Option Investor

Daily Newsletter, Saturday, 2/16/2019

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

The Dow, Nasdaq and Russell stretched their winning streak to eight weeks.

Weekly Statistics

Friday Statistics

Any winning streak that lasts eight weeks has got to generate some consternation on the part of investors. However, after a couple weeks of choppy trading the market just keeps moving higher. At the current level investors are starting to see those big round number targets and without a headline disaster we could see them hit.

When the indexes get close enough to a high-profile level it acts like a tractor beam that pulls them higher and higher until it is reached. Unfortunately, sometimes when those targets are reached, investors don't know what to do next. "Ok, now what?"

In the case of the Dow the 25,800 level was the round number target dating back to the October 16th close. Twice before it had been broken only to be sold hard in the days that followed. Obviously, closing over that level is only one part of the process. Now we need to hold over that level.

We are still catching up with all the reports delayed by the government shutdown so there were a bunch on Friday. The consumer sentiment for February rebounded sharply to 95.5 from the low 91.2 reading for January. Now that the shutdown was over, sentiment began to accelerate back to the upside. The present conditions component only rose a point from 109.9 to 110.0 but the expectations component rose from 79.9 to 86.2 for a 6.3 point gain.

Business conditions spiked 9 points from 34% of respondents to 52% reporting better conditions. That is still 7 points below the December level before the shutdown began. Overall economic optimism rose 8 points but remains 5 points below December.

Now that the government funding is behind us and the Chinese trade negotiations are heating up, we should see sentiment continue higher.

The NY Empire Manufacturing Survey for February rebounded 5 points from 3.9 to 8.8 but that is still well below the 21.4 level in November. There was a 10 point drop in December as the budget battle was beginning and fell to the lowest level since May of 2017.

New orders rose from 3.5 to 7.5 and backorders recovered from -7.6 to -0.7 but still in contraction. Employment declined from 7.4 to 4.1. However, the price components made big moves in the right direction. Prices paid declined from 35.9 to 27.1 and prices received rose from 13.1 to 22.9. Those planning on increasing their capital expenditure plans jumped from 17.9 to 29.3. This suggests the price pressures are fading and owners are feeling more confident about the future.

Industrial production for January declined -0.6% and the first decline in nine months. Manufacturing output declined 0.9%. Motor vehicles and parts fell -8.8% and the second loss in four months. The tariffs on Chinese materials was cited as the main problem. Manufacturers are holding off on resupply in hopes a deal can be concluded and tariffs dropped. Those not able to postpone buying are decreasing the size of their orders.

Surprisingly import prices declined -0.5% in January. This was the third consecutive decline with December down -1.0% and November down -1.7%. The majority of the prior month declines were related to oil prices. Excluding oil, import prices would have declined only 0.4% total for the three-month period. Export prices declined -0.6% driven by the strong dollar.

There are no signs of inflation at the import, production or consumer levels. Thursday's producer price index saw prices fall -0.1% for January and the consumer price index on Tuesday showed prices were flat for the third consecutive month.

Unfortunately, the impact from the shutdown and the weakness in Europe and Asia has been substantial. The Atlanta Fed real time GDPNow forecast for Q4 GDP has fallen from 2.7% growth to only 1.5% growth. The large decline in retail sales and inventories slashed the personal consumption expenditures (PCE) growth from 3.7% to 2.6%. This rippled throughout the forecast to cause an economic earthquake.

On the positive side, the 12-month outlook for the Fed is for no hike and a 19% chance of a rate cut. This chart is for the January 2020 meeting.

We have a light calendar for next week with the FOMC minutes the highlight. The Philly Fed Manufacturing Survey and the Existing Home Sales are the next most important.

Chinese trade negotiators will travel again to Washington this week in hopes of getting closer to a final deal before the March 1st trade deadline. The meeting days have not been published.

The Q4 earnings cycle is 80% over with 394 S&P companies having already reported. Q4 earnings growth is now projected at 16.4% with 6.0% revenue growth. Some 69.5% of companies have beaten estimates and 61.7% beat on revenue. For Q1 there have been 56 guidance warnings and 23 guidance upgrades. The are 51 S&P companies reporting this week. The forward PE has risen to 16.3%. The Q1 earnings forecast has declined to -0.5%. Energy is the biggest drag with a projected decline of -13.6% and healthcare is the strongest sector with a +6.2% forecast.

