Option Investor

Daily Newsletter, Sunday, 5/21/2017

Table of Contents

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

Market Wrap

Political Uncertainty

by Jim Brown

Click here to email Jim Brown

The Trump election caused a major market rally but the Trump presidency is causing significant political uncertainty.

Weekly Statistics

Friday Statistics

Another day, another potential disaster. President Trump was only an hour into his overseas flight when two different papers broke different stories that could have consequences. The New York Times said during the Trump meeting with the Russian ambassador in the oval office he trash talked Comey as "crazy" and a "nut job" saying the Russian investigation was a great pressure on him but he had fired the FBI director leading the investigation so the pressure would be removed. That comment seems to suggest that he fired Comey to impede the investigation and that would be obstruction of justice and also imply there might be something to the Russian collusion story. Press secretary spicer did not deny the comment but said the investigation was pulling focus from national security areas.

Secondly, the Washington Post reported that the FBI investigation had identified a senior White House adviser as a "significant person of interest." Prior persons of interest were written off by the administration as campaign associates and all past tense. The identification of a current "senior White House" adviser reduces the field significantly and would include family. If one of them were found to have colluded, it would be very bad for the president. Speculation late Saturday suggests it is Jared Kushner, Trump's son in law. Kushner was also responsible for negotiating the $109 billion arms deal with Saudi Arabia that President Trump signed this weekend.

Lastly, after but not related to the "nut job" comments, Comey agreed to testify publicly before the Senate Intelligence Committee after Memorial Day. You can bet that he will be asked all the hard questions about his meetings with the president and the answers could be damaging to the president. Comey has more credibility than the president. I would almost bet you Comey has agreed to testify against the will of his attorneys in order to set the record straight about their interactions. Since he was fired, he has been slandered almost every day by the administration. This is not going to be pretty even if Comey tries to remain professional. The senators are going to ask every hard question they can come up with over the next week. Recollection notes made by FBI officials have long been seen as credible evidence in trials.

For investors who thought President Trump's problems had been put on hold for several months until the special prosecutor finished the private investigation, they may be reconsidering it now. The press is not going to let this die and I am sure it was no coincidence all three stories broke one hour after his plane left for the overseas trip.

The market was in rally mode with the Dow at the highs of the day at 20,857 at 2:45 when the headlines began to appear. The Dow fell 55 points from that high to close at 20,802.

The dramatic decline in the dollar is further evidence investors are worried about the growing number of problems impacting the Trump presidency. The dollar soared after the election on expectations for tax reform, deregulation and better trade policies. If the president is under siege over the coming months, he will not be able to get anything passed. The democrats are already blocking all the major stuff and republicans are starting to peel away from the core support group. While Trump could remain in office, traders are starting to worry the agenda is dying.

Bank of America said more than $8 billion flowed into bonds for the week ended on Wednesday. Yields on the ten-year treasury fell to 2.19% on Thursday as the president's troubles deepened and the equity market was barely recovering from the Wednesday crash.

The market did not have any material economic reports on Friday to distract investors from planning their rebound purchases. Next week will be almost the same except for the FOMC minutes on Wednesday. The home sales reports will be of interest but both are expected to show declines. If there was an unexpected rise in sales that could be market positive.

The Richmond surveys on Tuesday are rarely market movers. The GDP on Friday is the first revision so it is not going to create any market excitement.

This is a holiday week even though the holiday is next Monday. This is the first official weekend of summer and traders will be leaving early for the week once the FOMC minutes are released. Volume will slow to a trickle.

Earnings are still taking center stage with some big movers on Friday. Deere (DE) reported blowout earnings of $2.49 compared to estimates for $1.68. Revenue of $8.29 billion easily beat estimates for $7.27 billion. The company said "We are seeing modestly higher overall demand for our products, with farm machinery sales in South America experiencing a strong recovery." After warning about a global recession for several quarters, the company said the worst of that recession may now be over. Deere said full year revenue should rise about 9%, up from the prior forecast of 4%. Net income is expected to be $2 billion, up from prior forecasts for $1.5 billion. Shares exploded higher on the earnings beat and raise.

Foot Locker's (FL) earnings stunk like a sweaty tennis shoe. The company reported earnings of $1.36 compared to estimates for $1.38 and less than the $1.39 posted in the year ago quarter. Revenue of $2.0 billion missed estimates for $2.02 billion. Same store sales rose only 0.5% and below estimates for 1.4%. The CEO said the weak results were due to late tax refunds in February. Gross margins also fell as the company struggled to unload excess inventory at discount prices. The CEO warned that Foot Locker may struggle to hit management's target of mid-single digit same store sales growth in 2017. Shares were hammered for a 17% loss.

