Option Investor

Daily Newsletter, Thursday, 8/17/2017

Table of Contents

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

Market Wrap

Down On Trump

by Thomas Hughes

Click here to email Thomas Hughes


The market fell more than 1% on growing concern the Trump agenda has been derailed. His response to the Charlottesville events led to an exodus of advisers, the implosion of his advisory councils, the possibility of fracture within the administration and put his pro-growth/tax-reform agenda at risk. The market is not happy with what it is hearing and seeing and so sold off hard in response. Today's action was broadly negative, all 11 S&P sectors moved lower.

International indices were a bit mixed but largely in the red. Asian indices were closer to flat than not with losses in the range of -0.25%. European indices were more firmly negative with losses in the range of -0.5% to -0.75%. The dovish tone to the FOMC minutes, compounded by today's release of ECB minutes, has put global traders on edge; maybe the economy really isn't doing as well as the aggregate of data says it is? A terror attack in Barcelona did not help matters, reports say 13 were killed and several dozens more were injured.

Market Statistics

Futures were negative this morning but nothing like what occurred during the open session. The futures trade indicated an open only a few points below yesterday's close but it did weaken a little after the data and going into the open. At the open the indices started off with small losses as indicated. A quick bounce to test for resistance was met by selling, slow steady selling, that lasted all day. The indices hit intraday support 5 times on the way down but each time failed. By the end of the day the broad market had shed more than -35 points and closed with a loss of -1.54%%.

Economic Calendar

The Economy

There was a fair amount of data today beginning with the weekly jobless claims. Initial claims fell by -12,000 to hit 232,000. This is just above the long term low, looking at recent trends it is possible a new low could be set in the next few weeks or so. The previous week's data was not revised. The four week moving average of claims also fell, by -500, to hit 240,500. On a not adjusted basis claims fell -6.6% versus expectations for a drop of only -1.7%. On a year over year basis not adjusted claims are down -9.8%. The down trend in initial claims may be over but it is clear that at least for now claims will trend at or near the long term low and consistent with labor market health.

Continuing claims fell by -3,000 to hit 1.953 million, last week's data was revised higher by 5,000 more than offsetting the decline. The four week moving average of claims fell by -6,000 to hit 1.960 million and has now rolled over and pointing lower. These figures have topped out over the past few weeks as initial claims began to move lower. If initial claims continues to fall this is likely to fall as well. Regardless, continuing claims is trending near historic lows and is consistent with labor market health.

The total number of Americans receiving unemployment benefits fell by -18,618 to hit 1.952 million. This is a four week low and consistent with seasonal and long term trends. The total number of claims should continue to fall over the next 2 months or so while the economy enters the fall hiring season. Downside target for the total claims is near 1.5 million and would be an all time low.

Philly Fed's Manufacturing Business Outlook Survey came in a bit below expectations but still strong at 18.9. This is a -0.6% drop from the previous month and the 13 month of positive reading. The 6 month forward outlook index gained 5.4% to hit 42.3%. Within the report new orders gained 2.1 to hit 20.4 while shipments rose from 17 to 29.4 and employment held steady. Within the employment segment hours worked and wages both increased.

Industrial Production rose at a rate of 0.2% in July after rising 0.4% in June. Output fell by -0.1%. Capacity utilization came in at a rate of 76.7% and is still running about -3% below the long running average.

The Index of Leading Indicators came in positive for the 12th month in a row. The index rose by 0.3% in July after rising 0.6% in June and 0.3% in May. The Coincident and Lagging Indices both rose as well, by 0.3% and 0.1%. Economists at the Conference Board say the index indicates a possible expansion of growth in the second half of the year, basically now.

