The Russell 2000 posted the biggest decline with a -1.14% loss. With the Russell down so hard it should be no surprise that all our positions declined.
This is especially troubling since the small caps should be outperforming to the upside in December. That is especially true because of the pending tax cuts. The Dow gained 87 points at the open but closed with a 77 point loss for a -164 point reversal. This is not a good sign but it was the first decline in six days. We have to give the big caps the benefit of the doubt. However, the next 3-5 days could be very volatile because of events in Washington and today's decline could have been cautionary selling.
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.
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
RDN - Radian Group
The long stock position was stopped out at $21.45.
NGVC - Natural grocers Vitamin Cottage
The long position remains unopened until a trade at $8.75.
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
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.
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.
CHGG - Chegg Inc - Company Profile
No specific news. Shares down with the market.
Original Trade Description: November 27th
Chegg, Inc. operates student-first connected learning platform that help students transition from high school to college to career. The company's products and services help students to study for college admission exams, find the right college to accomplish their goals, get better grades and test scores while in school, and find internships that allow them to gain skills to help them enter the workforce after college. It offers print textbook and eTextbook library for rent and sale; and provides eTextbooks, supplemental materials, Chegg Study service, tutoring service, writing tools, textbook buyback, test preparation service, internships, and college admissions and scholarship services, as well as enrollment marketing and brand advertising services. The company has a strategic alliance with Ingram Content Group Inc. Chegg, Inc. was founded in 2005. Company description from FinViz.com.
Expected earnings Jan 29th.
The company reported Q3 earnings of 1 cent, up from a loss of 3 cents and beat earnings for a loss of 1 cent. Those are not big numbers but the company is investing for the future. Revenue of $62.6 million beat estimates for $57.7 million. The company guided for the full year for revenue of $251-$252 million, up from prior guidance of $241-$243 million.
The company just acquired Cogeon GmbH, a provider of AI driven adaptive math technology and the math app, Math42.com. With access to new original content, they can launch their own math courses to provide self-guided and individualized solutions to more students. This will increase their market share in the high school market. The company is growing at a 26% annual rate.
The company said recent studies showed 64% of high school graduates were not prepared for college level math courses. Some 40% of college freshmen have to take at least one remedial math course.
Citigroup just initiated coverage with a buy rating. With Chegg's 4% penetration into a very large addressable market, there is plenty of room to grow. The analyst said Chegg's business model is a positive feedback loop that aids in new subscriber acquisition and cross-selling. They have a pipeline of new products aimed at expanding the addressable market.
Shares declined after earnings but are rebounding from the post earnings depression.
Long CHGG shares @ $15.07, see portfolio graphic for stop loss.
Alternate position: Long Apr $17.50 call @ 85 cents, see portfolio graphic for stop loss.
DEPO - Depomed - Company Profile
No specific news. Shares fell from the 4-month high in a weak market.
Original Trade Description: November 25th
Depomed, Inc., a specialty pharmaceutical company, engages in the development, sale, and licensing of products for pain and other central nervous system conditions in the United States. It offers Gralise (gabapentin), an once-daily product for the management of postherpetic neuralgia; CAMBIA (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug indicated for acute treatment of migraine attacks in adults; Zipsor (diclofenac potassium) liquid filled capsule, a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain in adults; and Lazanda (fentanyl) nasal spray, an intranasal fentanyl drug used to manage breakthrough pain in adults. The company also provides NUCYNTA ER (tapentadol extended release tablets), a product for the management of pain severe enough to long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults; and NUCYNTA (tapentadol), a product for the management of moderate to severe acute pain in adults. In addition, it is involved in the clinical development of Cebranopadol for the treatment of chronic nociceptive and neuropathic pain. The company sells its products to wholesalers and retail pharmacies. It also has a portfolio of license agreements based on its proprietary Acuform gastroretentive drug delivery technology with Mallinckrodt Inc.; Ironwood Pharmaceuticals, Inc.; and Janssen Pharmaceuticals, Inc. Company description from FinViz.com.
