Option Investor

Daily Newsletter, Tuesday, 10/24/2017

Table of Contents

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

Market Wrap

Four Stock Rally

by Jim Brown

Click here to email Jim Brown

The Dow outperformed the rest of the market thanks to four stocks.

Market Statistics

I wrote several times that Tuesday would be a major volatility day for the Dow because of three major components reporting earnings before the bell. I certainly did not expect the gains we got and most of that was related to the monster spike in 3M, which added nearly 100 Dow points all by itself.

Three other stocks also contributed to the outsized performance with CAT, BA and GS also powering the Dow higher. Those four stocks added 179 points to the Dow and sent the index into even more overbought status.

Shorts were clearly in a lot of pain with the Dow gapping higher by 168 points at the open and it closed with that same 168-point gain.

Of the four Dow components reporting earnings on Tuesday, 3M (MMM) was the king of the mountain. They reported earnings of $2.33 compared to estimates for $2.21. Revenue of $8.17 billion beat estimates for $7.92 billion. 3M raised its full year guidance range from $8.80-$9.05 to $9.00-$9.10. 3M gets 60% of its revenue from overseas and the weak dollar added to its profitability. Obviously, a 12 cent beat and a minor top end hike on guidance does not merit a $17 intraday spike in the stock. This was a monster short squeeze after the stock closed at new highs over the prior three days. I get it that the global economy is growing and this is good for 3M but this is going to be a short magnet over the next couple of weeks until the $13 closing gain is neutralized.

Caterpillar (CAT) reported earnings of $1.95 that nearly quadrupled and blew past estimates for $1.22. That is the kind of earnings beat that should have spiked the stock $13 like MMM but given CAT's recent string of new highs over the last three months, a lot of excitement was already priced into the stock. Revenue rose 25% to $11.41 billion compared to estimates for $10.61 billion. Construction equipment revenue rose 37% with energy and transportation equipment revenue rising 12%. CAT raised guidance for the full year from $5.00 to $6.25 on revenue of $44 billion. Analysts were expecting $5.29 and $42.94 billion. This was a killer quarter for CAT and this confirms more than anything else that the global economy is beginning to surge.

McDonalds (MCD) reported earnings of $1.76 that only matched estimates. Revenue of $5.75 billion declined from $6.42 billion and matched analyst estimates. Global same store sales rose 6.0% and beat estimates for 4.6% with US sales rising 4.0%. This was a disappointing report. Many analysts, including myself, expected the company to post stronger results because of their new premium burger menu and the full implementation of the delivery program. McDonalds did say the premium burgers were responsible for its earnings growth along with the McPick 2 menu. That is where you get two low dollar items for $2.50 or two larger items for $5.00. The company returned $2.9 billion to shareholders in Q3 through share buybacks and dividends. I believe the bloom is fading from McDonalds after this report and the stock is likely to give back some of its pre earnings gains.

The last Dow component reporting today was United Technologies (UTX). The company reported earnings of $1.73 that declined -7.8% and beat estimates for $1.69. Revenue of $15.06 billion beat estimates for $14.98 billion. United raised full year guidance from $6.45-$6.60 to $6.58-$6.63 and revenue guidance from $48.5-$59.5 billion to $59.0-$59.5 billion. Investors were hoping for better news and shares declined just over $1 for the day.

Biogen (BIIB) reported earnings of $6.31 that beat estimates for $5.73. Revenue rose 4.1% to $3.08 billion. Shares fell sharply because sales of Spinraza for spinal muscular atrophy came in at $197.6 million and missed estimates for $242 million. The drug costs $750,000 for the first year of treatment and drops to $375,000 in subsequent years. Sales of the MS drug Tecfidera dropped -3.5% to $1.07 billion and missed estimates for $1.09 billion. The competition is increasing from Roche, Celgene and Sanofi. As their drugs gain market share, Biogen is going to suffer. Shares fell $13 on the earnings news.

GM shares closed at a new high after the company reported earnings of $1.32 and beating estimates for $1.11. Revenue declined from $38.89 billion to $33.62 billion but beat estimates for $32.18 billion. The company said it would introduce two electric vehicles over the next 18 months with AT LEAST 20 by 2023. Look out Tesla! Volume declined 26% to 268,000 units due to planned down time. That reduced dealer inventories by -160,000 vehicles to 821,000 as of the end of the quarter.