The Dollar Index

The Dollar Index dipped a bit but losses were minimal. The index fell -0.10% on the FOMC's dovish tone but were supported in the end by an even more dovish tone from the ECB. Today's ECB minutes released dashed hopes the central bank would begin a taper soon, weakening the euro and offsetting weakness in the dollar. The index remains within its near term consolidation zone and appears to be setting up for another move lower. Resistance is just above the current level near $94, support is just above $93. A break below resistance would be bullish near term but face additional resistance at the short term down trend line. A break below support would be trend following and bearish with down side target near $92 in the near to short term.

The Gold Index

Spot gold moved up nearly a full percent on growing unease over antics in Washington. The metal moved up above $1290 but gains were capped at $1295. The move was also supported by dollar softness although that support was minimal. In the near term gold prices could continue to pressure resistance at $1295-$1300, a break above which would be bullish.

The Gold Miners ETF GDX tried to move higher along with the underlying metal but could not do it. The ETF opened with a small gain but right at resistance and then sold off from there to close with a small loss. It looks like the sector is still trapped within the near term range with little sign of breaking out. The indicators are pointing higher so resistance may be tested but they are still not showing any kind of strenghth. A break above resistance would be bullish but near term only, next resistance is near $24. A failure to break may result in a return to support at $22.50 or $22.00 in the near term.

The Oil Index

Oil prices gained about 0.35% following yesterday's report of falling US stockpiles. The move was capped however by other signs of increasing US and global production, and ongoing supply/demand imbalances. WTI gained about $0.15 to trade near $47 but still looks like it may trend lower over the near term.

The Oil Index continues to fall on declining forward earnings outlook driven by sluggish economic growth, dovish central bank minutes and falling oil prices. The index shed more than -1.6% today bringing the week's fall to near -5%. It has just crossed below my support target at 1,080 and looks like it could go lower. The indicators are both pointing lower suggesting a move down to next support is possible. I am still bullish for the long term due to positive forward earnings growth outlook, nearer term I remain cautious while waiting for signs of a bottom I still think is coming. That being said prices are starting to look pretty good.

In The News, Story Stocks and Earnings

Walmart reported before the bell beating on the top and bottom lines. Revenue grew 2.1% over last year, driven by a 60% increase in on line sales, but was not enough to satisfy investors. Forward guidance was also weak despite another quarter of increasing US comps and drove shares down by more than -2% in the premarket. The stock opened with a gap lower but buyers stepped in to drive prices up from there and create a green bodied candle.

Ross reported after the bell and delivered a nicer report. The company also beat on the top and bottom line with the difference of issuing strong forward guidance. The company says gains were driven by a 4% increase in comp store sales, double the expectations, and an unexpected increase in operating margins. Forward guidance is now in a range matching consensus, shares jumped 10% on the news.

Applied Materials also reported after the bell and also beat on the top and bottom lines. The company says semiconductor sales have risen 46% versus the year ago period. Total sales growth is up 33% which, with the addition of an increase in margin, to an 86% increase in EPS. Forward guidance has been raised above consensus and shares jumped close to 3%.

The Indices

The indices began the day with only marginal losses indicated but momentum began to build quickly and it lasted throughout the day. The fact that tomorrow is OPEX certainly added to today's volatility as traders fought hard to unwind positions. Today's move was led by the Dow Jones Transportation Average which lost -2.40%. The index created a log red candle moving down from the short term moving average and crossing below the long term moving average. The indicators are mixed and do not indicate a sharp move lower at this time. MACD is showing a small bullish peak with momentum on the wane and near zero, stochastic is still pointing firmly up with only a hint of %K rolling over. The index may continue to move lower but I would expect it to find strong support a little below today's close near the long term up trend line.

The NASDAQ Composite made the second largest gain today, about -2.0%. The tech heavy index created a long red bodied candle moving down from the short term moving average but closing above last week's low and well above the long term moving average and up trend lines. The indicators are mixed but rolling over into a bearish signal that could lead to further downside. MACD is most firmly bearish and indicates momentum is on the rise. A break below today's low would be bearish near term with downside target near 6,100.

