Option Investor

Daily Newsletter, Tuesday, 9/5/2017

Table of Contents

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

Market Wrap

Welcome to September

by Jim Brown

Click here to email Jim Brown

September is known as the most volatile month of the year.

Market Statistics

September is certainly off to a good start if it is going to live up to its reputation. The North Korean H-bomb test tanked the markets for the second Tuesday in a row and this time there was no immediate rebound back to positive territory. This particular test is more troubling than the missile over Japan because it ratchets up the complexity level for possible responses. Add in the expected ICBM test for next Saturday and it is clear North Korea is not going to stop on its drive to be a nuclear power with long distance reach until somebody stops them. That is the biggest worry. If they are not stopped now before they have a fully capable delivery system and inventory of armed missiles, stopping them later will be a lot more dangerous for everyone.

Countries without a missile aimed at their cities are not as excited about the entire Korean threat scenario so support from the UN and other allies is weak. That means the U.S. may have to go it alone with only South Korea and Japan in their corner.

The market tanked on the potential for a future event rather than the H-bomb test on Sunday. That potential will only increase as the country continues to test bigger missiles and bigger bombs.

The Nasdaq and S&P rebounded from their lows but the Dow struggled to hold the 21,750 level all afternoon. There was no material rebound in the Dow. The Dow was down -281 at its lows and closed with a -234 point loss.

The economic reports did not provide any support for the market. The ISM-NY declined from 62.8 to 56.6 for August. The only good news in the report was a sharp jump in the employment component from 37.8 to 56.4 and the highest level in 18 months. The overall report still suggested NY economic activity was still growing although at a slower pace.

Factory Orders fell -3.3% for July after a 3.2% gain in June. That was the largest monthly drop in almost three years. Nondurable goods orders rose 0.4% but durable goods fell -6.8%. The biggest hit to orders came from the transportation sector where orders declined -19.2% from May. A decline in auto manufacturing continued with the banks restricting auto loans to everyone except the best credits. Despite the negativity in June, orders are still up 4% over June of 2016.

On Wednesday, the ISM Nonmanufacturing Index and the Fed Beige Book will be the top attention getters. The Fed will probably say activity in most Fed regions is "moderate" and their word of choice for the last year. That means the economy is trudging along without any particular growth spurts.

There is a lot of Fedspeak this week and Fed Governor Lael Brainard warned today that the Fed should be cautious about raising rates because inflation is "well short" of Fed targets. She said the Fed should wait until there is confirmation of the direction of inflation and solid expectations the targets will be achieved.

Currently inflation is 1.4% on a trailing 12-month basis and the Fed target is 2.0%. She said the Fed should be clear it is comfortable with inflation moving over 2% before they begin to hike rates again. She is a permanent voting member of the FOMC. She warned that Hurricane Harvey raises uncertainties for the economy this year and will likely have a "notable" impact on growth in Q3.

Given Brainard's comments on rates and the flight to safety from the H-bomb test, the yield on the 10-year closed at a 10-month low and is threatening to move under 2%.

In stock news, Rockwell Collins (COL) agreed to be acquired by United Technologies (UTX) for $140 a share or roughly $30 billion including debt. Collins shareholders will receive $93.33 in cash and the rest in UTX shares. Collins shares only gained 39 cents to close at $131 suggesting there is serious doubt the deal will be approved by regulators. That was even more apparent after Boeing said it would use the power granted by its contracts with those companies and its influence on regulators to "protect our interests." Airbus also raised an alarm over the potential deal. UTX may be forced to sell numerous non-core assets to get the deal approved and to raise cash to fund the acquisition. United will borrow $15 billion and will assume $7 billion in Collins debt. They are projecting a closing in Q3-2018.

UTX shares took a major hit since about one-third of the acquisition price is new UTX shares. Moody's and S&P both put UTX ratings on review for a downgrade. UTX said it would halt share buybacks for at least the next three years. They have $2 billion remaining on a prior authorization.

In the same sector, Boeing (BA) received a favorable ruling from the WTO that reversed a ruling from the EU that the company had received prohibited support for the 777X jet. The EU ruling had banned support from the state of Washington that allowed Boeing to build a $1 billion plant to design and build the world's largest carbon composite wings for the 777X. The EU ruled that the state reduced its business and occupation taxes for Boeing in return for the company building the plant in Washington. Boeing shares fell $3 with the market.

Disney (DIS) managed to close positive after Wells Fargo upgraded the company from market perform to outperform. The analyst said investors should focus attention on companies with streaming strategies and move away from those companies without a plan. Viacom was one company mentioned and downgraded from outperform to market perform.

I understand the upgrade but investors are not paying attention. They are too focused on the cord cutting aspects surrounding ESPN and future loss of revenue. Shares closed positive today but the mouse house is right on the verge of breaking through $100 to the downside. A weak summer movie season has hurt them as well as other companies.

