The Russell 2000 has fallen more than 9.4% since the May 4th high at 1,618. The small cap sector continues to be the market leader. Friday's close was right on decent support at 1,465 but there is no confidence it will hold. The trade headlines are worsening as the days pass.
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.
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
FLEX - Flex Inc
The short position was entered at the open on Tuesday.
BITA - BitAuto
The short position was closed at the open on Tuesday.
BULLISH Play Updates
F - Ford Motor Co - Company Profile
The announcement of tariffs on Mexico killed this position for good. However, this is a September call option. I am dropping it from the portfolio as a loss, but I would not sell it for the 13 cents. Miracles do happen. Just put it in the folder of lost dreams and maybe we will get lucky.
Original Trade Description: May 18th.
Ford Motor Company designs, manufactures, markets, and services a range of Ford cars, trucks, sport utility vehicles, and electrified vehicles worldwide. It operates through three segments: Automotive, Mobility, and Ford Credit. The Automotive segment sells Ford and Lincoln vehicles, service parts, and accessories through distributors and dealers, as well as through dealerships to commercial fleet customers, daily rental car companies, and governments. The Mobility segment designs and builds mobility services; and provides self-driving systems development and vehicle integration, autonomous vehicle research and engineering, and autonomous vehicle transportation-as-a-service network development services. The Ford Credit segment primarily engages in vehicle-related financing and leasing activities to and through automotive dealers. It provides retail installment sale contracts for new and used vehicles; and direct financing leases for new vehicles to retail and commercial customers, such as leasing companies, government entities, daily rental companies, and fleet customers. This segment also offers wholesale loans to dealers to finance the purchase of vehicle inventory; and loans to dealers to finance working capital and enhance dealership facilities, purchase dealership real estate, and other dealer vehicle programs. Ford Motor Company was founded in 1903 and is based in Dearborn, Michigan. Company description from FinViz.com.
Ford shares have stalled at $10.40 after an earnings pop back in late April. Of Friday president Trump cancelled the tariffs on steel and aluminum from Canada and Mexico. That is positive for auto makers. The president also postponed tariffs on cars and auto parts, also positive for automaker earnings.
Ford is spending $11 billion to produce 40 different models of hybrid and electric vehicles by 2022. One of those vehicles is the new 2020 Explorer hybrid with a 500 mile range and a gas sipping 4-cylinder engine to keep the battery charged. Their new vehicle lineup also includes an electric F150 pickup, the most popular truck on the road.
When Ford shares break over the $10.50 level after building a 10-month base, we could see some decent gains. $12 would be the next resistance level. Options ar every cheap but don't expect a sudden surge to $20. Look for a double or triple and then exit.
I am not recommending a long stock position because this could be a slow mover. I would rather use the cheap option where we do not have much at risk in case the stock remains dormant for weeks.
Dropping: Long September $11 call @ 35 cents, currently .13, -.22 loss.
TRN - Trinity Industries - Company Profile
Trinity suffered the same fate as Ford. Tariffs on Mexico would be a serious hit to revenue on the railroads. They are not going to be adding new cars until the crisis is over and they could cancel orders already in progress.
The call has no value after the market crash on Friday. I am dropping it from the portfolio for a loss but I would not close the position.
Original Trade Description: May 4th.
Trinity Industries, Inc. provides rail transportation products and services in North America. It operates through three segments: Railcar Leasing and Management Services Group, Rail Products Group, and All Other. The Railcar Leasing and Management Services Group segment leases freight and tank railcars; originates and manages railcar leases for third-party investor-owned fund; and provides fleet maintenance and management services to industrial shippers. As of December 31, 2018, it had a fleet of 99,215 owned or leased railcars. This segment serves industrial shipper and railroad companies operating in agriculture, construction and metals, consumer products, energy, and refined products and chemicals markets. The Rail Products Group segment provides freight and tank railcars for transporting various liquids, gases, and dry cargo; and offers railcar maintenance services. Its railcars include autorack, box, covered hopper, gondola, intermodal, open hopper, and tank cars. This segment serves railroads, leasing companies, and industrial shippers of products in the agriculture, construction and metals, consumer products, energy, and refined products and chemicals markets. The All Other segment manufactures guardrail, crash cushions, and other highway barriers; and engages in the captive insurance, transportation, and other peripheral businesses. The company sells or leases products and services through its own sales personnel and independent sales representatives. Trinity Industries, Inc. was founded in 1933 and is headquartered in Dallas, Texas. Company description from FinViz.com.
This is a simple play. Trinity reported earnings of 24 cents that beat estimates for 20 cents. Revenue of $604.8 million missed estimates for $674.9 million. They guided for full year earnings of $1.15-$1.35 and that put the midpoint of $1.25 below analyst estimates for $1.31.
