Option Investor

Daily Newsletter, Monday, 1/1/2018

Table of Contents

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

Market Wrap

Record Market Gains

by Jim Brown

Click here to email Jim Brown

2017 will go down in the history books as a banner year for nearly all investors.

Weekly Statistics

Friday Statistics

When you look at the weekly graphic above, the gains/losses for last week were unexciting but the YTD numbers in the center column are outstanding. The Dow may have closed the year in negative territory but gained 25% for the year. This was a great year for the Dow but it only ranks 24th in percentage terms. I looked up all the years with a 25% gain or more since 1897 and 2017 came in at the bottom. I doubt anyone reading this commentary is complaining about "only" a 25% gain.

Since the election, the Dow has gained more than 6,856 points. On Thursday the Dow was up more than 5,000 points in a single calendar year for the first time ever but Friday's selloff reduced that to 4,956. This was still the largest yearly point gain in Dow history.

Since the election:

Dow closed over 19,000 on November 22nd.
Dow closed over 20,000 on January 25th.
Dow closed over 21,000 on March 1st.
Dow closed over 22,000 on August 2nd.
Dow closed over 23,000 on October 18th.
Dow closed over 24,000 on November 30th.

The Dow reached these levels because of several stocks with monster gains. Boeing was the undisputed leader and contributed 953 points, more than twice as many as the next largest contributor, CAT at 444 Dow points. The biggest losers were GE, no surprise there, IBM, XOM and MRK. Exxon was the surprise for me but they closed 2016 at $90 and fell to $76 in August. The rising price of oil has lifted them back to $84 but the stock is still sluggish.

2017 Dow Contributors

The Dow is up 18,250 points (+282%) since the 6,469 low on March 6th, 2009. More than 25% of that gain was in the last 13 months. The index has gone nearly vertical since the election. Many claim we have reached the euphoria stage and it would be hard to argue that using this chart.

Over the same period, the Nasdaq Composite has risen from 1,265 to 6,903, or 5,638 points or a 446% gain.

The S&P has gained 2,007 points since the devilish 666 low in March 2009. That is just over a 301% gain.

The Dow was targeting 25,000 in late 2017 but the resistance at 24,850 was too strong. That resistance was likely the point where portfolio managers had decided to draw the line and exit profitable positions. Professional traders like to slip in their sell orders just before major milestones in order to beat the rush. The 25,000 level was such a large round number that it was bound to be sold when hit. There were enough sellers just under that level to prevent it from happening in 2017. I have no doubt it will be hit in 2017 but there may be some significant volatility ahead.

I personally believe the Friday sell off was prompted by one or more fund managers selling futures ahead of next week. The closing decline happened in less than 15 minutes. In that period somebody sold more than 300,000 contracts of the S&P futures. That was 56% of the day's total volume in less than 15 min. In the Nasdaq futures more than 34,000 contracts were sold which was 25% of the daily volume total. On the Russell there were nearly 8,000 contracts sold representing 39.5% of the total volume.

I will be the first to agree that some of this volume was traders jumping in front of a falling market. However, I think you will agree that given the very low market volume in the last 30 minutes ahead of a holiday weekend, the sudden unexplained spike in the futures volume is the equivalent of a smoking gun.

The markets have been trading sideways for the last two weeks. Volume has been very light and the prior momentum and excitement had evaporated. Investors and portfolio managers appeared to be holding their breath and waiting for the tax year to end.

If you were a large portfolio manager with billions of dollars of stocks in your portfolio, selling futures on Friday could have helped you in two ways. First, that would hedge you against any market decline in early January. Your portfolio would take losses but the futures gains would offset some of those losses. That would be one potential reason for the futures activity. Secondly, if that same manager knew he was going to be taking profits on a large portion of his portfolio next week, then selling the futures was a hedge against the market damage from selling out of his own portfolio. There are a lot of portfolio managers with more than $100 billion in equities under management. They all have the same problems and goals. Make money and hedge against losses.

It has been 547 days since the market has had a 5% decline. The last one was the first three weeks of 2016 when the S&P dropped -269 points. While that is not likely to happen in 2018, there is always the risk. Since that 1,810 low in early 2016, the S&P has gained 865 points or 47.8% without even a minor correction. Trees do not grow to the sky and markets always cycle. Given the recent market gains, we are due for some volatility. Next week is a likely location IF it is going to happen.

If we do see some volatility in January, I would expect it to be short, sharp and shallow. For every investor wanting to take profits in big cap techs, industrials, etc, there are probably two investors hoping for a big drop as a buying opportunity. Many stocks like Boeing have had such a big rally there has not been any material buying opportunities. If you wanted to buy Boeing, you had to close your eyes and hope you were not buying a top.

