Option Investor

Daily Newsletter, Saturday, 10/7/2017

Table of Contents

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

Market Wrap

Holding the Gains

by Jim Brown

Click here to email Jim Brown

The markets traded sideways on Friday but that was bullish given the recent gains.

Weekly Statistics

Friday Statistics

The Dow ended a seven-day winning streak and came within 1.7 points of making it eight days. The S&P ended a six-day streak of gains with a 2.7-point loss. The Nasdaq stretched its winning streak to nine days with a 5 point gain. The Russell 2000 only gained five points from Monday's close to Friday's close but that came on top of a 162-point rebound so any gain was unexpected.

There are a lot of events in our future and that could have produced some event risk selling on Friday but it was so light it was not material. A Russian official just back from North Korea said the country was preparing for another missile launch in the days ahead. October 10th is the expected date. President Trump is expected to cancel the Iranian nuclear deal next week and recommend new sanctions. After a meeting with his military advisors on Thursday, Trump asked reporters if they knew what the meeting represented. He then said, "Maybe it is the calm before the storm." When asked about the comment later he winked and said, "You will find out soon." Those comments had people running in circles on Friday. On top of that, it was rumored that Secretary of State Tillerson was going to be replaced as early as this weekend.

Given those worries and the big drop in job numbers, it was bullish to see the Nasdaq extend its streak to nine days and support the market.

The big economic report for Friday was of course the Nonfarm Payrolls. Estimates were in the 75,000-100,000 range with 156,000 added in August. The headline number for September showed a loss of -33,000 jobs because of the impact of the multiple hurricanes. The prior two months were revised lower by a total of -38,000 jobs with July dropping -51,000 while August rose by 13,000.

The biggest hit to September was a decline of 111,000 jobs in the leisure/hospitality sector. Analysts theorize this was due to restaurants/bars being closed in Texas and Florida. Transportation and warehousing saw a gain of 22,000 jobs and government gained 7,000 jobs. Insurance gained 11,000 because of the surge in claims processing.

More than 2.9 million people were working only part time because of the weather while 1.5 million had jobs but were not working because of the weather.

The unemployment rate declined from 4.4% to 4.2% and the labor force increased by 575,000. The labor force participation rate rose from 62.9% to 63.1%. That is the first time over 63% since early 2014. Average hourly earnings rose 0.5% and now up 2.9% for the last 12 months.

Despite the negative headline number, analysts said this report showed the strength in the economy with huge numbers of people entering the job market and the sharp uptick in the wages. They said the Fed is likely to see enough strength here to hike rates in December. The dollar and the yield on the ten-year both shot higher on the news but faded back to flat by the close.

The drop in the payroll numbers caused the expectations for consumer spending to decline from 2.5% growth to 2.2% and changed the Atlanta Fed real time GDPNow forecast for Q3 from 2.8% to 2.5%.

Wholesale inventories for August rose 0.9% and matched analyst estimates. The prior three months all showed a 0.6% gain. Sales of durable goods rose 2% with nondurable goods rising 1.5%. The report was ignored.

The economic calendar for next week will be focused on the PPI and CPI and their impact on inflation. With the Fed unsure about a December rate hike, they will be focused on the price indexes for the next three reports. They would love to see 2% inflation to justify their rate hike.

The FOMC minutes on Wednesday are always important, especially when the various Fed speakers are out spinning different views on the future of rates. On Thursday, Harker was ready to hike under the scenario of hike now to be ahead of inflation growth. On Friday, Kaplan was in favor of holding off on the decision until additional data was available. The minutes are a look into the meeting to see what the group was thinking.

The first signs of Q3 earnings appear later this week with the bank stocks the first to report. JPM will be the first Dow component to report on Thursday but there will be 22 others reporting over the next two weeks.

To date, 23 S&P companies have reported for Q3 and 87% have beaten earnings estimates while 78.3% have beaten on revenue. For the quarter, earnings are expected to rise 4.9% and revenue expectations are for 4.3%. However, over the last four years, Q3 estimates have averaged about 4% below the final number. If the trend holds, that would give us about 8.3% for the quarter. The next three quarters are expected to average about 10% with Q4 at roughly 12% earnings growth. There have been 77 guidance warnings for Q3 with 48 positive guidance revisions. The current forward PE for the S&P is 18.0.

The big earnings disaster for Friday was Costco (COST). The earnings were great but the reaction was terrible. The company reported earnings of $2.08 that rose 17.5% and beat estimates for $2.02. Revenue of $42.3 billion rose 15.8% and beat estimates for $41.74 billion. That compares to $1.77 and $36.56 billion in the year ago quarter. Membership fees rose 13% to $943 million.

Same store sales were up 6.5% in the US and 5.7% globally. Analysts were expecting 5.2%. E-commerce sales rose 21%.

