Option Investor
Newsletter

Daily Newsletter, Saturday, 2/3/2018

Table of Contents

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

Market Wrap

Investors Wanted a Dip to Buy

by Jim Brown

Click here to email Jim Brown

After surging to the best start for January since 1987, markets posted the biggest decline since January 2016.

Weekly Statistics

Friday Statistics

The Dow closed at 26,472 last Friday with a 7.7% gain for the year. The index closed this Friday at 25,521 and a -4.1% decline for the week. A lot can change in a very few days. Art Cashin said there were $1.7 billion in sell on close orders on the NYSE.


Yields on the 10-year spiked nearly 3% to 2.854% on Friday after the Nonfarm payroll report showed wage growth accelerating to a 9-year high of 2.9%. Inflation has been dormant since the financial crisis but has suddenly rocketed higher suggesting the Fed may be behind the curve and will have to accelerate their rate hikes in 2018. However, frigid weather in January reduced the number of hours worked so the wage gains may be a temporary calculation error. Secondly, the onetime bonuses from the tax reform funds should also spike wages temporarily.


Apple ($AAPL) beat on earnings but missed on units sold and gave weak revenue guidance for Q1. After spiking $5 in the afterhours session the shares collapsed -$7.28 on Friday to close -10.5% below its $179.26 high and in correction territory. Bernstein cut them from buy to neutral and said the stock was fully valued for a slowing sales environment. Chip stocks that feed Apple were crushed with major declines. Apple shares subtracted 33 points from the Nasdaq.


The Nasdaq Composite lost -145 points and the Nasdaq 100 gave back -141 but it would have been worse except that Amazon added 17 points to the Nasdaq and Charter added 3 points. This offset some of the decline from Apple.


The Dow has lost more than 500 points only 17 times in history. There have only been 8 losses before Friday of more than 600 points. The Dow lost -696 at its lows and had it closed there it would have been the third largest point loss in history. Currently the third largest is -680. There was a minor burst of short covering at the close to lift the index off its lows.

Volume of 9.03 billion shares was the heaviest since the quarterly option expiration and index rebalance on December 17th at 10.7 billion. The A/D ratio was 7:1 decliners over advancers. Declining volume was 6:1 over advancing volume. Across all markets, there were 127 new highs and 525 new lows.

I wrote last week that a marker capitulation was normally determined by a significant imbalance in the A/D line of 8:1 to 10:1 with heavy volume. While 9.03 billion shares was high it was only about 15% over the recent average. On a purely technical basis, Friday was a strong retracement but it was not a true capitulation day. There is a stock market adage, "Markets rarely bottom on Fridays." When bearish sentiment appears suddenly, there is always the fear of the unknown over what could happen over the weekend. Markets do bottom on Mondays. It is not unusual after a Friday Flush for the markets to open sharply negative on Mondays and then rebound before the day is over.

If you surveyed traders the prior Friday and asked them what the market needed to do to deflate the overbought conditions and provide a dip to buy, they would probably have said a 3% to 4% decline. Now that we have had a -4.1% decline on the Dow, I did not see a lot of buying at the close. Everybody wants somebody else to go first.

Most of the market commentators were blaming the Nonfarm Payroll report for the sell off Friday morning. However, the S&P futures were down -15 at 4:AM and the Dow futures were down -200 before the payroll report was even released. I wrote about this last week that market commentators will always try to find something to blame for the dip because it makes them look knowledgeable on TV.

I have no doubt the report added to the bearish sentiment but it was not the trigger for the initial decline.

The report showed a gain of 200,000 jobs and slightly over the consensus forecast for a gain of 185,000. The unemployment rate remained flat at 4.1% along with the labor force participation rate at 62.7%.

The killer line item in the report was a +0.3% jump in hourly wages to 2.9% year over year. That is the fastest rate in nine years. This immediately spiked fears that inflation was suddenly accelerating and the Fed would have to hike 4 or even 5 times in 2018 to slow down the economy. The current consensus is for 3 rate hikes in 2018. Bull markets do not die of old age. They are killed by higher interest rates or recessions.

The previously reported December payrolls of 148,000 were revised higher to 160,000. The November numbers were revised lower from 252,000 to 216,000. Construction added 36,000 jobs, food service +31,000, healthcare +21,000, retail +15,000 and manufacturing +15,000. A whopping 518,000 people entered the workforce. Household employment rose 409,000 for January but 318,000 were due to an accounting change.


