Option Investor

Daily Newsletter, Saturday, 1/27/2018

Table of Contents

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

Market Wrap

Party Like it's 1987

by Jim Brown

Click here to email Jim Brown

The markets are off to the best start in 31 years and the opening gains in 1987.

Weekly Statistics

Friday Statistics

January 1987 saw the S&P gain 13% with the gain over the first three months of the year a 25.4%. It was an outstanding start to the New Year and investors were giddy with their success.

So far in 2018, the Dow it up 7.7%, Nasdaq 9.8% and S&P +7.4%. Those numbers pale in comparison to 1987 but it has still been a good year and it is only four weeks old.

Unfortunately, 1987 is not remembered for the big gains in the first quarter but for the big declines later in the year. After posting a 39.7% gain for the first 9 months, the S&P fell -34% in only 11 days in October 1987. I am not predicting that 2018 will mirror 1987 but euphoric rallies tend to end badly. As you can see in the chart there was no material warning that the bottom was going to fall out. The index was trading within a few points of its highs and 18 days later, it had given back nearly all the gains for the year.

I do not want to be that voice in the wilderness always saying the sky is falling. I am far from bearish. However, as a market analyst for the last 20+ years, I have watched hundreds of cycles where the market has gone up sharply and then retraced those gains. I think analysts get trapped in this cycle fetish. We are so used to watching the repetitive cycle that when a market post gains like we have seen for the last several months, it just seems obvious that profit taking will appear. When days and weeks pass and the upward velocity continues to increase, it only intensifies our natural reaction to try and apply a cycle to it.

Over the last month, I have pointed to early to mid February as a potential rocky period. I have said repeatedly that I expect the market to continue rising through next week. My opinion has not changed.

I got a big kick out of a reader last week. I said something in last weekend's market commentary about the potential for a rocky February and he called me a "leftist liberal fear mongering democrat." I have been called worse but I believe long time readers know that is not my mindset. Another reader said "the Trump rally will be at 30,000 by September. The future is so bright I gotta wear shades!" I sure hope he is right.

Everyone has an opinion, right or wrong, and that is what makes a market. I simply try to keep readers focused on the fact that nothing goes up forever without a pause.

Friday's economic news was weaker than expected. The first look at the Q4 GDP showed 2.55% growth when the consensus was for 3.0% growth. This is the first release and it will be updated twice over the next two months. This was down from the 3.16% growth in Q3 and 3.06% in Q2. Inventory accumulation removed -0.67% and net exports removed -1.13%. Consumption added 2.58%, fixed investment +1.27% and government +0.50%.

We know consumer spending is going to spike higher in Q1 now that hundreds of companies have announced bonuses as a result of the tax reform and consumers will be getting an average of about $100 more in their checks each month from lower taxes.

Hurricanes depressed growth early in Q4 but then accelerated growth late in the quarter as the rebuilding increased in intensity. This will continue in Q1.

The Atlanta Fed real time GDPNow forecast was holding right at 3.4% growth for Q4 on the last update. This suggests the BEA GDP above could be revised higher over the next two months.

The Durable Goods report for December showed a 2.9% rise in orders compared to consensus estimates for 0.9% and the 1.3% reading in the prior report. The gain was powered by nondefense aircraft at +15.9% and defense at +19.5%. Backorders rose +0.6%. New durable goods orders are up 11.5% over the same period in 2017. Analysts are worried that the ultra cold weather in January could have slowed manufacturing with everyone huddled in the common areas to keep warm.

Next week is very busy. This is a payroll week, FOMC meeting, ISM Manufacturing and State of the Union speech. There are a lot of reports that will be competing for headlines along with the very busy earnings calendar.

This is big cap tech week for earnings plus there are 125 S&P companies including ten Dow components. Google, Amazon, Apple and Alibaba will make Thursday the peak day for techs but Qualcomm, Facebook, PayPal and Microsoft will precede them on Wednesday. Conoco, Exxon and Chevron plus about a dozen other energy companies will also report.

As of Friday 24% of S&P companies have reported and 76% have beaten analyst estimates with 81% beating on revenue. The blended growth rate for earnings has risen from 11.7% to 12.0% not including the noncash charges related to tax reform. The blended estimate for revenue growth is 7.0% and rising. According to FactSet, earnings are expected to grow by double digits for the rest of 2018. That is a powerful force for future market expectations. The forward 12-month PE is 18.4, which is above the 5-year and 10-year averages.

