Option Investor

Daily Newsletter, Tuesday, 10/25/2016

Table of Contents

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

Market Wrap

Earning Excitement Fades

by Jim Brown

Click here to email Jim Brown

The market lost its Monday gains after a flurry of earnings provided disappointments rather than excitement.

Market Statistics

The early cycle euphoria faded into disappointment after several big names reported slowing revenue and lowered guidance. The normal early reporter excitement from last week faded and the markets reversed lower after their resistance test on Monday.

The economic reports did not help. The Consumer Confidence for October fell was the previously reported 104.1 to 98.6 on the headline number. The 104.1 was a nine-year high and it was revised down to 103.5. The current conditions component declined from 127.9 to 120.6 and the expectations component fell from 87.2 to 83.9. There were several factors in play.

The rising gasoline prices and slowing employment were a factor as well as the election uncertainty. I have reported before that presidential elections tend to depress confidence because the candidates are telling everyone how bad things are and how they are going to fix the problems. The fix part of the conversation seems to be forgotten but learning that wages are at an 18-year low and health insurance is going up 25% in 2017, become memorable.

Those respondents planning on buying an auto increased slightly from 12.5% to 12.6% but apparently they have not been actively looking as of yet. A friend was telling me last week that a new 4-door truck was $70,000 and a loaded Suburban was $80,000. Even with 7-year loans, those payments would be higher than most consumers could pay.

Those planning on buying a home fell from 5.9% to 5.1% and those thinking of buying a TV/appliance fell from 51.9% to 46.3%.

Weighing on Consumer Confidence is the recent announcement that Obamacare rates will rise an average of 25% in 2017. Some states will see a lot bigger spikes. For instance, Tennessee will see a 63% increase and Arizona will get a 116% increase. There is no reduction in deductibles to go with those rate hikes and in most plans, they actually go up. The government is claiming enrollment will rise 1.1 million in 2017 to 13.8 million. That does not tell the real story since millions have been pushed into the Medicaid program because they cannot afford to pay anything. More than 85% of Obamacare enrollees receive subsidies to offset their premiums. With only 15% of insured actually paying the bill the program is going to collapse. Until then the cost of being insured will continue rising.

The Richmond Fed Manufacturing Survey for October improved only slightly from -8 to -4 but the major components remained firmly in negative territory. Manufacturing conditions have now declined in 5 of the last six months. New orders are falling and backorders are seriously negative. The gap between orders and inventories, a proxy for future activity, fell to -30 suggesting conditions are going to get worse before they get better.

The separate services survey fell from 13 to 7 indicating a retracement there as well. The average wage index fell from 33 to 19 suggesting employment is fading. The sub component for retail employment fell from -2 to -13 even as we head into the holiday shopping season. If retailers are not staffing up for the holidays then the outlook is bleak. The high was +28 back in June and it has gone steadily downhill. Even worse, the expected demand component for the retail sector fell from 58 to 13 and the lowest level since April. Excluding retail, expected demand fell from 30 to 25. If services demand is slowing that rapidly ahead of the holidays, it paints a dismal picture for Q4 consumption.

The only important report left on the calendar for this week is the GDP on Friday. There are a lot of whisper numbers below the 2.5% consensus for growth. If the number came in under 2%, I do not know if the market would celebrate because the Fed would definitely be on hold longer or react negatively because of the weak economic growth.

Fed speakers Bullard and Evans both indicated the Fed would probably refrain from hiking in November but would hike in December in order to save face. After that, they may not entertain another hike for a long time because of the slow growth and desire to increase inflation.

It was a busy day for earnings and the good news was hard to find. Under Armour (UA) reported earnings of 29 cents compared to estimates for 25 cents. Revenue of $1.47 billion barely beat estimates for $1.46 billion. Sales in the U.S. rose 15.6% but that was well below the 20% level that UA normally produces and the slowest sales growth in six years. Gross margins fell from 48.8% to 47.5%. The company cited a difficult retail environment in North America and its decision to prioritize long-term growth over short-term profits. Retailers Sports Chalet and Sports Authority both went bankrupt over the last year.

