Traders Corner   27 comments

The S&P 500 will need a much bigger drop this week if it is going to bring down the weekly technicals. However, the daily technicals are neutral. The futures are pointing down at the moment, so we should start today on the downside.

The S&P 500 levels to watch today:

UPSIDE: 1808 (3 data points), 1810 (December 2nd’s high), 1813 (November’s high and the all-time high), and 1819 (top of the Bollinger Bands).
LAST CLOSE: 1800, inside the 1800-1803 (5 data points), .
DOWNSIDE: 1794-1798 (6 data points), 1790-1791 (2 data points), 1788 (November 18th’s low), 1785 (20 day moving average), 1775 (October’s high), 1751 (bottom of the Bollinger Bands), 1746 (November’s low), and 1743 (50 day moving average).

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27 responses to “Traders Corner

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  1. GTAT, my largest holding announced today they are increasing debt by 125m and issuing 12m new common shares, which I believe is about a ten percent dilution. The stock is trading down 6% this morning. Probably will not be a great day for my portfolio. Might be a decent entry point into GTAT though.

    • Marshall,
      You’re betting on the analysts hugely underestimating GTAT, aren’t you? The analysts have GTAT growing 1.8%/year over the next 5 years. Adding more debt and diluting shareholders is not a good sign for this company, which is already carrying 117% debt/equity and is bleeding cash (-55% profit margin). With a forward PE of 99, GTAT isn’t undervalued. This stock is priced for a lot more growth than the analysts are giving it credit. While analysts tend to be conservative in their estimates, to buy GTAT at even a 10% discount from $9.94 assumes the analysts completely missed the boat on this one.

      All that said, I have to ask: What do you know about this stock that the analysts either don’t know, or just got wrong?

  2. Ed – I suspect the analysts have not updated their models yet for the conference call GTAT held on November 4th. In that call the management discussed new deal with AAPL. They expect 2015 revenues to exceed 1 billion. They expect 2016 to be double 2014. “Taking all factors into account, we expect to deliver substantial year over year earnings growth over the next three years”. The analysts are flat out wrong about the prospects. However, everyone should do their own research. But my view is that this will be a $15 stock in two years with frankly minimal downside risk. They have very good visibility of next three years due to contract.

  3. Ed – can you name one firm that started having its products placed into AAPL products that has not had a large increase in price afterwards? AAPL buying into the sapphire screen validates the approach as economically feasible. When GTAT revenues start kicking upwards quickly in 2015 and people understand the causes and the technology that GTAT has, this stock has a lot of potential to go significantly higher. I can be patient and wait eighteen months while earnings are nil in 2014.

    • Marshall,
      My point is that Apple is the one who is getting the most of that deal. I think Apple is the play in this particular deal. You’re assuming that GTAT can monetize their deal with Apple, and maybe they can. The only problem is they won’t be able to monetize it with any of Apple’s competitors, which really limits GTAT’s upside.

      • Ed – if GTAT has cracked the riddle on making screens utilizing sapphire that is virtually unbreakable, not any heavier and not much more expensive than gorilla glass, it will have far more uses than just smart phones and tablets. The deal with AAPL allows them to get the critical mass to get there. But they can then still sell to auto manufacturers, window manufacturers, tv manufacturers etc. so I believe there is plenty of upside beyond AAPL. And I also do believe they will benefit from AAPL deal. They have already said the deal is accretive and that they will be making $1.00 per share in a couple of years.

        I am a bit surprised you are so negative on a stock that has historically made money and now projects to make money by shifting away from solar which is in a slump to an exciting new technology which the largest company in the world wants to use on their cutting edge products. You really think AAPL is the better play here? Maybe it has 25% upside. GTAT could have 100% upside IMHO.

        Am I concerned they are selling more stock and adding some debt? Not really. The fact that they can borrow money tells me they have shown their business plan to bond issuers and it has passed muster. Of course they need additional capital to support their growth plans. It isn’t like they are growing the 1.8% a year that you mentioned in your first comment.

      • I just increased my position by 28% at 9.27. This is in the do not touch for two years bucket.

      • Marshall,
        GTAT’s last quarter showed a penny lost per share in earnings, plus a 63% drop in revenues yoy. Their operating cash flow was a $151 million loss. Historically, they may have made money, but they are bleeding it now. The fact they had to get cash from Apple for their deal, and THEN had to borrow more, does not bode well.

        My guess is they took the deal with Apple because they were desperate, not because they liked the deal. The fact the deal was heavily in Apple’s favor shows that Apple was holding all the cards at that poker table. Apple couldn’t have gotten that kind of a deal from Corning, because Corning doesn’t have to offer that kind of a deal. IF GTAT’s product was so much better, they could have easily gotten Samsung or Google/Motorola involved in a bidding war. It is still possible Sapphire is a better product, but that means the financial wizards at GTAT dropped the ball in the Apple negotiations. Or it means the company has no financial leverage, and took the best offer they could get.

