The inauguration is over, governing has begun and the market is still confused.
The market declined at Monday's open on what could have been a minor sell the news event but dip buyers were waiting. Volume was low and conviction light and they were not able to lift the major indexes back into the green but they came close.
Without any major events in the near future, investors are faced with actually evaluating the earnings and economics and making an investing decision. Some may be trying to decide if they want to buy what could be a top in the market or wait for a dip that never comes. The markets have been moving sideways for six weeks and have had plenty of chances for a decent decline but every dip was bought before it could find any downside traction.
The earnings have been slightly higher overall than previously expected but the number of companies beating on the top and bottom line is below the recent averages. Revenue has been challenged by the strong dollar but also by weak sales and not just retail sales. If the Q4 earnings cycle continues to be lackluster, it will dampen the outlook for the next two quarters and could put a cloud over the market.
This week is a decision week. Investors will have to decide what the market and earnings are trying to tell them. The Dow and Russell 2000 are close to six-week lows but the Nasdaq and S&P are near their highs. The S&P did weaken slightly on Monday but still remains in the upper half of its range.
The 2,250 level on the S&P is the key to the big cap side of the market. A drop below that level could test 2,185 but that could be an overly optimistic projection. There are too many dip buyers. Most long term investors believe the market will be significantly higher by December because of the potential for lower taxes and cash repatriation.
The Dow is barely clinging to the 19,800 support level and is still at risk for a decent decline. There are 12 Dow components reporting this week and we could see some increased volatility. A close significantly below that 19,800 level could trigger some follow on selling. The Dow remains overextended despite the lack of selling over the last six-weeks.
The Nasdaq has ceased moving higher since the new closing high on the 13th. Support at 5,530 is continually tested but has held so far. The dip buyers are waiting at that level. We could see a drop to 5,400 if the big cap tech earnings this week disappoint. Thursday is the big day for reports so Friday could see the resulting volatility.
The Russell 2000 is just a few cents off a six week low and could post a major breakdown at any time. The 1,330 level would be initial support. Small caps normally lead the market and they are definitely leaning to the downside.
Dow components are in purple.
The calendar is weighted towards manufacturing reports this week but they will likely be ignored because of the earnings reports. The GDP on Friday could be a volatility event if the number is much lower than expected. However, all the current economics will be seen as the product of the last administration and the focus will be on what we should expect 2-3 quarters from now as a result of the increased optimism.
I would continue to be cautious about adding a lot of risk until the market picks a direction. Sideways is not a direction. If we do begin to decline sharply, refer to your shopping list of stocks you would like to buy and wait for a bottom. If we begin to move higher, the Dow needs to be over 20,000 and the S&P over 2,285 for confirmation the move has traction.
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NEW DIRECTIONAL CALL PLAY
TWLO - Twilio Inc - Company Profile
Twilio Inc. provides cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces. The company also provides use case products, such as a two-factor authentication solution. Company description from FinViz.com
Twilio is a cloud communications platform. That does not tell us very much but some if its biggest customers are Uber, AirBnB, WhatsApp and Messenger. Twilio has an application that matches phone numbers and internet addresses to usernames. When you send an instant message to somebody on Facebook, the Twilio app links your Facebook account to your mobile phone number and does the same thing on the other side of the conversation to your contact.
Twilio is a communications platform for new applications that do not want to reinvent the wheel and have to not only program all those linkages but build the databases necessary to connect with everyone.
Twilio had 88% revenue growth in 2015 and is expected to post 62% for all of 2016. Obviously as each year progresses and the revenue numbers soar it is harder to continue the growth when you first started and had almost no revenue. Still, 62% is outstanding.
Given its integration into numerous major applications in addition to the ones I listed above, they are a prime acquisition target. Amazon increased its stake in Twilio in December. Facebook recently increased integration of Twilio services in Messenger so it is not going to compete with the service but could decide to acquire it. With a market cap of $2 billion, pocket change to the big boys, and a dominant place in the existing technology, they are an excellent acquisition candidate.