Autodesk (ADSK) shares spiked $14 after the company reported a smaller than expected loss of 16 cents. Analysts were expecting a loss of 23 cents. Revenue of $486 million beat estimates for $470 million. They guided for a Q2 loss of 60-66 cents on revenue to $488-$500 million.

Shares rallied because the company is transitioning from a software sales model to software subscription model. Subscribers to the "new model" subscription plan rose 233,000 to end the quarter at 1.32 million. Maintenance plan subscriptions declined 47,000 to 1.97 million as customers moved to the new model. In total, they added 186,000 net subscribers to reach 3.29 million at the end of the quarter.

Whenever a company switches to a subscription model there is a couple years of declining revenue before the rising subscription base exceeds the prior metrics. Over the full year, they expect to add between 600,000 and 650,000 subscribers and begin generating positive net income for the first time in three years since they began the transition. Annualized recurring revenue (ARR) rose 103% to $692 million. Total ARR rose 18% to $1.74 billion. Deferred revenue rose 18% to $1.8 billion.

RBC Capital upgraded ADSK from sector perform to outperform with a $125 price target. Bank of America upgraded from underperform to neutral.

Campbell Soup (CPB) reported earnings of 59 cents that declined -4.8% and missed estimates for 64 cents. Revenue of $1.85 million missed estimates for $1.87 billion. The company revised guidance saying sales would fall up to 1% compared to prior guidance for a rise of up to 1%. Packaged foods companies have been struggling to adapt to the new healthier food demands of today's consumer. Campbell has created its own fresh-food unit in 2015 to sell various items and the unit is struggling. Sales equate to 14% of total volume and fell -6% in the quarter. "We have experienced significantly lower consumption across almost all our categories and felt it most acutely in February." Sales in the Americas fell by 2% with weak demand in V8 juices, condensed soups and broths. The company did raise earnings guidance for the year from $3.00-$3.09 to $3.04-$3.09. Shares fell -2% on the earnings.

Over 470 S&P 500 companies have reported earnings for Q1. Earnings have risen 15.2% over Q1-2016. For Q1, 75.2% of companies have beaten estimates. This is above the long-term average of 64% and the past four quarters of 71%. 62.8% have beaten revenue estimates and this is above the long-term average of 59% and the four-quarter average of 53%. For Q2 there have been 71 negative warnings and 33 positive preannouncements. There are 19 S&P-500 companies reporting this week and zero Dow components. The next Dow component is Nike in late June.

Hewlett Packard and Costco are the highlights for the coming week. Lowes and Best Buy would also be worth watching.

Lumber Liquidators (LL) rallied 11% after Oppenheimer upgraded the stock from perform to outperform with a $34 price target. This is the second upgrade this month with Wedbush upgrading from neutral to perform and a $27 price target. Shares closed Friday at $29 so that target has been hit. Both analysts said LL was succeeding in a post litigation recovery with an improved product lineup, procurement and improved store experience. The company now offers professional installation, which has proven to be very successful. Previously they just sold the flooring. With a strong housing sector there are more customers looking to upgrade their homes. The company still has not concluded the settlement on the bad Chinese flooring from a couple years ago but they took a charge for $15 million to cover any expected settlement.

Nvidia (NVDA) shook off the market crash and hit another intraday high on Friday after a Bernstein note. The analyst initiated coverage of Nvidia with an outperform saying the company has barely tapped into some massive growth markets. "Our analysis suggests their datacenter total addressable market (TAM) is likely somewhere between 'big' and 'huge,' driven by the mainstreaming of AI and the rise of accelerated computing; we forecast 63% annual growth through CY2019, reaching $3.6B in revenue." The analyst said Nvidia's multiyear head start in investing in artificial intelligence and deep learning puts the company well ahead of competitors in those two high-growth fields.

In addition, their automotive business is just getting started and could eventually be a multibillion-dollar business. Also, double-digit gaming growth should be sustainable in the long term. The analyst said even after their recent gains the stock remains reasonably valued compared to other high growth tech stocks and the market may not be fully appreciating Nvidia's long-term value. Currently the stock trades a 9 times sales and a PE of 40. Considering the explosive growth and technological lead on competitors that is probably conservative. Bernstein has a $165 price target.

UBS said Nvidia's new Volta chip has a 20% performance advantage over the yet to be released Vega chip from AMD and requires less power with better efficiency. They expect gross margin upside as sales of the Volta and Pascal chips increase. UBS has a $145 price target. Canaccord Genuity upgraded their price target to $155.

