Option Investor

Daily Newsletter, Tuesday, 8/29/2017

Table of Contents

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

Market Wrap

Unexpected Surprise

by Jim Brown

Click here to email Jim Brown

The strong buy the dip rebound in the markets was very positive for the near term outlook.

Market Statistics

I was worried yesterday evening that a knee jerk reaction to the North Korean missile launch would push the markets below recent support levels and trigger another round of selling from stop losses and investor frustration. I wrote last night that it would test the conviction of those still buying dips. Apparently, their conviction is in good shape given the strong rebound in the markets.

This was one more opportunity for sellers to take control of market direction and they were unable to do it. The strong rebound suggests a lack of sellers as we close out August and move into the normally more volatile September.

While political events and geopolitical headlines may still cause volatility in September, it would probably take a government shutdown to cause any real market damage. Strong earnings, a Fed on hold and the constant chatter about potential tax reform, appear to be the right mix for holding stocks near their recent highs.

The Dow fell -132 points at the open to break just below 21,700 before rebounding to nearly 21,900 before end of day profit taking slowed the gains. The Dow traded in a 206-point range and closed near the highs. That 21,900 level has been decent resistance for the last week.

The S&P Case Shiller Home Price Indexes for June showed a 5.7% rise year over year and flat with May. The Black Knight Home Price Index showed a rise of 6.2% over the same period and a 0.1% increase from May. Both reports were ignored.

Consumer Confidence for August rose from 120.0 to 122.9 and the second highest level since 2000. The highest was 124.9 in March. The present conditions component rose from 145.4 to 151.2 and the highest level since 2001. The expectations component rose from 103.0 to 104.0.

Those respondents planning on buying a car declined from 13.6% to 12.6%. That may change dramatically in a couple months after 500,000 cars were destroyed in Hurricane Harvey. Prospective homebuyers declined from 6.7% to 6.4%. Potential appliance buyers rose from 47.7% to 50.2%.

Confidence could also decline in September because of the hurricane. That is going to be very costly and result in thousands of job losses from destroyed businesses. Eventually, the rebuilding boom will hire thousands of workers but that will take months to get started because the insurance checks will have to arrive first. Analysts believe up to 80% of the people in Houston did not have flood insurance and that means no checks to repair the tens of thousands of dollars in damage to each home.

After the bell, the API crude inventory report showed a decline of 5.78 million barrels of oil compared to estimates for a 1.75 million barrel decline. Gasoline inventories rose 476,000 barrels for the week ended August 25th.

More than 26% of U.S. refining capacity is now offline in the Houston area. That is roughly 5 million barrels per day. That means crude inventories are going to rocket higher over the next several weeks until those refineries can restart operations.

WTI prices have declined sharply over the last couple days because of the potential for inventories to rise. WTI briefly traded under $46 today but the decline is probably not over.

More than 11% of Gulf production was offline in advance of Harvey. Most of that production is being restarted now that Harvey is fading. Several producers in the Eagle Ford halted operations as Harvey made landfall and they will be restarting as soon as water levels decline.

This is a map of the road closures in the Houston area as of this afternoon. Galveston Island was still being pounded by torrential rains but they are expected to dissipate by Wednesday morning. It could take a couple weeks to reopen all the roads in Houston because once the water drains, the stalled cars will have to be towed and all the debris removed from the hurricane winds. If you live in the Houston area, you are probably not going to be driving a lot in the near future. KHOU real time road closure map.

This is payroll week but unless there is a major miss in either direction, the market should not care. The Fed is on cruise control and is not expected to hike rates again until the August 2018 meeting based on the Fed Funds Futures. According to the futures, there is a zero chance of a rate hike at the September meeting.

The ISM Manufacturing Index on Friday is the next most important report compared to the payroll reports. It is expected to decline slightly and it would take a major drop to get anybody excited.

The few earnings reports we have left will generate more interest than the economic reports. The biggest one to watch would be the Costco earnings on Thursday. I am very tempted to place a long trade before that report even though we do not normally hold over earnings reports. All of the furor over the Amazon/Whole Foods deal is vastly overdone. The two stores are not even in the same category and Whole Foods is not going to impact Costco.

Ciena, Palo Alto Networks and Lululemon should also attract some investor interest. After this week, 498 S&P 500 companies will have reported and the Q2 cycle is over for all practical purposes.

