Option Investor

Daily Newsletter, Monday, 8/14/2017

Table of Contents

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

Market Wrap

Buying The Dip

by Thomas Hughes

Click here to email Thomas Hughes


Monday morning traders buy the dip as geopolitical tensions ease and Japanese GDP grows faster than expected. On the Korean Front Secretary of State Rex Tillerson and Secretary of Defense James Mattis have indicated the US is still pursuing diplomatic solutions, on the economic front Japanese GDP came in at an annualized 4.5% and above the 1.5% forecast by economists. The move looks good, now let's see if there will be any follow through.

Market Statistics

International indices were mostly higher although Japan oddly enough fell by -1%. The fall is likely due to market reopening after a holiday week last week. Chinese index rose by a full percent despite weaker than expected factory output, up 6.4%, fixed asset investment, up 8.3%, and retail sales, up 10.2%. European indices rose by roughly 1% on the news. There was little in the way of headlines out of the region this morning but that will change beginning tomorrow. The EU economic calendar is full this week including EU and German GDP and inflation data.

Futures trading was positive all morning, lifted by easing fear of war with North Korea. The SPX was indicted to open with a gain near 0.5% and that held into the open. The open was a bit hectic, the indices opened with significant gains and immediately began moving higher. The SPX hit intraday high just after 11AM, just over 1.00%, and commenced sideways trading from there. At 1:15 the indices were still trading in a very tight range near the early high and beginning to look as if they may decline. Decline never happened, the mid day range persisted into the close leaving the indices near the highs of the day.

Economic Calendar

The Economy

There was no economic data today and not a lot this week but what there is is fairly substantial. Topping the list is the Wednesday release of FOMC Minutes but also included is housing starts/building permits, Leading Indicators and several reads on regional manufacturing/business activity.

Moody's Survey of Business Confidence gained 1.6% in the last week. The index is now sitting at a 1 month high of 32.0%. Mr. Zandi says the survey reveals that global business is still upbeat and growing at a pace above potential. He makes note that only about 10% of responses are negative while 40% are positive. The one caveat is that sentiment remains well below the all time highs set in 2015.

With a little more than 91% of the S&P having reported for the 2nd quarter earnings growth stands at 10.2%. After last quarter this is the 2nd highest rate of quarterly growth since Q4 2011. The blended rate rose by a tenth in the last week and may rise a bit more over the next two. Of those reporting 73% have beaten earnings estimates while 69% have beaten revenue estimates, both figures above average. This week we can expect reports from 18 S&P 500 companies and 3 Dow components.

Despite this quarters strength in earnings growth forward outlook continues to erode bringing the full year blended rate down to 9.4% from last week's high 10.1%. This is not the lowest level it has been but it is close. On a quarter to quarter basis 3rd quarter growth estimates shrank to 5.2% from 5.6% while 4th quarter estimates fell to 11.2% from 11.4%. Full year 2018 estimates stand pat at 11.10%.

The Dollar Index

The Dollar Index held steady in today's session, posting a marginal gain of 0.03%. The index created a small doji candle just above potential support and may be setting up for a bounce higher. The indicators are pointing lower in the near term but divergence with the recent low suggest support levels are near.

This week may prove pivotal for the index and the EUR/USD. Between the EU data and the FOMC minutes chances for the euro and/or the dollar to strengthen/weaken are very great, a move in one could undermine moves in another. A bounce from the current level would be bullish but face resistance near $94. First target for support is at the current low near $93.60.

The Gold Index

Gold prices fell back from last week's high on reduced safe haven inflows but the fall was not great. Spot gold fell a little more than a half percent intraday to trade near $1285. Prices are underpinned by dollar weakness and low expectations for interest rate hikes over the next 9 months. This may change with the minutes, or with EU data, and should the dollar fall below current support levels gold is likely to rise back test resistance again. A further drop could find support near $1,280 or $1,270, resistance is just above $1,290.

The Gold Miners ETF GDX continues to trade within near and short term trading ranges and below the down sloping resistance line. Today's candle helps confirms resistance at the trend line but also support at the short term moving average. The indicators are bullish and suggesting some strength as prices are pushed higher by the short term moving average. A move up and above the down sloping resistance line would be bullish with upside targets near $24 and $25.

