Option Investor

Daily Newsletter, Monday, 11/6/2017

Table of Contents

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

Market Wrap

Quietly Making New Highs

by Thomas Hughes

Click here to email Thomas Hughes


The markets continue to drift higher, quietly making new highs as merger news hits the market. Last week there were hints of a possibly Broadcom/Qualcomm deal, those hints were confirmed. Broadcom has made an unsolicited offer for its smaller rival. Today we hear of a possible sale of 21st Century Fox to Disney. The deal is as yet unconfirmed, merely news that talks were held, but would end up with Disney owning most of but not all of the company and specifically movie studios, what would be left is a Fox narrowly focused on news and sports.

Global indices were mostly flat. In Asia trading was muted as President Trump's multi-nation tour gets underway in true Trump fashion. The president is quoted both praising and criticizing the very leaders he is set to meet. The Shang Hai Composite led with a gain just over 0.5% while the Nikkei and Heng Seng each closed with a bare minimum of movement. In Europe markets were flat as well with indices evenly split between gainers and losers. Earnings were in focus, as was the rising price of oil.

Market Statistics

Futures trading was flat to negative for most of the early morning but gained a little going into the open. The open was calm and quiet; the SPX opened with a marginal gain, moved down to test support just below Friday's close and then bounced from there. The index crept higher throughout the morning and into late afternoon setting new all time highs along the way. The days action was light, moves were small and the indices ended the day closing with marginal gains.

Economic Calendar

The Economy

There was no economic data today and very little this week. Tomorrow is the NFIB survey, JOLTs and Consumer Credit, Thursday is jobless claims and Wholesale Inventories and then on Friday Consumer Confidence.

Moody's Survey of Business Confidence gained a half percent to hit 28.3 but remain low relative to the last year. Mr. Zandi takes note of recent weakness citing downturns in sales, hiring and investment that appear to be heaviest in the US. Despite this the index remains high relative to historic levels with a significant number of respondents optimistic about the next 6 months.

With 81% of the S&P 500 reporting the blended rate of earnings growth is now 5.9%. Of those who have reported 74% are beating on EPS and 66% are beating on the revenue end, both above average. To date there are 6 sectors producing growth, led by the energy sector, while 7 sectors have higher growth rates today than they were expected to have.

Looking forward double digit growth is still expected to return next quarter and persist through the end of 2018. Next quarter estimate has fallen a bit, to 10.4%, but full year 2017 estimate is rising on this quarters results. The first quarter estimate for next year edged up to 10.6% while the 2nd edged down to 10.2%. Full year 2018 estimate also edged down but remains strong at 11.0%.

The Dollar Index

The Dollar Index gave up some of its gains today but remains above the $94 support target and well above the recent lows. The index appears to be in reversal following the break of a head&shoulders reversal and is indicated higher. This reversal is driven by firming of FOMC outlook coupled with softened ECB, BOJ and BOE outlook that will likely persist into the next round of central bank policy meetings if not longer. New resistance is now at $95, a break of which would confirm continuation of the reversal with next upside target near $96.25. A fall back below $94 would be bearish in the near term and likely keep the index range bound in the near to short term.

The Gold Index

Gold prices firmed today as the dollar consolidated its gains. Spot price moved up a little more than 1% to move above $1,280. This move is potentially bullish but does still face multiple resistance targets on the way up to $1,300. The caveat is that there is little to support the move other than today's fall in the dollar, unless Trump's Asia tour or the Saudi corruption purge has put the market on edge.

The Gold Miners ETF GDX moved higher in today's action, gaining a half percent in a move up from the $22.50 support target. This move confirms support at the midpoint of the long term trading range and is confirmed by the indicators. The caveat is that today's move also met resistance at the moving averages which happen to be forming a bearish crossover. A move above the moving averages would be bullish but leave the index within its trading range, a failure to move above and/or fall below current support would be bearish.

The Oil Index

Bullish oil traders struck black gold today. The price of WTI and Brent both surged more than 3% to close at multi-year highs. WTI gained $1.74 to close near $57.50 and may continue higher on momentum alone. The move was set up by signs of market tightening and hopes of OPEC's extension of production caps. It was set off by this weekends crackdown in Saudi Arabia which has sparked some worry over possibly supply disruption.

The Oil Index gained more than 2% on the move in oil, creating a large green maribozu candle. This is a strong candle consistent with the underlying trend, current earnings, forward earnings outlook, rising oil prices and a shifting fundamental outlook. The indicators are both in support of the move as well as indicative of strength. MACD is moving higher following a bullish crossover while stochastic is doing the same and also showing strength with a bullish crossover of the upper signal line. Upside target is 1,300. The caveat is that this candle may also signal a euphoric top to the market, I would be cautious with new and current positions.

