Option Investor
Newsletter

Daily Newsletter, Sunday, 6/23/2019

Table of Contents

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

Market Wrap

Record High Week

by Jim Brown

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Last week saw the S&P and many securities reach either record or multiyear levels.

Weekly Statistics

Friday Statistics

The Dow hit an 8-month intraday high at 26,907 on Friday with a 154-point intraday gain. Unfortunately, it did not hold, and the index declined -188 points to close with a 34-point loss. A record close would have been over 26,828 but it closed 109 points short.

The S&P closed at a new high at 2,954 on Thursday and slipped back to lose about 4 points on Friday. It was a very close call with the index in positive territory until an options related dive at the close.

The Nasdaq Composite closed at 8,051 on Thursday and 113 points below the May 3rd high with a 20-point drop on Friday.

The Russell 2000 remains the laggard with a close 190 points below its prior high with a 12.3% decline and still in correction territory.



There was only one material economic report on Friday. That was the existing home sales for May. Annualized sales rose from 5.21 million to 5.34 million. The 2.5% increase for the month is still -1.1% down from the same period in 2018. There were 670,000 homes sold in the Northeast, 1.22 million in the Midwest, 2.32 million in the South and 1.13 million in the West. Months of supply rose from 4.2 to 4.3 after a low of 3.6 in February. Single family home sales were 4.75 million and multifamily sales were 590,000.

The average home price rose from $266,900 to $277,700. That represents a 4.8% rise over the same period in 2018. Sales of homes under $100,000 declined -12.4%, $100,000-$250,000 were flat and sales of homes $250,000-$500,000 rose 10.5%. Sales from $500,000-$750,000 rose 11.5%, $750,000-$1 million rose 8.1% while sales over $1 million rose 2.3%. Cash purchases accounted for 19% of all sales. Sales should continue to grow with the 30-year mortgage rate around 4.0%.


There is now a 100% chance of a rate cut at the July 31st meeting. There is a 28.1% of a 50-basis point cut. Investors wondering why the Fed would cut 50 points in a booming market should think back to other rate cut events that started with 50-point cuts. In 1997 the Fed cut 50 points after the LTCM disaster and the Russian debt default. In 2001 and 2007 the Fed cut 50 points to try and head off recessions. Both times they were too late. This time the Fed is trying to be proactive and head off the global weakness and the impact of the Chinese tariffs. They do not want to be behind the curve again as US economics weaken in response to global events. As a result, the yield on the ten-year traded under 2.0% on Thursday and the lowest level since November 2016 just prior to the election.


The dollar declined -1.75 on the Dollar Index and a very unusual four day move. This is positive for earnings and for sales of US products overseas.


The falling dollar, fear of war with Iran, falling interest rates and yields all combined to lift gold to a 6-year high.


The next revision of the Q1 GDP is coming out this week. The recent economic reports have pushed the Atlanta Fed real time GDPNow forecast to 2.0% growth for Q2.


A couple weeks ago the PMI Services for May came in at 50.9. That is the lowest level since February 2016. That is a 39-month low. The Manufacturing PMI came in at 50.5 and a 117-month low. New orders were in correction under 50 and at ten-year lows.

While the normal weekly data is choppy and declining slightly, the longer-term data is in a very bearish trend. The trade war and tariffs are the cause of this deceleration. Whether or not the Fed can reverse this trend with another round of rate cuts is unknown.

The calendar for next week has an eclectic mix of data. Home sales are back again as well as the GDP and several regional Fed reports. The biggest item on the calendar is the G20 meeting and the potential for either an end to the trade war with China or an acceleration into a new round of tariffs. The new market highs would evaporate instantly if that was the case.


First quarter earnings are over. There are still three companies that have not reported but the early reporters for Q2 are already lining up. Earnings growth ended Q1 at 1.6% with 5.6% revenue growth.

There have been 82 earnings warnings for Q2 and nearing that critical 20% threshold. There have been 24 guidance upgrades. There are 12 S&P companies reporting next week. The expected earnings growth for Q2 is only 0.2% but early estimates are normally low. In Q1 the forecast fell to -2.0% but we ended the quarter positive.