The Oil Index

Oil prices fell more than -2.5% in today's action as US production and global demand woes persist. The China data for one was taken as a sign of tepid demand growth although I will point out again that while it missed expectations all data points showed respectable increases. Regardless, WTI shed $1.25 to trade near $47.50 and looks like is heading lower to test for support levels. $47.50 is a possible level of support but $45 looks more likely.

The Oil Index fell through the 1,120 support level and looks like it is heading down to test for stronger support. Today's move is driven by the near term decline in oil prices and likely to find support near the recent low in the range of 1,080 to 1,100. Without news to support it oil prices are likely to continue falling in the near term. Longer term I remain bullish due to forward earnings growth outlook, the next test to long term and/or strong support is the next opportunity for the index to confirm that outlook with a bottom.

In The News, Story Stocks and Earnings

This week will be another big one for earnings, this time it will be the retail sector in the spotlight. If last week's results are any indication I think we can expect to see declining revenue and declining earnings for many in the sector, especially if they don't have adequate web presence. The stand outs are Wal Mart, Home Depot and Target all due out later in the week. The XRT Retail Sector SPDR gained in today's session but sellers dominated action. The ETF opened with a small gain and then sold off throughout the day created a red bodied candle moving lower from resistance. The indicators are bearish and pointing lower with a downside target near $38.75 in the near term.

Sysco, the nations largest purveyor to restaurants of all variety, announced earnings this morning and delivered lukewarm results. The company beat on the top and bottom lines with revenue growth of 5.5% YOY but internals left a lot to be desired. The US portion of business, which is more than 75% of revenue, declined more than 3% YOY despite a rise in comp sales. Offsetting US weakness was an 80.5% increase in International sales, about 25% of business, but not enough to inspire bullish behavior. Shares of the stock opened with a gain near 0.5% to sell off and close with a loss near -0.5% after testing lows near -1.5%.

The VIX fell more than -20% today as fear leaves the market. The SPX swift rise coupled with risk-off sentiment helped the fear index shed 3 handles to trade just above 12.50. The indicators remain bullish but show signs of topping and downward movement in the near term. Down side target is near 11.50 and the long term moving average with a chance of moving lower. The risk is that North Korea will flare up again and drive fear back up to test resistance.

The Indices

The indices were indicated to rise and rise they did. Today's move was led by the Dow Jones Transportation Average which gained more than 1.60% by the close. The index created a medium sized green candle moving up from the long term moving average, confirming support and trend along the way. The move closed above resistance at 9,300 and looks like it will continue higher in the near term. The indicators confirm this move with a strong trend following buy signal that could lead the index higher over the next several months. First upside target is resistance at 9,500, after that is the current all time high.

The NASDAQ Composite posted the 2nd largest gain at just over 1.30%. Today's candle is a small green one formed with a 0.5% gap up so basically a medium sized candle. It is moving up from the short term moving average confirming support and trend. The indicators are rolling over into what could be a trend following buy signal but has not yet confirmed; stochastic is making a weak crossover but MACD remains bearish. A move up would face resistance at the current all time high.

The S&P 500 comes in 3rd today with a gain just shy of 1%. Today's candle is medium and green, moving up to, crossing and closing above the short term moving average. The move is bullish and confirms trend although the indicators remain weak. MACD at least is peaking in confirmation of the bounce, stochastic is still moving lower suggesting the bounce may not be all that strong. Regardless, the move is trend following with target at the current all time high. Should the index resume the near term down slide support target is just above 2,400.

The Dow Jones Industrials closed with the smallest gains but gains it made, 0.61%. The blue chips created a small bodied green candle moving up from Friday's close and near term support above the short term moving average. Today's move is bullish and trend following but the indicators do not confirm. Both MACD and stochastic are pointing lower suggesting today's move is not all that it appears to be. A move up may find resistance at the all time high, a move lower may find support at the short term moving average.

Today's action was bullish, trend following and obvious dip buying. The caveat is that the North Korea situation is still there, we're approaching the end of the earnings season and next quarters growth outlook is tepid compared with this quarters final result. Additionally, this week is earnings from the retail sector and the expectations aren't that great not to mention all the data coming out of the EU. It's also OPEX which could, especially in light of last week's sell off, add additional volatility. I remain bullish in the long term, economic and earnings fundamentals demand it, but near to short term there is some risk so I am cautious.