Shares of Depomed fell from $11 to $6 in August and traded sideways until sinking before earnings in November. Shares fell to $4.31 ahead of earnings.
They reported earnings of 14 cents that beat estimates for 8 cents. Revenue was $95.4 million. They guided for full year revenue of $375-$380 million. Shares spiked from $4.50 to $6.50 on the news.
They reported the damage to their processing plant in Puerto Rico was less than initially feared and the lost production would be less than $10 million in revenue.
After three weeks of post earnings depression the stock began to rise again in a weak market and closed at a 4-month high on Friday.
Update 12/4: Depomed announced it was contracting with Collegium Pharmaceuticals (COLL) to market its most lucrative product, the Nucynta line of pain killers. The company plans to cut 40% of its workforce and move its headquarters to the Midwest or East Coast where overhead will be cheaper. They are currently in Newark California. They will eliminate all of its painkiller sales force and any brand advertising for the product and collect royalties from Collegium. The company said the layoffs and the move to a lower overhead location would be a significant step in reducing expenses and provide financial and strategic benefits. The company will receive a minimum of $135 million a year in royalties and they are cutting $70 million a year in expenses. Shares were up 5% intraday but faded with the market.
Update 12/6: Shares continued to rise after Depomed announced an exit from opioid sales. Depomed will receive $135 million annually for four years plus royalties from Collegium Pharmaceutical. After 4 years, they will receive a double-digit royalty on sales of Nucynta. This was a good deal for Depomed because they are now out of the opioid business as regulators come down on the sector.
Long DEPO shares @ $7.27, see portfolio graphic for stop loss.
Alternate position: Long March $8 call @ 65 cents, see portfolio graphic for stop loss.
NGVC - Natural Grocers - Company Profile
No specific news. This position remains unopened until a trade at $8.75.
Original Trade Description: December 13th.
Natural Grocers by Vitamin Cottage, Inc., together with its subsidiaries, operates natural and organic groceries, and dietary supplement retail stores in the United States. Its stores offer natural and organic grocery products, such as organic produce; bulk food and private label products; dry, frozen, and canned groceries; meat and seafood products; dairy products, dairy substitutes, and eggs; prepared foods; bread and baked products; and beverages. The company's stores also provide private label dietary supplements; body care products comprising cosmetics, skin care, hair care, fragrance, and personal care products containing natural and organic ingredients; pet care and food products; household and general merchandise, including cleaning supplies, paper products, dish and laundry soap, and other common household products; and books and handouts. As of July 27, 2017, it operated 140 stores in 19 states. The company operates its retail stores under the Natural Grocers by Vitamin Cottage trademark. Natural Grocers by Vitamin Cottage, Inc. was founded in 1955 and is headquartered in Lakewood, Colorado. Company description from FinViz.com.
Expected earnings Feb 15th.
Natural Grocers, more commonly known as Vitamin Cottage, was given up for dead after they reported earnings of only 3 cents in August. Shares fell 35% to $5.50 and traded sideways for the next three months. In mid November they reported earnings of 6 cents that beat estimates by a penny. Revenue of $198.5 million also beat estimates. They guided for full year earnings of 21-31 cents which was above estimates for 21 cents.
Shares rebounded on the earnings beat and positive guidance. They rallied to $8.50 and stalled at that level. They gained 5.6% on Wednesday. Any further gains targets the next resistance level at $10.50.
I am going to put an entry trigger on this position to make sure they are going to move higher before we jump in.
With a NGVC trade at $8.75
Buy NGVC shares, initial stop loss $7.65.
Alternate position: Buy March $10 call, currently 35 cents. No initial stop loss.
That strike price is well out of the money but we have 3 months and it is cheap. If you buy it, plan on holding it long-term.
RDN - Radian Group - Company Profile
No specific news. Shares declined for the second day with the weak market putting a drag on the stock. The stock hit a 9-year high on Tuesday. We were stopped out of the stock positionat the close when the stock hit $21.45. The option position will move to the lottery play section.
Original Trade Description: December 6th.