The big earnings winner on Friday was AbbVie (ABBV). The company reported adjusted earnings of $1.48 compared to estimates for $1.44. Revenue of $7.74 billion beat estimates for $7.57 billion. They guided for full year earnings in the range of $7.33-$7.43 per share, up from $6.37-$6.57. The FactSet consensus estimate was $6.66. The company said it planned to invest $2.5 billion in US capital projects and a possible expansion to its US facilities. Sales of Humira, Imbruvica, Lupron, Creon, Synagis, Kaletra, Sevoflurane and Duodopa all came in above expectations. Shares spiked $15 on the news.

Honeywell (HON) reported earnings of $1.85 that narrowly beat estimates for $1.84. Revenue of $10.84 billion beat estimates for $10.77 billion. The company guided for full year earnings of $7.75-$8.00 per share on revenue of $41.88-$42.68 billion. That was an increase from $7.55-$7.80. They plan to repatriate $7 of the $10 billion in overseas cash and use it to fund their M&A activities, a competitive dividend and share buybacks.

Lear Corp (LEA) reported record earnings of $4.38 that beat estimates for $4.25. Record revenue of $5.36 billion beat estimates for $5.27 billion. They are projecting 17.4 million in vehicles sales in North America and 23.4 million in Europe and Africa plus 26.5 million vehicles in China. Free cash flow is expected to be more than $1.2 billion. They also announced the acquisition of EXO Technologies. They are a leading developer of differentiated GPS technology providing high-accuracy positioning solutions without the need for terrestrial base-station networks to support autonomous and connected vehicle applications. Shares rallied $6 on the news.

Colgate (CL) reported earnings of 75 cents that matched analyst estimates. Revenue rose 4.5% to $3.9 billion but missed estimates for $3.92 billion. Advertising spending rose 24% to $369 million and they plan to increase spending further in 2018. They guided to mid single digit sales growth in 2018 despite lowering sales prices as much as 2% to drive sales volume. Colgate sales are seen as stagnating in a positive global market and shares declined sharply on the report.

Wynn Resorts (WYNN) shares fell more than 10% after founder and Chairman Steve Wynn was accused of sexual misconduct by an article in the WSJ. The paper said it talked to more than 150 current and former employees and reported details on numerous events. The article alleges Wynn had a pattern of sexual harassment against employees who were paid to perform sexual favors while they feared losing their job. One manicurist settled for $7.5 million after Wynn reportedly forced her to have sex with him in his office even though she repeatedly rebuffed his advances and told him she was married. Immediately after the event, she filed a formal complaint and eventually settled out of court.

The problem mushroomed into a much bigger deal than just paying $1,000 per hour for sexual massages by the hotel's spa employees. The Nevada and Massachusetts gaming boards have opened an investigation saying the accusations would violate the "moral turpitude" clauses in their license requirements and could result in a revocation of their gaming licenses. If these accusations are true, Wynn could be ejected from his company. The board has already opened an investigation. He lost $250 million on Friday as the stock fell more than 10% on 12 times normal volume. The company lost more than $2 billion in market cap.

This kind of an event is a good lesson on why you should always have stop losses.

Boeing (BA) miraculously posted a fractional gain despite an unexpected ruling that Bombardier did not have to face a 300% duty on their CSeries 110-130 seat planes sold in the US. The US International Trade Commission had been expected to rule in favor of Boeing after the company had complained that Bombardier was selling planes in the US under cost at "absurdly low prices." Boeing said Bombardier dumped 75 of the planes in a sale to Delta. The ruling was 4 to zero on the ITC panel. Boeing can still appeal the decision and probably will just to keep the cloud of uncertainty over the sale of Bombardier planes in the US as long as possible. The ITC said Boeing was not harmed by the discounted planes since Boeing does not offer an exact competitor in that class. Boeing is trying to form a partnership with Embraer to offer a competitive plane to the CSeries.

Kroger generated a lot of news last week. Alibaba (BABA) is reportedly in talks with Kroger about an alliance. Kroger officials went to China for the discussions. Kroger has a market cap of $27 billion compared to Alibaba's at $508 billion. For Kroger that would be the equivalent of the lamb walking into the lion's den to talk about dinner. Kroger may be looking for a technology partner to combat the Amazon/Whole Foods acquisition. You know Amazon is going to expand the Whole Foods footprint and could do it through acquisitions. Kroger already opened its 1,000th ClickList location in December and they have a Scan, Bag, Go service in 400 locations.