Shares retreated from the post IPO highs of $70 to trade at $26 three weeks ago. Shares are testing resistance at $29 ahead of earnings on Feb 7th. A William Blair analyst expects the company to beat on both earnings and revenue. The analyst said "Twilio dominates the developer community, often benefitting from a first mover advantage while providing the best quality and performance in the market, particularly for its voice product of dual channel call recording capabilities."
We are in the Q4 earnings cycle so anything we add this week is going to be challenged by an earnings report over the next several weeks. On Twilio, the options are cheap and we can afford to hold over the February 7th report and we could be well rewarded.
Buy Feb $29 call, currently $2.02. No initial stop loss.
If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.
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Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.
Current Position Changes
NFLX - Netflix
Close the position at Tuesday's open.
BMY - Bristol Myers Squibb
The long call recommendation has been dropped.
IWM Russell 2000 ETF
The long call recommendation remains unopened until a trade at $126.
Original Play Recommendations (Alpha by Symbol)
BMY - Bristol-Myers Squibb- Company Profile
BMY decided not to ask the FDA for an accelerated approval on a cancer drug and the shares were crushed back to the $50 level. The option had been nearly worthless for a long time because of the drop back in August never recovered. It has declined to 10 cents today and I am dropping it from the portfolio. I would not recommend closing it since anything can happen over the next couple of months but I am no longer going to track it here.
Original Trade Description: August 8th.
Bristol-Myers Squibb Company discovers, develops, licenses, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. It offers chemically-synthesized drugs or small molecule, and biologic in various therapeutic areas, including virology comprising human immunodeficiency virus infection (HIV); oncology; immunoscience; cardiovascular; and neuroscience. Its products include Baraclude for the treatment of chronic hepatitis B virus infection; Daklinza and Sunvepra for the treatment of hepatitis C virus infection; Reyataz and Sustiva for the treatment of HIV; Empliciti, a humanized monoclonal antibody for the treatment of multiple myeloma; Erbitux, an IgG1 monoclonal antibody that targets and blocks the epidermal growth factor receptor; Opdivo, a fully human monoclonal antibody for non-small cell lung cancer, renal cell cancer, and melanoma; Sprycel, a multi-targeted tyrosine kinase inhibitor for the treatment of adults with Philadelphia chromosome-positive chronic myeloid leukemia; Yervoy, a monoclonal antibody for the treatment of patients with metastatic melanoma; Abilify, an antipsychotic agent for adult patients with schizophrenia, bipolar mania disorder, and major depressive disorder; Orencia to treat rheumatoid arthritis; and Eliquis, an oral factor Xa inhibitor targeted at stroke prevention in atrial fibrillation, and the prevention and treatment of venous thromboembolic disorders. Its products pipeline includes Beclabuvir, a non-nucleoside NS5B inhibitor that is in regulatory review for the treatment of HCV; BMS-663068, an investigational compound that is being studied in HIV-1; and Prostvac, a Phase III prostate-specific antigen to treat asymptomatic or minimally symptomatic metastatic castration-resistant prostate cancer.
BMY is NOT a one drug company. On Friday, the stock fell from $75 to $62 on news a clinical trial on Opdivo for lung cancer without chemotherapy had ended without the desired results. More than $20 billion in market cap was erased from the stock because of one trial on a drug that is already successful in lung cancer with chemotherapy and in treating renal cell cancer.
This was not a case where all the patients in the trial died. It was simply a trial that did not work. Specifically this particular trial was hoping to prove the drug would be successful in patients with more than 5% of the PD-L1 protein in the tumors and had not received chemotherapy. This is a very broad trial. They hoped to be able to avoid the expensive chemotherapy process and the very painful side effects. It did not work in that application BUT it has already been approved for use with chemotherapy. The competitor drug from Merck, Keytruda, was tested in a smaller subset of patients with more than 50% of the PD-L1 protein. If BMY had copied that trial for Opdivo, the drug may have worked.
Bristol-Myers has a very strong portfolio of cancer drugs, HIV drugs, etc. Revenue is NOT going to change because the drug had never been prescribed for this specific patient demographic. Nothing changed financially for BMY. They had hoped a successful test would have added billions to annual revenue several years into the future but that was just wishful thinking.
There is an existing Phase 3 trial with Opdivo in conjunction with the drug Yervoy for PF-L1 positive patients. If that trial is successful, the Checkmate-026 trial will be immediately forgotten.
