Small cap stocks suffered some indigestion after the rate hike and hike in expectations. We knew the Russell was at risk on a rate hike because small cap stocks are more susceptible to rate issues. The post Fed decline is not unusual and Thursday's market direction will be key.
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
If you are looking for a different type of trading strategy, try these newsletters:
Short term Calls and Puts on equities = Option Investor Newsletter
Credit spreads and naked puts = OptionWriter
Long term option investments = LEAPS Investor
3-6 month Option Trades = Ultimate Investor
Iron Condors = Couch Potato Trader
Full updates on all plays on Wednesday and Saturday.
Only closed plays are updated on other days.
BULLISH Play Updates
CORT - Cort Therapeutics - Company Description
No specific news. Minor gain in a negative market.
Original Trade Description: May 19th.
Corcept Therapeutics Incorporated, a pharmaceutical company, discovers, develops, and commercializes drugs for the treatment of severe metabolic, oncologic, and psychiatric disorders in the United States. It offers Korlym (mifepristone) tablets as a once-daily oral medication for the treatment of hyperglycemia secondary to hypercortisolism in adult patients with endogenous Cushing syndrome, who have type 2 diabetes mellitus or glucose intolerance, and have failed surgery or are not candidates for surgery. The company is also developing Korlym in combination with eribulin, which is in Phase I/II clinical trial to treat patients with metastatic triple-negative breast cancer; Korlym in combination with drug Abraxane that is in Phase II clinical trial to treat patients with triple-negative breast cancer; and Korlym combined with the androgen deprivation agent enzalutamide, which is in Phase II clinical trial to treat patients with metastatic castration-resistant prostate cancer. In addition, it develops CORT125134 for the treatment of patients with Cushing's syndrome and solid-tumor cancers; and CLIA-validated assay to measure expression of the gene FKBP5, which is stimulated by cortisol activity at glucocorticoid receptor. Corcept Therapeutics Incorporated was founded in 1998 and is headquartered in Menlo Park, California. Company description from FinViz.com.
Earnings Aug 7th.
We had a position in CORT that we dropped a couple weeks ago because the stock had lost its momentum and was trading sideways with time running out on the May $20 call option. They reported earnings on May 9th and shares have found some traction to close at a 4-month high.
They reported earnings of 19 cents rose 200% and revenue of $57.7 million rose 109%. Analysts were expecting $56 million. They reaffirmed their optimistic 2018 revenue guidance from the last earnings report of $275-$300 million.
Shares dipped on the news but then immediately begin to rise. The stock closed at a 4-month high on Friday.
Long August $20 call @ $1.55, see portfolio graphic for stop loss.
Previously closed 6/7: Long CORT shares @ $18.70, exit $18.15, -.55 loss.
CY - Cypress Semiconductor - Company Description
New 5-week high close. No specific news.
Original Trade Description: May 26thth.
Cypress Semiconductor Corporation designs, develops, manufactures, markets, and sells embedded system solutions worldwide. It operates in two segments, Microcontroller and Connectivity Division, and Memory Products Division. The Microcontroller and Connectivity Division provides microcontroller (MCU), analog, and wireless and wired connectivity solutions, including Traveo automotive MCUs; programmable system-on-chip and general-purpose MCUs; ARM Cortex-M4, -M3, and -M0+ MCUs; R4 CPUs; analog power management integrated circuits and energy harvesting solutions; CapSense capacitive-sensing controllers; TrueTouch touchscreens; Wi-Fi, Bluetooth, Bluetooth low energy, and ZigBee solutions; WICED development platform; and USB controllers comprising solutions for the USB-C and USB power delivery standards, as well as wireless Internet of things connectivity solutions. The Memory Products Division provides NOR and NAND flash memories, static random access memory (SRAM) products, HyperRAm, synchronous and asynchronous SRAMs, nvSRAMs, F-RAM ferroelectric memory devices, and other specialty memories and timing solutions. The company serves various markets, including automotive, industrial, consumer, computation, white goods, communications, handset, PC peripherals, mobile devices, networking, telecommunications, video, data communications, computation, and medical markets. Company description from FinViz.com.
Cypress is involved in almost every sector inside the semiconductor space with the exception of computer processors and video cards. They make chips for thousands of electronic devices and that market is only going to grow larger with the IoT revolution.