After the close, Hewlett Packard Enterprise (HPE) reported earnings of 30 cents on revenue of $8.2 billion. Analysts were expecting 26 cents and $7.5 billion. The company guided for the current quarter for earnings of 26-30 cents but analysts were expecting 40 cents. For the full year they lowered earnings guidance from $1.46-$1.56 to $1.36-$1.40. The cut in forecast was due to the spinoff last week of its software business into a merger with Micro Focus International. HPE was not penalized for the guidance cut because of the spinoff. Shares rallied 5% in afterhours.

Shares of Dave and Busters (PLAY) declined 5% in afterhours after the company reported earnings of 59 cents compared to estimates for 55 cents. Revenue of $280.8 million rose 14.9% but missed estimates for $282 million. Same store sales rose 1.1% but they guided for a 1-2% rise for the full year, down from prior guidance of 2-3%. They lowered full year EBITDA guidance from $276-$282 million to $270-$276 million.

MGM Resorts (MGM) announced a $1 billion buyback and said it would sell the real estate belonging to the MGM National Harbor Casino to MGM Growth Properties for $1.19 billion. The casino will continue to be operated by MGM. Shares rallied about 1% in afterhours.

Retailer Duluth Holdings (DLTH) reported earnings of 13 cents that beat estimates for 10 cents. Revenue of $86.2 million beat estimates for $82.8 million. They guided for the full year for earnings of 66-71 cents with revenue from $455-$465 million. Shares rose sharply in afterhours.

Storm season is definitely upon us. September 10th is normally the peak in hurricane activity but they can still form until November 1st. Currently there are three storms on the map. Irma is a category 5 hurricane with 185 mph winds that will more than likely hit Puerto Rico, the Dominican Republic and Cuba a glancing blow before running down the west coast of Florida. This is going to be a major storm and our only hope is that it loses some strength in its brush with Cuba. Analysts believe it could decline to a category 4 but still dangerous.

Jose is following Irma with 45 mph winds and rising. It is still classed as a tropical storm but it is increasing in intensity. It is expected to turn north before it gets to Florida and could make landfall further up the east coast.

Tropical storm 13 is forming in the western Gulf and could move up the coast to Houston. Analysts are split on whether it will strengthen significantly since it is so close to land. If it moves further offshore, it could develop into a named storm and become additional trouble for the Houston area.

Category 5 Hurricane Irma


The markets are showing a little more weakness on this dip than the prior North Korean headline. Knowing there is another ICBM test likely on Saturday could be a hindrance. Is it possible a cruise missile could appear just before the launch to set back the missile program? I would not bet against it. Since this launch is so well telegraphed, the target is well known. Even if nothing appears to stop it, there is the possibility they could launch it in the general direction of Guam or even California just to further agitate the US. This is a wild card for the markets this week.

The S&P dropped 30 points intraday but rebounded to lose only 19. That is a critical point since the 2,450 support level was broken intraday but rescued by the close. At this point, there is no obvious direction and even in normal years, September is known for being the most volatile month of the year.

The political battles have begun over the debt ceiling, budget approval and the hurricane relief funding. It is going to be a rocky few weeks.

The Dow remains the weakest index and the 50-point rebound from the lows was definitely lackluster. Home Depot and Wal-Mart rescued the Dow from a deeper loss because they were expected to benefit from Hurricane Irma sales.

Goldman Sachs was hit with the falling interest rate problem and Brainard's warning the Fed should not be in a hurry to hike rates. Goldman knocked 55 points off the Dow. United erased 46 points on the Rockwell Collins acquisition news.

Support on the Dow is 21,600, 21,500 and 21,300.

The Nasdaq Composite did not sell off as much as expected given the recent gains. The index rebounded 41 points from its lows to end with a loss of 59 points. That rebound from -100 to -59 was material. The Nasdaq rebounded 207 points from last Tuesday's lows and was at risk to give half of that back. The recovery today was impressive even though it did not make it back to positive territory.

Netflix and Microsoft posted only fractional declines and Apple was expected to decline this week ahead of the product announcement. Apple's decline could have been worse. Google is facing the potential for a monster anti-competitive fine from the EU in multiple billions of dollars on Android search practices. This could be announced in the weeks ahead so Google shares are likely to remain weak.

If the Nasdaq remains the strongest index there is a chance for continued market gains but it is slim. The September volatility is going to be a challenge for the entire market.

The Russell 2000 had a streak of 7 consecutive gains at the close on Friday. That streak ended today with a 1% decline but it could have been worse. The index held on support at 1,400 and that is somewhat bullish.

