The Russell 2000 broke support at 1,512 and the 4th day of declines. This is not a good sign for the December market when small caps are supposed to be in rally mode. The Dow declined again but it was minor. The Nasdaq struggled to post a gain and barely succeeded. The negative points in the tax bill are weighing on the markets. If they are not removed in the conference committee they will produce selling in late December. The market is not likely to rally strongly until the bill is revised.
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
DLTH - Duluth Holdings
The long position was closed at the open.
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BULLISH Play Updates
BOTZ - Global X Robotics AI - Company Profile
Since this is a long-term slow moving ETF position, there will not be daily commentary.
Original Trade Description: October 4th.
The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.
Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.
Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.
This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.
I am going to lag back on the stop loss because this could be a long-term position.
Update 10/26: Shares of BOTZ fell 50 cents for the biggest one-day drop since the ETF began in September 2016. There was no news but volume of 4.16 million shares was the largest ever and well over the 964,000 historical average.
Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.
CHGG - Chegg Inc - Company Profile
No specific news. Shares recovered some more of Monday's Nasdaq inspired loss.
Original Trade Description: November 27th
Chegg, Inc. operates student-first connected learning platform that help students transition from high school to college to career. The company's products and services help students to study for college admission exams, find the right college to accomplish their goals, get better grades and test scores while in school, and find internships that allow them to gain skills to help them enter the workforce after college. It offers print textbook and eTextbook library for rent and sale; and provides eTextbooks, supplemental materials, Chegg Study service, tutoring service, writing tools, textbook buyback, test preparation service, internships, and college admissions and scholarship services, as well as enrollment marketing and brand advertising services. The company has a strategic alliance with Ingram Content Group Inc. Chegg, Inc. was founded in 2005. Company description from FinViz.com.
Expected earnings Jan 29th.
The company reported Q3 earnings of 1 cent, up from a loss of 3 cents and beat earnings for a loss of 1 cent. Those are not big numbers but the company is investing for the future. Revenue of $62.6 million beat estimates for $57.7 million. The company guided for the full year for revenue of $251-$252 million, up from prior guidance of $241-$243 million.
The company just acquired Cogeon GmbH, a provider of AI driven adaptive math technology and the math app, Math42.com. With access to new original content, they can launch their own math courses to provide self-guided and individualized solutions to more students. This will increase their market share in the high school market. The company is growing at a 26% annual rate.
The company said recent studies showed 64% of high school graduates were not prepared for college level math courses. Some 40% of college freshmen have to take at least one remedial math course.
Citigroup just initiated coverage with a buy rating. With Chegg's 4% penetration into a very large addressable market, there is plenty of room to grow. The analyst said Chegg's business model is a positive feedback loop that aids in new subscriber acquisition and cross-selling. They have a pipeline of new products aimed at expanding the addressable market.
Shares declined after earnings but are rebounding from the post earnings depression.
Long CHGG shares @ $15.07, see portfolio graphic for stop loss.
Alternate position: Long Apr $17.50 call @ 85 cents, see portfolio graphic for stop loss.
DEPO - Depomed - Company Profile
Shares continued to rise after Depomed announced an exit from opioid sales. Depomed will receive $135 million annually for four years plus royalties from Collegium Pharmaceutical. After 4 years, they will receive a double-digit royalty on sales of Nucynta. This was a good deal for Depomed because they are now out of the opioid business as regulators come down on the sector.
Original Trade Description: November 25th
Depomed, Inc., a specialty pharmaceutical company, engages in the development, sale, and licensing of products for pain and other central nervous system conditions in the United States. It offers Gralise (gabapentin), an once-daily product for the management of postherpetic neuralgia; CAMBIA (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug indicated for acute treatment of migraine attacks in adults; Zipsor (diclofenac potassium) liquid filled capsule, a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain in adults; and Lazanda (fentanyl) nasal spray, an intranasal fentanyl drug used to manage breakthrough pain in adults. The company also provides NUCYNTA ER (tapentadol extended release tablets), a product for the management of pain severe enough to long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults; and NUCYNTA (tapentadol), a product for the management of moderate to severe acute pain in adults. In addition, it is involved in the clinical development of Cebranopadol for the treatment of chronic nociceptive and neuropathic pain. The company sells its products to wholesalers and retail pharmacies. It also has a portfolio of license agreements based on its proprietary Acuform gastroretentive drug delivery technology with Mallinckrodt Inc.; Ironwood Pharmaceuticals, Inc.; and Janssen Pharmaceuticals, Inc. Company description from FinViz.com.
Shares of Depomed fell from $11 to $6 in August and traded sideways until sinking before earnings in November. Shares fell to $4.31 ahead of earnings.
They reported earnings of 14 cents that beat estimates for 8 cents. Revenue was $95.4 million. They guided for full year revenue of $375-$380 million. Shares spiked from $4.50 to $6.50 on the news.
They reported the damage to their processing plant in Puerto Rico was less than initially feared and the lost production would be less than $10 million in revenue.
