Option Investor

Daily Newsletter, Monday, 3/13/2017

Table of Contents

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

Market Wrap

The Calm Before The Fed

by Thomas Hughes

Click here to email Thomas Hughes


It's FOMC week yet again and the market is holding its breath. Today's action was yet another day drifting sideways, just below the newly set all-time high and just above near term support levels. While this week promises lots of potential market-moving events today was devoid of any; the Q4 earnings cycle is coming to a close, the Q1 cycle has yet to begin, there were no economic data releases and very little in the way of business activity.

International markets painted a positive picture. Asian indices were mostly up and led by the Heng Seng's 1.11% advance. The Nikkei was a laggard with a gain closer to 0.11%, hurt by poor machinery orders. The big news in that region was the ousting of Korean president Park of possibility of political reform in South Korea. European indices were also able to edge higher, gaining about 0.25% on average. Sentiment there is positive but cautious as traders eye the possibility Theresa May will invoke Article 50 (possibly as early as tonight/tomorrow), political unease in Belgium and France and the outcome of the FOMC meeting.

Market Statistics

Futures trading indicated a mildly negative open for the first half of the early electronic session and then flip-flopped to mildly positive for the second. The open was weakly bullish but buying topped out on the S&P 500 within the first 5 minutes of trading. Sellers took over from there but all they were able to do was keep prices within a tight range for the rest of the day. The S&P bottomed out with a loss of -4 points (-0.01%) and remained above that and below break-even until mid-afternoon when the SPX moved into the green.

Economic Calendar

The Economy

Nothing on the economic calendar for today but the next few days promises to be action packed. The PPI is released tomorrow morning, CPI Wednesday and then the FOMC meeting/announcement Wednesday afternoon. Also Wednesday morning is Retail Sales, Empire Manufacturing, Business Inventories and the NAHB Housing Index followed by a fully packed Thursday and Friday as well, so lots of reason for caution in today's trading. And that doesn't count Brexit/Article 50, elections in Europe and Trump's first budget which may come out this week too.

Moody's Survey of Business Sentiment rose 0.2% to 33.8 and the highest level since May of 2016. Mr. Zandi says global sentiment remains strong and stable with the usual regional variations. North America is strongest, South America weakest with Europe and Asia both positive but cautious. Looking to the past 6 months we can see that sentiment has been steadily rising with periodic spikes in optimism. To my technician's eye it looks as if sentiment may be building up to a break-out and if so will be a bullish signal.

More than 99% of the S&P 500 has reported earnings for the Q4 which basically brings the season and the year to a close. The results are good, not quite as good as I thought they would turn out but expansionary and a nice lead-in to the new year. The fourth quarter is pegged at 4.9% with little chance of movement from the last 2 or 3 companies to report. Full year 2016 comes in at 0.4%, much better than the 0.1% we started the reporting season with. Looking forward to next quarter, Q1 2017, outlook remains good although it has been falling in recent weeks.

Looking forward quarterly growth is expected to continue expanding into the end of the year, and into next year. Full year 2017 estimates remain healthy at 9.8% with that expanding to 12% in 2018. Full year 2017 estimates have been coming down with Q1 and Q2 estimates but full year 2018 estimates are on the rise, up 0.2% in the last 2 weeks.

The Dollar Index

The Dollar Index held steady today as traders await the FOMC meeting. The index closed with a gain near 0.1% after testing support at the short term moving average and the $101.00 level. The index has been creeping up in the near term on rising expectations of an FOMC rate hike but resistance is growing at the $102.50 area. The indicators are rolling over into a possible bear signal, consistent with resistance, but more consistent with range bound trading when looking back to the past 6 to 12 weeks. The question now is which way it will break and that will come down to the FOMC. A simple interest rate hike may not be enough to do it now, expectations are running greater than 95% for the March meeting and greater than 90% out for the next three meetings with a more than 50/50 shot at another hike to boot. A hike and hawkish commentary or changes to the statement may however renew the Trump trade and send the dollar back to test long-term highs.

The Gold Index

Gold prices also held steady in today's session. Spot gold hovered near $1,203, just above short term support levels, with dollar outlook pushing it lower and geopolitical issues fueling near-term flight-to-safety. A bounce from $1,200 would be bullish, first target for resistance near $1,230. A break below $1,200 would be bearish with downside target near $1,150 and all dependent on the FOMC meeting.