Stanley Black & Decker (SWK) reported earnings of $1.95 compared to estimates for $1.87. Revenue of $3.3 billion beat estimates for $3.16 billion. The company guided for the full year for earnings of $7.33 to $7.43, up from $7.18-$7.38. Sales of tools and storage rose 22.2% with a 9% rise in volume. Sales in the industrial segment rose 8.9% on an 8% rise in volume. The security segment saw sales decline -8.8% due to divestitures. Shares rose $7 on the news.

After the bell, Chipotle Mexican Grill (CMG) reported earnings of $1.46 that missed estimates for $1.63. The company said hurricanes cost them 13 cents a share and a security breach cost them 64 cents. It was still a big miss. Revenue of $1.13 billion missed estimates slightly of $1.14 billion. They guided for full year same store sales of 6.5% and below the estimate for 7.2%. They also said they were going to open fewer new locations than previously expected. They had guided for 195-210 in prior months and they said it would be at the low end of that range and they would open only 130-150 stores in 2018. Shares fell $25 in afterhours and closed at a 5-year low of $293.80.

AMD reported earnings of 10 cents compared to analyst estimates for 8 cents. Revenue of $1.64 billion rose 25.7% and beat estimates for $1.51 billion. Shares collapsed in afterhours after the company guided for a 12% to 18% decline in Q4 revenue to around $1.34-$1.44 billion and analysts were expecting $1.34 billion. Based on analyst expectations that lower guidance was not that bad but it is the principle of lower guidance that sends investors running for the exits.

Juniper Networks (JNPR) reported earnings of 55 cents that missed estimates for 56 cents. Revenue of $1.26 billion narrowly beat estimates for $1.25 billion. The company guided for the current quarter for earnings of 49-55 cents with revenue of $1.20-$1.26 billion. Analysts were expecting $1.35 billion. Shares fell to $24.50 in afterhours and a 52-week low.

There were so many earnings on Tuesday it would be impossible to cover them all. The next two days will be the same with a flood of companies reporting. There are three Dow components on Wednesday, BA, KO and V. Boeing is the only one that could be a real market mover. They closed at another new high today with a $3.68 gain. If their earnings are anything besides outstanding, there could be a major decline, which would be Dow negative.

Thursday is tech day with MSFT, INTC, AMZN and GOOGL. All of those are after the bell so Friday morning will see the resulting volatility.

Whirlpool (WHR) reported earnings after the bell on Monday. Earnings of $3.83 missed estimates for $3.93. Revenue of $5.4 billion missed estimates of $5.5 billion. They guided for full year earnings of $13.60-$13.90 and analysts were expecting $14.61. Today they announced they were no longer going to sell appliances through Sears. They have been selling their appliances there for the last century. Whirlpool said the two companies could not agree on prices the company needed to be profitable. Sears fired back saying Whirlpool sought to use its dominant position in the market to bully Sears into accepting a price hike. Sears represents about 3% of Whirlpool's revenue. The company manufactures Maytag, KitchenAid, Jenn-Air in addition to the Whirlpool brand. Shares fell $19.

Apple Inc (AAPL) survived another iPhone X manufacturing story on Tuesday and actually closed higher. The Nikkei Asian Review said Apple may only be able to ship 20 million X phones this year rather than the 40+ million previously expected. The article said the OLED screen problem had been resolved but the TrueDepth camera system was still causing problems. An article last week said Apple may only have 3 million phones on launch day. Apple is trying to counter all these leaks by putting out a press release saying the X phones will be in all their stores on launch day and if you want one you need to get there early. That caused some consternation among analysts. If you only have 3 million to sell, why tell everyone to get to the Apple stores early. That is only going to cause long lines and frustrated customers when the inventory runs out. However, 3 million phones could produce a lot of store inventory and that means the online buyers are the ones that will face a long waiting period. Drexel Hamilton warned that anyone not getting an early order or one of the phones at a store is likely not going to get a delivery until after the holidays.

UBS did a survey and found that 19% of respondents plan on buying a new phone in the next 90 days. Of those respondents 69% plan on buying an iPhone. Of those buying an iPhone, 43% plan on buying the model X. That suggests demand for the X will be huge even with an estimated average price of $1,150. Also, the 8 Plus is out selling the regular 8 so Apple's revenue is going to rise due to the average selling price (ASP) of most phones rising. < a href="https://www.appleworld.today/blog/2017/10/23/another-survey-iphone-x-demand-will-be-exceptional" target="new">Link UBS said the higher ASP could lift Apple's FY 2018 earnings to $11.40.

