Q1 Update: Blistering Performance Amid Sharp Swings In The S&P 500

Includes: AA, AVP, LL, SRNE, TRTN
by: The Technical Trader


Since December 2015 I have written five articles on seeking alpha, two describing potential short opportunities and three articles describing potential long opportunities.

The stocks were chosen based on fundamental valuation and technical analysis.

Price performance has been on average positive 35% or 268% annualized with 4 stocks showing positive gains (2 shorts and 2 longs) and one showing negative losses (one long).

Click to enlarge

This article is intended to provide an update on the price performance of the five stocks that I have previously written about. Additionally, I have provided a fundamental and technical update as appropriate for each security

Overall, I am very happy with the performance which in my mind proves the value of combining fundamental analysis with technical analysis. The performance was substantially aided by the direction of the overall market as the two short positions were taken before the near 20% drop in the S&P500 in January and February 2016 while the 3 longs were entered shortly after the market bottomed towards the end of January. That is no coincidence. Typically, most stocks will exhibit peaking patterns prior to overall market peaks and bottoming patterns at or around market bottoms.

What follows is a brief discussion on each individual security.

Lumber Liquidators (NYSE:LL)

My article on LL (short) was published on December 21, 2015 when LL closed at $16.22. Since then the stock has drifted lower hitting a new 52 week low of $10.01 on February 29, 2016. I closed my short call option position on January 25, 2016 not because I thought the stock had bottomed but mainly because I thought the additional downside was limited and because the trade used a significant portion of my available margin due to its large short interest.

The stock has been prone to news driven spikes that have been short lived. Whitney Tilson announced on December 14, 2015 that he had covered his short and then on March 9, 2016 that he had re-entered it. There was news around a CDC report which initially included a mistake and then later was corrected.

Fundamentally, the company continues to struggle. On February 29, 2016 the company announced Q4 2015 and full year 2015 financial results which were not good. Sales for Q4 2015 declined 13.7% vs. Q4 2014 and the income statement was burdened by one offs that resulted in the company reporting a $19.8m or $0.73 per share loss. These included a $22m impairment charge to the company's inventory of Chinese laminate flooring that the company stopped selling earlier in 2015.

Cash and cash equivalents declined from $53.8m on 9/30/2015 to $26.7m on 12/31/2015 with financial debt remaining stable at $20m.

Given the very difficult year in 2015 the company's net debt of positive $6m is good news and better than I would have expected. The sales decline is understandable given the negative PR around the company and potentially shows that management is no longer willing to support sales at the expense of profitability. Gross margin as a % of revenues grew to 77% from 69% which was positive but the absolute gross profit declined due to lower overall sales. So far there is no evidence that the company will end up in bankruptcy either through massive fines or by having to replace flooring of customers who purchased the alleged faulty Chinese laminate flooring. That doesn't mean such a scenario cannot happen it only means that in my view such a scenario is unlikely.

Technically the stock price is showing signs of bottoming although I expect slightly lower lows ahead before an ultimate bottom is found probably between $8 and $11 per share. This is in line with my initial share price projection from my original December 2015 article. The significant short interest means that any positive news could cause the stock to sky rocket. As a result, I would personally not want to hold short positions at this time.

Alcoa (NYSE:AA)

My article on AA (short) was published on January 4, 2016. That day the stock closed at $9.71. January and February 2016 were not kind to AA as I predicted. The turmoil in the Chinese stock market and negative sentiment around commodities and commodity related equities sent AA down to a low of $6.14 on January 20, 2016. This was in line with my price projection of between $5 and $7 but I did not anticipate that it would happen within 3 weeks. Since then stock has rebounded significantly and closed on March 31, 2016 at $9.58.

AA reported financial results for Q4 2015 and the full year 2015 on January 11, 2016. The results were terrible even if seen through the lens of very muted expectations. The company reported a net loss of $500m or $0.39 per share. Excluding special items which again were numerous, net income was $65m or $0.04 per share. There was no evidence of a turnaround in the upstream aluminum business in the company's quarterly results and the restructuring and closures that had marked the company's upstream business continued.

Sales grew sequentially driven primarily by acquisitions in the downstream segment offset by lower aluminum prices.

I closed my short call option position on February 17, 2016 for two reasons. First, my initial price target had been reached and although I initially expected new lower lows the strength of the rebound forced me to reconsider that position.

Today looking at the charts I think most likely the lows are already in. Personally I would look to establish long positions after a pullback. The upcoming split of AA however makes that more complicated since it is not clear how investors view the two businesses or how their independent financials will look like.

Sorrento Therapeutics (NASDAQ:SRNE)

My article on SRNE (long) was published on January 14, 2016. I personally acquired stock at around $6 and that day the stock closed at $6.38. As of March 31, 2016 the stock closed at $5.38.

Clearly, as a long position this stock has been a disappointment so far. I figured the bottom would be between $5 and $6 but instead the stock fell to $4.25 February 11, 2016. Longer term the stock has significant potential, in my view, due to the promising early stage drugs in its development pipeline as well as potential royalties from NantPharma which on May 15, 2016 announced the acquisition of Cynviloq from SRNE.