They also affirmed full year production targets of 23,500-25,500 railcars. However, they deleted 3,050 railcars from their backlog because of the weak financial condition of the buyer. It was assumed to be an energy company. The cars were not scheduled to be delivered in 2019 so it has no impact on their earnings forecast.
Shares were hammered for a $3 loss to $21. After spending five days in the doghouse shares are starting to rebound. Analysts believe the price drop was an overreaction on a solid company with a great business.
Dropping: Long July $23 call @ 55 cents, zero value, -.55 loss.
BEARISH Play Updates
BITA - BitAuto Holdings - Company Description
We exited this position at the open on Wednesday to avoid any positive earnings reaction.
Original Trade Description: May 11th
Bitauto Holdings Limited, through its subsidiaries, provides Internet content and marketing services, and transaction services for the automobile industry in the People's Republic of China. It operates in three segments: Advertising and Subscription Business, Transaction Services Business, and Digital Marketing Solutions Business. The Advertising and Subscription Business segment offers advertising services, including automobile pricing and promotional information, specifications, reviews, and consumer feedback to automakers through its bitauto.com Website and related mobile applications. It also provides transaction-focused online advertisement and promotional services for automakers, automobile dealers, auto finance partners, and insurance companies; and Web-based and mobile-based integrated digital marketing solutions to automobile dealers. The Transaction Services Business segment operates an online automobile retail transaction platform, which provides transaction platform and self-operated financing services. The Digital Marketing Solutions Business segment offers one-stop digital marketing solutions, including Website creation and maintenance, online public relation, online marketing campaign, advertising agency, big data application, and digital image creation services for automakers. The company also distributes its dealer customers' automobile pricing and promotional information through its Internet service provider partners. Bitauto Holdings Limited was founded in 2000 and is headquartered in Beijing, the People's Republic of China. Company description from FinViz.com.
In theory this would be a great play on the long side because the stock is only trading at half its book value. However, auto sales in China are crashing. The company supplies online subscription and marketing services to auto dealers. When car sales are falling those dealers do not have the money to spend on online marketing programs.
The company has been spending a huge amount of money in developing systems and new programs to capitalize on a future rebound in sales but it has not arrived and their cash burn is accelerating.
In the next round of sanctions scheduled to be announced next week there could be a large hit to autos and auto parts. This will raise the price of cars and slow sales even more. Bitauto shares have been crashing since early March and the new tariffs could cause that to accelerate.
Closed 5/29: Short BITA shares @ $10.87, exit $10.22, +.65 gain.
Optional: Closed 5/29: Long July $10 Put @ 85 cents, exit .95, +.10 gain.
FLEX - Flex Ltd - Company Description
Flex priced $450 million of notes due 2029 and will use the proceeds plus available cash to redeem $500 million in notes due in 2020. Shares fell to a new 4-month low.
Original Trade Description: May 25th
Flex Ltd. provides design, engineering, manufacturing, and supply chain services and solutions to original equipment manufacturers worldwide. It operates through High Reliability Solutions, Industrial and Emerging Industries, Communications & Enterprise Compute, and Consumer Technologies Group segments. The company operates Customer Engagement Centers, Innovation and Design Centers, and Centers of Excellence/Competence. It also provides a portfolio of technologies in electrical/electronics, electromechanical, and software; and cross-industry technologies, including human machine interface, audio and video, system in package, miniaturization, IoT platforms, and asset tracking. In addition, the company designs and integrates advanced data center servers, storage and networking equipment, and data center appliances. Further, it provides value-added design and engineering services; and systems assembly and manufacturing services that include enclosures, testing services, and materials procurement and inventory management services. Additionally, the company offers chargers for smartphones and tablets; adapters for notebooks and gaming systems; power supplies for the server, storage, and networking markets; isolated DC/DC converters and non-isolated Point of Load converters for the information and communications technology market; and specialized power module solutions for other markets. It also provides after-market and forward supply chain logistics services; and reverse logistics and repair solutions, including returns management, exchange programs, complex repair, asset recovery, recycling, and e-waste management. The company was formerly known as Flextronics International Ltd. and changed its name to Flex Ltd. in September 2016. Flex Ltd. was founded in 1990 and is based in Singapore. Company description from FinViz.com.
Flex, formerly Flextronics, is struggling. In their recent earnings they reported 27 cents that matched estimates. Revenue declined -2.9% to $6.226 billion and missed estimates for $6.481 billion. They blamed sluggish demand from China, soft demand from networking customers and weakness in semiconductor capital equipment and energy verticals.
Revenue from the consumer technologies group declined -7% due to weakness in core consumer products. Revenues from industrial and emerging industries declined 8% because of weakness in semiconductor capital equipment. Revenue from high reliability solutions declined 4% due to weakness in medical equipment and automotive equipment. Health solutions rose 10% but could not offset the 12% decline in automotive.