The key sentence in the report was, "While we expect to continue to significantly outpace the apparel industry, the growth rate going forward will be less than expected from our investor day in 2015." Their current guidance is for growth in the low 20% range compared to prior years in the upper 20% range or higher. They said they were still on track for $7.5 billion in revenue in 2018. Shares declined -13% at the close after being down even more intraday. This weighed on Nike, Finish Line and all of the associated retailers.

Sherwin Williams (SHW) reported adjusted earnings of $4.23 compared to estimates for $4.34. Revenue of $3.279 billion missed estimates for $3.295 billion. They lowered guidance to low single digit growth for Q4 compared to 4% in Q3. Earnings are now expected to be $1.45-$1.55 per share compared to $2.12 in the year ago quarter. Shares collapsed -10% on the news.

Appliance maker Whirlpool (WHR) reported earnings of $3.66 that missed estimates for $3.86. Revenue of $5.25 billion missed estimates for $5.32 billion. The full year guidance was lowered to $14.00 to $14.25 compared to analyst expectations for $14.61. They said Europe remains challenging and they are attempting to "right-size" their inventory, meaning sales slowed, manufacturing did not and now they have more inventory than they can sell. Shares fell -10% on the news.

The earnings misses by Whirlpool and Sherwin Williams suggested the never-ending home improvement cycle might be coming to a close. With home sales slowing, the need to constantly remodel may be fading. Home Depot (HD) and Lowe's (LOW) saw their shares fall sharply.

There were multiple Dow components reporting today. Caterpillar (CAT) reported earnings of 85 cents that beat estimates for 76 cents. However, revenue of $9.16 billion missed estimates of $9.92 billion and was well under the $10.96 billion posted in the year ago quarter. The company lowered guidance again to full year revenue of $39 billion and earnings of $3.25. That compared to analyst estimates for $40.1 billion and $3.53. The CEO said, "Economic weakness throughout much of the world persists and, as a result, most of our end markets remain challenged." Our sales guidance for 2017 will not be significantly different than 2016. That is the polite way to say sales will be flat. Shares fell -2% on the news.

3M (MMM) reported earnings of $2.15 compared to estimates for $2.14. Revenue of $7.71 billion was in line with estimates. For the full year the company cut earnings guidance from $8.15-$8.30 to $8.15-$8.20. Analysts were expecting $8.22. They said revenue for the year would be flat compared to prior guidance of 1%. 3M gets nearly two-thirds of its revenue from overseas and they were hurt by the strong dollar. Sales in Asia-Pacific fell -2.2%. This was the second time 3M has guided lower.

DuPont (DD) reported earnings of 34 cents compared estimates for 21 cents. Revenue of $4.92 billion beat estimates for $4.87 billion. The company raised full year guidance from $3.15-$3.20 to $3.25 per share. They warned that revenue from the agriculture business would fall into the mid single digit percentage range and said weakness in commodity prices will continue.

Merck (MRK) reported earnings of $1.07 compared to estimates for 98 cents. Revenue of $10.54 billion also beat estimates for $10.24 billion. They narrowed the full year outlook and raised the range. They are now expecting $3.71-$3.79 per share compared to prior guidance of $3.67-$3.77 per share. Revenue is now expected to be $39.7-$40.2 billion compared to prior guidance of $39.1-$40.1 billion. Analysts were expecting $3.74 and $39.65 billion. Shares rallied 2% on the news.

United Technologies (UTX) reported earnings of $1.76 that beat estimates for $1.66. Revenue of $14.4 billion beat estimates for $14.3 billion. The company raised the low end of full year guidance by 10 cents to $6.33 to $6.60 per share. They guided for revenue to be flat for the year. However, they said the aerospace business was strong.

Procter & Gamble (PG) was the big winner for the day with earnings of $1.03 compared to estimates for 98 cents. Revenue of $16.52 billion beat estimates for $16.48 billion. Organic sales rose 3%. They guided for 2017 for 2% sales growth and mid single digit EPS growth. P&G plans to give $22 billion back to shareholders in 2017 in the form of dividends and stock buybacks. Shares exploded higher because many analysts were expecting an earnings and revenue miss.

