Option Investor

Daily Newsletter, Monday, 3/27/2017

Table of Contents

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

Market Wrap

No Trump Card For Healthcare

by Thomas Hughes

Click here to email Thomas Hughes


Market sentiment slips as the Trump agenda takes it first major hit. It's not surprising that the House republicans weren't able to reach consensus on Obamacare reform, it is a little surprising the Great Negotiator was not able to pull a magic rabbit out of his hat in order to pull it off. The failure, or retreat from possible failure to be more precise, raises concern the Trump economy won't be as terrific as he's said it would be, a possibility the market face all along. Today's action was negative, the failure definitely caused a sell-off, but in the end really not too bad.

International indices got hit the hardest, most of them being closed long before the mid-day rebound in US stocks could sway sentiment. Asia fell but results were a bit mixed. The Nikkei fell nearly -1.75% but other indices in the region shed more modest amounts closer to -0.25%. European markets were more consistently lower, about -0.5% on average, as regional headlines dominate news. Germany's business index hit a nearly 6 year high, Angela Merkel's party won a regional election in Saarland and the BOE releases its stress test results (not much to speak of).

Market Statistics

Futures trading painted a bleak picture for the bulls, down nearly a full percent at the low of the morning. The trade was fairly steady going into the opening bell, down about -0.75%, with little in the way of real business or economic news to move the market. The open was a bit frantic, the indices opened with losses near -0.5% extended that to roughly -0.75% and then bounced. Intraday bottom was established by 9:42AM and for the next 3 hours the market moved higher. Around 1PM a top was hit resulting in sideways range-bound trading for the next hour or so. By end of day the indices were moving higher again, slightly, to the highs of the day where they remained until the close.

Economic Calendar

The Economy

No economic data today and very little this week. The few reports that are on the calendar are important though; Consumer Confidence, 3rd estimate 4th quarter GDP, jobless claims, personal income/spending and the PCE. Next week is a big data week, NFP ADP Challenger etc.

Moody's Survey of Business Confidence gained 0.3% to hit a new 10 month high of 34.1. The index has been steadily rising since last summer and looks like it is on the way higher. Mr. Zandi changed his tone in the summary this week, getting a little more positive. Global business sentiment is unwavering, consistent with bouyant financial markets. Regional differences remains, the US is still strongest.

The count down to earnings season is on and the market is focuses. No matter what happens with the economy or politics it is always earnings that drive future valuations. This time around we are looking at expanding growth with expanding growth outlook, the question now is the quality of the season in relation to those expectations. So far, 12 S&P 500 companies have reported with 9 beating EPS and 6 beating revenue estimates, both above average. The blended rate for earnings is now 9.1%, up a tenth from last week.

Looking forward growth is still expected, as is expanding growth and now we have some glimmers of rising estimates as well. The Q2 outlook rose a half percent to 8.9% since the last time it was mentioned in the weekly Factset report. The 3rd quarter estimated is a little weak at 8.2% but growth expands again going into the 4th quarter, 12.4%. On a full year basis, 2017 outlook gained a tenth to hit 9.9% and 2018 outlook held steady at 12%.

The Dollar Index

The Dollar Index took a big hit when the healthcare vote was canceled it calls into question tax reform, infrastructure spending and jobs creation (the Trump Agenda). The index opened today's session with a loss of -.25%, fell as much as -1.00% and closed with a loss near -0.5% after testing support at the $99 level. Today's action confirms resistance at the $100 and raises the possibility of full reversal. The index has created what could become a H&S reversal with down-sloping neckline crossing just below today's close. A move below $99 will be significant but will not signify reversal until confirmed. Long term outlook, even without Trumponomics, is for steady GDP, jobs and earnings growth into the next 2 years so downside potential is limited.

The Gold Index

Gold prices moved up to hit a one month high just shy of $1,260. This move is supported by falling dollar value and flight-to-safety with upside targets near $1,275 and $1,300 now that $1,250 has been surpassed. This move may however be temporary in nature, depending on next week's data and FOMC outlook.

