Option Investor

Daily Newsletter, Saturday, 8/19/2017

Table of Contents

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

Market Wrap

Back to Back

by Jim Brown

Click here to email Jim Brown

The Dow posted major back-to-back declines for the first time in 2017.

Weekly Statistics

Friday Statistics

The major indexes were all headed lower in early trading but multiple events combined to lift the indexes off their lows. The Nasdaq Composite hit round number support at 6,200 and rebounded. The Russell 2000 hit support at 1,350 and rebounded. The Dow and S&P were still declining with the S&P hitting its low of 2,420 at 9:55 and the Dow reaching its low of -109 at 21,641 at 11:05. When the Bannon news arrived at 11:30 a short squeeze hit that lifted the Dow 152 points to gain +43 over a matter of just a few minutes. The peak was hit at 12:40.

However, I think the rebound on the Russell set the stage for the headline spike on the other indexes. The 2,420 level on the S&P was also a factor. Without the Bannon news those levels may not have made a lot of difference at the rate the Dow was declining but they provided support to the Dow recovery and sent traders scurrying to cover short positions. Unfortunately, weekend event risk weighed on the indexes at the close to produce back-to-back losses.

Consumer sentiment for August came in hot at 97.6 and the highest reading since January. This was a 4.2-point jump from the 93.4 in July. The present conditions component fell from 113.4 to 111.0 and the lowest since November but the expectations component soared from 80.5 to 89.0 and the highest level since January. Those respondents expecting business conditions to improve rose from 28% to 34%. Those expecting the economy to continue prospering over the next 12 months rose from 48% to 55% and the highest level of 2017.

The calendar for next week is short but has plenty of important events. The New Home Sales and Existing Home Sales will generate attention with both expected to post minor gains.

The biggest event is the Janet Yellen speech on "Financial Stability" on Friday and that will be a showstopper because she is expected to make the case for tapering QE purchases starting at the September FOMC meeting. All eyes will be glued to the event.

Mario Draghi, head of the ECB, will be in attendance but he will not speak. The ECB is trying to come up with plan of its own to reduce QE purchases.

With US inflation falling to 1.4% in the latest report and the Euro at 2-year highs, the Fed is going to find it tough to hike rates again this year. They may still squeeze one into the calendar but the justifications will be weak. If they are actually data dependent, the data does not support a hike.

The yield on the ten-year traded down to 2.163% at the open and very close to the 2.13% low for the year. The yield rebounded on the Bannon news on hopes the trade policy would not be as restrictive as Bannon wanted.

The outlook for the U.S. economy is looking better. The Atlanta Fed real time GDPNow for Q3 is predicting growth of 3.8%. The outlook started at 4.0% at the beginning of August and the forecast has managed to hold that stronger forecast. There are still a couple months of economic reports to digest before we know the final result. The Q2 forecast started at 4.3% and ended at 2.8% growth so plenty of time for changes. The actual Q2 GDP was 2.57% growth so very close to the GDPNow forecast.

The earnings calendar for next week is relatively uneventful with only a few highlights. Salesforce.com on Tuesday, Hewlett Packard on Wednesday and Broadcom on Thursday will lead the headlines. Lowes, Autodesk, Gamestop and Ulta Beauty will also attract attention.

In this Q2 cycle, 474 S&P companies have reported earnings and 73.8% have beaten estimates, well over the long-term average of 64%. More than 68.8% of companies have beaten on revenue and higher than the average of 59%. The projected earnings growth is currently 12.1%. Estimates for Q3 are now 6.7% with a rebound to 12.2% in Q4. There are 17 S&P companies reporting this week. All the Dow components have already reported.

Foot Locker (FL) was the biggest loser on Friday morning after reporting earnings of 62 cents compared to analyst estimates for 90 cents. Revenue of $1.7 billion missed estimates for $1.81 billion. Gross margin was down 300 basis points. Same store sales fell -6.6% compared to estimates for a 1% increase. The CEO warned that same store sales could be down 3-4% for the rest of the year. Guidance for 2H suggests earnings of $3.50-$3.75 compared to estimates for $5.43. Shares fell -28% on the news. Shares are now down more than 50% since May.

Hibbett Sports (HIBB) hit a 14-year low after reporting a loss of 15 cents that actually beat estimates for a 20-cent loss. However, revenue declined from $206.9 million to $188 million and missed estimates for $190.3 million. Same store sales fell -11.7% and worse than estimates for a -10.0% drop. The carnage in the stock price came after they cut full year guidance from $2.35-$2.55 to $1.25-$1.35 and same store sales guidance from flat to down mid to high single digits.