After the bell Apple (AAPL) reported earnings of $1.67 that declined -15% on a -9% decline in revenue to $46.85 billion. Analysts were expecting $1.66 and $46.94 billion. The company sold 45.5 million iPhones beating estimates for 45.0 million. They sold 4.9 million Mac computers, missing estimates for 5.0 million. They also sold 9.3 million iPads beating estimates for 9.0 million. Apple's gross margin fell from 39.9% to 38.0% for the quarter. Apple guided for sales in Q4 of $76-$78 billion, which was above estimates for $75.08 billion. Q3 was the third consecutive quarter of declining revenue. Analysts are also expecting earnings of $3.20 for Q4. Apple did not give an earnings estimate.

Services revenue rose to $6.33 billion and 13.5% of total sales. iPhone sales of $28.16 billion accounted for 60.1% of total sales. Tim Cook said he did not know how much the Samsung Note 7 disaster had helped iPhone sales but he appreciated every switcher from an Android product. Cash on hand rose to $237.6 billion. Shares initially spiked to $121.84 but eventually fell -$3.25 in afterhours trading to end just under $115.

Panera (PNRA) reported earnings of $1.37 that beat estimates for $1.34. Revenue of $684.2 million beat estimates for $682.2 million. The company guided for the current quarter to earnings of $1.96-$2.01. They guided for the full year to $6.67-$6.72 per share. Analysts were expecting $6.68. Same store sales rose 1.7%, which was under the 2.4% analysts were expecting. Shares spiked $11 in afterhours.

Pandora (P) fell sharply to a 3-month low after the bell when they reported a loss of 27 cents. Analysts were expecting a loss of 6 cents. Revenue rose 13% to $351.9 million but also missed estimates for $366 million. For Q4 the company guided to revenue of $362-$374 million with a loss of $39 to $51 million.

Chipotle Mexican Grill (CMG) reported adjusted earnings of 79 cents compared to analyst estimates for $1.58. Revenue of $1.04 billion missed estimates for $1.09 billion. Same store sales fell -21.9% and the number of transactions fell -15.2%. For Q4 the company expects same store sales to decline in the low single-digits. Shares only fell -$9 in afterhours and I am shocked they did not implode on that large of an earnings miss.

I just scratched the surface on the companies reporting on Tuesday. The next big day will be Thursday with AMGN, AMZN, GOOGL, TWTR, UPS and WYNN. More than 178 S&P companies are reporting this week.

Crude prices have fallen sharply from the $51.50 from last week to trade at $49.35 in the afterhours session. The weekly API inventory after the bell showed a 4.8 million barrel increase in crude inventories. Gasoline rose by 1.7 million barrels.

Adding to the inventory surge was a rebellion by Iraq saying it was not going to be part of the OPEC plan to limit production at the end of November. Russia also made some vague comments about whether they would be part of the deal, after Putin spiked prices a couple weeks ago by saying it was time to join OPEC. I have warned numerous times that talk is cheap and the closer we get to the November 30th meeting the less likely an actual deal will appear. They may try to save face with token deal announcement but it will have no teeth and nobody will follow it.




The major indexes rallied right to resistance on Monday with the Nasdaq 100 the exception, closing at a new high. Today's reversal pushed the Dow and the Russell 2000 back towards support but the S&P barely dipped below 2,145 and recent resistance.

The indexes are still in a downtrend until they overcome their recent resistance levels. If we get a couple more days of sloppy earnings we could be retesting the October lows very quickly. Fortunately, Wednesday is devoid of any major market moves in terms of earnings. That means the afterhours session on Thursday with AMZN and GOOGL is going to be the critical event for the rest of the week.

The S&P has resistance at 2,150 and support at 2,120. The 2,145 level is a speed bump in both directions. The S&P futures are down -6 as I write this so we could be off to a negative start on Wednesday.