Fedex is going to be important because the last two quarters they warned about a slowdown in global shipments. This is expected to have continued. Micron will be important because of the five additional Chinese companies that were blacklisted last week. Nike reports on Thursday and they are tariff bait. They have a lot of exposure to China. Constellation Brands reports on Friday and could take a hit from its exposure to Canopy Growth.


CarMax (KMX) reported earnings of $1.59 that rose 19.5% and easily beat estimates for $1.49. Revenue of $5.366 billion rose 12% and beat estimates for $5.179 billion. Overall same store sales rose 13% while used unit sales rose 9.5%. Used vehicle profits rose slightly to 13.1% with the average profit per vehicle at $2,215. Wholesale vehicle profits rose 9.8% to $1.043 and driven by a 6.6% increase in unit sales. They repurchased 3.0 million shares for $204.8 million during the quarter. They have $1.91 billion remaining under the existing authorization. Shares spiked over 5% at the open but faded to post a 3% gain.

With auto sales remaining relatively strong, CarMax and AutoNation should continue to prosper. Lower interest rates are fueling a boom in sales. Lower fuel prices stimulate auto buying with high profit SUVs the preferred vehicle.


Red Hat (RHT) reported adjusted earnings of $1.00 that beat estimates for 87 cents. Revenue rose 15% to $934.0 million and beat estimates for $931.6 million. Revenue from application development and technology subscriptions rose 24% to $235 million. Red Hat is going to be a big plus for IBM when the acquisition is completed. IBM will be able to expand market share and profits despite the high $34 billion price they are paying.

IDC believes applications running on Red Hat Enterprise Linux (RHEL) will contribute more than $10 trillion in global business revenues in 2019. That compares to the IDC projection of $188 trillion for total business revenue. IDC said $81 trillion was IT revenue. Red Hat software accounts for 25% of all corporate Linux operating systems. This suggests IBM is buying the goose that will be laying golden eggs in the future.


Canopy Growth (CGC) reported a 312% rise in revenue to C$94.1 million compared to estimates for C$92.6 million. The company reported a loss before EBITDA of C$98 million and much larger than estimates for a C$64 million loss. Adjusted gross margin was 16% and missed estimates for 24%. The CEO said they expect 40% margins by the end of 2019. They are in extreme growth mode now and are spending huge sums of money on growing space and product development. He said Q1 would be the bottom on margins. They sold 9,326 kg (20,560 pounds) of cannabis in Q1. They now have 600,000 sqft of growing space.

They had previously announced they were acquiring skincare company The Works for C$73.8 million to add beauty and sleep products to their portfolio. They also said they had received shareholder approval for the $3.4 billion acquisition of Acreage Holdings, the largest grower in the US. The deal cannot complete until the federal laws change in the US and they said 2021 is the first chance of that coming to pass. They warned that the acquisitions would cause a materially significant non-cash charge in the current quarter.

Shares declined on the margin miss despite the 300% increase in revenue. This is short sighted in my opinion. I think everyone understands we are moving towards deregulation in the US. More than 30 states now have some form of legal use. Stifel analysts believe the market will reach $28 billion in Canada and $100 billion in the US once legalization occurs. Canopy's revenue in the quarter was only C$98 million (US $75 million). There is an opportunity for extreme growth over the next decade and possibly a lot sooner.


Kroger (KR) shares tanked after reporting earnings of 72 cents that beat estimates by a penny but also declined a penny from the year ago quarter. Revenue declined slightly from $37.72 billion to $37.25 billion but still beat estimates for $37.19 billion.

Investors should not have reacted negatively. This quarter reflected the 2018 sale of their convenience store business and the resulting loss of revenue. The $2.15 billion sale of 762 stores in 18 states removed $4 billion in annual revenue and expenses related to the 11,000 employees. Kroger used $1.2 billion of the proceeds to repurchase 36.1 million shares. The sale closed in April 2018.

Comparing Q1 2018 revenue to Q1 2019 is apples and oranges. I believe investors should have been excited that revenue only declined about $480 million despite a loss of $4 billion in convenience store revenue. That suggests they had a great quarter. Same store sales rose 1.5% and online sales rose a whopping 42%. They guided for the full year for same store sales of 2.00-2.25% and earnings of $2.15-$2.25. Now that they are free from those comparisons, I would expect good news on the next earnings report.


