Option Investor

Daily Newsletter, Thursday, 9/7/2017

Table of Contents

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

Market Wrap

The Calm Between The Storms

by Thomas Hughes

Click here to email Thomas Hughes


With Hurricane Harvey and the ECB behind us market eyes turn to Irma and the FOMC. Irma is a strong Category 5 storm and targeting a far larger swath of the US mainland, from the tip of Florida up into the heart of Appalachia and scouring the southeastern coastline from the Keys to Cape Lookout. There are already gas shortages reported as evacuees flee target areas, supplies are limited and destruction is expected to be heavy. Landfall is expected early Saturday, the approach and aftermath are sure to affect market sentiment.

On the International front markets were buoyed by the rally in US equities Tuesday but gains were minimal as the approaching storm, an ECB meeting and approaching FOMC meeting loom over the market. In Asia indices were mixed; both Chinese indices fell while Japan and Korea made small gains. European indices were more firmly bullish but gains were still small. Today's ECB meeting was as to be expected, a whole lot of nothing that left traders wondering what the bank really thinks. They left rates unchanged and gave little hint in the statement as to direction. The press conference was a different story, Draghi seemed to be both hawkish and dovish at the same time. He said a decision on “policy calibration” was coming this fall, commenting on the breadth and strength of recovery and then hedging those sentiments saying the bank was ready to increase QE if needed.

Market Statistics

Futures trading indicated a mildly negative open in the early hours. They crept higher as the morning wore on, reaching break even just before 8:30AM. The daily data releases and ECB statements lifted added a little lift to the trade and put the indices on track for a positive open. The SPX opened with a gain slightly greater than 2 points or 0.08% and gains held for the first 15 minutes or so of trading. After that the index dipped down to break even and then down into negative territory giving up about 5 points at the low of the day. The lowest low within the days narrow range came around 12:45 and resulted in nothing more than a small bounce and continuation of sideways trading. By late afternoon the indices had returned to near break even where they remained into the close of the day.

Economic Calendar

The Economy

This is the first week for Hurricane Harvey to impact economic data. The weekly initial jobless claims are perhaps the most current read on the economy and lag by a week only. The continuing claims lag that by a week, and the total claims figure by another week so the first impact of Harvey to those figures will be next week and the week after.

Initial jobless claims jumped 62,000 to hit a high not seen since April 18th, 2015. The number of initial claims is 298,000 and likely to remain elevated over the next few weeks. The previous week's figure was not revised. The four week moving average of claims rose 13,500 to hit 250,250. On a not adjusted basis claims 27.5% versus an expected 1.3% and are now up YOY by 15%. The caveat to these numbers is of course the storm, and the coming storm. Going into this week the numbers were good, trending low and lower with no expectations of change. I will assume trends will remain stable in unaffected parts of the nation but the overall affect on labor and economics is yet to be seen.

Continuing claims fell by -5,000 but expect this number to rise next week and in the coming weeks. Claims are now 1.940 million and in line with expectations. The previous week's figure was revised up by 3,000, the four week moving average fell by -4,000. At this time the figure is trending low and near the historic lows, consistent with labor market health.

The total number of claims fell -44,256 to 1.872 million. This is the lowest level since July 1st, consistent with seasonal expectations and long term labor market trends. Assuming no impact from the storm this number was expected to fall to a long term low over the next few weeks and is well on its way.

Unit Labor Cost and Productivity for the second quarter was released today as well. The data shows a 1.5% increase in productivity as output increased 4% and hours worked rose 2.5%. Year over year productivity is up 1.3% with a 2.8% increase in output and 1.5% rise in hours worked. This data is a win-win for the economy as it shows increased output, increased productivity and an increase in hours worked. Unit labor costs are up only 0.2% from the first quarter and down -0.2% over the past 12 months.

The Dollar Index

The Dollar Index fell more than -0.5% to break through support and set a new 2.5 year low. Today's move was driven by the ECB decision and comments as well as US data and impact from the storms. While Draghi's comments included lingering dovishness he can't seem to shake they did put a bid in the Euro. He raised forward outlook for GDP and indicated a policy decision would be made later this year. Assuming that there is no deterioration in the data this means taper/tightening.

