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1:19 pm Looking Ahead - February 16, 2016

The US market will be closed on Monday in observance of Presidents Day.  What transpires when it reopens on Tuesday could have a lot to do with how the Chinese stock market reacts to what is observed in China's January Trade Balance report over the weekend.

China's Trade Balance report for January (Sunday, February 14, at 9:55 p.m. ET)

  • Why it's important
    • There are few reports these days that can make global capital markets feel better, or worse, about China's economy than the trade balance report, which provides insight on its export and import activity
    • China's devaluation of the yuan on August 11 triggered criticism for being a tacit attempt to boost China's exports.  Participants will use the report to extrapolate how things might turn in trade channels in coming months with a weaker yuan.
    • China is undergoing a deliberate transformation to become a consumer-led economy.  Import data will help shape the market's thinking about its progress (or lack thereof) in making that transformation.
    • This report will be a driver of policy stimulus expectations in China and elsewhere given the global preoccupation with China's growth slowdown and the slowdown in emerging markets
    • China's trade balance report will feed thoughts about the condition of the global economy since exports account for nearly a third of China's GDP

  • A closer look
    • China had a trade surplus of $60.09 billion in December, which was up from $54.10 billion in November
    • Exports have declined year-over-year in nine of the last 11 months.  They were down 1.4% in December, which was above expectations at the time
    • Imports declined 7.6% year-over-year in December, which was better than expected, but the series could not avoid its 14th monthly decline in a row

 

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  • What's in play?

    • China ETFs
      • iShares China Large-Cap ETF (FXI)
      • ProShares UltraShort FTSE China 50 (FXP)
      • db X-trackers harvest CSI 300 China A-Shares Fund (ASHR)
      • iShares MSCI China ETF (MCHI)
      • SPDR S&P China ETF (GXC)
      • China Small Cap ETF (HAO)
      • Market Vectors China ETF (PEK)

    • Regional ETFs
      • iShares MSCI Emerging Markets (EEM)
      • SPDR S&P Emerging Asia Pacific ETF (GMF)
      • iShares MSCI Japan (EWJ)
      • iShares MSCI South Korea Capped ETF (EWY)
      • iShares MSCI Singapore (EWS)
      • iShares MSCI Australia ETF (EWA)
      • iShares MSCI Taiwan ETF (EWT)

    • Currencies
      • USD/CNY
      • USD/JPY
      • EUR/USD

    • Commodities
    • Treasuries (TBT, TLT, SHY, SCHO)
    • S&P futures

12:18 pm Wynn Resorts surges after Mr. Wynn provides an optimistic outlook

Shares of Wynn Resorts (WYNN) are up 13% following Q4 results after CEO Steve Wynn provided an optimistic outlook. He owns ~12% of the company and purchased 258K shares earlier in the week.

On the always informal conference call, Mr. Wynn said he likes the stock a lot at these levels given the company's long term prospects. Wynn is opening a third casino in Macau later this year (and its first on the regions popular Cotai strip: Wynn Palace). He believes the Las Vegas assets are undervalued and he is very excited to have a casino (Wynn Everett) 15 minutes from Logan Airport outside of Boston in 2018.

Wynn preannounced 'better than feared' sales and EBITDA on January 15, which sent the stock higher off of a six and a half year low. Fourth quarter adjusted property EBITDA fell 33% to $287.5 million while net revenue fell 17% to $94 million.

In Macau, EBITDA fell 34% to $160 mln while net revenue fell 27% to $556 million. The Macau market continues to adjust to a 'new normal' after the government imposed regulations that crushed the VIP gaming market. The casinos were making big money as organized criminals used them to launder money. Wynn was hit especially hard as it serves the high end of the market. Gross gaming revenue in Macau fell 21% in January after falling 34% in 2015.

Meanwhile, the all-important Golden Week New Year Holiday is underway. It is one of the busiest weeks of the year in Macau.

Steve Wynn said the mass market looked strong so far but it was too soon to make a call on the VIP segment ahead of the weekend. He also noted that retail sales and hotel occupancy had stabilized since November.

