Option Investor

Daily Newsletter, Tuesday, 8/22/2017

Table of Contents

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

Market Wrap

One-Day Trend

by Jim Brown

Click here to email Jim Brown
One day does not make a trend. A short squeeze after three days of losses is normal.

Market Statistics

The short squeeze was triggered by an article on Politico titled "Trump's team and lawmakers making strides on tax reform plan." Unfortunately, 99.99% of traders only heard of the article rather than read it. The article stated there was a broad consensus on some of the best ways to pay for tax cuts. However, having six guys in a room agree on potential changes in the tax code is a long way from actually getting a tax reform bill passed in the House and Senate.

The options discussed included capping the mortgage interest deduction, ending the deductions for state and local taxes, eliminating the interest deduction on business loans and phasing in full expensing of investments in equipment or facilities for small businesses.

We all know that capping the mortgage interest deduction would be a major challenge for voters unless the caps were very high. Killing the deduction for state and local taxes against your federal taxes would also be a major sticking point. High personal tax states in the Northeast and West would be hit hard. The only thing that keeps voters from storming the state capitals every time the local taxes are raised, is that they can deduct it from their federal taxes. Changing that deduction would cause serious problems for high tax states. The lobbying against it would be massive.

Gary Cohn hinted last week that we have a great "skeleton" for tax reform. That is about all it is and you are not going to change 75,000 pages of IRS tax code with a skeleton plan discussed by a six guys in a room over a weekend. The "Big Six" as they are being called includes, Gary Cohn, Steven Mnuchin, Mitch McConnell, Paul Ryan, Orrin Hatch and Kevin Brady. The article also quoted Cohn as saying "we would like to put some skin and muscle on the skeleton and drive tax reform forward by the end of the year." Investors got excited and covered a few shorts and I am sure nobody saw that "end of the year" comment. There was also a comment that any reform program will "require" companies to repatriate cash from overseas. That may not go over well if the government is going to lower the tax only slightly but require repatriation. Another decision being considered is whether to make the cuts permanent or sunset them after 5-10 years.

The short squeeze in response to this headline was definitely a case of premature expectation since nothing has changed and nothing is likely to change until late in the year. The market trend has not changed. Three days down, one day up is normal for Aug/Sep.

Contrary to normal short squeezes where the market gaps higher and then trades sideways the rest of the day, this started as a squeeze at the open but actually rose the rest of the day. This suggests it was not all squeeze. There was some follow through buying. The key will be its ability to last for several days and not fade on Wednesday.

The economic reports were sparse for Tuesday. The FHFA purchase only home price index for June rose 6.5% and slightly less than the 6.9% in May. This was a lagging report for three months ago and it was ignored.

The Richmond Fed Manufacturing Survey for August was flat at 14.0. The only component to change significantly was employment, which rose from 10 to 17 and their highest level since March. This unchanged report was also ignored.

After the bell, the API inventory report showed a decline of 3.595 million barrels of oil. This was significantly smaller than the last EIA report with a decline of -8.9 million barrels. API said gasoline inventories rose 1.402 million barrels with distillates rising 2.048 million. The gasoline inventories were for the week before the eclipse. Given all the driving to and from the eclipse viewing sites it will be interesting to see what happens in next week's report. Various states reported 6-10 times the normal interstate traffic.

Wednesday's calendar has the new home sales with only a minor gain expected. The big event is still the Yellen speech on Friday where she is expected to mention tapering QE. That could have a cooling effect on the market depending on the wording.

Toll Brothers (TOL) reported earnings of 87 cents that beat estimates for 69 cents. Revenue of $1.5 billion rose 18% but missed estimates for $1.51 billion. The average price of a delivered home was $791,400 compared to $842,700 in the year ago quarter. The company has added a new home style of lower priced homes for millennials in addition to their normal luxury homes. These lower priced home sales weighed on the average selling price.

They delivered 1,899 homes, up 26%. They expect to deliver 7,000-7,300 homes in 2017. That was up from prior guidance of 6,950-7,450. The average delivered price is expected to be between $800,000-$825,000. Toll said a recall on floor joists by the manufacturer pushed the completion of 150 homes into 2018. This caused them to narrow their revenue forecast for the full year from $5.4-$6.1 billion to $5.6-$6.0 billion. New orders rose 24% to 2,163 in Q3. Shares declined $1 on the revenue miss.

DSW Inc (DSW) reported earnings of 38 cents compared to estimates for 29 cents. Revenue of $680.4 million also beat estimates for $669.2 million. They guided for full year earnings of $1.45-$1.55 compared to estimates for $1.44. Same store sales rose 0.6% compared to a -1.2% decline in the year ago quarter. They said online sales rose 27% thanks to large growth in mobile traffic. DSW has an active rewards program for online shoppers. Shares spiked 17% on the earnings.

