Option Investor

Daily Newsletter, Saturday, 9/9/2017

Table of Contents

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

Market Wrap

One Week Down

by Jim Brown

Click here to email Jim Brown

There are only three weeks left in September and several critical events have passed.

Weekly Statistics

Friday Statistics

The biggest problems on our wall of worry for September evaporated after the House and Senate both passed the compromise proposal to fund the government for three more months and temporarily suspend the debt ceiling for the same period and allocated $15.3 billion to Hurricane Harvey relief. The government shutdown can was officially kicked down the road to December 15th. President Trump signed the bill Friday afternoon. The market should have rallied on that news but there were plenty of undercurrents that produced a drag on stocks.

The Dow opened negative and eventually gained 61 points by mid morning but barely avoided closing negative after Apple shares fell -$2.63 to subtract 18 Dow points. The Nasdaq added to the decline with a -51 point drop on the Nasdaq 100 as the big cap tech stocks fell hard.

Friday's economic reports failed to interest the market. Wholesale Trade for July rose 0.6% after a 0.7% rise in June. Because it was a lagging report for two months ago, it was ignored.

Consumer Credit for July rose by $18.5 billion after an $11.8 billion rise in June. However, June's total was the smallest gain since December. The trailing 6-mo average is $15.65 billion. I suspect July was a rebound from an accounting challenge in June. Because this was a July number, it was ignored.

The calendar for next week is devoid of any market moving reports. The price indexes will be the most important because of the Fed's desire to see some rising inflation. They will get their wish in next month's reports because of the hurricane-induced spike in fuel prices.

The yield on the ten-year treasury fell to 2.037% intraday before rebounding slightly at the close. Everyone wants to short treasuries but everyone that does loses money. The current flight to safety should continue as long as North Korea is launching missiles.

The Dollar Index fell to 91.35 and the lowest close since January 2015. The declining dollar is going to be beneficial to corporate earnings since roughly 50% of S&P-500 sales are overseas. The sharp rise in the euro is helping this earnings trend.

You cannot turn on radio or TV without seeing news on Hurricane Irma. The storm is expected to make landfall in Florida late Saturday night at Cat 4 intensity. Islands in its wake have been devastated with 80%-90% of structures demolished. This will be a major storm. Because Florida is hit more often than Texas, the response is significantly different. People have fled and emergency crews are staffed and waiting.

The market was ignoring its approach other than pounding insurers early in the week and rewarding Home Depot (HD) and Lowes (LOW). Both companies have delivered at least 1,000 truckloads each of relief supplies to local stores and have prepositioned hundreds more to rush into the areas that are hit the worst. These companies have turned hurricane response into a science.

Currently, Jose is a cat 4 storm but it is expected to turn north and back out to sea. Hurricane Katia made landfall in Mexico on Friday.

Earnings are definitely over. There are only two companies with any investor interest for next week. Those are Cracker Barrel and Oracle. This is why portfolio managers use September to restructure their positions. They analyze the recent earnings and guidance and then add/subtract positions to profit from Q3/Q4 earnings and the start of the best six months of the year on November 1st.

Kroger (KR) reported earnings on Friday of 47 cents and that beat analyst estimates for 39 cents. Revenue rose 3.9% to $27.6 billion, which barely beat estimates for $27.49 billion. Same store sales rose 0.7% compared to estimates for 0.4%. The company guided for same store sales of 0.5% to 1.0% for the rest of 2017. They guided for earnings of $2.00-$2.05 and analysts were expecting $1.98. Analysts said the revenue growth guidance was weak and shares were hammered for a 7% drop.

Part of Kroger's problem came from a blog post by Target (TGT). The retailer said it was discounting thousands of products in an effort to move away from excessive promotions. They are moving towards the Wal-Mart model of "everyday lowest price" but insisted they would still offer specials on the "right products at the right time." Target shares fell -2%, Costco -1.2% and Wal-Mart -1.5%.

Obviously, these major chains are getting ready for the price war with Amazon and Whole Foods. They should not be worried because even with the recent price cuts at Whole Foods they are still significantly more expensive. The price cuts ranged from 1% to 9% and only on some items. Once Amazon begins offering larger discounts to prime customers, it may become more competitive.

Equifax (EFX) shares fell $19 after announcing they had been hacked and information on 143 million customers had been stolen. There were some unusual trades to go along with the news. Only a couple days after the hack was discovered, several officers sold $1.8 million in shares. They sold at roughly $145 per share. This immediately caused concerns but Equifax said, "three executives sold a "small percentage of their shares" but they "had no knowledge of the cyberattack."