In The News, Story Stocks and Earnings

Broadcom officially offered to buy Qualcom for $70 a share in cash and stock. Holders of QCOM would get $60 per share and $10 in stock which was a 20%+ premium to the price just before the rumors hit the market last week. There is yet no response from QCOM but one is expected soon. Shares of the stock gapped up at the open and hit the $65 level before falling back from resistance.

Disney and 21st Fox are in talk that could lead to Disney owning most of Fox's studios, production facilities and content. The deal is seen as a big bonus for Disney as it would increase its production capabilities, bring a host of new content under its wings and eradicate a source of competition. So far now comments from either company. Shares of Disney gained more than 2% on the news and broke above the short term moving average.

Online auto dealer Truecar reported after the bell and disappointed the market. The company was able to deliver a 10% gain in YOY revenue but missed expectations. Adjusted EPS of $0.02 beat by a penny but was offset by weak forward guidance. Shares of the stock fell more than -13% in after hours trading.

Avis Budget reported after the bell and missed on the top and bottom lines. The company also gave weak forward guidance which drove prices lower in after hours trading.

AMC Entertainment beat on the top and bottom lines sending the stock higher immediately after the release. A few minutes later, after traders had a chance to read down and see weak forward guidance, shares fell close to -5%.

Weight Watchers beat on both the top and bottom lines with EPS beating smartly. On top of this forward guidance for the full year was raised to the high end of the previous range. Shares of the stock jumped more than 8% on the news.

The Indices

note-I've redrawn trend, support and resistance lines.

Today's action was not robust, the market did not surge higher but it did move higher and set new all time highs. With one exception, the Dow Jones Transportation Average. The transports fell more than -0.20% to create a small spinning top doji just above current support. The index has been drifting lower over the near term and is now in danger of making a deep/deeper decline. The index show small sign of support at this level but remain bearish and suggestive of lower prices. Additionally, the short term moving average is beginning to roll over and will act as resistance on any move higher. If resistance is confirmed the index could go as low as 9,500 and the long term moving average in the near to short term.

Today's leader was the NASDAQ Composite. The tech heavy index gained 0.32% to set a new all time high. Today's candle is small and green, edging up from last week's close, and is supported by the indicators. Both MACD and Stochastic are rising following bullish crossovers and suggestive of higher prices. Stochastic is showing some strength as well with a cross of the upper signal line by %D. Upside targets are 6,800 and 7,000.

The S&P 500 made the second largest gain, a modest 0.12%. The broad market created a small spinning top type candle but set a new all time high while doing so. The move was not strong but is supported by the indicators. Stochastic has already fired a bullish crossover and moved higher with today's action, MACD confirmed today with a crossover of its own. Upside targets are 2,600 and 2,660.

The Dow Jones Industrial Average posted the smallest gain, only 0.03%, and created a very small spinning top doji. It also set a new all time high. The index is drifting higher in line with underlying trends and supported by the indicators. MACD is showing a bit of weakness in the near term but strongly bullish in the long while stochastic is confirming trend with a bullish crossover above the upper signal line. Market action may not be vigorous but the signs all point to higher prices. Upside target is 24,000.

Today's action wasn't strong but it was bullish and set new all time highs for most of the market. That being said there is something troubling me. The transports persist in drifting lower and appear set to correct back to the long term moving average. This isn't a definite signal but it does suggest the broader market could correct as well. Considering that we are nearing the end of the earnings cycle there is a chance the market could enter a period of consolidation, rotation and/or correction in the lull between seasons. The good news is that such a consolidation is yet to materialize. I remain cautiously bullish for the near term, firmly bullish for the short and long term.

Until then, remember the trend!

Thomas Hughes

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New Plays

Death by 1,000 Closures

by Jim Brown

Click here to email Jim Brown
Editor's Note

Lands End is slowly dying for reasons not their fault. Sears keeps closing the stores where they are located.


No New Bullish Plays


Lands' End, Inc. operates as a multi-channel retailer in the United States, the United Kingdom, Germany, and Japan. The company operates through two segments, Direct and Retail. It offers casual clothing, accessories, footwear, and home products. The company sells its products online through landsend.com, and affiliated specialty and international Websites; direct mail catalogs; and retail locations primarily at Lands' End Shops at Sears, Lands' End Inlet stores, and international shop-in-shops. As of January 27, 2017, it operated 216 Lands' End Shops at Sears; and 14 Lands' End Inlet stores. Lands' End, Inc. was founded in 1963 and is headquartered in Dodgeville, Wisconsin. Company description from FinViz.com.

Earnings Nov 30th. Hardly a month goes by without Sears (SHLD) announcing the closure of several dozen additional stores. The Lands End retail base is slowly eroding.