BMY is a good company. There is no material reason for a $20 billion market cap haircut. I am recommending we buy a rebound, not the dip because the dip could continue. We do not know where this panic selling will end although the $58-$60 level is strong support.
I am also recommending we buy a long-term option so this scenario can play out. If we are not filled at $62 then we can reevaluate next week and possible buy support at $58.
Position 8/9/16 with a BMY trade at $62
Dropped 1/23/17: Long March $65 call @ $3.50, expected to expire, -$3.50 loss.
Closed 9/13/16: Long Sept $57.50 put @ 63 cents, exit $2.01, +$1.38 gain.
DIS - Walt Disney - Company Profile
Disney announced that the next Star Wars movie due out in December will be called "The Last Jedi." The movie finished shooting in 2016 and Carrie Fisher had completed all her scenes before her death. The rest of the Force Awakens cast will return as well. The Force Awakens has not earned more than $2 billion at the box office to make it the third highest grossing movie of all time. The recent spinoff "Rogue One" has earned more than $1 billion.
Goldman upgraded Disney from neutral to buy with a $134 price target, up from $109.
Original Trade Description: November 28th.
The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. The company operates broadcast and cable television networks, domestic television stations, and radio networks and stations; and is involved in the television production and television distribution operations. Its cable networks include ESPN, Disney Channels, and ABC Family, as well as UTV/Bindass and Hungama. The company owns eight domestic television stations. It also owns and operates the Walt Disney World Resort in Florida that includes theme parks; hotels; vacation club properties; a retail, dining, and entertainment complex; a sports complex; conference centers; campgrounds; golf courses; water parks; and other recreational facilities. In addition, the company operates Disneyland Resort in California; Disney Resort & Spa in Hawaii; Disney Vacation Club, Disney Cruise Line, and Adventures by Disney; and Disneyland Paris, Hong Kong Disneyland Resort, and Shanghai Disney Resort, as well as licenses its intellectual property to a third party for the operations of the Tokyo Disney Resort in Japan. Further, it produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings, and live stage plays; licenses trade names, characters, and visual and literary properties to retailers and publishers; publishes entertainment and educational books, magazines, and comic books; and operates English language learning centers in China. Additionally, the company is involved in the sale of merchandise through its retail stores, Internet shopping sites, and wholesale business. In addition, it creates and distributes entertainment and lifestyle content for interactive media platforms. Company description from FinViz.com
We have played Disney before with mixed results. The cord cutting at ESPN has been a problem for the last year. However, Disney is now bullish on ESPN again thanks to all the skinny bundles being sold by various cable and set top box providers.
Disney has a strong menu of movies in the pipeline. Moana was released last week and received great reviews. The tickets have already gone on sale for the Star Wars movie "Rogue One" that starts in mid December.
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: The Last Jedi"
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"
Shanghai Disney has already had more than 4 million visitors in less than a year.
Earnings February 9th.
Things are going great for the entertainment company and the ESPN woes are being forgotten. Shares of Disney appear to be on the verge of a breakout over $99 and given the long advance ticket sales on Rogue One, the stock could see multiple weeks of gains in December.
Update 12/18/16: Shares spiked to a new 7-month high after Rogue One brought in $155 million over the weekend. The film is now expected to gross over $1 billion. This expands the Star Wars franchise into an entirely new spectrum similar to the Marvel movies. Disney can now produce a "Star Wars" movie every year with multiple story lines making their own direction. They have essentially doubled their Star Wars revenue stream. Bank of America named them to their U.S. 1 list on Monday of their best investment picks.
Long February $100 call @ $2.40, see portfolio graphic for stop loss.
HAIN - Hain Celestial Group - Company Profile
No specific news. Still no earnings date. The shares are holding their gains from the accounting announcement and they are slowly moving higher.
Once they announce an earnings date, we should see the shares begin to move higher. The stock spiked 12% on the "no wrongdoing" news.
Original Trade Description: September 5th.