Also, Equifax put options trade an average of only 13 contracts per day. For the entire month of July there were only 260 put contracts traded. However, several days after the cyberattack was discovered, 2,600 of the September $135 puts were purchased for about 65 cents each. That was an investment of roughly $156,000. After Friday's stock drop, those were worth about $12 each. That is about $3.2 million. Obviously, that trader will be getting a visit from the SEC.

Equifax created a website where you can see if your data was part of the data stolen. However, you have to click through a link that says you agree not to sue them or participate in a class action suit. Otherwise, there is no way to know if your data was stolen. They are taking a lot of heat on that attempt to skirt legal responsibility.

American Outdoor Brands (AOBC), formerly Smith & Wesson, reported earnings after the close on Thursday and paid the price on Friday. They reported adjusted earnings of 2 cents that missed estimates for 11 cents. A year ago, they earned 62 cents. Revenue of $129 million missed estimates for $148 million. For the current quarter, they guided for earnings of 7-12 cents and revenue of $140-$150 million. The company said sales of firearms had continued to decline under a Trump presidency. There is no urgency to buy a gun since there are no prohibitions on the horizon. Shares fell 18%.

Finisar (FNSR) reported earnings of 40 cents that matched analyst estimates. Revenue was $341.8 million and beat estimates for $341 million. They guided for revenue of $322-$342 million and earnings of 27-33 cents. Analysts were expecting 50 cents and $370 million.

The problem gives us some insight on Apple's production problems. Finisar is widely believed to be providing the 3D sensing unit for augmented reality and facial recognition in the iPhone X, 9, Edition or Pro, whatever it ends up being called. Finisar said a "large cell phone customer in the US" required some adjustments to the VCSEL array that is part of the 3D sensing. The CEO was questioned on the call if they had missed the order from Apple with the adjustments to the array. The CEO said, no, sales were just pushed forward a quarter and we are ramping up production now. The shortage of these parts could be part of Apple's production problem.

Apple (AAPL) is scheduled to announce their new products on Tuesday. The Wall Street Journal was out with a warning on Friday that shipments of the new phone were going to be delayed even further. Besides the 3D sensor, the WSJ said there were production issues with the OLED screens, which are made by Samsung. I cannot believe Apple would put its future in the hands of its biggest competitor. Reportedly, the fingerprint scanner has been dropped in favor of an infrared facial recognition feature. The warning from the WSJ caused Apple shares to fall -$2.63. We have been hearing these warnings for the last six months but coming this close to the announcement it caused a lot of concern.

There are analysts worried the Apple product launch could be a disappointment for the market. Boris Schlossberg, from BK Asset Management, warned a disappointing announcement could drag the entire market lower because Apple is the largest stock in the S&P, Dow and Nasdaq indexes. A sharp decline could impact the entire market. Apple shares do have a habit of selling off in the 3-4 weeks after a product launch. However, Apple is expected to announce 3 iPhones, 4K Apple TV and a new stand alone Apple Watch. Hopefully something will produce some excitement.

Somebody is really bullish on silver. Somebody bought 19,500 contracts of the January 2019 $25 LEAP calls on the SLV ETF. The trade went off at 47 cents or roughly $916,500. With the ETF at $17 today, that would take a 50% rally to end in the money in 2019. The ETF did trade as high as $48 in 2011 and it will eventually trade there again. Whether it will do it before January 2019 is the $916,000 question. Unless this investor has some inside information about an impending shortage of silver, this is probably a hedge against some other position. Gold and silver spike on geopolitical events and North Korea will be a festering sore for the foreseeable future. Once this trade began showing up in the news, open interest quickly spiked to 33,000 so the followers were definitely active.

North Korea was widely expected to launch a new ICBM on Saturday but it has not happened. Analysts believe the delay could be due to a strong period of solar storms last week that are hitting the earth's protective atmosphere this weekend. Because the missile travels outside the atmosphere, the guidance and electronics can be impacted and cause a malfunction. If North Korea wants a valid test, they need to wait a couple days until the solar activity has faded.

This Korean missile threat scenario is ridiculous. They have been preparing for the last two weeks to launch this missile. If we suspected them of bad intentions, it would be extremely easy to just launch a single cruise missile to eradicate it whenever a Korean missile reached the launch pad. They are never going to be a real threat as long as it takes them two weeks to get a missile ready to launch. Once they can launch an accurate ICBM from a mobile launcher they will be a threat. That assumes Kim Jong-Un is ready to commit country suicide. If they ever did attack somebody with a nuclear weapon, North Korea's military targets would be decimated in return and that would include Kim.