For the 5-week period ending Sept 30th. US same store sales were up 9.0%, Canada 9.4%, international 8.2% and total company 8.9%. E-commerce sales were up 30%. No weakness here!

Analysts and the talking heads on stock TV keep talking about the impact of Amazon dragging down Costco. Show me in the numbers above where Costco sales and earnings are dragging. In a recent survey by BMO Capital, they found that Costco consistently had lower prices and faster shipping than Amazon. They surveyed 16 categories and Costco was an average of 7% cheaper than Amazon. Shipping took an average of 4.5 days from Costco compared to 5.5 days from Amazon. Wal-Mart and Jet.com had prices that were 18% higher than Amazon and average shipping was 9.8 days.

Costco now has free 2 day shipping from 355 of its 741 stores through CostcoGrocery and faster shipping in as little as 2 hours is available with partner Instacart. Costco is not just sitting around waiting for Amazon to catch up. They are actively investing in the e-commerce platform and expanding it to their other stores. With a Costco or two in every major population center, they have an edge on Amazon because the products are already local for most people and that makes shipping faster. Amazon does have a larger number of items but that is not a negative for Costco. They have always had a variety of items based on buying opportunities and they may not have the same exact items on every visit. This allows Costco to buy cheaper and pass the savings on to the customer.

Costco also has its own private label brand in the Kirkland label. Last year Kirkland was the largest selling grocery brand on Amazon. Yes, on Amazon.

Unfortunately, for the stock, perception is reality. If enough talking heads say Amazon is killing Costco then that becomes the perceived reality and shares tank. That is what happened on Friday with COST down $10 after earnings.

Morgan Stanley downgraded from overweight to equal weight and $165 target. Goldman Sachs downgraded from conviction buy to hold. Shares fell to $157 and the $150 level is strong support. I would probably not buy it on Monday because the post earnings drop last time lasted several days. The Goldman downgrade could be persistent. I would be a buyer once a rebound begins. I would rather buy it a couple dollars higher than buy it too soon and be a couple dollars early.

Netflix (NFLX) continued to explode higher after they announced a price hike on Thursday. The middle plan will rise from $9.99 to $10.99, top tier 4K plan will rise from $11.99 to $13.99 and the basic plan remained at $7.99. Most analysts believe Netflix is priced well below the value of its service and these minor increases are not expected to create subscriber flight. RBC Capital said the content, not the subscription price is creating the subscriber churn. Netflix has dropped a lot of the older shows in order to concentrate on new original content. They are planning on spending $6 billion in 2017 and negative cash flow will be $2.0-$2.5 billion.

UBS raised its price target to $225 from $190 saying the company will probably post Q3 subscriber growth numbers that will blow away estimates. The analyst said the Q2 growth number probably persisted or even accelerated as advertising and word of mouth spreads in the 190 countries where they are now streaming. I think the UBS estimates are low. The analyst expects only 100,000 new US subs and 300,000 internationally. Earnings are Oct 16th.

Yum China (YUMC) reported earnings of 52 cents but analysts were expecting 56 cents. However, same store sales rose 6% and double expectations. The company said "food quality investments" led to lower margins and earnings. Bernstein cut estimates for the full year based on the declining margins. Labor inflation is also a factor with wages in China rising sharply over the last two years. The current CEO, Micky Pant said he was being replaced by Joey Wat, the COO since February. The switch will occur in March. Shares rose slightly despite the earnings miss.

Amazon (AMZN) is about to become the biggest drug dealer in the world. The decision could come soon as Jeff Bezos has been in talks with just about everyone involved in the industry. Amazon was an original investor in Drugstore.com with Bezos on the board. Walgreens purchased the site and shut it down in order to attract more people to Walgreens.com. There is almost no chance Amazon will not enter the business simply because of the monster profits, inflated pricing and multiple middlemen. Amazon has the power to go direct and it is going to be painful for companies like CVS (CVS), Rite Aid (RAD) and Walgreens (WBA). All of those stocks crashed on Friday.

Amazon now has 105 fulfillment centers with 35 new ones in the planning stages. Recently, Amazon has been buying up defunct shopping malls. They typically have a lot of acreage, good electric power and utilities and they are in population centers with a large labor pool. This allows faster delivery of merchandise since the malls are in large cities. Amazon increases its merchandise volume by 40% or more every year. That means they have to double their capacity every two years. In 2014, Amazon had over 10,000 operational robots. They are now thought to have more than 80,000 robots in those centers. Since more than 400 malls have shutdown over the last couple of years, there is plenty of opportunity for Amazon's growth.

The company is now developing a new delivery system called Seller Flex. It will allow Amazon to take control of the "last mile" in the delivery chain. That is currently handled by UPS, FedEx and the post office. Amazon already has 40 cargo jets and more than 5,000 semi trailers that deliver packages from fulfillment centers to UPS, FDX and US mail hubs. Instead of those carriers hauling packages all across the country, they only have to carry them from the local hub to the local consumer. Amazon gets a huge discount in rates for this service. It is not clear how Amazon is going to handle the last mile delivery and it will not happen overnight. It could take years, but the company is moving in that direction.

