The markets diverged significantly as classic rotation upset the indexes. For whatever reason, and there were many, the tech sector saw massive selling while the banks, energy and small cap stocks saw strong gains. The volume of selling appeared to be computer driven with the algorithmic trading computers running amuck.
The Russell 2000 was up a whopping 18 points at the highs while the Nasdaq was down over 100 points. Late in the day pressures equalized and there was $700 million in buy on close orders on the NYSE.
The Russell was a giant surprise since the first deletion list for the index rebalance was released after the close. The expectation of that list should have weighed on the index.
The Premier Investor portfolio did not lose a single position today but the Option Investor portfolio lost half. This was an example of the extreme divergence between big cap techs and small cap techs.
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.
Lottery Ticket Plays - Updated only on Weekends
Current Position Changes
HABT - Habit Restaurants
The long option position was stopped out at $18.25.
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
No specific news. Minor decline. They announced the firm earnings date is going to be June 23rd.
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.
Update 6/1/17: Short seller Citron Research issued a buy recommendation on Blackberry saying their automotive software is a game changer for the company. With an installed base of 60 million, QNX already has four times the number of cars as Mobileye when Intel bought them for $15 billion. Citron thinks BlackBerry shares could double and they could be an acquisition target now that their focus has changed to software. Shares rallied 8% to a new 52-week high.
Update 6/6/17: Blackberry downplayed the shift by Toyota away from the company's QNX software in favor of an open source Linux version for driving the console functions in the 2018 Camry sedans. Blackberry said it was focusing more on the faster growing market for autonomous driving technology.
Earnings June 23rd (revised)
Long BBRY shares @ $9.34, see portfolio graphic for stop loss.
Optional: Long July $10 call @ 35 cents. No stop loss.
FLEX - Flex Ltd - Company Profile
No specific news. Only a 2 cent decline.
Original Trade Description: June 3rd.
Flex Ltd. provides design, engineering, manufacturing, and supply chain services and solutions to original equipment manufacturers worldwide. It offers innovation services, such as innovations labs for supporting customer design and product development services from early concept stages; collective innovation platform, an ecosystem of technology solutions; Lab IX, a startup accelerator program; centers of excellence solutions in critical areas; interconnect technology center for printed circuits; and CloudLabs that enables customers to accelerate a spectrum of cloud, converged infrastructure, and datacenter strategies. The company also provides design and engineering services, including contract design and joint development manufacturing services, which cover various technical competencies, such as system architecture, user interface and industrial design, mechanical engineering, technology, enclosure systems, thermal and tooling design, electronic system design, reliability and failure analysis, and component level development engineering; and systems assembly and manufacturing services. In addition, it provides component product solutions, including rigid and flexible printed circuit board fabrication, and power supplies; after-market supply chain logistics services; and reverse logistics and repair services, such as returns management, exchange programs, complex repair, asset recovery, recycling and e-waste management for consumer and midrange products, printers, smart phones, consumer medical devices, notebooks, PC's, set-top boxes, game consoles, and infrastructure products. The company was formerly known as Flextronics International Ltd. and changed its name to Flex Ltd. in September 2016. Flex Ltd. was founded in 1990 and is based in Singapore. Company description from FinViz.com.
FLEX surprised me. I have traded it numerous times over the last 20 years but it was named Flextronics. They were a manufacturer of circuit boards. If you look at their company description above they are doing far more than that today.
FLEX reported earnings of 29 cents that beat estimates for 28 cents. They posted revenue of $5.86 billion that beat estimates for $5.67 billion. They guided for the current quarter for revenue of $5.7 to $6.1 billion and earnings of 24 to 28 cents. Full year free cash flow was $660 million and cash flow from operations of $1.15 billion. They have expanded margins for 14 consecutive quarters. They repurchased $350 million in shares for the year ended in March. The company said it remained committed to return 50% of free cash flow to shareholders on an ongoing basis. They ended the quarter with $1.8 billion in cash and debt of $3.0 billion.
Earnings July 27th.
Their guidance for earnings was a little lighter than expected because they announced a capex spending project that would weigh on the quarter's earnings. The spending is to improve a process to further expand margins.
Shares are in a steady uptrend and making new highs almost daily.