Crude prices rallied to $49 midweek for multiple reasons. Saudi Arabia said it would cut export allocations by 350,000 bpd beginning in October. They are trying to counteract the weak demand season with less oil hitting the market. Secondly, Hurricanes Irma and Jose are killing the shipping lanes from the Middle East. Tankers headed for the U.S. are faced with these two major storms right in their path and they have been there for more than a week. Tankers will have to loiter in place in the eastern Atlantic until the storms run their course. I am sure there are quite a few trailing Jose just far enough behind the storm to stay out of danger. This is going to cause a major traffic jam when they approach the Gulf ports all at once. Imports as reported by the EIA on Wednesday are going to take a sharp drop over the next couple weeks and then see a sharp rebound when all those tankers appear.

U.S. production fell -8% from 9.53 mmbpd to 8.781 mmbpd last week. Imports fell from the 8.15 mmbpd average to 7.08 mmbpd. Gasoline demand fell -700,000 bpd to 9.163 mmbpd. The drop in production is of course temporary and more than likely has already been recovered or at least will be by the end of next week.

Analysts were also concerned that Irma would not make the turn north into Florida and continue on a straight line to the oil patch offshore from Louisiana. There was no guarantee it would turn as expected. When that turn became more likely on Friday, crude prices collapsed.

Baker Hughes rig counts showed a decline of 3 oil rigs but a gain of 4 gas rigs. Offshore rigs remained unchanged at 16 and a multiyear low.


The four-day rally from last week ended on Monday with the S&P hitting the resistance high at 2,480. The index ended with a 15-point loss for the week at 2,461. Despite the decline, the S&P is just one good day away from a new high. With the political deadlines pushed out into December, the biggest challenge will be normal portfolio manager restructuring in September.

The second challenge will be the weakness in the big cap tech stocks. It may only be temporary because we have seen the dips bought many times. However, they do have a lot of accumulated profits that managers may want to capture before year-end. Doing it now and shifting into other positions before November, would be a wise strategy. While they could go higher, there is little reason to risk the existing gains. There is always the threat of an Apple disappointment on Tuesday. Even without a disappointment, shares typically decline over the next 3-4 weeks after an announcement.

The S&P chart is neither bullish nor bearish. The minor 15-point decline for the week after a 52-point gain the prior 4 days is just a normal blip. The S&P would have to decline below 2,440 again to turn the chart bearish and even then, that is only about a 2.5% decline from the highs.

The Dow remains the weakest index with strong resistance at 21,900 and again at 22,000. Support is 21,600, 21,500 and 21,300. The Dow is suffering from the 30 stock curse. Individual stocks were lifting it back in July/August and now individual stocks/sectors are weighing on the index. Note that the breadth was negative with 20 out of 30 stocks negative and overpowering the five big gainers at the top.

The uptrend support is critical. If that were to break, it could trigger some additional selling from investors unsure if they want to hold over September volatility.

The Nasdaq Composite closed at a new high on Monday but ended with a 75-point loss for the week. The 38-point decline on Friday was directly related to the sharp losses in the big cap techs. Nvidia closed at a two-week low as did Tesla. Apple was the big drag with a $2.63 drop on Friday and a $6 drop for the week.

As I wrote earlier, if managers decide it is time to rotate out of big cap techs, the market is going to have a bad month. Despite the recent weakness, I do not expect that to happen. Those stocks have the highest growth rates and with the exception of Amazon, the strongest earnings. There may be some selling but others are probably looking for a dip to establish positions.

Support is around 6,200 followed by 6,100. We just need to keep our fingers crossed that this pattern does not turn into a double top. Note that this is the third time in 2017 where big declines turned into several weeks of choppy trading and consolidation before a new rally appeared.

The Russell rallied for 7 consecutive gains and has been consolidating those gains and holding above the 1,400 support level for the last four days. The 1,399.43 close on Friday was close enough to 1,400 for me.

September is normally the most volatile month of the year. That is because normally there are budget battles in Washington that only get solved at the last minute. The new fiscal year starts on October 1st. September is also portfolio-restructuring month. Second half lows typically occur in late September and the first two weeks of October. Now that the political cloud has been lifted, I would like to think the rest of September will only be choppy rather than directionally bearish. There is no guarantee historical trends will be followed or that some new headline will not appear to disrupt the market.