For Q2 they announced a loss of 12 cents and analysts were expecting 9 cents. Revenue of $303.3 million did beat estimates for $292.6 million only because analysts were so negative on the outlook. The company reported a 5.5% increase in direct sales but the retail segment posted a 7.4% decline in revenue. They blamed that decline on the hundreds of stores Sears has closed or announced to be closed in 2017. On the positive side the remaining retail stores produced a 3.8% increase in same store sales.

Unfortunately, the light at the end of the tunnel is a train coming right at them with Sears holding the equivalent of a going out of business sale from now through Black Friday with everything in the store marked down from 10% to 50%. I would not be surprised to see a drastic restructuring of Sears announced after the holidays. With Sears closing dozens of stores per quarter they only have about 450 left and those could be cut in half or worse at year end.

Every bounce in LE is sold and they are only about 20 cents from a record low close.

Sell short LE shares, currently $10.95, initial stop loss $11.95.
Alternate position: Buy Dec $10 put, currently $45 cents, no initial stop loss.
The plan would be to hold the put over the Nov 30 earnings.

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

Dead Calm

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes posted only minor gains in a very calm market. The Dow traded in a very narrow 50 point range and gained only 9 points for the day. The S&P gained only 3 and the Russell 2000 gained 3. The Nasdaq gained 22 thanks to the Broadcom/Qualcomm headlines and gains in AMZN, AAPL, BABA and PCLN. The A/D line on the S&P was almost flat at 238 advancers to 221 decliners. The mood in the market was one of patiently waiting for a catalyst to move the market.

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

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

ON - ON Semiconductor
The long position was stopped at $20.85.

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 and Intel could have waited one more day before announcing a partnership to combine AMD's graphics chip with an Intel processor and High Bandwidth Memory to create a thinner and lighter chip for laptops with top tier visual performance. This was rumored several weeks ago but Intel denied it at the time. On Oct 10th, I wrote this.

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 was no longer referenced on the website. Vega Inside

AMD shares gapped open but not enough to trigger the $1 voided entry rule.

Original Trade Description: November 4th

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 Jan 23rd.

Nvidia (NVDA) shares were rocked again last week after news broke that Tesla was looking at options other than 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.

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.

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.

The new CEO for AMD, Lisa Su, said in an interview last week that with 10 major product launches this year, AMD has completely restructured its product portfolio. "This shift is perhaps one of the most ambitious product ramps that has been done, certainly in AMD's lifetime."

The new Ryzen Mobile combines the best points of the Zen processor and the best of the Vega product and the most recent graphics architecture into a single product. No other company has been able to combine premium processor cores from both categories and merge them into a single chip that runs in an ultra-thin notebook.

HPQ, Lenovo and Acer have announced products that will ship this quarter in time for holiday shopping. AMD products have found new popularity in the key retailer market. Su said they had captured 50% of sales at Amazon and Newegg, the two biggest online computer marketplaces. Processor revenue rose 74% in the latest quarter. Their new AI product, MI25, is already shipping in quantity to data centers around the world and acceptance was accelerating.

I think analysts were wrong on the Q3 earnings. I believe AMD is right on the edge of a resurgence that will make the company a real competitor again.

I am using the April options to get us past their January earnings. When we exit before the event the options will still have an expectation premium.

Position 11/6/17:

Long AMD shares @ $12.04, see portfolio graphic for stop loss.
Alternate position: Long April $12 call @ $1.50, see portfolio graphic for stop loss.

ARNC - Arconic - Company Profile


No specific news. Shares holding at 2-week highs.

Original Trade Description: October 28th

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Company description from Arconic.

Arconic is the old Alcoa. The aluminum mining company was split off as Alcoa Corp and the original Alcoa was renamed Arconic. This company manufactures parts and complicated assemblies from aluminum. They take the raw aluminum and add value to it by creating high tech, high value parts like turbine blades for engines and gas turbines. They are moving into 3D printing of aluminum parts. They have dozens of remote offices close to large industrial clusters where they can provide immediate service to large manufacturing companies.

Shares fell after earnings because they announced the appointment of a new CEO with their earnings report. Charles Blankenship will replace David Hess on January 15th.

The company reported earnings of 25 cents that missed estimates for 27 cents. Revenue of $3.24 billion beat estimates for $3.09 billion. The company guided for the full year for revenue of $12.6-$12.8 billion, up from prior guidance of $12.3-$12.7 billion. Full year earnings are now expected to be $1.15-$1.20 per share.

Expected earnings January 22nd.

Shares fell $3 on the earnings miss and CEO change. After bottoming at $24, they are trying to move higher with resistance at $25.15. I believe ARNC will return to pre earnings levels at $28.

Position 10/31/17:

Long ARNC shares @ $24.76, see portfolio graphic for stop loss.
Alternate position: Long Jan $26 call @ 95 cents, see portfolio graphic for stop loss.