The NY - ISM report posted a monster rise from 56.3 to 72.5 for January. That is the highest reading since 2006. Employment surged from 42.9 to 58.4. The biggest negative component was the six-month outlook which fell from a 10-yr high of 85.7 in December to a 2.5 year high at 76.1 in January. That took it out of the great category and back down to just really good. The headline number at 72.5 and the six-month outlook at 76.1 are both over 70 for just the second time since 2010.

The final reading of consumer sentiment for January rose from 94.4 to 95.7 and five points below the 18-year high of 100.7 in October. The present conditions component declined from 113.8 to 110.5 and the expectations component rose from 84.3 to 86.3. Of the survey respondents 77% said it was a good time to buy a major household item, 66% said it was a good time to buy a car and 67% thought it was a good time to buy a home.


Factory Orders for December rose 1.7% and the fifth consecutive monthly gain. Three of those months have seen an identical 1.7% increase. Durable goods orders rose 2.8% with nondurables rising 0.7%. Backorders rose 0.6% and defense orders rose 19.2% for the third increase in four months. This report was ignored.

We have a very light economic calendar for next week with only two material reports. There are seven Fed speeches. The biggest event is the government funding deadline on Thursday evening. However, lawmakers are already talking about kicking the can down the road again and putting it off until March 22nd. Several representatives have already said they would not vote for another extension unless there were major changes in the plan. They will probably come around because everyone caught flack from the three-day shutdown two-weeks ago. While they cannot agree on the actual funding and immigration issues, they can agree they do not want their phone lines to light up again with complaints.

March 5th is the deadline for a DACA resolution. That is not likely to happen either. The next two months will be continuous partisan headlines until they wade through some of these issues.

Janet Yellen officially stepped down as Fed chairman on Friday and will begin work at the Brookings Institute on Monday as a fellow in economic studies. She will join Ben Bernanke, Donald Kohn, Alice Rivilin and Alan Blinder, all prior Fed members. Jerome Powell will be officially sworn in as chairman on Monday.


The earnings calendar for next week has very few highlights. There is only one Dow component, which is Disney on Tuesday. Gilead, Tesla, Nvidia and Twitter will be the most watched names. Akamai, Chipotle Mexican, Yum Brands and Activision will probably generate a lot of interest as well.

There are 93 S&P companies reporting, down from the 125 last week. To date, 251 S&P companies have reported with 78.1% beating on estimates and 79.7% beating on revenue. The blended earnings growth estimate for Q4 is now 13.6% and revenue growth of 7.7%. There have been 27 guidance warnings and 27 companies gave positive guidance. The forward PE is 18.4.

With the number of large high profile companies falling sharply from last week, there will be less earnings excitement and anticipation in the market. The coming week is when I expected some profit taking volatility to appear with the following week volatile as well. After the flush last week, the future volatility could fade. Stops have been hit and many of the weak holders have been eliminated.


There were not a lot of earnings on Friday but there were some big names. Dow component Exxon (NYSE:XOM) reported earnings of 88 cents that missed estimates for $1.03. Revenue of $66.5 billion also missed estimates for $71.9 billion. Production of 3.99 million bpd fell well short of estimates for 4.165 million bpd.

In addition, Exxon said it will see a $5.942 billion benefit from tax reform. They are going to launch a $50 billion capex program over the next five years to triple production from the Permian to more than 600,000 bpd, expand operations, improve infrastructure and build new manufacturing sites. The improved infrastructure and additional production will provide a low-cost supply of feedstocks for downstream refineries and chemical operations in Texas and Louisiana. These facilities produce high demand plastics, chemicals and synthetic lubricants.


Dow component Chevron (NYSE:CVX) reported earnings of 72 cents that missed estimates for $1.22. Revenue of $37.62 billion barely topped estimates for $37.55 billion. Production of 2.74 million Boepd was up slightly from the 2.67 million Boepd in the year ago quarter. Their average price received for oil was $50 in Q4, up from $40 in the year ago period. Chevron said Q4 production was hurt by hurricanes, outages at their massive LNG plants in Australia and asset sales. They added 1.54 billion barrels of proved reserves in 2017 and replaced about 155% of net production for the year. They also announced a major discovery at the Ballymore prospect in the Gulf of Mexico in 6,536 feet of water. The initial exploration well found excellent fluid properties and more than 670 feet of net oil sands. They have a 60% stake in the prospect. It is only three miles from the Blind Faith platform, which will make it easier to commercialize the production.

