The Russell 2000 index closed only 1 point below a new high. It was a minor gain of 1.3 points but still a gain. The entire market was choppy today with the major indexes trading in and out of negative territory on low volume. It was definitely not awe inspiring and the lack of conviction was clear.
The Russell was up on the strength in the financials ahead of the earnings from the big banks on Friday. There is a real potential for a sell the news event because expectations are high.
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
FRGI - Fiesta Restaurant Group
The short position was entered at the open.
SHLD - Sears Holdings
The short position was stopped at $7.95.
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BULLISH Play Updates
ACOR - Acordia Therapeutics - Company Profile
No specific news. Excellent rebound to recover its two days of losses.
Original Trade Description: June 21st.
Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.
Acordia took a fall at the end of March when two Multiple Sclerosis patents were invalidated by a court. This is normal stuff and happens all the time to biotech companies when competitors want to introduce a generic. Shares crashed but the outlook for Acordia did not.
They fell another 5% in late April when revenue of $112 million missed estimates for $121 million. The company did reaffirm guidance for ful lyear Ampyra sales in the range of $525-$545 million.
Recently, their experimental Parkinsons drug CVT-301 was named Inbrija. In early June they presented Phase III data which met its primary endpoint of improvement in motor function compared to a placebo. Multiple secondary endpoints were also met. The company plans to file a new drug application with the FDA by the end of this quarter.
Expected earnings July 27th.
Shares have been rebounding sharply and cleared resistance from the April/May decline. They have a long way to go to recover their highs and that is a potential for profit.
Long ACOR shares @ $18.80, see portfolio graphic for stop loss.
KTOS - Kratos Defense - Company Profile
Kratos annlunced the acceptance of an advanced space radio monitoring system by the Sultanate of Oman. The project began in 2014 and includes 10 years of long-term support services. Shares closed at a new high.
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.
Update 6/13/17: Kratos said it was going to unveil its newest high performance class of military unmanned aerial system technology at the Paris Air Show next week. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.
Update 6/27/17: KTOS received $16 million in radar and system contract awards from a national security systems provider. Due to the classified nature of the program, on additional information was given.
Update 6/28/17: KTOS announced the award of a $37 million initial production contract for subsonic target drones from the U.S. Navy. This is the initial annual order in a long term acquisition program so this represents a major win for KTOS. The company said the anticipated annual order for 2018 was expected to be 25% larger. The aircraft can carry electronic counter measures, active and passive radar augmentation, infrared, identification friend of foe, internal chaff and flare dispensing, threat emitter simulators, smoke and scoring devices. In addition, separate contracts for Peculiar Support Equipment, Initial Systems Spares, External Payload Systems and Flight Consumables will follow shortly.
Update 7/11/17: Kratos was awarded a contract from the U.S. Government to help define the next generation ground architecture for wideband communications for the Dept of Defense. The project is to come up with solutions to maintain satellite contact in a wartime environment. No dollar amount was given.
Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.
BEARISH Play Updates
CARA - Cara Therapeutics - Company Profile
No specific news but a decent rebound. This is two days of gains. I am lowering the stop loss again after their drug news on Wednesday.
Original Trade Description: July 8th.
Cara Therapeutics, Inc., a clinical-stage biopharmaceutical company, focuses on developing and commercializing chemical entities designed to alleviate pain and pruritus by selectively targeting kappa opioid receptors in the United States. It is developing product candidates that target the body's peripheral nervous system. The company's lead product candidate comprises I.V. CR845, which is in Phase III clinical trials for the treatment of patients with acute postoperative pain in adult patients, as well as in Phase II/III clinical trial for the treatment of uremic pruritus disease. It is also developing Oral CR845 that is in Phase IIb clinical trial to treat moderate-to-severe acute and chronic pain, as well as in Phase I clinical trial to treat uremic pruritus; and CR701, which is in preclinical trial for the treatment of neuropathic and inflammatory pain. The company has license agreements with Maruishi Pharmaceutical Co., Ltd to develop, manufacture, and commercialize drug products containing CR845 for acute pain and uremic pruritus in Japan; and Chong Kun Dang Pharmaceutical Corporation to develop, manufacture, and commercialize drug products containing CR845 in South Korea. Company description from FinViz.com.
Cara had two drugs in the pipeline. CR701 is a cannabis derivative for pain management that is not an opiod. It would seem to be a promising drug but the company is not pushing it towards acceptance.
