This was the fourth major short squeeze in the month of May. The volatility is continuing but the markets are not moving dramatically lower. Despite the trend for the last four squeezes to be erased the very next day, we cannot count on that happening again.
Powering today's short squeeze was the major rally in Europe overnight, a huge jump in new home sales and the end of Brexit. A survey that came out today showed 55% of voters would vote to stay in the Eurozone compared to 42% who would vote to leave. That is a dramatic change from the 51/49 split just last week. It appears the support for leaving the Eurozone is collapsing. That sent the European markets soaring.
The short squeeze stopped us out of three put positions and none of the stocks had any specific news. This was just one more short squeeze and those stocks had plenty of shorts.
The S&P rallied exactly to strong resistance and tomorrow will be a key test of the market strength. If this squeeze is sold like the prior four, it could spell the end of hope for the bulls.
Current Position Changes
DLPH - Delphi Automotive
The long put position was entered at the open at $66.63.
AXP - American Express
The long put position was stopped out at $64.50.
FSLR - First Solar
The long put position was stopped out at $49.95.
GILD - Gilead Sciences
The long put position was stopped out at $84.25.
Check the graphic above for any profit stops in green.
We need to always be prepared for a profit exit at resistance.
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.
BULLISH Play Updates
DIS - Disney - Company Description
No specific news. Only a minor gain of 33 cents.
Original Trade Description: May 19th.
Disney operates as an entertainment company worldwide through broadcast and cable television networks, domestic TV stations, radio networks, movies and media distribution of all types, theme parks, hotels and cruise lines.
Disney missed earnings on May 10th and shares have fallen from $106 to $98 over the last week. This sell off is overdone and shares are approaching support at $96. I believe now is the time to buy.
Disney's latest movie, Captain America: Civil War has already broken $1 billion at the box office in only two weeks. It could end up one of the highest grossing movies of all times. Disney has an entire list of movies headed for the theaters and some will be as big as Captain America. Star Wars: The Force Awakens has already grossed over $2 billion and there are many more episodes planned.
Disney Movie Schedule
May 27th, 2016 - "Alice: Through the Looking Glass"
June 17, 2016 - "Finding Dory"
July 1st, 2016 - "The BFG"
Aug 12th, 2016 - "Pete's Dragon"
Nov 4th, 2016 - "Doctor Strange"
Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"
They also are opening the Shanghai Disney theme park on June 16th and they expect up to 100 million visitors in the first year with tickets starting at the introductory price of $57-$75. There are 330 million people living within 4 hours of the park. That is truly a cash-printing machine.
Disney has sold off because of a decline in ESPN subscriptions. This is vastly over rated as a problem. Given their recent billion dollar movies and the cash flow from Shanghai the ESPN problems will be forgotten. At this point all the bad news is already priced into the market.
With support at $96 and shares closing at $98 today I am recommending a July call that will expire two weeks before their next earnings report. It is cheap and we can capture any rebound from support. There is risk of a further decline to that support so I am putting the stop loss under that $96 level.
Long July $100 call @ $2.15, see portfolio graphic for stop loss.
MKC - McCormick & Co - Company Description
No specific news. Decent gain. CEO will present at the Bernstein conference on June 3rd.
Original Trade Description: May 11th.
McCormick & Company, Incorporated manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates through two segments, Consumer and Industrial. The consumer segment offers spices, herbs, seasonings, and dessert items. It provides its products under the McCormick, Lawry's, Stubb's, and Club House brands in America. The company was founded in 1889.
This is truly a recession proof business. Everyone in the world uses spices in the food and you are not going to go without salt or pepper regardless of how poor you are. They reported earnings of 73 cents that beat estimates and revenue rose +2% to $1.03 billion. Cost of goods fell -1.6% and profit margins rose +1.8%. Cash on hand rose 36.7% and inventories declined. They guided for full year revenue growth of 4-6%, earnings growth of 6-8% and earnings of $3.68-$3.75. They pay $1.72 in annual dividends at 43 cents per quarter.
Earnings June 30th.
In mid April they acquired Botanical Foods Company based in Australia for $114 million. They provide packaged herbs and sales are growing at double digit rates. They export their products to 15 countries under the Gourmet Garden brand. McCormick expects the acquisition to be fully accretive to earnings in 2017.