Long FLEX shares @ $17.53, see portfolio graphic for stop loss.
Alternate position: Long July $18 call @ 49 cents, see portfolio graphic for stop loss.
KTOS - Kratos Defense - Company Profile
No specific news.
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. Shares gave back a week of gains.
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.
WTW - Weight Watchers - Company Profile
No specific news. Gave back the gains for the week.
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
CAR - Avis Budget Group - Company Profile
No specific news.
Original Trade Description: June 5th.
Avis Budget Group, Inc., together with its subsidiaries, provides car and truck rentals, car sharing, and ancillary services to businesses and consumers worldwide. The company operates through two segments, Americas and International. It operates the Avis brand car rental system with approximately 5,550 locations that supply rental cars to the premium commercial and leisure segments of the travel industry; the Budget brand vehicle rental system with approximately 4,050 car rental locations, which serve the value-conscious segments of the industry; and the Zipcar brand, a membership-based car sharing network that provides vehicles to approximately 1 million members. The company also operates the Payless brand, which comprises approximately 240 vehicle rental locations; the Apex brand primarily in the deep-value segment of the car rental industry with approximately 25 rental locations in New Zealand and Australia; and the Maggiore brand that provides vehicle rental services in the commercial, leisure, and insurance replacement/leasing segments with approximately 130 rental locations in Italy, as well as the France Cars brand, which offers light commercial vehicle fleets with approximately 60 rental locations in France. In addition, it is involved in the local and one-way truck rental businesses with a fleet of approximately 22,000 vehicles, which are rented through a network of approximately 1,000 dealers and 480 company-operated locations that serve the consumer and light commercial sectors in the continental United States. Further, it offers optional insurance products and coverages, such as supplemental liability, personal accident, personal effects protection, emergency sickness protection, automobile towing protection, and cargo insurance products. The company was formerly known as Cendant Corporation and changed its name to Avis Budget Group, Inc. in September 2006. Avis Budget Group, Inc. was founded in 1946. Company description from FinViz.com.
Avis has been in existence for more than 70 years. Who would have thought 70 years ago that you could someday pull a phone out of your pocket and have a Uber or Lyft at your location within minutes?
The rental car business is changing and within another 5 years, there may not be a driver in that car that picks you up. The business model for car rental companies is dying.
Adding to their woes are the falling prices for used cars and the changing mix of vehicles in the rental fleets. Hertz, Avis, Budget and Payless have been moving towards smaller and cheaper cars with better gas mileage but customers are demanding more SUVs to pack in all their family and luggage. This is also related to the Uber trend. Single travelers are more than likely to hail an Uber but families are more likely to rent a car. Because of this the mix of models in the fleets are suddenly all wrong. The companies do not want to invest in an SUV fleet since those models can cost more than twice as much as the smaller passenger cars. When you are buying cars by the thousands, this price difference is material.
In their recent earnings Avis reported a loss of 94 cents compared to estimates for a loss of 51 cents and a loss of only 28 cents in the year ago quarter. Revenues of $1.839 billion missed estimates for $1.854 billion and declined due to higher fleet costs and pricing pressures.
Earnings August 2nd.
Hertz reported a similar earnings disaster.
The sector is in decline and it is not likely to recover soon.
Shares closed at a multiyear low on Monday.
Short CAR shares @ $21.31, see portfolio graphic for stop loss.
Alternate position: Long July $20 put @ $1.18, see portfolio graphic for stop loss.
FOSL - Fossil Group - Company Profile
No specific news. Shares are holding at that 14-yr low.
Original Trade Description: May 25th.
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.
SNCR - Synchronos Technologies - Company Profile
No specific news. $12 is holding as support.
Original Trade Description: June 1st.
Synchronoss Technologies, Inc. provides cloud solutions and software-based activation for connected devices worldwide. The company's products and services include cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, and identity/access management that enable communications service providers, cable operators/multi-services operators, original equipment manufacturers with embedded connectivity, and multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices. It also provides Synchronoss Enterprise solutions, such as secure mobility management, data and analytics, and identity and access management solutions for the financial, telecommunications, healthcare, life sciences, and government sectors; and Synchronoss Personal Cloud platform that delivers an operator-branded experience for subscribers to backup, restore, synchronize, and share their personal content across smartphones, tablets, computers, and other connected devices. In addition, the company offers software as a service for the organizations to securely manage, control, track, search, exchange, and collaborate on sensitive information inside and outside the firewall. Its products and platforms are designed to enable multiple converged communication services to manage across a range of distribution channels, such as e-commerce, m-commerce, telesales, customer stores, indirect, and other retail outlets. The company markets and sells its services through direct sales force and strategic partners. Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey. Company description from FinViz.com.