The gold miners moved slightly higher but not much and price action is not promising. The Gold Miners ETF GDX gained a full percent but created a small spinning top doji following a relief rally within a near-term down-trend. The relief rally may go on if gold prices are able to hold above $1,200 but upside target is the short-term moving average near $23.00. If not a test of support near $21.00 is possible with a break-through signaling further downside. The indicators are rolling over from a bearish low, consistent with a bounce support, but not suggestive of full correction at this time.

The Oil Index

Oil prices were flat today, WTI falling less than -0.1% at settlement, but look poised to move lower. The OPEC deal just wasn't enough to offset rising US rig counts, record US production and tepid demand. US rig counts jumped 12 last week, up 288 YOY, adding production capacity to an already ample supply, and show no signs yet of slowing. Until they do I expect to see downside pressure continue, providing of course that OPEC or Russia don't try to talk prices back up. Downside target for oil is $45 in the near to short-term.

The Oil Index looks set to continue a correction driven by falling oil prices. The index posted a margial gain in today's session but looks poised to move down to the 1,120 level. This would take the index back to a firm, long-term, support level built up over many months leading into the OPEC-deal driven rally. My long-term outlook for the sector remains bullish, earnings growth is still expected, but the near-term looks bearish. The risk now is that prices will move lower, and stay lower, ending hopes for the explosive earnings growth that is expected to-date.

In The News, Story Stocks and Earnings

Intel made news in the early hours when it announced the purchase of Mobileye. Mobileye is a chip-maker focused on the self-driving car industry, its purchase is a move by Intel to get into and stay ahead of that market. The deal values Mobileye at up to $16 billion, shares of that stock jumped more than 28% on the news. Shares of Intel fell a little more than -2% to trade just above near-term support.

Citrix Systems jumped nearly 7% this afternoon on news it was in talks with Goldman Sachs about a possible sale. The company is a leading provider of application and management software and services. Potential buyers are not yet known but will likely include top names.

The VIX continues to trade sideways and near long-term lows. Today's action saw gains at the open that were erased by the close. The indicators remain consistent with range-bound trading with a bias to the downside.

The Indices

Today's action in the indices was calm and quiet. For the most the indices moved sideways, two closed with gains while two closed with losses. The laggard is the Dow Jones Transportation Average which posted a loss of -0.41%. The index created a small black bodied candle below the moving average but closing above the 9,250 support line. The index looks set to move lower in the near term but as yet is still above support. The indicators are bearish and pointing lower, consistent with a test of support, but also showing early signs of reversing. A break below 9,250 is bearish near-term with downside target near 9,000. A bounce from 9,250 would be bullish with upside target near 9,600.

The Dow Jones Industrial Average also closed with a loss but only -0.10%. The blue chips created a small black bodied spinning top candle, just above near term support. Near term support is near 20,800. The indicators are moving lower suggesting support will be tested again with a possible move down or sideways to the short term moving average. A bounce from current levels would be bullish and trend following with upside target at the current all-time high.

The S&P 500 made the smallest gain in today's session, 0.04%. The broad market created a very small and doji-like spinning top candle extending the bounce from near term support begun last Thursday. The indicators are consistent with a test of support and showing sign of bouncing from support but little more at this time. Short and long-term outlook remains bullish out to 2018, near term is more questionable. A move lower, breaking below 2,355, would be bearish with downside target near 2,325. A bounce from this level would be bullish and trend following with upside target at the all-time high.

The NASDAQ Composite made the largest gain, 0.24%, and looks the most bullish. The index created a small white bodied candle moving up from a support bounce within an uptrend. The indicators remain bearish but are rolling over, consistent with such a bounce. Near term target is the current all-time high, only a few points above today's close, with the possibility of new all-time highs to follow.

The market is at a juncture. The next FOMC policy announcement is only 2 days away and it is largely expected to be a quarter point increase. The question is, will the rate hike cause the market to rally or will it cause the market to continue correcting? In the past, last year, a rate hike was a reason for fear, today that is not the case. Then, rate hikes were the demon to end easy-money policy and crush the bull market. Today they are a sign of economic health and the need for normalization. The rate hike and statements may cause a knee-jerk sell-off and they may not, if they do it will likely be the next great entry for long-term bullish positions. If it doesn't the rally will continue from here. I'm bullish, cautious ahead of the Fed, waiting for the next bullish signal.

Until then, remember the trend!