Bitcoin came back from the dead over the last two months with a surge from $3,232 in December to $11,030 this weekend. Part of the reason for the surge was the volatility in global currencies and the tariffs on China. Another reason was the pending announcement of Facebook's Libra coin. The company is planning on creating a "simple global financial infrastructure" using Zuckerberg's own words. The Libra currency will be a "stablecoin" which means its value will always be tied to the underlying currencies and not fluctuate like bitcoin. That makes it highly desirable for international trading and less desirable as a trading vehicle. For instance, nobody wants to sell a house in France for 1,000 bitcoins and find out several weeks later when you try to buy a house in the US that your bitcoins have each fallen a couple thousand dollars in value. Selling your house in Libra for the equivalent of $250,000 would still be worth $250,000 days, weeks or even years later and those coins could be used anywhere in the world.

Facebook will use a basket of currencies including the dollar and the euro to establish the underlying value. Initially transactions can be made "seamlessly" through WhatsApp and Messenger but will also be available on dozens of other messaging platforms around the world. The currency will be backed by a blockchain called the "Libra Protocol" and validated by multiple major corporations to provide transparency and stability. The coin will be managed by the "Libra Association" and run through the Libra Blockchain. The currency is expected to be launched in 2020 and Facebook will be the manager of the startup effort through 2019.

The initial management consortium consists of 27 high profile companies including Visa, MasterCard, Paypal, Booking Holdings, Uber, Lyft, Stripe, Ebay, etc.


Facebook claims the Libra initiative is aimed at the unbanked around the world starting with its nearly 3 billion Facebook members. Worldwide there are billions of people without bank accounts or credit cards. They do have smartphones. This opens up a world of opportunities for them such as online shopping that we take for granted in the US.

The coming of Libra has rekindled interest in bitcoin over the last two months. There is no way Facebook could have generated commitments from that number of sponsors above and kept the project a secret. Because Libra will validate stable blockchain currency for the working class, bitcoin found new life. In the end, Libra could kill bitcoin through ease of use and wide acceptance but for today there is new life.

Bitcoin is confidential and can be used for things that are not always legal. Libra will not be confidential, and Zuckerberg made a point of saying that transaction records would be available for police in the event of illegal transactions. Sell drugs, go to jail, or at least that is the theory.


The US Commerce Dept said it was adding five more Chinese companies to the sales blacklist. The dept said these companies did not operate in the best interests of the US and chip sales to them were now banned. The goal is to prevent China from using our own technology against us. These companies are developing super computers, AI and numerous military applications. It makes no sense to sell China's military chips to be used in military satellites, missiles and military equipment. US technology is the highest in the world and that gives us an edge over hostile powers without it.

The ban prevents Intel and AMD from selling high performance multicore processors to entities building super computers to simulate nuclear explosions and military simulation activities. Since 2015 China's National University of Defense Technology (NUDT) has been blacklisted for these reasons. The US recently discovered that NUDT had been using four separate companies and shipping addresses to circumvent the ban.

The Commerce Dept said the companies added to the list "pose a significant risk of being or becoming involved in activities contrary to the national security and foreign policy interests of the US." Chip stocks declined again on Friday after the announcement.

Over the weekend Eldorado Resorts (ERI) and Caesars Entertainment Corp (CZ) reportedly agreed to merge in a cash and stock deal worth about $18 billion including debt. Caesars closed at $9.99 and the deal values them around $13. Caesars operates 67 properties in six countries. Eldorado operates 26 domestic properties and is valued at $4 billion. The deal is expected to be announced on Monday.



The conflict with Iran caused crude prices to rocket higher. Just because President Trump called off a missile attack because of expected casualties, it does not mean the conflict will not lead to further military involvement. Iran said it could have shot down a Navy P-8 patrol aircraft with 35 personnel aboard, but they decided to let it pass. Obviously had they shot down that plane the military reaction would have been significantly worse. That is always a threat now that Iran believe the US is weak because they did not respond. Until the US military strikes back hard, Iran will be tempted to cause more trouble.