The key point for this recommendation is that the shares are not going down despite the weak market over the last three weeks. Shares continue to climb despite the broader markets. However, they did decline 47 cents today after a four-week high yesterday. This will be a hedge against the market suddenly turning unexpectedly bullish. If shares move over Tuesday's high, I expect them to retest the April highs at $101.
Long June $100 call @ $.95, no initial stop loss.
SKX - Skechers - Company Description
No specific news. Article in Forbes about declining sales in performance sneakers weighed on the entire sector.
Original Trade Description: May 4th.
Skechers designs, develops, markets and distributes footwear for men, women and children, and performance footwear for men and women under the Skechers GO brand. The company owns, operates of has franchised more than 872 stores internationally. They opened 78 stores in Q1 and plan on opening 160-165 more throughout the rest of 2016.
The company reported record earnings that rose from 37 cents to 63 cents for Q1 and easily beat the 43-cent estimate. Operating income rose 57.1%. Revenue surged 27.4% to $978.8 million and easily beat the estimates for $890 million. The company raised guidance for the current quarter to $875-$900 million.
Wholesale revenues rose 47.1% with an 8.5% increase in distributor sales and 23.2% increase in retail sales. Comparable same store sales rose 9.8%. Domestic retail sales rose 15.3% and international sales +59%. International same store sales rose 17.7%. To say that the company is doing everything right would be an understatement.
Earnings July 21st.
Shares split 3:1 in October just as a revenue miss for Q3 knocked the shares down 35% from $46 to $31. The stock went sideways for the last six months but has recently rebounded to resistance at $35. The strong earnings spiked the stock to that level and it has traded sideways for the last week as it consolidated those gains. In the last two days of market weakness shares lost $1 and were actually positive on Wednesday. I believe we are going to see a breakout to a six-month high.
I know it is strange to recommend a bullish position in a negative market but the lack of a market related decline in SKX suggests they will surge higher if the market were to turn positive.
I am going to recommend a slightly longer option on this position so the premium will not decay as fast if the market continues to be weak.
Also, because we are in a negative market I am going to put an entry trigger on the position. I do not want to recommend a bullish position and have the market gap down -100 points on Thursday. If SKX does not rebound to hit the entry point we lose nothing.
Position 5/9/16 with a SKX trade at $32.25:
Long July $35 call @ $1.00. No initial stop loss.
TWTR - Twitter - Company Description
MoffettNathanson cut TWTR from neutral to sell and the price target from $15 to $12. The analyst said Twitter was suffering from advertiser fatigue. The key phrase in the analyst note was that "hope is not a strategy."
The second downgrade came from Monnes Crespi Hardt with a price cut from $22 to $18 but they retained their buy rating.
Original Trade Description: April 9th.
Twitter operates as a global platform for public self expression and conversation in real time. I am pretty sure everyone knows what Twitter is so I am not going into depth in this explanation.
Twitter has become the bet of the year. Analysts either think it is going to single digits or going to the moon. The highest price target is $36 and the lowest is $11 with the average at $20.86 across a total of 27 brokers.
Twitter has trouble keeping users because the learning curve is steep and Twitter spam is increasing daily. Twitter bots can be programmed to spread tweets and make it appear there is a huge volume of interest in a specific subject. Andres Sepulveda, a Latin American political operative used custom software to direct 30,000 Twitter bots to create false enthusiasm for candidates and spread rumors about the opposition. Sepulveda said the tactics gave him "the power to make people believe almost everything." The man responsible for his operations said two American presidential candidates had contact him and one of those was Donald Trump.
Unfortunately, Twitter has been having trouble monetizing all the traffic regardless of whether it is real or fake. Their monthly active users include a lot of churn and barely any growth. While nobody expects Twitter to go out of business they are losing faith in the business model.
CEO Jack Dorsey is also CEO of Square and that carries mixed emotions. Some want him replaced and others want him full time. Almost nobody wants him to continue the dual role.
There are constant rumors that Twitter will be bought by someone like Google or Apple. If that were to occur it would carry a huge premium to the current $16 stock price.
Twitter has been earnings challenged for a long time and the stock has declined from $55 to the current $16 level on a lack of confidence they will turn the company around.
Earnings April 26th.
The stock is either going to single digits or it will be back well over $20 soon. It is not likely to continue moving sideways at $16.
