Option Investor

Daily Newsletter, Thursday, 4/6/2017

Table of Contents

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

Market Wrap

Wound Up, Waiting For Earnings

by Thomas Hughes

Click here to email Thomas Hughes


The market continues to trade cautiously, wound up within near-term ranges waiting on earnings season to unfold. Earnings kick-off in exactly one week with releases from Wells Fargo, JP Morgan and Citigroup. In the meantime tomorrow's NFP data and the Trump/Jinping summit has the markets attention and could spur some volatility. The summit is unlikely to produce any policy changes of firm news but could sway sentiment based on how relations between the two world leaders is perceived. The data bundle could be a real market mover. I expect it to at least sustain current trends with the possibility of being good to great.

International markets were mixed in the wake of yesterday's surprising FOMC minutes. The minutes revealed the Fed already talking about unwinding the balance sheet, an event that has been speculated on by the market but not been on the table til now. In Asia Chinese indices were mixed but flat, one indices closing with a gain near 0.25% and the other with a loss near -0.25%. Japanese stocks did not hold steady, falling -1.4% on Trump/Jinping unease.

European indices were equally cautious, holding near the flat line for most of the session. Indices were also impacted by Mario Draghi who gave a speech early this morning. In his comments he came across more dovish than expected. His comments, to the effect monetary easing was still the right thing to do, taking wind from sails filled with expectations the ECB may begin tightening soon.

Market Statistics

Our indices were indicated to open flattish for most of the morning, rising slightly after the 8:30AM data release. The open was a bit hectic even with volume as light as it was. The indices opened with a small gain and then proceeded to test break-even for support, bounce, test it again and bounce again before moving modestly higher. By 10AM the indices were all in the green but trading remained lackluster, the daily high was set less than 0.5% above yesterday's close and capped gains the rest of the day. Trading remained positive, but within the daily range, into the closing bell despite late day comments from the White House that put a damper on sentiment. The comments from Trump, "something should happen" with Assad.

Economic Calendar

The Economy

There was not a lot of data today but what there was is good. The Challenger report on planned lay-offs reveals that not only are job cuts trending lower from last year, plans for hiring have reached new all-time highs. The number of job cuts jumped 17% on a month to month basis in March but is -2% below the March 2016 total and is the 3rd month to be lower on a YOY basis. For the 1st quarter and YTD basis cuts are down -30% from last year as the energy sector rebounds. Cuts in the energy sector are down -84% from last year while those in the retail sector, this years leader, are up 184%.

Initial claims for unemployment fell -25,000, well ahead of expectations, to hit 234,000. Last week's number was revised higher by 1,000. The four week moving average of claims fell -4,500 to hit 250,000. On a not adjusted basis claims fell -9.2% versus an expected gain of 0.5% and are down -15% on a YOY basis. There has been some volatility in the first time claims figure over the past few weeks but based on this week's data it looks like the long-term downtrend may still be intact. Regardless, the figures remain consistent with ongoing labor market health and recovery.

Continuing claims, those filing for a second week, fell -24,000 to 2.028 million from last week's not-revised figure. The four week moving average of claims fell -7,750 to 2.023 million and a new 18 year low. Volatility in the initial claims figure has not passed through to the continuing claims figures, at least not yet. This figure remains firmly in downtrend and may hit new lows this spring.

The total number of claims rose by 4,563 to hit 2.326 million. This gain is not exactly expected but not out of line with the historical trends. Until something changes in the labor scene this figure remains in downtrend as well with an expected lows to be reached in late May and early October of this year. On a year over basis the total claims are down -5.2%.

Some thoughts on the NFP bundle. Job creation is likely to at least be steady and, bases on the ADP read, could be strong. The caveat is that there was some revision to last month's ADP so that must be considered here as well. So long as revisions don't come in horrifically low it should be a good read all around. The unemployment rate may come down, or it may rise, that will depend on the participation rate. The participation rate has been on the rise in recent months and could rise again, which is a good thing. I will not mind a rise in the unemployment rate if there are more workers looking for jobs. The real significant data points I think will be the hourly earnings and workweek. These too have been on the rise, signifying tightening of the labor market and strengthening of the consumer simultaneously.

The Dollar Index

The Dollar Index moved higher today, gaining about 0.2% to approach yesterday's 2 week high. The index is supported today by several factors including dovishness from the ECB, FOMC expectations and US economic trends. The index looks like it is set to move up to retest the $102 level and could begin that move tomorrow (NFP catalyst). The indicators are both bullish in support of higher prices although not overly strong. A break above $100.80 would be bullish, failure to breach that level could result in a test of support with an initial target near $100.

