Option Investor

Daily Newsletter, Tuesday, 12/26/2017

Table of Contents

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

Market Wrap

Rotten Apple

by Jim Brown

Click here to email Jim Brown

Apple shares declined nearly $5 and severely damaged market sentiment for the tech sector.

Market Statistics

Apple shares fell off a cliff in the premarket after a report from Taiwan Economic Daily claimed iPhone X demand could come in well below expectations in Q1. They claimed Apple would slash guidance from 50 million units to 30 million units. Since Apple has not given any iPhone X guidance, the report is somewhat dubious. However, some analysts have been cutting estimates significantly. JL Warren Capital is predicting sales of only 25 million units saying consumers are balking at the high price point with so many other phones available at cheaper prices.

Loop Capital remains bullish saying they are expecting 40-45 million units in Q1, up from 30-35 million in Q4. Jefferies is predicting 40 million. Reuters said research has shown that combined iPhone sales in Q4 have not been as strong as the debut of iPhone 6 in the same period in 2014. Rosenblatt securities reiterated a buy rating and $180 price target saying sales would be solid. The analyst said the sources behind the Taiwan report may have been confused since iPhone 8 production was cut several weeks ago. That news did not impact Apple shares because analysts thought it meant strong X sales. Rosenblatt said they are not seeing any order cuts from 3-D sensing and OLED display panel suppliers. He also said prior checks with Chinese suppliers showed X sales already above 8/8 Plus sales combined.

The damage was not just Apple shares. The chip suppliers for Apple also fell hard. That included QRVO, AVGO, SWKS and MU.

We have just over a month before we get the answer to these conflicting reports. Apple earnings are Feb 1st. Shares were down over $5 intraday to erase about 35 points off the Dow.

On the economic front, the Richmond Fed Manufacturing Survey for December declined sharply from 30 to 20. Backorders turned negative at -4. This was the first time in five months that components were negative. Any positive number shows expansion so the headline number is still strong. Even with the drop to 20, it is still the second strongest number since December 2010 and tied the October 2014 reading. The spike from 12 to 30 in November was unreasonable and the December drop was simply a snap back to reality.

The employment at 20 is a record high for that component. Wages increased slightly from 21 to 22.

The Texas Manufacturing Survey for December rose from 19.4 to 29.7 and the highest reading since 2006. Texas is benefitting from the resurgence in the oil sector, the rebuilding of the gulf coast after Hurricane Harvey and the tax reform will benefit small manufacturers that are making products for energy and construction.

The production component rose from 15.1 to 32.8 and a multiyear high. New orders rose from 20.0 to 30.1 but backorders slipped slightly from 11.4 to 9.2. Employment boomed from 6.3 to 20.4. Prices received rose from 15.1 to 17.9 and the high for the year.

The combination of the Richmond and Dallas reports suggests the national ISM could rise to 60 from the 58.2 reading for the prior month.

The S&P CoreLogic home prices for October rose 6.2% over October 2016 levels. This is old news since prices have been rising around these levels each month for the last year.

The calendar for Wednesday is headlined by the Pending Home Sales for November. That is the last material report for the week.

The API crude inventory report was pushed from Tuesday to Wednesday because of the holiday. However, oil prices exploded higher on news of a pipeline explosion in Libya. There is still fighting between different militias in Libya and the news reports said a band of heavily armed men attached explosives to the pipeline and blew it up. The pipeline carries 90,000 bpd to the main port in Libya. There is no estimate on the time to repair.

With the 450,000 bpd outage in the North Sea, 90,000 bpd in Libya, potential for similar sabotage in Nigeria plus a dozen other minor outages, the global inventories should be declining at a rapid rate. Crude prices spiked to almost $60 with a 2.2% gain. This excitement should begin to fade when US inventories begin to rebuild in mid January.

Seaport Energy said today there were more than 7,300 DUC wells in the US. (Drilled uncompleted) Those could all be turned on very quickly if prices shot up significantly. However, there would be a shortage of completion crews with most service companies operating full out already with no extra crews on standby. It would boil down to which producer would be willing to pay the highest price to get their wells fracked.