Deere & Company (DE) reported earnings of $1.97 that rose 27% and beat estimates for $1.93. However, revenue of $7.81 billion missed estimates for $7.9 billion. Agriculture & turf sales rose 13% to $5.34 billion but missed estimates for $5.42 billion. The company said equipment sales were expected to rise 24% in the current quarter. For the full year, they are projecting an 11% rise in revenue and net income of $2.075 billion. That minor revenue miss caused a 5% decline in the stock but given the positive guidance this could be a buying opportunity.

Estee Lauder (EL) reported adjusted earnings of 51 cents that beat estimates for 43 cents. Revenue of $2.89 billion beat estimates for $2.85 billion. They guided for the current quarter for earnings of 94 to 97 cents with analysts expecting 91 cents. Revenue is expected to rise 9-10%. Shares spiked 8% on the news.

There were mixed reasons given for the spike in WTI Friday afternoon but the one most likely was the impending futures expiration on Tuesday. When the market began rallying on Bannon's exit there may have been some urgency to cover shorts. Bannon was nationalistic and against free trade. With him out of the White House, trade deals are expected to be broader and probably not as harsh as some of the prior rhetoric had suggested. With only one day left to trade, those hoping to ride the futures a little lower before expiration, suddenly decided it was time to exit.

Earlier in the week, the EIA reported an 8.9 million barrel decline in inventories after a 6.5 million barrel decline the week before. In the last 7 weeks inventories have declined -42.7 million barrels. That pushed inventories down -13% for the year. However, prices did not rise on Wed/Thr because everyone knows driving demand is going to plummet the week after Labor Day.

Drillers are also cutting back on active rigs. They dropped 5 oil rigs last week and added one gas rig. Over the last six weeks, they have dropped a net of 6 rigs or 1 per week. Over the prior 25 weeks, they added 293 rigs or an average of 11.7 per week. The weakness in WTI down to $42-$44 in June/July was a serious reality check for drillers. If the normal summer demand cycle and 1.8 mmbpd in cuts by OPEC/non-OPEC producers could not raise prices then the long-term outlook was in trouble.


Volatility is increasing. The VIX did not spike on Friday but market volatility still increased. Whenever you have the Dow fall more than 100 points, rebound 152 points and then give back most of those gains, the volatility has increased. If you look back over the last week, a pattern has repeated.

The market was down sharply on Thr/Fri the prior week and then rebounded on Monday when the weekend event risk evaporated. The short squeeze held for three days then the indexes collapsed again to a 5-week low on the S&P. The S&P declined 55 points from Wednesday's high to Friday's low or a 2.2% drop. If we use the 2,480.91 closing high from August 7th that is just a 2.4% decline to Friday's low. It is unusual for 2017 but far from unusual in terms of normal markets that suffer a 3-5% decline several times a year.

Volatility is typically a sign of market tops and bottoms. Since the normal Aug/Sep weakness begins in option expiration week in August, we should not be surprised with the decline. Unfortunately, we are so accustomed to markets only going up and dips always being bought, some investors are learning there is actual risk in the market.

We have reached a point where the market is moving as we expected. That is scary since it rarely moves as expected. This could be the first historical trend that actually works this year.

In past years when we reached this point, I posed the question "Why buy?" Earnings are basically over. There is a strong chance for extreme volatility in September when lawmakers go back to work and begin attacking each other on the budget bill and debt ceiling hike. The Fed is going to begin reducing QE purchases in September and Q3 earnings are projected to be half of Q2. Portfolio managers typically take some chips off the table in Q3 and raise cash for the expected Q4 rebound. More often than not, we see a second half low in Sep/Oct.

I am not recommending investors sell stocks, only that they understand the risks of opening new long-term positions.

The recent increase in volatility suggests investors are considering all those possibilities and the decline into September has begun. There is no guarantee but the shrinking market breadth is the key indicator.

The S&P tested initial support at 2,420 on Friday and I expect it to retest the 2400-2410 level soon. This could be the first dip buy point for those traders still looking for a quick rebound. I plotted the percentage declines for each of the major support points.