While I am dreading the next correction because I know I will lose a lot of good positions when their stops are hit, I am also looking forward to the buying opportunity. Readers should decide to either ride out the potential volatility in hopes of seeing new highs later in the year or tighten up your stops and be ready to jump back in when a bottom appears.

My only caution is this. If the stock you are holding declines 10% how long do you think it will take for it to recover that 10% and return to the highs? That is your risk. If you are trading in a taxable account, you also have to weigh the tax cost of closing the position and reopening it again.

I do not want to get too deep in the predictions here but the general consensus is that we will see higher market highs in Q1 and then a decline later in the year. Those expecting the same thing in 2017 were disappointed.

Hedgeye Cartoon

Analysts expect companies to raise guidance when they report Q4 earnings in late January, early February. They will be announcing their tax benefits, dividend increases and new stock buybacks. Investors will want to be fully invested before those earnings begin. That gives us about two weeks before the earnings begin. After the Q4 cycle, the market should be stable on expectations for the actual improved earnings in the Q1 reporting cycle in Apr/May. However, after that cycle peaks, there could be some selling of the news because all the expectations will already be priced into the market.

That analyst consensus and $5 will buy you a coffee at Starbucks but that is the only guarantee. Markets are notoriously unpredictable and rarely conform to the conventional wisdom of analysts.

One potential flaw in the scenario is the actual costs associated with the tax reform. Several companies have already reported major hits to earnings because of the way the laws were changed.

Goldman Sachs (GS) warned of a $5 billion hit to earnings in Q4 as a result of profits held overseas. Goldman and hundreds of other companies have billions in profits held overseas. Previously, they did not have to pay the 35% tax unless that money was brought back into the US. Under the new law the companies are required to pay 15.5% on that cash held overseas regardless of whether that money comes back to the US or not. It is a double-edged sword. The money can come back at a cheaper tax rate but it is still taxed even if it is left overseas. On the plus side, the law allows them to stretch out the tax payments over the next 8 years and they will not be taxed on future international earnings, within limits. This is a giant win for future earnings.

Amgen (AMGN) has warned of a $6 billion hit. Citigroup has said it expects to book a $20 billion charge against Q4 earnings and Bank of America will take a $3 billion charge against Q4 earnings.

Nobody knows how these sweeping tax law changes will impact each US corporation because it is complicated. Until companies report their Q4 earnings and guidance, it is a big unknown and investors do not like uncertainty. This uncertainty could contribute to volatility in early January.



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The economic calendar kicks off with a bang next week with the ISM reports and the ADP and Nonfarm payroll reports. Unless there is a major miss from the forecasts, they should not be market movers. The FOMC minutes of the Fed meeting in December, could cause some market indigestion if they appear to contradict the expectations for 2-3 hikes in 2018. Analysts have toned down their expectations somewhat and as long as the Fed is still "slow and steady" the market will be fine. The new Fed Chairman, Jay Powell, is a follower of Yellen's policies and he is not likely to make any changes to the outlook in 2018 unless the data changes dramatically.

The earnings calendar for next week is highlighted by Rite-Aid and Walgreens. Monsanto (MON) and Constellation Brands (STZ) get honorable mention. There is a trickle of earnings between now and mid January but the deluge begins on the 16th with Citi, Morgan Stanley, UnitedHealth and others. That gives us about 10 trading days between now and the 16th.

Apple (AAPL) is trying to head off the class action suits by apologizing for batterygate and offering big discounts on new batteries on iPhone 6 and later models. They are cutting the price for a replacement battery from $79 to $29. The problem arose when it was discovered Apple was cutting back processing power by 50% on older phones when the batteries dropped to less than 80%. That means everyone still using the older phones were in restricted mode nearly all the time because the older the battery the less power it will retain after a charge. They have even offered to upgrade some iPhone 6S models for free. There is a serial number check online to see if your phone qualifies.

By dramatically cutting the price of the batteries, they will blunt some of the criticism but the suits will continue. People, who got fed up with their slow phones and bought a new one to solve the problem, have a valid right to sue. They may find it will take a very long time and all they are likely to get is a discount coupon for an iPhone 12.

Apple shares are still declining after the Taiwan Economic Daily News story on slashing iPhone sales projections. It will be a month before we know the real facts but I suspect Apple shares will be sold next week by investors not wanting to take the risk of holding to see the news article proven wrong.

