN - Huntsman Corp - Company Profile

Huntsman Corporation manufactures and sells differentiated organic and inorganic chemical products worldwide. The company operates in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. The company's products are used in various applications, including adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Huntsman Corporation was founded in 1970.

They reported Q2 earnings of 53 cents that beat estimates for 52 cents. Revenue of $2.54 billion matched estimates. They generated more than $350 million in free cash flow and made an early repayment of $100 million in debt. They also announced they were selling some of its European facilities and would use the proceeds to repay debt. They sold a manufacturing facility to Innospec Inc for $225 million and the transaction is expected to close in Q4. Huntsman will remain a raw materials supplier to the facilities once the transaction is completed.

They are also planning to close their titanium dioxide manufacturing (TiO2) facility in South Africa in addition to spinning off their remaining TiO2 business in early 2017. The closure/spinoff will save $200 million.

The earnings, restructuring and debt repayment plans have given the stock a positive bias. Shares broke over resistance on Tuesday to trade at a 52-week high. The next material resistance is $23.

Earnings Oct 26th.

Since the S&P futures are negative tonight I am going to put an upside entry trigger on the recommendation.

With a HUN trade at $17.65

Buy HUN shares, initial stop loss $16.15

Optional: Buy Nov $19 call, currently 60 cents. No initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

New Russell High

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 closed at a new 52-week high but came to a dead stop at uptrend resistance. The Russell continues to produce bullish chart patterns but today's gain came to a dead stop at 1,250 and the next material resistance level. It is very possible we could see a pause here before the market continues higher.

However, the market has shaken off all the gloom and doom and warnings of imminent weakness with just 2-3 days of sideways consolidation followed by a new high and then repeat the process. It would be tough to routinely call a market top here regardless of how "toppy" the charts look. In this case it is the Dow and S&P that have what would appear to be a top while the Nasdaq and Russell continue to move higher. In this case, the Russell is the market sentiment driver.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

HZNP - Horizon Pharma
The long position remains unopened until $23.40. High today was $22.78.

VSI - Vitamin Shoppe
The short recommendation has been cancelled.

FDC - First Data
The long position was entered at $13.50.

ACAT - Arctic Cat
The short position remains unopened until $14.15. Low today was $14.86.

RUBI - Rubicon Project
The short position remains unopened until $8.90. Low today was $9.03.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

FDC - First Data - Company Profile


No specific news. FDC finally peeked over the $13.35 resistance enough to trigger our long entry at $13.50.

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.

Position 8/23/16 with a FDC trade at $13.50

Long FDC shares @ $13.50, see portfolio graphic for stop loss.

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

HZNP - Horizon Pharma - Company Profile


No specific news. Still fighting resistance.

This position remains unopened until HZNP trades at $23.40.

Original Trade Description: August 18th.

Horizon Pharma plc is a biopharmaceutical company that engages in identifying, developing, acquiring, and commercializing medicines for the treatment of arthritis, pain, inflammatory, and/or orphan diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; DUEXIS and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis; and PENNSAID for the treatment of pain of osteoarthritis of the knees. Its products also include MIGERGOT to treat vascular headache; RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus and multiple other indications; and KRYSTEXXA to treat chronic refractory gout. The company has a collaboration agreement with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer.

On August 8th the company reported earnings of 56 cents that beat estimates for 53 cents. Revenue of $257.4 easily beat estimates for $238.1 million. They guided for full year revenue of $1.025 to $1.050 billion and analysts were expecting $1.02 billion. They also affirmed adjusted EBITDA in the range of $495-$510 million.

All three business units, Orphan, Primary Care and Rheumatology performed well. Primary care revenues rose 33%. Orphan revenues rose 51% and Rheumatology rose +211%.

They have multiple drugs rapidly gaining market share and multiple drugs in the pipeline. This stock could be a prospect for a long-term hold.

Earnings Nov 7th.

Shares broke through resistance on the August 9th earnings, consolidated and drifted back slightly to use that same resistance as support. Today's close was only 3 cents below an 11-month high. A continued push higher by even a few cents could trigger significant short covering with a target over $30.

With HZNP trade at $23.40

Buy HZNP shares, initial stop loss $21.85.

No options recommended.

MRO - Marathon Oil - Company Profile


No specific news. Shares up 5% on the rebound in oil prices.

Original Trade Description: August 17th.