Until then, remember the trend!

Thomas Hughes

New Plays

New Contracts Daily

by Jim Brown

Click here to email Jim Brown
Editor's Note

This defense company is reporting new contract awards almost daily. In this geopolitical environment there appears to be no shortage of cash for new products and upgrades.


KTOS - Kratos Defense - Company Profile

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 most of them are secret programs for unnamed government clients.

Kratos unveiled its newest high performance class of military unmanned aerial system technology at the Paris Air Show. 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.

Just over the last couple weeks Kratos announced a $2.9 million order for an airborne communications system, a $10 million order for a ballistic missile defense system, $23 million for a military radar system and $8 million for a GPS Satellite protection system. Analysts are expecting a record $800 million in revenue for 2018. They expect to do $150 million in unmanned revenues in 2018.

Kratos posted earnings of 1 cent and a $10.4% increase in revenue to $186 million. They guided to be free cash flow positive by $25 million in 2017.

Expected earnings Oct 26th.

With the daily new contract awards shares have risen $1.50 in the last week and closed at a 5-week high on Monday. They are very close to breaking out to a new high.

Buy KTOS shares, currently $12.72, initial stop loss $11.45.
Alternate position: Buy Nov $15 call, currently 60 cents. No initial stop loss.

With shares just crossing the $12.50 strike price, we have to reach out to $15 and a distant month.


No New Bearish Plays

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps more than $1.00 at the market open.

In Play Updates and Reviews

No Follow Through

by Jim Brown

Click here to email Jim Brown

Editors Note:

Monday was another short squeeze where the indexes gapped up at the open then traded sideways the rest of the day. The Dow gained 135 points in the first few minutes of trading and then traded flat to end with a gain of 135 points. The Nasdaq and S&P was a similar pattern. The Russell actually ticked slightly higher at the close to add about a point over the opening gains.

This was purely a short squeeze. Everyone short over the weekend in expectation of a confrontation between the U.S. and North Korea, were hurt badly at the open. The lack of follow through on all the indexes suggests a definite lack of conviction on the buy side. The sellers were locked and loaded and held their lines after the opening rally.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

GIII G-III Apparel
The long position was stopped at 25.85.

UCTT - Ultraclean
The long position was entered at the open.

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BULLISH Play Updates

GIII - G-III Apparel - Company Profile


No specific news. 250 shares traded at 25.78-25.80 7 seconds after the open to stop us out. At first I thought it was a bad tick but research proved otherwise. Apparently GIII has a history of trades away from the market. I did not go back and look to see what exchange the prior dips were on but it is frustrating.

I am recommending we reload this position using only the calls and we will maintain a wide stop and hopefully avoid future bad trades.

Buy Sept $30 call, currently 80-cents.

Original Trade Description: June 29th.

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates in two segments, Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under the G.H. Bass brand; and proprietary products under the DKNY, Donna Karan, Andrew Marc, Marc New York, Black Rivet, Wilsons, Eliza J, Jessica Howard, G-III Sports by Carl Banks, and G-III for Her brands. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, Tommy Hilfiger, Karl Lagerfeld Paris, Guess?, Kenneth Cole NY, Cole Haan, Levi's, Vince Camuto, Ivanka Trump, Ellen Tracy, Kensie, and Jessica Simpson brands, as well as has licenses with the National Football League, National Basketball Association, Major League Baseball, National Hockey League, Hands High, Touch by Alyssa Milano, Collegiate Licensing Company, Major League Soccer, Starter, and Warrior by Danica Patrick, as well as approximately 140 U.S. colleges and universities. The company offers its products to department, specialty, and mass merchant retail stores in the United States and internationally. As of January 31, 2017, it operated 411 leased retail stores, which included 190 Wilsons Leather stores, 163 G.H. Bass stores, 50 DKNY stores, 5 Calvin Klein Performance stores, and 3 Karl Lagerfeld Paris stores. The company also operates Wilsons Leather, G.H. Bass, and DKNY branded online stores. Company description from FinViz.com.

G-III shares were pressured in May by the weakness in the retail sector in general. They rebounded in early June on better than expected earnings but were hit again in early July by the next wave of retailer warnings.