The Gold Miners ETF GDX gained 2% on the move in gold prices but remains near the middle of its near-term range. The ETF appears to be winding up for a move, possibly higher, depending on the direction of gold prices. Today's action is the 8th day of trading just above $23 in what appears to be a flag pattern supported by bullish indicators. MACD is bullish and rising to a second peak while stochastic gives a follow-on buy signal high in the upper signal zone, both consistent with higher prices. The key now is resistance, near $23.50, a break above which would be bullish and confirm the move. Upside target is $25.50 in the near to short-term. Support on a pull-back is $22.50 and $21.

The Oil Index

Oil prices slid again today. Rising US rig counts, high levels of US storage, high global capacity, tepid demand and an ineffective OPEC add up to one thing; lower prices. OPEC may try to extend the production cut, that may support prices, but the long-term outlook for oil right now is for supply to meet demand, at least. Downside target is $45 with a chance of going lower.

The Oil Index fell nearly a full percent to test support at $1,150. The index is sitting on what could be solid support, if not next target is not far below. This support dates back to the trading range of 2016, a range that persisted for at least 8 months and based on pre-OPEC deal fundamentals. Looking forward I remain bullish on the sector based on earnings growth projections. The risk is that current projections are going to fall based on new, lower, oil prices. The question is how much they will fall and if forward EPS outlook remains positive. In terms of current quarter expectations, no changes due to high average prices for oil and products in the 1st quarter. If the index falls through $1,150 next target is $1,100 and then $1,075.

In The News, Story Stocks and Earnings

Egg producer Calmaine reported earnings this morning. Results were dismal but better than expected, driven entirely by the price boom/bust cycle related to last year's avian flu epidemic. Revenue fell nearly -32% on a -28% decline in shell egg prices and the after-effects of the epidemic. The build-up of new egg producing flocks has led to a younger, more productive population creating oversupply in a low-demand environment. Forward outlook is stable, the hen population is expected to moderate and there is some strength in the specialty egg market. Shares of the stock opened at a 2 year low on the news but recovered the losses and more, on high volume, by the end of the day.

Open-source software, Linux and cloud provider Redhat reported after the bell. The company reported a 17% increase in subscription revenue and a 40% increase in all-other revenues making the 60th consecutive quarter of growth. The company gave mixed forward guidance, first quarter below full year above consensus, and drove shares down by a full percent in after-hours trading.

The VIX opened with a significant gain, near 20%, but sold off throughout the day. The index shows a spike in fear but one that has quickly subsided. The indicators are consistent with a top within a trading range and suggest a move back to recent lows is possible.

The Indices

Index action was mixed, all opened with losses but only two closed that way. The loss leader was the Dow Jones Industrial Average with a decline near -0.25%. The blue chips created a small doji candle setting a new one month low and indicative of support at the 25,000 level. The indicators are strongly bearish and I say strongly because MACD is making a +1 year extreme peak and on the rise, suggesting at least a retest of current lows if prices bounce from here, or new lows if they don't. A break below 25,000 could go as low 20,000 before hitting next support target.

The S&P 500 closed with nearly no loss, -0.01%, but created a small white bodied candle in doing so. Today's price action set a new one month low but also gives indication support is at this level. The indicators are both bearish but also both rolling over, consistent with support and trend following. The caveat is that both are still bearish so support could easily be tested again. A break below support, near 2,325, would be bearish near-term with downside target near 2,300 or 2,250.

The Dow Jones Transportation Average closes with a gain near 0.07%. The transports created a medium sized white bodied candle with long lower shadow, indicative of support at this level. The indicators are bearish so support may be tested further but mitigated by two things. One, stochastic is oversold within a greater up-trend and both indicators are rolling over in indication of support within that same up-trend. A break below support, near 8,900, would be bearish near-term with downside target near 8,500 and 8,000.