In Vegas, profit was up 13% on modest net revenue growth as the casino was lucky during the quarter (higher than average win percentage). Las Vegas Sands (LVS) last week said Vegas is a lodging story. To that point, Wynn's casino revenue was flat as the strong dollar is impacting tourists at the Baccarat tables but revenue per available room (or RevPAR, a key hotel metric) was up 6.8%.

WYNN has significant resistance near and below the $70 level.

Mr. Wynn's optimism is also helping lift its Macau casino peers this session as the broader market rallies: Melco Crown (MPEL +10%), Las Vegas Sands (LVS +9%), MGM (MGM +7%).

12:07 pm For Visa, Square (SQ)

Badly in need of some good news, shares of mobile payment processing company Square (SQ) are surging higher today after Visa (V) disclosed a 9.99% passive stake in the company. Interestingly, Visa actually invested in SQ long before the company went public. In fact, the company initially bought a small stake in SQ back in April in 2011. However, since that investment was so small, it was not disclosed in SQ's IPO prospectus. Now, however, Visa's stake in the company has apparently grown significantly, causing it to disclose its position in a filing last night. With 3.52 million Class A shares, Visa is now the second largest holder of Class A stock, trailing only Capital Research and Management.

What this news primarily does for SQ is, it provides some validation for its business model. If one of the largest payment processing companies in the world is interested in building an equity position, that is a strong indication that SQ has a viable business with growth potential. There has also been some speculation that this growing interest in the company could be a harbinger for a future acquisition of the company. Given its depressed stock price (down 29% from its IPO opening price), the growing interest and competition in the mobile payment processing space, and SQ's significant established customer base, that could make sense for a company like Visa. That said, SQ has its warts, including a long track record of substantial operating losses, and the company has been investing heavily into other business lines, such as private lending, which could make it less attractive.

Regardless, the stock was certainly in need of a spark as sentiment has soured dramatically on it over the past couple of months. A common concern among investors is that its CEO, Jack Dorsey, is also running Twitter (TWTR), which, as everyone is fully aware, is grappling with its own issues. The fact that one CEO is attempting to turnaround two struggling businesses isn't exactly the most encouraging management set up.

It's also worth pointing out that SQ has its Q4 results coming up pretty soon. Specifically, it is scheduled to release its quarterly numbers on March 9 after the market close. At the moment, analysts are expecting the company to report a loss per share of ($0.12) on revenue of $344.8 million. This will be the company's first earnings report since its November 19, 2015 IPO, so it will be closely watched. It isn't unusual for a company to surpass (sometimes easily) analysts' estimates for its first quarterly report out of the chute. Analysts can tend to be a bit conservative in their initial estimates, setting up a good possibility of a beat. Whether or not this general trend plays out for SQ remains to be seen, but, with the stock looking like it has formed a bottom in the $8.25-$8.50 range, traders may look at SQ as a good risk-reward type of play ahead of its results.

In short, today's news is a positive event for SQ, giving it some much needed credibility. The recent stock action has been more encouraging as shares appear to have carved out a bottom. With its Q4 report upcoming, there could be some heightened interest in the stock as well. Fundamentally, there are plenty of issues remaining, such as its steep losses, mounting competition, and the aforementioned management situation, making the longer-term outlook murky. But, in the near-term, SQ is looking better, especially if the broader market cooperates.

11:52 am VeriSign reports Q4 results; adds $611 million to share buyback

Shares of domain-name registry and Internet security firm VeriSign (VRSN 76.05, +1.89) are trading 2.55% higher this afternoon following the company's Q4 report. Also in the report, VRSN announced the addition of $611 million to the company's share buyback program.

In the period, VRSN reported worse than expected Q4 earnings per share (EPS) of $0.76 on revenues which rose 6.7% year-over-year to $273 million.

In Q4, VRSN added 4.6 million net new names, ending with 139.8 million .com and .net domain names which is a 6.3% increase compared to Q4 of 2014. Also in Q4, VRSN processed 12.2 million new domain names for .com and .net, compared to 8.2 million last year.

In addition to the earnings, VRSN announced an addition of $611 million to the common stock share repurchase authorization. The total amount now authorized under the program now stands at $1 billion, with no expiration date.