The API petroleum inventory report after the bell showed a gain of 519,000 barrels of oil compared to estimates for a 425,000 barrel decline. Oil prices rose in afterhours because gasoline inventories declined 5.753 million barrels compared to estimates for a drop of 2.3 million. Distillate inventories fell -4.949 million barrels compared to estimates for a decline of 2.05 million. The decline in refined products suggests oil inventories will decline as refiners ramp up production. However, we are at that time of year where refiners let inventories of refined products decline before they ramp up production of the winter fuel blends. We should not apply too much importance to these numbers.

Crude prices also rose on comments from the Saudi energy minister saying basically "We will do whatever it takes to support prices." The minister said Saudi Arabia was determined to end the oil glut. Prices also rose on his comments that the confrontation between Iraq and Kurdistan was creating concerns in the market.

On the economic front, the Richmond Fed Manufacturing Survey for October declined from 19 to 12. The 7-point decline was the largest since April but it was from a high level. While the survey continues to show economic expansion this was a broad decline in the main components.

The calendar for the rest of the week is headlined by home sales reports and the Kansas Fed manufacturing report. The third revision of the Q2 GDP is on Friday. None of these reports should move the market. Investor interest is focused on earnings.


The Dow was the outperformer with a 0.70% gain because of four Dow components. The Nasdaq only gained 0.18% and the S&P 0.16%. The Dow gains are simply not sustainable. The index is quickly going to run out of earnings reporters to power the gains. Once the post earnings depression phase appears, it could be ugly. Stocks and indexes that post outsized gains for an extended period, typically post outsized losses when that growth spurt ends.

I am afraid we are reaching that point on the Dow. None of the other indexes are confirming the Dow gains. The only reason they were barely positive today was market sentiment created by the Dow. Anyone short anything probably took some off the table with the Dow exploded out of the gate.

The S&P gained only 4 points and that was probably due to CAT, MMM, AMZN and NFLX. The index is not confirming the Dow's gains and is well off its recent high at 2,578 and the closing high at 2,575. This formation suggests we will see additional declines. Support is now 2,555.

The Nasdaq should have done better than an 11 point gain. The big cap tech stocks were mostly positive but the gains were not outstanding given the stock prices. Netflix would be the exception to that claim. A $3 gain on a $1,000 stock is noise and will not lift the index.

The tech earnings are clustered on Thursday after the bell and they better all be blowouts if the Nasdaq is going to rally on Friday. Given some of the misses and big stock declines from today, tech investors may be reconsidering holding over the coming reports.

The Nasdaq has support at 6,565 and resistance at 6,635.

The Russell 2000 closed right at prior support at 1,500, which may be turning into resistance. The index still has not seen any material profit taking from its 162-point rally so any lower close on the Russell would trigger additional selling.

While I do expect the market to move higher over the next month, I am very concerned that we are moving ever closer to a significant profit taking event. Stocks take the stairs up and the elevator down. Earnings for most stocks have been great but we are starting to see a larger percentage of misses as the earnings volume grows. If portfolio managers begin to worry about the post earnings depression phase, they could begin taking profits soon and plan to reenter once we get a decent dip to buy.

The Dow is going to rapidly run out of earnings fuel in three days. The majority of the index will have reported when this week ends. That means next week could be bumpy. Since most traders try to anticipate events, that suggests we could see some bumps this week as well.

We are rapidly approaching a new challenge. With the president declaring outright war on senator's Flake and Corker, that eliminates 2 of the 52 he needs to get tax reform passed. That leave vice president Pence as the tie-breaking vote but if we see another defection from the ranks that would kill the tax reform process. When your own soldiers are defecting, you cannot afford to whittle down the remaining ranks or the war will be lost. We are very close to losing tax reform and once investors see that as a possibility, they will take their chips off the table.