I would recommend keeping some cash in your account just in case a buying opportunity appears.

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Random Thoughts

Every week when I click on this survey, I am always surprised by the results. The indexes were down for the week but bullish sentiment rose 4%. This survey does end on Wednesday so only two negative days had been seen when it closed. The bullish number is still almost 10% below normal. 71% still believe the market is not going higher.

Oppenheimer's chief investment strategist John Stoltzfus said on Friday, the North Korea problem and political issues will not derail the rally. He expects another 7% gain into year-end. "We do not believe we are headed into a period which will see the markets turn chaotic from here to the end of the year." "We also do not expect the market to take off in a straight line higher."

Stoltzfus is predicting the S&P will end the year at 2,650. Out of 16 top strategists, he is the second-biggest bull. He believes the passage of a tax cut and some infrastructure spending could see his target reached earlier or even surpassed.

His views are not shared by everyone. CNBC did an online survey asking if visitors expected the market to rally 7% by the end of December. Only 32% said yes.

CNBC Chart

Fundstrat Global Advisors co-founder, Tom Lee, is predicting the market will decline 5% over the next 30 days. He blamed risk aversion in the credit markets and a bond bubble. He said investors are also worried the Trump tax reform program will suffer the same defeat as the Obamacare repeal. Since investors are already factoring in some additional earnings from tax reform, that would be negative for the market. He warned that investors were betting on President Trumps 15% corporate tax rate and anything other than 15% would be market negative. Paul Ryan has already said there is no hope for 15% with 20% to 25% more likely. Once that is factored into the outcome, earnings estimates will be revised lower. He also warned of deterioration in market internals with fewer stocks supporting the indexes.

Since the election, the markets have rallied strongly. With average gains of about 7% per year, they are well over average. This is why we could see some negative portfolio adjustments in September. There is a significant amount of uncaptured gains.

Gains since the election:

Dow 19%
Nasdaq 23%
S&P-500 15%
Russell 17%

FlightRadar24 posted this picture of flights leaving Florida on Friday. Everyone with a plane was headed elsewhere on Friday to avoid the storm. These are ONLY flights leaving Florida from airports between Miami and Orlando. There were 332 departures. Flights Out


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Political correctness is tyranny with manners."

Charlton Heston


New Plays

Double Digit Earnings Growth

by Jim Brown

Click here to email Jim Brown
Editor's Note

Very few companies offer strong double-digit earnings growth. Himax has guided for 23% to 30% earnings growth for Q3.


HIMX - Himax - Company Profile

Himax Technologies, Inc., a fabless semiconductor company, provides display imaging processing technologies to consumer electronics worldwide. The company operates through Driver IC and Non-Driver Products segments. It offers display driver integrated circuits (ICs) and timing controllers used in televisions (TVs), laptops, monitors, mobile phones, tablets, digital cameras, car navigation, and other consumer electronics devices. The company also designs and provides controllers for touch sensor displays, liquid crystal on silicon micro-displays used in palm-size projectors and head-mounted displays, light-emitting diode driver ICs, power management ICs, scaler products for monitors and projectors, tailor-made video processing IC solutions, and silicon IPs. In addition, it offers digital camera solutions, including complementary metal oxide semiconductor image sensors and wafer level optics, which are used in various applications, such as mobile phone, tablet, laptop, TV, PC camera, automobile, security, and medical devices. The company markets its products to panel manufacturers, agents or distributors, module manufacturers, and assembly houses; and camera module manufacturers, optical engine manufacturers, and television system manufacturers. Company description from FinViz.com.

Himax produces video drivers for 4K TVs and that accounted for 36% of total revenue in Q2. However, the big news comes from the 3D sensing chips. They are expecting a 90% increase in revenue from this technology in Q3. There are rumors that Himax is going to supply the 3D sensing technology for the new iPhones. Since several companies are rumored to have been selected, somebody is riding the rumor wave.

Since Himax guided for a 90% increase in revenue in Q3 from those sensors, it would suggest there is a surprise in store for the chip community.

They also provide chips for vehicle display panels and they recently guided for demand to jump from 135 million units in 2016 to 200 million by 2022.

On August 30th, Qualcomm and Himax jointly announced a new high resolution, low power, active 3D depth sensing camera system to enable conputer vision capabilities such as biometric face authentication, 3D reconstruction and scene perception for mobile, IoT, surveillance, automotive and AR/VR. They specifically said it would enable Android smartphones to have unparalleled 3D experiences. They called it "game changing technology for smartphones." This technology is the culmination of 4 years of research and development by these two firms.