I am recommending we do a strangle on Twitter using the June options. Regardless of the stock or market direction we should be able to profit. Because Twitter is $16 and stagnant the options are relatively cheap. I want to buy them now and hold over earnings because that is likely to be a volatility event. We could also get some market moving news with the earnings release.
You could use the $18 call and $15 put for a net debit of $2.22 if you want a cheaper option.
Long June $17 call @ $2.07, see portfolio graphic for stop loss.
Previously Closed 5/17/16: Long June $16 put @ $1.45, exit $1.96, +.51 gain.
BEARISH Play Updates (Alpha by Symbol)
ABC - AmerisourceBergen - Company Description
No specific news. Only a minor rebound in a strongly bullish market.
Original Trade Description: May 12th.
AmerisourceBergen sources and distributes pharmaceutical products to healthcare providers, pharmaceutical and biotech manufacturers, and specialty drug patients in the United States and internationally. Its Pharmaceutical Distribution segment distributes brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to various healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and other alternate site pharmacies, and other customers.
The drug market is not working out well for ABC. In the recent earnings they reported earnings of $1.68 that beat earnings by 9 cents. However, revenue rose 9% to $35.7 billion and missed estiimates for $35.8 billion. If that was the whole story ABC would be a lot better off today.
The company warned on full year guidance and on 2017 expectations. They reduced full year guidance from $5.73-$5.83 per share to $5.44-$5.54 and analysts were expecting $5.78.
The CEO said, "Looking ahead, we expect our gross profit in the second half of the year to be negatively impacted by certain accelerating headwinds, including an increase in the rate of generic deflation and a lower contribution from new generic launches. In addition, an internal strategic initiative we had launched to increase sales of PRxO Generics and to increase our independent retail segment revenues is ramping slower than we had anticipated."
The company said 2016 revenue growth would be 8% and below prior estimates. For 2017 they expect 4%-6% earnings growth to $5.71-$5.82 per share and below current analysts estimates for 2016.
The long-term guidance warning tanked the stock but that was just the beginning of the declines. Shares are at a new 52-week low and still falling.
I am recommending an ITM June $75 option because it has high open interest (2,728) and a small spread. It is also cheaper than the next available strike, which would be the August $72.50 at $3.20 with a 50 cent spread and open interest of 15. I do not expect to be in this position for more than a couple weeks so the short term June option makes more sense.
Long June $75 put @ $2.60, see portfolio graphic for stop loss.
AXP - American Express - Company Description
No specific news. Dow component AXP spiked with the Dow short squeeze and stopped us out at $64.50. There was no news, it was just a short squeeze.
Original Trade Description: May 16th.
American Express provides charge and credit payment card products and travel related services to consumers and businesses worldwide.
I seriously doubt that anyone reading this play description is unfamiliar with American Express. Unfortunately, their prestige has take a number of hits over the last two years.
Costco dumped American Express and is moving to Visa as its accepted card. AXP said that loss represented 10% of AXP card holders.
Fidelity Investments also dropped AXP for Visa because Visa is accepted many more places than American Express. Fidelity has 68.9 million accounts. That has got to hurt AXP.
Jet Blue announced it was replacing AXP cards with a new MasterCard.
There are numerous other companies that have dropped AmExp as their preferred card. The reason is simple. Not all merchants accept the AMX card and the fees associated with that card are higher for merchants. The card also has higher credit requirements for being approved. It does not do these businesses any good to offer a partner card if only a small number of applicants can qualify.
American Express is different from MC/V because it actually owns the debt. When you charge on an AMX card it is AMX that is making you the loan. With wages in the U.S. declining for the last 7 years that means higher risk of default for AMX accounts.
V/MC accounts are backed by an issuing bank or credit union. V/MC have no risk in the transactions, they just take a processing fee.
A federal judge ruled against AMX in a lawsuit filed by the DOJ because AMX was penalizing retailers for suggesting customers use a different card because the AMX transaction fees were higher. The judge said retailers had the right to discourage AMX usage.
In the testimony for the suit CEO Chenault whined, "They have a billion cards, AMX has 55 million. They have 9 million merchants and AMX only has 6 million. I am dwarfed. We are swimming in a sea of bank cards." And that is exactly the problem.
The bank cards have lower credit standards, lower merchant fees and more generous customer bonus awards programs. The prestige of the AMX is fading and even the invitation only Black card, made out of titanium, is losing its luster.