The S&P 500 made the third largest decline today, just over -1.54%. The broad market index created a long red candle moving down from the short term moving average and closing below last week's low. The indicators are a bit mixed but generally bearish and consistent with an additional move lower. Downside target is less than a half percent below today's close near the long term uptrend line near 2,420. A break below this may find support at the long term up trend line.

The Dow Jones Industrial Average made the smallest decline, a wee -1.24%. The blue chips created a medium sized red candle moving down to cross below the short term moving average and halt at the long term up trend line. The indicators are more firmly bearish here than in the other indices and suggest that support at the trend line will be tested if not broken. A break below the trend line will be bearish for the short term with downside target near 21,200.

The indices moved lower and once again it didn't seem like panic selling, or that the bull market was falling apart. Today's move was deep but not so deep as to indicate major shift in sentiment, just enough for the market to let us know that maybe now is a good time to take profits on positions in the money and wait for the latest round of political hooplah to blow over. Forward outlook for earnings is still positive, forward outlook for economic growth is still positive, when those things change I will too. Until then I remain bullish for the long term and waiting for my next good entry signal.

Until then, remember the trend!

Thomas Hughes

New Plays

Trend Change?

by Jim Brown

Click here to email Jim Brown
Editor's Note

We will not know for several days if the trend has changed but the outlook today is bearish. With the Dow down -274, Nasdaq -123 and S&P -38, Friday could either be a monster rebound as shorts get squeezed or a follow through day where we see new lows. Given the location on the calendar, the lack of upside catalysts and the political upheaval in progress, my vote would be for another decline but that is just an opinion not a guarantee.

In 2017, we have not had a follow through day after a big decline. Each drop has been followed by a neutral day of a rebound. Eventually these trends end and a real decline appears. The big cap techs imploded and all closed at the lows for the day. Nobody was jumping in at the last minute in expectations for a Friday rebound.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Support Failure

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell closed under the 200-day average for the first time since June 2016. This is not a good sign and suggests there will be further market weakness ahead. The Russell has horizontal support in the 1345-1355 range so the round number of 1,350 would be the initial target with the close today at 1,358. If the Russell breaks below 1,340 it could be a long drop with the the next material support at 1,157. The index has tested the 1,340 level multiple times since December and pulled back from the brink every time. Let's hope it does it again.

The S&P lost 39 points and closed only 10 points from major support at 2410-2420. One more big decline and we could hit that tomorrow. I expect that support to hold, at least on the first test. The 100-day average is 2,016. We blew through the 50-day at 2,450 this morning.

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 call position was closed at the open.

RCII - Rent A Center
The long stock position was stopped at $12.75.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

GIII - G-III Apparel - Company Profile


No specific news. We closed the position at the open after the big drop on Tuesday.

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 8/15/17:

Closed 8/17: Long Sept $30 call @ 30 cents, exit 20 cents, -10 cent loss.

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

KTOS - Kratos Defense - Company Profile


No specific news. Only a minor decline. Good relative strength.

Original Trade Description: August 14th.

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 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 department spending.

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.

Position 8/15/17:

Long KTOS shares @ $12.78, see portfolio graphic for stop loss.
Alternate position: Long Nov $15 call @ 65 cents, see portfolio graphic for stop loss.

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

RCII - Rent A Center - Company Profile


RCII reported same store sales for July declined -5.7%. Shares declined -5.2% to stop us out of the stock position. The long call is still open but has no value. This will move to the Lottery Play section this weekend.

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:

Closed 8/17: Long RCII shares @ $13.63, exit $12.75, -.88 loss.
Alternate position: Long Sept $15 call @ 30 cents, see portfolio graphic for stop loss.

UCTT - Ultra Clean - Company Profile


No specific news. Shares erased a week of gains in the Nasdaq drop.

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. Holding at the 52-week lows. 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. Zacks published an article titled "Dark clouds over Dean Foods." That and the market crash pushed shares in our direction.

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 decline but new 2-yr low close.

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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