The wild card for predicting a decline is the legislative battle in late September. The last time the government was shutdown was 2011 and we all remember the -246 point S&P decline over 11 trading days. While I do not expect a repeat, Goldman Sachs says there is a 50% chance of a shutdown this year. Just having those odds continually quoted in the market headlines, makes it more likely investors will take chips off the table ahead of the actual battle.

The Dow has multiple levels of support but it is hard to judge the potential effectiveness because of the 30 stock index. Any one or two stocks can cause a major move on any given day and punch through support levels. The key ones to watch are 21,500, 20,900 and 20,400.

Even though Friday's final loss was only 76 points, there were very few gainers. Recently, the winners and losers have been close to evenly split but as you can see in the table below, the breadth is fading.

The Nasdaq was relatively tame on Friday with a 60 point range and only a 5 point decline at the close. The big cap techs were mixed with TSLA posting the largest decline at -$4. Even the high dollar stocks like AMZN, PCLN and GOOGL were just barely negative. As long as the big caps can hold their current levels, the broader index is not likely to move significantly lower. Unfortunately, FB, NFLX, NVDA, GOOGL, AMZN, PCLN and TSLA all have negative trends. I am just going to post the Amazon chart but the rest are similar. They are right on the edge of a breakdown that could take the Nasdaq a lot lower.

After hours totals:

At this point, the odds are pretty good the Nasdaq will test 6,100 in the near future. That would be a 5% decline and where it goes after that test is the big question. If the legislative battle heats up early, I would not be surprised to see a retest of 5,800 and basically a 10% decline.

The Russell 2000 is the weakest index, now down -6.4% from its high. The initial support at 1,350 was tested on Friday and the critical level is 1,340. If we lose that lower support there is a tremendous amount of empty space to fill before the low at 1,156 from November. I am not saying we are going to the November lows but if 1,340 breaks, the decline could accelerate.

It appears that every weekend has turned into a high-risk event. Traders are willing to be long during the week but afraid to be long over the weekend. On Friday North Korea was warning the joint exercises between the US and South Korea would cause a "major catastrophe" if they were held on schedule. The US and South Korea hold annual joint exercises and Kim Jong Un routinely warns they are a rehearsal for an invasion of North Korea. They begin on Monday.

The rapidly changing political landscape is also a risk. With two of President Trumps executive committees being disbanded last week, a panel advising the president on cultural issues resigning in mass on Friday and chief advisor Steve Bannon being asked to leave, there is considerable political risk. All week traders worried over who would be the next cabinet member to exit with worries multiple members could resign over the Charlottesville comments. Presidents in stress tend to do bigger things to distract from the little things. Ramping up geopolitical issues is a favorite target to distract from issues at home.

With people leaving at a rapid pace and verbal warfare against people in his own party, the outlook for Trump's agenda is looking grim, including tax reform and infrastructure spending. The market has sustained a 9-month rally on hopes for good things from a business friendly president. Once the market begins to believe those reforms are not coming, the direction could change.

The Bannon exit was seen by the market as a positive event because it would suggest less restrictive trade policies. However, Bannon has gone right back to Breitbart News where he is likely to become a very high profile attacker of the more moderate people still in the administration. He has a very large pulpit from which to launch attacks if that is his desire.

Over the weekend he said, "The Trump presidency we campaigned and fought for and won is over. We still have a huge movement, and we will make something of this Trump presidency. But that presidency is over. It will be something else. And there will be all kinds of fights, and there will be good days and bad days, but that presidency is over. I just think his ability to get anything done, particularly the bigger things, like the wall, the bigger, broader things that we fought for, it's just going to be that much harder." That statement is obviously a clue about his plans. On the plus side, Bannon said Trump's current advisors will try to "moderate him and make him more conventional." That would actually be good for the market if there was less drama and volatility in the White House.

The bottom line is that the market has event risk and not just weekend event risk. Given the place on the calendar, the Fed and the legislative events in September, I would be very surprised if we did not see some lower lows in the weeks ahead.

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Random Thoughts

This survey ended on Wednesday just before the Thursday decline. There were no major changes. Everyone is pretty confident in their positions. 66% still believe the market is not going higher.

Goldman Sachs said there was a 50% chance of a government shutdown "due to President Trump's declining poll ratings." The president's approval ratings fell another point to 37% in the last weekly poll. That is the lowest of any first-term president at this point in his term. According to Goldman, "Low approval ratings raise legislative risk." The debt ceiling must be raised by September 29th and failure to do this would force a shutdown. "We believe it would be brief." Goldman said the odds of a shutdown are "fairly high" because Democratic support for the spending bill will be required, which will force Republicans in Congress to make some difficult concessions.