Radian Group Inc., through its subsidiaries, provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance and Services. The Mortgage Insurance segment offers credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders and third-party beneficiaries by mitigating default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It provides primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment offers outsourced services, information-based analytics, valuations, and specialized consulting and surveillance services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other consumer asset-backed securities. This segment provides loan review and due diligence, monitoring of mortgage servicer and loan performance, real estate valuation and component services, real estate owned asset management services, and outsourced mortgage services. It primarily serves financial institutions, government-sponsored enterprises, securitization trusts, investors, regulators, and other mortgage-related service providers. Radian Group Inc. was founded in 1977 and is headquartered in Philadelphia, Pennsylvania. Company description from FinViz.com.
Expected earnings Jan 25th.
Radian reported Q3 earnings of 46 cents that beat estimates for 42 cents. Revenue rose 3% to $270 million. Mortgage insurance written rose 3% to $15.1 billion. Total primary mortgage insurance in force rose 8% to $196.8 billion. Deliquent loans were flat for the quarter. The company said defaults were declining.
The company provides mortgage insurance for credit worthy buyers who do not have the 20% down payment to avoid the insurance requirement. This means more millennials are able to buy houses and they are the population sector with rising incomes and trying to build their credit while buying homes to raise a family.
The company just completed the sale of Clayton EuroRisk, a provider of outsourced mortgage services in Europe, to a global investment firm. Radian is trying to focus on its core business in order to reduce expenses and maximize profits.
Shares gained $1 on the news four days ago and then moved sideways until today. Shares posted a minor gain but closed at a new nine-year high. (post financial crisis)
Closed 12/14: Long RDN shares @ $21.89, exit $21.45, -.44 loss.
Alternate position: Long Feb $23 call @ 65 cents, see portfolio graphic for stop loss.
SFM - Sprouts Farmers Market - Company Profile
No specific news. Still holding at resistance.
Original Trade Description: December 4th.
Sprouts Farmers Market, Inc., a healthy grocery store, provides fresh, natural, and organic food in the United States. The company's stores offer fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli products, baked goods, dairy and dairy alternatives, frozen foods, body care and natural household items, and beer and wine. As of May 04, 2017, it operated 280 stores in 15 states. The company was founded in 2002 and is based in Phoenix, Arizona. Company description from FinViz.com.
Sprouts was written off as dead after Amazon bought Whole Foods. However, just like Whole Foods is not a competitor to Costco, they are not a competitor to Sprouts either. Sprouts is not a "grocery" store. They are an organic produce store with meat and dairy and a few other items. They are a specialty store for organic products. Whole Foods had this original concept but morphed into more of a full service grocery store with organic products.
Some readers may disagree with me on the comparison but Sprouts is making money and Whole Foods was struggling and that is the bottom line.
For Q3 revenue rose 16% and same store sales rose 4.6%. Gross margins of 29.1% are far superior to grocery store margins and only 40 basis points below the peak in 2016 before the competition heated up.
Expected earnings Feb 1st.
Why Amazon? Sprouts has 280 stores spread across the country but only 7% are on the east coast where Aldi and Lidl are turning grocery shopping into a competitive sport. They are not going to be hurt by those big chains.
The small footprint and market cap of only $3 billion makes Sprouts an add on to Whole Foods. Since the companies are similar in that they are all organic, it would be a slam dunk for Amazon to double the size of their footprint on the cheap. Organic buyers spend more money than normal shoppers. The stores are in upscale neighborhoods and customers are likely Amazon Prime members.
Sprouts already has a partnership with Amazon with 2 hour home delivery to Prime customers. They just expanded the service area from the original 8 cities and that is another reason Amazon could scoop them up and head for the express checkout isle.
Shares have recovered from their Whole Foods reaction dip in August and are very close to breaking out to a new high. There is resistance just under $25 but the stock is moving up aggressively on their good earnings and guidance.
In order to get an option after the Feb earnings we have to reach out to March. They are a little more expensive than those I normally recommend in this newsletter. However, while the January options are cheaper, they will decay faster as we approach the December expiration in two weeks. You get what you pay for. As a compromise, I am going to use the $27.50 call instead of the $25 call. You can choose which call strike/series you like.
