Option Investor

Daily Newsletter, Tuesday, 3/7/2017

Table of Contents

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

Market Wrap

Small Caps Breaking Down

by Jim Brown

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The large cap indexes ended the day with only minimal losses but the small cap indexes posted big losses and closed at the lows for the day.

Market Statistics

The small cap stocks, which compose two-thirds of the market, are breaking down. The Russell 2000 and the S&P-600 both posted large losses and closed well under recent support. It appears those indexes, which have been the weakest since early December, are finally giving up some gains and that could trigger selling in the big cap indexes like the S&P-500.

There were no important economic reports this morning. The CoreLogic Home Price Index for January showed prices rose 6.9% year over year and a slightly lower rate than the 7.2% in December. This is a lagging number and it was ignored.

The Trade Deficit for January increased from $44.3 billion to $48.5 billion and the largest deficit since March 2012. Analysts claim the early Lunar New Year may have pulled forward some imports and the number will return to its $44 billion average by the end of March. Otherwise, this would have a significant impact on Q1 GDP. Imports rose 2.3% in January and exports declined -0.6%. Exports totaled $124.0 billion and imports were $189.4 billion. The stronger dollar is going to continue to weigh on exports as the Fed returns rates to normal. Also, a border adjustment tax will impact the imports significantly.

Moody's Chart

Consumer Credit additions for January declined to $8.8 billion from $14.2 billion in December and $25.8 billion in November. Revolving credit fell -$3.8 billion and the first drop in a year. It was the biggest decline since 2012. Nonrevolving credit rose $12.6 billion. The drop in the headline number is just one more piece of evidence that the December/January shopping season was very bad. Based on the pattern above I would expect the tax refund checks to go to paying down debt rather than a shopping splurge. The report was ignored.

The first employment report is due out on Wednesday. The consensus expectations have risen from 175,000 to 190,000 over the last two days. The nonfarm estimates rose by a similar amount.

Yellen said if employment remained steady, the Fed was going to raise rates in March. That is the condensed version of her statement. Analysts believe any nonfarm number over 175,000 will be considered steady and guarantee a Fed rate hike. However, should we get an unexpected decline and the Fed did not raise rates that could negatively impact the market. I know that seems like the opposite of reactions to prior meetings, but it would suggest recent employment was a bubble and the Fed might have to remain on hold for several more months.

While the market appears to be overly optimistic, the economy is not as strong as you would think. The Atlanta Fed real time GDPNow for Q1 has declined from a forecast of 3.4% growth to only 1.3% over the last four weeks. The economic reports have not been as strong as they appear on the surface. The Fed will look at this forecast before they decide to raise rates. The Fed funds futures are currently predicting an 84.1% chance of a rate cut. With the GDP forecast this low, will they actually pull the trigger?

President Trump tweeted this morning that he was working on a new system to lower drug prices. The only thing that came down was the price on drug stocks. The Biotech Index ($BTK) gapped lower and ended the day with a -1.4% loss. Several high profile drug stocks fell sharply before rebounding in the afternoon. This tweet was a major reason the markets opened lower. The futures were already negative overnight but fell again on the tweet. Multiple analysts were scratching their heads on the tweet and wondering what it meant. Citigroup said "It is unclear to us what a 'new system' would entail." Evercore said, "The question really is: what does this mean?" Evercore suggested Trump might be referring to Medicare Part B where there are no pricing tiers. Trump has said multiple times he wants drug companies to enter competitive bids on drugs sold to Medicare.

It was a boring day in the earnings cycle. Dicks Sporting Goods (DKS) reported adjusted earnings of $1.32 compared to estimates for $1.29. Revenue of $2.48 billion barely edged out estimates for $2.47 billion. Same store sales were up 5%.

Dick's guided for Q1 for earnings of 48-53 cents and analysts were expecting 61 cents. They guided for same store sales of 3% to 4%. Dick's expects full year earnings of $3.65-$3.75. Shares fell 9% on the weak guidance.