The Hain Celestial Group, Inc. manufactures, markets, distributes, and sells organic and natural products in the United States, the United Kingdom, Canada, and Europe. It offers grocery products include everything from infant formula to instant soups. They offer yogurt, snack chips, pastas, organic products of all types, specialty teas, baby care, personal care items and hundreds of other products. The company sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, and drug and convenience stores in approximately 70 countries worldwide. Company description from FinViz.com
When Hain was scheduled to report Q2 results on August 15th, they warned they would miss prior full year guidance and they were going to postpone their actual Q2 earnings because of an accounting issue. The issue was the timing of revenue recognition. Normally they book sales as revenue when the products are actually shipped to the distributor. However, in the past quarter, they had made some concessions to some U.S. distributors that made them question if they should have recognized the income when the product was shipped or when it was actually sold.
They did not describe the concessions but from the comments above it sounds like they may have given them longer terms on payment or possibly offered distributors a discount if they would order more products. A concession could be similar to "If you take 25% more product we can lower the price 10% and give you an extra six months to pay." Instead of booking that sale when it is shipped they may have to wait until it is actually paid because distributors can, in some circumstances, send product back that they previously ordered. Hain could have done a consignment deal. "We will ship you X tons of stuff and you pay us when you sell it."
The key to all those scenarios is who owns the product while it is sitting in the distributor warehouse. If Hain still owns it because of a special deal with terms, then they cannot recognize the revenue until it is sold.
The timing of the revenue recognition does not alter the amount of the revenue, only the quarter when it is recognized. Hain said they did not expect any restatement to be material but the stock was crushed.
The company reported there was an independent review being conducted by the board's audit committee. The new earnings date was moved from August 15th to September 15th.
Whenever the term "accounting issue" is mentioned, everyone runs for the sidelines. Investors do not know if somebody just misplaced a decimal point somewhere or suddenly the company is going to admit it is another Enron.
I believe the sell off was way overdone. Look at the chart for the last seven months. The stock was up 65% and there was a lot of profit at risk. Investors were in such a state of shock the ran for the exits.
Hain has strong support at $35 and shares have fallen from $56 to $36. There is little risk unless disaster really strikes. I am recommending we buy a February call to give the shares time to recover and a September put, just in case there is more bad news. The September put expires the day after earnings so we will need to close it expiration Friday morning. If they have more bad news the stock will gap lower and the put will inflate. I doubt we will need it.
Update 11/22/16: We are one step closer to a big move in HAIN. The company said they had completed their review of accounting practices for the period in question and found no wrongdoing. The audit committee recommended some measures for future accounting to handle the issues in question. The company said it was moving forward to bring its reporting up to date and there would be a further announcement regarding the timing of the quarterly earnings report.
Long Feb $38 call @ $3.90, see portfolio graphic for stop loss.
Closed 9/16/16: Long Sept $35 put @ $.60, expired, -.60 loss.
HD - Home Depot - Company Profile
No specific news. Shares exploded higher on Monday with a $2.50 gain on absolutely no news. Earnings are not until late February. HD added more than 15 points to the Dow.
Original Trade Description: October 3rd.
The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself (DIY), do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves homeowners; and renovators/remodelers, general contractors, repairmen, installers, small business owners, and tradesmen. The company also sells its products through online. As of December 31, 2015, it had 2,274 stores. Company description from FinViz.com
Home Depot is insulated from the Amazon competition. You cannot buy 2x4 boards, carpet or a 5 gallon bucket of stain on Amazon. With the housing recovery in full swing Home Depot has been fueling a massive remodeling binge. Customers trying to spruce up their homes so they can sell, go to Home Depot for the supplies. Customers that have just bought a home shop at Home Depot for items to remodel to fit their tastes. Customers just remodeling their own home to bring it up to date shop there as well. Home Depot now has online ordering with shipping to you on the smaller items or in store pickup for larger items. About 42% of online orders are now picked up in local stores. That also provides an opportunity to sell the customer something else as he wanders around the store. I am living proof that you cannot go into a Home Depot without buying something.
Same store sales have risen 4% or more in 15 of the last 16 quarters. In an interview with the CFO she said property managers were 3% of their customers but 40% of sales. That is an amazing statistic because once those professional managers are locked into a supplier like Home Depot they rarely change. The only other comparable big box is Lowes and they are always more expensive.