For Q1 they reported a 9.5% rise in revenue to $582.2 million. Earnings of 27 cents were dramatically improved over the 13 cents in the year ago quarter. That was above guidance for 22-26 cents. Gross margin improved 660 basis points to 45.9% and above guidance for 44.5-45.5%. Automotive revenue rose 15%. Memory product revenue rose 15% to $245.5 million.
For Q2 they guided for revenue of $605-630 million with gross margins of 46% and earnings of 27-31 cents. Those were roughly in line with estimates.
With revenue rising in growth markets they are gaining market share and that will continue to improve profitability.
Earnings July 26th.
I am not recommending a stock position. The option is very cheap and there is no reason to risk $1 or more on a stock position.
Update 5/30: Cypress announced the most advanced flash memory for mission critical applications. The Semper Flash memory is certified for extreme environments, high heat tolerance and long times between failure. This makes it suitable for things like self-driving cars where safety is of prime importance and a computer failure because of a memory blip could be life threatening.
Long July $17 call @ 55 cents, see portfolio graphic for stop loss.
ELY - Ely Callaway Golf - Company Description
No specific news. Shares closed at a new high.
Original Trade Description: May 9th.
Callaway Golf Company, together with its subsidiaries, designs, manufactures, and sells golf clubs, golf balls, golf bags, and other golf-related accessories in the United States and internationally. The company operates through three segments: Golf Clubs; Golf Balls; and Gear, Accessories and Other. It offers drivers, fairway woods, hybrids, irons, wedges, and putters. The company also provides packaged sets, golf gloves, golf footwear, golf apparel, travel gear, lifestyle apparel and accessories, headwear, eyewear, and practice aids. In addition, it licenses its trademarks and service marks for use on golf related accessories, such as golf apparel, footwear, golf gloves, prescription eyewear, practice aids, and OGIO branded bags. The company sells its products through golf retailers, sporting goods retailers, mass merchants, Internet retailers, department stores, field representatives, and in-house sales representatives, as well as to third-party distributors in the United States and approximately 100 countries. Callaway Golf Company sells its products under the Callaway Golf, Odyssey, Strata, OGIO, and TravisMathew brand names. It also sells pre-owned golf products through its Website callawaygolfpreowned.com; and Callaway Golf and Odyssey products through its Websites callawaygolf.com, odysseygolf.com, ogio.com, and travismathew.com. Company description from FinViz.com.
Callaway reported earnings of 65 cents that beat estimates for 51 cents. Revenue rose 31% to $403 million compared to estimates for $372 million. The company raised guidance from $1.12-$1.14 billion to $1.17-$1.19 billion. Earnings guidance rose from 64-70 cents to 77-82 cents. For Callaway these were outstanding numbers and suggests the company has turned itself around and business is booming.
They reported earnings on April 27th and spiked to $18.50. Post earnings depression hit and knocked the stock back down to just under $17. After a week of gains it is back at its post earning high and about to break out to new highs.
Long ELY shares @ $18.35, see portfolio graphic for stop loss.
Alternate position: Long August $19 call @ 75 cents, see portfolio graphic for stop loss.
SVU - Supervalu - Company Description
New 5-month high. The company announced plans to restructure as a holding company with multiple business units to better allocate cost, liabilities and synergies. This would allow them to realize up to $300 million in tax savings and make it easier to sell noncore assets. Shares declined slightly on the news.
Original Trade Description: June 2nd.
SUPERVALU INC., together with its subsidiaries, operates as a grocery wholesaler and retailer in the United States and internationally. It operates through two segments, Wholesale and Retail. The Wholesale segment engages in the wholesale distribution of various food and non-food products to independent retail customers, such as single and multiple grocery store operators, regional chains, and the military. It also provides professional services, such as pass-through programs; and various services comprising retail store support, advertising, couponing, e-commerce, network and data hosting, training and certifications classes, and administrative back-office solutions. The Retail segment operates retail stores that provide groceries and various additional products that include general merchandise, home, health and beauty care, and pharmacy products. It provides its products under the Cub Foods, Shoppers Food & Pharmacy, and Hornbacher's names, as well as 1 Rainbow stores. The company's stores offer a range of branded and private-label products comprising perishable and nonperishable grocery products. As of February 24, 2018, it operated a network of 3,437 stores, including 3,323 wholesale primary stores; and 114 retail grocery stores. The company was founded in 1871. Company description from FinViz.com.