Hurricane Nate made landfall in Louisiana as a category 1 storm with winds of 90 mph. The path took it through a large portion of the oil patch just south of New Orleans. As of Friday evening 71% of oil production had been shutdown. That is roughly 1.25 million bpd. Over 53% of gas production had also been shuttered. Oil companies have been working for four days to shutdown the platforms and evacuate the workers to land. Nate is a fast moving storm and should be well out of the Gulf by early Sunday.

The platforms are built to sustain 90 mph winds but that does not mean there will not be damage. It could take a week or more to repopulate the platforms and additional days to repair any damage. Analysts believe US inventories could decline by 10-15 million barrels or more depending on the damage and the time out of service.

Crude prices fell sharply on Friday with a $1.50 drop. Despite the expected drop in gulf production, there are continued worries over a prolonged global glut. Even with Iran, Turkey and Iraq planning to shutdown production from Kurdistan, the prices are still falling. With Kurdistan planning to seek independence, those three countries are going to try and starve it into submission by cutting off their exports of 600,000 bpd. If they can shut these pipelines that would do wonders for reducing global inventories because it could be a long-term situation.

The US problem is the lack of demand. The driving season is over and the heating oil season has not yet begun. October is typically a low demand period and prices normally decline until around Thanksgiving.

Saudi Arabia's King Salman visited Russia last week. They talked about oil production cuts and a Russian official said the cuts could be extended until the end of 2018. Russia also agreed to sell military equipment to Saudi Arabia. Oil has been kind to the Saudi royal family. King Salman brought an entourage of 1,500 people with him to Moscow. They booked the entire Four Seasons and Ritz Carlton hotels. Even people who live permanently in those facilities were forced to leave for the duration of the King's visit. He brought his own furniture, his own carpets, his own cooks, his own hotel staff and his own food. Each day a Saudi plane arrives with roughly 2,000 pounds of fresh food for the group. The king had his special gold escalator flown to Moscow just so he could exit his personal 747 in style. Unfortunately, it stopped halfway down and the king had to walk the final few steps. He then walked on a painted red path across the tarmac, resembling a red carpet, until he reached his motorcade. Even at $50 oil, Saudi Arabia is still doing well financially.


The markets are proceeding contrary to the normal trend for this time of year but there are multiple reasons the rally could continue. Positive earnings projections could reach 9% growth for Q3 and average 10% growth for the next three quarters. The Fed is in accommodative mode and even if they did hike in December and the expected three times in 2018 that would only put them at 2.25% at the end of 2018. The winding down of the balance sheet has begun at a snail's pace that will take them years to reduce it significantly. The economy is accelerating except for the hiccup we are going to see for Q3 because of the storms. Manufacturing activity is at a 13-year high. Services activity is at a 12-year high. Intermodal rail traffic is at a record high. Semi truck sales are up 62% over the last 12 months. Air travel is at a record high. Tax reform of some kind will likely be enacted over the next six months. More than likely it will be favorable to corporations and that will increase earnings. For every 1% decrease in corporate taxes, S&P earnings will rise by $2. All of these factors are positive for the market.

While those fundamental factors will be positive for the market long term, there can always be periods of weakness. It has been 461 days since the S&P had a 5% retracement. The average is twice a year. The markets do react to headlines but they do not need an external reason for profit taking.

The recent dips have been shallower and shorter each time. Portfolio managers and investors who were expecting the normal Sep/Oct volatility were left behind and they are eagerly buying every minor decline.

The next potential hurdle could be the budget and debt ceiling deadlines in early December. The reason we did not have volatility in September is because those were pushed out 90 days until December. If the market continues higher until December, we could see some significant profit taking if those events begin to generate ugly headlines. With only a few weeks left in the year, there would be no reason to risk existing profits and the potential for a government shutdown.

All of those events above are long term. For next week, we could see the rally continue even if some profit taking appears. The economic put is in and we need to keep buying the dip until proven wrong.

The AAII sentiment survey showed some neutral investors picking a side. A few turned bullish with the market at new highs BUT more turned bearish, suggesting they do not believe the rally will continue. Just remember, the herd is normally wrong. In this case all three camps are nearly equal so there is little to be learned from the survey this week.

The Volatility Index set a new 24-year low at 9.19 on Thursday. This extended period of low volatility could last if the market continues higher but historically, long periods of low volatility are normally followed by periods of high volatility. This is a trailing indicator rather than a predictor of future market moves. It is a flashing warning sign.