The NASDAQ Composite posted the largest gain, slightly more than 0.20%. The tech heavy index created a medium sized white bodied candle after opening at a one month low, confirming support at current levels. The indicators are bearish but rolling over in-line with the near, short and long term trend, also consistent with support. A break below support would be bearish near term with downside targets near 5,650 and 5,500. A bounce would be trend following with the all-time high as resistance.

The indices are correcting following the post-election and post-inauguration rallies. The failed healthcare vote may give that correction legs but based on today's action I'd say not. The market spooked, there was some selling but cooler calmer heads prevailed. For one thing, the healthcare vote is only one of many items on Trumps agenda and likely not forgotten and two, outlook for growth is still good and at no time has ever included the potential affects of the Trump economy.

When it comes to growth we're still on track and if, I say if, anything on Trump's list gets accomplished it will be icing on the cake. Since earnings are what drives the market long term I predict this correction will coincide with the onset of earnings, and bottom as we move into another cycle of growth. I am bullish long term, waiting for the next great entry, but neutral/bearish in the near-term waiting while we wait on data and the onset of earnings season.

Until then, remember the trend!

Thomas Hughes

New Plays

Shrinking Violet

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company has been shrinking for the last 18 months and guided for even more shrinkage. Investors like to buy companies that are growing rather than cutting off appendages in order to stop the bleeding.


No New Bullish Plays


FNSR - Finisar - Company Profile

SPX Corporation supplies infrastructure equipment serving the heating and ventilation (HVAC), detection and measurement, power transmission and generation, and industrial markets in the United States, China, South Africa, the United Kingdom, and internationally. It operates through three segments: HVAC, Detection and Measurement, and Engineered Solutions. The HVAC segment engineers, designs, manufactures, installs, and services cooling products for the HVAC and industrial markets, as well as boilers, comfort heating, and ventilation products for the residential and commercial markets. The Detection and Measurement segment offers underground pipe and cable locators, and inspection equipment, as well as bus fare collection systems, communication technologies, and specialty lighting products. The Engineered Solutions segment provides transformers for the power transmission and distribution markets; and process cooling equipment, as well as rotating and stationary heat exchangers for the power generation and industrial markets. This segment sells transformers for publicly and privately held utilities under the Waukesha brand name; and process cooling products and heat exchangers under the brand names of SPX Cooling, Marley, Yuba, and Ecolaire. Company description from FinViz.com.

SPX Corp is losing money. For Q4 they lost $86.1 million or -$2.06 per share after a -48 cent loss in the year ago quarter. Revenue of $395.3 million fell sharply from the $468.4 million in the year ago quarter. A lot of their loss came from divesting businesses that were marginally profitable or even losing money. They are trying to stop the bleeding. On an adjusted basis they reported earnings of 69 cents.

Earnings May 25th.

The company sold its European power generation business for "nominal cash at closing." That means they got rid of a loser and it did not cost them any additional money. They closed their dry-cooling tower business for $48 million. They also split into two companies, SPX Corp and SPX Flow (FLOW). After all their divestitures and spinoff they ended the year with only $100 million in cash. Last week they signed an agreement with creditors allowing them to keep the $48 million from the sale of the cooling tower business for another 360 days. The loan was partially secured by those assets and having to pay the loan down by that amount as called for in the prior agreement would have cut their cash on hand in half. The company said it was not looking to sell any other divisions at present but would be restructuring after the divestitures and trying to turn a profit. Good idea but not very convincing.

They guided for 2017 revenue of $1.3 to $1.4 billion and well below estimates for $1.47 billion. They did guide for earnings of $1.55 to $1.70, which would be an improvement if they can make it happen.

SPX Corp is not in good shape. It is a viable business but management made some bad decisions in the past and they are working through them. If the market weakens in April as is typically the case, SPXC is probably going to see more sellers than buyers. Investors have far more opportunities to buy growing companies rather than companies like SPX, which have been shrinking.

