Option Investor

Daily Newsletter, Thursday, 8/24/2017

Table of Contents

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

Market Wrap

Jackson Hole Eve

by Thomas Hughes

Click here to email Thomas Hughes


The market held steady ahead of Janet Yellens speech at the Jackson Hole Economic Policy Symposium. Today's action was light and without impetus as traders wait to hear what Ms. Yellen has to say. The speech is not expected to be a platform for policy announcement or change but will be closely watched for clues on what the Fed thinks about the economy, inflation and rate hikes. Kansas City Federal Reserve President Esther George said in statements today, from the symposium, that she was in favor of gradually increasing rates even with inflation below 2% because the long term view is consistent with economic growth and rising inflation.

Asian indices were mixed but none made significant gains or losses. Sentiment was oddly upbeat in the wake of Trump's shut-down-the-government comments. European indices were also mixed but more firmly bullish, most indices closed with gains if small gains, as they await tomorrow's Jackson Hole events. Retail stocks were in the spotlight after posting weaker than expected results.

Market Statistics

Futures trading was flat to mildly positive all morning. They gave little indication to the days action with little movement on economic data or earnings from the retail sector. The open was choppy, the indices opened with small gains, tried to move higher and then abruptly about-faced to move lower and into the red. Jerky price action continued into the early afternoon with the indices hitting a bottom near 10AM and then bouncing between intraday support and resistance several times before 2PM. This range held through the end of the day with the session ending near the lower end.

Economic Calendar

The Economy

Initial jobless claims rose by 2,000 from last weeks not revised total to hit 234,000. The four week moving average of claims fell -2,750 to hit 237,750. On a not adjusted basis claims fell -1.80% versus an expectation for -2.5% and are down -10.25% year over year. Claims are clearly trending near long term history lows and consistent with labor market health. The down trend in claims I've tracked over the past 6 years may have come to an end. That being said, so long as there is no major reversal in this figure labor markets should continue to tighten.

Continuing claims are unchanged from last week's revised number. The revision is +1,000 for a net gain of 1,000 this week. The four week moving average of continuing claims fell -2,750 to hit 1.957 million. This figure may have also ceased trending lower but remains near long term historic lows and consistent with overall labor market health.

Total claims fell -31,581 to hit 1.920 million. This drop is as expected, in line with seasonal and long term trends. We can expect for this decline to continue over the 6 to 8 weeks and bottoming out near 1.5 million. Looking back at last year and the year before we may also expect to see declines begin to accelerate in the next week or two.

Existing home sales fell by -1.3% versus expectations for gains. The annualized rate fell to 5.44 from a downwardly revised 5.51 million in June. On a YOY basis sales are still up by 2.1%. Data within the report reveals ongoing shortages of inventory. The average time for a home to go under contract has been under 30 days for 4 months due to high demand. Economists at the NAR say the first half of the year was lackluster due to the imbalance in supply and demand. The imbalance is leading to undue upward pressure on prices and further stifling sales.

The Dollar Index

The Dollar Index moved up slightly in today's action. The index is supported not so much by anticipation for what Yellen may say but a lack of commitment by traders before the speech. Price action over the past few weeks has formed a bearish flag within a short term down trend and does not appear to be gaining bullish strength. The indicators have confirmed the downtrend with strong bearish crossovers so I am leaning in that direction. Support is near $92.60 and the 15 month low, a break below there would be trend following and bearish. A bounce from this level would be bullish but only in the near term. Resistance is at $94 or just above there near the down trend line, about $94.50.

The Gold Index

Gold prices also held steady in today's trade, shedding only -0.24% in response to the dollar's mild rise. The metal is being supported by both a weakening dollar and weakening FOMC outlook but also by political risk, and none of that is really expected to change in the next 24 hours. Near term support is just above $1,290, a move higher may find resistance at $1,300 or $1,305 while a move lower may find support near $1,280 or $1,275 depending on the news. Longer term the metal looks set to rise on a falling dollar.

The Gold Miners ETF GDX rose nearly a half percent creating a small green candle above the down trending resistance line but is not looking overly bullish. The indicators are only weakly bullish and stochastic in particular suggests it is at resistance. The indicators is pointing up with a bullish crossover today but this is the 3rd crossover in the last two weeks and the three together are rolling over in confirmation of resistance. The ETF may continue higher, particularly if gold begins to move higher again, but there is resistance ahead. Next target is just below $24 and near the mid point of the long term trading range.

The Oil Index

Oil fell even as a Tropical Storm Harvey restrengthens into Hurricane Harvey. WTI fell about -1.75% to trade near $47.50 and the mid-point of recent trading ranges. Yesterday's draw down of US stockpiles suggests that the market is rebalancing, at least a little, but traders aren't buying it. Oil remains above the $45ish cutoff point shale drillers need to stay profitable so I don't expect to see supplies fall to far. Add to that rising OPEC output and there is little reason to be bullish on oil.

The Oil Index gained 0.35% in a move creating a small green candle. This is the 3rd such candle since price hit my support target at 1,080. This move may turn into more but at this time bullish bets are off. Oil prices are edging lower with bearish outlook and will likely drag the sector down with them. The indicators are consistent with a touch and bounce from support but do not support a strong move higher. Upside resistance is near the long term moving average at 1115. A break below the 1,080 line would be bearish but may find support near 1,050.

In The News, Story Stocks and Earnings

Retail was in the news once again with a flurry of releases before and after the bell. A number of chain stores ranging from the low end Dollar Tree through names like Perry Ellis, Fossil, Sally Beauty and Land's End. Highlights of the reports are improvements in inventory positioning, surprise gains in comp store sales and positive forward guidance. Stocks in the group surged 3% to 15% carrying the entire sector with them. The XRT gained more than 2% in early premarket trading, opened with a gap to the upside but fell in intraday trading.