VRSN's stock, like the majority of the Technology (XLK 39.26, +0.55 +1.42%) sector (and the broader market for that matter) has been on a notable downtrend since about early December. Since that time, VRSN is down more than 15% while the broader market indices -- Nasdaq -13.8%, S&P 500 -9.3% and Dow -9.0% -- have all been getting crushed. Technology (-9.3%) since early-December is also hurting for any sign of gains. 

VRSN is the 13th weighted component in the First Trust Dow Jones Internet ETF (FDN 59.68, +0.84 +1.43%). Other holdings in the ETF are in the likes of FB, AMZN, GOOGL and NFLX. Year-to-date, the FDN has been underperforming the broader market; however, VRSN and FB are the only outperformers of the FDN during that time, company VRSN probably does not mind sharing. 

11:12 am Pandora Slides After Missing Earnings Estimates

Shares of Pandora Media (P 7.30, -1.79) have spent the past two years in a steady decline from their 2014 high of $40.44. Yesterday, the stock surged 8.2% amid takeover speculation, but that gain has been retraced entirely after the music streaming service reported its fourth quarter results last evening.

Pandora reported earnings of $0.06 per share, which was worse than expected. The company's revenue grew 25.4% year-over-year to $336.20 million, beating analysts' average estimates.

During the fourth quarter, Pandora's total listener hours increased 3.0% year-over-year to 5.37 billion and advertising revenue grew 22.0% year-over-year to $269 million. For the full year, advertising revenue increased 27.0% to $933.30 million while listener hours increased 5.0% year-over-year to 21.11 billion.

Pandora's management commented on the results, touting growth in all areas of business. Chief Executive Officer Brian McAndrews voiced confidence in the company's core advertising model and said he believes Pandora remains in position to provide a complete audio streaming experience to users, including radio, on-demand music, and live music.

The growth in users and advertising revenue has not been enough to deflect continued concerns about the company's competition. Most notably, Spotify and Apple Music have stepped up their efforts in the music streaming business, which has led to investor caution when dealing with Pandora.

Going forward, Pandora expects to generate first quarter revenue between $280 and $290 million, which would match analysts' average estimates; however, Pandora's full-year expectations for revenue between $1.40 and $1.42 billion is a bit below current market expectations.

Pandora has tumbled 19.6% today, returning to levels from late 2012.

11:11 am Story Stocks: Groupon surges after a strong fourth quarter

Groupon (GRPN) has struggled since the start of 2015, with the stock closing yesterday (February 11th) down approximately 72% from that point. This morning, however, shares are trading up approximately 27% after the company reported a strong fourth quarter, beating on both earnings and revenues and also increasing their 2016 EBITDA guidance.

When Rich Williams was names CEO in November, he committed to streamlining the business and to investing in order to increase customer adoption. Perhaps more importantly than the top and bottom line beat last quarter is that the company showed encouraging signs of progress towards these commitments.

At the beginning of 2015, the company was operating in 47 countries. Today, they are operating in 28 "key" countries. In addition, Groupon is refocusing their investments into the North American markets and, as a result, is expecting to see an increased pace of customer growth in the second half of 2016.

The company is already starting to see benefits from their increased marketing efforts in North America as active customers increased by 645,000 in the fourth quarter (compared to 400,000 in Q2 and 349,000 in Q3), representing a 7.5% increase over the fourth quarter of 2014. This is a very encouraging metric for the company as active customer additions decreased between the third quarter and fourth quarter of 2014. In 2016 the company expects to spend between $150-200 million in marketing and a large portion of this will be spent in North America to continue to improve the customer base.

Groupon's initiatives to emphasize higher margin local deals and move away from low margin categories within Goods, such as consumer electronics, were also reflected in fourth quarter results. The commitment helped improve North American shopping margins by 10.3% in the period. They plan to continue to improve their product mix in the first half of 2016 in order to improve the margins of the company and set Groupon up for long term success.

Investors in Groupon have been perpetually disappointed over the past year, seeing share prices fall from $8.02 on January 2, 2015 to $2.24 as of close yesterday. Shares are surging 27% this morning helped by the fact that 16% of the float was sold short. It will be important to see if the company can continue to deliver on their initiatives going forward in 2016.