SPXC broke below support of the 100-day average and tried for three days to break back to the upside and failed. That average is now strong resistance. Back in November they tested the 200-day and that is the likely target on any continued decline.

Sell short SPXC shares, currently $23.26, initial stop loss $24.25
No options recommended because of price.

In Play Updates and Reviews

Missed another Opportunity

by Jim Brown

Click here to email Jim Brown

Editors Note:

The bears missed out on another opportunity to push the markets lower when the dip buyers outnumbered the sellers. The Dow and S&P closed only slightly negative after a huge drop at the open. The dip buyers appeared immediately and lifted the Nasdaq and Russell back into positive territory. The Dow lost -45 and the S&P -2. The key point is that the Dow and S&P both broke through uptrend support and both made a lower high and lower low.

The Russell and S&P-600 closed fractionally positive but near the top of their intraday range after trading significantly lower at the open. The small caps are trying to hold at support and that is encouraging.

We lost two positions with one a casualty of the dip and the other was Sears when news broke a fund manager was increasing his 28 million share position. For a day when the S&P dipped to 2,322 and -25 points at the open, the majority of our positions did very well.

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 was entered at the open.

ETSY - Etsy Inc
The long stock position was stopped out at $9.75 on the market drop

SHLD - Sears Holdings
The short stock position was stopped out at $8.55 .

NLNK - Newlink Genetics
The long stock position remains unopened until 21.00.

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

BCRX - Biocryst Pharmaceuticals - Company Profile


No specific news. Shares rebounded from the market drop at the open and are approaching a new resistance test.

Original Trade Description: March 18th

BioCryst Pharmaceuticals, Inc., a biotechnology company, designs, optimizes, and develops small molecule drugs that block key enzymes involved in the pathogenesis of diseases. The company markets peramivir, an intravenous neuraminidase inhibitor, which is approved for uncomplicated seasonal and acute influenza in the United States and Canada under the name RAPIVAB, in Japan and Taiwan as RAPIACTA, and in Korea as PERAMIFLU. It also has various ongoing development programs, including BCX7353 and second generation oral inhibitors of plasma kallikrein for hereditary angioedema; and galidesivir, a broad spectrum viral RNA polymerase inhibitor that is indicated to treat filoviruses, as well as forodesine, an oral purine nucleoside phosphorylase inhibitor for use in oncology. It has collaborative relationships with Mundipharma International Holdings Limited for the development and commercialization of forodesine; Shionogi & Co., Ltd. and Green Cross Corporation for the development and commercialization of peramivir in Japan, Taiwan, and South Korea; Seqirus UK Limited for the development and commercialization of RAPIVAB worldwide, except Japan, Taiwan, Korea, and Israel; and the University of Alabama at Birmingham for the development of influenza neuraminidase and complement inhibitors. Company description from FinViz.com.

BioCryst produces drugs and vaccines that treat or prevent the flu. They have a novel new drug called Rapivab that is used to treat viruses. They also have a new broad-spectrum antiviral for use against Ebola, Zika and the Marburg virus, among others. Whenever bird flu or swine flu headlines appear, BioCryst shares tend to rise because of their vaccines and treatments.

The current bird flu is H7N9 and a new version just appeared called the Yangtze River Delta lineage. This particular strain is highly contagious and jumps human to human. The virus has changed into a "high path" virus as opposed to a "low path" virus. That means it spreads faster inside the body and causes more damage. More than 41% of people infected eventually die.

The number of cases per year dating back to 2013 were in the 100-200 range and mostly in China. In the last several months with the outbreak of this new strain more than 460 cases have been confirmed. Remember, more than 41% die. This is the worst bird flu season on record.

Normally the bird flu is confined to mainland China. However, because there are open air fowl markets in China, the flu can be picked up by any migratory bird and spread around the world.