The S&P is in breakout mode and well over uptrend resistance. It is over extended and a drop back to that uptrend line around 2,525 could be expected without damaging the uptrend. A dip to 2,500 would be a little more detrimental but that would only be a 2% decline and represent another buying opportunity. With Q3 earnings kicking off with the banks next Thursday, I do not expect a significant decline to appear.

The Dow almost recovered enough on Friday to close positive and extend its streak for another day but could not push through that final 2 points. Actually, this is a good thing. Without the pressure of a long streak that keeps traders on the sidelines until it breaks, the buyers can now appear.

The Dow components were almost evenly divided between advancers and decliners but the $1.50 drop in crude prices put Chevron and Exxon in the loser column with Chevron erasing 10 Dow points.

The acceleration on the Dow over the last several days has put the index into overbought status and support is well back at about 22,500 or even 22,275. That would be a major blow to short-term market sentiment but not to the long-term rally. It would be another dip to buy. Only one Dow stock reports earnings this week but 20 will report over the next two weeks. That earnings lure should keep investors interested in the Dow stocks.

The Nasdaq has rebounded 237 points since the September 25th low. The index has broken out thanks to a resurgence of the big cap stocks. Once the rotation into small caps faded, the big cap techs began to see investors returning.

The initial resistance of about 6,650 with longer-term resistance around 6,800. The same earnings lure should keep the Nasdaq on an upward path even if there are some pauses along the way. The 6,460 level that was strong resistance for two months, should now be support if a material decline appears.

In the dictionary under the word "overextended" is a picture of the Russell 2000 chart. The index is holding its gains of roughly 162 points since the August 21st low but it is struggling. The last four days have been touch and go but it closed on Friday only 2 points off its record high. Needless to say, there could be some retracement ahead. However, if the Russell were to continue higher there would be additional short covering and it would be good for market sentiment.

I believe the markets will continue to stair step higher. I do not expect uninterrupted streaks to continue because once we do get into earnings there will be disappointments. The key will be to pick your entry points and save some cash back in case a real buying opportunity appears.

Tuesday is rocket man day but unless he actually fires one over Japan and explodes a nuke in the Pacific, I would expect very little market reaction. North Korea is old news now. There is the potential for a single cruise missile to explode on the NK launch pad as a message. This could be the storm President Trump was alluding to last week. The market would react very negatively to an event like that. However, Kim Jong-Un could react unpredictably and that makes a missile strike a very low probability.

Just focus on the market and continue buying the dips.

If you like the market commentary 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

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws."



New Plays


by Jim Brown

Click here to email Jim Brown
Editor's Note

Even companies with a good business model are becoming Amazon road kill. Vipshop Holdings is in the flash sale business but the Amazon and Alibaba cloud is pushing shares lower.


No New Bullish Plays


VIPS - Vipshop Holdings - Company Profile

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men. The company also provides handbags, such as purses, satchels, duffel bags, and wallets; apparel, gear and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers of all age groups; sports apparel, and sports gear, and footwear for tennis, badminton, soccer, and swimming; and skin care and cosmetic products, including cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish. In addition, it offers home furnishing products comprising bedding and bath products, home decors, and dining and tabletop items; small household appliances; designer apparel, footwear and accessories; and snacks, health supplements, and occasion-based gifts, such as chocolates, moon-cakes, and tea. Further, the company provides consumer financing, supply chain financing, and wealth management services. The company provides its branded products through its vipshop.com, vip.com, and lefeng.com Websites, as well as through its cellular phone application. Company description from FinViz.com.

Vipshop is in the flash sale business. That means other retailers bring them products they cannot sell and Vipshop marks down the price and runs a special flash deal special to clear out the inventory. Vipshop has been around for nearly 10 years and did very well in the early years. Unfortunately, profits are fading because manufacturers and other retailers can now unload their products on Amazon and Alibaba without the valuation haircut that occurs with Vipshop.

Earnings for the recent quarter were 17 cents and estimates were 19 cents. Revenue rose 30% to $2.58 billion. They filled 84.8 million orders.

Expected earnings Nov 15th.

The problem was rising costs. Margins declined in what Vipshop called a highly promotional market with higher advertising costs in hopes of gaining market share. If you translate that sentence it means they had to cut prices to generate the sales and they had to pay more for advertising to lure customers into the sale process.

With Alibaba's growth surging well beyond the optimistic estimates by analysts, they are taking over the online sales channel in China. This does not bode well for Vipshop in the future. Add in the Amazon monopoly in the US and Vipshop has nowhere to go to escape the rapidly growing retail cloud. The flash sales business has died in the US after a flood of competitors surged into business and then quickly disappeared.

Shares closed at a four-year low on Friday at $8.35 with the next support level around $2.50.

Sell short VIPS shares, currently $8.35, initial stop loss $9.05.
Alternate position: Buy Nov $8 put, currently 30 cents, no initial stop loss.