Boeing (BA) was the strongest performer on the Dow with President Trump headed to Saudi Arabia to discuss a closer relationship in combating ISIS and IRAN. They agreed on a new $100 billion arms sale agreement that could grow into $350 billion over the next ten years. There is already about $100 billion of arms sales in progress in multiple agreements. These agreements include missile defense systems, tanks, planes, helicopters, boats, radar systems, etc. Saudi Arabia is the archenemy of Iran and having a strong military capability along with a strong missile defense should keep Iran from becoming overly aggressive towards Saudi Arabia or any of their neighbors. BA, LMT, GD, ROK and HII were just some of the military contractors up on expectations for future deals.

Oil prices finally eased back over $50 on rumors OPEC could enact deeper and longer production cuts to end the inventory glut. Saudi Arabia and Russia have already announced an agreement to extend existing cuts through March 2018. Saudi's oil minister hinted there could be deeper cuts in the planning stages. OPEC meets on Thursday to discuss production and hopefully make an official announcement.

Some analysts claim OPEC cannot make deeper cuts because they are financially unable to take any less for their oil. I disagree. I am going to use Saudi Arabia as an example. In February, they exported 7.65 million bpd. At $45 a barrel that is worth $344 million a day. If they cut 250,000 bpd and everyone else did an equivalent amount and oil rose to $50, they would receive $370 million. That is more money for less oil. OPEC is totally in control of the price of oil. If they cut their production from the current 31.73 million bpd to 30.0 mbpd, they could push prices to $65 or even higher in the months ahead. It would not happen immediately but once inventories really began to decline, the prices would rise. They could easily lift prices to $75 if they wanted to. However, most OPEC nations are short sighted and they always cheat on the quotas so they cannot manipulate the price until they all stick together.

The recent production cut has had close to 100% compliance but that was only because Saudi Arabia, Kuwait and the UAE cut more than promised to make up for the other slackers. If they could reduce production more than the 1.8 million bpd that started in January and continue it into 2018 they could get back into control of prices.

Total crude inventories in OECD nations were 3.013 billion barrels as of May 1st. That is 276 million barrels over the five-year average range. That represents 64.8 days of supply. In a long term view, 64 days is nothing. Just think how quickly OPEC could be back in control with triple digit prices if they were willing to suffer some short-term pain for longer-term gain.

I think we could see some surprises out of the meeting this week.

Another reason oil prices rose on Friday was the Iranian elections. The current moderate president Hassan Rouhani was running against the hard line Ebrahin Raisi. If Raisi had won and adopted his hard line stance, Iran's oil output would have been at risk. Currently they are producing at full capacity and rapidly trying to increase that capacity. A hard line Iran would dramatically increase geopolitical tensions and risk of eventual outside military intervention. Rouhani won reelection by a decent margin. That could weigh on crude prices on Monday.

Active rigs surged higher with a gain of 16 land rigs with 8 oil rigs and 8 gas rigs. There was also a gain of 2 offshore rigs. If oil remains over $50 we could see these weekly numbers rise even higher.

Ironically, US production actually declined 9,000 bpd last week to 9.305 million bpd. That was the first decline in months but it is only temporary and likely caused by some minor pipeline outage in a gathering system.

The biotech sector has been very volatile with a series of 1% or greater advances and declines but remaining in a relatively narrow 200-point range for the last three months. On Friday, the index lost nearly 1% despite the rest of the indexes closing higher. There is a lot of indecision in the sector and the ASCO (American Society of Clinical Oncology) meeting starts on June 2nd. More than 5,000 abstracts have already been uploaded for that meeting. Typically, we see biotech stocks with a cancer focus, rise into this event.


If you just looked at the market stats graphic at the beginning of this commentary it looked like a boring week with only a minor decline. The Dow lost 92 points, Nasdaq 17 and S&P -9. Obviously, there was a big deal on Wednesday when the Dow lost nearly 400 points and the Nasdaq 158. While the recovery was lackluster on Thursday and choppy on Friday, traders did buy the dip. They did not rush in but approached it in a cautious manner on selected stocks.

Volume on Mon/Tue was 6.3 billion shares each. That spiked to 8.4 billion on Wednesday's crash and 8.1 billion on Thursday's battle to recover. Obviously, there were still a lot of sellers in the market on Thursday. Friday's volume shrank to 7.0 billion despite the slightly more bullish outcome. The conviction was still weak. The late day headlines scared traders back out of the market.

Watching the news shows on Saturday, the uproar appears to be fading. I am sure the Sunday shows will rekindle some worries but they should be offset by the positive news coming from Trump's visit to Saudi Arabia. Unless we get a new headline, the impact to the market on Monday should be minimal.

The S&P gained 16 points but closed 8 points off its intraday high. The prior support at 2,380 has returned as resistance over the last two days. Support is well below at 2,350.