Amazon made big news today announcing that its deal to buy Wholefood's Market has been approved by the FTC and will close next Monday. The press release went on to detail some of the plans they have for the company once the deal is in place including lowering prices on some staple items throughout the chain as well as integrating with Alexa and the overall Amazon delivery infrastructure. Shares of Amazon fell a little more than -1% to test support near the long term moving average and appear to be confirming support and the possibility of a bottom. Divergences in both indicators concur.

Grocery stores, restaurants and food delivery services fell on the Amazon news. The deal to take over Wholefoods and integrate not only the shopping but the cafeteria services into the delivery space will increase competition for anyone selling food. Kroger was among the leaders with a drop greater than -8%. PS, does anyone else thing Jeff Bezos could be a James Bond villain? He's bald, is a little scary looking and taking over the world.

The Indices

The indices made small moves today with one exception, the Dow Jones Transportation Average. The transports fell a little more than -0.70% where the other indices shed closer to -0.20%. Today's action created a small red candle falling from resistance at the long term moving average and through support at the long term up trend line. This move is bearish but not confirmed, it may lead to further downside or be the first tests of support. The indicators are pointing lower suggesting support will be tested again, they are diverging from this new low in a way suggestive support is present and likely to hold. At current levels the index has corrected -7.5% from the new all time high, another -2.5% would bring it to a full -10% and the index to my support line near 8,750.

The S&P 500 made the next largest decline, -0.20%. The index created a small bodied red candle hanging below the short term moving average and wedged into the long term up trend line. Price action looks like consolidation within an uptrend and above trend with the caveat of being below a point of possible resistance. The indicators are bearish but consistent with support at this level. The caveat is that neither is truly rolling over yet which leads me to think that consolidation or retreat is still possible. A move above the moving average would be bullish with resistance near the current all time high. Support is the long term up trend line, a break below which would be bearish with next target near the long term up trend line.

The Dow Jones Industrial Average posted the next largest decline, -0.13%. The index created a small red bodied candle sitting on the short term moving average and the long term up trend line and looks like it could fall through. Stochastic is showing a bullish crossover, in line with the prevailing trend, but MACD remains bearish and %D is still pointing lower so the signal is very weak. A fall through support could take the index down to my support target near 21,200 for a correction of -5%. A move up would confirm trend but face resistance at the all time high.

The NASDAQ Composite fell the least, only -0.11%, as rotation within the tech sector begins to cool of. The index created a small red candle hanging from the short term moving average and appears set to move lower. The indicators are consistent with support at this level but show signs that it may be tested again. A fall from the moving average may find support at 6,200 or just below along the long term up trend line. A break above the moving average would be bullish and trend following but face resistance at the current all time high.

I will start by saying I am still firmly a long term bull. The trends, the economics, the earnings and the outlook all scream bull market to me. That being said the near term is very iffy and leading me to be cautiously bearish. The charts are setting up for a correction that is growing more and more apparent every day. This correction may be sparked by Trump antics, or by Janet Yellen's speech tomorrow but those will be excuses. The correction will be caused by good old fashioned market mechanics and ultimately a great thing for the health of the long term bull market. We're in between earnings cycles, outlook is a little cloudy if positive and there is plenty of political nonsense to keep the market on its toes. I may be wrong, a correction may not come but it's better to be safe than sorry. If it does come I'll be ready to jump back in.

Until then, remember the trend!

Thomas Hughes

New Plays

Take the Day Off

by Jim Brown

Click here to email Jim Brown
Editor's Note

Take Friday off and give yourself a three-day weekend. Tell your boss I said it was ok. The markets are just passing time ahead of Janet Yellen's Friday speech. This is the lowest volume week I can remember in recent history. For the last four days the average volume was just over 5.2 billion shares. Friday will probably not break 5 billion unless Yellen says something very positive or develops a bad case of foot-in-mouth disease.

Traders are either on vacation, waiting on the Yellen & Draghi speeches or sitting on the sidelines waiting for a buying opportunity in September. There is no reason to trade in this environment. Bullish stocks are not rising and bearish stocks are not declining. Everything is churning sideways or slightly bearish.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Lackluster Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes declined with the exception of the Russell and Biotech Index. The gain in the biotech stocks were the reason the Russell posted a minor gain. That lifted the Russell index. The rest of the big caps indexes traded flat on very low volume but closed with small declines.

Friday is the big speeches by Yellen and Draghi and they can move the market. Traders are either on vacation, waiting on the speeches or avoiding weekend event risk. Friday is not likely to be a big day unless Yellen says something positive. It will be a time to take the day off.

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

HIBB - Hibbett Sports
The long put position was stopped at $12.35.

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


KTOS announced a new contract win from SKY Perfect JSAT, Asia's largest satellite operator. Shares spiked at the open but faded to only a minor gain in a weak market. Closed at an 8-day high.

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 decline but holding 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. Only a minor gain.

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. Closed at a 5-year low.

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. Minor rebound from Tuesday's 45-yr low close.

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. There was a minor rebound in the retail sector this morning that spiked HIBB on some short covering. We were stopped out for a minor loss.

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:

Closed 8/24/17: Long Oct $10 put @ 60 cents, exit 25 cents, -.35 loss.

SABR - Sabre Corp - Company Profile


Sabre rebounded sharply on no news. This was probably left over buying from the refinancing of their debt on Wednesday. Shares missed our stop loss by 11 cents.

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.

Update 8/23/17: Shares were up slightly after the company announced the refinancing of their $570 million Term A and $1.89 billion Term B credit facilities and $400 million revolving credit facility. The interest rates were lowered and the due date on the Term A facility was extended 12 months.

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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