Option Investor

Daily Newsletter, Thursday, 8/31/2017

Table of Contents

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

Market Wrap

Data, Data And More Data

by Thomas Hughes

Click here to email Thomas Hughes


The data driven Fed should be in hog heaven, we got a load of it today. From labor to spending, real estate and manufacturing all the bases were touched. The underlying theme remains the same; labor markets are tight and continue to tighten, wages and spending continue to rise, inflation continues to trend well below the FOMC target 2% rate. This combination is Goldilocks for the market, supporting growth with little to no interest rate hike expectation, and the indices responded with small gains.

Asian markets were mixed. The news of the day was Chinese PMI. The official manufacturing PMI came in positive and above expectations at 51.7 while the services index fell more than expected to 53.4. The news is at once positive but positive with the dark cloud of slowing in the services sector. Chinese markets fell marginally, led by the small cap Shang Hai index, while Japan rose more than 0.75%. European indices were firmly higher following the release Eurozone inflation data. The release shows inflation rising more than expected at 1.5% and the highest level in four months.

Market Statistics

Futures were positive all morning, starting with small gains and gradually rising to indicate an open near to 0.35% following the release of today's data. The open was a little intense but not too bad, the SPX gapped up by about 5 points and extended that to about +12 points by 10:30AM. This turned out to be an early top and the intraday high until late in the afternoon. Between 10:30AM and late afternoon the indices trend sideways within a narrow range just below the early high. Late afternoon the indices moved up to test the early high and broke through to close with a gain greater than 0.5% (SPX).

Economic Calendar

The Economy

It's been a while since we had a Thursday so full of data. Starting with the Challenger report on planned lay offs none are too exiting but all support long term trends and improvements within the economy. Challenger says plans for job cuts rose 19.4% from last month to 33825. This is 5% above the August 2016 level but leaves the YTD total down -26.1%. Retail led the charge in slashing employees from the roles. Looking to the hiring portion of the report plans for hiring rose 69% on a year over year basis and are up 435% on a year to date basis putting 2017 on pace to be the strongest hiring year since the recession. Looking ahead, based on trends, we can expect to see job gains grow to near 500K next month.

Initial jobless claims gained 1,000 on top of a revision of +1,000 for a net gain of 2,000. The four week moving average of claims fell by -1250 to hit 236,750. On a not adjusted basis claims rose by 0.5% versus an expectation of falling -0.2%. Not adjusted claims are down -9.1% year over year despite this week's gains. While it seems that the down trend in initial claims may have ended the figure continues to trend near the historic low, consistent with labor market health.

The continuing claims figure fell by -12,000 from last week's not revised figure to hit 1.942. The four week moving average of claims fell -6,250 to hit 1.951 million. The two figures are edging lower while trending near the long term historic low, consistent with labor market health.

The total number of claims fell -4,225 to hit 1.916 million. This is as expected, consistent with seasonal trends and in line with long term trends. On a year over year basis the total claims figure is down -8.75% and consistent with ongoing improvement in labor and employment. Based on this, the Challenger and the ADP reports I would be very surprised if the NFP was a miss and a little surprised if it is not a positive surprise.

Personal Income and Spending were both above expectations with the silver lining of cooling inflation. Personal income rose by 0.4%, spending by 0.3%. Within the report the all important PCE prices and PCE core prices both remain below the FOMC's target rate of 2%, and have declined from the previous month. Both PCE prices and PCE Core prices came in at 1.4%, down a tenth from the previous month.

Chicago PMI came in at 58.9 in August, unchanged from the previous month. This is the 18th month of positive readings, all components of the index except employment are up on a YOY and YTD basis indicative of strong and steady growth in the manufacturing sector. Gains in production and demand were offset by declines in employment and backlogs resulting in this months unchanged figure. Adding to the negative spin on employment is the fact it fell below 50 and into contractionary territory. Regardless, with production and demand on the rise we can expect to see employment levels hold steady and possibly rebound in the coming months.

Pending home sales rounds out today's data deluge, and on a bit of a sour note. The pending home sales figure fell -0.8% and has been negative 4 of the past 5 months. The index fell from a downwardly revised 110 to 109.8 and is down -1.3% YOY. The only bright spot in this report is that the declines are due to low inventory and a lack of response from the home builders. Economist at the NAR say that inventory is being gobbled up at an alarming rate compared to the number of new homes coming onto the market. Personally, the ridiculous prices homes are going for in my neighborhood make me want to sell, but then what would I buy?

The Dollar Index

The Dollar Index firmed on the day's data but gains were capped. While the data helps firm forward economic and FOMC outlook the same was happening in Europe with the Euro, undermining and offsetting gains in the dollar. The index closed with a loss near -0.25% after pushing up to test resistance at $93.00. The index remains in down trend but a continuation of that trend is in question. Tomorrow's NFP could answer that question, if the data is strong enough it could bring the bid back to the dollar. A break below support, just below today's close near $92.00, would be bearish. A move above $93 would be bullish but still face additional resistance near $93.70 and $94.