Michaels (MIK) reported earnings of 96 cents compared to estimates for 95 cents. Revenue of $1.75 billion rose 4.1% but missed estimates for $1.81 billion. The sales growth came from the acquisition of 19 stores from Lamrite West. Same store sales actually declined -0.5%. Michaels predicted the same sales trend for 2017. While other retailers are closing stores, Michaels plans on opening 17 new stores this year to bring their total to 1,220. They guided for full year earnings of $2.05-$2.17 and analysts were expecting $2.04. Shares rallied 2% on the news.

Navistar (NAV) reported a loss of 76 cents and analysts were expecting a loss of 51 cents. Revenue of $1.66 billion missed estimates for $1.75 billion. The company completed a $256 million equity investment from Volkswagen last week. Some analysts believe it will lead to a complete takeover of the problem plagued Navistar. The equity investment gives Navistar access to Volkswagen technology.

H&R Block (HRB) reported a loss of 49 cents that was slightly better than the 52 cents analysts expected. Revenue fell from $475 million to $452 million but still beat estimates for $427 million. The company normally reports a Q4 loss because of tax filing seasonality. They said they gained market share in the quarter and repurchased $100 million in stock. They have repurchased $317 million in the current fiscal year. IRS reported a 10% decline in E-filing so far in 2017.

Bojangles (BOJA) reported adjusted earnings of 28 cents that beat estimates for 21 cents. Revenue of $139.4 million just missed the estimates for $140.4 million. They guided for the full year for earnings of 87-93 cents and revenue of $560-$569 million. Same store sales rose 2.4%. Company owned stores rose 1.1% and franchised stored rose 3.2%. They opened 21 stores with 9 company owned and 12 franchised to bring their total to 716. They plan to open 57-62 stores in 2017. Shares collapsed on the news.

Earnings are winding down and Thursday is the last set of headliners. Sears, Staples and Ulta Beauty are the ones to watch.

Snap Inc (SNAP) shares continued to collapse with a 10% decline. I warned on Sunday once the IPO shares were settled and available for shorting, there would be a big hit to the stock price. Helping the slide was an investor group asking index providers S&P Dow Jones and MSCI to bar SNAP from being included in the indexes because the IPO shares were non-voting. S&P Dow Jones said they would not add any company until 6-12 months after the IPO and would use that time to study Snap's structure. MSCI said SNAP does not currently qualify for inclusion but the decision would be reviewed in May. There are now 5 analyst recommendations, two holds and three sells. One of those is an underperform, which I classify as a sell. Who wants to hold an underperforming stock. Been there, done that.

GEO Group (GEO), a REIT operator of private prisons, announced a 6 million share secondary after the close. They plan to use the proceeds to repay amounts under their existing revolving loan and for general purposes. Shares fell $3 on the news. They have been an outperformer since the election.

Dish Network (DISH) will replace Linear Technology (LLTC) in the S&P-500 on Monday. LLTC is being acquired by Analog Devices (ADI).


Was 100 the round number investors were watching? Today was the 100th day since the S&P has lost more than 1% in a single session. Is that the trigger for a sell off? I seriously doubt it. That only makes it the 12th longest streak since 1950. Those types of streaks rarely have any impact on the market.

The S&P has traded within 1.5% of its high for the last 79 days. That is how little downside volatility we have had. The index could not even put a couple days together to add up to 1.5%.

The TD Ameritrade Investor Movement Index (IMX) is setting records. The sentiment index was invented in 2010 and is currently at historic highs. The index is calculated by surveying positions and cash held in investor accounts as well as the amount of trading activity by those accounts. Ameritrade has more than 6 million investor accounts so it is a broad sampling. Having the index at a historic high is another piece of data indicating the market is overbought. This could be called the irrational exuberance index.

Volume today was 6.5 billion shares and down volume was more than twice up volume despite the minor index losses. Decliners of 4,918 vastly overcame advancers at 2,096. New 52-week lows of 153 beat new highs at 146 for the first time in 2017.

As of Monday's close, the Dow was up +14.2% since the election. The S&P +10.9%, Nasdaq +12.5% and the Russell 2000 +15.8%. Those are remarkable gains for less than four months of trading and without a 1% single day decline.