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

Minor Profit Taking

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets held their ground on Friday despite growing event risk. The long term potential outweighed the short term event risk but traders were not rushing to add new positions ahead of the weekend. The Russell only lost 2 points and held its ground for the fourth consecutive day. The index closed at 1,505 on Monday and 1,510 on Friday. That was a hard fought 5 points as the overbought small caps suffered some rotation back into the big cap stocks.

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

DF - Dean Foods
The long put position was stopped at $11.15.

ECA - Encana
The long call position was stopped at $11.25.

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

AMD - Advanced Micro Devices - Company Profile


No specific news. Only a minor move but holding the gains from Tuesday.

Original Trade Description: Sept 23rd

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. Its primarily offers x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete graphics processing units (GPUs), and professional graphics; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. The company provides x86 microprocessors for desktop PCs under the AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; and microprocessors for notebook and 2-in-1s under the AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brand names. It also offers chipsets with and without integrated graphics features for desktop, notebook PCs, and servers, as well as controller hub-based chipsets for its APUs under the AMD brand; and AMD PRO mobile and desktop PC solutions. In addition, the company provides discrete GPUs for desktop and notebook PCs under the AMD Radeon brand; professional graphics products under the AMD FirePro brand name; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. Further, it offers microprocessors for server platforms under the AMD Opteron; embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, and G-Series brand names; and semi-custom SoC products that power the Sony Playstation 4, Microsoft Xbox One, and Xbox One S game consoles. Company description from FinViz.com.

Expected earnings Oct 24th.

Nvidia (NVDA) shares were rocked last week after news broke that Tesla was looking at moving to AMD and away from Nvidia for the chips to power the autonomous driving functions. The initial headline saw AMD spike and Nvidia decline. The actual story is that AMD and Nvidia are partnering on creating a chip solution for Tesla. It is no surprise that AMD is in the mix because Tesla hired Jim Keller to lead development of Autopilot. Keller previously worked at AMD and led the development of the Zen architecture and the new Ryzen processors.

It appears that Nvidia and AMD have a team of about 50 engineers working to develop a comprehensive solution for Tesla. Here is where it gets interesting. I would not be surprised to see Tesla make an acquisition bid for AMD. The company only has a $13 billion market cap compared to $110 billion for Nvidia. AMD has a lot of products that are different from the Nvidia product line even though they both make GPUs. AMD has only existed for years as a foil for Intel. The bigger company could not be considered a monopoly as long as AMD existed. Now with Qualcomm getting into the processor market and AMD and Nvidia in a high tech partnership, it would make sense for Nvidia to acquire AMD. Since GPUs are a small part of AMD's product line, there may not be that much regulatory concern. Is it a long shot? Absolutely, but definitely in the realm of possibilities.

Even if there is never an acquisition bid, just the combination of AMD and Nvidia in a partnership validates the technical capabilities of AMD and lifts them into the big league. Where AMD has always been a low cost alternative to Intel and always 1-2 generations behind in technical expertise, they have dramatically improved their game in the last 12-18 months. Instead of being road kill on the Intel superhighway to state of the art processors, they have surged to be a real competitor. Partnering with Nvidia is a real step up for the company.

The chart is ugly with no apparent trend but there is decent support at $12. They could easily catch fire as investors begin to understand the ramifications of the partnership and we could see another leg higher like the one that started the prior May. There are no guarantees but I do not believe anyone sees AMD's future as anything but positive given recent events.

Update 9/25/17: AMD and Nvidia declined after Intel announced the next generation in the Core CPU line for desktops. This 8th generation Core-i7-8700K is the bet gaming processor ever with an internal clock frequency of 4.7 Ghz and Intel's fastest ever. They will also support 4K video. This is a challenge for AMD but the company is still ahead of Intel in the GPU race.

Update 10/3/17: AMD announced a new embedded GPU requiring less power and capable of driving five simultaneous 4K displays. The GPU requires less than 40 watts TDP and comes in a smaller, thinner package. The chip has a 1.25 TFLOPS speed and comes in three form factors including MCM, MXM and PCI Express. The 4K and 3D support works for games, medical imaging, advertising signage and industrial uses. The GPU has 4 GB of GDDR5 memory. Shares gained more than 5% on the news.

Position 9/25/17:

Long AMD shares @ $13.25, see portfolio graphic for stop loss.
Alternate position: Long Jan $14 call @ $1.25, see portfolio graphic for stop loss.

BOTZ - Global X Robotics AI - Company Profile


No specific news. Only a minor decline after a string of gains. We should be prepared for a decline as far back as $21.20 if the prior pattern holds.

Original Trade Description: October 4th.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.

DSW - DSW Inc - Company Profile


No specific news. Back to support again. I am raising the stop loss.