The Gold Index

Gold gave the market the old head fake, first dipping on today's data and then shooting higher when the dollar hit resistance and reversed the days gains. Spot gold closed the session up $13.00 and 1% from yesterday and is now above the $1,320 resistance target. This move is driven by expectations for a weaker dollar and supported by global political tensions, although those have eased a bit since earlier in the week. The risk is that tomorrow's NFP will positively surprise the market and send the dollar moving back higher.

The Gold Miners ETF GDX got a bid on the move in gold, gaining about 0.5% on the move to test resistance at $24.70 and the 38.2% retracement level. Today's candle is a medium sized green one that could be a continuation signal if only it had closed at a new high and above resistance. The indicators are bullish and pointing higher suggesting resistance will be tested and maybe broken with a couple of caveats. The ETF is still within a trading range and stochastic is indicating overbought at current prices, below a resistance level, while MACD momentum remain weak. A move up could come, possibly sparked by tomorrow's NFP, but caution is due until then. Even with a break above $24.70 the ETF is still within a trading range with target near $26.00.

The Oil Index

Oil prices caught a bid as OPEC worries fade and traders focus on Hurricane Harvey, the effects on energy infrastructure and a new storm brewing off the leeward islands and aiming for Puerto Rico. So far there have been several major shut-downs, today's news includes the largest refinery and a portion of Colonial Pipeline servicing about 40% of the Southeast. WTI gained nearly 2.5% to trade above $47.00. RBOB gasoline rose more than 13%.

The Oil Index gained a little more than 0.5% to trade just below the long term moving average. The index is moving up from long term support levels but still below major resistance with indications that resistance will be tested. The silver lining to the storm could be a drawdown of US supplies. A drawdown of US supplies of gas, diesel and oil would held tilt the supply/demand imbalance back in favor of demand and in turn help support prices. If so, this could be the turning point in the energy sector I was trying to target earlier in the summer but it's a wee bit early to tell. Regardless, energy stocks are trading near 18 month lows with a semi-stable outlook for oil and positive earnings expections and so of interest to me.

In The News, Story Stocks and Earnings

Wells Fargo made big headlines today. The company revealed that the fake account scam resulted in nearly 2X the number of false sign-ups as previously thought. The reaction on the street and from Capitol Hill was not good, both calling for the board to be removed with possible legal actions to boot. Bottom line, the news reveals a culture of fraud that spanned the company and so hard to believe those in charge had no idea it was going on. Shares of the stock fell a half percent to set a 9 month closing low.

Campbell Soup reported a -1.8% decline in earnings, missing expectations for revenue and earnings. Company CEO says that the packaged foods business is challenging as disruptors invade the market and consumer tastes shift toward the fresh category. The results led management to lower forward full year guidance to a range below the current range, sparking a decline in food stocks across the segment. Shares of Campbell's fell more than -8% and look like they are heading lower.

Lululemon reported after the bell and beat on all measures. The company reported revenues and earnings above estimates driven by 2% same store sales comps and a 30% rise in online sales. The results caused management to raise guidance above current consensus and sent the stock up more than 7.5% in after hours trading.

The Indices

The indices moved up today, driven by positive economic outlook. Leading the move was the tech heavy NASDAQ Composite with a gain of 0.94%. The index created a medium sized green candle moving up from the short term moving average, approaching the current all time high and supported by the indicators. Both indicators are moving higher following trend following bullish crossovers and indicative of higher prices. Resistance is at the all time high, a break above that would be bullish.

The S&P 500 closed with a gain of 0.56% coming in second for the day. The broad market index created a small to medium sized green bodied candle moving up from the short term moving average and supported by the indicators. The indicators are both pointing higher following bullish trend following crossovers and suggest higher prices are on the way. The current all time high is next resistance target, a break above that would be bullish.

The Dow Jones Industrial Average closed with a gain of 0.25%. The blue chips created a small green bodied candle, just above the short term moving average and the long term up trend lines. The indicators are in line with a trend following signal but it has not confirmed. Stochastic has fired a strong signal, MACD has yet to make its zero line crossover in support of the move. A move up from this level would be bullish and trend following with the caveat of resistance at the all time high. A break above there would be more bullish.

The Dow Jones Transportation Average brings up the rear with a gain of only 0.09%. The transports created a small shooting star doji at a resistance level but indicated higher nonetheless. Today's move did meet resistance but is and extension of a trend following bounce, and supported by the indicators. Both MACD and stochastic are pointing higher following bullish trend following crossovers and suggestive of higher prices. A move higher would face resistance near 9,400, a move lower would find potential support at the short and long term moving averages and the long term up trend line.