Iran only understands force. They have threatened to declare war around the world using their various proxies if the US strikes back. If we do not respond to their aggression, they will press the envelope.

Oil prices moved over $57 after hovering just over $50 the prior week. If there is a shooting war in the Persian Gulf, prices will move a lot higher. Iran also launched cruise missiles into Saudi Arabia and hit a power plant. There has not been a Saudi response but that does not mean there will not be one. If those two countries decide to fight, the oil facilities will be the main targets.

Active rigs declined by 2 last week with gas rigs falling by -4. A sustained crude price for several weeks could trigger the activation of some dormant oil rigs.

We finally got the Drilled but Uncompleted report from the EIA for May. The number of DUC wells rose by 41 in the Permian but declined in all other areas. The total is still well over 8,000 and that is a lot of completions to be scheduled when prices and pipeline capacity permit.






Markets

Analysts believe far too many bridges were burned in the negotiations between the US and China when they walked away from the table in May. While President Trump and President Xi will meet next week at the G20 there is not likely to be a deal. Even if both agreed to move forward it would still take weeks to put the deal on paper and then have a big signing party in a neutral location.

Analysts believe that regardless of the outcome of the meeting, Trump will increase tariffs on Chinese goods in order to apply more pressure. China will retaliate. Since agreeing to a deal after the imposition of new tariffs would look like Xi caved into pressure from the US, this would be shaky ground for Trump to cross.

IF, they do decide to begin talks again the meeting will probably break up with both sides proclaiming common ground and progress in the ongoing trade talks. Since Trump needs a quick resolution and a deal he can use in his reelection campaign, he may be more interested in getting something accomplished than coming out a big winner. If he gets any deal now, he can always come back again in 2021 and apply pressure again.

Unless the meeting ends in another walkout, the market will likely see the results as optimistic and indexes rise. A positive comment would be Trump saying we made good progress and there is no need for additional tariffs. An outstanding event would be Trump agreeing to cancel existing tariffs because of good progress. Nobody expects that to happen. Trump will want to keep the pressure on until a deal is signed.

Trump is also meeting with President Vladamir Putin at the G20. Nothing is expected to develop from that visit.

This is the risk for the market next week. Since the G20 meeting is Friday and Saturday for the heads of state, the market will trade on expectations or lack thereof all week. The speech by Powell on Tuesday will also be a pivotal point. If he tries to walk back some of the dovish comments the market could react negatively.

The S&P closed only 5 points over the May 3rd high of 2,945. This could be seen as strong resistance until we move significantly higher. Support is well below at 2,872 so there is a wide range for the index to run without impacting overall market direction. Volume is expected to be weak ahead of the July 4th holiday but once the bulls begin to stampede, anything is possible.


The Dow is struggling to close at a new high. The index traded over the 26,828 level on Friday with a brief print over 29,000 but then closed -182 points below the intraday high. The index was up +154 at the high of the day.

There were only a handful of stocks with moves over $1 with the rest of the components only fractionally changed. Most of the movement was more than likely related to option expiration.



The Nasdaq remains about 135 points below the May high at 8,164. The big cap techs were slightly negative overall but were helped by big gains in Google and Bookings. That kept the Nasdaq 100 to only a loss of 9 points.

The FAANG stocks were all positive for the week and that helped produce the 3% gain in the Nasdaq 100. Facebook was a big contributor with the Libra announcement. With a weak chip sector and big gains in June, the Nasdaq is going to have a tough road higher.



The Russell was again the weakest index. After failing at the 10% resistance level at 1,566 on Thursday the index retraced its gains with nearly a 1% decline on Friday. Fund managers are still not convinced they should be buying small caps ahead of the summer doldrums and potential G20 disaster.


We have had a great run in June after a terrible May. That is a trend that repeats quite often. However, there is another trend and that is the summer doldrums when the market suffers from lack of interest. Investors do not want to be heavily invested while they are on vacation. Volume tends to die and were it not for the Q2 earnings in late July, the market would be a ghost town. I continue to recommend not being overly long ahead of the G20 showdown. We could more 5% in either direction after the event. Given the strong gains in June, the path of least resistance is lower.