Original Trade Description: Sept 30th

DSW Inc., together with its subsidiaries, operates as a branded footwear and accessories retailer in the United States. The company operates through two segments, DSW and Affiliated Business Group. The company offers dresses, casual and athletic footwear, and accessories under various brands for women, men, and kids. It also provides handbags, hosiery, jewelry, and other accessories. As of August 29, 2017, the company operated 511 stores in 43 states; dsw.com, an e-commerce site; and m.dsw.com, a mobile site, as well as supplied footwear to 379 leased locations in the United States. DSW Inc. was founded in 1917. Company description from FinViz.com.

The CEO recently said "we seen an opportunity to acquire market-share as the retail industry consolidates." "We have reinvigorated and positioned DSW to benefit, beginning with a new brand mission: We inspire self-expression."

They have reorganized their stores, updated their marketing, added customer merchandise and expanded their online presence. Marketing statement

They reported Q2 earnings of 38 cents compared to estimates for 29 cents. Revenue of $680.4 million beat estimates for $669.2 million. They guided for the full year for earnings of $1.45-$1.55 and analysts were only expecting $1.44.

They announced a new $500 million share buyback program on top of $33 million left over from the prior authorization.

Expected earnings Nov 21st.

Shares closed at a 5-month high on Friday and on the verge of breaking out of a 10-month consolidation period.

I really like the option on this position.

Position 10/2/17:

Long DSW shares @ $21.60, see portfolio graphic for stop loss.
Alternate position: Long Jan $22.50 call @ $1.50, see portfolio graphic for stop loss.

DVAX - Dynavax - Company Profile


No specific news. Sharp drop from the 52-week high as the biotech sector saw some profit taking.

Original Trade Description: Sept 20th

Dynavax Technologies Corporation, a clinical-stage immunotherapy company, focuses on leveraging the power of the body's innate and adaptive immune responses through toll-like receptor (TLR) stimulation. Its product candidates are being investigated for use in multiple cancer indications, as a vaccine for the prevention of hepatitis B and as a disease modifying therapy for asthma. The company's lead product candidates include HEPLISAV-B, an investigational adult hepatitis B vaccine, which is in Phase III clinical trials; and SD-101, an investigational cancer immunotherapeutic that is in Phase I/II studies. Its product candidates also comprise AZD1419, which is in Phase II clinical trial for the treatment of asthma; DV230F that is in preclinical stage for the treatment of liver tumors; and DV1001, a TLR 7&8 agonist, which is in preclinical stage for the treatment of for multiple malignancies, as well as DV281 for the treatment of non-small cell lung cancer. It has collaboration and license agreements with AstraZeneca AB to develop AZD1419 for the treatment of asthma; and Merck & Co. to develop SD-101 for varios immuno-oncology therapies. Company description from FinViz.com.

Dynavax has a vaccine for Hepatitis B. Shares crashed on August 10th when the FDA asked for more information despite a 12-1 vote to approve it. The results of the request for info will be released no later than November 10th according to the company. They are confident the drug will be approved and they are already targeting an early 2018 release date.

Cathy Reese of Empire Asset Management said investors should use the current volatility to buy the stock and she has a $38 price target.

Earnings Nov 1st.

Shares have rebounded from the early August dip as investors become more confident the vaccine will be approved. Shares peaked a $21.85 on September 11th and then faded for a week as profit taking appeared. Wednesday's close was a 7-day high.

I am not planning on holding this position into the announcement. I would like to exit by the end of October to avoid any unplanned declines.

Update 10/2/17: Shares spiked nearly $2 on news it was considering strategic alternatives on its Hep-B vaccine. Those would include selling the drug to someone else or licensing it to a larger company. DVAX is a small company and does not have the infrastructure to market it on a worldwide basis. The drug Hellisav-B is expected to receive FDA approval in the coming weeks. Whichever route they take would provide upfront cash to enable them to continue development on their immuno-oncology pipeline.

Options are very expensive because of the big expectations. This will be a stock only position.

Postion 9/21/17:

Long DVAX shares @ $21.10, see portfolio graphic for stop loss.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. Shares are holding at the resistance highs.

Original Trade Description: Oct 2nd

Hewlett Packard Enterprise Company provides technology solutions to business and public sector enterprises. It operates through Enterprise Group, Software, Enterprise Services, and Hewlett Packard Financial Services segments. The Enterprise Group segment offers servers, management software, converged infrastructure solutions and technology services; hybrid cloud solutions, including private cloud platform; business critical systems; storage products, as well as 3PAR StoreServ, a Storage platform; and networking products comprising switches, points, controllers, routers, and wireless local area network and network management products. This segment also provides software-defined networking and communications capabilities; network access solutions for mobile enterprises; and consulting services. The Software segment offers software to capture, store, explore, analyze, protect, and share information and insights within and outside organizations; enterprise security, application delivery management, and IT operations management software products. This segment provides HP Vertica, an analytics database technology for machine, structured, and semi-structured data; and HP IDOL, an analytics tool for human information, as well as solutions for archiving, data protection, eDiscovery, information governance, and enterprise content management. The Enterprise Services segment offers consulting, outsourcing, and support services across infrastructure, applications, and business process domains; and application and business services that help clients to develop, revitalize, and manage their applications and information assets. The Hewlett Packard Financial Services segment provides leasing, financing, IT consumption and utility programs, and asset management services. Company description from FinViz.com.

