Stops Initiated on Carbonite (NSDQ: CARB) and Synchrony Financial (NYSE: SYF) Plus Steelcase (NYSE: SCS) Soars

There is much to cover with news in the portfolio, and I have piles of stock to dig through to find us some new names so I will keep this brief.

Happily, the market seemed to find some footing last week. Apple’s (NSDQ: AAPL) soggy quarter did not help the mood, but breadth and strength in some smaller stocks give me optimism that the worst of the selling may be over.

I am putting the finishing touches on a few new trade ideas and hope to introduce them this week. As noted before, I will do my best to issue trade recommendations before the market opens so that subscribers can organize trades before your busy day begins.

As always, thank you for your questions and comments on the Stock Talk boards. One subscriber alerted me that they had filled the Boston Beer (NYSE: SAM) put trade, so I will enter that to the portfolio and continue to follow the fundamentals on that name.

Boston Beer is an odd trader and the options trade with very wide spreads. Just last week I canceled the pending trade with the thought that it had not been filled.

Around the Portfolio:
Air Transport Services Group (NSDQ: ATSG) missed estimates slightly due to the delay in converting some aircraft to freight from passenger. In addition to the selling hitting the transports sector, the stock certainly did not weather these delays well.

Air Transport’s business is lumpy even in the best of times. It requires vast upfront capital spent on aircraft that then deliver profits over an extended period. My research shows demand for the company’s cargo capacity remains strong. I am doing more work on the industry and modeling of Air Transport’s numbers but am keeping my buy on it for the moment. I will certainly alert you if this opinion changes.

AbbVie (NYSE: ABBV) flip-flopped on a good quarter but risks to its lead drug, Humira, remain. It reported $2.14, $.13 better than expected with revenue slightly higher than expected. Global HUMIRA sales increased 9.8% adjusting for currency fluctuations. IMBRUVICA net revenues were $972 million, with U.S. sales of $812 million and international profit sharing of $160 million for the quarter, reflecting growth of 41.3 percent.

The company’s Hepatitis C drug, Mavyret, continues to beat expectations. It more than doubled to $840 million. The potential for this drug’s growth is the foundation for my bullishness. I am, however, aware of risks to the Humira franchise, which is seeing competition in Europe. I’ll be keeping a shorter than usual leash on this stock for that reason.

Overall, I am pleased with the quarter. The company raised earnings estimates from $7.81 to $7.91.

Carbonite (NSDQ: CARB) got walloped Friday after it missed quarterly revenue estimates and lowering booking growth by 9%. The stock dropped almost 25% and saw its rating and price target cut by analysts. Interestingly, those new targets, most at $40 or higher, are still well above the stock’s current price.

Carbonite has been beating estimates (top and bottom line) every since its shift into corporate accounts. When seeing the stock reaction, I expected a real disaster and was surprised that the numbers were really not terrible.

Of course, this didn’t change the direction of the stock nor lessen the pain of the decline. Oddly, Carbonite seems to be suffering due to a shift away from one-time large license deals to subscription, or cloud-based, deals. I’ve looked at many potential short sale ideas based on this concept and 99% of the time; investors are delighted to have recurring, albeit smaller pieces, of revenue versus a one-time lump.

The company is having an issue with one partner (a 4% customer), but guidance seems to incorporate a slowdown with this partner. I am most impressed with the company’s cash flow generation, which equaled $17 million in the quarter and more than doubled from last year.

I think the biggest issue with Carbonite’s stock is that the company sold 5.4 million shares at $37.50 in July. The buyers of that stock are underwater and feeling duped. The stock traded a record 4.2 million shares on Friday, so I expect that most of these unhappy holders have sold.

I am sticking with the stock right now but putting a $23 stop loss on the position. This limit means if the stock closes below $23 two consecutive days, I recommend selling it. Carbonite has been one of our best stocks (up over 100% earlier this year), so this drop is particularly painful and highlights the struggle between booking gains or sticking around and riding the upside.

The Chemours Company (NYSE: CC) reported a decent quarter. While revenue missed expectations slightly, it beat earnings by $.07 or 5%. It guided earnings and cash flow to the low end of estimates with one quarter of the year left.

Based on the destruction in the stock since last quarter, I expected that most investors expected some reduction in estimates. The cut is not sizeable, and the stock now trades with a P/E of 5x 2019 estimates, an all-time low for valuation despite the resolution of several legal issues that bogged the stock down in the past.

However, some analysts do not agree. Citi analyst P.J. Juvekar downgraded Chemours to Neutral from Buy and lowered his price target for the shares to $38 from $44. His main concern is the future of the company’s Tio2 product, a chemical used in paint and plastics. Pricing had risen significantly for this product but recently is flattening and some customers are working down inventories they built up in fear of perpetually higher prices.