9:37 am Activision Blizzard Slides Following Earnings Miss

Video game developer and publisher Activision Blizzard (ATVI 28.55, -1.97) reported its fourth quarter results last evening and the announcement was largely disappointing. Activision reported earnings of $0.83 per share on $2.12 billion in revenue. The company missed analysts' average estimates on both metrics and its revenue contracted 4.3% year-over-year.

The company highlighted its revenue from digital channels, which grew 14.0% year-over-year and constituted 37.0% of the total non-GAAP revenue.

Activision ended 2015 with a net income of $892 million, which represented 6.8% year-over-year growth, but amortization of capitalized software development costs and intellectual property licenses grew faster than a year ago, leaving the company with $1.19 billion in net cash from operating activities versus $1.29 billion a year ago (-7.8% year-over-year).

Activision Blizzard has been a well-known name in the gaming community for years with the company developing content for PCs as well as all major gaming consoles. However, the company now has its sights set on improving its position in the mobile arena, evidenced by its November agreement to acquire King Digital Entertainment for $5.90 billion in equity value. This acquisition is expected to improve the company's position in a market where potential for content has grown thanks to continued improvements in smartphone technology.

Going forward, the company expects first quarter earnings of $0.11 per share on $800 million in revenue. These results would represent a bottom-line miss on above-consensus revenue given current estimates. For the full-year, the company expects to generate above-consensus earnings of $1.75 per share on $6.25 billion in revenue.

Shares of Activision Blizzard have surrendered 5.7% after hitting a five-month low earlier this week.

9:25 am Calpine Reports Fourth Quarter Loss

Calpine (CPN 13.20) reported a fourth quarter GAAP loss of $0.13 per share, which topped expectations. On the top line, revenues fell 25.9% year/year to $1.44 billion, which also beat expectations.

The company reported fourth quarter 2015 Adjusted EBITDA of $390 million, compared to $345 million in the prior year period, and Adjusted Free Cash Flow of $97 million, or $0.27 per diluted share, compared to $95 million, or $0.24 per diluted share, in the prior year period.

The increases in Adjusted EBITDA and Adjusted Free Cash Flow were primarily due to higher Commodity Margin driven by higher contribution from hedges and hedging through our retail subsidiary acquired in October 2015, the acquisition of our Fore River Energy Center in November 2014, the commencement of operations at our Garrison Energy Center in June 2015 and higher regulatory capacity revenue in PJM.

Power markets are evolving more today than at any point since deregulation, primarily due to sustained low natural gas prices, continued subsidization of renewable generation, a growing focus on resource reliability and the proliferation of environmental regulations. This evolution has weighed upon the public equity markets as investors consider its impacts.

Calpine's message in that debate is clear: a modern, flexible and clean fleet like Calpine's is essential in each of our markets today and will be even more so in the power generation sector of the future.

The company continues to expect Adjusted EBITDA of $1.8 billion to $1.95 billion and Adjusted Free Cash Flow of $710 million to $860 million, or $2.00 to $2.40 per share.

They further expect to invest $285 million in our growth projects throughout 2016, primarily the construction of York 2 Energy Center.

The company said, "We continue to move forward with our turbine modernization program. Through December 31, 2015, we have completed the upgrade of 13 Siemens and eight GE turbines totaling approximately 210 MW and have committed to upgrade three additional turbines. In addition, we have begun a program to update our dual-fueled turbines at certain of our East Region power plants.

8:13 am Optical equipment vendor Infinera (INFN)

Infinera (INFN) is trading roughly flat in early pre-market trading after reporting in-line Q4 results and providing in-line Q1 guidance.

Background:

INFN is a provider of optical transport networking equipment, and is a beneficiary of the 100-gig optical upgrade cycle. INFN's flagship product is its 100-gig DTN-X platform, which is used by service providers to manage the traffic of video, mobile, and cloud-based services. The company has a very diversified customer base, and counts as customers 17 Tier 1 global carriers, 4 of the top 5 North American cable companies,  3 of the 4 top Internet content providers, as well as bandwidth wholesalers such as Level 3, XO Communications, etc. 