Netflix (NFLX) changed its pay structure for top employees as a result of changes in the tax laws. Under the old laws, salary was taxed at one rate and performance based conditional bonuses of stock at a different rate. Under the new law, there is no difference between cash salary and stock compensation so they are switching the compensation back to cash. For example, Chief Content Officer Ted Sarandos will get a raise from $1 million to $12 million in salary instead of stock bonuses. Sarandos earned $9 million in bonuses in 2017 and $4 million in bonuses in 2016, in addition to his $1 million in annual salary. He will still receive stock compensation in 2018 but under a different program.

CEO Reed Hastings will receive $700,000 in salary and $28.7 million in stock options. Chief product officer Greg Peters will jump from $1 million in salary to $6 million along with $6.6 million in stock options. I think I need to dust off my resume and send it to Netflix for chief newsletter editor and see if I can get in on that fountain of cash.

Huntington Ingalls Industries (HII) is replacing CR Bard (BCR) in the S&P-500 at the open on Wednesday. Becton Dickinson (BDX) is acquiring CR Bard leaving an open spot on the S&P-500. Scientific Games (SGMS) will replace HII in the S&P-400 and Ultra Clean (UCTT) will replace SGMS in the S&P-600.

Tivo (TIVO) reportedly has received multiple expressions of interest from private equity firms to take the company private at just over $20 a share. Shares were trading at $14 before the news broke. Tivo merged with digital entertainment guide provider Rovi Corp in a $1.1 billion deal in 2016. Rovi paid $10.70 per share for Tivo and then kept the Tivo name and symbol. In their last earnings they had $310 million in cash and marketable securities and a market cap of less than $2 billion. This is a very competitive space with companies like Comcast and DirecTV marketing their own DVR products and other companies like Hulu, Amazon, Apple and Google offering over the top streaming services. In December Tivo made a deal with cable operator Altice USA to support their digital offerings. Tivo recently won an International Trade Commission battle against Comcast violating two of Tivo's patents.

Crude prices continue to rise as US inventories decline. Libya said they would begin repairing the damaged pipeline sometime next week. The pipeline was blown up by a rival militia to halt the export of oil. The pipeline carried 90,000 bpd. The pipeline is expected to be back in operation by mid January.

US oil production fell -35,000 bpd last week to 9.754 million bpd. That is the first decline in 8 weeks after posting 7 consecutive weeks of record production.

The active rig count declined -2 to 929. Gas rigs declined by 2 and oil rigs were flat at 747. Seaport Energy said last week there were a record number of drilled and uncompleted (DUC) wells in the US at 7,300. With that kind of backlog there is no reason to activate additional rigs. Add in the holiday disruption and there are not likely to be any rigs added next week.

The analyst consensus is that prices will decline in early 2018 and then rebound into the summer. The problem ahead is the potential for the OPEC production cut to be weakened or eliminated in July. The various global outages have helped to accelerate the global inventory decline and Russia is expected to balk at having the cuts extend past the end of June. Saudi Arabia is expected to fight to keep the cuts in place because of their pending IPO of Saudi Aramco. They need oil prices as high as possible to get the maximum price for their IPO. However, many investors have backed away from the deal after Mohammed bin Salman (MBS) arrested more than 200 people including more than 100 princes in order to solidify his grip on power.

He has been charging these people enormous sums of money to gain their freedom. MBS is reportedly demanding $6 billion from Prince Alwaleed bin Talal, the famous international investor. He is worth an estimated $18 billion but is refusing to liquidate and pay the fine because he has done nothing wrong. If he pays the fine, it would be an assumption of guilt and would hurt his future business dealings.

International investors are backing away from the Aramco IPO because they have been reminded there is no rule of law in Saudi Arabia. Whatever the king wants to do, he does, even if it causes problems in the business community.


The S&P has been moving sideways and Friday's close was a two week low. There is strong resistance at 2,692-2,694. Support is well below at 2,650 and 2,625. A minor 5% decline would target 2,550 and that is well below Friday's close. The biggest dip we have seen since January 2016 was a -3.1% drop. The market is very overdue for some profit taking. I think everyone would agree that a 5% decline would reset the overbought conditions and allow a new rally to begin. A 3% decline would be 2,610.

The Santa Rally has two more days to run. The S&P needs to close above 2,685 on Wednesday or the rally will have failed. "When Santa fails to call, the bears will come to Broad and Wall."

The S&P saw 62 days with a record high in 2017.

The selling at the close was very broad and that also suggests it was futures related. The Dow declined to just above short-term support at 24,720. A break below 24,700 should trigger additional selling with an initial target of 24,100. A 3% decline would be to 24,092 so that 24,100 support should be critical. A 5% decline would take the index to 23,600. The resistance at 24,850 remains very strong and has been an immediate stop with every test.