Enter passively and exit aggressively!

Jim Brown

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New Plays

Pivotal Week Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

With new highs on the S&P and divergence between small and large caps this is a pivotal week. Small cap stocks are still lagging, and it is tough to find any bullish candidates. Any negativity out of the G20 meeting could weigh heavily on small stocks.



NEW BULLISH Plays

DAN - Dana Incorporated - Company Profile

Dana Incorporated provides drive and motion products, sealing solutions, thermal-management technologies, and fluid-power products to vehicle and engine manufacturer in North America, Europe, South America, and the Asia Pacific. The company operates in four segments: Light Vehicle Driveline Technologies, Commercial Vehicle Driveline Technologies, Off-Highway Drive and Motion Technologies, and Power Technologies. The Light Vehicle Driveline Technologies segment offers front drive steer rigid axles, rear drive rigid axles, driveshafts/propshafts, front/rear drive units, AWD systems, power transfer units, electromechanical propulsion systems, EV gearboxes, and differentials for use in light trucks, sport utility vehicles, crossover utility vehicles, vans, and passenger cars. The Commercial Vehicle Driveline Technologies segment provides steer and drive axles, driveshafts, and tire inflation systems for medium and heavy duty trucks, buses, and specialty vehicles. The Off-Highway Drive and Motion Technologies segment manufactures front and rear axles, driveshafts, transmissions, torque converters, industrial gear boxes, tire inflation systems, and electronic controls; wheel, track, and winch planetary drives; and hydraulic valves, pumps, and motors for use in construction, earth moving, agricultural, mining, forestry, material handling, and industrial stationary applications. The Power Technologies segment offers gaskets, cover modules, heat shields, engine sealing systems, cooling products, and heat transfer products for light vehicle, medium/heavy vehicle, and off-highway markets. Dana Incorporated has a strategic partnership with Hyliion Inc. The company was formerly known as Dana Holding Corporation and changed its name to Dana Incorporated in August 2016. Dana Incorporated was founded in 1904 and is headquartered in Maumee, Ohio. Company description from FinViz.com.

Dana shares are in rally mode because they reported positive earnings and the CEO was bullish about the future. The CEO said tariffs were not a problem for Dana and actually provided some positive momentum since they are a US company.

They reported earnings of 78 cents compared to estimates for 75 cents. Revenue was $2.2 billion, a 5% rise and tenth consecutive quarter of revenue growth.

The commercial division saw revenue rise nearly 10% to $431 million.

The CFO said a "robust sales backlog" provided strong expectations for 2019 and 2020 growth.

Earnings August 1st.

Buy DAN shares, currently $17.94, initial stop loss $16.35.
Optional: Buy Sept $19 call, currently 95 cents, stop loss $16.35.



SYMC - Symantec Corp - Company Profile

Symantec Corporation provides cyber security products, services, and solutions worldwide. It operates through two segments, Enterprise Security and Consumer Cyber Safety. The Enterprise Security segment offers endpoint and information protection products, including endpoint security, advanced threat protection, and information protection solutions and their related support services; and network and Web security products, such as network security, Web security, and cloud security solutions and their related support services. It also provides email security products, managed security services, and consulting and other professional services. The Consumer Cyber Safety segment offers Norton security solutions as a subscription service providing protection for devices against malware, viruses, adware, and ransomware on various platforms; and LifeLock identity theft protection solution that provides identity monitoring, alerts, and restoration to its customers. It also provides Norton Secure VPN and other consumer security solutions, as well as Norton Wi-Fi Privacy VPN. The company serves enterprises, including business, government, and public-sector customers; small, medium, and large businesses; and individuals, households, and small businesses. It markets and sells its products and related services through direct sales force, direct marketing and co-marketing programs, e-commerce and telesales platforms, distributors, Internet-based resellers, system builders, Internet service providers, employee benefits providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. The company was founded in 1982 and is headquartered in Mountain View, California. Company description from FinViz.com.

Symantec launched Norton 360 Deluxe to become the first comprehensive cyber security paid product to launch in the Microsoft store. It is available i Windows 10 and 10S. Since most new PCs ship with Windows 10 and McAfee security this is a major plus for Symantec.