In early March, a form of H7N9 was discovered at a Tyson chicken farm in Tennessee. This was the high-path form. The farm was quarantined and the entire flock of 55,000 chickens was destroyed. The problem is that the infection was caused by a wild bird that contaminated the flock. Since the virus does not impact the birds, nobody knows if the flock is contaminated except they are constantly checked with blood tests. Once they find one chicken is infected it is too late.

In the U.S. bird farms are supposedly "bio-secure" to isolate the chickens from wild birds. Normally that works in most cases. However, the virus still makes it into the population unless extreme measures are taken.

The key to this position is that there will likely be more H7N9 headlines in the U.S. because the possibility of further farm contamination is too great. This is not one bird that flew from China and contaminated one farm. Birds carrying it fly north across Russia to Alaska infecting other birds as they go. Once in Alaska they are pushed south by the winter weather and everywhere they stop, other birds are infected. There is no telling how many thousands or even millions of wild birds are infected in the U.S. already because it does not affect their health. They are passive carriers.

When new headlines appear, it will boost stocks that have vaccines and treatments against exotic viruses like Ebola, Zika, etc. Those treatments will not specifically work against the bird flu other than as a broad-spectrum antiviral. However, the stocks will rise on the expectations.

BCRX spiked to $9 on the news of the farm in Tennessee and should move higher on their own even if there are no further headlines. The potential for the H7N9 contamination to be limited to just one farm is highly doubtful.

Update 3/24/17: News broke Friday that the bird flu had been detected in three new farms in Alabama. The state issued a "stop movement" order for birds and eggs in Alabama. The prior week three farms in Tennessee had to slaughter and dispose of all their chickens after testing positive.

Earnings May 29th.

We have to buy the stock because the option premiums are inflated due to the expectations of another significant spike. I looked at buying a longer strike out in June but the spreads are too wide. If you buy that call you have to hold it or lose half your premiums if stopped out.

Position 3/20/17:

Long BCRX shares @ $8.82, see portfolio graphic for stop loss.
No options due to price and spreads.

ECA - Encana Corporation - Company Profile


No specific news. Shares rebounded from the market drop at the open and closed positive for the day despite weakness in crude prices.

Original Trade Description: March 13th

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.

Position 3/14/17:

Long ECA shares @ $10.43, see portfolio graphic for stop loss.

Optional: Long October $11 call @ $1.40, no stop loss.

ETSY - ETSY Inc - Company Profile


No specific news. The market drop at the open knocked ETSY down to $9.60 and stopped us out at $9.75 before rebounding to close at a five day high. The long call is still open. This position will move to the Lottery Play section next weekend.

Original Trade Description: March 15th

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers. Company description from FinViz.com.

Etsy reported earnings of 3 cents that beat estimates for a penny. Revenue of $110.2 million also beat estimates for $106.9 million. Merchandise sold rose 16.7% to $865.2 million. The stock was crushed because the company guided for higher costs. However, there was a good reason and shares are starting to rise again.

Etsy is an ecommerce website where crafters can post and sell their wares. So far, so good. The company has come up with the great idea to sell craft supplies on the website so other existing crafters plus all the people shopping the website can buy their supplies there as well. Not only will the company provide supplies but they are adding tutorials and other craft ideas. That will make the site even more "sticky." This is scheduled to launch in April.

In addition, they introduced Google Shopping on the website and launched their first ever global brand campaign. They have changed the backend of the seller website to provide a new seller dashboard and new application called Shop Manager.

I think this expansion is a great idea. Where other retail websites are stagnant, Etsy is growing rapidly and these new features will increase viewers, buyers and sellers. The knee jerk decline in the stock price on the rise in expenses was a buying opportunity.

Earnings May 30th.

Position 3/16/17:

Closed 3/27/17: Long ETSY shares @ $10.25, exit $9.75, -.50 loss.

Still open: Long June $12.50 call @ 36 cents, no stop loss.

FNSR - Finisar - Company Profile


No specific news. Where the opening market drop bit us on ETSY, it helped us on FNSR and we were filled at the low for the day.