Shares rallied on the announcements but then faded last week. The company issued a press release suggesting an Oppenheimer analyst had become too excited about the prospects and they reaffirmed their recent guidance. The fading excitement erased $1.50 in gains but support appeared at $10 and the overall uptrend should resume.

Expected earnings November 7th.

Buy HIMX shares, currently $10.19, initial stop loss $8.85.
Alternate position: Buy Dec $11 call, currently 95 cents. Initial stop loss $8.35.


No New Bearish Plays

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps more than $1.00 at the market open.

In Play Updates and Reviews

Tech Drag

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap techs weighed on the market but the Russell managed to close fractionally positive. The Dow barely closed positive with Apple the biggest drag. The Nasdaq 100 lost 50 points and the S&P lost 4 points because of the tech drag.

This could have been weekend event risk selling but there has been a deterioration in the A/D line and most of the small cap stocks are struggling.

With North Korea expected to launch a new ICBM on Saturday, we could see another dip at the open on Monday. Some analysts claim they may delay the launch because of the solar flares.

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.

Lottery Ticket Plays - Updated only on Weekends

Current Position Changes

FTR - Frontier Communications
The long put position was stopped at $14.05.

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Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

CIEN - Ciena Corporation - Company Profile


No specific news. Shares dipped at the open but rebounded back over support.

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.

Update 9/7/17: Good article in Barron's on what Wall Street is missing about the Ciena outlook. Full Article

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


KTOS priced the secondary offering at $12.25 and shares immediately dipped to that level. The offering will close on Tuesday and shares can resume their upward trend. We knew this was going to happen and normally shares rebound after the pricing.

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. Shares fell with the Nasdaq on Friday.

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


Another major spike in Symantec as the news of the Equifax hack spreads.

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

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.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.

DDD - 3D Systems - Company Profile


No specific news. Still stuck between $12 and $13.

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:

Long Sept $12 put @ 44 cents, see portfolio graphic for stop loss.

Previously closed 8/31: Short DDD shares @ $13.00, exit $12.95, +.05 gain.

DF - Dean Foods - Company Profile


No specific news. The decline returned with a 2% drop.

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:

Long Sept $11 put @ 30 cents, see portfolio graphic for stop loss.

Previously closed 9/7/17: Short DF shares @ $11.37, exit $11.30, +.07 gain.

ECA - Encana Corporation - Company Profile


No specific news. Shares down sharply with oil prices on Friday.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compared to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex will be funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings July 27th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Update 5/5/17: Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.

Update 6/10/17: Encana agreed to sell its Piceance natural gas assets to Caerus Oil for $735 million. There are 3,100 operated wells that produce 240 million cubic feet of gas and 2,178 barrels of natural gas liquids every day.

Update 7/21/17: Encana reported earnings of 18 cents that easily beat analyst estimates for 4 cents. Revenue of $1.08 billion also beat estimates for $773.2 billion. The outlook and long-term projections were also strong. Shares closed positive but were hampered by a -1.32 drop in oil that tanked the sector.

Position 3/14/17:

Long October $11 call @ $1.40, no stop loss.

Previously closed 4/19/17: Long ECA shares @ $10.43, exit $11.15, +.72 gain.

FTR - Frontier Communications - Company Profile


Shares rebounded just enough on Wednesday to stop us out by 12 cents before shares rolled over again. No specific news.

Original Trade Description: August 21st.

Frontier Communications Corporation provides communications services to residential, business, and wholesale customers in the United States. It offers broadband, video, voice, and other services and products through a combination of fiber and copper based networks to residential customers. The company also provides broadband, Ethernet, traditional circuit-based, data and optical transport, and voice services, as well as Multiprotocol Label Switching and Time Division Multiplexing services to small business, medium business, and larger enterprises, as well as sells customer premise equipment. In addition, it offers 24/7 technical support; wireless broadband services in selected markets; and frontier secure suite of products, including computer security, cloud backup and sharing, identity protection, and equipment insurance. Further, the company provides satellite TV video services; voice services, including data-based VoIP, and long distance and voice messaging services; and a package of communications services. Additionally, it offers a range of access services that allow other carriers to use facilities to originate and terminate their local and long distance voice traffic. As of December 31, 2016, it served approximately 5.4 million customers and 4.3 million broadband subscribers in 29 states. The company was formerly known as Citizens Communications Company and changed its name to Frontier Communications Corporation in July 2008. Company description from FinViz.com.