In the last quarter, G-III saw sales rise 16% to $529 million. Because of costs associated with the acquisition of Donna Karan they posted a loss of 18 cents but analysts were expecting a loss of 37 cents. Wholesale sales are growing by double digits in most brands. The Wilsons Leather and Bass Stores are the exception and they said they were closing some stores and repurposing some others. The Donna Karan brand is rapidly expanding with new merchandise and G-III thinks it could eventually be their biggest brand. The company is expected to earn $1.27 in 2017 and $1.72 in 2018.

Expected earnings September 5th.

Shares have risen over the last three weeks despite the market volatility. They closed only 20 cents below a five-month high on Friday. A breakout could trigger short covering and additional buying.

Position 7/31/17:

Closed 8/14: Long GIII shares @ $26.10, exit $25.85, -.25 loss.
Alternate position:
Closed 8/14: Long Sept $30 call @ 72 cents, exit .80, +.08 gain.

RCII - Rent A Center - Company Profile


No specific news. Not a material move.

Original Trade Description: August 2nd.

Rent-A-Center, Inc., together with its subsidiaries, leases household durable goods to customers on a rent-to-own basis. The company operates through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. It offers durable products, such as consumer electronics; appliances; computers, including tablets; smartphones; and furniture, including accessories under rental purchase agreements. The company also provides merchandise on an installment sales basis; and offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks within retailer's locations. It operates retail installment sales stores under the Get It Now and Home Choice names; and rent-to-own and franchised rent-to-own stores under the Rent-A-Centre, ColorTyme, and RimTyme names. As of December 31, 2016, the company owned and operated approximately 2,463 stores in the United States, Canada, and Puerto Rico, including 45 retail installment sales stores; 1,431 Acceptance Now kiosk locations in 40 states and Puerto Rico; 478 Acceptance Now virtual (direct) locations; and 130 stores in Mexico, as well as franchised 229 rent-to-own stores in 31 states under the Rent-A-Center, ColorTyme, and RimTyme names. Company description from FinViz.com.

Earnings were not good. The company posted a loss of 1 cents compared to estimates for earnings of 7 cents. Revenue of $677.6 million did beat estimates for $664.7 million. The problem was a number of new initiatives that take time to manifest into gains. This is a company with a portfolio of loans on household goods and there is not much they can do to change that on a qtr to qtr basis. The new initiatives only apply to new business so it takes a while to generate a large portfolio under the new rate plan. Core U.S. sales rose 230 basis points in Q2. Acceptance Now, a new initiative, saw sales rose 380 basis points. The average monthly rate of new finance agreements rose 5.7%. Higher end products now compromise 65% of store inventory. Same store sales in existing stores rose 6.7%.

Expected earnings Oct 25th.

Hedge fund Marcato Capital Management demanded the company sell itself or it would start a proxy war to replace the entire board. Hedge fund Engaged Capital has already been demanding a company sale arguing that a restructuring could best be done by new owners. Engaged won a proxy fight and now has 3 board members. RCII turned down offers from HIG Capital, Lone Star Funds and Vintage Capital over the last several months. Marcato said the $15 offer from Vintage was the opening offer and would rise if RCII would negotiate with Vintage and open its books.

The stock appears to be rising on takeover interest. Resistance is $16 and the stock traded as high as $37 in the last couple of years. If Vintage does raise their offer it would probably be in the $16-$16.50 range. Whether RCII would accept it is unknown.

With multiple sharks circling and two hedge funds demanding a sale, there could actually be competing offers once RCII decides to negotiate. The downside would appear limited.

Position 8/3/17:

Long RCII shares @ $13.63, see portfolio graphic for stop loss.
Alternate position: Long Sept $15 call @ 30 cents, see portfolio graphic for stop loss.

UCTT - Ultra Clean - Company Profile


No specific news. Excellent breakout over resistance at $22.25. Now we are targeting $25.

Original Trade Description: Augusy 12th.

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.

We have played UCTT several times before with varying results. The stock is volatile based on the direction of the chip sector. Since UCTT sells to chip makers, their good/bad fortune impacts UCTT. Fortunately, we are in a tech world where every year, more chips are required to make more gadgets including computers, tablets, phones, TVs and now the billions of IoT devices to be installed over the next several years.