The Dow benefitted from the arms deals in Saudi Arabia with Boeing leading the charge. Caterpillar benefitted from the positive earnings guidance from Deere. United Technology was also a defense related winner. Chevron was up because oil prices moved over $50 and Walmart reported earnings Thursday evening that powered it higher.

The Dow has failed to return to the prior support at 20,900 after bouncing off 20,600 on Thursday. The Dow finished 53 points below its intraday highs and remains the weakest index overall but it was the strongest on Friday. The support at 20,600 needs to hold or the damage to sentiment could be dramatic.

The Nasdaq was weaker than the Dow and S&P on Friday with only a 0.47% rise compares to the 0.68% rise on the Dow. The big cap techs faded sharply on Friday afternoon after decent rebounds from Wednesday's lows. I am not sure we are out of the woods yet because profit taking on the Nasdaq may not be over. Support is now 6,000 and resistance 6,160.

The small caps were very weak on Friday compared to the magnitude of their decline. The minor 6-point gain on the Russell was 7 points below its intraday high. If the markets are going to rally, the Russell is going to have to find some buyers. Continued weak performance will eventually drag the broader market lower.

While nobody can predict market action on Monday or the direction for next week, it would be very tough to bet against the market. Every dip is bought and there have been multiple reasons the market should have sold off over the last several weeks and with the exception of the Wednesday decline, it has held solid. This rebound has been lackluster and we are in the sell in May and go away period. However, 15% earnings growth is a strong stimulant for equities.

Unless the president develops a bad case of foot in mouth disease over the weekend, the market should shake off the Friday headlines and continue trying to regain its highs. However, another day of material declines could punish the dip buyers and poison sentiment. I would continue to buy the rebound as long as it remains intact. If we see the market begin to roll over again, I would move to the sidelines.

The MACD sell signal has been triggered on the sell in May and go away strategy. That could influence direction in the week ahead.

Random Thoughts

Amazing what a nearly 400-point drop in the Dow can do to market sentiment. The bullish contingent took a real hit with nearly a 9% drop. Those fleeing were equally divided between neutral and bearish. Since this survey ends on Wednesday, it has 4 days where the market was positive before the crash. The survey for this coming week will be interesting to see if investors rushed back into the bullish camp or remained on the fence.

Last week results

Last week the WannaCry ransomware attacks began. After several pauses, they are still going strong. At Option Investor, we have had more than 1,000 intrusion attempts by just the WannaCry worm in the last week. Fortunately, we have good firewalls and up to date software and none have succeeded. This is on servers that do not have email. These are indirect attacks. Once the malware imbeds itself on a system, it tries to spread by randomly attacking other IP addresses in the network. Having one system breached in a data center puts the thousands of other systems in that center at risk.

Cisco's Naveen Menon said last week that Cisco is tracking more than 20 billion cyber attacks a day. To put that in context there are only 3.3 billion Google searches a day. Naveen said a study by Cisco found that 2 out of every 5 companies that are attacked withdraw from implementing new mission critical technology and spend all their time building firewalls, protecting data and shrinking infrastructure to make it easier to manage. He said the financial impact from cyber attacks is incalculable but it is not from the actual losses but from the lost opportunity and the loss of technology development. He said without the security threat we could see 8 to 9 times the current technology growth rate.

Cyber security is going to be a key growth area forever. As long as the opportunity exists for unscrupulous people to use technology to steal from others or cause damage just for fun, the cyber security sector is going to benefit. The sector is currently fractured because of the thousands of ways to perpetrate an attack and the hundreds of ways to protect against those attacks. Every company has a different method. The various companies are going to be forced to consolidate in order for any one company to cover all the bases. SYMC, FEYE, PANW, CHKP, CSCO, PFPT, SCWX, TMICY and even IBM and Intel are all chipping away at the problem. The trick for us is to decide which companies will be acquired and which will be the acquirers.

There were 7,457 individually listed stocks in 1995. That number has fallen 42% to just over 4,000 today. There are currently more ETFs at 5,000+ than stocks and more than 26,000 mutual funds.

In 1984, an untitled piece of art by Hatian-American painter Jean-Michel Basquiat sold for $19,000. It is one of his pieces representing injustice for black men. The artist eventually went into a drug fueled death spiral with more and more critics talking down his work. He died on August 12th 1987 of a drug overdose. His unusual works began to rise in price as demand increased. David Bowie began collecting them and that stimulated others to pay attention whenever a Basquiat came up for sale. Last week a Japanese billionaire paid $110.5 million for the same painting. That is a great return for just over 30 years.


Enter passively and exit aggressively!