Thank goodness for PG, UTX, BA and MRK. Those four Dow components added about 55 Dow points or the loss at the close would have been a lot higher. Tomorrow only two Dow components report and they are Coke and Boeing. Coke is not a market mover. However, Boeing could easily move 4-5 points and be responsible for a 30 point Dow swing. The challenge for Wednesday is Apple with their $3 drop after the close. If that holds it will be worth about -25 Dow points. Add in the post earnings depression on those Dow stocks that have already reported and we have anchors in place ready to drag the index lower if there is no headline to trigger a short squeeze.

Support at 18,100 and resistance at 18,250 are the critical levels to watch.

The Nasdaq Composite gave back -26 points but the Nasdaq 100 only lost -18. I still believe portfolio managers are going to use the big cap tech stocks for their end of year window dressing later this week. It is too dangerous to try and pick sectors based on whom you think will win the election. It is far easier to window dress for the October fiscal year end by just throwing money at stocks like Netflix and Facebook.

The NDX is well over support at 4,800 and Monday's historic high was 4,909. The NDX will be the sentiment index for the rest of the week.

The Russell 2000 gave back nearly 1% and was the biggest loss of the broad market indexes. The Biotech Index gave back -1.2% and helped to drag the Russell and Nasdaq Composite lower. The Russell has support at 1210, 1205 and 1195 so it would take a major market upset to crash through those levels. If that were to happen, it could be a long drop to 1,095.

The markets appear to be setting up for another retest of support. However, if the mutual fund window dressing appears in volume it could delay that retest until next week. There is a significant chance a support test will occur before the election. There is too much uncertainty and volume is very anemic. Volume is a tool used by the bulls and without volume the bears can increase their conviction with every tick lower.

I would continue to urge not to be overly long and maintain a shopping list of stocks you would like to buy at a lower level. We may never get that chance but if we do, we need to be ready.

As of next Sunday there will only be 62 days left in 2016. On the last weekend in October, we begin the Early Bird Special for the End of Year Renewal Special. For a one-week period, we offer the EOY Special for an additional $50 discount. Be prepared because the Early Bird Special only lasts one week. The regular EOY begins the weekend after Thanksgiving.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Risky Market

by Jim Brown

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Editor's Note

The earnings outlook has soured and the uncertainty over the election is growing. The excitement over Q3 earnings faded quickly and the major indexes are showing weakness. The S&P futures are down -6 as I type this and there is a good chance the market will gap lower at the open on Wednesday. The rest of this week could be choppy and we do not need to be adding new positions into a negative market open.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

False Alarm

by Jim Brown

Click here to email Jim Brown

Editors Note:

Monday's rally was not the beginning of the end of month window dressing. If it was then managers quickly pulled back into their shell as earnings events turned into a chain of disappointments to weigh on the market. The Russell 2000 lost almost 1% as it moved back towards prior support at 1,210.

The home improvement sector melted down intraday after Whirlpool and Sherwin Williams both reported disappointments that led to large declines in their stocks as well as HD and LOW.

Consumer confidence also fell sharply to weigh on the economic outlook.

Small cap stocks are turning more volatile as it appears the market could weaken further. We were stopped out of ALRM and CLVS today for minor losses. Everything declined except MENT.

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

FNSR - Finisar
The long stock position remains unopened until a trade at $30.15.

CSIQ - Canadian Solar
The long stock position remains unopened until a trade at $16.15.

FTNT - Fortinet
The long stock position was closed at $31.37 at the open.

HLX - Helix Energy
The long stock position was opened at $10.18 at the open.

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Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

ALRM - Alarm.com - Company Profile


No specific news. Big drop back to support at the open and it was enough to stop us out for a 10-cent loss. Very frustrating just as it appeared ready to punch through resistance at $30.

Original Trade Description: October 1st.

Alarm.com Holdings, Inc. provides cloud-based software platform solutions for the connected homes in the United States and internationally. It offers multi-tenant software-as-a-service platform that allows home and business owners to intelligently secure and manage their properties, as well as remotely interact with an array of connected devices through a single intuitive interface. The company provides interactive security solutions, which offer intelligent security and awareness services through a dedicated, cellular, and two-way connection to the home or business; and intelligent automation solutions that connects, integrates, and controls the devices in the home or business, such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors, and other connected devices. It also offers video monitoring solutions, which provide live streaming, smart clip capture, high definition continuous recording, and instant video alerts through its mobile app or on the Web; and energy management solutions that offer enhanced energy monitoring and management services. It has approximately 2.6 million residential and business subscribers. Company description from FinViz.com.