The company reported earnings of 62 cents and analysts were expecting 51 cents. Revenues rose 75% to $228 million and beat estimates for $214 million.

They guided for earnings in the current quarter of 62-68 cents and analyst estimates were only 39 cents. At the midpoint of 65 cents that would be 66% higher than estimates. Very few companies are growing earnings that fast. Shares declined after the CEO said he was taking two months off to addess a treatable medical condition.

Expected earnings Oct 26th.

Shares are starting to rebound from the post earnings dip.

This is a short-term call because the next option series is December and options are too expensive. We have to buy just out of the money because the next strike at $25 requires a 10% move in the stock in only 4 weeks. That is very possible but we are entering a weak market period.

Position 8/14/17:

Long UCTT shares $22.70, initial stop loss $20.55, see portfolio graphic for stop loss.
Alternate position: Long Sept $22.50 call @ $1.50, see portfolio graphic for stop loss.

BEARISH Play Updates

DDD - 3D Systems - Company Profile


No specific news. Very minimal rebound in a bullish market. No short covering here. Support still $12.

Original Trade Description: August 7th.

3D Systems Corporation, through its subsidiaries, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, and colorjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications. Additionally, the company provides warranty, maintenance, and training services; on-demand solutions; and software and healthcare services. Company description from FinViz.com.

3D reported adjusted earnings of 8 cents compared to 12 cents in the year ago quarter. Revenue rose less than 1% to $158.4 million but sales of 3D printers declined -4%. Analysts were expecting 12 cents and $162.5 million.

The company guided for the full year for revenue of $643-$671 million, down from $643-$684 million. They guided for earnings of 46 cents, down from 51-55 cents.

3D keeps talking about new products adding to revenue in 2018 but that is a long way off and could be wishful thinking.

Expected earnings November 1st.

Shares fell $5 on the earnings and guidance miss but I expect them to fall further. If shares break support at $12, they could fall to $6 and a 7-year low.

Position 8/8/17:

Short DDD shares @ $13.00, see portfolio graphic for stop loss.
Alternate position: Long Sept $12 put @ 44 cents, see portfolio graphic for stop loss.

DF - Dean Foods - Company Profile


No specific news. No short covering in DF today.

Original Trade Description: August 9th.

Dean Foods Company, a food and beverage company, processes and distributes milk, and other dairy and dairy case products in the United States. The company manufactures, markets, and distributes various branded and private label dairy case products, such as fluid milk, ice creams, cultured dairy products, creamers, ice cream mixes, and other dairy products; and juices, teas, bottled water, and other products. It sell its products under approximately 50 national, regional, and local proprietary or licensed brands, and private labels, including DairyPure, TruMoo, Alta Dena, Berkeley Farms, Country Fresh, Dean's, Friendly's, Garelick Farms, LAND O LAKES, Lehigh Valley Dairy Farms, Mayfield, McArthur, Meadow Gold, Oak Farms, PET, T.G. Lee, Tuscan, and others. The company sells its products to retailers, distributors, foodservice outlets, educational institutions, and governmental entities through its sales forces. Company description from FinViz.com.

Dean Foods reported earnings of 21 cents that declined -47.1% and missed estimates for 31 cents. Revenue of $1.93 billion, which also missed forecasts. The lowered their full-year guidance from $1.35-$1.55 to 80-95 cents. That is a major haircut.

Expected earnings Nov 8th.

Dean Foods handles a lot of milk brands and the USDA said milk sales nationwide declined -2.9% in May alone. Management said competitive and volume pressures are hurting the company and the negative dynamics are expected to continue the rest of the year.

Milk has been found to cause diabetes or at least make it worse and the news is spreading fast. I have a friend that has been taking insulin for 20 years. I talked him into dropping milk from his diet and he was able to get off insulin within 3 weeks. A year later he backslid and began to drink milk again and he had to go back on insulin. He was quickly convinced and has sworn off forever and now leads a normal life with no diabetes meds.

Shares fell sharply to a 5-year low but given the severity of the guidance warning and the size of the earnings miss, the stock could continue to decline.

Position 8/10/17:

Short DF shares @ $11.37, see portfolio graphic for stop loss.
Alternate position: Long Sept $11 put @ 30 cents, see portfolio graphic for stop loss.