I believe that current estimates incorporate conservative volume and price data for Tio2 and am still bullish on the company’s Opteon product.

Griffon (NYSE: GFF) received a bearish underweight recommendation from JP Morgan with a price target of $11. I suggested selling the Griffon puts with a 100% plus gain on the weakness in the stock.

NXP Semiconductor (NSDQ: NXPI) finally jumped on a better than expected earnings event. Needham analyst Rajvindra Gill said NXP Semiconductors posted a “solid quarter and beat” given the uncertain macroeconomic climate and he is “pounding the table hard” to reiterate his Strong Buy rating on the stock given the growth drivers he sees in automotive, IoT and 5G infrastructure.

As a reminder, this stock has been a total disaster, falling dramatically due to fears that weak European auto sales would decimate demand for its auto chips. While NXP saw a modest slowdown in auto and a slight sequential decline in order rates in China, it did not experience a material problem with order cancellations or excess inventory in the supply chain. The analyst raised his price target on NXP shares to $110 from $100 following the company’s Q3 report.

Steven Madden (NSDQ: SHOO) reported earnings of $0.65 per share $0.03 better than the S&P Capital IQ Consensus of $0.62. Revenues rose 3.9% year/year to $458.48 million missing the $472.8 mln S&P Capital IQ Consensus.

Guidance increased from $1.76 to $1.77, a tiny increase and still lower than analysts’ $1.80.
Analysts are most excited about the company’s ability to drive comp store sales at its brick and mortar stores.

Systemax (NYSE: SYX) had a banner day last week. The stock rose 30% on Wednesday and closed up roughly 20% on the week. The company reported earnings of $0.39 per share, $0.05 better than the two-analyst estimate of $0.34; revenues rose 15.4% year/year to $235.8 million vs. the $231.01 million estimate.

The company’s Industrial Products division continues to prove itself somewhat Amazon-immune. In the third quarter, the Industrial Products Group increased over 15% organically compared to the third quarter of last year, and the rate of sales growth has accelerated for five consecutive quarters.

Profit margins increased, and management noted it had not seen any impact from tariffs.
William Blair analyst Ryan Merkel upgraded Systemax to Outperform following the company’s “strong” Q3 results. The analyst sees “good visibility” to 20% growth in 2019.

Synchrony (NYSE: SYF) dropped on news that Walmart (NYSE: WMT), with whom it had a credit card contract, is suing the company. This summer Synchrony announced it could not come to terms with Walmart about a new contract. Walmart replaced Synchrony with Capital One.

The transfer of the $10 billion in balances on Walmart branded credit cards is at the crux of the disagreement between the companies. I do not have any unique insight on who might prevail in this suit, but obviously, it is not good news to have a behemoth like Walmart threaten you with a large lawsuit. The company had been negotiating whether to sell the $10 billion in balances on the Walmart portfolio to Capital One or retain it.

In its statement, Synchrony accused Walmart of walking away from the negotiations.
Synchrony issued the following statement in response to the lawsuit recently filed by Walmart Inc. in the United States District Court for the Western District of Arkansas:

“This lawsuit is nothing more than an attempt by Walmart to exert leverage and avoid the contractually defined process for valuing the loan portfolio that Synchrony has serviced on behalf of millions of Walmart customers for the last 20 years. It is unfortunate that, despite our good faith efforts to resolve this commercial dispute amicably and in accordance with the contract, Walmart walked away from discussions and rushed to file suit. Ultimately, Walmart is trying to avoid paying the fair market value for the portfolio as required by our contract. We believe Walmart’s complaint is completely baseless and without merit, and we intend to vigorously defend our position…While this is clearly an attempt by Walmart to avoid paying the fair market value for the portfolio, we are committed to enforcing the terms of our contract…”

Despite reporting good numbers which reflect the company’s effort to improve the credit profile of its portfolio, the stock is down.

I am putting a $26 stop loss on Synchrony. This limit means if it closes below $26 for two days, I suggest selling your position.

Tapestry (NYSE: TPR) beat revenue and earnings expectation and increased the low end of guidance by $.05 to $2.75-$2.80. The increase is a few cents more than the $.03 beat, so this is positive.

The stock dropped a bit, and I am still working through all the sell-side comments I can find to figure out why. One analyst pondered that Tapestry will have tougher comparisons going forward, but estimates look to reflect those numbers. Overall, I thought the quarter seemed quite good, and management is quite optimistic about its leading Coach brand and Kate Spade.

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