The company announced a quarterly dividend of $1.12, up from $1.08, payable March 12th to holders on February 16th. Chevron has raised their dividend for more than 25 consecutive years.


Este Lauder (EL) reported earnings of $1.52 that beat estimates for $1.44. Revenue of $3.74 rose 17% and beat estimates for $3.67 billion. They guided for the current quarter for earnings of $1.02-$1.04 and analysts were expecting $1.01. For the full year they guided for $4.27-$4.32, up from $4.04-$4.12 and beat estimates for $4.20. They announced a dividend of 38 cents payable March 15th to holders on February 28th. Shares faded from their opening high in the weak market.


Clorox (CLX) reported earnings of $1.23 that beat estimates by a penny. Revenue of $1.42 billion missed estimates for $1.43 billion. They guided for full year earnings of $6.17-$6.37 per share. Analysts were expecting $6.16. Investors were not happy and punished the stock with a $9.50 drop.


Charter Communications (CHTR) reported earnings of 86 cents that beat estimates by a penny. Revenue of $10.6 billion beat estimates for $10.58 billion. They added 15,000 new video customers, 300,000 new internet customers and 53,000 new voice subscribers. In the world of cable cutting this was an outstanding report. Shares exploded higher for a $16 gain in a weak market and added 3 points to the Nasdaq.


Merck (MRK) reported earnings of 98 cents that beat earnings for 94 cents. Revenue of $10.43 billion missed estimates for $10.49 billion. The company recorded a loss of $125 million as the result of the June cyber attack. Sales of Januvia, Keytruda and Gardasil beat expectations. The company guided for full year revenue of $41.2-$42.7 billion compared to estimates for $41 billion. They guided for earnings of $4.08-$4.34 and analysts were expecting $4.10. They announced plans to invest $8 billion in US capital projects over the next five years with $12 billion planned in total. They also announced bonuses for employees as a result of tax reform. Shares had been declining since the "lower drug prices" pledge by President Trump on Tuesday.


Just when you thought Elon Musk had run out of ideas, he comes up with an even wilder product. Musk sold 20,000 $500 flamethrowers in four days and raised $10 million for his tunnel boring company named The Boring Company. Yes, I said flamethrowers. He joked on twitter that the device was sentient and its safeword was "cryptocurrency" and comes with a free blockchain. Here is a video with Musk demonstrating it. Video Never a dull moment.


Tesla also sold $546 million in auto lease-backed bonds on Thursday. The securities were sold to yield between 2.3% and 5.0%. At the initial prices, the offering was oversubscribed by 14 times. The leases are on its Model X and S vehicles. Since Tesla is expected to burn through $4.2 billion in cash in 2018, the company will obviously be selling more debt in the near future. Tesla plans to become a regular issuer of ABS securities.

The governing body of auto racing (FIA) has approved a series of races where 20 drivers will race the fully race-prepared Tesla Model S P100D in the Electric Production Car Series. There will be a three heat qualifying format and then two 60 kilometer races, one in daylight and one at night. There will be a cap on horsepower at 778 hp and roughly the same level as a Formula 1 car. The cars will have 1,100 pounds of weight removed to make them even faster. Since they can accelerate from 0-60 in 2.2 seconds, I cannot imagine how fast they will be 1,100 pounds lighter. In theory, the Electric Production Car series is to pit cars from different manufacturers against each other but there is a shortage of high performance cars other than Teslas so they will have the track to themselves until other competitors appear.


Musk recently received a new 10-year contract where he will receive nothing in guaranteed salary, options, bonuses, etc. His compensation will be tied to manufacturing goals and company market cap. Tesla has a $60 billion market cap today. For every $50 billion in additional market cap, he will be awarded 1% of the outstanding stock. Today that would be a $584 million award. The goal is to reach $650 billion in market cap within 10 years. If he succeeded in accomplishing that goal along with the manufacturing milestones, his total compensation over that period would be $55 billion. That is a serious goal. Any shares awarded throughout the 10-year contract must be held for an additional 5 years from the date of vesting just to make sure regular shareholders are protected.