SNCR was supposed to report earnings on May 9th. Instead, on April 27th they announced that the new CEO and CFO were leaving unexpectedly after only a few months on the job. The prior CEO and founder and the prior CFO would return to help get the company through some rough times.
The company also announced that expected revenue for Q1 would be $13-$14 million less than prior guidance. Operating margins of 8% to 10% would also be less than prior guidance. Earnings will be on May 9th and everything will be explained on the call.
On May 8th the company announced it was rescheduling the earnings date for May 15th.
On May 15th, they announced they would not be releasing earnings and they had no projected date. Apparently, the founder and CEO for 17 years along with his partner the prior CFO were having problems reconciling some items and the auditor Ernst & Young was "suggesting" additional reviews of critical accounting procedures.
This is just speculation but when a new CEO and CFO suddenly depart after only a few months, it may have been because they uncovered a hornets' nest of problems and determined they did not want to be associated with the company. We will never know if that is correct or not. However, when the prior CEO for 17 yrs and CFO for 13 yrs, cannot immediately reconcile the books after only being away for a few months, that suggests additional problems. These are the kinds of things that get auditors really interested and they start poking into things they glossed over before.
On May 22nd, the company received the warning of impending delisting by the Nasdaq. This is a boilerplate type event triggered by the failure to file and they have until November to correct the problem, but itis just one more thing on their plate.
Shares had already been falling since the weak earnings in January. They closed around $25 before the first announcement broke. They declined to $11 then rebounded to $19 on the hope that the prior CEO/CFO would quickly get the company back on track. Now the stock is back at 7 year lows and the bad news just keeps piling up.
If they had a projected earnings date, I would feel better about their recovery. We are now nearly a month late on the financials and no news is flowing. SNCR could be headed a lot lower because the eventual news could be bad. Rarely do earnings delays result in positive news.
This has to be a stock only play because the options are too expensive.
Short SNCR shares @ $12.64, see portfolio graphic for stop loss.
SYNT - Syntel Inc - Company Profile
No specific news.
Original Trade Description: June 7th.
Syntel, Inc. provides digital transformation, information technology (IT), and knowledge process outsourcing (KPO) services worldwide. The company operates through Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics, and Telecom segments. It offers managed services, including software applications development, maintenance, and digital modernization testing, as well as IT infrastructure, cloud, and migration services. The company also provides a range of consulting and implementation services built around enterprise architecture; data warehousing and business intelligence; enterprise application integration; and SMAC technologies, including social media, Web and mobile applications, big data, analytics, and Internet of things. In addition, it offers KPO services that provide outsourced solutions for knowledge and business processes; and business intelligence, enterprise resource planning, and business and technology consulting services. The company offers its products to various companies in the banking and financial services, healthcare and life sciences, insurance, manufacturing, retail, logistics and telecom, and other industries. Syntel, Inc. was founded in 1980 and is headquartered in Troy, Michigan. Company description from FinViz.com.
Syntel has been around for a long time but there is far more competition today than just a decade ago. Cloud sourcing has overtaken outsourcing. Companies do not need to maintain their own server farms and services like SalesForce.com and Automatic Data can handle all the service issues of running a business.
Syntel reported earnings of 46 cents and analysts were expecting 44 cents. Those estimates had dropped from 51 cents over the prior four weeks. Revenue of $225.9 million beat estimates for $225.1 million.
The company guided for the full year for earnings of $1.57 to $1.77. Analysts were expecting $2.32 but had revised their estimates lower over the prior 4 weeks to $1.90. Syntel still missed the lowered targets.
Estimated earnings July 20th.
Shares are sinking fast and are very close to a new 7-year low at $16.35. There is very little buying activity.
Short SYNT shares @ $16.65, see portfolio graphic for stop loss.