The S&P has erased the post speech gains and is closing in on decent support at 2,360. A break below that level could trigger the sell off everyone has been expecting. With the futures down -5 Tuesday night and the markets down for two consecutive days, we could be setting up for a real decline.

The Dow has traded in a narrow range for the last three days with slightly lower highs and lows. The doji candles represent indecision and lack of conviction by both buyers and sellers. The Dow is the most overbought index and the least supported. There was very little movement in the individual Dow components.

The Nasdaq has also erased the Wednesday gains and is closing in on strong support at the 5,800 level. The small bodies on the last two candles represent indecision and Tuesday's candle closed near the lows.

The small cap Russell 2000 closed at the low for the day and well under support at the 1385-1388 level. The index has been the weakest link and it could be leading the large caps lower. The sharp decline in the biotech sector was a major factor in today's drop.

There are multiple things weighing on the market. We have the economic slowdown in Asia, warnings over the South China Sea, North Korea and Iran firing missiles, the impending French election and the sporadic tweet storm. Add in the uncertainty over the FOMC meeting next Wednesday and the expiration of the debt ceiling.

Last night the republicans released the draft of the new American Healthcare Act and it appears to be dead on arrival. More than 20 republican senators and representatives have said they will not vote for it and the list is growing.

The new administration cannot do tax reform, which is what the market really wants, until the healthcare reform is passed. With everyone choosing sides before the bill has even moved into the first committee, it is going to be a long hard fight and it may not happen before the August recess. That means overhauling the tax system may not happen in 2017. That is a major sentiment killer once it becomes apparent to the retail and even institutional investors.

The market has had dozens of reasons to sell off and failed to do so. Every minor dip has been bought. Now after two days of minor declines there is a growing feeling that a volatility event is imminent. We will have to wait and see if this is just a new wall of worry that can be scaled or is this the Great Wall that proves to be too high without a running start from a lower level.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Competition Accelerating

by Jim Brown

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Editor's Note

Competition for the consumer dollar is heating up in every sector. Even grocery stores are under stress and they already work on the smallest profit margins in the consumer retail.


No New Bullish Plays


KR - Kroger Co - Company Profile

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of January 30, 2016, the company operated 2,778 retail food stores, including 1,387 fuel centers; 784 convenience stores; and 323 fine jewelry stores and an online retail store, as well as franchised 78 convenience stores. Company description from FinViz.com.

Kroger reported earnings of 53 cents that matched estimates but declined 7% from the year ago quarter. Revenues rose 5% to $27.611 billion and that best estimates for $27.357 billion. Same store sales fell -0.7% and the first decline in 13 years. Analysts expected a 0.1% rise. Competitors Ahold Delhaize, Walmart, Publix and Aldi reported an increase in sales so apparently Kroger is losing market share.

They guided for 2017 for earnings in the range of $2.21-$2.25 per share. Analysts were expecting $2.23.

Earnings June 1st.

There is a major battle shaping for the grocery sector. German discounter Aldi is on a push to open hundreds of new stores in areas currently served by Kroger. Target has vowed to lower prices and sacrifice margins in order to retain market share. Amazon is experimenting with the grocery store concept and has been rumored to be considering opening more than 1,000 stores. Walmart has expanded their grocery departments and now carry more than 350 organic products under the private Walmart labels.

Kroger has been forced to adopt a more promotional posture with bigger ads and lower prices in order to retain share. Goldman removed Kroger from their conviction buy list and warned they doubt they will be able to even get close to their forecast for 8-11% earnings growth. Northcoast cut them from buy to neutral and several analysts cut their price targets.

Tuesday's close was a two year low and the decline is not likely to stop. The grocery sector is broken and profits are going to be tough to generate.

Sell short KR shares, currently $28.81, initial stop loss $30.15.

Optional: Buy April $27.50 put, currently 45 cents, no stop loss.

In Play Updates and Reviews

Not a Good Sign

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P-600 and the Russell 2000 both had big losses and closed at the low for the day. The Russell closed at 1,375 and well under prior support at 1,385. The S&P-600 closed at 837 and well under critical support at 846. The big declines and closing at the lows is a very bearish sign for the rest of the week. There may be a short term rebound but a new trend has been established.

