The big cap indexes declined slightly but the Russell 2000 fell nearly 1%. The FAANG stocks are holding up the big cap side of the market but the small caps are running for cover. The Russell 2000 fell -11 points and I believe this is related to the Russell rebalance that begins on June 9th. That is when Russell will publish the list of the stocks to be removed from the index and those that will be taking their place. The hedge funds have already done their calculations and are shorting the stocks they believe will be removed.
The S&P-600 was also down but not as much as the Russell. This lends a little credibility to that idea. We should not apply to much importance to Tuesday's market action since volume was very low and many traders were still on an extended weekend vacation.
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.
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
KTOS - Kratos Defense
The long position was entered at the open.
If you are looking for a different type of trading strategy, try these newsletters:
Short term Calls and Puts on equities = Option Investor Newsletter
Credit spreads and naked puts = OptionWriter
Long term option investments = LEAPS Investor
3-6 month Option Trades = Ultimate Investor
Iron Condors = Couch Potato Trader
BULLISH Play Updates
BBRY - Blackberry - Company Profile
Blackberry was downgraded by Raymond James to market perform (neutral) from outperform (buy). The analyst raised the price target from $9 to $11.
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.
Update 5/22/17: BBRY is exploding higher. I am not going to raise the stop loss because I think they have turned the corner and we could be looking at $20 in the future. $11.25 is two-year resistance and it closed just over that level today. Three-year resistance is $16. The next step up from there is $30. BlackBerry has completely changed its business model and is no longer a phone company. People are finally catching on and I am sure there are plenty of shorts left to cover. Now that a monster move has begun there will probably be a lot of price chasers as well.
Update 5/24/17: BlackBerry currently has more than 60 million QNX operating systems installed in late model cars and expects to license another 36 million in 2017. With U.S. auto rates around 18 million a year, that shows how BlackBerry has infiltrated the overseas markets as well. Shares were down slightly after an article in Forbes suggested Microsoft and Apple could compete for this marketplace in the years ahead.
Update 5/27/17: Blackberry and Qualcomm reached a final agreement on the arbitration award on overpaid royalties. The final award will be $940 million and wil be paid to Blackberry on May 31st. Qualcomm will deduct some royalties due from 2016 and Q1-2017 but Blackberry will receive most of the money. That includes $125 million in interest and attorney's fees. Qualcomm had originally agreed to cap certain royalties under their original licensing deal years ago but then demanded Blackberry pay anyway. In this case Blackberry prevailed.
Earnings June 30th.
Long BBRY shares @ $9.34, see portfolio graphic for stop loss.
Optional: Long July $10 call @ 35 cents. No stop loss.
KTOS - Kratos Defense - ETF Profile
No specific news. Shares declined with the Russell sell off.
Original Trade Description: May 24th.
Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.
Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.
China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.
Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.
Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.
Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense depart spending.
I am not recommending a stock position given the sharp gains already.
Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.
STM - STMicroelectronics - Company Profile
No specific news. Minor gain and still holding over support.
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.
TWLO - Twilio Inc - ETF Profile
No specific news. Down with the small cap sector.
Original Trade Description: May 20th.
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.
Long TWLO shares @ $25.01, see portfolio graphic for stop loss.
Alternate: Long July $28 call @ $.75, see portfolio graphic for stop loss.
UCTT - Ultra Clean Holdings - ETF Profile
No specific news. Completely erased Friday's gain with the drop in small caps. Ultraclean will present at the Stifel Technology conference on June 6th at 10:55 PT.
Original Trade Description: May 22nd.
Ultra Clean Holdings, Inc. designs, develops, prototypes, engineers, manufactures, and tests production tools, modules, and subsystems for the semiconductor capital equipment and equipment industry segments primarily in North America, Asia, and Europe. It offers precision robotic systems that are used when accurate controlled motion is required; gas delivery systems, which include one or more gas lines consisting of small diameter internally polished stainless steel tubing products, filters, mass flow controllers, regulators, pressure transducers and valves, component heaters, and an integrated electronic and/or pneumatic control system; and various industrial and automation production equipment products. The company also provides subsystems, such as wafer cleaning sub-systems; chemical delivery modules that deliver gases and reactive chemicals in a liquid or gaseous form from a centralized subsystem to the reaction chamber; frame assemblies, which are support structures fabricated from steel tubing or folded sheet metal; and top-plate assemblies. In addition, it offers liquid delivery systems; process modules, which are the subsystems of semiconductor manufacturing tools that process integrated circuits onto wafers; and other high level assemblies. The company primarily serves original equipment manufacturing customers in the semiconductor capital equipment, consumer, medical, energy, industrial, flat panel, and research industries. Company description from FinViz.com.