Marathon Oil Corporation operates as an energy company. It operates through three segments: North America E&P, International E&P, and Oil Sands Mining. The North America E&P segment develops, explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in North America. The International Exploration and Production segment explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in Equatorial Guinea, Gabon, the Kurdistan Region of Iraq, Libya, and the United Kingdom; and produces and markets products manufactured from natural gas, such as liquefied natural gas and methanol in Equatorial Guinea. The Oil Sands Mining segment mines, extracts and produces oil from Alberta and Canada.

Marathon reported a Q2 loss of 23 cents beating estimates by a penny. Revenue of $1.3 billion beat estimates for $1.19 billion. Q2 production averaged 384,000 Boepd and in line with guidance. U.S. production averaged 189,000 Boepd. They said they were adding extra rigs in Q3 thanks to new inventory of leases in the STACK play Oklahoma. Raymond James upgraded them from outperform to strong buy and Bank of America upgraded them from neutral to buy.

Earnings November 2nd.

Shares are poised to break over resistance at $15.75 as OPEC chats up the headlines about a possible production freeze in late September. The next material resistance is $20.

Position 8/18/16 with a MRO trade at $16.05

Long MRO shares @ $16.50, see portfolio graphic for stop loss.


Long Oct $17 call @ 70 cents. No initial stop loss.

NTCT - NetScout - Company Profile


No specific news. Excellent gain as the stock accelerates away from prior resistance.

Original Trade Description: August 15th.

NetScout Systems, Inc. provides real-time operational intelligence and performance analytics for service assurance, and cyber security solutions internationally. The company offers nGeniusONE management software that enables customers to predict, preempt, and resolve network and service delivery problems, as well as facilitate the optimization and capacity planning of their network infrastructures; and specialized platforms and analytic modules that enable its customers to analyze and troubleshoot traffic in radio access and Wi-Fi networks. It also provides Intelligent Data Sources under the Infinistream brand name that provide real-time collection and analysis of data from the network. In addition, the company offers portable network analysis and troubleshooting tools to identify key issues that impact network and application performance. Further, it provides security solutions that enable service providers and enterprises to protect their networks against DDoS attacks; and threat detection solutions that enable enterprises to identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks.

In late July, NetScout reported adjusted earnings of 28 cents that beat estimates for 25 cents. Revenue od $278 million beat estimates for $275 million. They guided for full year earnings of $1.87-$2.12, up from $1.85-$2.10 with revenue of $1.20-$1.25 billion.

NetScout provides their services to the enterprise and service providers. Their products enable network monitoring to maintain continuous uptime and network availability while isolating bottlenecks and intrusions. Their network visibility switches were ranked number one in market share by IHS Network Monitoring.

They posted record attendance at the company's Engage 16 user conference in May. They released version 2.1 of their advanced security solution, Spectrum. They have a new range of products to be released in the coming months that will boost full year revenue for 2017.

Earnings Oct 27th.

Shares spiked on earnings in late July and then experienced the mandatory post earnings depression phase where they consolidated for two-weeks. On Monday they broke over resistance and closed at a 8-month high.

Position 8/19/16 with a NTCT trade at $28.85

Long NTCT shares @ $28.85, see portfolio graphic for stop loss.

No options recommended.

RDN - Radian Group - Company Profile


No specific news. New 8-month high close.

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.

Position 8/12/16 with a RDN trade at $13.15

Long RDN shares @ $13.15, see portfolio graphic for stop loss.


Long Sept $14 call @ .15, no stop loss.

UIS - Unisys Corp - Company Profile


No specific news. Unisys said new wearable technology is going to revolutionize the biometrics market. They surveyed 54 biometric professionals who said there is a technology revolution in progress.

Original Trade Description: August 13th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. The company serves commercial, financial services, public sector, and the U.S. federal government through direct sales force, distributors, resellers, and alliance partners. Unisys Corporation was founded in 1886.

Unisys reported Q2 adjusted earnings of 81 cents compared to estimates for 25 cents. Those earnings more than doubled from the 36 cents in Q2-2015. Revenue of $748.9 million easily beat estimates for $688.1 million. Profit margins rose from -6.5% in Q2-2015 to +6.6%. They reaffirmed full year guidance for earnings, revenue, margins and free cash flow. They ended the quarter with an order backlog of $3.8 billion.

Technology revenue rose 30.7% and accounted for 18% of overall revenue. This is going to be a major profit center in future quarters. Profit margins in this unit rose 48%, up from 15.6% in the year ago quarter. Sales of the ClearPath software are soaring.

The Unisys Stealth security product was approved by the NSA for use in classified programs and making the product eligible for use by more than 20 countries to protect super sensitive systems and information.