At the risk of sounding fickle my suspicions of correction are dissipating. The indices are finding or have found support at long term trend lines, are bouncing higher from moving averages and supported by trend following signals. I've been bullish for the long term, waiting for the next good signal. This may not turn out to be a good signal but it bears all the hallmarks. I am bullish near term, a bit cautious with resistance levels still in play, but looking to see those levels broken. The risk is of course tomorrow's data which we will get before the market opens.

Until then, remember the trend!

Thomas Hughes

New Plays

Holiday Event Risk

by Jim Brown

Click here to email Jim Brown
Editor's Note

With the three-day rally and everything that is happening globally there is event risk. The markets are out of character for this time of year. August and September are the two weakest months of the year and the Nasdaq closed at a new high. The Dow is lagging with a close 170 points below its prior high. We are either setting up for a contrarian blowout in September or reality is going to return next week with a double top in the indexes.

With these gains on low volume and contrary to the seasonal norms, I have to question whether they will stick. Friday's volume should be the lowest for the week and given the three-day rally there could be some fear of holiday weekend event risk. There is no rush to add positions until we see what happens at this critical level.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Seasonal Rebellion

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq closed at a new high and the S&P is not far behind. The tech index has rebounded 200 points in three days to close 6 points over the prior high. The normal seasonal trends have evaporated. The S&P is only 10 points below its high but the Dow is lagging at -170 points.

The Russell had an outstanding day with a 1% gain of 14 points and closed 5 points over strong resistance at 1,400.

Bullishness is breaking out all over in a normally weak period. September is the most volatile month of the year and that starts next week. It should be interesting.

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

MRVL - Marvel Technologies
The long position was entered at the open.

DDD - 3D Systems
The short stock position was stopped at $12.95.

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

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BULLISH Play Updates

KTOS - Kratos Defense - Company Profile


Kratos received a $2.2 million for unmanned jet drone aircraft and related services. The contract was for an unnamed buyer because of security considerations. Shares only gained 5 cents but it was to 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.

MRVL - Marvel Technology - Company Profile


No specific news. Shares posted a minor gain but closed at a new high.

Original Trade Description: August 30th.

Marvell Technology Group Ltd. designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a range of storage products, such as hard disk drive (HDD) and solid-state drive controllers, as well as HDD components, such as HDD preamps components; and develops software enabled silicon solutions consisting of serial advanced technology attachment port multipliers, bridges, serial attached SCSI, and non-volatile memory express redundant array of independent disks controllers and converged storage processors for enterprise, data centers, and cloud computing businesses. The company also provides networking products comprising Ethernet solutions comprising Ethernet switches, Ethernet physical-layer transceivers, and single-chip network interface devices; and embedded communication processors. In addition, it offers a portfolio of connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated system-on-a-chip products, which are integrated into a variety of end devices, such as enterprise access points, home gateways, multimedia devices, gaming products, printers, automotive infotainment and telematics units, and smart industrial devices. Further, the company provides printer-specific standard products, as well as full-custom application-specific integrated circuits; and communications and applications processors. Company description from FinViz.com.

Marvel reported earnings of 30 cents that beat estimates for 28 cents. Revenue of $605 million beat estimates for $601 million. Free cash flow more than doubled from $38 million to $89 million. Core revenues rose 6%, storage controller revenues rose 13%. SSD chips rose from 20% to 25% or revenue. The new SSD products are rapidly gaining market share and remain a high profit item. Gross margin was 60.4%. They guided for Q3 for revenue of $595-$625 million with earnings of 30-34 cents per share.

Expected earnings Nov 23rd.

The company is in the midst of a restructuring process while they are changing their product mix for the better. Apparently it is working.

Shares spiked from $15.75 to $17.25 after earnings then pulled back slightly on post earnings depression. They rebounded today to a new 2-month high and very close to a new high.

Position 8/31:

Long MRVL shares @ $17.79, see portfolio graphic for stop loss.
Alternate position: Long Oct $18 call @ 64 cents, see portfolio graphic for stop loss.

SYMC - Symantec - Company Profile


No specific news. Minor gain but a new 4-week high.

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.


BEARISH Play Updates

DDD - 3D Systems - Company Profile


No specific news. We were stopped on the short stock position at the open but the stock rolled over and closed down -33 cents. The long put position is still open and will move to the Lottery Play section this weekend.

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:

Closed 8/31: Short DDD shares @ $13.00, exit $12.95, +.05 gain.
Alternate position: Long Sept $12 put @ 44 cents, see portfolio graphic for stop loss.

DF - Dean Foods - Company Profile


No specific news. Minor rebound from the 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.

SABR - Sabre Corp - Company Profile


Ethiopian Airlines signed up to use the Sabre reservation technology. Shares are fighting resistance at $18.50. Missed being stopped by 15 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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