Original Trade Description: March 25th.

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, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless 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. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

Finisar reported earnings of 59 cents that rose 136% but missed estimates for 62 cents. Revenue rose 23% to $380.6 million but also missed estimates for $389.5 million. They guided for Q1 earnings of 53 cents and revenue of $370 million. Analysts were expecting 58 cents and $393 million.

Despite the enormous improvement in sales and earnings the stock was crushed for a 25% decline from $35 to $26. The damage was worse because competitor Ciena (CIEN) had also reported a weaker quarter the day before. Panic gripped traders that optical networking was somehow slowing down. The pace of sales "growth" in China slowed slightly and that sent investors running for cover. China is building out its 100 gigabit network technology in metropolitan areas and they are consuming enormous amounts of networking equipment.

Earnings June 9th.

Good article in Barrons very positive on Finisar. Read it here.

Finisar is not a one trick pony. They are also pushing into the smartphone market and will be competing on the 3D sensor components in the next version of smartphones. They are also building out massive networks in the cloud computing datacenters that require miles of fiber and very fast connections.

After the drop, multiple analysts reiterated buys and outperforms on FNSR saying this was just a hiccup and there are far greater earnings in the future. Raymond James upgraded them from outperform to strong buy. Jefferies upgraded from hold to buy. MKM reiterated a buy rating and $41 price target. Needham reiterated a strong buy and $44 target. Stifel, Raymond James and William Blair all reiterated a buy rating.

Shares have rebounded $2 off the lows from last week and should continue to accelerate higher in the days ahead.

The Optical Networking and Communications Conference was last week and there were numerous positive comments about Finisar and Lumentum. This should help lift this stock.

I know FNSR is pressing our $30 limit in this newsletter and that means higher risk of loss if a disaster appears. Readers may want to buy the option instead on this position.

Position 3/17/17:

Long FNSR shares @ $27.89, see portfolio graphic for stop loss.

Optional: Long May $30 call @ $.85, see portfolio graphic for stop loss.

HABT - Habit Restaurants - Company Profile


No specific news. Shares dipped with the market at the open but rebounded to close at a new three-month high. There was a flurry of buying right at the close that broke through some intraday resistance at $16.50.

Original Trade Description: March 22nd.

The Habit Restaurants, Inc., a holding company, operates fast casual restaurants under The Habit Burger Grill name. It specializes in offering fresh made-to-order char-grilled burgers and sandwiches featuring choice tri-tip steak, grilled chicken, and sushi-grade albacore tuna cooked over an open flame; and salads, as well as sides, shakes, and malts. As of March 2, 2017, the company operated approximately 170 restaurants in 15 locations in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Nevada, Washington, and Maryland, the United States; and the United Arab Emirates. The Habit Restaurants, Inc. was founded in 1969 and is headquartered in Irvine, California. Company description from FinViz.com.

Habit reported earnings of 7 cents that beat estimates for 3 cents. Revenue rose 21.8% to $73.9 million. Same store sales rose 1.7%. This was the 52nd consecutive quarter of positive same store sales. They opened 11 company stores and 2 franchises in Q4. The CEO said they were proud of their strong beat considering it is a fiercely competitive environment.

For full year 2017, they guided to revenue of $338 to $342 million, which represents 19.8% growth at the midpoint. The guided for 2% same store sales and the opening of 31 to 33 new company stores alony with 5 to 7 franchised stores. Analysts were expecting $339.2 million.

Earnings June 1st.

Shares spiked from $14 to $16 on the news and then pulled back for two weeks on post earnings depression. They have since recovered that $16 level and are about to break out to a new three month high. Shares dipped on Tuesday but very little and the rebound today erased the dip completely.

Position 3/23/17:

Long HABT shares, currently $15.95, see portfolio graphic for stop loss.
Optional: Long June $17 call @ 70 cents, no initial stop loss.