Alternate position: Long August $15 put @ .43, no stop loss.
VXX - Volatility Index Futures - ETF Description
The intraday spike evaporated when the Dow/S&P rebounded in the afternoon.
We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.
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.
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.
ECA - Encana Corporation - Company Profile
Encana agreed to sell its Piceance natural gas assets to Caerus Oil for $735 million. There are 3,100 operated wells that produce 240 million cubic feet of gas and 2,178 barrels of natural gas liquids every day.
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 compared 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 will be 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 July 27th.
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.
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
ETSY was holding its gains from the prior two weeks until Friday. This is a June option and I recommend closing the position at the open on Monday.
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.
Update 5/19/17: 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."
Earnings May 2nd.
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.
FRAC - Keane Group - Company Profile
No specific news. Shares rebounded on Friday back over prior support.
Original Trade Description: May 31st.
Keane Group, Inc. provides full-service completions that include hydraulic fracturing, wireline, coiled tubing, and nitrogen units. It also offers drilling and well construction services that include top hole air rig packages and cementing. The company was founded in 1973 and is based in Houston, Texas. Company description from FinViz.com.
Investors are fleeing energy stocks and analysts are talking about $40 oil. This is ridiculous. All the major players, EIA, IEA, OPEC, Wood MacKenzie, etc all believe global inventory levels are declining by 700,000 bpd thanks to the OPEC production cuts. There are challenges where production is increasing. Libya is ramping up production after years of dormancy because of the civil war. The U.S. is ramping up production we well. These facts are constantly quoted by the bears. What they do not tell you is that global demand is expected to increase between 1.2 and 1.4 million bpd in 2017. With the summer driving season now underway, that demand will begin to surge. Inventory levels in the U.S. have declined -19 million barrels over the last 7 weeks. Now that driving season is here they will begin to decline at a faster rate.
In order for U.S. production to increase there needs to be an increase in fracking capacity. Much of that capacity was cold stacked in 2016 after the oil crash. Today there is not enough capacity and prices are surging.
Keane Group is an oil field service company that just came public in January. The dual oil crashes in March and May, crushed the stock back from $23 to $12. When they reported earnings in early May they were reactivating fracking capacity at a frantic pace. They went from 15 operating fleets to 19 fleets over the last quarter and are still in the progress of reactivating the rest.
In late May they announced the acquisition of RockPile Energy, another oilfield service company and fracking operator. The acquisition will increase Keane's fleet of frackers by 26% and it will be one of the largest and most modern pressure pumping fleets in North America. They will have about 1.2 million hydraulic fracturing horsepower available.
The evolution of hydraulic fracturing in the U.S. over the last three years has been remarkable. The horizontal laterals on the wells are longer with most now in the range of 10,000 feet. The amount of sand and chemicals forced into the wells have increase by a factor of four or more, which means more horsepower, bigger sand capability and better technology. The frackers are going to be in high demand for years to come because producers have figured out how to produce oil and be profitable under $50.
Keane's shares have declined from the IPO price but over the last month they have been rising while all the other energy stocks have been declining. This is proof that frackers are in high demand and investors are understanding the production curve.
Expected earnings August 1st.
Weekly inventories are due out on Thursday morning. If there is another big decline the oil price meltdown could end as quickly as it began.
Because this is a new stock, the option spreads are wide and dangerous. If FRAC performs as expected, we will be ok. If not there could be a substantial penalty in stopping out of an option position. For that reason the alternative option position will not have a stop loss.
Alternate position: Long July $17.50 call @ 45 cents. No stop loss.
Previously closed 6/8/17: Long FRAC shares @ $15.34, exit $14.64, -.70 loss.
HABT - Habit Restaurants - Company Profile
Shares collapsed last week and stopped us out at $18.25.
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.
Alternate position: Long Sept $21 call @ $1.15, exit .25, -.90 loss
Closed 5/16/17: Long HABT shares @ $19.50, exit $18.75, -.75 loss.
TWLO - Twilio Inc - Company Profile
No specific news. Shares are moving sideways while we wait for buyers to appear.
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 July $28 call @ $.75, see portfolio graphic for stop loss.
Previously closed 5/31/17: Long TWLO shares @ $25.01, exit $23.85, -1.10 loss.
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.