Kroger has also been in acquisition discussions with online wholesaler Boxed and online retailer Overstock.com. Kroger recently announced a restructuring plan called Restock Kroger where they are going to "redefine" grocery shopping and expand the customer experience. Recent rumors claim Kroger's bid for Boxed.com may have come up short and Amazon could also be in the bidding.

One retail consultant wrote last summer that Alibaba should buy Kroger as a way to enter the US retail market and extend and complement their global retail ecosystem. He wrote that acquisition would be Kryptonite to Amazon Whole Foods and Walmart/Jet.com.

On Friday, we learned that Casey's General Stores (CASY) has reportedly submitted a bid for Kroger's convenience store chains valued at more than $2 billion. Casey's could be looking for a poison pill to push away activist investor JCP Investment Management, which is trying to get Casey to put itself up for a sale. Kroger announced last year they wanted to sell their 780 convenience stored and Goldman Sachs is shopping the assets. The stores go by multiple names like Kwik Shop, Loaf 'N Jug, Turkey Hill Minit Markets, Tom Thumb, Quick Stop, etc. They have accumulated these as they acquired the supermarket chains associated with them over the years.

Kroger is a massive retailer with 2,790 retail food stores in 35 states, 2,266 pharmacies, 1,480 supermarket fuel centers, 785 convenience stores, 306 jewelry stores, 219 retail health clinics and 38 food production plants.

Lowe's Companies (LOW) announced a new $5 billion stock buyback program in addition to the $2.1 billion remaining on their existing program. No date was given for the program, which means it could be a public relations effort rather than a plan to give back to shareholders and lift the stock price. Open-ended plans tend to never be completed. Those companies that get the most bang for their bucks are the ones that put a short fuse on the program as in 3-6 months. Their stock prices tend to rise sharply. However, if Lowe's waits until a market correction appears and then goes all in on the dip, it could keep their shares supported and provide a quicker rebound. There are pros and cons for both methods of buying back stock. Lowe's shares are at historic highs so waiting for a dip would be preferable and a wiser use of capital.

Twitter (TWTR) shares got a boost after noted short seller Andrew Left of Citron Research tweeted he owned Twitter shares and the stock was going to $35. He said engagement levels were rising and Twitter dominates the social media space for news. He said Twitter was a better acquisition target than SNAP and a company like Tencent might be interested in taking a huge position in the US social media market.

Barron's said Twitter could be acquired by Salesforce.com. A CFRA analyst contradicted that scenario saying while there were multiple merger rumors, the bigger news was the company working on a SnapChat clone for easier media sharing in addition to texts and tags.

Overall, there have been numerous positive mentions about Twitter in the last several weeks and shares are rising.

Crude prices closed at $66.24 on Friday and a three-year high. The crashing dollar was responsible for most of the movement over the last week. US producers added 12 oilrigs last week to 759 and the largest weekly gain since March. Gas rigs declined by 1 to 188. Large speculators raised their net long positions in WTI by 7,612 contracts to a new record high at 549,602. The CME said speculators raised their net long positions in Brent crude by 13,912 to a new record of 584,707. That equates to 584.7 million barrels of oil.

With everyone 100% long heading into a normally weak two-month period for crude prices, there could be a monster volatility event in our near future.


The major indexes closed at new highs again but the AAII investor sentiment survey took a major turn lower. This survey ends on Wednesday and the Dow was flat on Tuesday and dipped on Wednesday. The Nasdaq imploded on Wednesday with a major -110 point reversal from the intraday highs. Investors immediately fled the bullish camp thinking the rally was over. Surprise, surprise! The Dow, S&P and Nasdaq all rebounded to close at new highs.

Schwab posted this chart from Bloomberg showing the relative performance of years following years with exceptionally low volatility. 2017 was tied with 1995 for low volatility with the biggest S&P decline at 3.1% for the entire 12 months. I thought the chart was interesting but I do not think it is relative in our current environment. The factors driving the market today, tax reform, rising earnings, low interest rates and strong global economy are likely to continue driving the market the rest of the year. There will be weak patches but we should end the year higher.