        Yes, I prefer Apple here, because Apple showed some savvy negotiating. I suspect Apple will make more money from Sapphire than GTAT will.

        By the way Marshall, don’t think this diminishes my respect for you. You did give me Genworth after all. 😉

      • Good discussion guys. I think both of you have good points and, splitting the difference, I’m going to put GTAT on my watch list. I like Trader’s idea but what if GTAT drops below 8.39??

      • Jeff, you can buy back the options you sold for less and keep the profit. You are then free to sell the stock, resell options again, or hold the stock if you believe in the long term story. You are never locked in when you sell covered calls. You can always buy back your calls with no further obligation.

      • Thanks Trader I think I may try my first covered call with this trade tomorrow. I’ll post how it goes.

        This just seems like a no-brainer. I just haven’t done a lot of these types of transactions before.

  4. For those of you who are interested in following Marshall on GTAT, here is a play for your consideration. You could buy GTAT at it’s current price of 9.39. Sell the July 2014 12.50 calls for 1.00. This will reduce your cost to 8.39. It you are called out in July your profit will be 12.50-8.39=4.11 49%. If you are not called you’ll keep the 1.00 for a 10.6% return on your investment. You can then hold, sell, or sell covered calls again. Keep in mind that 1 call contract =100 shares of stock. If you agree with Marshall that there is not a lot of downside risk, this is a conservative play with a nice return whether you are called out or not.

  5. Trader – thanks for the idea. To be clear, I think downside is limited over a little longer time horizon than June of 2014. By early 2015, the revenues from their contracts should start kicking in.

    • Marshall, I picked that time frame as an example of how covered calls could work. For someone looking at a long term hold, you could sell Jan 2015 15’s for 1.35 or Jan 2016 for 2.40. You always have the option to trade the calls around a core position, as they move up and down. w_seattle is a master at doing this.

    • Marshall, I like using 3 or 6 month calls around positions since they tend to be more volatile as the expiration date nears. I’ve held core positions (particularly in BTU and X, though X closed out in Nov) for well over a year turning calls the whole time. Picking up +.10 to +.60 or so on fairly regular cycles. If GTAT remains volatile as it likely may for a while, the option prices will swing quite a bit. Now you will be taxed at a higher rate than a dividend, but for a stock that you plan to hold, it is nice income. The only way that you really lose is if the stock is well over the strike price + the premium you received. But you can always buy another position if you believe that the stock still has upside at the strike price. If the stock price drops, you sell the stock and buy the option to close at a lower price than you recieved so you make some money on a losing stock. If you have a certain loss you’re willing to take on the stock, you can just pull the trigger at that point. I think it’s a great strategy for stocks that you have faith in or are upside down in. Hopefully this is clear enough…

  6. I added a small position of SPXU at $16.74. Will sell it at $16.94 or carry it over.

    • Ed, I really don’t understand your short term trades. $.20? Hardly seems worth the risk since you are trading small positions. Keep in mind, you can only spend absolute dollars. Percentages don’t count.

      • Trader,
        I call it small relative to my portfolio size. Believe me, I have more than 1 share. 😉

        Seriously though, 1% on a small position is relatively meaningless, you are correct. However, enough daytrades like that during the month, and that can become 1% on your entire cash position, which still comes in as a profit at the end of the month.

      • True enough Ed when you are right. I don’t keep track but if I recall you have lost somewhere around 3% on your last couple of day trades. When you are trading for 1% you have to be right almost every time. Your gains will never exceed your loses when your losses are three times your winners.

      • Trader,
        I did pretty good on my last UPRO daytrade, although that wasn’t a “small” position, and it was more like a “week trade”. I keep it small when I’m going against the Fed and/or all the technicals aren’t aligned perfectly.

  7. I left an open order to sell SPXU at $17.14 after hours. Otherwise, tomorrow is another day…

  8. Trader,
    Have you reentered the UCO covered call market? I vaguely remember you dropping UCO when oil went on a big run up but now that it is back around $30 a share is it back in play from a covered call perspective? I believe your covered call strategy is very effective, it is a bummer that you pretty much stopped posting those trades.
    As for Ed’s day trading I see it as a hobby for him now that he has a nearly full portfolio. Based on his posted results I think those trades turn out to be a wash pretty much.

    Robb

  9. Robb, I have continued to trade UCO/SCO with covered calls. I currently have two UCO positions with DEC 30 and 34 calls. No SCO at the moment. Was called out on those positions last month. I quit posting trades because there didn’t seem to be much interest in what I was doing, which is ok. When it seems no one asks questions, I assume there isn’t much interest. The few comments there are seem to be oriented towards individual stocks. That’s not the way I play the game. If you want me to post UCO/SCO trades I would be happy to do so. I continue to believe that this is a conservative strategy with a decent return.

    • Trader,
      I would appreciate you posting UCO/SCO trades. I am not sure what others did but I would review your trades, see if I agreed based on my own analysis and then make a similar trade or pass.

      Robb

      • Please keep posting your options strategy. I’m sure there are a few besides myself that learn from what you share with us. Thank you.

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