The dollar fell at the open to a low of 91.62 on the Dollar Index. This is the lowest level since January 2015. The index rebounded with the market but it is still at 31-month lows.

The yield on the ten-year note fell to 2.091% at the open and rebounded to 2.136% at the close. That is a ten-month closing low on a flight to safety trade. The problem with North Korea is not over and it will only get worse in the months ahead until somebody finally responds with military force. North Korea is the most heavily sanctioned country in the world and they are still ignoring all the UN resolutions against them. As current UN ambassador Nikki Haley said today, "enough is enough." The UN Security Council held a meeting this evening to consider what to do about North Korea. The toothless Security Council ended the meeting with only a strongly worded statement demanding North Korea cease all missile and weapons research and development. I am sure Kim Jong-Un is feeling appropriately censured and will give the orders immediately.

United Technology (UTX) is reportedly in a deal to buy Rockwell Collins (COL) for more than $20 billion. The two companies have discussed a share price for COL around $140. That would be about $9 over today's close. Rockwell just closed its acquisition of B/E Aerospace this year. Rockwell makes cockpit and communication systems and UTX makes Pratt & Whitney jet engines, among other things. Investors clearly like the combination because UTX shares rose 3% on the news.

Apple shares are well on their way to their pre-announcement ramp. Cleveland Research upgraded them today to buy with a $197 price target. The iPhone 8 leaks are breaking out everywhere complete with pictures. This means production has begun and people are taking phones and parts to leak on the internet. The general disappointment has been over the wireless charging feature. Apple has reportedly gone with a 7.5-watt base unit rather than the global standard for a 15-watt unit. Researchers claim the iPhone will not work with the chargers already in the market. That means users will have to buy Apple licensed chargers if they want one in multiple locations. That insures another revenue stream for Apple.

CEO Tim Cook collected $89.6 million in stock as part of a ten-year deal he signed when he became CEO in 2011. He was able to sell 560,000 of his restricted shares, which he did last week. Half of the shares vested because of his length of time on the job and the other half because Apple delivered returns in the top one-third of the S&P 500 index over the last three years. Apple sold another 291,000 shares for $46.4 million to pay Cook's taxes on his sales. He still has options on 2.94 million shares worth $479 million at today's price. He will receive 560,000 shares of stock annually from August 2018 through August 2020. His final payment under his ten-year contract will be 1.26 million shares in August 2021. It is a good gig if you can get it.

The disaster for the day was Best Buy (BBY). The company reported adjusted earnings of 69 cents that beat estimates for 63 cents. Revenue of $8.94 billion also beat estimates for $8.66 billion. Same store sales of 5.4% beat estimates for 2.2%. They guided for the current quarter to earnings of 75-80 cents and revenue of $9.3-$9.4 billion. Analysts were expecting 65 cents and $8.99 billion. Shares fell 12% on the news.

The problem came when the CEO developed foot in mouth disease. Hubert Joly cautioned analysts on the conference call saying the company may not be able to sustain the mid single digit same store sales. He said, "We do not believe that mid-single-digit comps are a new normal" but positive comps are achievable. Even after giving the positive comps warning, he guided for 5% same store sales in Q3. They are expecting stronger phone sales because of the new Samsung Note 8 and the iPhone 7, 7s and 8.

"Positive" comps are a long way from the 5.4% reported in these earnings. The company guided to full year revenue growth of 4%, up from prior guidance of 2.5%. Analysts said they were picking up business from the closing of Sears and Kmart stores along with the bankruptcy of HH Gregg.

Multiple analysts suggested the decline was a buying opportunity since the actual earnings and guidance were strong. Best Buy is known for being cautious and analysts expect them to beat in Q3. Support is $53 and I would be a buyer of a rebound from that level.

Finish Line (FINL) warned that Q2 sales declined -3.3% to $469.4 million thanks to a -4.6% drop in same store sales. That should equate to earnings of 8-12 cents and analysts were expecting 38 cents on revenue of $477.2 million. The CEO said, "The marketplace for athletic footwear became much more promotional as our second quarter progressed resulting in challenging sales and gross margin trends." The company guided to full year comps of -3% to -5%, down from prior guidance of "low single digit growth." The new outlook suggests full year earnings of 50-60 cents compared to prior guidance for $1.12-$1.23.