After three weeks of post earnings depression the stock began to rise again in a weak market and closed at a 4-month high on Friday.
Update 12/4: Depomed announced it was contracting with Collegium Pharmaceuticals (COLL) to market its most lucrative product, the Nucynta line of pain killers. The company plans to cut 40% of its workforce and move its headquarters to the Midwest or East Coast where overhead will be cheaper. They are currently in Newark California. They will eliminate all of its painkiller sales force and any brand advertising for the product and collect royalties from Collegium. The company said the layoffs and the move to a lower overhead location would be a significant step in reducing expenses and provide financial and strategic benefits. The company will receive a minimum of $135 million a year in royalties and they are cutting $70 million a year in expenses. Shares were up 5% intraday but faded with the market.
Long DEPO shares @ $7.27, see portfolio graphic for stop loss.
Alternate position: Long March $8 call @ 65 cents, see portfolio graphic for stop loss.
DLTH - Duluth Holdings - Company Profile
No specific news. The position was closed at the open. At 1:30 shares shot up 75 cents on no news.
Original Trade Description: November 20th
Duluth Holdings Inc. markets clothing, tools, and accessories under the Duluth Trading brand via Website and catalogs for contractors and serious do-it-yourselfers in the United States. It offers shirts, pants, casual wear, workwear, underwear, outerwear, footwear, accessories, and hard goods for men and women. The company markets its products under the various trademarks, trade names, and service marks, including Alaskan Hardgear, Armachillo, Ballroom, Bucket Master, Buck Naked, Cab Commander, Crouch Gusset, Dry on the Fly, Duluth Trading Company, Duluthflex, Fire Hose, Longtail T, No Polo Shirt, and Wild Boar Mocs. It also operates six retail stores and an outlet store across Minnesota, Iowa, and southern Wisconsin. The company was formerly known as GEMPLER'S, Inc. and changed its name to Duluth Holdings Inc. Duluth Holdings Inc. was founded in 1989 and is headquartered in Belleville, Wisconsin. Company description from FinViz.com.
Duluth reported Q2 earnings of 13 cents and beat estimates for 10 cents. Revenue of $86.2 million also beat estimates for $82.8 million. The company guided for the full year for earnings of 66-71 cents and revenue in the range of $455-$465 million.
Shares traded sideways to slightly higher for the last two months. On November 1st, BMO Capital downgraded the company from outperform to market perform and lowered their price target to $20. The analyst said they were seeing increased fall promotions and early season specials by brands they considered to be peers to Duluth.
Whether this will impact Duluth or not is unknown until they report earnings on Dec 7th. Shares have ticked up over the last three days as investors buy retailers ahead of the holiday season.
I also see Duluth as an acquisition target but that is not likely over the next three weeks.
This is going to be a short play. We are going to exit before the Dec 7th earnings. I am looking for a continued rise to $20 over the next three weeks.
Closed 12/6: Long DLTH shares @ $18.26, exit $18.67, +.41 gain.
Closed 12/6: Long Jan $20 call @ $1.10, exit .90, -.20 loss.
Net gain 21 cents.
INVA - Innoviva Inc - Company Profile
No specific news. Support break. Close the stock position.
Original Trade Description: November 15th
Innoviva, Inc. engages in the development and commercialization of bio-pharmaceuticals. Its portfolio of respiratory products include RELVAR/BREO ELLIPTA, (fluticasone furoate/ vilanterol, FF/VI) and ANORO ELLIPTA (umeclidinium bromide/ vilanterol, UMEC/VI). The company, under its the Long-Acting Beta2 Agonist (LABA) collaboration agreement and the strategic alliance agreement with Glaxo Group Limited (GSK), is entitled to receive royalties on the sales of RELVAR/BREO ELLIPTA; and a 15% of any future payments made by GSK under its agreements relating to the combination FF/UMEC/VI and the Bifunctional Muscarinic Antagonist-Beta2 Agonist program, as monotherapy and in combination with other therapeutically active components. It has LABA collaboration agreement with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease and asthma. The company was formerly known as Theravance, Inc. and changed its name to Innoviva, Inc. in January 2016. Innoviva, Inc. was founded in 1996 and is headquartered in Brisbane, California. Company description from FinViz.com.
Expected earnings January 24th.
Innoviva reported earnings of 21 cents ($23.8 million) compared to estimates for 33 cents. Revenue was $48.6 million. Yes, earnings were nearly 50% of revenue. Adjusted EBITDA rose 39% to $46.0 million. Cash onhand was $168.2 million. They received $51.9 million in royalties from Glaxo Group (GSK).
Shares crashed nearly $3 on the earnings miss despite very positive business comments from the company. Their new drugs now being marketed by Galxo were dowing well. The sales of Relvar/Breo Ellipta rose 40% to $297.4 million. Sales of Anoro Ellipta rose 51% to $111.9 million. They received a positive opinion in September from the EU Medicine Agency for Trelegy Ellipta for COPD. They received approval for the same drug from the FDA. Read further business updates in their release HERE.