For Q2, the company reported earnings of 15 cents compared to estimates for 11 cents. Revenue rose 24% to $64.4 million and beat estimates for $58.6 million. Software as a Service (SaaS) revenue rose 23% to $42 million. The company guided for the ful lyear for earnings of 49-51 cents and revenue of $242.3-$245.8 million. Analysts were expecting 48 cents on $241.7 million.

Earnings Nov 8th.

Despite the strong beat and strong guidance shares crashed from the historic high close of $33 before the earnings were released. Shares were up +135% since the February low at $14 and traders took profits. The only ratings change was from Raymond James from outperform to market perform based on value because of the strong gains. At the same time Imperial Capital raised their price target from $24.50 to $30. Since shares closed the day before at $30 that was an implied neutral rating.

Shares collapsed back to $28 and here there for three weeks then fell sharply on September 6th on no news to bottom at $25. That bottom was quickly bought and Friday's gain lifted the shares back over resistance at $28.50.

There is no bad press for Alarm.com. Earnings and revenue are growing, subscribers are growing and shares are back over resistance. If the market is going to rally in late October this should be a tech stock that outperforms.

Position 10/3/16 with a ALRM trade at $29.05

Closed 10/25/16: Long ALRM shares @ $29.05, exit $28.95, -.10 loss.

CC - Chemours - Company Profile


No specific news. Only a 5 cent decline.

Original Trade Description: October 17th.

The Chemours Company helps create a colorful, capable and cleaner world through the power of chemistry. Chemours is a global leader in titanium technologies, fluoroproducts and chemical solutions, providing its customers with solutions in a wide range of industries with market-defining products, application expertise and chemistry-based innovations. Chemours ingredients are found in plastics and coatings, refrigeration and air conditioning, mining and oil refining operations and general industrial manufacturing. Our flagship products include prominent brands such as Teflonâ„¢, Ti-Pureâ„¢, Krytoxâ„¢, Vitonâ„¢, Opteonâ„¢ and Nafionâ„¢. Chemours has approximately 8,000 employees across 35 manufacturing sites serving more than 5,000 customers in North America, Latin America, Asia-Pacific and Europe.

Chemours was spun off from DuPont in 2015. The company spent hundreds of millions of dollars developing hydrofluoroolefin (HFO)-based alternatives and blends with low global warming potential. These replace the hydrofluorocarbons (HFCs) that were used in air conditioners for decades and reportedly responsible for global warming.

The UN's Montreal Protocol calls for HFCs to be phased out and replaced. Chemours has created a replacement and expects more than 24 million vehicles to be on the road in 2016 using their HFO-1234yt (Opteon) product in their air conditioners. By the end of 2017 that number will rise to more than 50 million. They believe by 2025 the HFO-based solutions will have replaced 325 million tons of Co2 equivalents. The Opteon product line has been widely accepted and nearly every refrigeration manufacturer is moving in that direction.

For Q2 they reported adjusted earnings of 27 cents that easily beat estimates for 17 cents. Management delivered more than $100 million in cost reductions in the first six months of 2016.

Earnings Nov 3rd.

CC has been moving up steadily since August as analysts began coverage and the company beat on earnings on August 8th. Over the last 30 days consensus estimates for Q3 have risen from 26 cents to 30 cents. Full year estimates have risen from 77 cents to 84 cents. Rising estimates suggest the stock will continue higher.

After a $7 rally since the earnings, the stock pulled back last week and found support at $14.75. Shares were up today on the UN news since it means even more manufacturers will be forced to switch to the HFO products.

Position 10/18/16 with a CC trade at $15.45

Long CC shares @ $15.45, see portfolio graphic for stop loss.

No options recommended.