The Dow posted 71 days with a record high in 2017.

The Nasdaq has been the weakest index. The big caps have been choppy with a downward bias with the exception of only a couple stocks. The index closed at a two-week low and below initial support. The 6,785 level would be a 3% decline with a 5% drop at 6,650. With Apple on the edge of a breakdown and the chip sector negative for the last several weeks, the Nasdaq could be the index that leads the market lower. Tech stocks are not going to benefit from the tax reform as much as industrials. Techs have the lowest effective tax rates of all 10 S&P sectors. This could cause some selling next week as investors rotate into tax benefit sectors.

The Nasdaq Composite had 72 new highs in 2017. The index has been up for six consecutive years and has not done that since the streak in 1975-1980.

The Nasdaq 100 is now up for nine consecutive years and that is a record.

The Russell 2000 tried valiantly to break through the strong resistance at 1,550 but did not succeed. Friday's close was a two week low. A 5% decline would take the index to 1,471 and a 3% drop would target 1,502. That is a nice round number that has been defended in the past.

If the retail herd is normally wrong about direction, the AAII survey results are a bad omen. Bullish sentiment has not been this high since November 13th, 2014. Bearish sentiment has not been this low since November 4th, 2015. Bullish sentiment has risen 23.3 points since the recent bottom at 29.3% on November 16th. Historically, when sentiment has been this high the market under performs in the six months that follow. Obviously, there are fundamental factors that should support the market over the next four months and that is why bullish sentiment is so high. That does not mean there will not be a counter reaction to this bullish move.

This was the fourth consecutive year that the S&P has declined on the last day of December. In 2014, the S&P declined 21 points on the last day and continued to decline another 87 points on the three days that followed for a total drop of -108 points. In December 2015, the S&P declined 20 points on the last day and continued to decline another 231 points in the 12 days that followed. In December 2016, the S&P declined -10 points and then rebounded 43 points over the next four days. Just because the last day of trading is negative, it does not mean the next week will be negative. In December 2013, the last day was positive but the S&P still declined -31 points over the next 8 days. Then, after a week of minor gains, the index fell -103 points over the next 8 days.

If this minor bit of research tells us anything is that January has posted losses more often than not in recent years. 2012 was the exception. After a -27 point drop in mid December 2011, the S&P rocketed higher in January for a 214-point gain through the end of March.

There are exceptions to every trend. Hopefully, January 2018 will be an exception and the market will continue higher. Unfortunately, hope is not a trading strategy and we need to be prepared in case the markets take a needed rest. Be prepared with cash in your account to buy the dip. Actually, I prefer to say buy the rebound because picking bottoms is a dangerous way to trade. Look for a strong rebound on decent volume and then enter your new positions. Entering too late is always preferable to entering too soon.

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Jim Brown

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New Plays

Boom & Bust

by Jim Brown

Click here to email Jim Brown
Editor's Note

Some companies cannot maintain a trend and continually cycle between boom and bust. SNAP is one of those companies. Every cycle of gains is sold and earnings always disappoint.

I really did not want to recommend a position this weekend. I expect a gap open on Tuesday and it could be up or down. There is so much uncertainty that anything is possible. The most likely direction is lower. SNAP does not do well even in a bullish market and with earnings in mid January, investors should be running to the sidelines. A down market may even help this position.


No New Bullish Plays


SNAP - Snap Inc - Company Profile

Snap Inc. operates as a camera company. It offers Snapchat, a camera application that helps people to communicate through short videos and images. The company also provides a suite of content tools for partners to build, edit, and publish snaps and attachments based on editorial content; and Spectacles, which are sunglasses that capture video from a human perspective. The company was formerly known as Snapchat, Inc. and changed its name to Snap Inc. in September 2016. Snap Inc. was founded in 2010 and is headquartered in Venice, California. Company description from FinViz.com.

There is no magic to this position. Shares are declining ahead of their Jan 23rd earnings. The company has failed to increase users in a meaningful way. Facebook is killing them with their similar product. CNN recently cancelled their daily Snapchat News show called "The Update" because it was not making any money. Advertisers had abandoned the feature. Everything is negative for SNAP's outlook.

Evercore ISI rated them an underperform, the equivalent of a sell rating, with a price target of $7 on December 6th. SNAP shares are already about 50% below their post IPO peak and they were trading at $15 at the open on Friday. The Evercore rating is looking for another 50% decline.