None of the major indexes rebounded back into positive territory and the biotech sector was down -1.4% on a Trump tweet. These random tweets could poison market sentiment and cause a correction to begin.

With a Fed rate hike likely on the 15th and the government debt ceiling expiring on the same day, there could be some additional profit taking in the days ahead.

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

CONN - Conn's Inc
The short stock position was entered at the open.

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BULLISH Play Updates

ARNC - Arconic - Company Profile


No specific news. Big 3% decline to put our option $1 in the money.

We do not care which way Arconic moves just as long as it moves a lot in one direction.

We have plenty of time. The put is now in the money.

Original Trade Description: February 16th.

Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. Company description from FinViz.com.

What that description does not tell you is that Arconic is the old Alcoa. Back in October Alcoa spun off the aluminum smelter business and named it Alcoa. The remaining hith tech manufacturing business they named Arconic. Basically, this is the profitable part of the old Alcoa. They produce all sorts of high tech aluminum products for nice profits.

Their Q4 earnings were mixed because of expenses incurred as a result of the spinoff.

Zacks reported Q1 estimates have risen from 20 cents to 25 cents over the last several weeks as analysts reevaluate the new company. Full year estimates have risen from 92 cents to $1.10, a 19.6% increase.

On Wednesday Arconic said it had sold 60% of the Alcoa stake it kept during the spinoff for $890 million and would use the money to pay down debt and buy back shares. They also retained loss carry forward tax credits that will offset future earnings.

Earnings May 2nd.

Shares went ballistic after the Q4 earnings and rose from $23 to $30. Every day I kept watching the stock and thinking, "ok, tomorrow they will dip and I will add them to the portfolio." They never dipped until this week. That dip was very shallow and has lasted only 3 days.

We never know. They could fall off a cliff tomorrow and retest the $23 pre-earnings. I seriously doubt it because funds have been adding Arconic as a new position.

I am going to recommend an options only strategy with a four-week duration. I am recommending we buy a $30 call and a $28 put. The total cost will be $1.52 and that is our total risk. We only need ARNC to move in either direction more than a couple bucks and we should be profitable.

Either way at least one option should be profitable and offset the cost of the other. Depending on the market we could actually profit on both if we got a big dip and then a big rebound. The only way we lose both premiums is if the stock holds at $29 for the next month. That is not likely.

Update 2/17/17: Hedge fund Lion Point, a minor shareholder in Arconic, urged the company to "promptly engage" with Elliott Management to increase shareholder value. Elliott is the largest shareholder in Arconic is trying to get the CEO replaced and they have nominated five board members. Lion Point and Elliott both believe "the intrinsic value of Arconic materially exceeds the company's current stop price."

Update 2/23/17: Arconic declared a quarterly dividend of 6 cents on common stock, 93.75 cents on Class A preferred stock and $6.71875 on Class B shares. The dividends are payable on May 25th to holders on May 5th.

Update 3/2/17: The board appointed former UTX executive David Hess as an independent director. At the same time they issued an open letter to shareholders rebutting activist investor Elliott Management's attempt to take over the board and replace the CEO Klaus Kleinfeld. Shares declined $1 as the fight took a very public turn.

Position 2/17/17:

Long Mar $30 call @ 90 cents. No stop loss.
Long Mar $28 put @ 60 cents, No stop loss.

CSIQ - Canadian Solar - Company Profile


No specific news. Shares fell another -3% despite no news. We have an option position here and will hold over the Mar-9th earnings. We really hope those earnings are positive.

Original Trade Description: February 27th

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. The company has operations in North America, South America, Europe, Africa, the Middle East, Australia, and Asia. Company description from FinViz.com.

Shares are rebounding out of a three month base at $12 and nearing a four-month high. They had a tough Q3 where they matched earnings estimates after a drop in Chinese demand due to a drop in incentives. That resulted in a 30% decline in panel prices.