So far there has been no news updates in regards to its development drug pipeline or Cynviloq. I understand that the company may be negotiating with potential partners but nothing has been announced so far. The company's cash position is for the short term sufficient but SRNE will have to raise more cash if the Cynviloq royalties or some other deal doesn't materialize in 2016.

Technically SRNE is currently difficult to read. The $4.25 low could be the final bottom or not. Further price action is required to make that determination. I intend to hold my current SRNE long positon pending further updates.

Avon Products (NYSE:AVP)

My article on AVP (long) was published on January 25, 2016 when the stock closed at $2.61. Since then the stock has been on a tear closing at $4.81 on March 31, 2016 for a 84% increase in 66 days or 460% annualized.

On February 11, 2016 AVP announced Q4 2015 and full year 2015 financial results. Although they contained a few positive items the overall picture was negative and blurred by a number of one off items that made the comparison to past quarters difficult.

For Q4 2015 total revenue declined 20% to $1.6BN. The decline was largely driven by the divestiture of Liz Earle and the continued strength in the USD. Excluding the divestiture of Liz Earle and in constant dollars sales increased 3%. The number of active representatives were up 2% year over year which was positive.

Net loss from continuing operations (due to the previously announced transaction with Cerberus Capital Management LLP ("Cerberus") the North American business was defined as discontinuing operations) was $15m or $0.04 per share. Including discontinuing operations the net loss was $317m or $0.72 per share.

On March 1, 2016 Cerberus and AVP announced the closing of their previously announced transaction. I view this as a positive for the company and the stock, as the restructuring of the business is now likely to accelerate with the assistance and guidance of Cerberus.

Technically, AVP likely bottomed at $2.21 on January 20, 2016 as I initially expected. Given the impressive gains in the stock a correction is likely not far away and a pullback to $3.50 to $4.00 per share should provide investors with another chance to increase or to establish new long positions.

The improvement in the company's financial results are likely to take more time and although a slight improvement in Q1 2016 financial results are likely given a weaker USD and some positive impact from the ongoing restructuring efforts a material improvement is not likely to materialize until 2017.

For now I am holding my AVP long position expecting much higher share prices in 2017 and 2018 in line with my initial projections of $10 per share within 2-3 years.

TAL International (NYSE:TAL)

My article on TAL (long) was published on February 12, 2016 when the stock closed at $9.41. Since then the stock has raced higher closing at $15.44 on March 31, 2016 for 64% increase in 48 days or 480% annualized.

On February 24, 2016 TAL reported Q4 2015 and full year 2016 financial results. Leasing revenues increased by 2.4% in 2015 vs. 2014 to $608m. Adjusted net income per share for 2015 was $2.84 vs. $3.80 in 2014. GAAP EPS was $2.67 and $3.68 respectively for 2015 and 2014.

Although the bottom line was significantly worse in 2015 than 2014 the results are pretty good for a company whose traded below $10 in the beginning of February 2016. There was no evidence that the decline in steel and container leasing prices has ended but the proposed merger with Triton should provide an earnings boost that will offsets continuing industry weakness. Eventually, weakness in the USD should provide a boost to emerging markets and global trade which should benefit TAL.

Additionally, TAL announced a quarterly dividend on March 24, 2016 of $0.45 per share. Assuming the company will continue to pay quarterly dividends at this level this results in a dividend yield of 19% for investors who bought the stock at $9.41.

The biggest near term risk to TAL fundamentally would be a failure to close the merger with Triton for whatever reason. The closing of the merger, which management has announced will likely take place sometime in H1 2016, is likely to propel the stock higher.

Technically TAL has had an impressive run since the February 2016 lows below $10. It is still possible that the stock will breach the $8.15 lows hit on January 20, 2016 but increasingly unlikely.

A correction in the general stock market and TAL is likely in the near future, possibly as soon as Q2 2016. Depending on how the correction unfolds I intend to increase my current long position because I still believe my previous thesis is still valid. In the medium to long term I project TAL to increase to $20 per share.

Final remarks

Q1 2016 was a very successful quarter for me personally. After a brutal fall in share prices in January and February 2016 (which benefited my short positions), the S&P 500 rebounded nicely and is now close to previous all-time highs.

As is typically the case, negative sentiment breeds off of negative news as investors begin to alter their views in line with share prices. This is one of the key insights of the famous speculator George Soros which he explained in his classic finance book the Alchemy of Finance.

I expect the markets to hit new all-time highs in 2016 after a brief correction which could unfold as early as Q2 2016.

Disclosure: I am/we are long AVP, SRNE, TAL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article presents the opinions of the author and does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Investors are recommended to independently complete their own due diligence and evaluate any investment independently as well as to seek the advice of a financial advisor. The appropriateness or legality of a particular investment will depend on an investor’s individual circumstances and investment objectives. The securities, instruments, or strategies discussed in this article may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. The article is not an offer to buy or sell or the solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.