Schwab's Liz Ann Sonders tweeted on Friday that the market was the most overbought since 1904. (not a typo).

Schwab also warned that the Citibank Economic Surprise Index was rolling over. This index measures the number of economic reports that are moving higher versus the number of reports moving lower. In theory, this is a leading indicator for a weakening economy. Personally, I believe the economic conditions got ahead of themselves in the optimism department and this weakening is more of a reversion to the norm. For instance, the consumer sentiment indicators have faded over the last two months but are still near record highs. This will be something to continue watching but the index is still well above zero.

Bank of America reported another week of record inflows into equity funds of $33.2 billion. By comparison, a total of $278 billion flowed into equities for all of 2017. Last week equated to 11.9% of 2017 money flows. YTD has seen $77 billion flow into equity funds. At the same time, they warned a significant pullback in "sky-high" markets in the next couple of months was "very likely."

BAML private client equity exposure is rising at the fastest pace in 10 years and cash allocation is at record lows. The BAML "Bull & Bear" gauge has given a sell signal at 7.9 and just under the 8.0 level where BAML recommends selling. The indicator has given 11 sell signals since it began in 2002 and has been 100% accurate all 11 times. The average peak to trough drops in the following 3 months after a sell signal has been -12%. "A tactical S&P-500 pullback to 2,686 (-6%) in Feb/Mar is now very likely" according to BAML. They also warned that a sudden reversal in the dollar's decline could spark a sharp correction. In the note they reminded that the 1987 market crash was triggered by a FX spat between the US and Europe.

Currently the S&P is closing in on 2,900. Three or four more days like Friday and it would be nearing 3,000. There was a blowout on Monday and another one on Friday and the S&P gained 62.5 points or 2.2% for the week. It is now up 7.5% for the year. It should be evident on the chart that the advances are out of character compared to the prior trend. We know the market can continue higher for weeks to come until buyers run out of money or conviction or both. The markets always revert to the mean. Sometimes it just takes a little longer than others for that to happen.

The Dow milestones are flying by faster than mile markets on an interstate highway. The time between 25,000 and 26,000 was only 9 trading days or 13 calendar days. That was a record for the shortest time. The index is already threatening to hit 27,000 next week. Obviously the higher the market goes the faster the milestones will be hit because the percentage difference between the points grows smaller every day. The Dow had to rise 100% to go from 1,000 to 2,000 or 10% from 10,000 to 11,000 but only 4% to go from 25,000 to 26,000. Multiple analysts have said we could see 30,000 before the year is out. The Dow is up 8,729 points or 48.8% since the election.

The Dow components were solidly positive on Friday with the exception of Goldman and Caterpillar. CAT reported earnings on Thursday and is still fighting post earnings volatility. To its credit, the stock is only down about $1.50 from the pre earnings close and that was after a monster gain of 75 points since April.

The Dow continues to accelerate higher and the 26,000 level is now initial support. The index is now 12% above its 100-day average.

The Dow Transports lost -1.6% for the week. This is a sentiment drag on the Dow Industrials but you could not tell it from the Dow's gains.

The Nasdaq had a huge bout of profit taking on Tue/Wed but shook it off and charged higher to close over 7,500 only 4 days after closing over 7,400. The big cap tech stocks are suddenly on fire again and the big group of tech earnings are not until next week. It will be the following week where we could see some weakness.

The Russell was the under achiever last week with a +0.6% gain compared to the 2.1% on the Dow and 2.8% on the Nasdaq 100. The index is holding over support at 1,600 but just under resistance at 1,610. The index has only had three days of strong gains in January.

The trend is your friend, until it ends. I am sticking with my forecast of continued gains next week but a potential rough spot in February as some of the current excesses are removed.

The way the immigration fight is shaping up in Washington the odds are good we are going to get another government shutdown. Like we saw last week, the negative impact to the market was weak and the post shutdown rebound was strong. I would expect that same cycle if another shutdown appears.

The State of the Union speech on Tuesday could be a wild card. We never know what will be said and how it will impact the markets. Comments over trade wars, dollar weakness, treasuries, interest rates, tariffs, North Korea, Russian investigation, etc, could cause ripples in the pond.

I told a couple readers I would try and have the graphic on all the analyst targets done this weekend but it remains incomplete. Many analysts seem to be waffling on picking a target this year. Most claim they want to see how the guidance in Q4 earnings plays out before picking a number and I understand that. I will try to fill in some blanks this week and I will publish what I have next weekend.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"I have learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel."