INFN has traditionally been very successful in long-haul, where its primary competitor is Ciena (CIEN). In April 2015 the company announced a key acquisition when it bought Transmode, which added a portfolio of end-to-end Metro products to INFN's product portfolio. Management believes that metro adoption of 100-gig will start to ramp up this year and add a second, long-term leg of growth. When metro spending does kick in, INFN's new XT and XTC products and Cloud Xpress (for data centers) should position it well. While there have been persistent concerns about competitors entering the 100-gig market, INFN has still managed to grow at a much faster rate than the industry as a whole.

Q4 Results & Guidance:

As mentioned above, Q4 results were in-line with expectations. Sales rose +40% to $260 million, while EPS grew at an even faster rate of +62% to $0.21. During the call, management attributed the strong revenue growth in the quarter to continued strength in long-haul, the ramp in its data center business, and a full quarter of the metro business acquired from Transmode. Margins also saw some nice year-over-year expansion, with non-GAAP gross margin rising to 48% versus 46% in 4Q14, and non-GAAP operating margin expanding to 12.7% versus 11% in the year-ago period. Cash flow from operations was $26 million in Q4.

When introducing Q1 guidance during the call, management said that industry conditions in Q1 could be challenging as customers take time to finalize their capex budgets, convert them into orders, and build networks. As such, the company provided in-line guidance, with sales expected to be $240-250 million, which at the midpoint represents a -6% sequential decline but a year-over-year increase of +31%; EPS is expected to be $0.15-0.19 in Q1.

During the conference call, management provided the following color concerning the year ahead: "Looking at 2016, consistent with industry analysts, we anticipate the overall market to grow 6% to 7%, in long-haul DWDM, 9% to 10% in metro DWDM and double-digits in DCI [data center interconnects]. Growth estimates for the DCI market vary considerably between industry analysts, though all project the market will grow substantially in 2016. While overall long-haul growth is slowing, our aggressive deployment in the 100-gig long-haul footprint over the past few years places Infinera in an excellent position to continue to outgrow the long-haul market. Across the broader market, we believe we have good opportunity to gain market share in 2016 based on driving the growth trajectory of Cloud Xpress, achieving traction from new products, adding long-haul capacity to our 100-gig footprint, and revenue synergies from our new metro portfolio." 

Interestingly, regarding their fast-growing Cloud Xpress product, they noted that: "The momentum that was building near the end of the year has actually accelerated in Q1 for the Cloud Xpress product. It's actually in Q1 so far exceeding our expectations. That's what we thought would happen to architectural win... And even though a number of competitors have announced competing products, we're really not seeing them impact the market yet."

8:10 am JPMorgan CEO Dimon Lends Vote of Confidence with Big Insider Purchase

There are insider purchases of corporate stock and then there are insider purchases of corporate stock.  JPMorgan Chase (JPM 53.07) CEO Jamie Dimon made one of the latter, according to a Form 4 filing with the SEC that was submitted on February 11.

Specifically, the filing revealed that Mr. Dimon purchased 500,000 shares of JPM common stock for prices ranging from $53.1309 to $53.2991.  In other words, Mr. Dimon spent approximately $26 million to buy his company's stock.

With the aforementioned purchases, Mr. Dimon is now a beneficial owner of 6,746,335 shares of JPM stock.  That translates to a little over $358 million at yesterday's closing price.

News of the latest stock purchases have put a nice bid in JPM shares this morning.  They are trading 3.8% higher in pre-market action at $55.10, so Mr. Dimon stands to make a nice paper gain today should that position hold.

His purchase comes at a perilous time for the banking stocks.  They have been battered this year on a host of issues, all of which have fed back to worries about weakened earnings prospects.

JPM has not been exempt.  It is down 19.6% year-to-date.  That leaves it well below the 10.5% decline for the S&P 500, but slightly ahead of the  SPDR S&P Bank ETF (KBE 26.52), which is down 21.6%.

Insider buying is often construed as a sign of confidence in the company's outlook, yet there are varying degrees to that assessment that generally range with the size of the purchase and the title of the insider making the purchase.  

Mr. Dimon's latest purchase qualifies as a big purchase; hence, it has been taken as a big vote of confidence this morning in the notion that this year's selling of JPMorgan in particular -- and perhaps bank stocks in general -- has been overdone.

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