Over the last 12 months the company had revenue of $705 million but lost a whopping $3.2 billion when stock grants were included. If you back out the onetime expenses they still lost $818 million on revenue of $705 million. They cannot continue doing this. You cannot operate at a 100% loss forever.

The Facebook program Instagram copied most of the SnapChat features and has 700 million daily active users. SnapChat only had 178 million in Q3 and that number had only risen 3% for the quarter. SNAP is four times more expensive than Twitter on a price to sales ratio and even Twitter is struggling to succeed.

SNAP has a market cap of $13 billion and it is a failing company. That market cap is going to shrink as the losses continue to pile up. Earnings are Jan 23rd and the odds are very good they will miss estimates again.

Sell short SNAP shares, currently $14.61, initial stop loss $15.25.
Alternate position: Buy Feb $14 put, currently 88 cents, initial stop loss $15.65.

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

No New Highs

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes gave up some gains and all posted significant losses to end the year. The Russell 2000 slammed into solid resistance at 1,550 once again and then fell back to close with a 13 point loss. The Dow hit 24,850 once again and fell back with a -118 point loss. The Nasdaq closed at a 2-week low without coming close to its recent highs.

The majority of the selling came in the closing minutes and appeared to be a large portfolio manager setting up for a negative market next week.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Lottery Ticket Plays - Updated only on Weekends

Current Position Changes

NUAN - Nuance Communications
The long stock position was stopped at $16.25.

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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. Minor decline with the market from the new high close.

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.

HIMX - Himax Technologies - Company Profile


No specific news. Surprising gain in a weak market.

Original Trade Description: December 27th.

Himax Technologies, Inc. is a fabless semiconductor solution provider dedicated to display imaging processing technologies. Himax is a worldwide market leader in display driver ICs and timing controllers used in TVs, laptops, monitors, mobile phones, tablets, digital cameras, car navigation, virtual reality (VR) devices and many other consumer electronics devices. Additionally, Himax designs and provides controllers for touch sensor displays, in-cell Touch and Display Driver Integration (TDDI) single-chip solutions, LED driver ICs, power management ICs, scaler products for monitors and projectors, tailor-made video processing IC solutions, silicon IPs and LCOS micro-displays for augmented reality (AR) devices and head-up displays (HUD) for automotive. The Company also offers digital camera solutions, including CMOS image sensors and wafer level optics for AR devices, 3D sensing and machine vision, which are used in a wide variety of applications such as mobile phone, tablet, laptop, TV, PC camera, automobile, security, medical devices and Internet of Things. Founded in 2001 and headquartered in Tainan, Taiwan, Himax currently employs around 2,150 people from three Taiwan-based offices in Tainan, Hsinchu and Taipei and country offices in China, Korea, Japan and the US. Himax has 3,011patents granted and 441patents pending approval worldwide as of September30th, 2017. Himax has retained its position as the leading display imaging processing semiconductor solution provider to consumer electronics brands worldwide. Company info from Himax Technologies.

Himax was setting new highs in early December and Citron Research tweeted the company was a fraud and the story behind the company was bogus. Citron never followed up with any facts but that was enough to crash the stosk from $13.50 to $10.

Himax immediately posted a news release denying anything in the tweet. After trading sideways for the last couple of weeks they may be starting to rebound.

Himax reported Q3 earnings of 5 cents and revenue of $197.1 million which beat estimates for 4 cents and $191.3 million. Himax makes the wafer level optics (WLO) that powers the facial recognition in Apple's iPhone X. Since Apple is probably going to make that a standard feature in all future iPhones this is a good deal for Himax. Because of the iPhone shipping cycle, they should post good Q4 earnings. The company said WLO shipments would accelerate in Q4 and beyond. They also said they were working on several new development projects with Apple that would be announced in the future. Apple is also expected to bring the facial recognition technology to the iPad Pro products.

The company guided for Q4 earnings of 13-15 cents, which would be a major jump from the 5 cents in Q3.

They also announced a new partnership with Qualcomm to bring 3D sensing and facial recognition to Android devices and expects to mass produce and ship the technology in Q1-2018.

Expected earningss February 8th.

Because HIMX shares declined so sharply, they could be immune from any early month volatility in January. There is no guarantee it is a plausible scenario.

Position 12/28/17:

Long HIMX shares @ $10.25, see portfolio graphic for stop loss.
Alternate position: Long Feb $11 call @ 75 cents, see portfolio graphic for stop loss.

IMMU - Immunomedics Inc - Company Profile


No specific news. Minor decline from the 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. Shares finally dipped far enough below support to stop out the long stock portion of the position. The long call position will move to the lottery play section.