ITCI - Intercellular Therapies - Company Profile


No specific news. After a week of declines and coming very close to our stop loss, ITCI exploded higher posting gains at the open in a weak market. This could be good news for the rest of the week. One analyst remarked the stock had been under quiet accumulation for the last several days and they finally ran out of sellers.

Original Trade Description: March 16th

Intra-Cellular Therapies is developing novel drugs for the treatment of neuropsychiatric and neurodegenerative diseases and diseases of the elderly, including Parkinson's and Alzheimer's disease. The Company is developing its lead drug candidate, lumateperone (also known as ITI-007), for the treatment of schizophrenia, bipolar disorder, behavioral disturbances in patients with dementia, including Alzheimer's disease, depression and other neuropsychiatric and neurological disorders. Lumateperone, a first-in-class molecule, is in Phase 3 clinical development for the treatment of schizophrenia, bipolar depression and agitation associated with dementia, including Alzheimer's disease. The Company is also utilizing its phosphodiesterase platform and other proprietary chemistry platforms to develop drugs for the treatment of CNS and other disorders. Company description from company website.

ITCI is meeting with the FDA in late March to discuss the filing of their newest drug for schizophrena and they have already contracted with a manufacturer to supply commercial quantities. The drug is lumateperone and it has already successfully navigated all the required studies and the results were presented at the annual meeting of the American College of Neuropsychopharmacology (ACNP) and the CNS Summit. For company information on their other drugs Click Here

They reported a smaller than expected Q4 loss of 64 cents compared to estimates for 77 cents. The company has averaged a 14.6% positive earnings surprise over the last four quarters. They are not a big company and deal mostly in research so they have a permanent loss until their new drugs hit the market. They have $10 per share in cash.

Shares were very volatile the day the earnings were released and shares settled at $13.50 several days later. Now a new uptrend has begun with a close at $15.75 today. The prior high was the mid $40 range. Shares crashed in September when a trial of drug ITI-007 for schizophrena failed a stage three trial for one specific test. The drug has 7 other uses.

Earnings May 31st.

There is an uptrend forming with resistance at $17. If the stock breaks above that resistance level it could run because of the recent memory of the $45 highs.

Position 3/17/17:

Long ITCI shares @ $15.72, initial stop loss $13.75,
No options recommended because of high prices and wide spreads.

NLNK - Newlink Genetics - Company Profile


No specific news. Shares have formed support at $20. Now we need some buyers to appear. I considered buying NLNK at the open on Tuesday because now we have clear support and we coul dhave a very tight stop. I decided to pass because we need to see a rebound before we enter.

This position remains unopened until a trade at $21.00.

Original Trade Description: March 20th.

NewLink Genetics Corporation, a biopharmaceutical company, focuses on discovering, developing, and commercializing immunotherapeutic products for the treatment of cancer. Its portfolio includes biologic product candidates based on its HyperAcute cellular immunotherapy technology, which is designed to stimulate the human immune system to attack cancer cells; and small-molecule product candidates that are focused on breaking the immune system's tolerance to cancer by inhibiting the indoleamine-2, 3-dioxygenase pathway and the tryptophan-2, 3-dioxygenase pathway. The company is developing IDO pathway inhibitors comprising indoximod that is in multiple Phase I and Phase II clinical trials for patients with melanoma, pancreatic cancer, malignant brain tumors, metastatic breast cancer, acute myeloid leukemia, prostate cancer, and non-small cell lung cancer (NSCLC); and GDC-0919 and atezolizumab (MPDL3280A) that is in Phase Ib clinical trials for patients with locally advanced or metastatic solid tumors. Its clinical development products include NLG2101 for metastatic breast cancer; NLG2102 for refractory malignant brain tumors; NLG2103 for advanced melanoma; NLG2104 for metastatic pancreatic cancer; NLG2105 for pediatric patients with refractory malignant brain tumors; and NLG2106 for acute myelogenous leukemia. The company's HyperAcute cellular immunotherapy product candidates under clinical development include tergenpumatucel-L, is being investigated in Phase Ib/II clinical trial for patients with advanced NSCLC; and dorgenmeltucel-L, is being investigated in a Phase II clinical trial for patients with advanced melanoma. Its infectious disease program includes replication-competent recombinant vesicular stomatitis virus, a vaccine technology to treat Ebola and Marburg viruses. The company has license and collaboration agreements with Genentech, Inc. and Merck, Sharpe and Dohme Corp. Company description from FinViz.com.