The earnings calendar is shrinking. Dow component Walmart will report on Tuesday. Agilent, CVS, Dominoes Pizza and Hewlett Packard Enterprise should be the most watched for the rest of the week.

Mattel (MAT) reported an earnings surprise on February 7th and shares shot up from $12.30 to $17.25 on the news. They reported earnings of 4 cents and analysts were expecting a 16-cent loss. For five days the stock rose and analysts bragged on how they had beaten the Toys-R-Us curse that tanked Hasbro the prior week.

On Friday at 2:PM the company warned that 2019 revenue would be flat with 2018 and analysts had been expecting 3.5% growth. They said Q1 revenue would be down due to currency issues and weakness in China. The company said weakness in Thomas & Friends and American Girl brands were responsible. They did not give earnings guidance, but analyst said based on their revenue and commentary the expected 5 cent earnings would likely turn into a loss. Shares collapsed with an 18% drop and the worst single day percentage decline since 1999. There are bound to be lawsuits on this given the way they delayed the announcement. Anybody that bought Mattel after the earnings, thinking the company was in good shape, would have a case against them for losses on the negative guidance. This selective data release is not the right way to do it.

Newell Brands (NWL), formerly known as Newell Rubbermaid, reported earnings of 71 cents that beat estimates for 67 cents. Revenue declined 6% to $2.3 billion and missed estimates for $2.43 billion. Food and appliance sales of $824 million missed estimates for $844 million. Outdoor living sales declined -7.2% to $809 million and missed estimates for $855 million. Learning and development sales fell -3.2% to $707 million and missed estimates for $735 million.

They guided for earnings of $1.50-$1.65 and analysts were expecting $1.91. Revenue guidance of $8.2 billion also missed estimates for $8.79 billion. Shares fell -21% on the news.

PepsiCo (PEP) reported earnings of $1.49 that matched estimates. Revenue of $19.524 billion narrowly beat estimates for $19.51 billion. Frito Lay revenue rose 4% to $5.0 billion and topped estimated for $4.94 billion. Beverage revenue rose 2% to $6.01 billion. Pepsi said 2019 earnings were expected to decline about 1% but analysts were expecting 3.4% growth. They raised their annual dividend by 3% to $3.82. Shares spiked over $3.

XPO Logistics (XPO) reported disastrous earnings of 62 cents, down from $1.42 in the year ago quarter and well below analyst estimates for 84 cents. Revenue of $4.39 billion missed estimates for $4.56 billion. They authorized a $1.5 billion buyback and projected revenue growth in 2019 of 3% to 5%.

However, the company said their "largest customer" (assumed to be Amazon) was "substantially downsizing its business with XPO starting in Q1." Projected volume is expected to drop by 66%. Amazon paid XPO nearly $1 billion for shipping services in 2019. XPO is being forced to close three facilities where Amazon was the largest customer. Two of the facilities each occupied more than 500,000 square feet so this is not a minor event. Amazon recently announced a one million square foot facility to handle heavy/bulky items, similar to what XPO handled for Amazon.

Amazon has boosted its Prime Air fleet to 50 Boeing 767 freighters and currently operates nearly 7,500 semi-trucks/trailers. They are implementing a "last mile" delivery service where they are funding small business startups in major cities with up to 20 delivery vehicles each. Amazon has a commitment from Mercedes for 20,000 Sprinter vans for these startup companies. The concept is to have a bunch of independent delivery companies serving specific areas in and around big cities. When coupled with their planes, trucks and 185 distribution centers, they will be cutting out FedEx, UPS and the USPS on many of their deliveries.

They are renting/buying/building airport facilities all around the country and are expected to ramp up to 100 planes over the next couple of years. Currently, analysts believe they have reduced revenue by 2% at Fedex and UPS and that will rise to 10% by 2021. XPO is feeling this impact already because of their less than truckload shipments related to the spoke/hub delivery system.

In Amazon's most recent SEC filings, they listed for the first time "logistics and transportation companies" as competitors. That is a clue they are rapidly expanding into that area.

On Friday Amazon announced a $700 million investment into electric truck startup Rivian Automotive. Amazon was the lead participant on the investment. Amazon is hoping the electric trucks will bolster its logistics network. GM was also mentioned as a possible contributor. The company would have a $3 billion valuation. Bezos personally reached out to the company to see if Amazon could provide funding.