Shares faded from $96 to $50 and then rebounded in April to $67. Now they are fading again. They guided to earnings declines for the second half of 2016 because of the switch from AMX to other cards at various corporate customers like Costco. Earnings will rise in Q2 because of the sale of their Costco card portfolio but then decline the rest of the year. The CEO warned at the shareholder meeting, "We continue to face substantial competitive and environmental challenges."
Earnings July 28th.
Shares have flat lined recently with support at $63.75. If that level breaks we could see a decline to $59 fairly quickly. With the summer doldrums ahead, investors are not going to be patient with a stock that is basically dormant and forecasting lower earnings in the second half. Why would an equity fund want to own that stock in this environment?
Position 5/17/16 with an AXP trade at $63.50
Closed 5/24/16: Long July $62.50 put @ $1.70, exit $1.19, -.51 loss
CP - Canadian pacific Railway - Company Description
No specific news. Big spike at the open but it was instantly sold. No change in the outlook.
Original Trade Description: May 9th.
Canadian Pacific is a transcontinental railroad in Canada and the USA. It transports bulk commodities including grain, coal, fertilizer, crude oil and refined products, lumber and minerals. They operate about 12,500 miles of track across Canada and the Northern and Midwest USA.
The fires have knocked more than one million barrels per day of production offline. Every day another operator announces a shutdown because the fire is approaching, employees are evacuating their homes or the roads and utilities are shutting down.
The actual oil facilities are relatively fire proof. They are engineered to avoid that danger. However, they cannot run without employees and more than 100,000 people have been evacuated from the area. Nearly 2,000 homes and businesses have been destroyed. The water is undrinkable and there is no gas or electric service. Roads are closed and facilities have been shutdown.
When the fire burns out and the workers come home, they may not have a home left standing. That means they are going to be out of work for weeks trying to relocate their families. The local governments are not going to let people back into existing homes because of the lack of water, gas, sewage, electricity, etc. This is going to be a long-term problem.
It could take weeks or even months to reopen the oil sands facilities because of the lack of electricity. The transmission lines have been destroyed. In some areas the towers have melted. The oil sands cannot operate without electricity. Pipelines, pumping stations, etc will also be offline until the electricity returns.
If production is going to be offline for weeks or even months there will be a lot less crude oil moved by train. With the entire province in turmoil there will be all manner of delays and trains carrying other commodities could be halted or severely delayed.
CP depends on crude oil, refined products, coal, lumber and grain for the majority of its revenue. I foresee weeks of delays and significantly lower railroad traffic. Shares are already declining on the news but I expect them to decline a lot further as investors begin to factor in the loss to earnings in Q2.
The company said domestic intermodal traffic fell -1% to 8,300 cars for the week ended May 7th. However, international intermodal volume declined -4.6%. Total intermodal volume declined -3%.
Earnings July 20th.
Long June $130 put @ $2.95, initial stop loss $142.50
DLPH - Delphi Automotive - Company Description
No specific news. Shares spiked at the open because of the market short squeeze but stalled at resistance at $68.
Original Trade Description: May 23rd.
Delphi, a former division of General Motors, manufacturers vehicle components and provided electrical and electronic, powertrain, and safety technology solutions to the automotive and commercial vehicle markets worldwide.
When they reported Q1 earnings of $1.36 they beat the estimates for $1.34. Revenues increased 7% to $4.05 billion but missed estimates for $4.08 billion. They repurchased 5.6 million shares worth $370 million in the quarter and had $137 million left to spend. In April the board authorized a new $1.5 billion repurchase program. They currently has $463 million in cash and $4.35 billion in debt.
On the surface it would appear they are a very healthy company. However, they are very dependent on U.S. auto production. The Autonation CEO said on his earnings call that auto inventories were at record highs and there was no space left to store them. He said manufacturers would have to cut back on production for the rest of the year to bring inventory levels back into balance.
Vehicle sales have been helped by low gasoline prices and the abundance of subprime loans available to consumers. Some 44% of borrowers were taking out 61-72 month loans. However, all good things must end. Gasoline prices are rising and are not likely to return to the recent lows for a very long time, if ever.