The CFO said the addressable market for their products in the U.S. is $550 billon and Home Depot only has 20% of that market. There is plenty of opportunity for additional growth. More than 50% of U.S. homes are over 40 years old. The company is targeting $100 billion in annual revenue in 2018.
Home Depot has bought back $2.6 billion in stock in 2016 with $2.4 billion to go. Their capital spending plans called for $5 billion for stock purchases. The company will also pay $3.4 billion in dividends. They have not added a new store in the U.S. in more than three years. They are using the expansion money to remodel one-third of each store every year. These "resets" are critical to keeping the stores fresh and implementing new marketing strategies.
Earnings Feb 21st.
Update 11/22/16: The company reported earnings of $1.60 compared to estimates for $1.58. Revenue of $23.15 billion bet estimates for $23.05 billion. Same store sales were +5.5% overall and +5.9% in the USA. HD guided for the full year for revenue growth of 6.3% and same store sales of 4.9% with earnings rising 15.9% to $6.33. Consensus estimates were $6.33 and $94.16 billion. The company had $3.59 billion in cash at the end of the quarter.
Shares declined after the news because investors expected stronger guidance because of Hurricane Matthew reconstruction. After two days of declines, the stock rebounded to nearly erase the loss.
Long Feb $135 call @ $2.15, see portfolio graphic for stop loss.
IWM - Russell 2000 ETF (LONG PUT) - ETF Profile
The Russell continues to trade lower but every point is a fight. Our $134 put is now in the money so a decent decline from here would give us a profit. I added an exit trigger at $131.
Original Trade Description: December 12th
The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.
The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.
I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 13 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,180 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.
Dow - January 2016
We also have the potential for an ugly inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.
I am recommending a long put on the Russell ETF.
There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.
I have a similar put position in the Premier Investor Newsletter because every subscriber needs to be hedged against a potential market event over the next five weeks.
Initial support is in the $130 range.
Long Feb $134 put @ $3.37, see portfolio graphic for stop loss.
IWM - Russell 2000 ETF (LONG CALL)- ETF Profile
The Russell continues to trade lower but every point is a fight. I raised the potential entry trigger slightly in order to give us a better chance of entering the position.
I am changing the entry trigger to $131.00. That is the same place we will exit the IWM put position listed above.
Original Trade Description: Jan 3rd
The Russell ETF mimics the movements of the Russell 2000 Index with a 1:10 ratio.
The Russell 2000 has failed to break support but it was the strongest gainer in the post election rally. At one point, the Russell was up 20.1%. That suggests in a market decline it could also be the fastest decliner.
Analysts are in agreement that the markets will finish 2017 significantly higher with estimates as high as 25,000 for the Dow and 2,500 for the S&P. If the regulations currently stifling small business are removed and the tax rates changed to 15% as Trump has promised, this sector will show a major boom in earnings and could be the largest gainer in 2017.
I considered buying calls on the SPY, DIA, QQQ and IWM. I decided to use the IWM for the reasons stated above.
I am going to use a dip trigger on this position to enter the play. We already have a put position on the ISM and we will exit it at the same time this position is triggered. I am putting the trigger at $126 but there is no guarantee we will reach that level. The IWM traded at $115 just before the election.
I am using the August calls because they were only $1 more than the June strikes and we get two extra months. I do not expect to hold the position that long since the summer months are normally weak for the market. We can sell them in June with a lot of time premium left.
With an IWM trade at $130.50
Buy August $135 call, estimated premium $6, no initial stop loss.
NFLX - Netflix - Company Profile
Netflix broke out to a new high over $140 on earnings but is currently bleeding points. I am recommending we exit the position and look to get back in with a longer option around the $130 level.
CLOSE THE POSITION
Original Trade Description: November 14th
Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic streaming, International streaming and Domestic DVD. It offer members with the ability to receive TV shows and movies streaming content, including original series, documentaries, and feature films through a host of Internet-connected screens, such as TVs, digital video players, TV set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. As of October 17, 2016, it served approximately 86 million streaming members in 190 countries. Company description from FinViz.com
Netflix blew away earnings estimates on October 17th and spiked from $100 to $129 over the next week. Post earnings depression has been weighing on the sock but the decline was minimal until the Nasdaq 100 sell program on Thursday the 10th. Shares dipped to $115 but have held in that range for the last three days. I would like to think the sector rotation has run its course and portfolio managers still need some tech stocks in their portfolios.