While on the topic of Amazon, the company pulled the plug on its proposed $5 billion investment and 50,000 jobs in NYC. A few misinformed and uneducated protestors and politicians caused enough of a stink that Amazon bailed on the HQ2 project in NYC.

New York City is in one of the top five highest tax states, highest cost of living, most congested, etc. NYC is expected to run a $3 billion budget deficit in 2019 and will pay $7 billion in interest on their debt. They needed the $5 billion in investment and the 50,000 high paying jobs that would produce billions in taxes over the coming years. Amazon was planning to hire 25,000 and analysts believe the support services around the HQ would have created another 25,000. Restaurants, shopping, entertainment facilities, etc, would have been built and staffed. Over the next 25 years there would have been tens of billions in taxes paid by those businesses and workers. Personally, I could not believe Amazon wanted to go there and pay those high wages, taxes and the higher cost of living. There are so many places in the country that would have welcomed them at 25-40% of the cost.

Apple (AAPL) shares were under pressure on Friday after multiple SEC filings showed that big investors were trimming their positions. Berkshire Hathaway sold roughly 3 million shares, but they still had 249.5 million as of December 31st. However, since this notice covered Q4 investors did not know if they continued selling in January. Given Berkshire's paper loss of $22 billion from the October high to the January 3rd low, or 40% of their investment, they could have continued their sales of Apple shares in January.

However, Berkshire assistant Debbie Bosanek, said Warren did not sell the Apple shares. The shares that were sold were managed by one of Buffett's two portfolio managers. She also clarified that none of the Apple shares purchased by Buffett himself have ever been sold. You know Berkshire had to put out that note in order to avoid a costly run on Apple shares if individual investors thought Buffett had lost confidence in the company. With 249 million shares, every $1 of decline is a $249 million loss.

Tiger Capital announced the sale of one million shares. David Tepper and George Soros both announced they had closed their positions. Shares were only down fractionally on Friday.

Apple announced it would resume selling iPhones in Germany that include Qualcomm chips. Qualcomm had won a patent case there and the court allowed an injunction preventing sales of some iPhone models. This was a major blow to Apple, and they had no choice but to revert back to Qualcomm chips in order to avoid losing sales on a large number of units.

FANG stocks had a bad day on Friday despite the big market gains. The FANG trade has fallen out of favor as we near the potential for a resolution of the China trade problem. Industrials are in favor on the expectations for a rebound in overseas sales. Some 50% of profits earned by international companies are made overseas. FactSet projects 2019 earnings by domestic companies like small caps to rise by 8.0% while profits from international companies will rise only 1.7%. If we achieve a meaningful trade agreement with China, those international profits will soar. This is fueling the transition from tech growth to industrial stocks.

Facebook and Google are under a privacy cloud and how private information is used. Hardly a day goes by without some headline about an inquiry or action proposed by an overseas country. The UK is preparing to release a report calling for them to be regulated. Major fines, expected to be record amounts, are being negotiated in the US for past privacy breaches.

Netflix is the only one of the four that is maintaining forward momentum. This could also be related to post earnings depression in the tech sector. The Nasdaq Composite only gained .61% and the $NDX +.46% when the Dow was up 1.74% on Friday.

How much do you make in your regular job? According to SV Business Journal, if you work for Facebook the median salary is $240,000 per year plus free catered meals, generous paid vacations, on-campus gyms, nap rooms, laundry facilities, free rides to work, stock options, etc. That is three times what a typical worker at Paypal makes and $40,000 a year above what a Google employee makes. In fact, Facebook employees make about four times the lowest paid tech employee at major companies. Facebook has 36,000 employees.

Median Salaries:
Yelp $59,298
Micron $56,540
Bio-Rad $62,450
Coherent $64,707
Hewlett Packard Ent $65,652
Agilent Tech $68,579
PayPal $70,228
Dell $83,139
Qualcomm $85,592
Oracle $89,887
AMD $89,909
EA $96,336
Intel $102,100
Symantec $102,869
Illumina $102,920
Netgear $105,318
Cadence $110,038
AMAT $113,999
Ebay $122,891
Cisco $132,764

Crude prices rebounded again after Saudi Arabia said they were going to cut another 500,000 bpd starting March 1st. They are doing this because Russia has not cut their production as promised. There was also an outage of 300,000 bpd when a ship's anchor cut a power cable to the Safaniyah offshore field in Saudi Arabia.