Their hot new drug CR845 is a kappa-opioid receptor that is being studied for severe itching caused by chronic kidney disease and for various types of pain.
Last week they reported results for a phase 2b study on CR845 that were not statistically significant. The three levels of medication included 1.0 mg, 2.5 mg and 5.0 mg. The 1.0 and 2.5 failed to show any results. The 5.0 mg showed only a minute improvement in pain that could have been related to the placebo effect or simply random chance. The trial was a failure.
CARA had run up significantly on the hopes for the drug. Shares imploded over five days to give back half their value. I would not normally recommend a position with such a large decline but the six day rally before the results was roughly $9 so an $11 drop just erased that last bit of irrational exuberance. With CR845 in limbo until new trials and new uses can be developed and CR701 apparently on hold for some unknown reason, the company suddenly has no appeal for investors. If light support at $13.40 fails we could see $8.50 very quickly. Investors are suddenly fleeing this sinking ship.
Update 7/12/17: Cara spiked at the open on positive results on an early-stage trial of a treatment for chronic kidney disease-associated pruritus or CKD-aP. The company is expecting to begin a later stage test before the end of the year.
Expected earnings August 3rd.
Short CARA shares @ $13.50, see portfolio graphic for stop loss.
Alternate position: Long Aug $12.50 put @ 1.05, see portfolio graphic for stop loss.
FRGI - Fiesta Restaurant Group - Company Profile
No specific news. Shares closed at a new 4-year low.
Original Trade Description: July 12th.
Fiesta Restaurant Group, Inc., through its subsidiaries, owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana brand names. The company's Pollo Tropical restaurants offer various Caribbean inspired food, and Taco Cabana restaurants offer a selection of Mexican food. As of January 1, 2017, it had 177 company-owned Pollo Tropical restaurants, 166 company-owned Taco Cabana restaurants, and 29 franchised Pollo Tropical restaurants in the United States, Puerto Rico, Panama, Trinidad & Tobago, Guatemala, the Bahamas, Venezuela, and Guyana, as well as 5 franchised Taco Cabana restaurants located in New Mexico, 2 non-traditional Taco Cabana licensed locations on college campuses in Texas, and 1 location in a hospital in Florida. Company description from FinViz.com.
Expected earnings August 7th.
On May 8th, Fiesta reported earnings of 25 cents compared to estimates for 30 cents. Revenue of $175.6 million missed estimates for $178.2 million. Same store sales declined -6.7% at Pollo Tropical and transactions declined -8.9%. Sales at Taco Cabana decreased 4.5% and sales transactions fell -4.0%. The company closed 30 stores that were losing money.
The company is under attack by JCP Investment Management, which has a 3% stake. JCP had lobied for changes to be voted at the June shareholder meeting. The company and JCP have been trading hostile press releases. The shareholder meeting went in favor of Fiesta but JCP is not giving up. Shares began to decline further when JCP did not gain control of the board.
Shares closed at a 4-year low on Wednesday at $18.80 and the IPO price in 2012 was $11. Shares had traded as high as $69. With the chain closing stores at a rapid pace, their long term future is in doubt.
Short FRGI shares @ $18.75, see portfolio graphic for stop loss.
Alternate position: Long September $17.50 put @ $1.05, see portfolio graphic for stop loss.
FTR - Frontier Communications - Company Profile
No specific news. Shares rebounded 50 cents on no news.
Original Trade Description: July 10th.
Frontier Communications Corporation provides communications services to residential, business, and wholesale customers in the United States. It offers broadband, video, voice, and other services and products through a combination of fiber and copper based networks to residential customers. The company also provides broadband, Ethernet, traditional circuit-based, data and optical transport, and voice services, as well as Multiprotocol Label Switching and Time Division Multiplexing services to small business, medium business, and larger enterprises, as well as sells customer premise equipment. In addition, it offers 24/7 technical support; wireless broadband services in selected markets; and frontier secure suite of products, including computer security, cloud backup and sharing, identity protection, and equipment insurance. Further, the company provides satellite TV video services; voice services, including data-based VoIP, and long distance and voice messaging services; and a package of communications services. Additionally, it offers a range of access services that allow other carriers to use facilities to originate and terminate their local and long distance voice traffic. As of December 31, 2016, it served approximately 5.4 million customers and 4.3 million broadband subscribers in 29 states. The company was formerly known as Citizens Communications Company and changed its name to Frontier Communications Corporation in July 2008. Frontier Communications Corporation was founded in 1927. Company description from FinViz.com.