Recently banks reported that as many as 31% of those subprime loans were in trouble. While not technically in default, there have been problems like late or missed payments. Also, as many as 35% of those borrowers are underwater because the value of recently new cars has fallen sharply with the resale market still crowded with the used cars everyone is trading in to buy new.
As a result of those statistics the subprime auto loan market is evaporating. It is becoming increasingly hard to obtain financing and larger down payments are required. This is slowing the sale of new cars. In the March sales report the run rate fell to 16.6 million and a two year low. That rebounded to 17.4 million in April and analysts blamed the dip on the weather. However, the last five months have been significantly lower than the last five months in 2015 when the sales rate rose to 18.2 million. Manufacturers are compensating by raising incentives nearly to the rate immediately after the recession. Also, manufacturers leased a lot of cars in order to move inventory immediately after the recession. Those cars are now coming off lease with 2.55 million expiring in 2015 and that number will rise by 500,000 per year through 2018.
This is where Delphi runs into trouble. As auto sales decline it will reduce revenue for Delphi. We are also heading into the summer months when auto factories shut down to retool for the new models that come out in the fall.
Investors have caught on to the "peak auto" worries and Delphi shares have been declining since their earnings in early May. If a company is going to miss on revenue in the good times they are likely to miss again as auto sales slow.
Earnings August 3rd.
Long July $65 put @ $1.92, initial stop loss $69.25.
There is no open interest on the July strikes because the series was just added today after the May expiration. It should not be a worry because the pricing is not out of line and open interest will rise quickly.
FSLR - First Solar - Company Description
No specific news. Short squeeze stopped us out at the open.
Original Trade Description: May 2nd.
First Solar provided solar energy solutions worldwide through two segments. Those are components and systems. The component segment produces the actual solar modules that convert sunlight into energy. The systems segment produces the infrastructure to combine those panels into working systems that are sold to corporations, governments and utility companies.
The company reported earnings of $1.06 that beat estimates for 93 cents. Revenue of $848 million rose 3% but missed estimates for $958 million by a mile. The company blamed the shift to a lower priced module for the decline in revenue. Another factor was the decision by the government to extend the Investment Tax Credit (ITC) another five-years on solar installations. This caused some companies to postpone plans that were being rushed to take advantage of the ITC. Now they have time to think the plans through and make calm decisions. The number of urgent sales declined.
The company refined its guidance positively to revenue in the range of $3.8-$4.0 billion and earnings up from $4.00-$4.50 to $4.10-$4.50. The minor increase in guidance did not excite investors.
With the earnings the company also announced CEO Jim Hughes had resigned and CFO Alexander Bradley would be his interim replacement. Hughes had successfully rescued First Solar from a crisis in 2012 when polysilicon prices were crashing Today the company's panels are close to multi-crystalline. The sudden departure of a hero caused some investors to flee the stock.
Earnings August 2nd.
Shares have fallen significantly since the Thursday earnings but show no indications the drop is slowing. The entire solar sector is in distress since the SunEdison (SUNE) filed bankruptcy a couple weeks ago.
I expect the decline to continue with initial support at $52.50 but longer term support well below at $40. The transformational issues of the ITC extension and the CEO resignation could linger for several weeks.
Closed 5/24/16: Long June $52.50 put @ $2.40, exit $3.50, +1.10 gain.
GILD - Gilead Sciences - Company Description
No specific news. Big short squeeze in biotech and the market stopped us out at the open.
Original Trade Description: May 14th.
Gilead is a research based biopharmaceutical company that discovers, develope and commercializes medicines in areas of unmet needs. They have numerous well known drugs for treatment of HIV and various cancers but their most recent winners have been for treatment of Hep-C.
The first Hep-C drug was Sovaldi and that one was revised and reformulated in conjunction with another drug and the result was the blockbuster drug Harvoni. When taken in an 8 to 12 week regimen it cures Hep-C in 98% of patients. Otherwise they would be facing liver transplants or death. It does not just end the symptoms but it cures the disease. The downside is that it costs $96,000 for the 12 week treatment.
Last year Gilead lost a patent dispute with Merck and now that company has a competitive drug that they are discounting well under the cost of Harvoni. In the Q1 earnings Harvoni sales declined 16% from $3.58 billion to $3.02 billion. Sales in the U.S. declined more than 50% from $3.02 billion to $1.41 billion. Sales in Japan were expected to offset some of that decline but failed.