The Gold Index

Gold prices edged higher but only marginally and were not able to break resistance, again. Spot gold gained roughly 0.5% but was not able to move above $1,255. The metal is supported by geopolitical uncertainty and the recent pullback in dollar value, but not fundamentals. Longer term outlook for the dollar remains bullish, until that changes gold prices are likely to remain under pressure. Support targets are not that low however, in the $1,200 to $1,235 range, depending on the data here and abroad, and how the central bankers react to it.

The Gold Miners ETF GDX held yesterday's gains but did not move higher. The ETF remains below resistance at the 38.2% retracement level and appears to have stalled. The indicators are consistent with an asset trading at the top of a range but are not showing much strength. A fall from this level may find support at $22.50 or $21.50.

The Oil Index

Oil prices gained more than 1.25% despite yesterday's bearish inventory data. Inventories are at new record levels with US production on the rise but traders are looking beyond this to signs a drawdown is imminent. One reason is signs of tightening markets in Asia, due to the OPEC cut, which have driven US exports to new highs. Another is the onset of driving season, declining gas storage and a refining sector ready to start cracking. However, oil prices are likely to remain range bound until concrete signs of declining storage emerge. Until that happens I will remain cautious on oil, leaning toward bearish.

The Oil Index made small gains today but remains below resistance. The index is poised to move higher but is having a hard time breaking through the 1,200 level on the first go. The indicators are bullish and showing a buy, following the recent bounce from strong support, with upside target near 1,250 in the near-term. The move may be triggered by oil prices but more likely earnings expectations, which remain strong.

In The News, Story Stocks and Earnings

Carmax reported earnings this morning and blew away the estimates. The used car dealer reported top and bottom line beats driven by a near 10% increase in comp store sales. The company is benefiting from improving labor markets, improving consumer strength, consumer sentiment and a rising level of used-car inventory. Shares of the stock opened with a -3% loss, quickly moved lower to test a support level and then bounced back to close with a gain greater than 2%. Today's action may not lead to an immediate rally but does look like a bottom has been hit.

Sunoco struck oil this morning when it announced the divestiture of part of its North American business. The company is selling most of its convenience store locations to the owners of 7-11 in a deal worth $3.3 billion dollars. The proceeds are to be used by Sunoco to pay off debts and to move forward the plan to become a leading nationwide supplier of fuels. Shares of the stock jumped more than 20% on the news.

Constellation Brands reported this morning a delivered a tasty treat for investors. The company beat on the top and bottom lines as beer sales in particular and beverage sales in general rebound from weakness seen at the end of last year. The company was also able to raise the dividend by 30% and raise full year guidance to a range well above the consensus estimate. Shares of the stock jumped 4% in the premarket session, moved up as much as 10% from there and then closed at a 4 month high with a gain near 6%.

The Indices

Today's action was lot like yesterday's but not quite as violent; they opened, they moved higher, they hit resistance and then retreat back to break-even or lower. In both cases action was restrained by near-term trading ranges, winding up for the NFP and earnings season, the difference is that yesterday's action was driven by FOMC news while today's news was less than exciting.

Leading today's session, barely, is the Dow Jones Transportation Average with a gain near 0.4%. The transports trend exactly sideways within the 7 day range for the 7th day in a row. It is forming a congestion band that is biased to the upside based on trends, expectations and the indicators. The indicators are both bullish and pointing higher, consistent with higher prices, with the short term moving average as resistance. A break above the moving average would be bullish, and trend following, with upside target near 9,250 and 9,500.

Today's runner up was the NASDAQ Composite with a gain of only 0.24%. The tech heavy index created a small spinning top doji sitting on support at 5,850 and near the mid-point of the near-term trading range. The index has been consolidating within this range and setting up for a trend following move higher. The indicators are a bit mixed but consistent with support at current levels and setting up for bullish crossovers. Looking over the past month or so the MACD has made a reverse Head and Shoulders which is highly suggestive of support and a potential reversal in momentum. The stochastic is a bit erratic, showing volatility in the index within the trading range, but set up now to make a bullish crossover at a higher level. Both these signals, if triggered, are trend following and would come along with a bounce from the moving average, and most probably new all time highs, a bullish combination.