Cosmetic seller Coty Inc (COTY) reported zero earnings compared to estimates for 9 cents. Revenue of $2.24 billion beat estimates for $2.17 billion. For the full year, they reported earnings of 63 cents, down -54%, and missing estimates for 76 cents. On the full year basis revenues declined 5%. They ended the quarter with $535.4 million in cash and $7.2 billion in debt. Shares crashed 9% on the news.

Medtronic (MDT) reported earnings of $1.12 that beat estimates for $1.08. Revenue of $7.39 billion missed estimates for $7.45 billion. The company said it was hurt by a global IT disruption in June and the shortage of diabetes sensors. The company guided for a 4%-5% increase in full year revenue and 9%-10% rise in earnings. Shares fell slightly on the report.

After the bell, Salesforce.com (CRM) reported earnings of 33 cents, which beat estimates for 31 cents. Revenue of $2.56 billion beat estimates for $2.52 billion. They guided for the current quarter for earnings of 36-37 cents and revenue of $2.64-$2.65 billion. Analysts were expecting $2.61 billion. For the full year, they guided for $1.28-$1.31 and revenue of $10.35-$10.40 billion. Shares were down slightly in afterhours.

Chipmaker Cree Inc (CREE) reported earnings of 4 cents that missed estimates for 5 cents. Revenue of $358.9 million beat estimates for $350.3 million. They guided for the current quarter for revenue of $353-$367 million and analysts were expecting $368.5 million. Shares fell 10% in afterhours.

La-Z-Boy (LZB) reported earnings of 24 cents that missed estimates for 29 cents. Revenue of $351.1 million missed estimates for $357.7 million. The company said low volume in their plants was not enough to absorb the fixed costs, which impacted margins. Translated, that means earnings were weak due to slow sales. Shares fell -15% in afterhours.

Earnings for Wednesday will be headlined by Hewlett Packard, Lowes, PVH and Guess. Broadcom is the big dog on Thursday.

After the bell, the Wells Fargo CEO warned employees to brace for another round of negative headlines. He said the bank would announce over the next several weeks the completion of a third party review of the consumer sales scandal. He said, the results will "generate news headlines" but the best thing the bank can do is focus on fixing problems. They have already paid out $5 million in individual settlements and are facing several hundred million more in class action settlements. They have already paid $185 million in fines and penalties. CEO Sloan took over after the bank was found to have opened about 2 million fake accounts without customer authorizations. Shares fell $2 in afterhours but recovered to close unchanged.

Restaurant Brands International (QSR), parent of Tim Hortons, Burger King and Popeye's, was named a "top pick" at UBS. The analyst said the current initiatives are driving earnings, unit growth and same store sales. Shares rose 2.4% on the upgrade.

The Air Force awarded contracts to Boeing (BA) and Northrop Gruman (NOC) to development a replacement for the silo based Minuteman III intercontinental ballistic missile system. The Minuteman missiles are our biggest deterrent against a nuclear strike by another country. Launching a strike against the U.S. by another country would be suicidal for the country launching the strike. The U.S. could obliterate any other country on earth if attacked. The Minuteman missiles are one of the three legs of the nuclear triad with ballistic missile submarines and missiles/bombs delivered by bombers the other two legs. Currently there are 400 silo-based missiles on standby to respond to any attack. However, these missiles are decades old and need to be replaced. These contracts are just the first step in designing a replacement system that does not depend on floppy disks for guidance info. Seriously, they are really old.


At its lows on Monday, the S&P was down -2.95% from its closing high on August 7th. That is hardly a serious correction. In a normal market, it is common to get declines like that or worse at least once a quarter. Investors are so accustomed to markets only going up, this was a somewhat traumatic event for some. FAANG stocks actually went down. The end of the world was upon us.

After a less than a 1% rebound today, all is right with the world if you believe the chatter from traders. New highs are being predicted and the declining trend has been forgotten. Unfortunately, those who do not learn from history are doomed to repeat it.

There is nothing specific to discuss about the markets this evening. The indexes were down for several days and a short squeeze appeared. Move along, there is nothing to see here.

The key point is that the trend has not changed. If you look at the S&P, Nasdaq and Russell charts, the trend is still bearish. Until the market rallies for a week and starts to break through some of that overhead resistance, it will remain bearish. One day does not make a trend.

The S&P tested support at 2,420 twice and then rebounded to 2,450. Until it moves over 2,475, the trend is still bearish and today's candle is just another lower high.

It was a good day for the Dow. Only 3 components were negative and there were some strong gainers. We would all be thrilled if this continued for the rest of the week but I would not hold my breath. While it is possible, it is not probable.

The Boeing headline caused a $4 spike in the shares and a gain of nearly 28 Dow points. As long as there are 3-4 companies a day with outstanding gains, the index can move higher.

However, resistance is now 22000-22050 and until that level is broken, we remain in a short term down trend. The longer-term trend remains bullish but only over a much longer window. Some of the gains here were definitely short covering after some of the stocks suffered serious declines over the last two weeks. Remember, the Dow was down about 450 points over the last two weeks.