Windows 10S only allows apps that come from the Microsoft Store so that gives Symantec a big foot in the door for future releases. The product is offered for a $9.95 monthly subscription price.

Mizuho upgraded Symantec from neutral to buy with a $23 price target. Goldman upgraded from neutral to buy with a $28 target.

Earnings August 8th.

Shares have moved over the late May high close of $20.50 and the next material resistance is $24.

Buy SYMC shares, currently $20.84, stop loss $19.65.
Optional: Buy Oct $22 call, currently $1.23, stop loss $18.85.



Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps more than $1.00 at the market open.


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Dead Stop

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite the market bullishness the Russell came to a dead stop on 1,566 on Thursday. That is important because that is the 10% correction level and it has been both resistance and support multiple times over the last six months. Given the overbought conditions in the market the Russell could struggle with this area.



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


FLEX - Flex Inc
The short position was stopped at $9.65.

MYL - Mylan
The long put position was stopped at $18.25.


BULLISH Play Updates

CONN - Conns Inc - Company Profile

Comments:

No specific news. Rebound stalled after 2-week high on Tuesday.

Original Trade Description: May 18th.

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through two segments, Retail and Credit. The company's stores offer furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; and home appliances, such as refrigerators, freezers, washers, dryers, dishwashers, and ranges. Its stores also provide consumer electronics comprising LED, OLED, QLED, 4K Ultra HD, smart televisions, gaming products, and home theater and portable audio equipment; and home office products that include computers, printers, and accessories. In addition, the company offers short- and medium-term financing to its retail customers; and product support services, which comprise next-day delivery and installation services, credit insurance products, product repair services, and repair service agreements. As of March 26, 2019, it operated 125 retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and Virgin. The company was founded in 1890 and is headquartered in The Woodlands, Texas. Company description from FinViz.com.

Conns reported earnings of 58 cents that beat estimates for 53 cents. This was up from 40 cents in the year ago quarter. Revenue of $353.51 million missed estimates for $358.39 million. The company has beaten on earnings the last four quarters but missed on revenue each time over the same period.

Analysts have been too aggressive on estimates given the early year weakness in retail sales. Now that retail sales are rebounding, I expect Conns to also show an improvement.

Earnings August 30th.

Shares fell 25% on the missed revenue. For a company that has beaten on earnings for the last four quarters and beat raised Q1 earnings from 40 cents to 58 cents, this is an extreme over reaction. Shares are starting to show life again after trading at $17 for two weeks.

Position 6/17:
Long CONN shares @ $17.60, see portfolio graphic for stop loss.
Optional: Long October $20 call @ $1.45, see portfolio graphic for stop loss.



CYOU - Changyou.com Ltd - Company Profile

Comments:

No specific news. The rebound has stalled but at least shares are not declining. I am giving them one more week.

Original Trade Description: June 5th.

Changyou.com Limited develops and operates online games in the People's Republic of China. The company operates through Online Game, Platform Channel, and Cinema Advertising segments. It develops, operates, and licenses online games, including interactive online games that are accessed and played simultaneously by various game players through personal computers; and mobile games played on mobile devices. The company also operates 17173.com Website, an information portal that provides news, electronic forums, online videos, and other information services on online games to game players; and offers various software applications for PCs and mobile devices, as well as purchases pre-film cinema advertising slots from movie theater operators for advertisers. As of December 31, 2018, it had approximately 4.9 million total average monthly active accounts; and 1.6 million total active paying accounts. The company was founded in 2003 and is headquartered in Beijing, the People's Republic of China. Changyou.com Limited is a subsidiary of Sohu.com Limited. Company description from FinViz.com.

Changyou reported earnings of 69 cents, up from 30 cent in the year ago quarter. Revenue of $123 million and beat estimates for $115.85 million. They guided for Q2 for revenue of $110-$120 million and earnings between 41-50 cents. Analysts were expecting $106.8 million and 46 cents.

The company also announced a special dividend of $9.40 that was paid on June 3rd. As is customary the price of the stock was reduced by the $9 paid in the dividend. Shares held at $9 for several days before moving higher.