Expected earnings Dec 5th.

HPE has been undergoing an intense reorganization for several years. That included splitting off from HPQ in an effort to separate the corporate business from the consumer business. Meg Whitman has done a superb job in trimming excess departments and selling off non-core assets.

Recently, she announced another 10% reduction in the workforce that would result in 5,000 job cuts. She said the reductions would result in fewer lines of business and a more streamlined decision process. The current 3-year plan calls for savings of $1.5 billion and shift the focus towards research and development.

When Whitman took over in 2011 Hewlett Packard had 350,000 workers before the spinoff. Now HPE has 52,000.

The company now specializes in cybersecurity, enterprise WiFi, cloud services, servers and other corporate technology. Whitman recently said the company is seeing rapidly growing demand across key areas of the business.

Shares closed at a new high on Monday after trading in a $2 range for almost a year. I believe the latest announcement on reductions and streamlined operations has finally struck a chord with investors.

Update 10/3/17: Shares down slightly on news they allowed Russia to examine the source code of security software used to guard Pentagon secrets. The review was required by Russia and other countries prior to those countries considering HPE as a cybersecurity vendor for their secrets. However, by letting Russian software engineers view the source code, supposedly to make sure there was no hidden back door access for US spies, they learned how the code worked, what the software was guarding against and gave them insights as to how they could defeat it. The top White House cyber security official said this was becoming a bigger problem because everyone (other countries) was demanding to see the source code and that has now become a security risk.

Position 10/3/17:

Long HPE shares @ $14.97, see portfolio graphic for stop loss.
Alternate position: Long Jan $16 call @ 50 cents, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


No specific news. Shares closed at a 4-week high on Thursday. Fractional decline on Friday.

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.

Update 9/11/17: The company announced it had successfully completed a required number of missions with their jet powered unmanned drone system. The missions are part of the performance demonstrations prior to delivery of ten drones over the next six months. The customer was not announced for security reasons. However, a program they announced with the Navy several months ago called for delivery of 10 drones in 2017 with the potential for multiple follow on orders in 2018. This could be part of that project.

Update 9/18/17: Kratos deployed the first fully autonomous vehicle in Colorado with the Colorado Dept of Transportation. The robot vehicle replaces the trailing vehicle in a work construction crew. It follows the crew throughout the day and acts as a mobile crash barrier. Previously, a CDOT employee had to drive a specially built truck mounted with impact absorbing rear bumpers. Basically, this protects the work crew on the road by giving erratic drivers something to hit other than the work crew. There is still the problem of the driver in this truck when a car, truck or semi plows into the truck at 70 mph. In Colorado these bumper trucks were hit an average of 7 times per year, sometimes with injury to the CDOT drivers. The Kratos robotic crash guard truck has no driver so nobody is injured with an errant civilian vehicle crashes into it. The robot vehicle monitors the work crew and maintains a safe distance behind them with enough lane coverage to keep them from getting hit.

Update 9/21/17: KTOS successfully completed the third test of AN/SPY-6(V) Air and Missile Radar (AMDR) against a live ballistic missile target. The new radar is slated to begin service on the Navy's next generation Arleigh Burke Class Guided Missile Destroyer currently under development. This is a big step for Kratos.

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. Resistance holding at $18.60. I am recommending we close the call position. This is an October option and it will see accelerating premium decay starting next week if MRVL shares do not spike higher.

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.

BEARISH Play Updates

FDC - First Data - Company Profile


Former British PM, David Cameron, joined the FDC International Advisory Board. He will work on expanding FDC relations in key regions around the world. Shares rallied slightly and I lowered the stop loss.

Original Trade Description: September 16th.

First Data is a global leader in commerce-enabling technology, serving approximately six million business locations and 4,000 financial institutions in more than 100 countries around the world. The company's 24,000 owner-associates are dedicated to helping companies, from start-ups to the world's largest corporations, conduct commerce every day by securing and processing more than 2,800 transactions per second and $2.2 trillion per year. Company description from FDC.

First Data earnings will be impacted by the three hurricanes because retail activity was slowed significantly over the weeks following the hurricane impacts. FDC said retail activity declined 72% in the first three days and was not expected to resume significantly for weeks. Stores need to recover from the floodwaters and flooding. They need electricity restored in order to run registers and POS terminals.

Expected earnings Nov 6th.