Stock news was very light today so this will be a short newsletter. Mallinckrodt (MNK) entered into an agreement to buy Sucampo Pharmaceuticals (SCMP) for $1.2 billion including debt. They are buying the company to get the flagship constipation drug Amitiza and the deal is expected to close in Q1. The CEO of Sucampo said Mallinckrodt was the natural partner to accelerate development of Sucampo's rare disease drug portfolio. The MNK CEO said the acquisition would add "at least" 30 cents to earnings in 2018. News broke in early December that SCMP had received an offer but the buyer was unnamed. Shares spiked from $11 to $17 over the last month and added another $1 to the $18 offer price on Tuesday. MNK shares were only fractionally higher.

Garmin (GRMN) introduced a new fitness tracker that only needs to be charged once a year. The screen is an always on, color display that is readable in sunlight. The Vivofit is designed to be worn 24/7 and safe in the shower. The device can be paired with a smartphone for additional features. The company said a tracker is only worthwhile if you are wearing it and by giving it a one-year battery, there is no reason to take it off. The display is programmable and comes with a watch face, countdown timer, stopwatch, multiple alarms and a weather widget. The device can even track your smartphone and help you find it when it is lost. Garmin Release Investors were not impressed and shares gained only 9 cents. I told you it was a slow news day.

Credit Suisse (CS) said it would take a $2.3 billion charge because of the tax reform. Banks tend to pay taxes in advance so they can get relief in future years. They are treated as a deferred tax asset. Money paid in when taxes were 35% is worth less with taxes at 21%. That means they have to write down those deferred assets. Bank of America is expected to take a $3 billion charge and UBS a CHF-3 billion charge. Shares of CS were only fractionally lower so investors are unconcerned.

Energous Corp (WATT) shares spiked nearly 100% after the bell after finally receiving their long awaited approval from the FCC on their wireless charging technology. Shares were heavily shorted with about 5 million shares or 30% of its float short. The company was ahead of the wireless charging curve but could not get its technology approved until today. This technology uses "RF power" or electricity transmitted through radio frequencies rather than the magnet technology (QI) adopted by Apple and others. The Energous technology will allow devices to be several feet away from the charging source. They have demonstrated charging from as far as 15 feet from the source. Shares spiked from day's low at $8.42 to the $17.25 high in afterhours. Shares settle at $15.30.

Retailers were up despite the weak market. MasterCard SpendingPulse reported a 4.9% rise in holiday sales. Online sales rose 18.1%. This was the best holiday sales since 2011. Super Saturday as it is called when Christmas falls on a Monday, was the second strongest day of the year behind Black Friday. Total holiday sales are expected to exceed $682 billion. Despite the strong year for retailers, there were the most store closings ever in 2017. Analysts do not expect 2018 to be much better. The move to online shopping is unstoppable. Some 70% of shoppers bought something online this year. Analysts believe online sales will be 50% of the total before 2030.

On the positive side for UPS and FDX, some 8% to 15% of online sales are expected to be returned or exchanged. Only about 8% of merchandise bought at a brick and mortar is returned. That is roughly $90 billion at the high end. January 5th is expected to be the biggest day for returns.

Brick and mortar retailers are getting into the act by offering to accept returns for stuff bought on Amazon. Retailers believe that is just another way of getting customers in their store. FedEx and UPS have setup customer drop off locations in 35,000 locations including Walgreens, Krogers and some Albertson's stores, dry cleaners, etc. UPS said 8.5 million packages were shipped back to retailers in the first week of January 2017.

Retailers traded higher as the normal sell Christmas cycle did not appear. In many years, investors buy retailers in October, with some selling on Black Friday and others waiting until Christmas to close the positions. It is still early, retail gains are at risk once the calendar turns to 2018. Costco was the one retailer where sellers have been active. They reported earnings on Dec 15th and shares have declined to post spike lows.