Also helping lift prices was the sanctions on Venezuelan oil exports. Those sanctions have put a serious crimp in the sale of oil from Venezuela. Tankers continue to be stuck in a holding pattern while Venezuela tries to find willing buyers. Opposition president elect Gauido named a new board to Citgo in a move intended to seize control of the US-based subsidiary of PDVSA and restart oil sales with the proceeds going to the new Venezuelan government. China has also begun talks with the new opposition government in order to reinforce their claims on more than $20 billion remaining on $50 billion in loans they made to Venezuela. China has been taking oil in payment on the loans.

The progression of trade talks with China also lifted oil prices. A resumption of trade would increase demand. China's imports and exports also rose faster than expected in January, reducing fears of a dramatic slowdown and improving the outlook for oil demand.

The EIA revised its production forecasts for 2020 to 13.2 million bpd, up from last month's estimate of 12.9 mmbpd. They now expect 12.4 mmbpd in 2019 and that is a 300,000 bpd jump in the estimate just since last month.

The IEA warned that the loss of heavy oil production from Venezuela, Iran and Mexico was causing problems for refiners. WTI production is soaring but heavy oil production is declining for various reasons. The IEA said it could cause a significant price hike for heavy oil as refiners put a premium on those barrels. Refiners setup to process heavy oil could be challenged to find enough supply and that would boost prices on oil and on refined products. Analysts believe a lack of resolution on the Venezuelan heavy oil exports would prevent the US from ending the waiver program on Iran when it is scheduled to end in May. The world may need the heavy oil from Iran if it cannot get it from Venezuela.

Note that the refinery utilization declined significantly last week from 90.7% to 85.9% as refiners move into the maintenance season to prepare for the production of summer blend fuels. Also note the sharp drop in imports of roughly one million barrels per day. OPEC has urged their members to restrict shipments to the US in order to influence the price of WTI, which is governed by US inventory levels. This decline in imports is also the result of refiners going offline for maintenance. If they cannot refine oil over the next 60 days, there is no reason for them to continue accepting deliveries over that period.


On Thursday the S&P futures dropped -30 points to 2,730 over an hour ahead of the open. After struggling back to 2,758 at 3:PM they crashed again at the close. This was the third consecutive day the markets sold off at the close. By 2:45 Friday morning the futures were down -14 points when a China headline broke and the short squeeze began. The futures rebounded to gain 47 points by the close.

The market went from ugly with the futures at a 3-day low at 2:30 am to closing at a two-month high at 4:PM on Friday. When I wrote the Option Writer newsletter late Thursday evening, the outlook was grim. Friday's performance is solid proof of how much headlines control the market as shorts are squeezed.

Analysts are puzzled as to why the market keeps rising. The Dow, Nasdaq and Russell have been up for 8 consecutive weeks. Another streak that is not getting as much attention is the 11 consecutive weeks of outflows from equity funds. Bank of America said $83 billion has flowed out of equities over the last 11 weeks. These two facts seem to contradict each other. How can the markets rally for 8 weeks if there have been outflows for 11 weeks?

The market cap of the US equity market is $34 trillion. The $83 billion in outflows is only 0.00237% of the total market cap. This is the proverbial drop in the bucket. This does not mean $83 billion is not material because the vast majority of the US market cap never changes hands. Those stocks sit in investor accounts for years or even decades at a time without being traded. Average daily trading volume is about $350 billion. The $83 billion in outflows over the last 11 weeks equates to about $1.5 billion a day. Compared to the $350 billion average daily volume, it is insignificant. This is another example of people worrying about a headline that is immaterial in the bigger picture. It sounds like a big number, but it isn't once you do the math.

What is important is the resistance at 2,815 on the S&P. This level repelled rallies three times since October and we are getting close again. The S&P has rallied 429 points since the December 26th low at 2,346. There have been three periods of decent retracement along the way, but this rebound is very overbought given the length of the rebound and the weak fundamentals in economics and earnings. Nobody will be more excited if we break through that 2,815 level but I remain skeptical until it happens.