Keep some cash in your account in case we do get a buying opportunity because that is looking more likely with each passing day.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Betting Against the House

by Jim Brown

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Editor's Note

The house always has better odds and the odds are building for some profit taking. If you consistently bet against a deck that is stacked you are going to lose. The Dow's unbelievable move is going to end. It is only a matter of time. Today's gains are only going to hasten its decline once the short squeeze ends. We need to wait patiently for a dip to buy or risk buying a market top. I know waiting is not fun but is is definitely better than losing money.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Volatility Warning

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes other than the Dow are telegraphing future weakness. The Dow blew out again with a 167 point gain but the other indexes did not confirm. The Russell could not close over 1,500 by more than a fraction of a point and the S&P only gained 4 points. The Nasdaq posted an anemic 11 points despite the Dow surge. Only four stocks on the Dow added 179 points so this was not a broad market rally. There is likely to be profit taking in our future.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

TTS - The Tile Shop
The long position was entered at the open.

CONN - Conn's Inc
The long call position was closed at the open.

AMD - Advanced Micro
The long stock position was closed at the open.

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


AMD reported earnings of 10 cents compared to analyst estimates for 8 cents. Revenue of $1.64 billion rose 25.7% and beat estimates for $1.51 billion. Shares collapsed in afterhours after the company guided for a 12% to 18% decline in Q4 revenue to around $1.34-$1.44 billion and analysts were expecting $1.34 billion. Based on analyst expectations that lower guidance was not that bad but it is the principle of lower guidance that sends investors running for the exits.

We closed the long stock position at the open for a minor gain just to make sure we avoided this type of collapse. We still have the January call and plenty of time for a rebound. The call will move to the Lottery Play section next weekend.

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.

Update 11/10/17: AMD shares rallied after a processor conference and upgrade to Nvidia. Yesterday there was an article with a picture of a new Intel processor with "Vega Inside" but it has disappeared today. Intel has previously denied any licensing with AMD but the picture showed a mobile processor with Intel Outside, Vega Inside, which would mean AMD's Vega graphics on an Intel chip. This was for a mobile processor for a notebook or tablet. Apparently, Intel was not ready for the world to see that internal graphic and the article was removed from circulation. If/when Intel does announce a deal with AMD the stock is going to soar.

Update: I was able to go back and find the link I had saved even though it is no longer on the website. Vega Inside

Position 9/25/17:

Closed 10/24: Long AMD shares @ $13.25, exit $14.20.
Alternate position: Long Jan $14 call @ $1.25, see portfolio graphic for stop loss.

BOTZ - Global X Robotics AI - Company Profile


No specific news. Long-term position.

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.

CONN - Conn's Inc - Company Profile


Yesterday after the bell CONN provided an operational update that contained some mixed details. October same store sales in hurricane areas was up 15% but nationwide sales were down -7%. I was worried about how this would play in today's market and recommended we close the November option position at the open because a drop in CONN shares could have negatively impacted that short-term option.

Hindsight is always 20:20 and CONN shares exploded higher with a $4.45 gain. We exited the option for a double so we cannot complain but the high for the day was double that. Fortunately, we kept the stock position and were richly rewarded.

I am going to tighten the stop loss significantly because this short squeeze may not last.

Original Trade Description: Sept 23rd

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through two segments, Retail and Credit. The company's stores provide furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; and home office products consisting of computers, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. The company also provides short- and medium-term financing to its retail customers, as well as offers product support services, such as product repair services, repair service agreements, and various credit insurance products. As of January 31, 2017, it operated 113 retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Conn's, Inc. was founded in 1890 and is based in The Woodlands, Texas. Company description from FinViz.com.

Conn's reported earnings of 26 cents and analysts were expecting a loss of 2 cents. Revenue of $366.6 million missed estimates for $371.9 million. They are located outside of Houston and were forced to close 23 stores, distribution and service centers in Beaumont and Houston. They lost 100 selling days as a result of the storm.

The company said collections from customer financings would be impacted and sales were slow after the stores reopened. However, once utilities and transportation systems were restored, the business saw a large uptick in activity. People who were flooded out have to replace all of their furniture and electronics. Because the company is located in and has a heavy presence in Houston, they will benefit from the surge in replacing household items for months into the future. Shares are rebounding on this outlook.

Earnings Dec 7th.

I profiled this as a long position on Sept 28th but the stock gapped higher on the 29th on an analyst upgraded and that cancelled the entry. Oppenheimer raised their rating to an outperform with a $56 price target. He said investors were under appreciating the resurgence of the Conn's business model and credit portfolio. The crisis of confidence from September 2016 has long passed.