Lastly, Musk is negotiating with Anheuser-Busch, PepsiCo and UPS to build on-site charging terminals at their facilities as part of the electric truck project. Pepsi has committed to buy 100 Semis and UPS ordered 125 as a test project. Tesla is trying to get these companies to install Tesla Solar and commercial Powerwall installations to recharge the trucks. The solar would recharge the Powerwall batteries during the day and the Powerwalls would recharge the trucks at night. This would significantly reduce the electrical cost to power the trucks and improve the operating metrics. That would be a win-win for Tesla to convince companies to buy all three products. If it works as expected, it could set the pattern for new purchasers for years to come.

So, the key question today is whether investors buy Tesla shares in hopes that Musk accomplishes his goal and boosts the market cap from $60 billion to $650 billion within 10 years. That would take the shares from $345 today to $3,450 by 2028. Any takers?


It was a rough week in crypto currencies. More than $100 billion in market cap was erased from the crypto market. Bitcoin declined from $12,000 last weekend to $7,900 (-33%) intraday on Friday. That was down from $19,000 in December. India said they wanted to eliminate the use of digital currencies in criminal activities suggesting much tighter regulation was coming. South Korea, China and others are also pursuing everything from strict regulation to outright bans.

There is also a considerable amount of worry over Tether. This is a digital currency that is supposedly pegged to the US dollar. One tether equals one dollar. For that to work, Tether Limited would have to have $2.2 billion dollars on deposit somewhere to offset the 2.2 billion tether tokens. Tether Limited has supplied what it called "proof of deposit" confirmations but the names of the banks were blacked out so there is no way to prove those are real.

The actual problem for the crypto community is that tether is being used as a currency to buy other currencies like bitcoin. Holding fiat cash in a currency exchange is dangerous so people immediately buy tether since it is a $1 for $1 exchange rate. They do not have to worry about the coin fluctuating significantly. Then they can use their tether to transfer from exchange to exchange and buy other currencies. Numerous analysts have pointed out that new "grants" of tether coins always seem to occur when bitcoin is hitting its highs. The Bitfinex exchange is owned by the same people that own Tether Limited. In January alone Tether Limited has released 850 million new digital tokens into the Bitfinex wallet and the release dates tend to coincide with bitcoin highs. Critics claim Tether Limited is using the tether coins to prop up bitcoin and thereby support the entire crypto currency market. One analysis showed that 48.8% of the rise in bitcoin prices occurred in the two-hour periods following the arrival of 91 different tether grants to the Bitfinex wallet.

The CFTC has subpoenaed Bitfinex and Tether Limited and there has been no further news on that investigation. According to Coindesk, Friedman LLP, the accounting firm that previously audited Tether Limited/Bitfinex has cut ties with the companies and said the two parties had dissolved their relationship.

The problem could be huge. If tether has been propping up bitcoin and is now having financial problems and the investigations cause traders to be alarmed, they could try to redeem their tokens for dollars and basically cause a run on the tether bank. That would prevent tether from propping up the bitcoin market and the market in general and the entire crypto currency balloon could implode. Because these headlines and stories are becoming more common, we could already be seeing a run on the entire currency space. Bitcoin declined 33% last week to levels not seen since November. With no inherent value in crypto currencies, there is extreme risk of bad actors perpetrating all kinds of schemes. If you have crypto currencies, watch the headlines very carefully.


Crude prices only declined 74 cents on Friday but the energy sector was one of the biggest decliners with a -4.2% drop. The key was obviously the missed earnings by Chevron and Exxon but the sector drop began last Monday as investors worried about the approaching seasonal weakness. The US added 6.8 million barrels to inventory and the first addition since November 17th. Inventories typically rise over the next two months and prices decline.





Markets

The AAII Sentiment Survey that closed on Wednesday saw only a minor change in bullish sentiment but neutral investors were rapidly moving to the bearish camp. The Dow fell -177 points on Monday but the bulls were sticking it out. It will be interesting to see next week's survey after the Dow lost nearly 1,100 points for the week.


Bank of America reported another $25.7 billion in inflows to equity funds in the week ended on Wednesday. Equity and index ETFs garnered $22.4 billion of those funds. That brought the total for January to a record $102.7 billion. Citigroup said ETFs pulled in a record $79 billion in January including $42 billion into stock funds. That is not a typo; the totals for BAC and C do not match.