The Nasdaq big caps were back in force today. They powered the Nasdaq Composite to an 84-point gain and the Nasdaq 100 to an 87-point gain. However, you would have thought the gains in the big caps would have caused an even bigger rise but there was still some undercover selling.

The negative trend in the market is easily seen in the Nasdaq chart. The declines are larger than the gains and resistance is still intact.

The Russell 2000 had a nice gain of 14 points but compared to the -103 point decline that was hardly material. The small caps are still the weakest index but they did hold at initial support of 1,350. A break under 1,340 would be the signal to short the market.

Contrary to what I might have implied in the comments above, I am not bearish on the market. I would be thrilled if the rally continued. However, given our point on the calendar, the Yellen speech on Friday and the expected political volatility in September, I simply believe we are at a great risk of further declines than further rallies. One day does not make a trend and until the negative trend changes we should respect the current market direction.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Fighting the Calendar

by Jim Brown

Click here to email Jim Brown
Editor's Note

The next six weeks are the most dangerous period for the entire year. Tuesday's short squeeze is likely a one-day event. I would be thrilled if the rally continued but the calendar is working against us. We have a full portfolio with both bullish and bearish positions. There is no reason to add additional risk without a good idea about market direction.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

No Change in Trend

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market short squeeze created some decent gains but there is no change in the trend. Dow 3 days, up 1, is not a trend change. It is just a short squeeze. All the index charts are showing lower highs that will not be bullish without at least 2-3 more days of gains. While I would be thrilled with a late summer rally, I am not counting my chickens before they hatch.

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

FTR - Frontier Communications
The long put position was entered at the open.

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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

KTOS - Kratos Defense - Company Profile


No specific news. A minor gain and still holding support.

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. Minor gain and back over recent support.

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. Minor rebound on market short covering.

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


Company announced the departure of its CFO and appointment of an interim CFO.

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.

FTR - Frontier Communications - Company Profile


No specific news. No short covering here with another 68 cent loss.

Original Trade Description: August 21st.

Frontier Communications Corporation provides communications services to residential, business, and wholesale customers in the United States. It offers broadband, video, voice, and other services and products through a combination of fiber and copper based networks to residential customers. The company also provides broadband, Ethernet, traditional circuit-based, data and optical transport, and voice services, as well as Multiprotocol Label Switching and Time Division Multiplexing services to small business, medium business, and larger enterprises, as well as sells customer premise equipment. In addition, it offers 24/7 technical support; wireless broadband services in selected markets; and frontier secure suite of products, including computer security, cloud backup and sharing, identity protection, and equipment insurance. Further, the company provides satellite TV video services; voice services, including data-based VoIP, and long distance and voice messaging services; and a package of communications services. Additionally, it offers a range of access services that allow other carriers to use facilities to originate and terminate their local and long distance voice traffic. As of December 31, 2016, it served approximately 5.4 million customers and 4.3 million broadband subscribers in 29 states. The company was formerly known as Citizens Communications Company and changed its name to Frontier Communications Corporation in July 2008. Company description from FinViz.com.

Frontier is simply being squeezed out by the competition. The CEO said with their recent earnings, they were facing "severe competition" in the telecom space. Revenue declined -12% in Q2 to $2.3 billion and missed estimates for $2.4 billion. They have missed revenue targets in 3 of the last 4 quarters. They posted an operating loss of $662 million, compared to $75 million in the year ago quarter. The loss this year was accelerated by a forced write down of goodwill for $532 million. Operating costs rose by $500 million to $2.8 billion for the quarter. The per share loss for the quarter was $1.10 and slightly better than the $1.10 analysts expected. Shares spiked temporarily but then resumed their downward trend.

Charter (CHTR), Comcast (CMCSA), AT&T (T) and Windstream (WIN) are eating their lunch. Bigger is better in the telecom space and Frontier is shrinking.

Shares are down 81% over the last year from a 52-week high of $75. On Monday they closed at a historic low. My charts only go back to 1972 and today's close was the lowest on record. I think Frontier is going to single digits. There is no light at the end of this competitive tunnel. Their only hope will be a takeout at some point. Free cash flow is shrinking from $250 to $205 million for the quarter. Liquidity is falling from $522 million to $387 million. They have a market cap of $995 million and debt of $17.8 billion. That is not a desirable picture of a takeout candidate. The more likely path is a continue slide into single digits.

Expected earnings Oct 31st.

Position 8/22/17:

Short FTR shares @ $12.72, see portfolio graphic for stop loss.
Alternate position: Long Oct $11 put @ 90 cents, see portfolio graphic for stop loss.

HIBB - Hibbett Sports - Company Profile


No specific news. Short covering with the market.

Original Trade Description: August 19th.

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.

Position 8/21/17:

Long Oct $10 put @ 60 cents, see portfolio graphic for stop loss.

SABR - Sabre Corp - Company Profile


No specific news. Minor short covering with the market.

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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