SABR - Sabre Corp - Company Profile


No specific news. Only a minor rebound as some shorts covered on SABR.

Original Trade Description: August 5th.

Sabre Corporation, through its subsidiary, Sabre Holdings Corporation, provides technology solutions to the travel and tourism industry worldwide. It operates through two segments, Travel Network, and Airline and Hospitality Solutions. The Travel Network segment operates as a business-to-business travel marketplace that offers travel content, such as inventory, prices, and availability from a range of travel suppliers, including airlines, hotels, car rental brands, rail carriers, cruise lines, and tour operators with a network of travel buyers comprising online and offline travel agencies, travel management companies, and corporate travel departments. The Airline and Hospitality Solutions segment provides a portfolio of software technology products and solutions through software-as-a-service and hosted delivery models to airlines, hoteliers, and other travel suppliers. This segment offers SabreSonic Customer Sales & Service, a reservation system that provides capabilities around managing sales and customer service across an airline's diverse touch points; Sabre AirVision Marketing & Planning, a set of airline commercial planning solutions; and Sabre AirCentre Enterprise Operations, a set of solutions for planning and management of airline, airport, and customer operations. The Airline and Hospitality Solutions segment also provides software and solutions to hoteliers through SynXis, a central reservation system; SynXis Property Manager Solution for property management; and marketing, professional, and revenue management services. Company description from FinViz.com.

American Airlines founded the company in 1960 and spun it off in 2000. Texas Pacific Group and Silver Lake Partners acquired it in 2007. They listed on the Nasdaq in 2014. Sabre is the largest global distributions systems provider for air bookings in North America.

Sabre closed its first week of trading at $16.50 in April 2014. The odds are good we are going to see that level again soon. They recently reported earnings of 35 cents that matched estimates. Revenue rose 6.6% to $900.7 million and beat estimates for $895 million.

The company announced a new "cost reduction and business alignment program" with the goal of saving $110 million a year in expenses. They are going to reduce global headcount by 9%. They reiterated their full year guidance of $3.54-$3.62 billion and earnings of $1.31-$1.45. However, they said earnings would likely come in at the lower half of guidance. Think about that for a minute. We are going to affirm our guidance but earnings will be at the low end of that guidance. Did they actually affirm guidance of lower guidance?

They said the poor results were related to multiple factors. They halted work on the implementation of their new SabreSonic reservation system, no reason given but clearly it was not going well. They said they were seeing higher stability, security and technology costs related to a "security incident" in their Sabre Hospitality central reservation system during the quarter. Were they hacked? They did not say. Lastly, they said they were dealing with accounting changes for revenue collected from customer Alitalia, which is going through a bankruptcy process. Typically that means you get pennies on the dollar for receivables. The guidance was not good. Shares crashed from $22 to $19.50.

There was a dead cat bounce over the next couple days and now they are heading lower again. I do not see any reason why anyone would want to own Sabre when there are much better companies like Priceline, Tripadvisor, Trivago, Expedia, etc.

Expected earnings Oct 31st.

Shares closed at a two-year low on Friday at $19.73 and could be headed for a retest of the post IPO low at $15.

In addition to the short on the shares we have two ways to play the option. We can buy the October $17.50 put for 10 cents and forget about it. It will expire before earnings so it will have to be in the money at some point in the future to make any money. It is $2 OTM now and October has 75 days until expiration. If we want to roll the dice, the January $17.50 put is only 45 cents. That lets us hold over the October earnings, which should be disappointing. And gives us an extra 90 days to profit. The difference is $35 in cost. The key here is that January is well out of our normal 30-45 day play scenario. I am going to recommend the October option but you should choose the one that best suits your risk reward profile.

Update 8/7/17: Bank of America downgraded the stock from neutral to underperform (sell) and shares fell sharply at the open. It would have been nice if they had waited until after we were in the position. Shares fell about $1 at the open, rebounded slightly and then rolled over again in the afternoon. I think BAC helped us overall since it will put added pressure on the stock.

Position 8/7/17:

Short SABR shares @ $19.02, see portfolio graphic for stop loss.
Alternate position: Long Oct $17.50 put @ 40 cents, see portfolio graphic for stop loss.

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