Update 12/12: IBD upgraded SFM to a 95% composite rating and 80% relative strength rating.
Long SFM shares @ $24.09, see portfolio graphic for stop loss
Alternate position: Long Mar $27.50 call @ 80 cents, see portfolio graphic for stop loss.
YRCW - YRC Worldwide - Company Profile
No specific news. Shares retreated from the new 52-week high in a weak market.
Original Trade Description: December 9th.
YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2016, this segment had a fleet of approximately 7,700 tractors comprising 6,200 owned and 1,500 leased; and 31,000 trailers consisting of 24,900 owned and 6,100 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, truck loading, and other specialized offerings; guaranteed and expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, reddawayregional.com, and newpenn.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,600 tractors, including 5,000 owned and 1,600 leased; and 13,500 trailers comprising 10,800 owned and 2,700 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. YRC Worldwide Inc. was founded in 1924 and is headquartered in Overland Park, Kansas. Company description from FinViz.com.
YRCW reported Q3 earnings of 22 cents that missed estimates for 28 cents. Revenue of $1.25 billion matched estimates. Shipments were impacted by the hurricanes in Texas and Florida. Shares traded sideways on the miss.
Regional shipments increased 4.0% despite the hurricane impact. Revenue per hundredweight ros 3.4% and revenue per shipment rose 3.8%. That was the highest revenue per hundredweight increase in more than 3 years. They are refreshing the fleet to more economic tractors and transitioning 8 terminals to become regional distribution centers. This will add capacity and reduce costs.
Expected earnings Feb 1st.
The entire transportation sector crashed in late October and early November and that knocked 25% of YRCW shares. The rebound started in mid November and shares have recovered all the loss and are close to a breakout to a new 52-week high.
Update 12/11: After the bell, YRC provided an operational update for November. Tonnage per day increased 1.1%, revenue per hundredweight rose 3.7%. Revenue per shipment rose 5.0%. Regional tonnage per day rose 6.0%, revenue per hundredweight rse 0.8% and revenue per shipment rose 4.1%. Overall these were some good numbers.
Long YRCW shares @ $14.20, see portfolio graphic for stop loss.
Alternate position: Long Jan $15 call @ 71 cents, see portfolio graphic for stop loss.
This is a short-term call and we will need to be out of it by the end of December. The next available option series was April at double the cost.
BEARISH Play Updates
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.
Short VXX shares @ $40.95, see portfolio graphic for stop loss.
XONE - Exone Co - Company Profile
No specific news. Shares posted a nice decline to close below support at $9.70.
Original Trade Description: December 11th.
The ExOne Company develops, manufactures, and markets three dimensional (3D) printing machines, 3D printed and other products, materials, and services primarily in North America, Europe, and Asia. The company provides various machines that enable designers and engineers to design and produce industrial prototypes and production parts. Its machines include Exerial, S-Max/S-Max+, and S-Print, which are indirect printing machines; M-Print, M-Flex, and Innovent that are direct printing machines; and MWT industrial grade microwaves. The company also supplies associated materials comprising consumables and replacement parts; and other services, such as training and technical support services. It markets its products to industrial customers and other end-market users in the aerospace, automotive, heavy equipment, energy/oil/gas, and other industries under the ExOne brand name. The ExOne Company was founded in 2005 and is headquartered in North Huntingdon, Pennsylvania. Company description from FinViz.com.
Expected earnings Feb 8th.
The company reported a Q3 loss of 30 cents on revenue of $15.9 million. Those anemic numbers came after a 32% increase in machine revenue and 13% increase in non-machine revenues. It makes you wonder how bad it would have been if revenues had not surged.
The stock has rolled over and is heading lower at a rapid pace. With earnings on Feb 8th, we can buy a $10 February put for 90 cents. This is strictly a bet on the falling chart and the fact that investors are dumping this stock before year-end.
Short XONE shares @ $10.39, see portfolio graphic for stop loss.
Alternate position: Long Feb $10 put @ 90 cents, see portfolio graphic for stop loss.
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