The EUR/USD shot up to test long term resistance on the news and looks like it will break through. The dollar additionally lost ground against the yen and other world currencies as economic data remains in that Goldilocks range where we have growth and little to no inflation. The indicators are in support of today's drop in the DXY, suggesting targets low in the $80's range. The risk is that economic data will pick up and/or the FOMC will starting talking hawkish again.

The Gold Index

Gold prices firmed as the dollar weakened. The metal is supported by a weaker and weakening dollar as well as geopolitical turmoil that doesn't appear to be dissipating. Spot prices jumped more than 0.80% to trade above $1350 and at a one year high. Price is not at a significant resistance target and round number that could impact trading in the near term. A break through $1350 would be bullish and could take gold up to $1380 or $1400.

The gold miners moved higher in response to the increase in gold, the miners ETF GDX gaining a little more than 2.35% to set a new 7 month high. The move is supported by rising prices but is approaching a long term resistance level. This level is near $26 and the top of the long term trading range. The indicators are bullish and suggest that this level will be reached. That being said momentum remains weak and stochastic suggests an overbought asset within a trading range so caution is warranted.

The Oil Index

Oil prices were relatively stable today, trading in a tight range near $49 and closing with a small loss. Over the past few days prices have edged up as Texas oil country begins to come back to life and they may edge higher. Irma is putting an additional strain on gas supplies that will equate to draw-downs of supply in the coming weeks. In the near term resistance is at $50, a break above there would be bullish with targets near $52.50. Regardless, with oil trading near the high end of the short term trading range forward earnings outlook will stabilize and firm.

The energy sector is also moving higher. The Oil Index gained roughly 0.50% to set a one month high but still face resistance at the long term moving average. The index is bouncing higher from long term support and may have entered my long awaited reversal pattern. The indicators are bullish and gaining strength so a move up to test resistance at the long term moving average looks likely in the least. A break above the moving average would be bullish but face additional resistance before full reversal is assured.

In The News, Story Stocks and Earnings

GE took a hit today when analysts at JPMorgan said the company's fundamental's are most likely worse than we think. They say the company's reset is going to be undermined by structural weakness in power, a less than expected rebound in oil & gas and a more GAAP approach to accounting. They say there are downside risks to their already low estimates and compare the company's outlook to that of Tyco in the 1990's. Shares of the stock fell nearly -4% to hit an almost 2 year low.

GoPro updated its Q3 guidance before the bell. The company says that revenue and earnings will be at the top end of the range and above consensus as consumer trends strengthen. They also expect to see margins expand and to post a profit on a non-GAAP basis. Shares of the stock jumped more than 12% to create a pinbar doji at a significant resistance level.

The VIX closed with nearly no gain or loss, creating a small red bodied candle sitting on support at both moving averages. The index shows an elevated amount of fear but not an extreme amount and is trending near the middle of the 6 month range and appears to be stabilizing at that level. We may see additional spikes on news and events but so long as the index remains below the 16 level and within the trading range bull market conditions are likely to persist over the longer term.

The Indices

With so much hanging over the market's head right now the fact the indices are holding their levels shows some resilience. Today's action was impacted by data, the FOMC, the ECB and earnings. Disney and Comcast both issued profit warnings that took a bit of steam out of the media sector. Disney for one fell -3.9%. The Dow Jones Industrial Average posted the largest decline, -0.10%, creating a small red bodied candle. Today's candle is sitting on the short term moving average and closes below it, as well as the long term up trend line, but does not confirm a break of support. The indicators are mixed but generally consistent with support. A break below the moving average would be bearish with a target near the long term moving average. A move up would be trend following and bullish with potential resistance at 22,000 and then the all time high.