Maya Angelou

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

New Plays

Massive Market

by Jim Brown

Click here to email Jim Brown
Editor's Note

VIPshop Holdings has access to more than a billion consumers in China alone and JD.com and Tencent just took a major stake in the company.


VIPS - Vipshop - Company Profile

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men. The company also provides handbags, such as purses, satchels, duffel bags, and wallets; apparel, gear and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers of all age groups; sports apparel, and sports gear, and footwear for tennis, badminton, soccer, and swimming; and skin care and cosmetic products, including cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish. In addition, it offers home furnishing products comprising bedding and bath products, home decors, and dining and tabletop items; small household appliances; designer apparel, footwear and accessories; and snacks, health supplements, and occasion-based gifts, such as chocolates, moon-cakes, and tea. Further, the company provides consumer financing, supply chain financing, and wealth management services. The company provides its branded products through its vipshop.com, vip.com, and lefeng.com Websites, as well as through its cellular phone application. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People's Republic of China. Company description from FinViz.com.

VIPS has about a 6% market share in e-commerce apparel in China. Currently there is a battle in progress for market share among numerous major players including Alibaba and their various websites. They all exist in come part under the Alibaba umbrella.

Tencent (TCEHY) and JD.com (HD) are two of the major online players. They just announced an $853 million stake in VIPS. Tencent bought a 7% stake for $604 million and JD.com put up another $259 million to increase their stake from 2.5% to 5.5%. FYI Tencent owns a 21% stake and Walmart owns a 10% stake in JD.com. These are major players who believe VIPS is going to grow significantly.

VIPS is the 4th largest business to consumer online retailer in China behind Alibaba's Tmall, JD.com and Suning, in that order. Over the last 12 months VIPS increased its active customers by 22% to 6.5 million. The company is expanding out of apparel and accessories and into things like pharmaceuticals. On Alibaba's Singles Day, VIPS handled more than 10 million orders. Analysts expect VIPS revenue to grow 33% in 2018 and earnings to grow 43%.

Why is the investment by JD.com and Tencent so critical? Tencent has 980 million monthly active users on WeChat and JD.com has 266.3 million active customers. They are going to make these customers available to VIPS. Remember, VIPS only has 6.5 million customers but they have the products that Tencent does not have. This means VIPS sales are going to explode.

VIPS has earnings on Feb 19th. I am recommending we buy a cheap call and hold over the earnings event because good things are likely to come out of the report.

No stock, just buy the call. The stock is rising quickly but it could reverse just as easily.

Buy Mar $19 call, currently $1.15, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Better Internals

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell posted only a minor gain but the A/D line was significantly better. On the S&P-600 small cap index there were 287 advancers compared to 226 decliners. That was an improvement over the last several days. The Russell only gained 6 points with the Nasdaq up 95 and Dow 223 and the index did not close at a new high. Still, Friday was an improvement.

It appears the big cap market is going to continue blowing out for at least another week. Money flows are off the charts as investors chase prices higher.

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

BB - BlackBerry
The long stock position was closed at the open.

STM - ST Microelectronics
The long position was stopped at $23.65.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

BB - Blackberry Ltd - Company Profile


No specific news. We closed the stock position at the open after shares fell below support on Thursday. We still have a long term call and a short term put to protect us against any further downside. The options will move to the Lottery Play section next week.

Original Trade Description: January 8th.

BlackBerry Limited operates as security software and services company in securing, connecting, and mobilizing enterprises worldwide. The company operates in three segments: Software & Services, Mobility Solutions, and Service Access Fees (SAF). The Software & Services segment offers enterprise software and services, including mobile-first security, productivity, collaboration, and end-point management solutions for the Enterprise of Things through the BlackBerry Secure platform; BlackBerry technology solutions, such as BlackBerry QNX, Certicom, Paratek, BlackBerry Radar, and intellectual property and licensing; AtHoc, which provides secure, networked crisis communications solutions; SecuSmart that offers secure voice and text messaging solutions with encryption and anti-eavesdropping facilities; licensing and services related to BlackBerry Messenger; and cybersecurity consulting services and tools. The Mobility Solutions segment engages in the development and licensing of secure device software and the outsourcing to partners of design, manufacturing, sales, and customer support for BlackBerry-branded handsets. This segment also develops software updates for its legacy BlackBerry 10 platform, and delivers BlackBerry productivity applications to Android smartphone users via the Google Play store; and sells its DTEK60, DTEK50, Priv, Leap, and Passport smartphones and smartphone accessories, as well as offers non-warranty repair services. The SAF segment consists of operations related to subscribers using mobile devices with its legacy BlackBerry 7 and prior operating systems. The company was formerly known as Research In Motion Limited and changed its name to BlackBerry Limited in July 2013. BlackBerry Limited was founded in 1984 and is headquartered in Waterloo, Canada. Company description from FinViz.com