Supervalu is under attack by activist shareholder Blackwells Capital. Over the last several months they have lobbied for Supervalue to split up, sell itself, end its involvement in retail and for Blackwell to take control of the board.
As a result of pressure from this shareholder they are selling eight distribution centers to an undisclosed buyer for $483 million. They will lease back the centers for 20 years.
That was not good enough for Blackwells. The activist now wants Supervalu to sell 30% of the 217 stores it owns. Blackwells said the market value of the real estate exceeds the market cap of Supervalue. By selling the high dollar real estate the company could reduce debt and return money to shareholders.
The company recently completed the sale of 23 Farm Fresh stores in mid May to three different retailers for $43 million.
The company also explored an outright sale based on Blackwells demands. This has not been sufficent for the investor. Blackwells has submitted a slate of six directors to be voted on at the next shareholder meeting. Blackwells owns 7.3% of the company but having six directors would give it control of Supervalue. Obviously the company is resisting.
This activist battle and the moves Supervalu has taken to try and appease Blackwells has caused a rebound in the stock and that rise should continue through the annual shareholder meeting in July.
Earnings July 24th.
Shares are rebounding from a five-month base.
Long SVU shares @ $18.81, see portfolio graphic for stop loss.
Optional: Long July $20 call @ $1.10, see portfolio graphic for stop loss.
SYNT - Syntel - Company Description
No specific news. New closing high.
Original Trade Description: May 30th.
Syntel, Inc. provides digital transformation, information technology (IT), and knowledge process outsourcing (KPO) services worldwide. The company operates through Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics, and Telecom segments. It provides end-to-end, integrated application, and infrastructure management services; develops software applications; and offers legacy modernization services, such as software analysis, language conversion, reverse engineering, database migration, code optimization, cloud onboarding and migration, ecosystem migration, testing, and management. The company also provides consulting, implementation, and management services for enterprise architecture, data warehousing, business intelligence, and enterprise application integration, as well as mobility, big data, analytics, and Internet of Things technologies. In addition, it offers KPO services that provide outsourced solutions for knowledge and business processes. The company offers its products to various companies in the banking and financial services, healthcare and life sciences, insurance, manufacturing, retail, logistics, and telecom industries. Company description from FinViz.com.
The company reported earnings of 55 cents that beat estimates for 44 cents. Revenue of $243 million beat estimates for $228 million. They guided for the full year for earnings of $1.76-$1.96 and revenue in the range of $920-$960 million. They have beaten earnings for the last four quarters.
Earnings July 19th.
Shares closed at a new high on Thursday and should continue making new highs, market permitting. The gains on each of the last four earnings reports have been impressive and it looks like investors are finally catching on to the good news.
Long Aug $35 call @ 80 cents, see portfolio graphic for stop loss.
No stock recommendation.
TEVA - Teva Pharmaceutical Industries - Company Description
No specific news. New 10-month closing high.
Original Trade Description: June 9th.
Teva Pharmaceutical Industries Limited develops, manufactures, markets, and distributes generic medicines and a portfolio of specialty medicines worldwide. It operates through two segments, Generic Medicines and Specialty Medicines. The Generic Medicines segment offers sterile products, hormones, narcotics, high-potency drugs, and cytotoxic substances in various dosage forms, including tablets, capsules, injectables, inhalants, liquids, ointments, and creams. This segment also develops, manufactures, and sells active pharmaceutical ingredients. The Specialty Medicines segment provides branded specialty medicines for use in central nervous system and respiratory indications, as well as the women's health, oncology, and other specialty businesses. Its products in the central nervous system area comprise Copaxone for multiple sclerosis; Azilect for the treatment of Parkinson's disease; and Nuvigil for the treatment of excessive sleepiness associated with narcolepsy and certain other disorders. This segment's products in the respiratory market include ProAir, ProAir Respiclick, QVAR, Duoresp Spiromax, Qnasl, Braltus, Cinqair/Cinqaero, and Aerivio Spiromax for the treatment of asthma and chronic obstructive pulmonary disease, as well as Treanda/Bendeka, Granix, Trisenox, Lonquex, and Tevagrastim/Ratiograstim products in the oncology market. This segment also offers a portfolio of products in the women's health category, which includes ParaGard, Plan B One-Step, and OTC/Rx, as well as other products. The company has collaboration arrangements with Attenukine, Procter & Gamble Company, and Regeneron Pharmaceuticals, Inc. Teva Pharmaceutical Industries Limited was founded in 1901 and is headquartered in Petach Tikva, Israel. Company description from FinViz.com
Teva is the largest generic drug manufacturer in the world. Unfortunately, that market place is becoming very competitive and the company has to reinvent itself to return to a profitable growth profile.