Late Monday an SEC Form 4 was filed showing Harriet Stevens, a 10% owner, purchased another 42,000 shares for $1,066,800 on Oct 13th. This is a strong vote of confidence in the stock. She already owns 5.984 million shares worth $152 million. She did not need to buy more unless she really felt the stock was going higher.

Update 10/18: KeyBanc reiterated and overweight rating and raised their price target from $24 to $42. Shares spiked to $28.35 on a short squeeze related to the upgraded but faded back to $26.85 at the close. That was still a 5.5% gain.

Update 10/23: The company issued an operational update after the bell. They see the impact from the hurricanes as limited. Same store sales were impacted because of 100 lost selling days and reduced traffic associated with Harvey. However, starting in mid September they saw increased traffic and sales as consumers began to rebuild and replace everything they lost in the flood. October same store sales are up 15%. There were both positive and negative factors in the update and shares did not move in afterhours because the update was not released until 5:24 PM after the session closed.

I am recommending we close the long call position. It is a November call and any decline from the operational update would see the premium evaporate quickly.

Position 10/17/17:

Long CONN shares @ $26.00, see portfolio graphic for stop loss.
Closed 10/24: Long Nov $28 call @ $1.06. Exit $2.00, +.94 gain.

FINL - Finish Line - Company Profile


No specific news. Shares posted a minor decline.

Original Trade Description: October 21st

The Finish Line, Inc., together with its subsidiaries, operates as a retailer of athletic shoes, apparel, and accessories for men, women, and kids in the United States. The company offers athletic shoes, as well as an assortment of apparel and accessories of Nike, Brand Jordan, adidas, Under Armour, Puma, and other brands. It engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. As of April 2, 2017, the company operated 573 Finish Line stores in 44 states in the United States and Puerto Rico. It also operates e-commerce site, finishline.com and mobile commerce site, m.finishline.com. The company was founded in 1976 and is based in Indianapolis, Indiana. Company description from FinViz.com.

This is a simple scenario. UK retailer Sports Direct has acquired an 8% interest in Finish Line as it tries to expand its presence in the USA. Sports Direct was acquiring additional shares through third parties in order to force an acquisition. In late August, Finish Line adopted a poison pill to prevent a forced takeover. Since that pill was enacted, the companies have been in discussions and insiders claim the deal is moving along nicely towards completion.

Wells Fargo said there was at least a 50% probability the deal would happen and they are targeting a sale in the $14 - $16 range. Shares are currently trading at $10.50 and EBITDA of 4.5. Wells Fargo said that would be the cheapest takeout in years. Staples was bought by Sycamore for 5.5 times in September. Since Staples had not posted positive comps in 10 years they believe Finish Line will be sold for more than the Staples rate.

Shares jumped on Friday after the company declared an 11-cent dividend.

I am recommending as own this stock ahead of earnings on Dec 22nd. If there is going to be a deal announced it should happen on or before earnings.

Position 10/23/17:

Long FINL shares @ $10.49, see portfolio graphic for stop loss.
Alternate position: Long Feb $12 call @ 75 cents, see portfolio graphic for stop loss.

MRVL - Marvel Technology - Company Profile


No specific news. Shares cannot seem to close over that $18.60 resistance. When a breakout comes it could be strong.

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:
Closed 10/9: Long Oct $18 call @ 64 cents, exit 64 cents, breakeven.

ON - ON Semiconductor - Company Profile


No specific news. New closing high. Citi raised its price target from $17 to $23.50 and reiterated a buy rating.

Original Trade Description: Oct 9th.

ON Semiconductor Corporation manufactures and sells semiconductor components for various electronic devices worldwide. It operates through three segments: Power Solutions Group, Analog Solutions Group, and Image Sensor Group. The Power Solutions Group segment offers discrete, module, and integrated semiconductor products for various applications, such as power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference. The Analog Solutions Group segment designs and develops analog, mixed-signal, and logic application specific integrated circuits and standard products, as well as power solutions for a range of end-users in the automotive, consumer, computing, industrial, communications, medical, and aerospace/defense markets. This segment also provides trusted foundry, trusted design, and manufacturing services, as well as integrated passive devices technology. The Image Sensor Group segment offers complementary metal oxide semiconductors and charge-coupled device image sensors, as well as proximity sensors, image signal processors, and actuator drivers for autofocus and image stabilization for a range of customers in automotive, industrial, consumer, wireless, medical, and aerospace/defense markets. The company serves original equipment manufacturers, distributors, and electronic manufacturing service providers. Company description from FinViz.com.