NewLink reported a loss of 46 cents in Q4 and that beat analyst estimates for 66 cents. Revenue of $12.7 million significantly beat estimates for $4.3 million. They ended the quarter with $131.5 million in cash.

Earnings May 30th.

Newlink has multiple drugs in the pipeline targeting cancer and it has been mentioned multiple times as a possible acquisition target by Gilead Sciences. In addition to the IDO pathway drugs they partnered with Merck to develop an Ebola vaccine. The drug received breakthrough therapy designation from the FDA and PRIME status from the EU Medicines Agency. In December, the final results of a trial in Guinea were published in the Lancet confirming the efficacy of the vaccine.

In early April the company will present two abstracts at the American Association for Cancer Research (AACR) annual meeting. Presenters accepted to deliver their abstracts normally rise into the meeting. They present on April 4th. The abstracts being presented are chosen by an AACR committee as the best and most promising. This is an honor to be chosen.

This is a stock only play because option prices are out of sight. Shares hit a new 52-week high on Monday.

With a NLNK trade at $21.00

Buy NLNK shares, initial stop loss $19.65.

Previously closed 3/21/17: Long NLNK shares @ $22.56, exit $20.65, -1.91 loss

VIPS - Vipshop Holdings - Company Profile


No specific news. Nice rebound but a minimal gain.

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

SHLD - Sears Holdings - Company Profile


Monster 11% spike stopped us out for a minor gain. The move came after hedge fund manager Bruce Berkowitz of the Fairhoime Fund bought 574,800 shares to lift his holdings to more than 28 million shares. I wish him luck. That spike stopped us out at $8.55 for a minor gain of 55 cents.

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.

Update 3/13/17: 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.

Update 3/15/17: Sears lost the third top executive in the last three months. Kmart president Alasdair James is no longer with the company. Sears does not announce departures because there has been so many. The name just disappears from the website. James was removed on Wednesday. Sears will not comment on departures even when asked.

Update 3/21/17: After the evening session had ended, Sears filed its annual report saying there was "substantial doubt" that the company could continue to exist as a "going concern" which is the legal term for remaining in business. This along with the fact that lenders for Sears hired a bankruptcy attorney a couple weeks ago should be the death knell for Sears shares.

Update 3/22/17: Sears declined 12% on the news they did not know if they would be in business at the end of 2017. That should be the kiss of death since vendors are not going to finance inventory if they fear Sears will file bankruptcy. The key sentence from the annual report reads, "substantial doubt exists related to the company's ability to continue as a going concern." Sears lost $2.2 billion in the year ended on January 28th. They ended the year with $286 million in cash but they received some money from the sale of the Craftsman brand to Stanley Black & Decker. Suppliers are now demanding either cash up front or payment upon delivery and shipping smaller orders according to several sources. Insurers that previously insured suppliers against a Sears default are no longer writing those policies. Sears inventory levels are "pathetically badly inventoried today and they will become worse" according to Mark Cohen a former CEO of Sears Canada.

Update 3/24/17: Francis Chou's Opportunity Fund still believes Sears to be undervalued although they said their original $50 target was "likely too optimistic." They are basing this on the brands and real estate available for Sears to sell if the need arises. Personally, I do not understand why anyone would buy Sears today when there are far better companies available.

Position 3/13/17:

Closed 3/27/17: Short SHLD shares @ $9.10, exit $8.55, +.55 gain.

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