Fortunately, the company is taking action. They have been selling off noncore assets to pay down debt. They just installed a new CEO, Kare Schultz, and he took immediate action. On his second day on the job, he restructured the management team and said he would present a major restructuring plan in mid December. The stock jumped to a two-month high after news broke they were considering cutting 10,000 of their 57,000 workers in an effort to save $1.5-$2.0 billion a year.
In December, Teva announced they were cutting 14,000 workers from their 56,000-person workforce. They expect to reduce costs by $3 billion by the end of 2019, with $1.5 billion in cost reductions in 2018. The company also suspended its dividend for ordinary shares and will eliminate bonuses for 2017. They are planning on closing a "significant number" of R&D facilities, offices and other locations around the world. They are going to consolidate offices in the US from 7 locations to only one campus. Teva incurred a lot of debt when they purchased the Allergan generic pharmaceuticals business for $40 billion last year. That was poorly timed just as generic prices were crashing. The company is also reviewing its asset base in order to sell noncore assets. Apparently, the new CEO, Kare Schultz, is determined to turn the company around sooner rather than later. Shares are bouncing back from a 17-year low in November. Shares were upgraded by Morgan Stanley, Goldman Sachs and Credit Suisse on Friday.
Teva said its BLA application for Fremanexumab as a preventive for migraine headaches had been granted a priority review designation by the FDA. There were two successful Phase III studies under the HALO program with patients with episodic migraine and chronic migraines.
In February, Teva shares exploded higher after Warren Buffet reported a new stake of 18,875,721 shares or roughly 2% of the company. Teva is now making a generic Viagra that is going to be a cash cow for the next several years and should help raise their stock price.
Teva posted earnings of 94 cents that was well above estimates for 66 cents. Revenue of $5.07 billion beat estimates for $4.81 billion. The company raised revenue guidance from $18.3-$18.8 billion to $18.5-$19.0 billion. They raised earnings guidance from $2.25-$2.40 to $2.40-$2.65.
Teva said it hoped to launch its new blockbuster migraine drug as soon as September. The FDA assigned Sept 16th as the action date for the drug's approval.
Earnings are August 2nd.
We were stopped out of our June option position last week because I had a tight stop to prevent losing any gains as we approached expiration. With everything turning positive for Teva I am recommending we enter a new position.
With earnings on August 2nd I am recommending an August call and we will exit before earnings. I am not recommending a stock position because biotechs are typically volatile.
Long August $24 call @ $1.33, see portfolio graphic for stop loss.
BEARISH Play Updates
VXX - Volatility Index Futures - ETF Description
Minor rebound in a negative market. It will eventually be single digits but it could be months in the future since we are entering the summer slowdown in the market.
Previously: On Feb-5th a reader emailed me saying a friend was short 1,000 shares. When the $21 spike came in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.
I wrote in the prior newsletter that we were not using a profit stop in this position because it could be hard to re-short the shares after a volatility event. That is just trade management for a profitable position. In ANY SHORT POSITION, you should have a catastrophe stop loss to avoid the position turning into a major loss. Had this person had a stop loss at their entry point, they would have been closed for a breakeven and they would be sleeping a lot better tonight.
Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!
Original Trade Description: September 18th.
The VXX is a short-term volatility ETF based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.
As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.
We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.
Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally into year-end we could see a sharp decline in the VXX over the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.
The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.
I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.
Short VXX shares @ $40.95, see portfolio graphic for stop loss.
Short VXX shares @ $54.27, see portfolio graphic for stop loss.
Average cost = $47.61.
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