Jim Brown

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New Plays

Easy Way Out

by Jim Brown

Click here to email Jim Brown
Editor's Note

When faced with a complicated task many companies take the easy way out. That short cut sometimes ends up costing them a lot more in the long run.


TWLO - Twilio Inc - ETF Profile

Twilio Inc. provides cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces. The company also provides use case products, such as a two-factor authentication solution. Twilio Inc. was founded in 2008 and is headquartered San Francisco, California. Company description from FinViz.com.

Twilio has a messaging application that is built in to dozens of apps you probably use every day. When tech startups try to decide how to engineer a solution they normally find that imbedding Twilio messaging is much simpler in the beginning. The thought process is that once the company is running and profitable they will go back and build their own platform. For most businesses that never happens and they end up paying for Twilio forever.

When they reported earnings on May 3rd, they said revenue growth would slow because Uber was finally taking that step of engineering their own messaging platform and would be phasing out Twilio. When a company reaches the size of Uber they can afford to build their own interface. Only a few companies ever make the switch. Other major customers on their network with no plans to change are Nordstrom, Airbnb, Amazon, Facebook, WhatsApp to name a few.

Uber accounts for 12% of Twilio revenue so the exit is painful. Pacific Crest downgraded the stock saying they had underestimated the risk from Uber. JP Morgan reiterated its overweight rating and $36 price target saying Twilio would continue riding Amazon's coattails to success with Amazon Web Services. Their price target is $33.

Shares fell after Twilio guided for an adjusted loss of 10-11 cents on revenue of $86.5 million. Analysts were expecting 8 cents and $87.8 million.

Last week CEO Jeff Lawson bought 100,000 shares at an average price of $23.43 ($2.34 million). Board member Jim McGeever, VP of Oracle's Netsuite unit, bought 10,000 shares at $23.19. They do not appear to be worried about the business slowing.

Earnings August 1st.

Shares are ticking higher and closed at a three week high on Friday.

Buy TWLO shares, currently $25.16, initial stop loss $23.25.

Optional: Buy July $28 call, currently $.81, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Still Not Impressed

by Jim Brown

Click here to email Jim Brown

Editors Note:

The intraday rebound was respectful but the indexes rolled over in the afternoon to post only a lackluster gain. We should not question a decent gain but when the Russell gave back more points intraday than it gained at the close, that is really frustrating. There were some more headlines out of Washington that tanked the market late in the day.

The headlines brought back worries of weekend event risk and cautious traders moved to the sidelines. Just because President Trump is out of the country it does not mean he is immune to the headlines.

I am hoping this was just a dose of weekend caution and we can move higher next week but the internals are not giving me a lot of conviction.

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.

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Current Position Changes

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BULLISH Play Updates

BBRY - Blackberry - Company Profile


No specific news. New 52-week high.

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Update 5/15/17: Blackberry is actually profiting from the WannaCry malware. The company pivoted to a software security firm a couple years ago and they offer security for both mobile and enterprise applications.

Update 5/16/17: Blackberry is working with at least two automakers on security software that would monitor the car's operating system and warn the driver if the system has been hacked. This is going to be very important in the future as self-driving cars become more plentiful. The system is currently being tested by Aston Martin and Range Rover. The virus software would cost drivers $10 a month. Blackberry software is already running in millions of cars. Shares exploded higher.

Update 5/17/17: Blackberry announced new mobile software to allow crisis managers, police forces, fleet managers, etc, to always know where their personnel are located. The AtHoc Account is an authorized solution for Federal government FedRAMP applications. The software merges inputs from managers, call center operators, data streams from HR and travel systems as well as self reporting by individuals.

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.

HZNP - Horizon Pharma - Company Profile


No specific news. Minor decline with the biotech index down nearly 1%.

Original Trade Description: May 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Horizon reported earnings of 21 cents that missed estimates for 25 cents. Revenue of $220.9 million rose 8% but missed estimates for $253 million. They guided for full year revenue of $1.0 to $1.035 billion, down from $1.26 billion. Analysts were expecting $1.4 billion. Shares were crushed for a 39% drop from $15.50 to $9.50.

Earnings July 31st.

However, the company said the declines in earnings and revenue were due to a change in business practices and how they contract with pharmacy benefit managers. To combat this change the company is changing its cost and pricing structure to better match the new contract requirements.

Secondly, they said they were expsnding investments in the drug Krystexxa and they raised sales expectations from $250 million to $400 million for the full year. They also signed a deal to acquire River Vision and its Thyroid Eye Disease drug for $146 million and the acquisition will close immediately. They also received approval from a supplemental New Drug Application (NDA) for Ravicti, a drug for urea cycle disorders in children.