CLVS - Clovis Oncology - Company Profile


Coverage was initiated by Chardan Capital markets with a sell rating and $15 price target. Shaes crashed through support to stop us out.

Original Trade Description: October 12th.

Clovis Oncology, Inc., a biopharmaceutical company, focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, Europe, and internationally. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers. Company description from FinViz.com.

Clovis has been rising on the prospects for the drug Rucaparib. They reported in September the FDA was not planning on holding an advisory committee meeting to discuss the new NDA application. The FDA has accepted the company's NDA for accelerated approval and granted it a priority review. The FDA response is expected to be positive and is expected by Feb 23rd.

However, on October 7th the company released data on a Rucaparib trial that appeared to show it was less effective than a competing drug already on the market from AstraZeneca. Shares were crushed for a $10 drop at the open. Analysts were quick to come to their defense saying there are many trials and making a decision by just one trial with a very narrow patient subset was comparing apple to oranges. Shares immediately rebounded.

Clovis has several anti cancer drugs in final stages and the outlook is very positive. Just seeing that CLVS shares have not declined with the sector over the last couple of days is a very strong indication that portfolio managers are buying and holding.

Earnings Nov 3rd.

Position 10//13/16:

Closed 10/25/16: Long CLVS shares @ $31.97, exit $31.45, -.52 loss.

CSIQ - Canadian Solar - Company Profile


No specific news. High today $15.56.

This position remains unopened until a trade at $16.15.

Original Trade Description: October 20th.

Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar wafers, cells, and solar power products primarily under the Canadian Solar brand name. The company operates through Module, Energy Development, and Electricity Generation segments. Its products include various solar modules that are used in residential, commercial, and industrial solar power generation systems. The company also provides specialty solar products consisting of Andes Solar Home System, an off-grid solar system, designed to provide an economical source of electricity to homes and communities without access to grid; and Maple Solar System, a clean energy solution for families, as well as solar system kits, which are a ready-to-install packages, such as inverters, racking system, and other accessories. In addition, it develops, builds, and sells solar power projects; performs the engineering, procurement, and construction (EPC) work for the solar projects; and offers operation and maintenance services that include inspection, repair, and replacement of plant equipment, site management, and administrative support services. It offers its products to distributors, system integrators, project developers, and installers/EPC companies. Company description from FinViz.com.

Canadian Solar has a global pipeline of commercial and utility installations in progress of 2.4 gigawatts of power. Last week they bought a 49% stake in two 15 megawatt solar projects in Telangana India. The projects come with a 25 year power purchase agreement and a 5.54 rupee tariff per kilowatt hour.

This is just one more project for CSIQ as the continue to grow in scale and extend their reach around the world. They have installed more than 16 gigawatts across 90 countries since 2002 but this is their first project in India. Australia recently approved funding for two projects totaling 47 megawatts with a 20 year power purchase contract. The 17 Mw Longreach project will consist of 54,600 MaxPower2 solar modules and produce 39.0 gigawatts of power in the first year. The 30 Mw Oakey project will use 93,600 solar modules and produce 59.9 gigawatts of power the first year.

The company had $3.47 billion in sales last year with $171 million net profit. They are currently priced very cheaply at a PE of 11 times earnings. They have more than $500 million in cash and their market cap is only $900 million. Sales are growing at a rapid rate.

Earnings Nov 10th.

Share have resistance at $16 and then clear sailing until $20.

With a CSIQ trade at $16.15

Buy CSIQ shares, currently $15.70, initial stop loss $14.35

Optional: Buy Nov $17 call, currently .65, no stop loss.

FNSR - Finisar - Company Profile


No specific news. Still fighting resistance at $30. High today $30.12 to miss our entry by 3 cents.

This position remains unopened until a trade at $30.15.

Original Trade Description: October 19th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Company description from FinViz.com.

Finisar shares rallied throughout the third quarter. In early September shares spiked after earnings and then leveled off but retaining a positive bias. They reported earnings of 38 cents that beat estimates for 30 cents. Revenue of $341.3 million also beat estimates for $334 million. The company guided for the current quarter for earnings of 44-50 cents on sales of $355-#375 million. Analysts were only expecting 32 cents and $344 million. The CEO blamed the soaring earnings on booming sales of certain transceivers and switches. China is in the middle of their upgrade to a 100 Gb infrastructure and the U.S. carriers like Verizon are just getting started.