BOTZ - Global X Robotics AI - Company Profile


Since this is a long-term slow moving ETF position, there will not be daily commentary.

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.

Update 10/26: Shares of BOTZ fell 50 cents for the biggest one-day drop since the ETF began in September 2016. There was no news but volume of 4.16 million shares was the largest ever and well over the 964,000 historical average.

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.

ON - ON Semiconductor - Company Profile


The company reported earnings of 30 cents that missed estimates for 40 cents. Revenue of $1.39 billion beat estimates for $1.37 billion. They guided for the current quarter for revenue of $1.33-$1.38 billion. They missed the estimates but that was a 976% rise in profits and 46% increase in revenue. Shares fell sharply at the open to stop us out but rebounded sharply in the afternoon. I like this stock and I would love to see some post earnings depression so we can launch a new position.

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, confirmed.

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.

Update 10/25/17: ON announced a CMOS image sensor platform that brings new levels of performance and image quality to automotive applications such as ADAS, mirror replacement, rear and surround view systems, and autonomous driving. The Hayabusa platform features a ground-breaking 3.0-micron backside illuminated pixel design that delivers a charge capacity of 100,000 electrons, the highest in the industry, with other key automotive features such as simultaneous on-chip high dynamic range (HDR) with LED flicker mitigation (LFM), plus real-time functional safety and automotive grade qualification. Shares declined only 15 cents in a weak market.

Update 10/26/17: ON announced a new 1/2.7-inch 2.3 Megapixel (Mp) CMOS digital image sensor with an active-pixel array of 1936H x 1188V. The AR0239 produces extraordinarily clear and sharp digital images in challenging bright and low light conditions. This, along with its ability to capture continuous video and single frames, makes it an ideal choice for many applications, including security and surveillance systems, body cameras and vehicle DVRs (dash cameras).

Position 10/10/17:

Closed 11/6: Long Nov $20 call @ 80 cents, exit $1.19, +.39 gain.

SVU - Supervalu - Company Profile


No specific news. Minor decline after the 2-week high on Friday.

Original Trade Description: October 28th

SUPERVALU INC., together with its subsidiaries, operates as a grocery wholesaler and retailer in the United States. The company operates through two segments, Wholesale and Retail. The Wholesale segment engages in the wholesale distribution of various food and non-food products to independent retail customers, such as single and multiple grocery store operators, regional chains, and the military. This segment also provides various services, such as retail store support, advertising, couponing, e-commerce, network and data hosting solutions, and training and certification classes, as well as administrative back-office solutions. As of February 25, 2017, this segment operated approximately 1,902 stores with a network spanning 40 states. The Retail segment operates retail stores that provide groceries and various additional products, including general merchandise, home, health and beauty care, and pharmacy products. This segment operated 217 stores under the Cub Foods, Shoppers Food & Pharmacy, Shop 'n Save, Farm Fresh, and Hornbacher's banners, as well as 2 Rainbow stores. The company's stores offer a range of branded and private-label products comprising perishable and nonperishable grocery products. SUPERVALU INC. was founded in 1871 and is headquartered in Eden Prairie, Minnesota. Company description from FinViz.com.

Supervalu has morphed into more of a wholesaler of groceries than a retailer. Given the movement by Amazon and Walmart into online groceries that may be the way to go.

For Q3 they reported adjusted earnings of 46 cents that beat estimates for 36 cents. Revenue of $3.8 billion narrowly beat estimates for $3.79 billion. Wholesale sales rose 63% from $1.7 billion to $2.7 billion while retail and corporate sales were flat. They announced the acquisition of Associated Grocers of Florida for $180 million. Associated had revenue of $650 million for the trailing 12 months. This is a major bolt on acquisition where they can add value and scale and increase their presence in Florida, the Caribbean, South America and Asia. In June they completed the acquisition of Unified Grocers, an active distributer on the West Coast for $390 million. Unified had revenue of $3.8 billion in 2016.

Shares of SVU have been declining since their high of $84 in April 2015. With these two acquisitions and the sale of the Sav-A-Lot division in 2016, the company is turning the business around. I like that they are reducing their exposure to retail and all the expenses and employee related hassles that go with running a retail grocery store. By focusing on the wholesale business they can reduce overhead and expand their reach and their profit margins.

Who knows, maybe Amazon will decide they need to buy a wholesale grocery distributor.

Earnings Jan 17th.

Position 10/30/17:

Long SVU shares @ $16.13, see portfolio graphic for stop loss.
Alternate position: Long Jan $18 call @ $1.05, see portfolio graphic for stop loss.

BEARISH Play Updates

BBBY - Bed, Bath and Beyond - Company Profile


Shares up slightly after Bloomberg ran an article calling BBBY buy out bait.

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.

VXX - Volatility Index Futures - ETF Description


Since this is a long-term slow moving 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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