They guided for Q2 for earnings of 25-29 cents which exactly bracketed estimates for 27 cents. For the full year they expect $1.20-$1.30 or $1.25 midpoint and analysts were expecting $1.26.
Earnings July 30th.
With the trade war and tariffs on Chinese goods, demand is going to decline even further. Shares have fallen below near term support and could be targeting $7.
Short FLEX shares @ $9.30, see portfolio graphic for stop loss.
Optional: Long October $9 put @ 81 cents, see portfolio graphic for stop loss.
MNK - Mallinckrodt Plc - Company Description
Piper Jaffray analyst David Amsellem downgraded the stock to neutral on Friday morning saying the developments last week had "blown his bull case to smithereens." This downgrade came a day after MNK reiterated its prior announcement of a spinoff of its generic drug business to shareholders.
MNK is under pressure for raising the price of a vial of Acthar from $1,650 in 2007 to $39,000. That progression included price hikes by Questcor before MNK bought the company in 2014. The drug has been profiled as the poster child of what is wrong in the pharma industry. The prior week Medicare/Medicaid took Acthar off the approved list and MNK sued CMMS over the decision.
Original Trade Description: May 18th
Mallinckrodt plc, together with its subsidiaries, develops, manufactures, markets, and distributes specialty pharmaceutical products and therapies in the United States, Europe, the Middle East, Africa, and internationally. It operates in two segments, Specialty Brands, and Specialty Generics and Amitiza. The company markets branded pharmaceutical products for autoimmune and rare diseases in the specialty areas of neurology, rheumatology, nephrology, ophthalmology, and pulmonology; and immunotherapy and neonatal respiratory critical care therapies, as well as analgesics and gastrointestinal products. It offers H.P. Acthar Gel, an injectable drug for various indications, such as rheumatoid arthritis, multiple sclerosis, infantile spasms, systemic lupus erythematosus, polymyositis, and others; Inomax, a vasodilator to enhance oxygenation and reduce the need for extracorporeal membrane oxygenation; Ofirmev, an intravenous formulation of acetaminophen for pain management; and Therakos photopheresis, an immunotherapy treatment platform. The company is also developing Terlipressin for the treatment of hepatorenal syndrome; StrataGraft, which is in Phase III and II clinical development for the treatment of burns; Stannsoporfin, a heme oxygenase inhibitor for the treatment of jaundice; Xenon gas for inhalation; MNK-6105 and MNK-6106, an ammonia scavenger for the treatment of hepatic encephalopathy, a neuropsychiatric syndrome associated with hyperammonemia; VTS-270 that is in Phase III development for Niemann-Pick Type C, a neurodegenerative disease; and CPP-1X/sulindac, which is in Phase III development for Familial Adenomatous Polyposis. It markets its branded products to physicians, pharmacists, pharmacy buyers, hospital procurement departments, ambulatory surgical centers, and specialty pharmacies. It has collaboration with the Washington University School of Medicine in St. Louis. The company was founded in 1867 and is based in Staines-Upon-Thames, the United Kingdom. Company description from FinViz.com.
MNK reported earnings of $1.94 that beat estimates for $1.70. Revenue of $790.6 million rose 4.7% and beat estimates for $766.3 million. They raised their full year guidance from $8.10-$8.40 to $8.30-$8.60.
So why are MNK shares falling to new lows? MNK was named in the latest suit by 44 attorney general as one of 12 companies involved in a price fixing scam on generic drugs. They reportedly inflated drug prices by as much as 1,000%. The case claims the alleged illegal activity was "pervasive and industry wide." A press release on Monday tanked the sector.
Not only is MNK under attack by the price fixing suit but they are involved in eight other specific investigations on generic drug pricing and the persistent opioid drug investigation. They are in serious trouble because regulators and attorneys general don't launch investigations unless they are relatively sure there is cause. I would not be surprised to see MNK in the $5 range as these events heat up.
Update 5/26: MNK filed suit against the Dept of Health and Medicare/Medicaid to keep its Acthar Gel in the system. The CMS recently required MNK to change the base date average manufacturer price used to calculate rebates. Without the suit, Acthar Gel would be removed from the system. That accounts for 10% of total sales. Prior guidance was $1 billion in sales for the drug and analysts now expect a $600 million charge for the decision.
Long July $14 put @ $1.75, see portfolio graphic for stop loss.
VXXB - Barclays VIX Futures ETN - ETN Description
Despite the major market decline the VXX only rose just over 2 points. Investors do not seem to be in panic mode.
It will probably take us weeks to make a new low, but it will happen.
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.
Short VXXB shares @ $35.33, see portfolio graphic for stop loss.
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