Earnings August 1st.
When a company's stock enters the terminal decline mode and reaches penny stock status, many will do a reverse split to avoid being delisted. The hope is that lifting the stock from $1 to $15 will entice funds to come back to your shares. Many funds are prohibited from holding stocks under $5 so they would have left the stock when that $5 level was broken. The problem with this strategy is that the stock is normally in a terminal decline and just bumping up the stock price does nothing to change the fundamentals.
Also, when a declining stock suddenly jumps back to $15 as is the case with Frontier, that encourages the shorting community to double down at the higher prices. Shorts that rode it down the first time, see the news and jump back in for another ride. FTR shares closed at $1.06 on Friday.
You cannot use options this soon after a reverse split. The premiums are crazy. After several days they will mellow and I will look at adding them to the recommendation.
Short FTR shares @ $14.68, see portfolio graphic for stop loss.
SHLD - Sears Holdings - Company Profile
No specific news. Target's guidance upgrade lifted the entire retail sector and Sears spikes 7% on short covering. We were stopped out for a minor gain.
Original Trade Description: July 5th.
Sears Holdings Corporation operates as an integrated retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Craftsman, and Joe Boxer labels; Sears brand products, such as Kenmore and DieHard; and Kenmore-branded products. As of January 28, 2017, this segment operated approximately 735 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers merchandise, and parts and services to commercial customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; home improvement services, such as siding, windows, cabinet refacing, kitchen remodeling, roofing, carpet and upholstery cleaning, air duct cleaning, and garage door installation and repair; and protection agreements and product installation services. This segment provides merchandise under the Kenmore, DieHard, Bongo, Covington, Canyon River Blues, Simply Styled, Everlast, Metaphor, Roebuck & Co., Outdoor Life, and Structure brands, as well as under the Roadhandler, Levi's, Craftsman, and WallyHome brands. As of January 28, 2017, this segment operated 670 full-line stores and 25 specialty stores. Company description from FinViz.com.
Hardly a week goes by that some aspiring writer/researcher does not post a scathing article on the retail prospects of Sears and/or Kmart after a surprise visit to an actual location. The outlook for Sears to survive as a retailer is very dim. Sears Canada just filed bankruptcy and that should be a clue for the outlook in the U.S. as well. With a cash burn rate of as much as $2 billion a year, it is only a matter of time.
Expected earnings August 24th.
In the last week of June, the stock rose as board member Bruce Berkowitz began trying to pump up the shares by proclaiming Sears was worth $90 to $100 a share just because of their real estate. They do have a lot of real estate but they are mall anchors and the malls are dying. They have already spun off a large portion of their holdings to Seritage Growth Properties (SRG). Those were the locations without debt. They have recently done some sale leaseback transactions to raise cash but now they have to pay lease rentals and that increases their cash burn.
Most analysts do not believe the Berkowitz story and assume he is trying to rescue a drowning stock price, which is one of his largest holdings.
Shares rebounded from $6.20 to $9.20 on the Berkowitz claims. Short sellers ran for cover. Now that the stock has returned to resistance, the rebound should be over and reality will return.
I am writing this as a stock short. The options are expensive. The August $8 put is $1.30. I am not recommending it.
Update 7/7/17: CEO Eddie Lampert announced on Friday they were closing 43 additional stores. That would be 8 Sears stores and 35 Kmart stores. He said Sears is still working to cut costs while trying to respond to the needs of a changing consumer. He also warned of reduced support from some vendors. That would mean they are not giving Sears credit terms on purchases.
Well after the close on Friday, the company announced a new "Line of Credit Facility" for $500 million with a maturity of not more than 179 days. The facility will be secured by a second lien on inventory, receivables and related assets. The announcement of the loan facility said Lampert's ESL Investments was considering participating in the loan but was under no obligation to do so. This is known as a tease to incentivize lenders.
The company also said it sold and closed on more than $200 million in real estate transactions and reduced the balance of the April 2016 $500 million real estate loan to $347 million. The announcements were made at 5:30 after the extended hours session ended so there was no stock movement.
Closed 7/13/17: Short SHLD shares @ $8.60, exit $7.95, +.65 gain.
VXX - Volatility Index Futures - ETF Description
New closing low despite the lackluster market gains.
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.
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.
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