I am recommending we risk $3 to see if Netflix can return to $130 by its next earnings report on January 16th. They opened in 130 countries last January and subscribership is finally exploding. Investors will be betting on another earnings beat.
I am using the March options because the strikes are round numbers. Most of the January strikes are odd numbers left over from the stock split. I am also using March so there will be some earnings expectation built into the premiums when we exit before the report. I am also using a wide stop loss because the net debit is only $3.25.
Update 12/18/16: Netflix announced that most of its shows are now available for downloading to a mobile device to be watched later when you are offline and not connected to the Internet. It requires the latest iOS or Android 4.4.0 operating system. You download the movies/shows before you travel and then watch them whenever.
Piper Jaffray increased their estimates for Netflix subscribers by 2020 by 35% from its earlier estimates for a 23% increase. In a survey 63% of subscribers said they would remain subscribers with 33% staying even if the prices rose 50% or more.
Long March $120 call @ $9.00, see portfolio graphic for stop loss.
Short March $130 call @ $5.63, see portfolio graphic for stop loss.
Net debit $3.37.
CLOSE THE POSITION
SRG - Seritage Growth Properties - ETF Profile
Seritage put out a leasing update on January 17th to counteract the negative information about Sears terminating some more leases. However, the update did not mention that Sears had terminated 19 additional leases the prior week. The report was full of numbers saying "since the company's inception we have leased 2.2 million sqft" or "We increased rental income by $41 million since the company's formation." That is all great but they have a ton of vacancies and it is not what they did since the company was formed but what are they doing now. It was clearly a press release to counter the stock slide, which it did. Shorts were forced to cover and the stock spiked 10% to $44. I applaud them for a gambit well played. The stock was at an 11-month low the day before their press release. It killed our put position but nothing really changed at the company.
Original Trade Description: January 9th.
Seritage Growth Properties (Seritage) is a self-administered and self-managed real estate investment trust (REIT). The Company is engaged in the acquisition, ownership, development, redevelopment, and management and leasing of diversified retail real estate across the United States. The Company's assets are held by and its operations are primarily conducted through directly or indirectly, by Seritage Growth Properties, L.P. Its portfolio include approximately 42.4 million square feet of gross leasable area (GLA), which consists of approximately 230 owned properties totaling over 37.0 million square feet of GLA across approximately 49 states and Puerto Rico and interests in approximately 30 joint venture properties totaling over 5.4 million square feet of GLA across approximately 17 states. Its portfolio includes over 3,000 acres of land, or approximately 10 acres per site for its owned properties. Company description from finance.google.com
Seritage was spun off from Sears Holdings in July 2015 and given 230 Sears properties in the spinoff. This was a gambit to raise money for Sears and capitalize on their unleveraged real estate. Unfortunately, Sears is terminating leases on those stores at a rapid pace. They terminated a couple dozen in January 2016 and Seritage filed a notice with the SEC last week that Sears had given notice of termination on another 19 leases. These are major holdings as the company description explains above. However, if Sears terminates a lease it is because the store is unprofitable and more than likely is located in a dying mall. Finding a new retailer to take over a monster Sears location in a dying mall is a major problem.
Seritage has been successful in several locations but Sears is terminating leases faster than Seritage can remodel and remarket the empty buildings. With Sears likely to file bankruptcy in the near future, Seritage could get the majority of its existing portfolio vacated at one time.
Sears is obligated to pay a year's rent as a termination penalty but in a bankruptcy filing those penalties would be voided. That means Seritage would not have the benefit of Sears essentially paying for the remodel and remarketing.
Seritage shares are sinking fast because the investing public has caught on to the harsh reality that Seritage could be in trouble.
Earnings are Feb 2nd and they could contain some unpleasant details.
I am using the February options and plan to hold over the event in case there is a disappointment. At $1.45 for the option, we have little risk.
Long February $40 put @ $1.60, see portfolio graphic for stop loss.
Prices Quoted in Newsletter
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