Earnings December 8th.

We entered a FNSR position on October 4th just as shares gapped open to $31. That turned out to be the peak for a three month rally. After a week of declines the shares could be ready to move higher.

The declines were sector related. The optical networking stocks were all slammed after some guidance warnings in the space. Finisar was riding the crest of a Goldman Sachs upgrade to buy on the 11th. That caused the peak in the stock just as the sector news appeared.

I am putting an entry trigger on this position to make sure the stock can get over recent resistance before we buy it.

With a FNSR trade at $30.15

Buy FNSR shares, currently $29.65, initial stop loss $28.75

No options recommended.

FTNT - Fortinet - Company Profile


The position was closed at the open ahead of earnings on Thursday. No specific news.

Original Trade Description: October 15th.

Fortinet, Inc. provides cyber security solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and virtual appliances products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which provides a single point of network log data collection. It also offers FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; and FortiDDos and FortiDB database security appliances. Further, it offers security subscription, technical support, training, and professional services. Company description from FinViz.com.

Fortinet released preliminary earnings numbers on the 11th and the stock was crushed in the afterhours market. The company said earnings would be in the range of 15-16 cents compared to prior guidance of 17-18 cents. Revenue would be in the range of $343-$348 million compared to guidance of $372-$376 million.

This is not the end of the world but shares fell from $34 to $29. They blamed the guidance miss on lengthening deal cycles saying enterprises were becoming more strategic in their purchasing decisions and buying with less urgency than last year. They also admitted to "sales execution challenges" in North America as the result of a new sales force in that market. They just recently expanded into North America. There were also "macro" issues in Latin America and the U.K. that they did not explain.

Despite the guidance cut they are still positive about Q4 and 2017 saying the "competitive-differentiating and market-leading security fabric" was intact and they remain confident in the underlying strength of the business. They will release their actual earnings on October 27th. Normally, when a company warns in advance, they report better earnings than their guidance in the warning.

Shares are already rebounding because multiple brokers immediately reiterated their buy ratings. Wunderlich said buy with price target of $42. Doughtery said buy with a price target of $35. RBC Capital reiterated a sector perform rating with a price target of $37.

I believe there is very little risk in taking a position in FTNT at this level. The damage has already been done.

Position 10/17/16:

Long FTNT shares @ $30.92, see portfolio graphic for stop loss.

HLX - Helix Energy Solutions - Company Profile


No specific news. Shares down slightly with crude prices.

Original Trade Description: October 24th.

Helix Energy Solutions Group, Inc., provides specialty services to the offshore energy industry primarily in the Gulf of Mexico, North Sea, the Asia Pacific, and West Africa regions. It operates through three segments: Well Intervention, Robotics, and Production Facilities. The company engineers, manages, and conducts well construction, intervention, and abandonment operations in water depths ranging from 200 to 10,000 feet; and operates remotely operated vehicles (ROVs), trenchers, and ROVDrills for offshore construction, maintenance, and well intervention services. It also offers well intervention; intervention engineering; production enhancement; inspection, repair, and maintenance of production structures, trees, jumpers, risers, pipelines, and subsea equipment; and life of field support. In addition, the company provides reclamation and remediation services; well plugging and abandonment services; pipeline abandonment services; and site inspections. Further, it engages in the installation of subsea pipelines, flowlines, control umbilicals, manifold assemblies, and risers; burial of pipelines; installation and tie-in of riser and manifold assembly; commissioning, testing, and inspection activities; and provision of cable and umbilical lay, and connection services. Additionally, the company offers oil and natural gas processing services to oil and natural gas companies; and fast response system services. It serves independent oil and gas producers and suppliers, pipeline transmission companies, alternative energy companies, and offshore engineering and construction firms. Company description from FinViz.com.