Everything looks bright for INVA and their strong relative strength in a weak market suggests they will do well when the market recovers.
Alternate position: Long March $15 call @ 60 cents, see portfolio graphic for stop loss.
SFM - Sprouts Farmers Market - Company Profile
No specific news. Only a minor gain in a weak market.
Original Trade Description: December 4th.
Sprouts Farmers Market, Inc., a healthy grocery store, provides fresh, natural, and organic food in the United States. The company's stores offer fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli products, baked goods, dairy and dairy alternatives, frozen foods, body care and natural household items, and beer and wine. As of May 04, 2017, it operated 280 stores in 15 states. The company was founded in 2002 and is based in Phoenix, Arizona. Company description from FinViz.com.
Sprouts was written off as dead after Amazon bought Whole Foods. However, just like Whole Foods is not a competitor to Costco, they are not a competitor to Sprouts either. Sprouts is not a "grocery" store. They are an organic produce store with meat and dairy and a few other items. They are a specialty store for organic products. Whole Foods had this original concept but morphed into more of a full service grocery store with organic products.
Some readers may disagree with me on the comparison but Sprouts is making money and Whole Foods was struggling and that is the bottom line.
For Q3 revenue rose 16% and same store sales rose 4.6%. Gross margins of 29.1% are far superior to grocery store margins and only 40 basis points below the peak in 2016 before the competition heated up.
Expected earnings Feb 1st.
Why Amazon? Sprouts has 280 stores spread across the country but only 7% are on the east coast where Aldi and Lidl are turning grocery shopping into a competitive sport. They are not going to be hurt by those big chains.
The small footprint and market cap of only $3 billion makes Sprouts an add on to Whole Foods. Since the companies are similar in that they are all organic, it would be a slam dunk for Amazon to double the size of their footprint on the cheap. Organic buyers spend more money than normal shoppers. The stores are in upscale neighborhoods and customers are likely Amazon Prime members.
Sprouts already has a partnership with Amazon with 2 hour home delivery to Prime customers. They just expanded the service area from the original 8 cities and that is another reason Amazon could scoop them up and head for the express checkout isle.
Shares have recovered from their Whole Foods reaction dip in August and are very close to breaking out to a new high. There is resistance just under $25 but the stock is moving up aggressively on their good earnings and guidance.
In order to get an option after the Feb earnings we have to reach out to March. They are a little more expensive than those I normally recommend in this newsletter. However, while the January options are cheaper, they will decay faster as we approach the December expiration in two weeks. You get what you pay for. As a compromise, I am going to use the $27.50 call instead of the $25 call. You can choose which call strike/series you like.
Long SFM shares @ $24.09, see portfolio graphic for stop loss
Alternate position: Long Mar $27.50 call @ 80 cents, see portfolio graphic for stop loss.
SYNT - Syntel - Company Profile
No specific news. Holding at the recent highs.
Original Trade Description: November 18th
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 offers managed services, including software applications development, maintenance, and digital modernization testing, as well as IT infrastructure, cloud, and migration services. The company also provides a range of consulting and implementation services built around enterprise architecture; data warehousing and business intelligence; enterprise application integration; and SMAC technologies, including social media, Web and mobile applications, big data, analytics, and Internet of things. In addition, it offers KPO services that provide outsourced solutions for knowledge and business processes; and business intelligence, enterprise resource planning, and business and technology consulting services. The company offers its products to various companies in the banking and financial services, healthcare and life sciences, insurance, manufacturing, retail, logistics and telecom, and other industries. Syntel, Inc. was founded in 1980 and is headquartered in Troy, Michigan. Company description from FinViz.com.
Syntel reported earnings of 51 cents that beat estimates for 41 cents. Revenue of $231.3 million also beat estimates for $218.2 million. For the full year they guided for earnings of $1.81-$1.88 and revenue of $890-$902 million. They ended the quarter with $109 million in cash.
Business is good and a highly qualified labor force has allowed them to reduce their employee coult from 23,055 last year to 21,928 at the end of Q3. The CEO said the demand for digital services was robust and the insurance segment continued to post healthy growth.
Shares spiked from $19 to $25 on the earnings in mid October. After a month of post earnings depression the uptrend has returned with the stock back at $25.
Because the stock is a few pennies over $25 the next available option strike is the $30 level. There is no open interest in Dec/Feb series. I am going to reach out to May where there is open interest of 415 contracts and there is actually a bid and ask quote. We do not have to hold the position until May but should we get lucky and Syntal makes a breakout, the long dated options will inflate relatively quickly.
Long SYNT shares @ $25.00, see portfolio graphic for stop loss.
Alternate position: Long May $30 call @ $1.05, see portfolio graphic for stop loss.
BEARISH Play Updates
VXX - Volatility Index Futures - ETF Description
Since this is a long-term slow moving ETF position, there will not be daily commentary.
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.
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