The company also said the board adopted a poison pill to prevent the "likelihood that any person or group would gain control of Finish Line through open market accumulation or coercive takeover tactics that the board determines are not in the best interest of the company and shareholders." Analysts said the pill was put in place to prevent a takeover attempt by UK based Sports Direct, which currently owns 8% of Finish Line and has wanted to expand in the USA.

Drug technology company Catalent (CTLT) reported adjusted net income of $185 million that rose 21.1%. EBITDA of $450 million rose 12.1%. Revenue for the full year rose 12% to $2.07 billion. They guided for 2018 for revenue of $2.16-$2.24 billion, with 6% to 10% EBITDA growth and net income growth of up to 14.6%. Shares spiked 14% on the news.

After the bell, Berkshire Hathaway (BRK.B) announced it was exercising warrants to acquire 700 million shares of Bank of America at a steep discount. Six years ago as the bank was recovering from the financial crisis, Berkshire made a large investment to shore up confidence in the bank. The execution price on the warrants of $7.14 and BAC shares closed today at $23.58. That roughly triples the investment he made in 2011 and makes Berkshire the largest shareholder at 6.6%. To pay for the shares Berkshire traded $5 billion in Bank of America preferred shares purchased in 2011. The new shares are worth about $16.5 billion. Berkshire was collecting $300 million a year in the preferred dividends and will now earn $336 million a year in dividends on the common stock. That is like winning Powerball every year.


The strong rebound in the markets is a very positive event despite the major indexes closing at resistance once again. The opening drop could have triggered an even larger sell off and it did not happen. That is short term bullish. Even with the 206 point Dow rebound, the volume remained lethargic at only 5.3 billion shares. There was no panic selling on the decline and no rush to buy on the way back up.

The broad market advance decline line was almost dead even with 3,489 advancers to 3,568 decliners. Given the market volatility, it was good to finish nearly even.

While the rebound was encouraging, resistance at 2,450 remained rock solid. That could change at any time since market sentiment probably improved on today's rebound. The morning dip did not even come close to initial support at 2,420 so traders are likely to assume there is little risk in the near term market. That could be a bad assumption once we get into September but at least it should work for this week. The 11 S&P sectors were split between positive and negative.

The Dow did not reach resistance at 21,900 but came within 21 points before stalling. It was still a good effort. United and Boeing were the biggest gainers and added nearly 40 points to the Dow. Nike was the biggest loser on the Finish Line guidance warning.

The Dow is well above support levels at 21,600, 21,500 and 21,300. We could dip to the lowest one and it still would not be a major market drop. The Dow is holding within 2% of its recent high despite all the headline volatility.

I was most worried about the big cap tech stocks breaking critical support levels but my worries were misplaced at least for today. The opening drop did break support but traders rushed into the gap and they all rebounded back into safe territory with the exception of Nvidia, which closed fractionally negative.

If today's support break did not create the cascade selling, then traders are now going to see those support levels as buying opportunities rather than threat levels.

The Nasdaq is still in danger is retesting support at 6,100 in September. Resistance at 6,300 remains solid and now we need to see if investors can tack on another day of gains and move above that resistance. That would be very bullish given our point on the calendar.

The Russell managed to add to its recent rebound gains but it is finally reaching resistance at 1388-1400. This will be the real test of investor sentiment.

I was impressed with the market rebound. I did not expect a material gain after the sharp drop in the futures on Monday night. However, North Korea is a paper tiger and as long as nobody takes military action against him the situation is not likely to flare up into a real event. Kim is predictable. He wants attention and he is not embarrassed by constantly launching rockets that fail. He wants to protect himself against being removed from power by using his nuclear bluff until it turns into a reality. Standing up to the rest of the world endears him to the misled citizens in his country. There will be future headlines but the world is powerless to stop him short of blockading the entire country, which will never happen.

When President Trump did not respond to the missile over Japan with a couple cruise missiles aimed at his missile facilities, the event became just another throw away headline on North Korea.