Amazon (AMZN) said it saw record levels of shoppers throughout November and December. In one week alone more than 4 million people became Prime subscribers. That is phenomenal. The company said it sold "tens of millions" of Alexa enabled devices and would have sold more but were out of stock on the Echo Dot, Echo Spot and Alexa Buttons. That claim also involves a tremendous number of Alexa enabled tablets. My wife got a 10 inch as a present and I won a 7 inch. I was not expecting much after having a bad experience several years ago with the early models. These are light years ahead in technology and ease of use. I would highly recommend them.

The company said shopping on the Amazon mobile app rose 70% this year as people were moving away from desktop shopping. More than 1,400 electronic products were ordered per second on mobile devices. Amazon said the hottest non-Amazon products were the Instant Pot, WowWee Fingerlings, the Fitbit Charge 2 fitness tracker, the 23andMe DNA test, the Coffee Lovers K-Cup 40-count variety pack, TCL Roku Smart LED TVs and Rumba robot vacuums. The Instant Pot fad is unbelievable. The Instant Pot Community Facebook group has almost one million members. I know people that have multiple pots because they love them so much. Amazon said their cargo planes can each carry more than 10,000 Instant Pots. The company said they sold enough Instant Pots to make more than 9 million bowls of chili at the same time.

Amazon never gives us the exact numbers of items sold but compares them to metrics they make up. For instance, they said they sold enough TVs to build 2,500 towers the size of the Space Needle. In the 5 days from Thanksgiving through Cyber Monday, they sold more than 140 million items from small businesses and entrepreneurs selling on Amazon. The most requested song on Alexa was Jingle Bells and the most requested recipe was chocolate chip cookies. Amazon packed and shipped more than 1 million packages a day.

The last Prime Now order in time for Christmas was delivered in 58 minutes at 11:58 p.m. on Christmas Eve in Baltimore, MD. The order included the Kid Galaxy Amphibious RC Car Morphibians Shark Remote Control Toy, the Crayola Oil Pastels Art Tools, 28 ct., and the VTech Click and Count Remote.

Here is the complete list put out by Amazon of their holiday shopping statistics. Amazon List


The markets traded sideways on very low volume of only 4.07 billion shares. That is the lowest full day volume since December 23rd, 2016. Wednesday is not expected to be much higher. Last year volume increased about 300 million shares per day between Christmas and New Years. After New Year's volume surged to the high 6 billion, low 7 billion range for the next two weeks.

This week is not expected to see any material market movement. According to the Stock Trader's Almanac, since 1950 the market has averaged a 1.5% gain between the two holidays. However, according to Kensho over the last five years the major indexes have averaged about a half percent decline. For this year, I would go with the Kensho numbers. The graphic below from CNBC shows the results of buying the indexes at the open the day after Christmas and selling them at the close on the last trading session of the year.

The markets were already trending lower coming into this week and the Apple drop in the premarket confirmed that negativity. The Tuesday declines were minimal with the Nasdaq losing the most ground thanks to Apple and the chip suppliers.

The S&P traded in a very narrow 5-point range and ended with a 3-point loss. There was never any direction other than sideways. Support remains 2,678 and resistance 2,695. The index is in range for another attempt at 2,700 but it would take a lot more excitement to get it moving higher. The low volume is going to be an anchor.

The Dow recovered slightly at the close but it was lackluster. The 8-point loss was better than the -30 point loss all afternoon but we are dealing with a 25,000 point index and these moves are just noise. The Dow traded in a 70-point range but that was due to the Apple inspired gap lower at the open and a rebound dip buy that faded quickly. The index traded in about a 30-point range for most of the afternoon. There was no excitement, no buyers and no sellers. If it were not for Apple shaking up the market, it would have been even more boring to watch.

The Nasdaq big caps continued their losing trend and this is not positive for the January outlook. With these stocks showing deteriorating trends, it suggests there could be some heavy selling once the tax calendar rolls over. There is no excitement and these stocks are the sentiment indicators for the Nasdaq.

The index has given back all its new high gains from last week and appears to be heading for a test of 6,900 as support.

The Russell is the only index with a gain and it was very minor. The Russell does look like there are some bargain hunters trying to pick up a few shares with that upslope trend over the last week. A break over 1,550 could energize the entire market.