The money flows confirmed the Bank America, Merrill Lynch sell signal on their Bull/Bear Indicator. The indicator triggered a sell signal the prior Tuesday and confirmed it last Tuesday. The indicator has given 11 sell signals since it began in 2002 and has been right on every one. This was the 12th sell signal and it was also right. The indicator has a perfect record and we should pay rapt attention the next time it is triggered. BAC is projecting a drop on the S&P to 2,686 or -6.4% in the coming weeks. The S&P was down -3.85% last week so not much farther to go if they are right. The bank has a 3,000 price target for year-end and a bullish case target of 3,100.

The last time the Dow declined more than 600 points was June 24th, 2016 and the day after the Brexit vote. The Dow has only declined more than 600 points on eight prior days. However, the higher the index goes the more common declines of this magnitude may become. The decline on Friday was the fifth largest drop but it was the smallest percentage move. In the future when headlines prompt a selloff we could expect to see larger declines. There are five 7% moves on that list. A 7% decline today would be -1,786 points. We will see that at some point in the future but hopefully not for a long time.


There was no green on the component graphic for Friday. The A/D line was 30:0 decliners to advancers. Goldman cost the Dow nearly 85 points to be the biggest loser but there were a lot of big losers that contributed to the -666 loss. The stock that surprised me the most was Nike with only a 43-cent decline. That stock has been rebounding for three months but apparently, nobody wanted to sell it.


The Dow crashed through 26,000 and appears headed for a test of uptrend support in the 25,250 range. The ideal scenario would be a -250 drop to that level at the open on Monday and then a strong V bottom rebound to close positive. The chances of that happening are slim and none but we can always wish. There is bound to be some dip buying on Monday but there could also be some new sellers. Investors who did not sell on Friday and have had to rethink that 666-point loss all weekend, could decide to bail on Monday.

Even if the Dow does rebound, we should be wary of a new sell cycle on any bounce. A decline this severe is rarely over in one day. The market may rebound but it it not likely to be vertical but days of choppy gains and losses.


The S&P declined 2.1% on Friday and -3.85% for the week. That is the biggest decline since the market collapse in January 2016. The obvious target on any continued decline is the 50-day average at 2,715. When coupled with Bank of America's high profile call for a drop to 2,686, they are both in the same general area. Those would be a 5.5% to 6.4% decline respectively. There is light support around 2,735.


Thank you Amazon and Charter. Without those two stocks, the Nasdaq indexes would have been about 20 points lower. The big cap tech stocks had a rough day but it could have been worse. Facebook only declined -2.80 and Broadcom -3.30. Those are normal declines for those stocks and not a crash. Microsoft was slightly out of character with a -2.50 drop. That stock rarely moves that much in a single day. The last time was December 4th and the time before that was June 9th. With nearly 8 billion shares outstanding, it is hard to generate a big move.



The Nasdaq Composite has multiple areas of light support but the best technical support is the 30-day average. The index has bounced from that level multiple times over the last six months. That is currently 7,203. Below that, there are multiple levels of light support at 7,135, 7,115 and 7,040. I would not expect the index to move that low but anything is always possible.


The Nasdaq 100 tends to over penetrate the 30-day by a few points so that makes the 6,700 level a natural target.


The small cap Russell declined slightly below prior resistance, now support at 1,550 but closed near enough for it to still have an impact. The percentage decline for the week at -3.8% was the same as the S&P so it was not leading the pack but keeping pace. The A/D line on the small caps was almost 11:1 in favor of decliners. They had been weakening for several days.


The US equity markets lost nearly $1 trillion for the week. That is real money and I am sure there are plenty of millennial investors that have never lived through an actual market crash.

Volatility increased significantly with the VIX rising 27% to 17.16. However, the VIX futures ETF only rose 13.5%. The volume was unbelievable. The VXX has roughly 33.5 million shares outstanding. Of those, 32.8 million are short because it is a futures product and it always goes down eventually. The volume on Friday was 130 million shares or 4 times the outstanding shares. The algo computers must have been having a field day because there is no way that came from individual investors.


I would recommend watching the open on Monday. Anything is possible. If you must buy the open, you are probably going to have to go naked and avoid stop losses. Even if the market eventually rallies by day's end, the opening volatility could be huge. We could move in both directions in a hurry. Of course, the Dow has been moving in alternating 250-point intraday moves for a couple weeks so that is not new.

I do believe there will be a tradable move higher before the market finally moves lower ahead of February expiration. The key word there is tradable. While I am going to recommend new positions in the various newsletters this weekend, they are not for the faint-hearted. The only guarantee for next week is that there will be volatility. There is no guarantee of direction.