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:

Closed 12/29: Long NUAN shares @ $16.98, exit $16.25, -.73 loss.
Alternate position: Long Apr $18 call @ 95 cents, see portfolio graphic for stop loss.

YRCW - YRC Worldwide - Company Profile


No specific news. Down with the market and the transport sector.

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.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.

AMD - Advanced Micro Devices - Company Profile


No material news on AMD. I am going to retain this position until the Jan-23rd earnings and see if the partnership with Intel boosted their earnings. If the stock is not moving after earnings I will drop it.

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.

Update 11/6/17: 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

Update 11/8/17: AMD's head of the graphics chip unit, Raja Kordui, announced his resignation. This creates big sentiment problems for AMD. He said he was leaving to spend more time with his family but why would a highly successful department head exit right on the eve of a major product expansion? Of course AMD said this would not impact their direction and future goals but Kordui was credited with making AMD GPUs competitive with Nvidia and kept Nvidia from dominating the space. CEO Lisa Su will assume Kordui's role until a replacement is named. She is by far the most intelligent and dynamic CEO the company has ever had and she is more than capable of occupying both positions.

Update 11/27/17: Benchmarks on AMD's new Ryzen 5 5200U processors showed they beat Intel's 7th generation counterparts by a wide margin and came close to the newest 8th generation Kaby Lake products for a significantly lower price point. Their GPU products outperformed Intel's and maintained parity with Nvidia. That means their performance gap did not increase.

Update 11/28/17: Mizuho warned that cryptocurrency demand for chips could slow in 2018. The chip sector declined with Nvidia and AMD taking the heat. Nvidia only gets $80 million a year from GPU sales for currency mining. AMD gets nearly $500 million.

Update 12/5/17: AMD shares took another hit after Nvidia announced the new Titan V video GPU card aimed at super high performance video, AI and neural networks. This card is 9 times more powerful than the prior Titan Xp that was announced in April. This is the kind of performance advances that makes Nvidia unbeatable in the video market.

Position 11/6/17:

Long April $12 call @ $1.50, see portfolio graphic for stop loss.

Previously Closed 12/4/17: Long AMD shares @ $12.04, exit $10.50, -1.54 loss.

DEPO - Depomed - Company Profile


No specific news. Shares crashed with the 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.

Position 12/4/17:

Long March $8 call @ 65 cents, see portfolio graphic for stop loss.

Previously Closed 12/28: Long DEPO shares @ $7.27, exit $8.35, +1.08 gain.

EXTR - Extreme Networks - Company Profile


No specific news. Shares are struggling but not declining. We have a long-term call position remaining.

Original Trade Description: November 25th

Extreme Networks, Inc. provides software-driven networking solutions for enterprise customers worldwide. The company designs, develops, and manufactures wired and wireless network infrastructure equipment; and develops the software for network management, policy, analytics, security, and access controls. It offers edge/access Ethernet switching systems that delivers Ethernet connectivity for edge of the network; aggregation/core Ethernet switching systems for aggregation, top-of-rack, and campus core environments; data center switching systems for enterprises and cloud data centers; and wireless access point products, as well as distributed Wi-Fi networks. The company also provides ExtremeControl, a network access control solution that allows the enterprises to unify the security of their wired and wireless networks with visibility and control over users, devices, and applications; and ExtremeAnalytics, a network-powered application analytics and optimization solution, which captures, aggregates, analyzes, correlates, and reports network data that enables in decision making and enhancing business performance. In addition, it offers ExtremeCloud, a wired and wireless cloud network management solution, which offers advanced visibility and control over users and applications. The company sells and markets its products through distributors, resellers, and field sales organizations. It serves enterprises and organizations in education, healthcare, manufacturing, hospitality, transportation, and logistics, as well as government agencies. Company description from FinViz.com.

Over the last year Extreme bought the networking assets of Avaya after they went bankrupt. They also bought the networking assets from Brocade, a company that is being acquired by Broadcom. They also acquired the wireless networking unit from Zebra Technologies (ZBRA) in a restructuring move. Each of these assets they acquired for less than half annual sales. This is a bargain in the tech world. They also acquired the customers from these acquisitions and have begun cross selling to them from their other product lines. Extreme is no longer a bit player in the networking sector but has grouped together end to end solutions.

In the last quarter, they grew revenue by 73%. Earnings rose from 7 cents to 16 cents and beat estimates for 14 cents. They are targeting margins of 60% in future quarters. Revenue was $211.7 million and they guided for $236-$246 million in the current quarter.

Expected earnings Feb 6th.