CSIQ is the second largest solar manufacturer in the world with 5.8 gigawatts of annual module capacity. It has a strong pipeline of orders, $1 billion in cash and $1.2 billion in future proceeds from the sale of non-core assets. That is a lot of liquidity for a solar company. They have an operating portfolio of solar plants worth $1.4 billion that will eventually be sold to investors.

CSIQ has earnings on March 9th. Normally I would not recommend a position ahead of earnings. However, I am not recommending this as a stock position. In a normal stock position we risk about $1 per share. I am recommending we buy a call option, currently 93 cents and hold over earnings. The stock is moving in the right direction and earnings expectations are low. We could have a break out situation with CSIQ.

Position 2/28/17:

Long April $16 call @ 95 cents, see portfolio graphic for stop loss.

SWIR - Sierra Wireless - Company Profile


No specific news. Shares still consolidating in a weak market.

Original Trade Description: March 1st

Sierra Wireless, Inc. provides wireless wide area modem solutions for the mobile computing, rugged mobile, and machine-to-machine (M2M) markets. It develops and markets wireless modems for mobile computers; embedded modules for original equipment manufacturers (OEMs); and fixed and mobile wireless data solutions for industrial, commercial, and public safety applications. The company's products and solutions connect people, their mobile computers, and fixed terminals to wireless voice and mobile broadband networks. Its mobile computing products are used by businesses, consumers, and government organizations to enable high speed wireless access to a range of applications, including the Internet, e-mail, corporate intranet, remote databases, and corporate applications; and rugged mobile and M2M products are primarily used in the public safety, energy, industrial, transportation, and transaction processing markets. The company also provides various product development and integration support services, which include software and hardware integration, platform RF testing and optimization, regulatory approvals, mobile operator certification, project management, and sales and technical support training. Company description from FinViz.com.

Sierra guided for Q4 earnings of 13-19 cents and revenue of $157 million. They reported earnings of 27 cents on revenue of $163 million. Revenue from OEM solutions rose 11.2% and Enterprise solutions +27.1%. Gross margin was 34.3%. They guided for Q1 revenue from $152-$161 million representing up to 12.7% growth. They projected earnings of 13-20 cents. Analysts were expecting $154.8 million and 12 cents.

Earnings May 11th.

The company is very strong in the IoT and just won the fastest connected car contract with Volkswagen. The car company will be using Sierra's modems to connect the cars to the cloud through its Car-Net platform. The connected car market is expected to grow 31% annually through 2020 and be worth $41 billion a year.

They have a 33% market share in the machine to machine (M2M) market. They recently announced a new wide area WiFi technology to allow IoT devices to be plug and play.

The company has a lot going for it and they beat their own guidance significantly last quarter.

Position 3/2/17:

Long SWIR shares @ $29.10, see portfolio graphic for stop loss.

No options recommended because of price and spreads.

VIPS - Vipshop Holdings - Company Profile


No specific news. The company announced a new credit facility for $632,500,000 for the purpose of repurchasing outstanding 1.5% convertible notes due 2019.

Original Trade Description: February 27th

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men, cosmetics, toys and games, sports equipment and hundreds of other categories. Company description from FinViz.com.

In Q4 revenue rose 36.5% to $2.73 billion. Full year revenue rose 40.8% to $8.15 billion. The number of active customers in Q4 rose 39% to 27.5 million. The number of total customers rose 42% to 52.1 million. Total orders for Q4 rose by 26% to 82.0 million. Total orders for the full year rose 40% to 269.8 million. Gross profits for Q4 rose 33.4% to $643.4 million. Gross profits for the full year rose 37.4% to $1.96 billion. They added five local distribution centers to further improve speed and efficiency of order processing. They have more than 20,000 staff and 2,000 self-operated delivery stations.

Earnings May 22nd.

Vipshop is tiny compared to Alibaba but they are growing rapidly and the three main rating agencies recently gave them favorable ratings. Fitch rated them BBB+, Moody's Baa1 and S&P BBB. The company is not a flash in the pan and those ratings indicate they are solid.

Shares spiked to $13 on the earnings news and moved sideways for a week. They posted a minor gain today in a weak market to close at a five-day high.