The S&P 500 also closed with a loss, -0.02%, and created a small red bodied candle. Today's candle is sitting on the short term moving average and confirms, in its small way, support at that level. The indicators are both bullish if on the weakside, as are both moving averages, suggesting additional upside is on the way. Support is near 2,460, a bounce from here would be bullish and trend following. A break below the short term moving average would be bearish but near term only, with target near 2,425 and the long term up trend line.

The NASDAQ Composite posted the smallest gain, 0.07%, and created a small doji candle. The index is sitting above the short term moving average appears to be consolidating after a trend following bounce from support. The indicators and both moving averages are rising in confirmation of the move and suggest higher prices are on the way. A bounce from the moving average would be bullish and trend following with upside target at 6,600 in the near term.

The Dow Jones Transportation posted the largest gain, 0.39%, and looks the most bullish. The index is consolidating above the long term up trend line, the long term moving average, the short term moving average and the 9,300 resistance line that has been in play over the last year. The indicators are bullish and support a strengthening market with both MACD and stochastic showing increasing strength. A bounce from this level would be bullish with possible resistance at 9,500 and then the current all time high.

With earnings season still a ways off and so much going on in the world it's a bit surprising to the see charts the way they are. Bullish. They are, as a group, bouncing up off long term support levels in line with prevailing trends and supported by the indicators. The only thing left for them to do, in most cases, is to break final resistance targets and move up to new highs. The VIX is a small concern but it's rise to current levels could be easily attributed to protective put buying rather than outright bearishness. I remain firmly bullish for the long term, and cautiously bullish for the near term. When and if the move higher begins I will be ready to add to bullish positions.

Until then, remember the trend!

Thomas Hughes

New Plays

Futures Falling

by Jim Brown

Click here to email Jim Brown
Editor's Note

Multiple events are causing the S&P futures to decline in overnight trading. The markets were already cautious ahead of potential weekend event risk. The S&P futures are down -5.50 as I type this. With North Korea expected to launch another ICBM on Saturday on their Founders Day anniversary, there is likely to be some event risk selling on Friday. Secondly, about 8:PM the ECB said it would consider tapering QE purchases and the Euro soared in the evening session with the dollar index falling to the lowest level since January 2015.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Dow Weakness

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow was the drag on the market with several components suffering from negative headlines. GE, DIS, TRV, VZ and GS were the big drags on the Dow with Disney warnings on earnings and erasing 30 Dow points. The Russell appears to be losing its grip on support at 1,400 and most Russell stocks were negative on the day.

With North Korea expected to launch a new ICBM on Saturday, there will likely be some weekend event risk selling on Friday.

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

DF - Dean Foods
The short stock position was stopped at $11.30.

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

CIEN - Ciena Corporation - Company Profile


No specific news. Good article in Barron's on what Wall Street is missing about the Ciena outlook. Full Article

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


Sharp 5% decline on no news erased five days of gains.

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.

Update 9/5/17: 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.

Update 9/6/17: KTOS announced a $46 million contract with the Saudi Royal Navy to assist in increasing military communications and preparedness. They also announced the QWK Integrated Solutions LLC, a partnership of multiple defense firms had won a $3.038 billion five year contract. The partnership will provide for rapid development and integration of space, missile defense, cyber, directed energy and related technologies to support SMDC/ARSTRAT and the warfighter.

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. Still volatile as it battles resistance at $18. Minor decline.

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


Symantec shares spiked $1 as Equifax reported hackers had stolen the personal data from 143 million users.

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.

Update 9/6/27: Symantec said the US and EU power grid had been hacked by state actors and they had gained access to core systems that would have allowed them to be shutdown. The hacks were loosely tied to a recently dormant group called Dragonfly with links to Energetic Bear or Kola, widely believed to be sponsored by Russia.

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 but shares rebounded just enough to stop out the short stock position. The long put position is still open and will move to the Lottery Play section.

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:

Closed 9/7/17: Short DF shares @ $11.37, exit $11.30, +.07 gain.
Alternate position: Long Sept $11 put @ 30 cents, see portfolio graphic for stop loss.

SABR - Sabre Corp - Company Profile


No specific news. Shares declined slightly with the airline sector.

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.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now