FDC also had the unfortunate luck of filing for a secondary offering of 85 million shares with an overallotment allowance of another 12.75 million on September 11th, just after the twin storms. The shares were sold by New Omaha Holdings, a major shareholder in FDC. With only about 300 million shares actively traded that is close to a 25% increase in the float. The shares were priced on Sept 18th at $17.75 each.

Selling nearly 100 million shares when your shares are already depressed would be expected to depress them even further. Shares closed at $17.55 on Wednesday and the 4-month low close is $17.47. Any further decline could put them into free fall to major support at $15.

There is always the potential for an earnings warning over the next several weeks.

Update 9/28/17: FDC announced a new service called Disburse-to-Debit to allow companies that hire temporary workers or "gig" workers to pay them instantly upon completion of a task by sending the money to their debit cards. This works for people like Uber drivers, part time workers at special events or even insuranve companies paying claims. An agent can upload the user data and the debit card payment arrives instantly. This is a smart service and FDC shares rallied 33 cents on the news.

Position 9/28:

Short FDC shares @ $17.56, see portfolio graphic for stop loss.
Alternate position: Long Jan $17 put @ 70 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


New historic low on Thursday. Since this is a long-term position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally into year-end we could see a sharp decline in the VXX over the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, 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.

CIEN - Ciena Corporation - Company Profile


Colt Technology Services is expanding its Asian Pacific network with Ciena 100Gbps and 200Gbps platforms. Shares are still struggling with resistance around $22.35.

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 Nov $23 call @ 93 cents, see portfolio graphic for stop loss.

Previously closed 9/13: Long CIEN shares @ $21.89, exit $21.98, +.09 gain.

DF - Dean Foods - Company Profile


No specific news. Shares spiked to our stop loss on Thursday.

Original Trade Description: September 16th.

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 CEO warned, that volume and mix challenges are occurring at a higher-than-planned rate. As such, given the resulting volume shortages, they lowered their full-year guidance from $1.35-$1.55 to 80-95 cents. That is a major haircut.

On August 22nd the CFO resigned unexpectedly, effective Sept 1st. That is never good when a CFO exits with only one-week's notice.

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.

We shorted this stock on August 10th at $11.37 and shared dipped about 60 cents then rebounded to take us out of the short. The long put ended 6 cents in the money after shares began to roll over again. I believe we are going to see new lows.

Position 9/18/17:

Closed 10/5: Long Dec $10 put @ 40 cents, exit 25 cents, -.15 loss.

Previously closed 9/26: Short DF shares @ $11.02, exit $10.95, +.07 gain.

ECA - Encana Corporation - Company Profile


Shares fell sharply at Friday's open as oil prices dropped $1.50. The decline in oil stopped us out of this position.

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.

Update 9/15/17: Bernstein turned bullish on ECA saying production should increase 26% in 2018 and 16% in 2019. The analyst said the Q3 earnings could be the potential catalyst for investors.

Position 3/14/17:

Closed 10/6: Long October $11 call @ $1.40, exit .45, -.95 loss.

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

ETSY - Etsy Inc - Company Profile


No specific news. Shares are still struggling with support and no material breakdown yet.

Original Trade Description: Sept 13th.

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers. Company description from FinViz.com.

For Q2, the company reported earnings of 10 cents that rose from a 6-cent loss in the year ago quarter. Revenue rose 19.1% to $101.7 million. Active sellers rose 10.9% to 1.83 million. Gross merchandise volume rose 11.7% to $748 million. Sales on mobile devices rose 47%. International sales rose 31% to 32% of gross sales. The number of employees in the workforce declined 23% thanks to an aggressive push by the CEO to expand profitability.

They guided for gross merchandise sales to rise 12% to 14% for the full year, up from prior guidance of 11.7%. Full year revenue is expected to rise 18% to 20% and in line with the 19.1% in Q2.

The company is growing rapidly, especially internationally and they are reducing costs significantly. Over the last several months, they replaced the CEO, CFO and CTO in their push to grow the company and profits quickly.

Expected earnings Nov 2nd.

On Sept 7th a Davidson's analyst, Tim Forte, went all in on ETSY with a glowing forecast. Shares spiked to $17.50 and then faded for a couple days. They have rebounded over the last three days and closed at a new high on Wednesday.

Position 9/14/17:

Long Dec $20 call @ 70 cents, see portfolio graphic for stop loss.

Previously closed 9/27: Long ETSY shares @ $17.79, exit $16.75, -1.04 loss.

HIMX - Himax - Company Profile


Himax is in the right sector with the right products and partners (MSFT, QCOM) but the stock rally has stalled at $11. We are just waiting on the next big headline.

Original Trade Description: Sept 9nd

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.

Position 9/11/17:

Long Dec $11 call @ $1.20, see portfolio graphic for stop loss.

Previously closed 9/25/17: Long HIMX shares @ $10.31, exit $9.65, -.66 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