Expected earnings March 21st.

BlackBerry started out as a smartphone manufacturer under the name Research in Motion (RIMM). Over the years they failed to keep pace with Apple and Android and the BlackBerry phones are now just a niche market and they contract with another company to have them made.

BlackBerry has evolved into a software and services company with security software, mobility solutions, and dozens of other categories. The company is now the largest provider of automobile operating systems with tens of millions of cars using their QNX software.

They are using their experience in auto OS to build the next generation of autonomous vehicles. They announced last week that Baidu had chosen them to help develop self-driving technology. Baidu said "by integrating the QNX OS with the Apollo platform, we will enable carmakers to leap from prototype to production systems." BlackBerry radar, an asset tracking solution, is already available at more than 2,800 heavy-duty truck dealerships across North America. This software and equipment tracks trucks, loads, trailers, containers, heavy machinery and other transportation assets. Trucking companies and shippers can track the location of their cargo and vehicles in real time all the time.

Last week they reported earnings of 3 cents that beat estimates for a breakeven quarter. Revenues of $226 million beat estimates for $212 million. The company guided for the full year for revenue of $920-$950 million with software revenue up as much as 15%. This was the second quarter of positive earnings surprises after a long drought of weak results. The company promised positive EPS and cash flow for the future.

There are rumors in the market that BlackBerry could suddenly become an acquisition target because of their small size of $8 billion market cap and vast array of growing software services. Shares spiked to a new 4-year high on the earnings and guidance and the stock is suddenly hot once again. This is not some new fad company. There is history and there is a remarkable turnaround in progress.

I am going out to June with the option to get past the March earnings. There is likely to be some profit taking from the recent gains, so we need to buy some time.

I am going to recommend the stock but I am adding a March put, just in case the rebound fails. I fully expect the stock to be significantly higher a couple months from now but I am recommending a 50 cent insurance policy.

Update 1/16: BlackBerry launched a product called BlackBerry Jarvis. This is anti hacking software for self driving cars. Manufacturers can use it to scan their product before they are released to look for weak points that could be hacked. Tata Motors said the product allowed them to cut the analysis time down from 30 days to 7 minutes.

Position 1/9/18:
Closed 1/16: Long BB shares @ $14.22, exit $13.10, -1.12 loss.
Long Mar $13 put @ 50 cents, see portfolio graphic for stop loss.

Alternate position: Long June $15 call @ $1.30, see portfolio graphic for stop loss.

BOTZ - Global X Robotics AI - Company Profile


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

Original Trade Description: October 4th.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

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

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.

IMMU - Immunomedics Inc - Company Profile


No specific news. Recovered Thursday's loss.

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.

Update 1/8/18: Royalty Pharma bought $75 million of IMMU shares at $17.15 per share, 15% over the current price. They also paid $175 million for the rights to market Sacituzumab Govitecan (IMMU-132) on a global basis. They will pay a royalty of 4.15% on a step down basis until sales reach $6 billion annually then the rate will be 1.75%. The $250 million in cash will allow IMMU to fund its next phase of growth with expenses covered well into 2020. Shares declined slightly since the stock sale added to the shares outstanding.

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.

TTMI - TTM Technologies - Company Profile


No specific news. Finally a day that was not a decline. Our stop loss is just under Thursday's low.

Original Trade Description: January 20th.