The problem is the drug Zepatier from Merck. This competitor is being priced "aggressively" in order to take market share from Gilead.
Gilead is a great company but they made a mistake on the patent and that allowed Merck to enter the market. Gilead bought back $8 billion in shares in Q1 and that helped boost the stock price to $102 ahead of earnings. They still have $21 billion in cash but stock purchases have slowed as they look for an acquisition to give them a larger drug pipeline. The board did approve another $12 billion buyback but they are not likely to be aggressive in light of the rapid decline in sales.
In order to combat the Merck drug, Gilead is being forced to significantly discount Harvoni and that means cash flow and margins will continue shrinking. They also issued guidance that was lighter than analysts expected as a result of the price cuts.
Earnings July 26th.
Shares have declined to $82, which is support from the low in January. While they have fallen significantly, I believe they will continue to decline and make a new low. The current political environment is strongly against high priced drugs and politicians will continue to try and outdo each other with headlines as the election heats up. This should weigh on the entire sector.
Initial support is $80 but given the growing negatives, it could retest support at $63.
Position 5/19/16 with a GILD trade at $81.65
Closed 5/24/16: Long July $80 put @ $2.58, exit $1.54, -1.04 loss.
GPRO - GoPro - Company Description
GoPro announced a partnership with Red Bull for a multi-year project that includes content production, distribution, cross-promotion and product innovation. Red Bull will receive some equity in GoPro and GoPro will become Red Bull's exclusive point-of-view imaging technology for capturing immersive footage of Red Bull's media productions and events.
Shares spiked 45 cents. I put a stop loss on the position above today's high.
Original Trade Description: May 18th.
GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.
GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.
They reported earnings on May 5th after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.
The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold an estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.
Next earnings July 21st.
There was an interesting article on Yahoo today about the flood of GoPro competitors hitting the market and why these competitors have better cameras than GoPro. GoPro Competition
If GoPro does not get their act together soon their stock could be in the low single digits. Today's close was only 5 cents from a new low.
The risk here is that somebody buys them but with the flood of new competitors why would they?
Long July $8 put @ 62 cents. No stop loss.
HOG - Harley Davidson - Company Description
No specific news. Short squeeze lifted shares to resistance at $44.70.
Original Trade Description: May 11th.
Harley Davidson manufactures cruiser and touring motorcycles. They design, manufacture and sell wholesale on-road Harley Davidson motorcycle as well as a line of motorcycle parts, accessories and general merchandise, motorcycle insurance and motorcycle maintenance contracts. The company was founded in 1903.
Harley has had a long and tortured career. Motorcycles are very cyclical. When economic times are tough the sales decline sharply. When times are good and the country is at full employment the sales rise sharply.
The problem is the price. The cost of motorcycles has rocketed higher over the last decade and bikes can cost $20,000 to $40,000. That is a lot of money for the blue collar worker that would be their biggest market if money was not a factor. Middle income families are just that, families and living expenses are high. With wages falling for the last 7 years it has caused a problem for sales of high-ticket items. High income jobs like those in the oil patch that allow for excess extra income have taken a serious hit with a loss of 192,000 jobs over the last two years. The U.S. accounted for 89% of global demand for Harley Davidson bikes.
In their last earnings report sales in the U.S. were declining and margins were shrinking. They suffered from the strong dollar impacting overseas sales, unfavorable product mix, meaning only the lower priced bikes were selling and increased manufacturing costs. Touring bikes, the high dollar bikes with the highest margins saw sales decline -0.8% while lower cost cruisers rose 15.1% and Sportster/street bikes rose +1.2%. Free cash flow is shrinking. Average revenue growth over the last 3 years has been 2.4% compared to 8.7% at competitors.
Debt is rising as they build new manufacturing plants and increasing competition from cheaper competitors is hurting sales.
Earnings July 19th.
Competitor Polaris (PII) has eaten into Harley sales with their new line of Indian motorcycles. They bought the iconic brand in 2011 and began introducing bikes to compete with Harley and sales are booming.
Analysts warned last month the shrinking cash flow and rising debt levels put the 2.9% dividend yield in danger. Shares have declined from $49.50 when they reported earnings to $45.60 today.
I am recommending a short term June $45 put. That gives us about three weeks to profit as the market weakens from now into early June. The next available strike is August and at $3, I would rather play with the short term June position.