The strong earnings and weak expectations for Fed action have set the stage for another rally once the budget battle and debt ceiling issues are resolved in late September. The best six months of the year begin on November 1st and many investors are hoping for a normal buying opportunity in September or early October. After today's rebound, they may be disappointed unless there is an actual government shutdown. The odds of a material correction are declining with every day that passes.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Cautionary Day

by Jim Brown

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Editor's Note

Headlines have become the daily market driver. The headline last night caused us to be cautionary today and the market posted a decent rebound. I scanned my list of small cap stocks tonight and I could not find anything that was screaming "buy me." There is no reason to force a new play just because it is a newsletter day. There will always be another day to trade as long as we conserve our capital.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Market Passed the Test

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market recovery from the opening drop was a passing grade. I wrote on Monday night, a rebound from a sharp decline at the open would be evidence the buy the dip mentality was alive and well. The Dow dropped -135 at the open and rebounded to gain 57 points. That is a pretty convincing move BUT resistance held on the Dow, S&P and Nasdaq. Traders bought the dip but they could not lift the indexes over resistance. This suggests we are not going to see any big declines this week or early next week.

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

UCTT - Ultra Clean
The long position was stopped at the open.

FTR - Frontier Communications
The short stock position was stopped 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. Defense stocks got a boost from the Korean missile event. KTOS closed at a new 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.

SYMC - Symantec - Company Profile


No specific news. Shares gave back some of their recent gains when the market dropped at the open.

Original Trade Description: August 26th.

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Digital Safety and Enterprise Security. The Consumer Digital Safety segment provides Norton-branded services that provide multi-layer security services across desktop and mobile operating systems, public Wi-Fi connections, and home networks to defend against online threats to individuals, families, and small businesses. This segment also offers LifeLock-branded identity protection services, such as identifying and notifying users of identity-related and other events, and assisting users in remediating their impact; and digital safety platform designed to protect information across devices, customer identities, and the connected homes and families. The Enterprise Security segment provides endpoint protection products, endpoint management, messaging protection products, information protection products, cyber security services, Website security, and advanced Web and cloud security offerings. Its enterprise endpoint, network security, and management offerings supports evolving endpoints and networks, as well as provides an integrated cyber defense platform. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. Company description from FinViz.com.

Symantec is the largest provider of security products for retail buyers. They have an excellent suite of firewalls and antivirus programs. I have used everyone in the market at one time or another and Symantec has always been the best for me.

Last week they announced something different. They announced a secure router that handles everything in your house. It has special security for smartphones, tablets, PCs, IoT devices, etc. It has a handy user friendly interface and you can set at the router level, individual passwords for everyone in the family with individual settings by password. Say you have a 12 year old boy in the house. You can set different parental exclusions for him than you would for an 8 year old in the same house. You are in charge of everyone's access regardless of what device they are using.

The secure router blocks attacks before they get to your PC and before Windows has to deal with them. The router is not cheap but compared to what it does, it is cheap for the number of functions. How much does it cost to have your PC compromised? The router is $300 and comes with a year of service. After the year is up it goes to $10 a month. That is an entirely new revenue stream for Symantec. Obviously, it will not show up in their earnings for several quarters but the stock is rising on the news.

You can read the full press release HERE.

Expected earnings Nov 1st.

The stock is at the upper end of the range that I recommend in Premier Investor. With the potential for volatility in September, I am not recommending we go long the shares. This will be an option only position so we can try and ride out some of the volatility with minimum risk.

Update 8/28: Symantec said over the weekend they have identified a sustained cyber spying campaign, likely state sponsored, against Indian and Pakistani entities. The espionage effort began in October. India, China and Pakistan have raised military readiness over the last several weeks.

Position 8/28/17:

Long Oct $31 call @ 48 cents, see portfolio graphic for stop loss.


UCTT - Ultra Clean - Company Profile


No specific news. Shares dropped to a 2-week low with the market at the open to stop us out before rebounding to a 1-week high.

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:

Closed 8/19: Long UCTT shares $22.70, exit $21.85, -.85 loss.
Alternate position:
Closed 8/19: Long Sept $22.50 call @ $1.50, exit 1.00, -.50 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. Closed at a 5-year low on Monday. Gained a penny today.

Original Trade Description: August 9th.

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

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

Expected earnings Nov 8th.

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

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

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

Position 8/10/17:

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

FTR - Frontier Communications - Company Profile


No specific news. Shares of FTR dipped slightly at the open but rebounded strongly to stop us out on the short position. We still have the long put position and it will move to the Lottery Play section next weekend.

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:

Closed 8/29: Short FTR shares @ $12.72, exit $13.75, -1.03 loss.
Alternate position: Long Oct $11 put @ 90 cents, see portfolio graphic for stop loss.

SABR - Sabre Corp - Company Profile


No specific news. Shares are fighting resistance at $18.50.

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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