Goldman said, "We continue to believe a tax cut is slightly more likely than not, but our conviction is low, as there has been little progress to date. If tangible progress has not been made by October, after these fiscal deadlines have passed, tax legislation will start to look less likely, in our view."

Art Cashin warned on Friday the Dow would drop up to 500 points or more if multiple Trump advisors were to resign. That would not happen in one day but over time. Cashin said traders were worried that a Gary Cohn departure could result in the exit of Wilbur Ross and others. There were a lot of rumors about a Cohn departure earlier in the week but the White House eventually squashed them saying there was no truth to the speculation.

After the close on Friday Carl Icahn resigned from his role as special advisor to the president on regulation. He said he discussed it with the president and the decision was made with Trump's blessing. Icahn said he wanted to avoid "partisan bickering" and scrutiny regarding his role. Some Democrats had asked regulators to look into Icahn, a major investor in energy and equities, to see if he had engaged in any improper behavior. In his resignation letter Icahn stressed he had never had any access to non-public information or profited from his advisory position.

A new study found that raising a child from birth through age 17 costs about $233,610 or roughly $13,000 a year on average. Higher income families spend significantly more, around $372,210 and lower income families averaged $174,690. A household earning $200,000 a year could expect to spend $52,000 in just the first year of a child's life according to NerdWallet. If you elect to cover college you can spend $20,090 per year for average instate tuition and $34,220 for out of state or private institutions. Yes, kids are expensive but worth it.

As I typed those numbers, I wondered how my generation survived when our parents had a single wage earner, mother at home and average income of less than $5,000 a year. (1950s) Of course the average house cost $22,000, a Ford $2,000, milk 92 cents, bread 18 cents, gasoline 23 cents and sirloin steak 69 cents lb. Fifties Prices


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


Those who expect to reap the blessings of freedom, must, like men, undergo the fatigue of supporting it.

Thomas Paine


New Plays

Bad to Worse

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sporting goods retailers continue to decline as a group as comp sales crash. Hibbett is a prime example of bad metrics.


No New Bullish Plays


HIBB - Hibbett Sports - Company Profile

Hibbett Sports, Inc., together with its subsidiaries, operates athletic specialty stores in small and mid-sized markets primarily in the South, Southwest, Mid-Atlantic, and the Midwest regions of the United States. Its stores offer a range of merchandise, including athletic footwear, team sports equipment, athletic and fashion apparel, and related accessories. The company also sells merchandise directly to educational institutions and youth associations. As of January 28, 2017, it operated 1,059 Hibbett Sports stores and 19 Sports Additions athletic shoe stores. Company description from FinViz.com.

Hibbett Sports shares hit a 14-year low after reporting a loss of 15 cents that actually beat estimates for a 20-cent loss. However, revenue declined from $206.9 million to $188 million and missed estimates for $190.3 million. Same store sales fell -11.7% and worse than estimates for a -10.0% drop. The carnage in the stock price came after they cut full year guidance from $2.35-$2.55 to $1.25-$1.35 and same store sales guidance from flat to down mid to high single digits.

The CEO said, "We experienced a very difficult retail environment in the quarter, with a significant decline in transactions and resulting pressure on gross margin." The drop in margins was driven by the increasingly promotional environment, markdowns taken to liquidate excess and aged inventory and logistics and store occupancy expenses associated with lower comparable store sales.

For the rest of 2017 Hibbett expects "the external environment to remain challenging."

Earnings expected Nov 15th.

HIBB shares actually rebounded significantly from their opening low on Friday. I suspect the rebound was due to the single sentence in the earnings release that said, "online sales appear promising and exceeded expectations." While the may be "promising" they did not prevent a dramatic cut to guidance. I believe this rebound attempt will fail.

Until it does fail, I am only recommending a put option and not a short on the stock. I am willing to risk 60 cents until the downtrend continues.

Buy Oct $10 put, currently 60 cents, no initial stop loss.

In Play Updates and Reviews

Small Cap Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap index touched support this morning before rebounding 12 points intraday. The index hit 1,350 at the open before rebounding to 1,362, Unlike the other indexes the Russell retained most of its rebound gain and only turned negative in the last 5 min of trading. This was not related to the Bannon news although the index did spike further, when the news broke. This was dip buying at support.