Long June $45 put @ $1.50, See portfolio graphic for stop loss.
NKE - Nike - Company Description
No specific news. Minor rebound with the market. UA signed a deal with UCLA for $280 million and they got all the buzz for the day.
Original Trade Description: May 21st.
Nike designs, develops, markets and sells athletic footwear, apparel, equipment and accessories for men, women and kids worldwide. The company offers products in eight categories including running, basketball, football, men's training, women's training, sportswear, action sports and golf under the Nike and Jordan brand names.
Part of Nike's successful marketing involves signing deals with various celebrities, sports teams, franchises, etc, for endorsements and advertisements obtained by teams and players wearing Nike apparel. Sometimes Nike discounts their equipment to enterprises including colleges, group sports associations, etc along with an agreement not to use another brand.
Last week Nike signed an $870 million, 10-year deal with the Chelsea soccer club and they will provide all their equipment and apparel starting in 2017. I am pretty sure the club cannot use $87 million a year in uniforms, shoes, balls and nets. That means the rest of the money Nike is paying is for advertising the Nike swoosh on all their uniforms. That is an expensive advertising deal but evidently Nike thanks it is worth the money.
Recently Nike paid endorsements have reached unbelievable heights with LeBron James receiving a $1 billion lifetime contract to endorse Nike products and allow his name to be used for a line of basketball shoes. The problem occurs when these sports start quit playing. Within a few years they are all but forgotten as a new crop of athletes become the new superstars and a new crop of teenagers want new gear named after or endorsed by those new stars. Under Armour's Stephen Curry is a prime example. He is the new star on the block and they cannot keep his shoes in stock.
When Foot Locker reported earnings on May 19th they said Nike's basketball shoes were not selling. Nike shoes account for 60% of Foot Locker revenue. Foot Locker accounts for 20% of Nike revenue. Nike's basketball shoes for named players including LeBron James, Kobe Bryant, Kyrie Irving and Kevin Durant occupy the most shelf space at Foot Locker and sales of those high dollar shoes are slowing. I reported several weeks ago that Foot Locker was selling some of those shoes for 50% off in their online store. That is a clear sign of slow retail sales.
With so much of Nike's revenue coming from the Foot Locker chain it suggests Nike could have some earnings problems in the current quarter. If those shoes are not selling in Foot Locker they are probably not selling at Finish Line (FINL) either. Finish Line has been struggling with sales anyway and having a Nike product that is not moving could make the situation worse. Add in the bankruptcy and closure of 450 Sports Authority stores and another sales outlet for Nike bit the dust.
Nike is a good company. They have great products and they sell worldwide and online. Their last quarter earnings rose 22% to 55 cents and beat estimates for 48 cents. However, revenue of $8.03 billion missed estimates. Nike blamed the strong dollar for the revenue miss. They said futures orders rose 12% and that also missed estimates for 15%. They also missed on revenues in the prior quarter.
Now that basketball season is over and all those unsold basketball shoes are cluttering up store shelves we could see further weakness in the current quarter earnings due out on June 23rd. With all the retail earnings declines over the last couple weeks it makes sense that Nike may have been having some of the same volume problems. Since they missed on revenues in the prior two quarters, it would seem to be a good bet they will miss this quarter as well given the weakness in retail.
Shares crashed after their earnings problem on March 22nd and flatlined around $60 for a month. That sideways movement has now turned into a downward slide with the stock hitting a three-month lod on Friday before rebounding from the initial FL instigated dip. I believe the stock is going to continue to move lower and the bounce on Friday was an entry point.
Long July $55 put @ $1.75, initial stop loss $60.25
SPY - S&P 500 ETF - ETF Description
The S&P gapped higher with the index hitting resistance at 2,075 and that was a dead stop. The SPY closed right at that level ($207.87).
We need a decline to appear quickly before our June options evaporate.
Original Trade Description: March 16th.
All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.
Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.
The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.
The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.
I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.
This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.
Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.
Position 3/23/16 with SPY trade at $204.11
3/23/16: Long June $200 put @ $4.77 with SPY trade at $204.11
4/01/16: Long June $200 put @ $3.26 when SPY traded at $207.
4/19/16: Long June $200 put @ $1.95 when SPY traded at $210.
See portfolio graphic for stop loss.
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