The Dow Jones Industrial Average was the laggard, closing with gains near 0.10%. The blue chips created a doji spinning top sitting on support at the 30 day moving average. The index is trading near the bottom of its near-term trading range and looks like it could move up to the upper end. The indicators are mixed but confirm support at this level and suggest a shift in momentum is possible The same reversal pattern is evident in the MACD and stochastic is set up for the same trend following crossover, all this is left now is for a confirmation. A bounce from the moving average would be bullish, upside target near 21,000. A fall below the average would be bearish with possible support at 20,500 and the bottom of the near-term trading range.

The S&P 500 finished the day with a gain of 0.19%, creating a small doji candle. The index is sitting on near-term support, within the near-term trading range, and poised to move higher. The indicators are set up like on the other charts, poised for a trend following buy signal that could come with some strength. Upside target is 2,400 with a possible break to new all-time highs.

As a chartist, trading with the trend is always (usually) the smartest thing to do. Right now the charts are set up for what could be significant entry signal. The indices have been in consolidation for over a month. They have bounced from the bottom of near-term trading ranges and edging higher. The indicators are set up for a strong trend following entry and the whole thing is supported by forward economic and earnings outlook. A good report tomorrow could spark a rally that is carried forward through earnings season. The only caveat is that it hasn't happened yet, and the signal is yet to fire let alone be confirmed. Needless to say, I'm bullish. I'm cautious for the near-term, the Trump/Jinping summit a possible hot-spot among many others, but bullish for the short and the long.

Until then, remember the trend!

Thomas Hughes

New Plays

Off the Beaten Path

by Jim Brown

Click here to email Jim Brown
Editor's Note

Most traders have probably never heard of this company currently making new highs. This is a sleeper stock in a sector that is rarely discussed. However, Amazon is paying attention with a major investment.


KRNT - Kornit Digital - Company Profile

Kornit Digital develops, manufactures and markets industrial digital printing technologies for the garment, apparel and textile industries. Kornit delivers complete solutions, including digital printing systems, inks, consumables, software and after-sales support. Leading the digital direct-to-garment printing market with its exclusive eco-friendly NeoPigment printing process, Kornit caters directly to the changing needs of the textile printing value chain. Kornit's technology enables innovative business models based on web-to-print, on-demand and mass customization concepts. With its immense experience in the direct-to-garment market, Kornit also offers a revolutionary approach to the roll-to-roll textile printing industry: Digitally printing with a single ink set onto multiple types of fabric with no additional finishing processes. Founded in 2003, Kornit Digital is a global company, headquartered in Israel with offices in the USA, Europe and Asia Pacific, and serves customers in more than 100 countries worldwide. Company description from Kornit.

The company description pretty much says it all. They have developed a process to print on fabric that is fast and cheap and the company is setting new highs as the demand for their product increases.

The company reported earnings of 16 cents on a 33.4% increase in revenue to $34 million. There was a secondary offering in January that raised $38 million for the company and was very oversubscribed.

The big spike in early January was news the company granted Amazon warrants to buy up to 2.9 million shares at $13. Since KRNT only has 31 million shares outstanding that is nearly a 10% position in the company. The warrants came after Amazon placed an order for a "large number" of textile production systems for Amazon's own use in the Merch by Amazon program.

Earnings May 16th.

Shares made a new high on March 31st and they closed within 10 cents of that high on Thursday. Shares have risen over the available option strikes so this will be a stock only position.

Buy KRNT shares, currently $19.00, initial stop loss $17.65.


No New Bearish Plays

In Play Updates and Reviews

Surprising Small Cap Strength

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes posted 1% gains and closed at the highs for the day. I was shocked when I began reviewing the charts. Big caps down, small caps up, this is real rotation because there are no windows to dress this week. The small cap charts suggests there may be an actually rally in our future. Unfortunately, the large cap charts are telling a different story.

The Dow and S&P closed well off their highs with lower highs and lower lows. The Dow was up 99 points intraday and fell back to only +15. The Nasdaq 100 big cap index barely posted a gain and the big cap tech stocks that have been leading the market higher were all negative for the day.

This poses a problem for chart readers. The small caps showing strength when the big caps are weak is normally bullish. However, if the big cap techs continue to weaken, they could lead the broader market lower. Friday will be interesting as we see what happens ahead of the weekend event risk.

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

ACOR - Acordia Therapeutics
The short stock position was entered at the open.