I am sorry to tell you that Keene Little has been forced to leave Option Investor after 14 years. His dad's health has worsened and Keene has moved to be able to take care of him. The constant daily care has made it impossible for Keene to concentrate on the market and he regretfully had to give up his weekly market commentary for the foreseeable future. I would ask that everyone keep Keene and his family in your prayers in the weeks ahead.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"You will never reach your destination if you stop and throw stones at every dog that barks."

Winston Churchill


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

Defense Funding Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

You cannot fight a war today without state of the art equipment. Kratos is building those drones and aircraft.



NEW BULLISH Plays

KTOS - Fratos Defense and Security - Company Profile

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Earnings Feb 26th.

We played Kratos several months ago when they were just beginning to win contracts for their target drones. Now they are winning contracts and have vehicles in advanced tests as attack drones that can fly with F16s and F35s and function as ground attack aircraft and aerial defense aircraft.

Kratos has found a niche in the unmanned aircraft business. Last week they were chosen to participate in a multi company award for $998 million for the Air Force TETRAS program. This is to develop a multi function drone that will be used for Command, Control, Communications, Computer Intelligence, Surveillance and Reconnaissance or C4ISR. The military sure loved their alphabet soup names.

Also last week, Kratos completed the first milestone in the Enterprise Ground Services (EGS), Command and Control System-Consolidated (CCS-C) and the transition of the Military Satellite Communications (MILSATCOM) satellite C2 system into the EGS. I don't know what all of that means but it is part of the Air Force Enterprise Space Battle Management Command and Control system (BMC2) currently being developed.

The key point here is that Kratos has been winning these awards nearly every week and they are rapidly integrating themselves into every phase of the military's attack and defense communications network in addition to their highly intelligent drone division.

The prior week Kratos announced that numerous high performance unmanned drone aircraft had completed multiple missions for customers around the world in tactical and threat representation missions. They do sell to other customers than the US military.

With Kratos rapidly advancing their capabilities and winning larger and larger contracts, they are likely to seen even more business once the defense funding is approved by congress.

Shares did NOT decline in the market selloff last week. I am recommending an options only position using a longer term option and we will hold over their earnings on Feb 26th.

Buy May $12.50 call, currently $1.20, no initial stop loss because of market volatility.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Incoming!

by Jim Brown

Click here to email Jim Brown

Editors Note:

The overbought conditions were finally erased when the markets crashed last week. The indexes crashed through various support levels and landed significantly lower as sell programs appeared nonstop on Friday. This was a typical capitulation day event and hopefully, it was a one day wonder.

Attention: Newsletter changes starting this week.

Most readers are aware that we publish multiple newsletters with stock picks. The number of positions that must be researched, analyzed and recommended is sometimes overpowering. This means I have to come up with 700-850 new positions every year and then research the news and post updates on each for every newsletter. Obviously there are not 700-850 stocks that are worthy of investment every year.

Annual recommendations:

Option Investor 200-250, average 4-5 per week.
Premier Investor 200-250, average 4-5 per week.
Ultimate Investor 50, average 1 per week.
LEAPS Investor 50, average 1 per week.
Option Writer 150-200, average 3-4 per week.
OilSlick, 50, average 1 per week.

Because Option Investor and Premier Investor are daily, it is very easy to fall into the trap of forcing a new position every day because it is a newsletter day. I have tried to fight that but it has been a problem for years regardless of who was writing the plays.

I am stopping that process this week. We had a writer change last week that means I will be writing market wraps on Tue/Thr/Sat and Tommy will do Mon/Wed.

Market wrap research and preparation is a 6-8 hour process. We don't just sit down and spew out 3500-4000 words of comprehensive research and analysis over a couple hours. There is a lot of research that never makes it to the commentary because of time and space but we have to do it to determine what events are relative and which are not.

Starting this week, I will only be doing play updates on Wednesday and Saturday. Not having to read all the news every day and post an update for every active position will save a lot of time. I will update the daily portfolio graphic and post an update on any closed positions.

I am also going to stop the process of new daily plays. I do not just draw symbols out of a hat. A lot of research goes into each recommendation. The 2-3 hours a day per newsletter that are spent scanning charts, checking earnings dates, looking at option montages and reading hundreds of news headlines makes the play picking process frantic on days I have to write the commentary plus another newsletter.

I am explaining this in depth because I want readers to understand the process and that we do care about the end result, which is making money for readers.