The Dow and S&P are nearing initial support levels at 21,500 and 2,410. I would expect dip buyers to appear at those levels. That does not mean we are going to drop further at Monday's open because the weekend event risk rebound could appear on Monday.

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.

Lottery Ticket Plays - Updated only on Weekends

Current Position Changes

HZNP - Horizon Pharma
The long call position expired.

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BULLISH Play Updates

KTOS - Kratos Defense - Company Profile


No specific news. A minor gain in a down market. 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.

UCTT - Ultra Clean - Company Profile


No specific news. Shares rebounded with a decent gain. Good relative strength here as well.

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. The rebound in the Russell lifted many of the oversold stocks.

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.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.

AOBC - American Outdoor Brands - Company Profile


Shares of AOBC appear to have found support at $18.40 and rebounded the last two days in a down market. I am recommending we close the position.

Original Trade Description: July 22nd.

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

Smith and Wesson saw the future when they changed names to American Outdoor Brands. President Obama was the best firearms salesman ever. He never missed an opportunity to talk down firearms and talk up gun control. Consumers, worried there would be a change in policy, rushed out to buy guns every time there was a new verbal assault on the second amendment. Gun sales hit record levels year after year.

When President Trump was elected as a pro-gun president, the urgency to buy more guns, faded. 2017 is still going to be another record year but only by a thin margin.

Smith & Wesson realized while President Obama was in power they needed to rebrand themselves to avoid the curse of being a prominent gun company in case the laws changed. They changed names to American Outdoor Brands and began a concentrated campaign to acquire a bunch of outdoor brands for products that had nothing to do with the shooting sports but they acquired some of those as well. Scopes, knives, safes, reloading, camping supplies, etc. Unfortunately, their main product line still depended on a continuing rise in firearms sales.

They reported earnings in late June of 57 cents that easily beat estimates for 37 cents. Revenue of $229.2 million beat estimates for $211 million. However, they guided for the current quarter for earnings of 7-12 cents and revenue in the $140-$150 million range. For the full year, they guided for $1.42 to $1.62 and revenue of $750-$790 million. Analysts were expecting $1.61 and $827.8 million. They said gun sales had slowed because of the new president. Secondly, they said they were going to use their unused portion of their $500 million line of credit to acquire additional growth opportunities. That means they were going to leverage up to their max debt to acquire new brands.

The CEO said, "Although good for the long-term viability of the industry, we believe that the election results coupled with a Republican Congress and choice of Supreme Court justice(s) could be a net-negative for [American Brands] as it eliminates any realistic fear of gun regulation, which has been a major driver of gun sales over the past eight years."

Shares declined sharply to $21. Over the last three weeks they have tried to rebound from that level but there is no excitement left. There have been a series of lower highs and Friday's close was below support and a three-month low.

Expected earnings September 7th.

I believe AOBC is going to retest the March lows at $18 if not lower. There are no positive catalysts on the horizon.

Position 7/24/17:

Long Sept $20 put @ $1.00, see portfolio graphic for stop loss.

Previously closed 8/1: Short AOBC shares @ $20.78, exit $20.95, -.17 loss.

ECA - Encana Corporation - Company Profile


No specific news. Shares continue to be volatile with oil trading under $47 midweek.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compared to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex will be funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings July 27th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Update 5/5/17: Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.

Update 6/10/17: Encana agreed to sell its Piceance natural gas assets to Caerus Oil for $735 million. There are 3,100 operated wells that produce 240 million cubic feet of gas and 2,178 barrels of natural gas liquids every day.

Update 7/21/17: Encana reported earnings of 18 cents that easily beat analyst estimates for 4 cents. Revenue of $1.08 billion also beat estimates for $773.2 billion. The outlook and long-term projections were also strong. Shares closed positive but were hampered by a -1.32 drop in oil that tanked the sector.

Position 3/14/17:

Long October $11 call @ $1.40, no stop loss.

Previously closed 4/19/17: Long ECA shares @ $10.43, exit $11.15, +.72 gain.

HZNP - Horizon Pharma - Company Profile


Horizon shares spiked significantly the last two days on a patent win but it was not enough to get them back over our $14 call and it expired worthless.

Original Trade Description: July 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Expected earnings August 7th.