The key to Extreme's progress is software networking. The industry is moving from hard coded command line interface routers and switches to Windows like interfaces that can be operated by lower skilled operators rather than high dollar network technicians proficient in Cisco router code.

Shares have rallied sharply over the last two weeks but I believe they have farther to go because the recent earnings surprised investors.

Position 11/27/17:

Long Mar $15 call @ $1.15, see portfolio graphic for stop loss.

Previously Closed 11/29: Long EXTR shares @ $13.81, exit $12.25, -1.56 loss.

FINL - Finish Line - Company Profile


No specific news. Shares still rising from the earnings and upgrades.

Original Trade Description: October 21st

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

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

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

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

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

Update 10/31/17: Shares fell sharply on the Under Armour revenue drop and weak guidance. We were stopped out of the stock.

Update 12/22: The company reported a Q3 loss of 26 cents. Analysts were expecting a loss of 37 cents. Revenue of $378.5 million beat estimates for $361.5 million. For the current quarter, they guided for earnings of 40-58 cents. For the full year they guided for earnings of 59-67 cents. Expectations were minimal so shares rebounded strongly after the report.

Position 10/23/17:

Long Feb $12 call @ 75 cents, see portfolio graphic for stop loss.

Previously closed 10/31: Long FINL shares @ $10.49, exit $9.50, -.99 loss.

INVA - Innoviva Inc - Company Profile


No specific news. Shares are struggling at secondary resistance but holding their gains.

Original Trade Description: November 15th

Innoviva, Inc. engages in the development and commercialization of bio-pharmaceuticals. Its portfolio of respiratory products include RELVAR/BREO ELLIPTA, (fluticasone furoate/ vilanterol, FF/VI) and ANORO ELLIPTA (umeclidinium bromide/ vilanterol, UMEC/VI). The company, under its the Long-Acting Beta2 Agonist (LABA) collaboration agreement and the strategic alliance agreement with Glaxo Group Limited (GSK), is entitled to receive royalties on the sales of RELVAR/BREO ELLIPTA; and a 15% of any future payments made by GSK under its agreements relating to the combination FF/UMEC/VI and the Bifunctional Muscarinic Antagonist-Beta2 Agonist program, as monotherapy and in combination with other therapeutically active components. It has LABA collaboration agreement with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease and asthma. The company was formerly known as Theravance, Inc. and changed its name to Innoviva, Inc. in January 2016. Innoviva, Inc. was founded in 1996 and is headquartered in Brisbane, California. Company description from FinViz.com.

Expected earnings January 24th.

Innoviva reported earnings of 21 cents ($23.8 million) compared to estimates for 33 cents. Revenue was $48.6 million. Yes, earnings were nearly 50% of revenue. Adjusted EBITDA rose 39% to $46.0 million. Cash onhand was $168.2 million. They received $51.9 million in royalties from Glaxo Group (GSK).

Shares crashed nearly $3 on the earnings miss despite very positive business comments from the company. Their new drugs now being marketed by Galxo were dowing well. The sales of Relvar/Breo Ellipta rose 40% to $297.4 million. Sales of Anoro Ellipta rose 51% to $111.9 million. They received a positive opinion in September from the EU Medicine Agency for Trelegy Ellipta for COPD. They received approval for the same drug from the FDA. Read further business updates in their release HERE.

Everything looks bright for INVA and their strong relative strength in a weak market suggests they will do well when the market recovers.

Position 11/16/17:

Long March $15 call @ 60 cents, see portfolio graphic for stop loss.

Previously Closed 12/7: Long INVA shares @ $13.03, exit $12.76, -.27 loss.

RDN - Radian Group - Company Profile


No specific news. The trend changed and shares are falling fast. I am recommending we drop this position. With the February option premium only 15 cents, I would not close it but the odds are shrinking that the stock will recover.

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)

Update 12/13/17: 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 position at the close when the stock hit $21.45. The option position will move to the lottery play section.

Position 12/7/17:

Drop: Long Feb $23 call @ 65 cents, probably expiration, -.65 loss.

Previously Closed 12/14: Long RDN shares @ $21.89, exit $21.45, -.44 loss.

SFM - Sprouts Farmers Market - Company Profile


No specific news. Shares still fighting 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 Mar $27.50 call @ 80 cents, see portfolio graphic for stop loss.

Previously Closed 12/27: Long SFM shares @ $24.09, exit $24.45, +.36 gain.

STM - ST Microelectronics - Company Profile


No specific news. Shares are moving sideways in a negative chip market and barely honoring uptrend support. Plenty of time.

Original Trade Description: November 11th

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. STMicroelectronics N.V. was founded in 1987 and is headquartered in Geneva, Switzerland. Company description from FinViz.com.