I am going to send out a survey next week with detailed questions about the newsletters. Please take the 2-3 minutes to answer it so I can make sure the newsletter we are providing is the one you want to read.

As always, you can email me directly about the topics above or any topic on your mind and I will respond.

Thank you in advance for your understanding.

Jim Brown

Send Jim an email




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


GME - Gamestop
The long position was stopped at $16.25.

SFM - Sprouts Farmers Markets
The long position was stopped at $26.75.

SNAP - Snap Inc
The short position was stopped at $14.00.



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

GME - Gamestop - Company Profile

Comments:

No specific news. The continued market decline pushed GME shares lower and we were stopped at $16.25.

Original Trade Description: January 29th.

GameStop Corp. operates as an omnichannel video game retailer. It sells new and pre-owned video game hardware; video game software; pre-owned and value video game products; video game accessories, such as controllers, gaming headsets, virtual reality products, memory cards, and other add-ons; and digital products, including downloadable content, network points cards, prepaid digital and subscription cards, and digitally downloadable software. The company also sells mobile and consumer electronics, including wireless products and services, and accessories, as well as new and pre-owned smart phones; personal computer (PC) entertainment software in various genres, including sports, action, strategy, adventure/role playing, and simulation; and strategy guides, magazines, and interactive game figures. In addition, it offers collectibles that include licensed merchandise related to the video game, television, and movie industries, as well as pop culture themes; and operates electronic commerce Websites under the GameStop, EB Games, Micromania, and ThinkGeek brand names. Further, the company operates kongregate.com, a browser-based game site; Game Informer magazine, a print and digital video game publication; iOS and Android mobile applications; Simply Mac, a certified Apple consumer electronic products reseller, as well as offers certified training, warranty, and repair services; and Spring Mobile, an authorized AT&T reseller operating AT&T branded wireless retail stores, as well as pre-paid wireless stores under the Cricket Wireless name that offers prepaid services, wireless devices, and accessories. As of January 28, 2017, it operated approximately 7,535 stores in the United States, Australia, Canada, and Europe. GameStop Corp. primarily offers its products through stores under the GameStop, EB Games, and Micromania names. The company was formerly known as GSC Holdings Corp. GameStop Corp. was founded in 1994 and is based in Grapevine, Texas. Company description from FinViz.com.

Expected earnings March 5th.

When Gamestop reported Q4 earnings, sames store sales rose 11.8%, hardware sales rose 39.4% and software sales rose 7.3%. The only gaming hit was an 8.1% decline in sales of preowned software. That was due to a surplus new games hitting the market in the quarter making older titles less desirable.

However, the killer was a 20% decline in revenue from AT&T for selling their mobile phones and DirecTV service. It was not that they sold dramatically fewer units but AT&T slashed their compensation to retailers. For instance if the company got $50 in Q3 for selling a phone and only got $40 in Q4 for selling the same phone, the revenue shortfall is not the fault of the seller but the manufacturer.

Gamestop is currently selling for a ridiculous PE of 5.5 with an 8.7% dividend. Game sales are doing fine and they have 7,500 stores. This looks like a buying opportunity.

Position 1/30:
Closed 2/2: Long GME shares @ $17.08, exit $16.25, -.83 loss.
Alternate position:
Closed 2/2: Long April $18 call @ .84, exit .45, -.39 loss.



VIPS - Vipshop - Company Profile

Comments:

No specific news. Only a minor decline in a weak market.

Original Trade Description: January 27th.

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.

Position 1/29/18:
Long Mar $19 call @ $1.15, see portfolio graphic for stop loss.




BEARISH Play Updates

JBL - Jabil Inc - Company Profile

Comments:

No specific news. Shares returned to the lows with a 3% drop.