Horizon has a portfolio of orphan drugs with more on the way. The shares were hammered but they are already rebounding strongly on what some investors are seeing as a buying opportunity.

Position 5/16/17:

Long HZNP shares @ $10.75, see portfolio graphic for stop loss.

Optional: Long June $11 call @ 55 cents, see portfolio graphic for stop loss.

IWM - Russell 2000 ETF - ETF Profile


The Russell gain on Friday was only 6 points and it closed 8 points off the intraday high. The afternoon headlines from Washington killed the end of day momentum. I put a tight stop on the position in case the market rolls over.

Original Trade Description: May 17th.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. Description from iShares.com

The Russell 2000 has been moving sideways since early December and has tested both sides of its range multiple times. The spike to a new high at the end of April was sold when the cat fight started in Washington. Fund managers were concerned the tax reform package would be delayed.

Unfortunately, that happened and the political headlines turned deadly with the selling climax on Wednesday.

Now that a special prosecutor has been appointed many months will pass before there is any material news out of that office. For all practical purposes the press and the democrats have lost a rallying cry. Now they have to wait like the rest of us. The market should rebound.

However, there could be volatility on Thr/Fri as margin calls are covered and weekend event risk causes traders to take profits in a shaky market.

I am bringing back the IWM option trade we tried to put on in the middle of April but could not get an entry point. I am recommending we go long at the open on Thursday and hang on through the volatility.

Position 5/18/17:

Long IWM July $138 call @ $2.00, no initial stop loss until next week.

STM - STMicroelectronics - Company Profile


No specific news. Shares were up slightly again as the rebound in chip stocks continued.

Original Trade Description: May 6th.

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

Position 5/08/17: Long July $17.50 call @ 65 cents, no initial stop loss.

Position 5/18/17: Long STM shares @ $16.25, see portfolio graphic for stop loss.

Previously closed 5/17/17: Long STM shares @ $16.34, exit $16.25, -0.09 loss.

USO - US Oil Fund ETF - ETF Profile


Headlines suggest OPEC will agree next week to a production cut extension through March 2018.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Update 5/8/17: Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

Position 4/24/17:

Long Jun $10.50 call @ 40 cents, no stop loss.

WLL - Whiting Petroleum - Company Profile


No specific news. Nice rebound when oil moved over $50. Closed at a 7-week high.

Original Trade Description: May 1st.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Position 5/2/17:

Long WLL shares @ $8.55, see portfolio graphic for stop loss.
Optional: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.

WTW - Weight Watchers - Company Profile


No specific news. Monster $2.37 spike on absolutely no news. Somebody got caught seriously short.

Original Trade Description: May 13th.

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, activity, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges. In addition, it offers various digital subscription products, including Weight Watchers OnlinePlus and a weight management companion for Weight Watchers meeting members to digitally manage the day-to-day aspects of their weight management plan, as well as provides interactive and personalized resources that allow users to follow weight management plan. Further, the company provides Personal Coaching, an online subscription product that offers one-on-one telephonic, e-mail, and text support and personalized planning from a Weight Watchers-certified coach, as well as offers access to other online tools. Additionally it offers various products, including bars, snacks, cookbooks, food, and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators, and fitness kits, as well as third-party products, such as activity-tracking monitors. The company also licenses the Weight Watchers brand and other intellectual property in frozen foods, baked goods, and other consumer products, as well as endorses selected branded consumer products; and engages in publishing magazines, as well issues other publications, such as cookbooks, and food and restaurant guides with SmartPoints values. It offers products through its meeting and franchisee business, as well as online. Weight Watchers International, Inc. was founded in 1961. Company description from FinViz.com.

Weight Watchers posted a Q1 profit of 16 cents compared to estimates for a 4-cent loss. Revenue of $329.1 million rose 7.2% and beat estimates for $323 million.

Subscribers rose 16% to 3.6 million. Subscribers have now risen for 5 straight quarters. This is the first time since 2011 that they gained subscribers for a full year. The company raised guidance for the full year to $1.40-$1.50. Analysts were expecting $1.27. They said they were off to a strong start thanks to the Oprah Effect. The TV personality joined the brand late in 2016.

Earnings August 1st.

The stock has been a rocket since Oprah began pitching for the brand but it is showing no signs of fading. The post earnings spike to $25 saw some post earnings depression but shares are already moving back to that post earnings level. I believe female investors are betting on the Oprah Effect to continue driving profits. Even at this level the stock is not overly expensive with a PE of 17.

I am recommending it because it has refused to decline in a weak market. The risk is less with the option position.