We should not expect much from this week. I will be happy if we can just hold our recent gains. I would love to see the Dow make a run for 25,000 but at 254 points below that level, I just do not see any catalyst to overcome the low volume blahs.

I would recommend watching from the sidelines and maybe we will get a buying opportunity next week. There is no rush to invest. Be patient and wait for an entry point.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Wait for the Shot

by Jim Brown

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Editor's Note

Market participants are watching carefully for the starter's gun. That starting signal will not happen until next week. A listless market and low volume are not conducive to gains. The market is on cruise control until next week and there is no reason to jump in with new money until we have a better idea for the future. The object of investing is to make money, not to trade just because the market is open.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

No Decline on Russell

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap index posted only a minor gain but it was the only broad index to do so. The Russell continued its series of higher lows if you don't count the opening .41 dip below Friday's low. That is not relative in the overall scenario. The index rebounded instantly and closed positive. The market crashed at the open after Apple shares and all its component manufacturing companies after a report out of Taiwan that sales were slipping. Apple erased nearly 35 points off the Dow.

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

IMMU - Immunomedics
The long position was entered 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

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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.

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.

CHGG - Chegg Inc - Company Profile


No specific news. Still holding at the recent highs.

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.

Position 11/28/17:

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. Still holding the recent gains.

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.

Position 12/4/17:

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.

IMMU - Immunomedics Inc - Company Profile


No specific news. New 15-year high close.

Original Trade Description: December 23rd.

Immunomedics, Inc., a clinical-stage biopharmaceutical company, focuses on the development of monoclonal antibody-based products for the targeted treatment of cancer, autoimmune disorders, and other diseases. The company engages in developing antibody-drug conjugate (ADC) products comprising IMMU-132, an ADC that contains SN-38, which is in Phase II trials used for the treatment of patients with metastatic triple-negative breast cancer, and small-cell and non-small-cell lung cancers; IMMU-130, an anti-CEACAN5-SN-38 ADC that is in Phase II trials for the treatment of solid tumors and metastatic colorectal cancer; and IMMU-140 that targets HLA-DR for the potential treatment of liquid cancers. It also develops products for the treatment of cancer and autoimmune diseases, including epratuzumab, anti-CD22 antibody; veltuzumab, anti-CD20 antibody; milatuzumab, anti-CD74 antibody; and IMMU-114, a humanized anti-HLA-DR antibody. The company also provides LeukoScan, a diagnostic imaging product to determine the location and extent of infection/inflammation in bone. In addition, it offers other product candidates for the treatment of solid tumors and hematologic malignancies, as well as other diseases, which are in various stages of clinical and pre-clinical development. The company has a research collaboration with The Bayer Group to study epratuzumab as a thorium-227-labeled antibody. Immunomedics, Inc. was founded in 1982 and is headquartered in Morris Plains, New Jersey. Company description from FinViz.com.

Immunomedics recently announced a blinded trial on breast cancer drug sacituzumab govitecan showed positive results. The drug is an anti-TROP-2 antibody that can target multiple tumor types including breast cancer, lung cancer and colorectal cancers. This would be a holy grail of cancer treatment if the drug continues to post solid results. The drug is being tested to treat triple negative breast cancer, a tough-to-treat indication with limited treatment options. These cases represent 15% of the 246,660 new cases of breast cancer reported each year resulting in 40,450 deaths per year. In the recent trial the "objective response rate" or ORR was 31% or nearly double the historical rate for the standard treatment of these patients. The company plans to file for an accelerated FDA approval in early 2018. An independent study of this drug by an outside firm estimated it could produce $3 billion in annual sales by 2025.

Obviously, there is no guarantee the drug will be approved or be successful in the real world but the outlook is promising and it is lifting the stock price. Shares broke out to a new 15-year high on Friday and could continue to make new highs as long as the research on this drug and others continues to be positive. Seattle Genetics (SGEN) owns 7.3% of the company and executed warrants to acquire 8.6 million shares on December 5th for $42.4 million. They obviously believe the drug has potential.

Hopefully the potential for a blockbuster drug will insulate us from any market negativity in January.