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BULLISH Play Updates

CPE - Callon Petroleum Company - Company Profile


No specific news. Minor gain in a weak market.

Original Trade Description: April 3rd.

Callon Petroleum Company, an independent oil and natural gas company, acquires, explores for, develops, and produces oil and natural gas properties in the Permian Basin in West Texas. As of December 31, 2016, its estimated net proved reserves totaled 91.6 million barrel of oil equivalent. The company was founded in 1950 and is headquartered in Natchez, Mississippi. Company description from FinViz.com.

This is a small oil producer with 66 years of experience. They reported Q4 earnings of 8 cents that missed estimates for 10 cents. Revenue of $69.1 million also missed estimates for $71.8 million. However, that is not the real picture.

Production for the full year increased 59% with 77% oil. Q4 production increased 11% with 76% oil. Reserves increased 69% to 91.6 million Boe with 78% oil. They replaced 311% of production with new wells and new discoveries. Their finding and developing costs are very low at $8.77 per barrel. They increased their Permian acreage by 41,000 acres through multiple acquisitions. They raised 2017 production guidance by 60% to 24,000 Boepd. Callon ended the quarter with $653 million in cash.

Earnings May 29th.

Shares hit a low of $11 on March 14th and began to rebound. That rebound has begun to accelerate over the last week with oil prices rising back over $50. With refiners restarting after the Feb/March maintenance cycle, oil inventories should begin to decline. That always lifts prices in the spring and summer months and rising oil prices lifts equities.

Position 4/4/17:

Long CPE shares @ $13.31, see portfolio graphic for stop loss.

Optional: Long May $14 call @ .55, see portfolio graphic for stop loss.

ECA - Encana Corporation - Company Profile


No specific news. Shares up at the open but faded with the market.

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.

HABT - Habit Restaurants - Company Profile


No specific news. Support has formed at $17.25. Habit is nearing resistance at $18. If we can get through that level, the next challenge would be $21 and then $24. The historic high in 2014 was $44.

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.

BEARISH Play Updates

ACOR - Acordia Therapeutics - Company Profile


No specific news. Analysts are saying the 20% cost reduction plan will not be enough and the company is going to have to cut a lot deeper to survive. Shares were flat. There was no rebound after five days of strong declines.

Original Trade Description: April 5th.

Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.

It has not been a good four days for Acordia. The company reported on Friday a U.S. District Court had ruled that four key patents for their primary drug Ampyra were invalid. This clears the way for Mylan, Teva and Roxane to immediately begin producing a generic version. Those companies have already applied to the FDA for permission. Seven other companies had sought to copy the drug but agreed to delay settlements with Acordia.

The problem for Acordia is that Ampyra produced 90% of the $519 million in Acordia revenues in 2016. With multiple generic competitors hitting the market very soon, that number will be significantly lower for 2017. Acordia said they were going to appeal the verdict but that is a long shot at best and those larger companies have more money to defend their case.

Acordia said on Wednesday they were cutting 20% of the workforce to save $21 million a year. Unfortunately, that will not be near enough to save the company. They ended 2016 with $153 million in cash and revenue guidance for $540 million in 2017. If that is cut in half they will be forced to raise money with a secondary offering. If they are smart they should already have it queued up and ready to go before the stock falls into single digits. Obviously, that will further depress the stock price but they have no other alternative.

Shares have fallen significantly over the last four days but the patent decision is the equivalent of a death sentence if they cannot raise money quickly.

Earnings are April 27th and the expectations for guidance could be ugly.

Position 4/6/17:

Short ACOR shares @ $17.05, see portfolio graphic for stop loss.

No options recommended because of price.

DEPO - Depomed Inc - Company Profile


No specific news. Very minor 7 cent rebound.

Original Trade Description: April 1st.

Depomed, Inc., a specialty pharmaceutical company, engages in the development, sale, and licensing of products for pain and other central nervous system conditions in the United States. It offers Gralise (gabapentin), an once-daily product for the management of postherpetic neuralgia; CAMBIA (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug indicated for acute treatment of migraine attacks in adults; Zipsor (diclofenac potassium) liquid filled capsule, a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain in adults; and Lazanda (fentanyl) nasal spray, an intranasal fentanyl drug used to manage breakthrough pain in adults. The company also provides NUCYNTA ER (tapentadol extended release tablets), a product for the management of pain severe enough to long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults; and NUCYNTA (tapentadol), a product for the management of moderate to severe acute pain in adults. In addition, it is involved in the clinical development of Cebranopadol for the treatment of chronic nociceptive and neuropathic pain. The company sells its products to wholesalers and retail pharmacies. It also has a portfolio of license agreements based on its proprietary Acuform gastroretentive drug delivery technology with Mallinckrodt Inc.; Ironwood Pharmaceuticals, Inc.; and Janssen Pharmaceuticals, Inc. Company description from FinViz.com.