With rising earnings and the special dividend behind them, the stock should continue to rise to its prior level.

Earnings July 29th.

Position 6/10:
Long CYOU shares @ $10.50, see portfolio graphic for stop loss.
Optional: Long July $11 call @ 50 cents, see portfolio graphic for stop loss.



LK - Luckin Coffee Inc - Company Profile

Comments:

LK announced that the IPO was oversubscribed, and the underwriters took their full allotment of 4.95 million shares at the IPO price of $17. Shares declined -3% on the news.

Original Trade Description: June 16th.

Luckin Coffee Inc. engages in the retail sale of freshly brewed drinks and pre-made food and beverage items in the People's Republic of China. It offers freshly brewed drinks, including freshly brewed coffee and non-coffee drinks; and food and beverage items, such as light meals. The company operates pick-up stores, relax stores, and delivery kitchens under the Luckin brand, as well as Luckin mobile app, Weixin mini-program, and other third-party platforms that cover the customer purchase process. As of March 31, 2019, it operated 2,370 stores, including 2,163 pick-up stores, 109 relax stores, and 98 delivery kitchens in 28 cities in the People's Republic of China. The company was founded in 2017 and is based in Xiamen, the People's Republic of China. Company description from FinViz.com.

The company is being called the Starbucks of China because there will be a store on every corner. They expect to grow from 2,400 stores in April to 5,000 stores by the end of 2019.

They sell coffee a lot cheaper than Starbucks and are heavy into spiced teas which are popular in China. The stores are small format and only seat 8-12 people with the idea being that Chinese people are always in a hurry. They do not accept cash. All purchases must be made through their app and that allows the company to constantly push coupons to their customers. Sales are expected to rise 3,000% by 2021. Market share is expected to grow from 1% to 23% over the same period according to Morgan Stanley.

Last week the Qatar Investment Authority disclosed they had acquired a 3.25 million share position post IPO of 8.81%. Capital Group, a unit of Capital research Global Investors disclosed they had acquired a 5.8 million share block or 15.6%. Carob Investments, a unit of Singapores soverign wealth fund GIC Private bought a $45 million stake representing a 13.04% ownership position. Hedgefunds Melvin Capital acquired a 1.7 million share stake and Darsana acquired a 34.4 million Class A share stake or 11.12%.

With all these large investors buying large positions which will not be traded, it is shrinking the float and could create some volatile moves as other companies try to follow their lead.

No earnings date available.

Needham rates Luckin a buy with a price target of $27. With a shrinking float any positive news can send shares sharply higher.

Position 6/17:
Long LK shares @ $19.68, see portfolio graphic for stop loss.



BEARISH Play Updates

ASPS - Altisource Portfolio Solutions - Company Description

Comments:

No specific news. No material movement. Bearish trend intact.

Original Trade Description: June 9th

Altisource Portfolio Solutions S.A. operates as an integrated service provider and marketplace for the real estate and mortgage industries in the United States and internationally. It operates in two segments, Mortgage Market and Real Estate Market. The company offers property preservation and inspection, real estate brokerage and auction, title insurance and settlement, appraisal management, broker and non-broker valuation, foreclosure trustee, mortgage charge-off collection, residential and commercial loan disbursement processing, and residential and commercial construction inspection and risk mitigation services, as well as valuation data; residential and commercial loan servicing, vendor management, marketplace transaction and payment management, and default services technologies; and document management platform. It also provides fulfillment, loan certification, and mortgage banker cooperative management services; loan origination system; loan certification and mortgage fraud insurance; and vendor management oversight platform. In addition, the company offers mortgage brokerage and homeowners insurance solutions; and buy-renovate-lease-sell and data solutions, as well as real estate brokerage services under the Owners.com name. Further, it provides post-charge-off consumer debt collection services, customer relationship management services, and information technology infrastructure management services. The company serves financial institutions, government-sponsored enterprises, utility companies, commercial banks, servicers, investors, non-bank originators, correspondent lenders, mortgage bankers, insurance companies, and financial services companies. Altisource Portfolio Solutions S.A. was incorporated in 1999 and is headquartered in Luxembourg City, Luxembourg. Company description from FinViz.com.