Last week Helix reported earnings of 10 cents compared to estimates for 4 cents. Revenue of $161.2 million beat estimates for $156.4 million. The company said they had "seen a significant improvement in their financial results but industry conditions remain challenging."

An increase in the price of oil would do wonders for Helix and all the other offshore service businesses. Fortunately, for Helix they operate around the world and there is a strong surge in offshore natural gas drilling and pipeline construction around Africa and Australia. They are also very active in the North Sea. The natural gas activity has kept them afloat where other offshore service companies have failed.

They sold $100 million in stock in Aug/Sep and they had $499 million in cash at the end of the quarter. They prepaid $8 million in debt in Q3 and capex spending was $99 million.

The company is in good shape financially and the offshore drilling activity is increasing. If OPEC is successful in claiming a production cut/halt at the end of November this will raise the price of oil and benefit everyone.

Earnings January 18th.

Position 10/25/16:

Long HLX shares @ $10.18, see portfolio graphic for stop loss.

No options recommended.

MENT - Mentor Graphics - Company Profile


No specific news. New closing high.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Long MENT shares @ $28.54, see portfolio graphic for stop loss.


Long Jan $30 call @ $1.35, no stop loss.

We will hold the option as a lottery ticket play is the long stock position is stopped.

BEARISH Play Updates

SSYS - Stratasys Ltd - Company Profile


No specific news. New 2-month low.

Original Trade Description: October 22nd.

Stratasys Ltd. provides three-dimensional (3D) printing and additive manufacturing (AM) solutions for the creation of parts used in the processes of designing and manufacturing products; and for the direct manufacture of end parts. Its 3D printing systems utilize its patented fused deposition modeling (FDM) and inkjet-based PolyJet technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. The company offers entry-level desktop 3D printers to systems for rapid prototyping, and production systems for direct digital manufacturing under the Dimension, Objet, Fortus, Polyjet, SolidScape, and MakerBot brands, as well as MoJo and uPrint product families, and Dental Series products. It also provides 3D printing consumable materials, including FDM, cartridge-based materials, Polyjet cartridge-based materials, Smooth Curvature Printing inkjet-based materials, and non-color digital materials, as well as provides color variation services. In addition, the company offers customer support, basic warranty, and extended support programs; leases or rents 3D printers and 3D production systems; produces prototypes and end-use parts for customers from a customer-provided CAD file; and provides plastic and metal parts for rapid prototyping and production processes, as well as related professional services. Further, it operates Thingiverse, an online community for sharing downloadable, digital 3D designs; and GrabCAD Community for mechanical engineers and designers. The company's products and services are used in aerospace, automotive, consumer electronics, consumer goods, medical processes and medical devices, education, dental, jewelry, and other industries. Company description from FinViz.com.

Stratasys does not report earnings until Nov 15th. Piper Jaffray believes they will miss on revenue because of a recent survey of 68 firms showed "extremely discouraging" demand for SSYS and 3D Systems (DDD) products. Stratasys is expected to post its first year over year profit in 8 quarters because of extensive cost cutting but revenue is expected to fall short of the $174.5 million consensus estimate.

The challenge is the entry of the 800 pound gorilla into the 3D market. That gorilla is Hewlett Packard. They announced their entry into the market five months ago and will begin shipping products over the next two months. Piper and some other analysts said buyers are waiting to commit to purchases until they actually see the HP products. The HP product line is expected to be robust and priced competitively. Another manufacturer, privately held Carbon 3D, is also drawing attention and suddenly buyers have an entire array of 3D printers and manufacturers to choose from. GE just bought a 3D printing company in Europe and is expected to expand the offering in a big way given their available cash and manufacturing experience. Because of the expense on some of these printers, buyers are taking the extra time to make sure they buy the one that fits their needs the best.

Shares are trading at a 3-month low and only about 50 cents above an 8-month low. If support at $19.35 fails we could see $15 in a hurry as investors flee before the mid November earnings.

Position 10/14/16:

Short SSYS shares @ $19.97, see portfolio graphic for stop loss.

No options recommended because of distance from the strike and short time frame.

VXX - Volatility Index Futures - ETF Description


Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.

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