Earnings Nov 6th, unconfirmed.

ON continues to power higher on a surge of new products as the IoT boom continues. The company completed the acquisition of Fairchild Semiconductor in September.

A major factor in the boom is the Advanced Driver-Assistance Systems. This market is expected to reach $42 billion by 2021 according to MarketsandMarkets. This is giving ON a tremendous boost in earnings and forecasts.

However, they missed earnings for Q2. They reported 26 cents and estimates were 33 cents. Revenue of $1.34 billion beat estimates for $1.31 billion. The company guided for the current quarter for $1.34-$1.39 billion.

Somebody believes they are going to beat those estimates by a mile. On Monday, somebody bought 11,000 of the November $20 calls at 65 cents. That is a $715,000 bet. I suggest we follow them.

Because of the steep gains over the last month, I am not recommending a stock position. We will do this with options only.

Update 10/11/17: ON and Fujitsu announced an agreement where ON will purchase 40% of Fujitsu's 8-inch wafer fabrication plant in Aizu-Wakamatsu. The purchase will be completed by April 1st. ON already had a 10% share and will acquire another 30%. ON said it planned to increase ownership to 80% in the second half of 2018 and 100% in the first half of 2020. By scaling into the ownership it will allow ON to add capacity as demand increases.

Update 10/12/17: ON announced to new System on a Chip (SOC) 1.0 Megapixel CMOS image sensing products for the automotive imaging sector. The company said annual shipments of cameras for use in cars will easily surpass 80 million units by 2020.

Position 10/10/17:

Long Nov $20 call @ 80 cents, see portfolio graphic for stop loss.

TTS - Tile Shop Holdings - Company Profile


No specific news. Shares gave back some of Monday's gains. That is ok as long as the rebound continues.

Original Trade Description: October 23rd

The Tile Shop is a leading specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. The Company offers a wide selection of high quality products, exclusive designs, knowledgeable staff and exceptional customer service, in an extensive showroom environment with up to 50 full-room tiled displays which are enhanced by the complimentary Design Studio – a collaborative platform to create customized 3D design renderings to scale, allowing customers to bring their design ideas to life. The Tile Shop currently operates 134 stores in 31 states and the District of Columbia, with an average size of 20,500 square feet and sells products online.

The Tile Shop reported earnings of 5 cents and revenue of $84.4 million. Analysts were expecting 4 cents and $84.1 million. It was a minor beat but the company had warned on revenues back in early October and analysts reduced their forecasts.

Shares have been severely beaten up since July with a drop from $20 to $8. The company blamed the highly promotional environment and customers shopping for "entry level" products. The company has rectified this deficiency by adding some cheaper products and said they were adjusting their advertising and promotions to meet demand.

Shares have been flat all month but ticked up slightly on Friday and then accelerated on Monday. After a month of consolidation, it may have formed a bottom.

Earnings January 16th.

I am using February options to provide some earnings expectations in the premium. The December options are cheaper but will decay faster.

Position 10/24/17:

Long TTS shares @ $9.65, see portfolio graphic for stop loss.
Alternate position: Long Feb $10 call @ 80 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

BBBY - Bed, Bath and Beyond - Company Profile


No specific news. Minor rebound from Monday's 8-yr low close.

Original Trade Description: October 14th.

Bed Bath & Beyond Inc., together with its subsidiaries, operates a chain of retail stores. It sells a range of domestics merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and juvenile products. It also provides various textile products, amenities, and other goods to institutional customers in the hospitality, cruise line, healthcare, and other industries. As of February 25, 2017, the company had a total of 1,546 stores, includes 1,023 Bed Bath & Beyond stores in 50 states, the District of Columbia, Puerto Rico, and Canada; 276 stores under the names of World Market, Cost Plus World Market, or Cost Plus; 113 buybuy BABY stores in 35 states and Canada; 80 stores under the CTS name; and 54 stores under the Harmon name. It also offers products through various Websites and applications, such as bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, christmastreeshops.com, buybuybaby.com, buybuybaby.ca, harborlinen.com, t-ygroup.com, and worldmarket.com. In addition, the Company operates Of a Kind, an e-commerce Website that features specially commissioned limited edition items from emerging fashion and home designers; One Kings Lane, an online authority in home decor and design that offers a collection of selected home goods, and designer and vintage items; PersonalizationMall.com, an online retailer of personalized products; Chef Central, an online retailer of kitchenware, cookware, and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. Company description from FinViz.com.