Position 3/3/17:

Long VIPS shares, currently $13.15, see portfolio graphic for stop loss.
Position 3/6/17: Long April $14 call @ 30 cents, no stop loss.

BEARISH Play Updates

CONN - Conn's Inc - Company Profile


No specific news. Shares dipped on the HHGreg bankruptcy news then rebounded slightly on the thought that maybe this would be positive for Conn's in reducing competition.

Original Trade Description: March 6th

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through Retail and Credit segments. The company's stores provide home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; and home office products consisting of computers, tablets, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. Conn's, Inc. also provides repair service agreements, installment credit plans, and various credit insurance products. As of March 29, 2016, the company operated approximately 100 retail locations in Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Company description from FinViz.com.

In the Q3 earnings cycle, Conn's reported a smaller than expected loss of 12 cents. Analysts were looking for -19 cents. Revenue of $308.4 million and below the $395.23 million in the year ago quarter. They guided for Q4 same store sales to decline -10%. At the end of Q3 analysts were expecting a profit of 13 cents and revenue of $453.44 million. The odds of them beating this forecast are slim. Zacks said the analyst estimates have declined significantly to a loss of 52 cents for Q4. They have dropped 11 cents in just the last 30 days.

Conn's sells electronics along with appliances and furniture. Electronics sales are being dominated by Amazon and Best Buy. The furniture sector has been slow and appliances are hit and miss. With appliance prices rising sharply it has cut down on buyers that can afford the big ticket items.

Earnings March 28th.

I believe Conn's will continue lower because everything we have heard about the Q4 retail picture has been negative. Shares are trading at a 6-month low with support at $6.50. I believe we can still get $1.50 between now and earnings on the 28th. The odds of a rebound over the next three weeks are very slim.

Position 3/7/17:

Short CONN shares @ $8.00, see portfolio graphic for stop loss.
No options recommended because of price.

CRAY - Cray Inc - Company Profile


No specific news. Shares closed at a new 3-week low.

Original Trade Description: February 18th

Cray Inc., together with its subsidiaries, designs, develops, manufactures, markets, and services high-performance computing systems. The company operates through Supercomputing, Storage and Data Management, Maintenance and Support, and Engineering Services and Other segments. It offers a range of supercomputing systems, including the Cray XC40-LC, XC40-AC, CS400-AC, CS400-LC, and CS-Storm supercomputers. The company also provides analytics products comprising Cray Urika-GD Graph Discovery Appliance, which addresses the interactive data discovery with graphs; and Cray Urika-XA Extreme Analytics Platform used for production-class data analytics workloads. In addition, it offers storage and data management products, such as the Cray Sonexion storage systems that embeds the Lustre parallel file system and other software in an optimal configuration; Cray DataWarp applications I/O accelerator; and Cray Tiered Adaptive Storage, a flexible storage and archiving solution, which allows customers to transparently move data among fast, primary, and archival tiers. Further, the company provides custom engineering solutions; and customer support services comprising hardware and software maintenance, applications support, installation project management, system installation and de-installation, site preparation, and technical training for its systems, as well as ancillary services in application consulting, third-party software support, site engineering, on-site analysts for defined projects, and specialized training. Company description from FinViz.com.

Shares of CRAY were weak in January after the company provided selective guidance that was not specifically positive. They reported earnings on Feb 9th and spiked from $17.50 to $22.50 but never rose any higher.

The earnings of $1.38 were good and beat estimates for $1.24. Revenue of $346.6 million also beat estimates. However, the earnings guidance and commentary was lackluster. "While 2016 was not nearly as strong as we originally targeted we finished the year well." "Due to current market conditions, the company has limited visibility into 2017. While a wide range of results remains possible, the company continues to believe it will be difficult to grow revenue compared to 2016." Revenue is expected to be flat to down. Operating expenses are expected to be higher and gross profits are expected to be slightly lower. It was hardly an exciting outlook.

Earnings May 9th.

Shares began to decline last week and are poised to break below the post earnings support at $21. With a lackluster outlook, any decline in the Nasdaq could be magnified in Cray.