The company reported earnings of 47 cents that beat estimates for 42 cents. Revenue of $204.6 million also beat estimates for $192.1 million. They guided higher for the current quarter to earnings of 49 to 55 cents and revenue of $210 to $220 million.
Earnings July 26th.
The company said it was seeing "extraordinary demand" and they were ramping up production to meet this demand.
Shares had been moving up steadily and I wanted to add them as a play multiple times but kept waiting for a pullback. That happened last week with a 10% decline and now they are surging again. Any further gain from Monday's close will be a new high.
Long UCTT shares @ $22.60, see portfolio graphic for stop loss.
Long July $25 call @ .59, see portfolio graphic for stop loss.
WTW - Weight Watchers - Company Profile
No specific news. Only a minor decline from the new closing high.
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.
Long WTW shares @ $24.48, see portfolio graphic for stop loss.
Alternate: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.
BEARISH Play Updates
ERA - Era Group - Company Profile
No specific news. Minor rebound from Thursday's big decline. Support is $7.25.
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?
Short ERA shares @ $10.69, see portfolio graphic for stop loss.
No options recommended because of wide spreads.
FOSL - Fossil Group - Company Profile
Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, MISFIT, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, CHAPS, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of December 31, 2016, it owned and operated 94 retail stores and 129 outlet stores located in the United States, as well as 230 retail stores and 132 outlet stores internationally. Company description from FinViz.com.
Fossil reported an adjusted loss of 35 cents compared to estimates for a loss of 21 cents. Revenue of $581.8 million missed estimates for $596.5 million. For Q2 they guided for a loss of 23 to 40 cents.
Analyst expectations for Q2 have declined from a loss of 6 cents to a loss of 25 cents and has declined three times in the last couple of weeks. For the full year analysts are now expecting earnings of 90 cents, down from $1.11 a month ago.
Earnings August 8th.
Fossil is struggling despite the decent revenue. Costs and marketing are too high and they are losing market share to the rapidly expanding number of brands.
Shares closed at an 8-year low on Thursday and under $11.30 would be a 14 year low. I believe Fossil is going to single digits with $6 the likely target.
Short FOSL shares @ $11.78, see portfolio graphic for stop loss.
Long July $11 put @ 55 cents, see portfolio graphic for stop loss.
VSI - Vitamin Shoppe - ETF Profile
No specific news. Only a minor rebound after Wednesday's historic low.
Original Trade Description: May 24th.
Vitamin Shoppe, Inc., through its subsidiaries, operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States and internationally. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 900 brands, such as own brands comprising Vitamin Shoppe, BodyTech, True Athlete, Mytrition, plnt, ProBioCare, Next Step, and Betancourt Nutrition; and national brands, including Optimum Nutrition, Cellucor, Garden of Life, Quest Nutrition, Solaray, Solgar, and Nature's Way. The company sells its products through Vitamin Shoppe and Super Supplements retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of December 31, 2016, it operated 775 company-operated retail stores; and 7 franchise stores in Panama, 5 franchise stores in Guatemala, 3 franchise stores in Costa Rica, and 2 franchise stores in Paraguay. Company description from FinViz.com.
Vitamin Shoppe reported earnings of 37 cents that missed estimates for 58 cents. Revenue of $316.9 million missed estimates for $326.7 million. Same store sales fell -6.3% while e-Commerce sales fell -9.1%. The stock fell 32% on the news.
Bad earnings happen all the time to many companies. However, they normally try to be upbeat about the future. That was not the case at VSI. The company warned that weak traffic and sales would continue because of changes to their loyalty program and intensifying promotional environment in the Sports nutrition category.
The best thing they could say was that they could continue their cost reduction initiatives. They
Guided for the full year for sales to decline in mid single-digits and earnings of $1.50-$1.75. They guided for the quarter to earnings of 32-42 cents. Analysts were expecting $1.76 and 42 cents. The odds are good VSI will come in at the low end of their guidance and that is weighing on the stock.
Earnings August 9th.
They have another problem because only 7 stockholders own 50% of the stock. If one of those stockholders decides to stop the bleeding and cut their losses, there is not enough daily volume to sustain a major exit. That could push shares significantly lower.
Shares are approaching $10 and are already at a historic low. The outlook is grim and once that $10 level is broken we could see a sharp decline as funds race to exit before the $5 level where most funds can no longer hold the shares.
Short VSI shares @ $11.55, see portfolio graphic for stop loss.
Long Aug $10 put @ 49 cents, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
Minor decline despite the market drop and a new historic closing low. Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.
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.
Short the VXX @ $17.98, no stop loss because it always declines eventually.
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.