It is a tough world when nearly every one of your products is listed on Amazon along with a dozen competitive products with free 2-day delivery. Bed, Bath and Beyond is stuck in that rut and it is painful.

In their recent earnings they reported 67 cents, down from $1.11 in the year ago quarter and missed estimates for 93 cents. Revenue of $2.9 billion also missed estimates for $3 billion. Same store sales declined -1.7%. The retailer said it was undertaking a number of "transformational initiatives." One of those initiatives was the termination of 880 manager positions. Shares fell 18% on the earnings.

With Toys-R-Us filing bankruptcy, there are now concerns about other stores possibly following suit. BBBY is in trouble even though they are buying back shares and paying a dividend. With sales and earnings declining those shareholder friendly efforts may have to be curtailed. They have 65,000 employees and 1,550 stores.

This is simply a case of a large brick and mortar retailer trying to compete with an all powerful Amazon and we know who is going to win this battle in the long run.

Expected earnings Dec 19th.

I am reaching out to January on the option because we can buy an extra 40 days of time for 21 cents. We can buy time but we do not have to use it.

Position 10/16/17:

Short BBBY shares @ $21.20, see portfolio graphic for stop loss.
Alternate position: Long Jan $20 put @ $1.10, see portfolio graphic for stop loss.

HAWK - Blackhawk Network Hldgs - Company Profile


No specific news. Shares posted back to back declines. I hope this trend continues.

Original Trade Description: October 18th.

Blackhawk Network Holdings, Inc. provides a range of prepaid gift, telecom, and debit cards in physical and electronic forms; and related prepaid products and payment services in the United States and internationally. It operates through three segments: U.S. Retail, International, and Incentives & Rewards. The company distributes closed loop gift cards in the areas of digital media and e-commerce, dining, electronics, entertainment, fashion, transportation, home improvement, and travel; non-reloadable open loop gift cards; and prepaid wireless or cellular cards that are used to load airtime onto the prepaid handsets, as well as sells handsets. It also offers general purpose reloadable (GPR) cards; and Reloadit, a GPR reload network product that allows consumers to reload funds onto their previously purchased third-party GPR cards. In addition, the company provides incentives solutions comprising solutions, which allow businesses to manage consumer incentive programs, including in-store, online, or mail-in rebate processing; a hosted software platform for managing sales person and sales channel incentive programs; bulk prepaid card ordering systems and Websites to allow business and incentive program clients to use prepaid cards as part of their incentive and reward programs; and direct-to-participant fulfillment services for prepaid cards, checks, and merchandise. Further, it offers Cardpool that provides an online marketplace and various retail locations to sell unused gift cards; digital services for online and mobile applications; and card production and processing services to its prepaid gift and telecom content providers. The company distributes its products through grocery, convenience, specialty, and online retailers. Company description from FinViz.com.

Blackhawk is in trouble. The company reported Q3 earnings of 18 cents that beat estimates for 10 cents but revenue of $208.1 million missed estimates for $216.5 million. The company guided for the full year for earnings of $1.56-$1.70 and analysts were expecting $1.68. They cut revenue guidance to $940-$981 million and analysts were expecting $1.1 billion.

The CEO said, "We have recently seen increasing competitive pressures in some retail markets and believe this will result in lower growth in our U.S. retail physical channels going forward."

PayPal, Visa and MasterCard are making a big push into prepaid cards. Blackhawk is fighting the three giants in the market and apparently, they are losing market share.

Shares fell $10 on the earnings and have continued to bleed points in the days that followed. They are at a 52-week low and are approaching a 3-year low at $30. Investors tend to flee when companies warn of increased competition and falling market share. If the $30 level breaks, the next support is around $23.

Earnings January 10th.

Because the stock is over $30 this will be an option only position.

Position 10/19/17:

Long Dec $30 put @ .50, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Since this is a long-term ETF 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.

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