TTM Technologies, Inc., together with its subsidiaries, manufactures printed circuit boards (PCBs) worldwide. It provides a range of PCBs and electro-mechanical solutions, including conventional PCBs, high density interconnect PCBs, flexible PCBs, rigid-flex PCBs, custom assemblies and system integration products, and IC substrates. It also produces test specialized circuits that are used in radio-frequency or microwave emission and collection applications; printed circuits with heavy copper cores, and embedded and press-fit coins; PCBs with electrically passive heat sinks; and PCBs with electrically active thermal cores. In addition, the company offers various services, including design for manufacturability, PCB layout design, simulation and testing, and quick turnaround services. The company's customers include original equipment manufacturers and electronic manufacturing services companies that primarily serve the networking/communications, cellular phone, computing, aerospace and defense, and medical/industrial/instrumentation end markets of the electronics industry; and the U.S. government. TTM Technologies, Inc. was founded in 1978 and is headquartered in Costa Mesa, California. Company description from FinViz.com.

TTMI is an underappreciated chip stock. Earnings are rising and they are growing by acquisition. For Q3 they reported earnings of 32 cents on revenue of $667 million. For Q4 they guided for earnings of 49-55 cents on revenue of $700-$750 million. This was the fourth consecutuve quarter of organic growth, revenues and earnings that exceeded guidance.

On December 3rd they announced a deal to acquire radar components maker Anaren for $775 million in case from Veritas Capital. Anaren produces microwave components for wireless, space and defense electronics providers and counts Raytheon Co Lockheed Martin Corp, and Northrop Grumman Corp as customers. TTMI said the deal would immediately reduce costs and be accretive to earnings.

Earnings expected on Feb 7th.

Shares are about to break out to a six month high over $17.50 ahead of earnings. The short-term trend over the last month has been steadily higher. They have long-term resistance at $19.50 and a break over that level would be a new high and cause significant buying.

I do not usually recommend stocks just before earnings. I am suggesting we play the stock position and exit before the Feb 7th event. I am recommending we hold the very inexpensive option over the earnings in hopes of a real breakout to new highs. The stock closed at $17.59 so the $17.50 strike is expensive and risky. The next strike is $20, well OTM but the price is only 35 cents. It is a cheap bet on a positive earnings breakout.

Position 1/22:
Long TTMI shares @ $17.48, see portfolio graphic for stop loss.

Alternate position: Long March $20 call @ 34 cents, see portfolio graphic for stop loss.

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 specific news. Nice rebound to close at a 3-month high.

I am going to retain this position until the Jan-30th 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.

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.

CHGG - Chegg Inc - Company Profile


No specific news. New closing high

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.

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 Apr $17.50 call @ 85 cents, see portfolio graphic for stop loss.

Previously Closed 1/16: Long CHGG shares @ $15.07, exit $16.45, +$1.38 gain.

EXTR - Extreme Networks - Company Profile


No specific news. Shares failed at resistance at $14 but they are still trying for a breakout.

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.

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.

JCP - JC Penny Company - Company Profile


No specific news. Shares are still flirting with support at $3.75.

Original Trade Description: January 10th.

J. C. Penney Company, Inc., through its subsidiary J. C. Penney Corporation, Inc., sells merchandise through department stores. The company sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products, home furnishings, and appliances, as well as provides various services, including styling salon, optical, portrait photography, and custom decorating. As of November 10, 2017, it operated approximately 874 department stores in the United States and Puerto Rico. The company also sells its products through its Website, jcpenney.com. J. C. Penney Company, Inc. was founded in 1902 and is based in Plano, Texas. Company description from FinViz.com.

This is going to be a short play description. JCP had been left for dead as the next retailer to disappear after Sears because they are both anchor tenants in dying malls across America. A funny thing happened on the way to bankruptcy court. JCP actually began to recover.

The company raised guidance last week saying same store sales rose 3.4% thanks to strong demand for home goods, beauty products and jewelry. The company said their ecommerce sales rose double digits. They reaffirmed their full year earnings forecast and the CFO warned Sears, "we are coming after your appliance business." That is pretty cocky and suggests JCP is a long way from dead.

Shares are suddenly recovering and the outlook has improved significantly.

The best thing about this position is that the May option is very cheap since investors have not really caught on to the recovery yet. We can slip in and take a position and hold the option over earnings and we could have a big long term winner.

Position 1/11/18:
Long May $4 call @ 60 cents, see portfolio graphic for stop loss.

Previously Closed 1/25: Long JCP shares @ $3.97, exit $3.75, -.22 loss.