Frontier is simply being squeezed out by the competition. The CEO said with their recent earnings, they were facing "severe competition" in the telecom space. Revenue declined -12% in Q2 to $2.3 billion and missed estimates for $2.4 billion. They have missed revenue targets in 3 of the last 4 quarters. They posted an operating loss of $662 million, compared to $75 million in the year ago quarter. The loss this year was accelerated by a forced write down of goodwill for $532 million. Operating costs rose by $500 million to $2.8 billion for the quarter. The per share loss for the quarter was $1.10 and slightly better than the $1.10 analysts expected. Shares spiked temporarily but then resumed their downward trend.

Charter (CHTR), Comcast (CMCSA), AT&T (T) and Windstream (WIN) are eating their lunch. Bigger is better in the telecom space and Frontier is shrinking.

Shares are down 81% over the last year from a 52-week high of $75. On Monday they closed at a historic low. My charts only go back to 1972 and today's close was the lowest on record. I think Frontier is going to single digits. There is no light at the end of this competitive tunnel. Their only hope will be a takeout at some point. Free cash flow is shrinking from $250 to $205 million for the quarter. Liquidity is falling from $522 million to $387 million. They have a market cap of $995 million and debt of $17.8 billion. That is not a desirable picture of a takeout candidate. The more likely path is a continue slide into single digits.

Expected earnings Oct 31st.

Position 8/22/17:

Closed 9/6: Long Oct $11 put @ 90 cents, exit .30, -.60 loss.

Previously closed 8/29: Short FTR shares @ $12.72, exit $13.75, -1.03 loss.

INFY - Infosys - Company Profile


No specific news. Shares are plunging on the management indecision.

Original Trade Description: June 26th.

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. It provides business information technology services, including application development and maintenance, independent validation, infrastructure management, and business process management services, as well as engineering services, such as engineering and life cycle solutions; and consulting and systems integration services comprising consulting, enterprise solutions, systems integration, and advanced technologies. The company's products include Finacle, a banking solution that provides analytics, core banking, consumer e-banking, corporate e-banking, Islamic banking, mobile banking, origination, payments, SME enable, treasury, wealth management, and youth banking solutions. Its products also comprise Infosys Mana, a knowledge-based AI platform; Infosys Information Platform, an analytics platform that enables to get insights from various data sources for decisions across industries; AssistEdge, CreditFinanceEdge, ProcureEdge, and TradeEdge that are cloud-hosted business platforms; Panaya that enables various SAP and Oracle EBS changes; and Skava, which are digital experience solutions, as well as analytics, cloud, and digital transformation services. The company serves clients in the financial services, manufacturing, retail, consumer packaged goods and logistics, energy and utilities, communication and services, hi-tech, life sciences, healthcare and insurance, and other industries. Company description from FinViz.com.

Infosys reported earnings of 24 cents that rose 5.8% and beat estimates by a penny. Revenues of $2.651 billion beat estimates for $2.629 billion. Revenues rose 6.3% on a constant currency basis. The company announced numerous wins of high profile contracts.

The company is dilligently following its "Renew Now" program with three offerings. Those are Artificial Intelligence, Knowledge-based IT and Design Thinking. During the reported quarter, Infosys continued to renew traditional services and rolled out others in areas such as Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Cyber Security, and IoT Engineering Services. Also, during the quarter, Infosys launched Boundaryless Data Lake, an offering powered by the Information Grid Solution on Amazon Web Services (AWS).

The company raised 2018 guidance with revenue growth in the range of 7.1% to 9.1%, up from 6.1%-8.1%.

Earnings October 13th.

Shares rebounded over the last week to close at a new 9-month high on Wednesday.

Update 8/18/17: Shares spiked to a new 9-month high on Thursday then collapsed -7% on Friday. The drop came after the CEO quit because of a fight with the founders. CEO Vishal Sikka, resigned as CEO but will remain as executive vice chairman. Interim CEO Pravin Rao will report to Sikka until a new CEO can be found. Sikka had been praised for the transformational changes he was trying to put in place but the founders continually put roadblocks in his path. This was probably the kiss of death for this position but for 25 cents, we will let it ride.

Position 7/27/17:

Long Oct $17 call @ 25 cents. See portfolio graphic for stop loss.

Previously closed 8/7: Long INFY shares @ $15.66, exit $15.55, -.11 loss.

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