Position 5/15/17:

Long WTW shares @ $24.48, see portfolio graphic for stop loss.
Optional: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

ERA - Era Group - Company Profile


No specific news. Minor 2 cent gain.

Original Trade Description: May 8th.

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Position 5/9/17:

Short ERA shares @ $10.69, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

VXX - Volatility Index Futures - ETF Description


The stronger market bounce erased more than 1$ from the VXX.

Original Trade Description: April 12th.

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

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

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

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

We know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.

CX - Cemex - Company Profile


Cemex said it was widening its distribution network in Southern California to meet increased demand. The company is adding a 14 acre terminal in Los Angeles.

Zacks pointed out that earnings growth for 2017 is expected to be 20.4% and 17.5% for the long-term prospects. Analysts have boosted 2017 estimates by 21.3% over just the last month.

We have a July call so we have plenty of time.

Original Trade Description: January 25th

CEMEX, S.A.B. de C.V. produces, markets, distributes, and sells cement, ready-mix concrete, aggregates, and other construction materials in Mexico and internationally. The company also offers various complementary construction products, including asphalt products; concrete blocks and roof tiles; architectural products; concrete pipes for storm and sanitary sewers applications; and other precast products comprising rail products, concrete floors, box culverts, bridges, drainage basins, barriers, and parking curbs. In addition, it provides building solutions for housing projects, pavement projects, and green building consultancy services; and information technology solutions and services. The company has operations in Mexico, the United States, Northern Europe, the Mediterranean, South America, the Caribbean, and Asia. Company description from FinViz.com.

Bernstein Research researched all the contractors that could supply materials for a border wall. In the Bernstein map below Cemex is represented by the red blocks. Building 1,000 miles of wall, which is what Trump has promised will take a lot of concrete.

Cemex is one of the world's largest suppliers of cement and readymix concrete. Analysts believe the wall will cost between $15 to $25 billion to build and concrete would be a major expense. Based on various comments about what Trump is asking for, analysts expect 7 feet deep and up to 40 ft high for 1,000 miles. That will take 7.1 million cubic meters of concrete worth $700 million. However, engineers believe it would be easier and cheaper to build precast panels like the wall in Israel and other places. That would allow the panels to be constructed close to Cemex locations and not have 1,000 concrete trucks rotating up and down the wall every day. The picture below is the Israeli wall made with concrete panels and it stretches 420 miles.

Regardless of how the wall is constructed, it will take a lot of concrete and Cemex is going to be a supplier. Cemex has a large presence in the U.S. so it is immune from the US First rule.

Update 2/2/17: The secretary of Homeland Security said they are planning to complete the border wall in less than two years. They plan on a crash construction project in the heavily traffic areas and then fill in the blanks over the next two years. That means once construction begins it could be in multiple locations at once and the velocity could be extreme in order to get most of it done before the 2018 elections.

Update 2/10/17: CX said sales rose 4% in Q4 to $3.2 billion. EBITDA rose 10% to $654 million and +15% for the full year to $2.7 billion. Free cash flow rose 91% to $1.7billion in 2016. Debt declined by $2.3billion. Asset sales reached $2 billion of which $1 billion will close in 2017. .

Update 3/17/17: Cemex did not bid on the border wall. The company said they felt it would be bad faith and they could face repercussions from their home company of Mexico even though they have multiple concrete plants on both side of the border. However, they did say if a contractor asked for prices for cement they would be obliged to provide those prices and supply the cement.

Cemex is reducing debt by as much as $4 billion through price hikes and asset sales. They expect revenue from the U.S. to rise by $550 million in 2017 without any impact from the wall. In their analyst meeting last week the tone was positive and they expect overall revenue to rise 4% to 6%. That would rise if any infrastructure spending programs were enacted.

Update 3/25/17: Mexico warned Mexican companies it would not be in their best interest to participate in building the border wall between the two countries. The government said it was not going to pass a sanctions law but consumers would know and they would likely boycott any company that participated.

Cemex has said they would not participate but did say they would provide raw materials if asked by the eventual bid winners. Competitor Grupo Cemantos has said they would participate in the project.

The U.S. government said they had received expressions of interest from 720 companies to build the wall or supply components and services.

Update 4/28/17: The company reported a ten-fold increase in quarterly profits aided by asset sales. Cemex earned $336 million in Q1 compared to the $35 million in the year ago quarter. They made $152 million on selling a concrete tube business in the U.S. and $98 million on selling part of a unit in the GCC. They have another $320 million in announced asset sales set to close. Revenue rose 6% on a constant currency basis and debt fell -3.7% to $12.16 billion. Shares are trying to push through resistance at $9.25.

Earnings May 2nd.

CX shares have already spiked in January once it became apparent the wall was actually going to happen. The stock broke out to a new high on Wednesday and probably has a long way to go.