I would be hesitant to add long positions this week. Now that we are in September and volatility is expected to increase in normal years, the North Korean problem, the probable Saturday missile launch, the political battles over the debt ceiling, annual budget and hurricane funding are likely to fuel that volatility in the weeks ahead. September normally provides a buying opportunity but normally late in the month.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Patience Please

by Jim Brown

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Editor's Note

Rushing into volatile situations is rarely conducive to a positive outcome. September is known for producing buying opportunities. However, today is not likely that opportunity. September is the most volatile month and the buying opportunities normally come at the end of the month. With the long list of negative catalysts ahead and zero positive catalysts, the market has a monster wall of worry to climb if it is going to move higher. I recommend we keep new plays to a minimum this week until we see what happens next weekend and the expected North Korean missile launch. If the U.S. were to interfere with that launch, it could be a major event.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Could Have Been Worse

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market decline could have been worse but some indexes closed well off their lows. The S&P rebounded 11 points from its lows to close down 19 points. The difference between 19 and 30 is a lot because the low at 2,446 was below initial support at 2,450. The rebound suggested there were still some dip buyers but there was still a lack of conviction.

The Russell managed to hold at support at 1,400, which was somewhat bullish given its 7-day rally that ended on Friday. The Dow closed at a 2-week low with very little rebound. The Dow remains the weakest index.

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

CIEN - Ciena Corp
The long position was entered at the open.

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BULLISH Play Updates

CIEN - Ciena Corporation - Company Profile


No specific news. Only a minor decline in a weak market.

Original Trade Description: Sept 2nd

Ciena Corporation provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. The company's Networking Platforms segment offers hardware networking solutions optimized for the convergence of coherent optical transport, optical transport network switching, and packet switching. Its products include 6500 Packet-Optical Platform and the 5430 Reconfigurable Switching System, Waveserver stackable interconnect system, CoreDirector Multiservice Optical Switches, and OTN configuration for the 5410 Reconfigurable Switching System, as well as Z-Series Packet-Optical Platform; 3000 family of service delivery switches and service aggregation switches, and the 5000 family of service aggregation switches, as well as 8700 Packetwave Platform and the Ethernet packet configuration for the 5410 Service Aggregation Switch; and 4200 Advanced Services Platform, Corestream 5100/5200 Advanced Services Platform, Common Photonic Layer, and 6100 Multiservice Optical Platform. This segment also sells operating system software and enhanced software features embedded in each of these products. The company's Software and Software-Related Services segment offers network management solutions, including the OneControl Unified Management System, ON-Center Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release, and Planet Operate; and Blue Planet network virtualization, service orchestration, and network management software platform, as well as related installation, support, and consulting services. Its Global Services segment provides consulting and network design, installation and deployment, maintenance support, and training services. Company description from FinViz.com.

Ciena reported earnings of 51 cents that beat estimates of 49 cents. Revenue rose 9% to $728.7 million and beat estimates for $726.9 million. Gross margins were 45% with an 11.3% operating margin. They ended the quarter with $854.1 million in cash and generated free cash flow of more than $50 million. Shares were knocked for a 15% loss on the news.

They guided for Q3 revenue of $720-$750 million and a record quarter. Analysts were expecting $766 million.

The CEO talked to a Barron's analyst after the earnings call and was very upbeat. He said we are still in bullish mode with 7% annual growth and 5% growth in North America. Compound growth over the last five years is 9%. The Q3 guidance takes into account two factors. Government spending overall has slowed. That means less spent on networking equipment. Secondly, Tier One telecom operators get a lot of government business and the slowing government spend has affected them as well. There has been a lot of regional M&A that is being digested. This impacts the entire networking market not just Ciena. We are still predicting 7% growth and a record quarter despite the temporary government slowdown.

Piper Jaffray reiterated an overweight rating saying they understood the government and regional provider problem and Ciena had a lot of positive signs despite this government slowdown. Ciena is executing well, new product acceptance is good. We believe Ciena is the best positioned system supplier for the two hottest segments of the optical market.

Citi upgraded from neutral to buy. Doughtery reiterated a buy and $27 price target.

Earnings Nov 30th.

Shares declined after earnings to support at $21.50 and rebounded 2% on Friday.

Position 9/5/17:

Long CIEN shares @ $21.89, see portfolio graphic for stop loss.
Alternate position: Long Nov $23 call @ 93 cents, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


New high in a weak market. Unfortunately, after the close they announced a secondary offering of 12.5 million shares that will increase the float by 14%. If I recommended we sell at the open on Wednesday, we are going to get hit with the normal "sell the news" decline. If we retain the position, stocks normally rise after a secondary is completed. We can either take a loss on Wednesday or hang on for a bigger gain later. I am recommending we hold the position. I am removing the stop loss to avoid being knocked out of the position for a loss. Shares declined to $12.80 in afterhours, a drop of $1. If that is all the decline we get, I would be very happy.

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. Minor 1 cent decline after a nice rebound from the market dip.

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. Very minor decline of 5 cents and holding the recent gains.

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

DF - Dean Foods - Company Profile


No specific news. Holding at the 5-year lows.

Original Trade Description: August 9th.

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

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

Expected earnings Nov 8th.

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

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

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

Position 8/10/17:

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

SABR - Sabre Corp - Company Profile


No specific news. Finally, a resistance failure 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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