Horizon posted and earnings disappointment in May that saw the stock collapse from $15.50 to $9.50. They reported earnings of 21 cents that missed estimates for 25 cents. Revenue was $220.9 million and missed estimates for $248 million. They guided for the full year for revenue of $1.0 to $1.03 billion. The problem was a shift in the contracting model with pharmacy benefit managers that was not performed in accordance with expectations.

That contracting problem has been solved. They also announced that three patents cases against Dr Reddy's, Lupin Ltd and Mylan Labs were upheld by a US District Court, which will prevent generics for VIMOVO until 2022 at the earliest.

Horizon is small company with numerous drugs in the pipeline and in trials. Shares are recovering from the May disaster and there is still $2.50 to gain to fill the gap from the post earnings crash.

Update 8/11/17: Horizon posted a big earnings beat with 41 cents compared to estimates for 12 cents. Revenue was $289.5 million compared to estimates for $237 million. They guided for revenue of $1.01-$1.05 billion for the full year and analysts were expecting $991 million. Shares spiked to $14 on the news but quickly fell back to $11.33 over the next three days. There were no headlines to support the decline. Somebody was waiting for the earnings to unload a big block. With expiration next Friday, this $14 call option will expire worthless without a big move.

Position 7/17:

Closed 8/18: Long Aug $14 call @ $.50, expired, -.50 loss

Previously closed 7/27: Long HZNP shares @ $13.05, exit $12.75, -.30 loss.

INFY - Infosys - Company Profile


Shares spiked to a new 9-month high on Thursday then collapsed -7% on Friday. The drop came after the CEO quit because of a fight with the founders. CEO Vishal Sikka, resigned as CEO but will remain as executive vice chairman. Interim CEO Pravin Rao will report to Sikka until a new CEO can be found. Sikka had been praised for the transformational changes he was trying to put in place but the founders continually put roadblocks in his path. This was probably the kiss of death for this position but for 25 cents, we will let it ride.

Original Trade Description: June 26th.

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. It provides business information technology services, including application development and maintenance, independent validation, infrastructure management, and business process management services, as well as engineering services, such as engineering and life cycle solutions; and consulting and systems integration services comprising consulting, enterprise solutions, systems integration, and advanced technologies. The company's products include Finacle, a banking solution that provides analytics, core banking, consumer e-banking, corporate e-banking, Islamic banking, mobile banking, origination, payments, SME enable, treasury, wealth management, and youth banking solutions. Its products also comprise Infosys Mana, a knowledge-based AI platform; Infosys Information Platform, an analytics platform that enables to get insights from various data sources for decisions across industries; AssistEdge, CreditFinanceEdge, ProcureEdge, and TradeEdge that are cloud-hosted business platforms; Panaya that enables various SAP and Oracle EBS changes; and Skava, which are digital experience solutions, as well as analytics, cloud, and digital transformation services. The company serves clients in the financial services, manufacturing, retail, consumer packaged goods and logistics, energy and utilities, communication and services, hi-tech, life sciences, healthcare and insurance, and other industries. Company description from FinViz.com.

Infosys reported earnings of 24 cents that rose 5.8% and beat estimates by a penny. Revenues of $2.651 billion beat estimates for $2.629 billion. Revenues rose 6.3% on a constant currency basis. The company announced numerous wins of high profile contracts.

The company is dilligently following its "Renew Now" program with three offerings. Those are Artificial Intelligence, Knowledge-based IT and Design Thinking. During the reported quarter, Infosys continued to renew traditional services and rolled out others in areas such as Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Cyber Security, and IoT Engineering Services. Also, during the quarter, Infosys launched Boundaryless Data Lake, an offering powered by the Information Grid Solution on Amazon Web Services (AWS).

The company raised 2018 guidance with revenue growth in the range of 7.1% to 9.1%, up from 6.1%-8.1%.

Earnings October 13th.

Shares rebounded over the last week to close at a new 9-month high on Wednesday.

Position 7/27/17:

Long Oct $17 call @ 25 cents. See portfolio graphic for stop loss.

Previously closed 8/7: Long INFY shares @ $15.66, exit $15.55, -.11 loss.

RCII - Rent A Center - Company Profile


On Thursday, 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. There is no reason to close the position but it will likely expire worthless. I am dropping this position from weekly coverage. Do not close it because lightning can strike.

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 Sept $15 call @ 30 cents, see portfolio graphic for stop loss.

Closed 8/17: Long RCII shares @ $13.63, exit $12.75, -.88 loss.

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