We do know that these high-profile resistance targets act like tractor beams when the index gets close so the odds are good, we will test it. It is the results after the test that are important. Do we push through or fail again? Also, since this level is such a high-profile event the bears are likely to be setting up their shorts once we pass 2,800.

The Dow benefitted from the rotation into industrial stocks and stocks that will benefit from a Chinese trade agreement. Boeing continues to be a leader whenever the China talk turns positive. The index closed over the first line resistance at 25,817 with the next target at 26,191. The giant round number in our future is 27,000. If we get through that resistance from November, the 27,000 level is going to be the instant target.

The Nasdaq Composite closed just barely over the 200-day at 7,465 and a move over 7,500 should set up a sprint to 8,000 and the highs from October. The decline in the FANG stocks held the index back on Friday.

The Russell 2000 closed 3 points over correction territory with the second-best percentage gain at 1.56% of all the major indexes. The small caps reacted much stronger than expected on the positive news from China. They should not be impacted as much from the tariffs other than cost of goods and raw materials. The small caps are mostly domestically focused companies and do very little business in Asia.

With the government shutdown out of the way and Chinese negotiators coming to Washington to play nice once again, there is nothing in the headlines to roil the market. That is almost scary. The market does best when it is climbing a wall of worry and we seem to be entering a calm period. However, the last two weeks of February are normally the weakest as post earnings depression weighs on the market. With the major indexes nearing their prior highs on weak earnings projections ahead of a weak period on the calendar, what could possibly go wrong? Obviously, quite a bit but investors are drunk on the potential for a trade agreement.

Enter passively and exit aggressively!

Jim Brown

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New Plays

Copy That!

by Jim Brown

Click here to email Jim Brown
Editor's Note

Other companies wish they could copy the Xerox earnings beat and strong guidance raise. This is not the Xerox of old. This is a new revitalized company with many different products.


New positions are only added on Wednesday and Saturday except in special circumstances.


XRX - Xerox - Company Profile

Xerox Corporation designs, develops, and sells document management systems and solutions worldwide. It offers managed document services, including managed print services and multi-channel communication services, as well as a range of digital solutions, such as workflow automation services, content management, and digitization services. The company also provides desktop monochrome and color printers, and multifunction printers; copiers, digital printing presses and light production devices, and solutions; graphic communications and commercial printers; inkjet presses; and FreeFlow portfolio of software solutions for the automation and integration of print jobs processing. In addition, it sells paper products, wide-format systems, and global imaging systems network integration solutions. The company sells its products and services directly to its customers through sales force, as well as through independent agents, dealers, value-added resellers, systems integrators, and the Web. Xerox Corporation was founded in 1906 and is headquartered in Norwalk, Connecticut. Company description from FinViz.com.

Xerox reported earnings of $1.14 that beat estimates for $1.04. Revenue of $2.53 billion just under estimates for $2.56 billion. They guided for the full year for earnings of $3.70-$3.80 that was well above estimates for $3.53.

Unlike other stocks with post earnings depression the strong guidance has powered XRX higher. Friday's close was a 10-month high.

Earnings April 30th.

Buy XRX shares, currently $30.47, stop loss $28.85.
Optional: Buy July $32 call, currently $1.60, stop loss $27.85.


No New Bearish Plays

In Play Updates and Reviews

Six Days

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite the volatility in the big cap indexes the Russell has posted six consecutive gains. Friday's 1.5% gain was big and lifted the index to close back above correction territory. The next major resistance is at 1,582, 1,587 (200-day) and 1,597. If the Russell can close over those levels the next target would be a new high at 1,741. While I seriously doubt we are just going to keep moving higher, we have a good trend in place that could make any dips bearable.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

No Changes

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

Short term Calls and Puts on equities = Option Investor Newsletter

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3-6 month Option Trades = Ultimate Investor

Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.

BULLISH Play Updates

BOX - Box Inc - Company Profile


No specific news. Closed at a new 5-month high.

Original Trade Description: Jan 19th.

Box, Inc. provides a cloud content management platform that enables organizations of various sizes to manage and share their enterprise content from anywhere or any device. The company's Software-as-a-Service platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 23 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, and energy industries, as well as government sector primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Box, Inc. was founded in 2005 and is headquartered in Redwood City, California. Company description from FinViz.com.