STM reported earnings of 28 cents rose 136% on revenue of $2.14 billion, which rose 19%. Analysts were expecting 24 cents and $2.09 billion. Earnings were boosted by multiple products in the Apple product line. All product groups reported double-digit revenue growth with strong demand across all geographies. The CEO said "we continue to see strong demand in Q4 across all products and all geographies with strong booking activity and the expected acceleration of growth serving wireless applications. Revenue should increase 10% in Q4."

Expected earnings January 25th.

Demand is surging for their new "time of flight" sensors, which Apple is buying as a proximity or motion detector for the iPhones.

Last week STM announced a new, faster wireless charging QI extended power chip for phones and tablets. The chip supports the very latest QI standard for faster charging. By raising the power from 5W to 15W phones can charge three times faster.

I have looked at playing STM a dozen times over the last several months and kept waiting for a pullback that never came. Shares dipped on Thursday with the chip sector but immediately rebounded. I believe the chip sector will remain hot and STM will continue higher. With the earnings beat and strong guidance there should be nothing holding it back.

Update 11/27: STM created a tiny motor driver chip that brings finer motion control to laboratory automation, industrial robots, 3D printers and other applications. The chip offers a smaller size, lower power consumption and precise micro stepping delivering greater precision.

Position 11/13/17:

Long April $25 call @ $1.70, see portfolio graphic for stop loss.

April is the only option series that allows us to exit before earnings but still have the expectation in the option price.

Previously Closed 11/29: Long STM shares @ $23.56, exit 23.85, +.29 gain.

SVU - Supervalu - Company Profile


No specific news. Shares broke out of two weeks of consolidation and are holding at secondary resistance.

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.

Update 12/15: Supervalue completed the acquisition of Associated Grocers. This will increase their share of specialty and organic foods. They also updated their partnership with Instacart to allow shoppers to purchase more products online for pickup in the stores using a drive up service where the merchandise is delivered to their cars.

Position 10/30/17:

Long Jan $18 call @ $1.05, see portfolio graphic for stop loss.

Closed 11/8: Long SVU shares @ $16.13, exit 15.65, -.48 loss.

SYNT - Syntel - Company Profile


No specific news. Shares gapped down again on Friday. I considered closing the position but this is a very long-term option position. The stock could be significantly higher (or lower) by May.

Original Trade Description: November 18th

Syntel, Inc. provides digital transformation, information technology (IT), and knowledge process outsourcing (KPO) services worldwide. The company operates through Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics, and Telecom segments. It offers managed services, including software applications development, maintenance, and digital modernization testing, as well as IT infrastructure, cloud, and migration services. The company also provides a range of consulting and implementation services built around enterprise architecture; data warehousing and business intelligence; enterprise application integration; and SMAC technologies, including social media, Web and mobile applications, big data, analytics, and Internet of things. In addition, it offers KPO services that provide outsourced solutions for knowledge and business processes; and business intelligence, enterprise resource planning, and business and technology consulting services. The company offers its products to various companies in the banking and financial services, healthcare and life sciences, insurance, manufacturing, retail, logistics and telecom, and other industries. Syntel, Inc. was founded in 1980 and is headquartered in Troy, Michigan. Company description from FinViz.com.

Syntel reported earnings of 51 cents that beat estimates for 41 cents. Revenue of $231.3 million also beat estimates for $218.2 million. For the full year they guided for earnings of $1.81-$1.88 and revenue of $890-$902 million. They ended the quarter with $109 million in cash.

Business is good and a highly qualified labor force has allowed them to reduce their employee coult from 23,055 last year to 21,928 at the end of Q3. The CEO said the demand for digital services was robust and the insurance segment continued to post healthy growth.

Shares spiked from $19 to $25 on the earnings in mid October. After a month of post earnings depression the uptrend has returned with the stock back at $25.

Because the stock is a few pennies over $25 the next available option strike is the $30 level. There is no open interest in Dec/Feb series. I am going to reach out to May where there is open interest of 415 contracts and there is actually a bid and ask quote. We do not have to hold the position until May but should we get lucky and Syntal makes a breakout, the long dated options will inflate relatively quickly.

Update 12/12: Shares hit a new 52-week high on Monday and dropped $2 at the open today to stop us out of the stock position. The drop came after Goldman downgraded them from neutral to underweight (sell).

Position 11/20/17:

Long May $30 call @ $1.05, see portfolio graphic for stop loss.

Previously Closed 12/12: Long SYNT shares @ $25.00, exit $24.00, -1.00 loss.

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