NUAN - Nuance Communications - Company Profile


The company released preliminary Q4 results and shares spiked 8% on Monday. They guided to earnings of 26-27 cents and analysts were expecting 22 cents. Revenue is expected to be $507.0 to $510.0 million and analysts were expecting $493 million.

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.

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 Apr $18 call @ 95 cents, see portfolio graphic for stop loss.

Previously Closed 12/29: Long NUAN shares @ $16.98, exit $16.25, -.73 loss.

SFM - Sprouts Farmers Market - Company Profile


No specific news but shares spiked to a 19 month high.

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.

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.

Update 1/12: Sprouts partnered with Instacart to expand home delivery in additional markets. They will start in Arizona and then roll out to other US cities later in the year. Sprouts already has a home delivery deal with Amazon in eight cities.

The company also preannounced Q4 earnings. They expect same store sales to rise 4.6%. For all of 2017 they expect net sales growth of 15.3% with same store sales of 2.9% with earnings of 98-99 cents. The guidance excluded any benefits from the tax reform.

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


Shares fell sharply on Thursday with the chip sector down hard and they reported earnings. They warned Q1 would be weaker than Q4 in a seasonal dip but investors dumped the stock. We were stopped out at $23.65 on Wednesday ahead of the earnings.

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:

Closed 1/24: Long April $25 call @ $1.70, exit $1.45, -.25 loss.

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

SYNT - Syntel - Company Profile


No specific news since Dec 28th. Very quiet. 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.

BEARISH Play Updates

AOBC - American Outdoor Brands - Company Profile


No specific news. Shares rebounded slightly with the Shooting, Hunting and Outdoor Trade show (SHOT) this week in Las Vegas. Lots of news on new sporting goods products. I would have closed the position ahead of the event but for 20 cents we are better off holding it and looking for a post show decline.

Original Trade Description: December 30th.

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

AOBC is a great company but times have changed. Under the 8-years of Barack Obama as president the firearms sector boomed because Obama never missed a chance to blame firearms for every act of violence rather than the criminal acts of the violent offenders. He had said numerous times he would ban firearms if he could and enacted policies that pressured gun dealers including limiting their access to banking. With a potential new gun control law behind every event, gun sales boomed to all time records. In the last year of his presidency he bragged several times that he had become the best gun salesman ever.

President Trump is pro gun and there are multiple pro gun laws making their way through congress. There is no fear of any gun bans even after the Las Vegas shooting. With no urgency to buy new guns, sales are falling. AOBC said rising inventories were a problem and they are being forced to reduce production.

Investors looking for promising stocks for 2018 with rising revenue and earnings, will likely avoid AOBC because they have neither. In their Q3 earnings report, revenue declined -36% to $148.4 million and earnings fell -90% from $32.5 million to $3.2 million. With 3 years left in Trump's term, the outlook for rising sales is weak at best.

They guided for 2018 for earnings of 57-67 cents and will include write downs of acquired assets.

Update 1/4/18: Firearms background checks fell -8.4% in 2017, the first year over year decline in 15 years. Checks rose from 8.45 million in 2002 to 27.54 million in 2016. AOBC has to deal with this sharp decline in volume.

Position 1/4/18:
Long March $10 put at 35 cents.

Previously Closed 1/16: Short AOBC shares @ $12.14, exit $12.35, -.21 loss.

SNAP - Snap Inc - Company Profile


SNAP shares declined again on news that Twitter is now copying SnapChat with a video app. The company also said the VP of Product is leaving the company. With advertisers already fleeing SNAP, additional competition is not going to help.

Original Trade Description: December 30th.

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.

Update 1/2/18: The 27-year old founder of Snap Inc hosted a New Years Eve party for employees that cost $4 million with the rapper Drake the headline performer. The news probably helped SNAP shares post a 30 cent gain but investors overall were hostile that he could spend that kind of money with SNAP shares in the tank. Update 1/12/18: Raymond James downgraded from neutral to sell on Friday calling it an overvalued chat company. The analyst said, "agency checks indicate Snap's advertising platform is still largely experimental and user demographics are less attractive to advertisers. In our discussions with ad agencies, Snapchat's very young audience is not as attractive to many advertisers given their much lower income levels."

Position 1/2/18:

Alternate position: Long Feb $14 put @ 84 cents, see portfolio graphic for stop loss.

Previously Closed 1/3/18: Short SNAP shares @ $14.69, exit $15.25, -.56 loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now