Position 12/26/17:

Long IMMU shares @ $14.69, see portfolio graphic for stop loss.
Alternate position: Long Feb $16 call @ $1.15, see portfolio graphic for stop loss.

NGVC - Natural Grocers - Company Profile


No specific news. Still flirting with resistance at $8.90.

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.

Position 12/15/17 with a NGVC trade at $8.75

Long NGVC shares @ $8.75, see portfolio graphic for stop loss.
Alternate position: Long March $10 call @ 35 cents, see portfolio graphic for 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.

NUAN - Nuance Communications - Company Profile


No specific news. No material movement. I raised the stop loss on the long stock position. If support breaks we have 4 months for the option to work.

Original Trade Description: December 16th.

Nuance Communications, Inc. provides voice recognition and natural language understanding solutions worldwide. It operates through four segments: Healthcare, Mobile, Enterprise, and Imaging. The Healthcare segment offers transcription solutions, which enables physicians to streamline clinical documentation with medical transcription platform; Dragon Medical, a dictation software that empowers physicians to accurately capture and document patient care in real-time on various devices; clinical document improvement and coding solutions to ensure patient health information is accurately documented, coded, and evaluated; and diagnostic solutions that allows radiologists to document, collaborate, and share medical images and reports. It also provides Dragon professional and personal productivity solutions to business users and consumers. The Mobile segment provides a portfolio of virtual assistants and connected services built on voice recognition, text-to-speech, natural language understanding, dialog, and text input technologies to automotive manufacturers, device makers, and mobile operators. The Enterprise segment offers OnPremise solutions and services, an automated customer service solution comprising speech recognition, voice biometrics, transcription, text-to-speech, and dialog and analytics products; and OnDemand multichannel cloud, a platform that offers enterprises the ability to implement automatic customer service. The Imaging segment provides MFP Scan automation solutions to offer scanning and document management solutions; MFP Print automation solutions to deliver printing and document management solutions; and PDF and OCR software, a technology that enables the capture, creation, and management of document workflows. The company was formerly known as ScanSoft, Inc. and changed its name to Nuance Communications, Inc. in October 2005. Nuance Communications, Inc. was founded in 1992 and is headquartered in Burlington, Massachusetts. Company description from FinViz.com.

Expected earnings Feb 27th.

Nuance took a hit after Q3 earnings because of a malware attack that knocked 11 cents off their results. The still reported 20 cents that beat estimates for 15 cents. Revenue of $$465.9 million declined 8% because of the attack. The company said sales fell -$53 million because customers were unable to process orders on the website. Net new bookings fell 18% to $424.4 million.

On the positive side recurring revenue from subscriptions accounted for 71% of the total making future projections more accurate. Full year bookings rose 10%. Enterprise sales rose 7%.

Also impacting the stock was the downgrade to current quarter guidance because of the unknown repercussions from the malware attack. Recovering lost sales and momentum were hard to determine. They guided for the current quarter for revenue of $486-$500 million and earnings of 19-22 cents.

Shares spiked on the better than expected earnings then immediately declined on the weak guidance. Several analysts thought it was a buying opportunity because the attack was behind them and their cloud offerings were growing steadily.

They did guide for all of 2018 for revenue of $2.03-$2.08 billion and earnings of $1.06-$1.15 per share. That was in line with analyst estimates so it suggests there was no real damage to the business.

Shares went through two weeks of post earnings depression and are now rebounding. Friday's close was a 4-month high.

Position 12/18/17:

Long NUAN shares @ $16.98, see portfolio graphic for stop loss.
Alternate position: Long Apr $18 call @ 95 cents, see portfolio graphic for stop loss.

SFM - Sprouts Farmers Market - Company Profile


No specific news. Shares closed over resistance at $24.65.

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.

Position 12/5/17:

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. No material movement. Minor decline from the 52-week high.

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.

Position 12/11/17:

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.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.

XONE - Exone Co - Company Profile


No specific news. Minor rebound. Could be short covering ahead of year end. Target is $7.

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.

Poition 12/12/17:

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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