Position 1/26/17:

Long July $11 call @ 52 cents. No initial stop loss.

Previously closed 2/6/17: Long CX shares @ $9.42, exit $9.05, -.37 loss.

ECA - Encana Corporation - Company Profile


No specific news. Shares up with oil 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.

Update 5/5/17: Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.

Position 3/14/17:

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

Previously closed 4/19/17: Long ECA shares @ $10.43, exit $11.15, +.72 gain.

ETSY - ETSY Inc - Company Profile


Shares spiked again last week to $13.31 after two private equity firms took large stakes. TPG Group revealed a 4.3% stake and Dragoneer Investment Group holds a 3.7% stake. In filings, both revealed they had asked ETSY to explore strategic alternatives including a sale. ETSY responded saying the company is reviewing "strategic and operational plans" while the board "will carefully consider all options to increase shareholder value."

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.

Update 4/22/17: On Friday the Australian Tax Office warned overseas sellers their websites would be blocked if they did not comply with the GST LVG tax laws in Australia. Ebay, Alibaba, Amazon, Etsy and others have complained they are not sellers. They merely match buyers and sellers for a commission. Ebay and Etsy do not collect the money so they cannot pay the tax. The tax only applies to vendors that sell $75,000 a year and therefore any forced collection could not be implemented until a vendor reached that level. It would be impossible to then go back and collect the tax from the vendor for the first $75,000 sold.

Shares were trading at an 8-week high on Thursday. Major sell off on Friday's news. The company said it would report earnings on May 2nd.

Update 5/5/17: Etsy reported a breakeven quarter for earnings that matched estimates. Revenue of $97 million missed estimates for $98.4 million. They also announced a new CEO to replace Chad Dickerson who will be leaving at the end of May. They announced layoffs for 8% of their workforce. Shares plunged on the earnings to a low of $9.90 but rallied on Thr/Fri back to $11.67 and a 10% move on Friday alone to close at a 2-month high.

Earnings May 2nd.

Position 3/16/17:

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

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

FNSR - Finisar Corp - Company Profile


No specific news. Shares were crushed by the market drop and the drop in the networking sector ahead of the Cisco earnings.

Original Trade Description: April 24th.

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.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Update 5/5/17: Nice gain on unusual option activity. More than 6,800 May $24 calls traded against an open interest of 2,800, which means they were bought at around 75 cents each. Another 2,000 May $25 calls were bought at 45 cents. That is a total of $600,000 in premium when the normal volume is only a couple hundred contracts. Somebody is betting big on a short fuse with only two weeks to go.

Position 4/25/17:

Long June $25 call @ $1.20, see portfolio graphic for stop loss.

Previously closed 5/17/17: Long FNSR shares @ $23.10, exit $23.95, +.85 gain.

HABT - Habit Restaurants - Company Profile


No specific news. New earnings in the retail sector caused another drop in HABT at the open that stopped us out of the stock position. The option position is still open and will move to the Lottery Play section.

Original Trade Description: May 10th.

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 revenue of $78.6 million that increased 17.4%. Earnings were 9 cents. Same store sales rose +0.9% despite the flooding in California in Q1. That is where they have the most stores. This was their 53rd quarter of consecutive same store sales growth. They opened 3 new stores in the quarter to total 165 company operated locations and 13 franchised locations.

They guided for the full year for revenue of $338-$342 million. Same store sales of 2%. They will open 31-33 company operated stores and 5-7 franchised stores.

The company had $49.5 million in cash and no debt other than $9 million in short term lease-financing costs for stores under construction.

Earnings August 2nd.

Habit dies not suffer from the same discounting problem afflicting other QSR chains. Habit has a solid repeat customer base and they keep this base faithful by offering new premium menu items on a limited time basis every few weeks. By introducing short term premium specials they attract customers back into the stores every time. That creates repeat business between the announcement of new menu items. By not continuing them on the menu, it keeps their inventory costs lower and causes people to rush in to get the next special because they know it is going away.

They implemented digital advertising program during the quarter and expanded their email mailing list from 278,000 to 538,000 using a promotion for a free Charburger. The redemption rate was 49%, which is unheard of in fast food retailing. The average amount spent when customers redeemed the special was $3.85, which consisted of additional high profit items like fries and drinks. In reality, the special had no material cost and doubled the size of their email list.

It appears HABT shares are about to break out to a new leg higher after the two week pause for earnings.

Position 5/11/17:

Closed 5/16/17: Long HABT shares @ $19.50, exit $18.75, -.75 loss.

Still open: Long Sept $21 call @ $1.15, see portfolio graphic for stop loss.

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