The company is under attack by activist investor Starboard Value. Starboard wants to own the company for a potential M&A move at some point in the future. Last week, the company said they had reached an agreement with Starboard to replace the CEO and add two new Starboard nominated members to the board.

Normally when an activist investor gains control of a company it suggests the stock will go up. However, analysts at Cantor Fitzgerald say it is not currently a buy. They believe there will be continued weakness in the shares once investors realize it could be a long time before a merger/acquisition is accomplished.

CF said existing problems include "softness" in the opioid market and the potential attack on opioid drugs by the new administration. There needs to be a realignment in Depomed's sales force. They need to explore the exit opportunities in Opana. They also need to supply clarity relating to Depomed's debt refinancing.

CF said all those factors should continue to pressure the stock. Starboard will also have to create some additional value before they can market the company for a profit. The analyst thought this would take the better part of 2017.

Depomed guided for Q1 revenue of $95-$100 million and analysts were expecting $114.6 million.

Earnings May 23rd.

Shares broke support at $14.75 on the news of the agreement with Starboard. Shares are dropping like a rock on the Cantor Fitzgerald analysis.

Update 4/4/17: The company announced the prepayment of $100 million of its $475 million in secured debt. The loan facility matures in 2022 and Depomed is planning on refinancing the remaining $375 million later this year. Shares gained 25 cents on the news.

Position 4/3/17:

Short DEPO shares @ $12.52, see portfolio graphic for stop loss.

Optional: Long May $12 put @ 80 cents, see portfolio graphic for stop loss.

FSLR - First Solar - Company Profile


Very minor rebound of 4 cents from a multiyear low.

Original Trade Description: March 30th.

First Solar, Inc. provides solar energy solutions in the United States and internationally. It operates through two segments, Components and Systems. The Components segment designs, manufactures, and sells cadmium telluride solar modules that convert sunlight into electricity. This segment offers its products to solar power systems integrators and operators. The Systems segment provides turn-key photovoltaic solar power systems or solar solutions, such as project development; engineering, procurement, and construction; and operating and maintenance services to utilities, independent power producers, commercial and industrial companies, and other system owners. The company was formerly known as First Solar Holdings, Inc. and changed its name to First Solar, Inc. in 2006. Company description from FinViz.com.

First Solar shares have been under pressure for months. On March 20th they were removed from the S&P-500 and investors are still selling the shares.

They reported a Q4 loss of $6.92 per share compared to estimates for $1.00 in earnings. The earnings included a $729 million restructuring charge compared to only $4 million in Q3. If we back out the restructuring charges the company would have earned $1.24 and shown a sizeable beat. However, revenue declined from $480 million in Q3 to $208 million in Q4.

Earnings May 23rd.

First Solar is building quality projects but they are facing a stiff headwind. Tax incentives around the world are shrinking and it is becoming increasingly harder to make a profit. Whenever they get a big power generation facility completed they are forced to sell it to recover their money rather than sit back and let the long term profits roll in.

On Thursday, March 30th, they sold the 250-megawatt Moapa Southern Pauite Solar Project in Nevade to Capital Dynamics, a Swiss private equity firm. The facility supplies power to the Los Angles Dept of Water and Power. They did not disclose the terms of the sale and the stock tanked again. By not disclosing the terms, investors always fear the worst, that they were forced to sell at a big discount.

The stance taken by the new Trump administration on EPA restrictions on coal and gas fired electric generation plants will make power cheap again and these massive solar developments will find it harder to break even. Solar power generation is getting cheaper to build but it cannot compete with gas fired plants at $3 or coal fired plants that operate even cheaper.

Shares broke to a five-year low last week and today's decline is a lower low. The prior low back in 2012 was $11.50 and we could be headed to that level long term.

Position 3/31/17:

Short FSLR shares @ $27.50, see portfolio graphic for stop loss.

Optional: Long June $25 put @ $1.15, see portfolio graphic for stop loss.

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