Earnings February 27th.

Box is a provider of cloud content management services to enterprise customers. Procter & Gamble and GE are two of its largest customers. Over the last several weeks there has been a persistent rumor they will be acquired. Google has been a rumored acquirer but it is more likely Microsoft or even Hewlett Packard could be interested.

Entering a position on acquisition rumors is rarely a good move. More than 90% of the time nothing happens. In this case revenue is growing in excess of 25% for 2018 and they guided for 20%+ for 2019. They also guided for their first quarterly profit in Q4 since they went public in 2015.

Their customer retention rate is close to 100% and they had more than 90,000 customers at the end of Q3. Box has enough scale that it makes sense to be acquired rather than a large company trying to replicate their product and service and spend years stealing market share. Buying Box now would be an instant add on to profits.

Shares broke over three-month resistance on Friday and the next material level is $24.

Position 1/22/19:
Long BOX Shares @ $19.74, see portfolio graphic for stop loss.
Optional: Long March $21 Call @ $1.00, see portfolio graphic for stop loss.

EGHT - 8X8 Inc - Company Profile


8x8 said it had upsized the convertible offering from $200 million to $250 million because of heavy demand. The unsecured notes will pay annual interest of 0.5%. The notes mature on October 1st, 2023 and can be redeemed prior to that date at the rate of 38.984 shares per $1,000 principal amount of the notes. That conversion equivalent is about $25.68 per share and the stock closed on Friday at $19.82. Shares posted a minor gain.

Original Trade Description: Feb 9th.

8x8, Inc. provides enterprise cloud communications and customer engagement solutions for small and mid-size businesses, mid-market, and distributed enterprises worldwide. It offers unified communications, team collaboration, conferencing, contact center, analytics, and other services to various business customers on a software-as-a-service (SaaS) model. The company provides 8x8 Virtual Office, a self-contained and end-to-end solution that delivers high quality voice and unified communications-as-a-service; 8x8 Virtual Contact Center, a multi-channel cloud-based contact center solution; and 8x8 Virtual Office Meetings, a cloud-based video conferencing and collaboration solution that enables secure and continuous collaboration with borderless high definition (HD) video and audio communications from mobile and desktop devices. It also offers 8x8 Sameroom, an interoperability platform, which enables cross-team messaging and collaboration within a large organization and between organizations; and Script8, a communications flow and routing engine that offers a scripting environment for routing communications data for specific workflows, as well as allows end-users to create simple, personalized, and customizable communications experiences, such as communications control, external data source integration, and intelligent routing. The company integrates its services with third-party applications and platforms, including enterprise resource planning, customer relations management, human capital management, and other proprietary application suites. It markets its services to end users through direct sales organization, Website, and channel partners. As of March 31, 2018, the company serves approximately 53,800 business customers. 8x8, Inc. was founded in 1987 and is headquartered in San Jose, California. Company description from FinViz.com.

8X8 was punished severely for earnings that missed only fractionally. The company reported a loss of 6 cents on revenue of $89.9 million. Analysts were expecting a loss of 6 cents on revenue of $88.6 million. No problems there except that matching on earnings normally produces a decline in the stock.

They lowered guidance for 2019 from $334-$338 million to $334-$335 million. Still not a major decline but the stock was hammered.

Service revenue rose 20% with a 61% increase in customers billing more than $10,000 in monthly recurring charges. Average monthly service revenue per business customer rose to $5,211.

The CEO said, "we are disrupting a $50 billion addressable market that is shifting toward cloud solutions with a preference for a single technology platform."

Shares fell from $19.50 to $16.50 on the earnings. They have recovered to $18.79 and continue to move higher.

Earnings April 30th.

Update 2/13: 8x8 announced the offering of $200 million in convertible senior notes. Over the next 40 days the company will enter into agreements with option counterparties to create "capped calls." This process is an attempt to limit the impact of any future conversion of the notes on the number of shares outstanding.

Position 2/11:
Long EGHT shares @ $18.88, see portfolio graphic for stop loss.
Optional: Long May $20 call @ $1.05, see portfolio graphic for stop loss.

EPZM - Epizyme - Company Profile


No specific news. New 7-month high close.

Original Trade Description: Feb 6th.