Original Trade Description: January 31st

Jabil Inc. provides electronic manufacturing services and solutions worldwide. The company operates through two segments, Electronics Manufacturing Services and Diversified Manufacturing Services. It offers electronics design, production, and product management services. The company provides electronic circuit design services, such as application-specific integrated circuit design, firmware development and rapid prototyping services; and designs plastic and metal enclosures that include the electro-mechanics, such as the printed circuit board assemblies (PCBA). It also specializes in three-dimensional mechanical design comprising the analysis of electronic, electro-mechanical, and optical assemblies, as well as offers various industrial design, advance mechanism development, and tooling management services. In addition, the company provides computer-assisted design services consisting of PCBA design, and PCBA design validation and verification services; and other consulting services, such as the generation of a bill of materials, approved vendor list, and assembly equipment configuration for various PCBA designs. Further, it offers product and process validation services that include product system, product safety, regulatory compliance, and reliability tests, as well as manufacturing test solution development services. Additionally, the company offers systems assembly, test, direct-order fulfillment, and configure-to-order services. It serves automotive and transportation, capital equipment, consumer lifestyles and wearable technologies, computing and storage, defense and aerospace, digital home, healthcare, industrial and energy, mobility, networking and telecommunications, packaging, point of sale, and printing industries. The company was formerly known as Jabil Circuit, Inc. and changed its name to Jabil Inc. in June 2017. Jabil Inc. was founded in 1966 and is headquartered in St. Petersburg, Florida. Company description from FinViz.com.

Expected earnings March 15th.

Jabil reported earnings of 80 cents that beat estimates for 78 cents. Revenue of $5.59 billion also beat estimates for $5.5 billion. They posted wide guidance for Q1 of 50-74 cents on revenue of $4.75-$5.50 billion. Analysts wre expecting $4.76 billion.

By all rights Jabil shares should be rising but the decline that started in September has accelerated with Wednesday's close a 52-week low. With the Semiconductor Index showing increased volatility in what could be a topping process, the lesser known chip companies are declining.

Position 2/1/18:
Short JBL shares @ $24.33, see portfolio graphic for stop loss.
Alternate position: Long March $24 put @ 70 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

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

There is no stop loss on the VXX because the volatility can rise and fall suddenly intraday and long term the VXX "always" declines because of the futures component that routinely expires and must be rolled forward. You can set your own stops to protect gains but you have to be ready to jump back in very quickly and shares may not be available to short at any given time. There are only 33.5 million shares outstanding as of 2/1/18 and according to ShortSqueeze.com 32.8 million are already short. Volume on 2/2 was 130.0 million so lots of churn.

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

Comments:

The company posted a 34% jump in revenue to $1.48 billion and 25% growth for the full year to $5.33 billion. Adjusted earnings were 8 cents that beat estimates for 5 cents. Shares spiked to a 3-month high on Wednesday but the market decline knocked shares back down. I am going to continue holding this position given the decent earnings.

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.



BB - Blackberry Ltd - Company Profile

Comments:

The BlackBerry CEO said automotive, healthcare, oil and gas, top their list of IoT markets. He said the company's security background gives them an edge over Microsoft and others in the mobile device management (MDM) market.

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:
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.

Previously Closed 1/16: Long BB shares @ $14.22, exit $13.10, -1.12 loss.



CHGG - Chegg Inc - Company Profile

Comments:

No specific news. Shares are holding at the highs. Only a minor decline on Friday.

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

Comments:

The company was named to the S&P-600 and shares spiked to $15.50 before the market decline knocked them back to $14.30.

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

Comments:

No specific news. Retail earnings have proven choppy and the sector has begun to decline. When the majority report in two weeks maybe the trend will reverse.

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

Comments:

No specific news. The preliminary earnings spike the prior week faded in the weak market.

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.

Update 1/26: 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.

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

Comments:

No specific news but shares spiked to a 19 month high the prior week and then fell back in the market crash to stop us out.

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:

Closed 2/2: Long Mar $27.50 call @ 80 cents, exit $1.51, +$.71 gain.

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



SYNT - Syntel - Company Profile

Comments:

Still no specific news since Dec 28th. Very quiet. Shares broke below support in the weak market. This is a May call position. Plenty of time.

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.



TTMI - TTM Technologies - Company Profile

Comments:

No specific news. Shares collapsed in the week market. Earnings next week.

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 March $20 call @ 34 cents, see portfolio graphic for stop loss.

Closed 1/31: Long TTMI shares @ $17.48, exit $16.50, -.98 loss.




BEARISH Play Updates

AOBC - American Outdoor Brands - Company Profile

Comments:

Shares rebounded slightly with the Shooting, Hunting and Outdoor Trade show (SHOT) the prior week in Las Vegas. Lots of news on new sporting goods products. Those headlines have faded and AOBC shares are making new lows.

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

Comments:

SNAP shares rebounded on various headlines surrounding the Olympics and the potential for a sales of the company. We were stopped out at $14.

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:
Closed 2/1: Long Feb $14 put @ 84 cents, exit 1.08, +.24 gain.

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