Position 2/21/17:

Short CRAY shares @ $21.30, see portfolio graphic for stop loss.

Optional but not recommended: April $20 put, $1.00.

FOSL - Fossil Group - Company Profile


No specific news. Shares declined again to a new 8-year low.

Original Trade Description: March 5th

Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC BY MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, company-owned retail and outlet stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of January 2, 2016, it owned and operated 99 retail stores and 139 outlet stores located in the United States, as well as 250 retail stores and 131 outlet stores internationally. Company description from FinViz.com.

Fossil reported adjusted earnings of $1.36 that beat estimates for $1.21. Unfortunately, that was a decline of 23.2% over the year ago quarter. Revenue of $959.2 million declined -3% and missed estimates for $971.7 million. For the current quarter, the company expects to lose 10 to 25 cents compared to earnings of 11 cents a year ago. They guided for a wide range for earnings of $1.00 to $1.70 for the full year. They guided for Q1 revenue to decline 8% to 11.5%.

Traditional watch sales declined -2%. Sales of jewelry and leathers declined -5%. Global same store sales fell -7% with declines in all product categories. Gross margin declined 200 basis points and operating margins fell from 9.0% to 6.9%. Cash on hand at the end of the quarter declined -$64 million to $236 million.

Over the last 30 days consensus earnings estimates for the ful lyear have declined from $1.94 to $1.19. All revisions have been negative.

Earnings May 16th.

Shares dropped sharply on Friday after the consensus earnings revisions were released. The $17.42 close was an 8 year low and the very negative comments above suggest shares could go a lot lower.

Position 3/6/17:

Short FOSL shares @ $17.48, see portfolio graphic for stop loss.

Optional: Long April $17 put @ $1.00, see portfolio graphic for stop loss.

INFN - Infinera Corporation - Company Profile


No specific news. New 4-week low close.

Original Trade Description: February 25th

Infinera Corporation provides optical transport networking equipment, software, and services worldwide. The company offers Infinera DTN-X family of platforms for subsea, long-haul, regional, and metro mesh networks; Infinera DTN platform for subsea, long-haul, and regional mesh networks that support a range of Ethernet and optical transport network client interfaces; and Infinera FlexILS Line System platform that connects various Infinera platforms over long distance fiber optic cable. It also provides Infinera TM-Series, a carrier-grade packet-optical transport platform; Infinera TS-Series, a passive optical wavelength-division multiplexing (WDM) product; Infinera Cloud Xpress Platform, a compact platform for cloud/data center interconnect applications; and Infinera ATN Platform, a small form-factor WDM platform. In addition, the company offers Infinera Open Transport Switch, a software platform that enables abstraction and virtualization of the underlying Infinera platforms; and Infinera Management Suite, a network management system used by network operators to manage various Infinera platforms. Further, it provides various support services for vraious hardware and software products. The company serves communications service providers, Internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, and government entities. Company description from FinViz.com.

Infinera makes products primarily used by telecom companies to increase their capabilities over existing fiber optic cables to reduce the need to laying more fiber. Their major market today relies on infrastructure upgrades in China, which is a very competitive market.

The company reported a loss of 12 cents that narrowly beat estimates for a 13 cents loss but was down sharply from the 5 cent profit in the year ago quarter. Revenue declined 30% to $181 million but did beat estimates for $175 million. For the current quarter they guided for revenue of $167-$178 million, down from $249 million in the year ago quarter. Analysts were expecting $171 million. However, they guided for a loss of 16 cents and analysts were expecting 11 cents.

Analysts claim the company is suffering from a perfect storm of M&A among its biggest clients that has reduced demand.

Earnings May 11th.

After trading flat at $8.50 for seven months the shares spiked to just over $12 on the better than expected earnings. Short covering is a wonderful thing if you are long. However, everyone that sat on the $8 stock for seven months is now running for the exits. I believe the stock will return to its prior levels given the negative guidance.

Position 2/27/17:

Short INFN shares @ $10.87, see portfolio graphic for stop loss.

Optional: Long July $10 put @ 78 cents, see portfolio graphic for stop loss.

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