Epizyme, Inc., a clinical stage biopharmaceutical company, discovers and develops novel epigenetic medicines for patients with cancer and other diseases in the United States. Its product candidates include tazemetostat, an inhibitor of the EZH2, which is in Phase II clinical trial for patients with relapsed or refractory non-hodgkin lymphoma (NHL); Phase II clinical trial for relapsed or refractory patients with mesothelioma; Phase I dose-escalation and expansion study for children with INI1-negative solid tumors; Phase II clinical trials for patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL); Phase Ib/II clinical trial in elderly patients with DLBCL; and Phase II clinical trial for relapsed or refractory patients with mesothelioma characterized by BAP1 loss-of-function,; and Phase Ib/II clinical trial for the treatment of patients with relapsed or refractory metastatic non-small cell lung cancer, as well as Phase II clinical trial in adult patients with ovarian cancer. The company is also developing additional programs, such as pinometostat, an intravenously administered small molecule inhibitor of DOT1L for the treatment of acute leukemias; and PRMT5 inhibitor that is in Phase I clinical trial for patients with solid tumors and NHL. Epizyme, Inc. has collaboration agreements with Celgene Corporation; Genentech Inc.; Glaxo Group Limited; Roche Molecular Systems, Inc.; Eisai Co. Ltd.; Lymphoma Study Association; and Boehringer Ingelheim. The company was founded in 2007 and is headquartered in Cambridge, Massachusetts. Company description from FinViz.com.

In early January, Epizyme said it was planning to file for approval of its leading drug candidate, Tazemetostat, later this year. This drug is a late-line treatment for follicular lymphoma with EZH2 mutations. There are approximately 25,000 cases diagnosed annually. The Phase 2 data, showed an objective response rate (ORR) of 71% and complete remission of 11%. The ORR for patients with the wild-type EZH2 mutation saw a 6% remission.

The company said the completed Phase 2 data could serve as a new drug application in Q2 for use in epitheloid sarcoma, a cancer without a drug therapy.

Obviously, it takes some time for FDA approval but once approved this could be a very large cash flow in the hundreds of millions of dollars annually.

Shares popped on the initial announcement in January then suffered a relapse on profit taking. This week EPZM has rebounded out of that dip and made a new 5-month high.

Earnings March 12th.

Position 2/7/19:
Long EPZM shares @ $11.63, see portfolio graphic for stop loss.
Optional: Long March $12.50 call @ $.55, see portfolio graphic for stop loss.

INFN - Infinera - Company Profile


Infinera reports earnings next Thursday after the close. I will be out next week, and I am recommending we hold over the report. We have a cheap 31 cents call option so an earnings disaster will have minimal risk.

Original Trade Description: Jan 5th.

Infinera Corporation provides optical transport networking solutions, equipment, and software and services worldwide. The company's product portfolio consists of Infinera DTN-X Family of terabit-class transport network platforms, including the XTC Series, XTS Series, and XT Series; Infinera DTN-X XTC series multi-terabit packet optical transport platforms that integrate digital OTN switching and optical WDM transmission; and Infinera DTN-X XT series for terrestrial applications and XTS series for subsea applications. It also provides Infinera XTM Series packet-optical transport platform that enables high-performance metro networks with service-aware, application-specific capabilities; and Infinera Cloud Xpress Family designed to meet the varying needs of ICPs, communication service providers, Internet exchange service providers, enterprises, and other large-scale data center operators. In addition, the company offers Infinera FlexILS open line system platform that connects various Infinera and third-party terminal equipment platforms over long-distance fiber optic cable providing switching, multiplexing, amplification, and management channels. Further, it provides software solutions, including Xceed Software Suite that address long-haul, subsea, and metro networks, as well as a range of support services for all hardware and software products. The company also serves telecommunications service providers, Internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, enterprise customers, and government entities. It markets and sells its products and related support services primarily through its direct sales force. The company was formerly known as Zepton Networks. Infinera Corporation was founded in 2000 and is headquartered in Sunnyvale, California. Company description from FinViz.com.

Earnings Feb 5th.

Infinera is a global supplier of terabyte speed network equipment. They are in nearly every country. Their products handle long haul data transmission even in undersea links.