Earnings July 25th.

Altisource is an uninspiring company. Their earnings read like a list of excuses by a 4th grader on why they don't have their homework. Revenue is falling and they are selling off multiple divisions where their business plan failed to produce results.

In the US they might be forgiven for a few bad decisions, but they are located in Luxembourg. That effectively takes them out of the normal reporting and recourse solutions. They may be a good company but their list of excuses is causing investors to lose interest.

With revenue in Q1 of $165 million and earnings of only $200,000, there is little room for error. The adjusted earnings have more notes than what should be legal.

They have sold their property management business. They are selling their buy-renovate-lease-sell business. They are selling their financial services business. The proceeds will be used to reduce debt. The key point here is that investors are losing interest. Shares closed at a new low on Friday.

Position 6/10:
Short ASPS shares @ $19.13, see portfolio graphic for stop loss.
Options are thinly traded and premiums not realistic.



FLEX - Flex Ltd - Company Description

Comments:

The chip sector rebounded with the market mid-week and stopped us out of the remaining option position.

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.

Position 5/28:
Closed 6/20: Long October $9 put @ 81 cents, exit .58, -.23 loss.

Closed 6/4: Short FLEX shares @ $9.30, exit $9.45, -.15 loss.



MYL - Mylan - Company Description

Comments:

Mylan shares spiked after news broke that Pfizer was buying Array Pharma for $11.4 billion. That suggests there will be more M&A as the smaller companies get snapped up by the giants. Mylan could become a target. We were stopped on the spike.

Original Trade Description: May 31st

Mylan N.V., together with its subsidiaries, develops, licenses, manufactures, markets, and distributes generic, branded-generic, brand-name, and over-the-counter (OTC) pharmaceutical products in North America, Europe, and internationally. It offers active pharmaceutical ingredients and finished dosage forms; and antiretroviral medicines to treat HIV/AIDS. The company also provides prescription products, such as EpiPen Auto-Injector; Perforomist Inhalation Solution; Dymista; Creon; and Influvac, as well as YUPELRI, an inhalation solution for the maintenance treatment of patients with chronic obstructive pulmonary diseases. In addition, it markets OTC products, including Cold-EEZE, MidNite, Vivarin, Brufen, CB12, and EndWarts. The company offers its products to therapeutic areas, such as cardiovascular, CNS and anesthesia, dermatology, diabetes and metabolism, gastroenterology, immunology, infectious disease, oncology, respiratory and allergy, and women's health. Its customers include retail pharmacies, wholesalers and distributors, payers, and insurers and governments, as well as institutions, such as hospitals. Mylan N.V. has collaboration and license agreements with Pfizer Inc.; Momenta Pharmaceuticals, Inc.; TB Alliance; Theravance Biopharma, Inc.; Biocon Ltd.; and Fujifilm Kyowa Kirin Biologics Co. Ltd. The company was founded in 1961 and is headquartered in Canonsburg, Pennsylvania. Company description from FinViz.com.

Earnings August 6th.

Mylan won the distinction of being one of the five worst performing stocks of 2019. They are being sued by 44 states for collusion and price fixing on generic drugs. This is likely to be the biggest case of its kind ever. Teva and Mylan are two of the major defendants. Analysts believe Teva could be liable for more than $3 billion in damages and Mylan would see fines of $1.1 billion or more. That is more than 10% of Mylan's market cap.

They are already down hard on the news but are likely to go to single digits.

Update 6/9/19: Union pension fund adviser CtW Investment Group urged Mylan shareholders to vote against the company's four director nominees, who are on the boards nominating and governance committee. CtW said these four had operates with a "serious disregard for the rights of Mylan shareholders." Shares are bleeding slowly lower after Tuesday's minor bounce to $18.

Position 6/3:
Closed 6/18: Short MYL shares @ $16.91, exit $17.75, -.84 loss.
Optional: Closed 6/19: Long August $15 put @ $.98, exit .36, -.62 loss.



VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

Shares dipped to $26 on the positive market but rebounded on the Iranian conflict.

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.

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