Thomas Hughes

New Plays

Very Bullish Buying

by Jim Brown

Click here to email Jim Brown
Editor's Note

An investor is betting $1.7 million this $10 stock is going higher. There is tremendous call activity in July/Oct at the $11 strike. Time to follow the money.


ECA - Encana Corporation - Company Profile

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compares to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings May 18th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Buy ECA shares, currently $10.64, initial stop loss $9.50

Optional: Buy October $11 call, currently $1.50, no stop loss.


No New Bearish Plays

In Play Updates and Reviews

Step by Step

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes have posted two consecutive days of small gains. The Russell gained 5 points and the S&P-600 3 points. The gains have been minor and the indexes are not moving very far away from support. Investors are positioning for Wednesday's Fed announcement. Historically, the day before a Fed decision is positive so hopefully Tuesday will follow that trend.

However, the CBO scored the new healthcare plan as a disaster and the odds of getting anything passed over the next couple months are exceedingly slim. That means the tax cut proposal will be pushed out until after the August recess and investors are not going to be happy once they realize that fact. The sell in May cycle this year could be especially strong.

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

SHLD - Sears Holdings
The short stock position was opened at $9.10.

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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

ARNC - Arconic - Company Profile


No specific news. Resistance is $27 and our stop loss is just above that level.

Use $26 as an exit target on the put. We will keep the call open just in case a headline appears.

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. Yes, I am fallible. For some reason unknown to me, I have been profiling the CSIQ updates with a March option bias. An observant reader reminded me today that this is an APRIL option. We have plenty of time and CSIQ reports earnings on March 21st. The stock is finally cooperating with two days of gains and today appeared to accelerate. Don't write off CSIQ yet.

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.

VIPS - Vipshop Holdings - Company Profile


No specific news. Shares rebounded back to the top of the recent congestion range.

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.

Update 3/7/17: The company announced a new credit facility for $632,500,000 for the purpose of repurchasing outstanding 1.5% convertible notes due 2019.

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 are clinging to psychological support at $8 and a break there could hit $6.50 very quickly. Investopedia had an article today claiming the bear market for retailers was just getting started.

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.

FOSL - Fossil Group - Company Profile


S&P announced after the close on Friday that FOSL is being removed from the S&P-400 midcap index and added to the S&P-600 small cap index before the open on March 20th. Shares fell 4% today on the news. Today's close was 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.

KR - Kroger Co - Company Profile


No specific news. New two-year low close on a downgrade to Casey's.

Original Trade Description: March 7th

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.

Position 3/8/17:

Short KR shares @ $28.85, see portfolio graphic for stop loss.

Optional: Long April $27.50 put @ 45 cents, no stop loss.

SHLD - Sears Holdings - Company Profile


News out well after the close: Sears lenders hired Kramer Levin to represent them in expected debt talks. The lenders are expecting trouble so they already hired a bankruptcy firm. That is not a good sign for Sears.

Original Trade Description: March 11th

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

We played Sears as a short several times before. Sears is eventually expected to file bankruptcy. It is only a matter of time.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Feb-9th before spiking the next day on misplaced optimism to stop us out of a short position for a decent gain.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the completion of the sale of the Craftsman brand to Stanley Black & Decker for $525 million in cash and payments over the next 3-5 years to total $900 million. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

Sears reported an adjusted Q4 loss of $1.28 that was better than expectations for a loss of $2.85 per share. That still represented a loss of $607 million and they are burning cash at an alarming rate. Analysts now believe they need $2 billion to make it through 2017. Revenue was $6.1 billion, down from $7.3 billion but beat estimates for $5.9 billion.

Earnings June 8th.

Susquehanna said Sears is struggling just to exist and the results were terrible. They do believe the chain will continue to exist through 2017 thanks to sales of real estate and brands, and then the outlook becomes increasingly worse once there are no longer any assets to sell. By selling their real estate and leasing it back, they raise immediate cash but they take on a new debt on every store. Outstanding debt and capital lease obligations rose from $2.2 billion to $4.2 billion in 2016. That means their cash burn in 2017 will actually increase significantly.

Shares spiked on short covering after the earnings but came to a dead stop at $9.50 and exactly where resistance held back in January. I think the shorts will load up again now that earnings are over and no further headlines are expected.

Position 3/13/17:

Short SHLD shares @ $9.10, see portfolio graphic for stop loss.

No options recommended because of price.

The $9 put is $2.05 and 22% of the stock price.

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