Shares collapsed back in early November when they reported earnings. The CEO said the company had seen a pause in sales as buyers evaluated the combined company. They had just purchased Coriant. The CEO said revenue in Q4 would increase by 50% because of the acquisition but they would post a bigger loss on acquisition expenses.

For Q3 they lost 4 cents and analysts were expecting a 5-cent loss. The guidance for Q4 was a loss of 26-30 cents because of the acquisition.

Shares fell to $3.50 post earnings. Over the last week they have recovered to $4.25 and appear to be accelerating higher. Resistance is $5.

This is not a fast mover, but all the bad news is now priced into the stock.

Readers have been requesting more low dollar stock recommendations and this would fit that scenario.

Update 1/10: The Australia to Japan undersea cable completed a major upgrade of the 12,700 kilometer cable system using Infinera ICE4 devices allowing multi terabit capacity.

Update 2/13: Infinera was selected to provide a long-distance telecommunication network in Mexico for GTAC on a nationwide basis. The selected Infinera because of its capability to deliver up to 200 gigabits per second and error free transmission of 80 channels of 100 gigabits per channel without regeneration over a 400-kilometer distance.

Position 1/7/19:
Closed 2/7: Long INFN shares @ $4.22, exit $4.75, +.53 gain (12%).

Optional: Long April $5 Call @ 31 cents, no stop loss.

RDUS - Radius Health - Company Profile


No specific news.

Original Trade Description: Feb 2nd.

Radius Health, Inc., a biopharmaceutical company, develops and commercializes endocrine therapeutics in the areas of osteoporosis and oncology. The company markets TYMLOS for the treatment of postmenopausal women with osteoporosis. It is also developing abaloparatide transdermal patch, a short-wear-time patch formulation of abaloparatide that is in Phase III clinical trial to treat postmenopausal women with osteoporosis; RAD1901, a selective estrogen receptor down-regulator/degrader, which is in Phase I clinical trial for the treatment of metastatic breast cancer; and RAD140, a non-steroidal selective androgen receptor modulator that is in Phase I clinical trial to treat breast cancer. The company has collaborations and license agreements with 3M; Ipsen Pharma SAS; Eisai Co. Ltd.; Duke University; and Teijin Limited, as well as research and development agreements with Nordic Bioscience Clinical Development VII A/S. Radius Health, Inc. was founded in 2003 and is headquartered in Waltham, Massachusetts. Company description from FinViz.com.

A week ago, Radius took advantage of the JP Morgan Healthcare Conference to raise guidance for the full year 2018. Sales of their lead drug, Tymlos, surpassed the upper range of $95-$98 million. This is for osteoporosis in postmenopausal women. This is the only anabolic drug in the US market that is increasing its market share. Share rose from 20% at the beginning of 2018 to 27% at the end of the year. In December, market share of new anabolic patients was 40%.

They announced an accelerated late stage clinical pipeline for two drugs with blockbuster potential ($1 billion a year). These are elacestrant (breast cancer) and abaloparatide-patch (osteoporosis in postmenopausal women.)

For the full year 2019 they expect revenue of $155-$175 million and year-end cash of more than $100 million.

Earnings February 28th.

Since the JP Morgan conference three weeks ago, Radius has moved steadily higher. If shares can move over $20 the rally should accelerate.

Position 2/4/19:

Optional: Long March $20 call @ $.90, see portfolio graphic for stop loss.

Previously closed 2/7: Long RDUS shares @ $18.70, exit $17.95, -.75 loss.

BEARISH Play Updates

VXXB - Barclays VIX Futures ETN - ETN Description


Finally a decent decline to a two month low. We just need to be patient.

Original Trade Description: Nov 17th.

The investment seeks return linked to the performance of the S&P 500 VIX Short-Term Futures Index TR. The ETN offers exposure to futures contracts of specified maturities on the VIX index and not direct exposure to the VIX index or its spot level. The index is designed to provide investors with exposure to one or more maturities of futures contracts on the CBOE Volatility Index. Company description from FinViz.com.

The VXXB is a short-term volatility ETN 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 ETN. 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, the prior VXX ETN had done five 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 VXXB and its predecessor the VXX always decline long term.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETN and forget it. 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 may put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

The VXXB will be hard to short. The shares are out there and being traded because the volume on Thursday was 22.1 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.

Position 2/1/19:
Short VXXB shares @ $35.33, see portfolio graphic for stop loss.