On Thursday, Unisys won a government contract to move the Treasury Departments Comptroller of the Currency office to the cloud. This will affect more than 4,000 Treasury employees. Earlier in the year, Unisys moved the U.S. Dept of the Interior and its SAP-based financial management system to the cloud.

This company is at the right place at the right time with the right security products and the NSA approval opens a tremendous business opportunity in those 20 countries.

Earnings Oct 25th.

Shares spiked to $10.40 on the earnings news and then traded sideways for two weeks. Over the last several days the trend has turned positive and it closed at $10.55 on Friday and a 5-month high.

Position 8/15/16 with a UIS trade at $10.65

Long UIS shares @ $10.65, see portfolio graphic for stop loss.

BEARISH Play Updates

ACAT - Arctic Cat - Company Profile


No specific news. Shares gave back Monday's gains.

This position remains unopened until a trade at $14.15.

Original Trade Description: August 20th.

Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs), and recreational off-highway vehicles under the Arctic Cat and MotorFist brand names. The company also provides related parts, garments, and accessories. It offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. In addition, the company provides snowmobile garments for adults and children under the Arcticwear brand, which include jackets, coats, pants, and casual sportswear. Its Arcticwear line of clothing also includes insulated outerwear, hats, mittens, helmets, boots, sweatshirts, T-shirts, and casual wear.

For Q2 the company reported a loss of 81 cents that was twice what analysts expected at 40 cents. Revenue of $104.9 million also missed estimates for $118.7 million. The company lowered guidance for the full year to a loss of 70 cents to $1 per share on revenue of $635-$655 million. Shares crashed from $18.25 to $14.33 on the news.

Earnings Oct 28th.

Since the July 29th earnings, analysts have been slashing estimates. Six analysts have cut full year estimates from a consensus loss of 19 cents to a loss of 92 cents. For the current quarter, five analysts have cut estimates from 41 cents to 62 cents.

Shares tried to rebound twice and failed. If the post earnings low fails we could see ACAT move into single digits.

I am recommending we short the stock if it makes a new August low. The current low is $14.33. It could take several days before this position it triggered.

With a ACAT trade at $14.15

Sell short ACAT shares, currently $14.81. Initial stop loss $16.00.

There are some bad ticks recently and I would like to avoid being stopped out on a bad upside tick. Once in the position I will reset the stop loss.

RUBI - Rubicon Project - Company Profile


No specific news. The last 7 analyst ratings changes have been downgrades.

This position remains unopened until a trade at $8.90.

Original Trade Description: August 22nd.

The Rubicon Project is a technology company that engages in automating the buying and selling of advertising. The company offers advertising automation platform that creates and powers a marketplace for buyers and sellers to readily buy and sell advertising at scale. Its advertising automation platform features applications for digital advertising sellers, including Websites, mobile applications, and other digital media properties to sell their advertising inventory; applications and services for buyers comprising advertisers, agencies, agency trading desks, demand side platforms, and ad networks to buy advertising inventory; and a marketplace over which such transactions are executed.

Unfortunately, the arrival of sophisticated ad blocking software has caused RUBI significant pain. The war to claim the space occupied by display advertising has gone nuclear. Facebook reported they had changed their advertising code to get past the largest ad blocker, AdBlock Plus. Only a day later AdBlock reported they had changed their code to counter the change by Facebook. The next day Facebook announced a new change followed by AdBlock announcing a new change, etc. This went on for nearly ten days and we still do not know who will be the winner. AdBlock has more than 200 million users of its blocking program.

For a small company like Rubicon, they are getting trampled by the giants as they race to make their blocking/serving software successful. In their Q2 earnings RUBI reported 17 cents and $65.1 million in revenue. That beat the street on both numbers. However, they warned that "the digital advertising market is undergoing changes that have fueled headwinds that we expect will continue the remainder of the year in desktop advertising."

They cut guidance for the current quarter from 12 cents and $70.2 million to 8 cents and $62 million. They cut full year guidance to 75-90 cents on revenue of $260-$275 million. That compared to a prior forecast of $275-$290 million. Consensus estimates were looking for 90 cents and $295 million.

Shares crashed from $14 to $9 on the guidance warning. After a minor rebound attempt they are heading lower again and closed at $9.05 on Monday and a historic low.

The outlook is not good for RUBI and their competitors. The ad blocking war is only going to grow more competitive and fewer ads are going to be served and that will impact revenue for quarters to come.

With a RUBI trade at $8.90

Short RUBI shares, initial stop loss $10.

VSI - Vitamin Shoppe - Company Profile


No specific news. Shares rallied 1.6% and it does not appear it is going to decline.

This recommendation has been cancelled.

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.

Recommendation cancelled.

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