11:30pm (EST)
1. Market Summary
2. Is Proofpoint (PFPT) Theft Proof for Your Portfolio?
3. Weekly Wrap Portfolio Update
4. Week Ahead
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1. Market Summary
The bulls avoided their first 3-week losing streak in over a year after the market rallied throughout the week. Friday was a volatile session and is usually the case with option expiration day but geopolitical concerns also added to the mayhem.
The bears ended the week by taking 3 of the major 4 indexes but Tech looked strong after making a run at its 52-week peak. This week could be extremely volatile with the Fed heads meeting up for their annual gathering in Jackson Hole along with heightened saber rattling.
The Dow fell 50 points, or 0.3%, to finish at 16,662 on Friday. The blue-chips reached 16,775 on the open before a 200-point drop to 16,575 during the first half of trading. Shaky support at 16,600 held and the index nearly cleared 16,800. I mentioned a run into the 16,800-17,000 zone could come following the back test and hold of the 200-day MA the prior week. The Dow just missed holding its 100-day MA and there is further risk to 16,400-16,350 on a close below 16,600.
The S&P 500 slipped a tenth-point, or 0.01%, to settle at 1,955. The index finished just below its 50-day MA but did reach a high of 1,964 on Friday. I mentioned the S&P might struggle at 1,950-1,960 but the midweek close above 1,940 was the breakout sign. Tuesday’s low reached 1,928 but support at 1,925 and the 100-day MA held like a champ. If the bulls can clear and hold 1,960 to start the week, look for another run to 1,975-2,00.
The Nasdaq gained a 12-pack, or 0.3%, to close at 4,464. Tech traded to a high of 4,482 ahead of Wall Street’s lunch break and bottomed at 4,427 before rebounding late in the day. The bulls were able to gold 4,450 to keep 52-week highs in play and a move above 4,486 would do the trick. A close below this level, and more importantly, 4,425-4,400 and the 50-day MA, would be bearish.
The Russell 2000 slipped a little over a point, or 0.2%, to end at 1,141. The small-caps closed just below the their 200-day and 100-day MA’s at 1,145 but held 1,140 into the close. I talked about the bulls needing to clear 1,150 and the 50-day MA at 1,160 before they were out of the woods and Friday’s action was discouraging to an extent. The low of 1,131 was higher than Tuesday’s trip to 1,129 but another close below 1,125-1,120 could spark another round of selling pressure.
The S&P 500 Volatility Index ($VIX, 13.15, up 0.83) traded down to 11.89 on Friday’s open but zoomed to 14.94 on the Russia-Ukraine headlines. The bulls held 15 and kept the close below 13.50, both bullish signs. Any closes above 15 this week would be bearish while any drops below 12.50 would continue to be bullish. More on the VIX to come…
There were 3 clues I said to watch for last week and they were the VIX, the Monday/ Friday Dow closes and the action in the small-caps. The bulls came close to getting the hat trick but fell just short with Friday’s pullback in the blue-chips.
The Dow started the week with a Monday win but it wasn’t too impressive. Still, the 16-point extended the blue-chips winning streak to 3-straight Monday’s. Friday’s have been weak of late with the bears now winning 3 of the past 4 sessions. Of course, much of the end of week weakness is tied to the Russia-Ukraine crisis.
The blue-chips haven’t closed in the red on both a Monday/ Friday since April so this trend continues to be an important tell for market direction. For new subscribers, up Dow M/F’s are bullish and usually means money is flowing into the market while negative sessions are bearish. Mixed Monday/ Friday can suggest trading ranges.
The VIX was another important clue I used to remain bullish and it too, continues to be a great tool for predicting market direction. The VIX came into the week above 15 and I mentioned the bulls needed to get back below this level and then 13.50. Monday’s close at 14.23 and test to 13.72 was a good sign a continued bounce off the lows would come. Wednesday’s drop below 13.50 confirmed higher highs were in store for the S&P and this level will need to hold throughout this week. The bulls cannot afford to give up the 15 level again. The VIX traded to a low of 12.42 on Thursday and will need to get a close below 12.50 to confirm higher highs this week.
The action in the small-caps was encouraging but the Russell 2000 is still down nearly 2% for 2014. The other major indexes are all positive for the year with the Nasdaq and S&P 500 advancing 6.9% and 5.8%, respectively. However, the Dow is only up a half-percent YTD and has underperformed its peers. The bears only need 86 points to take back the blue-chips.
It is unclear if technical analysis trumps headline news this week and the bears are all about the drama. Economic news here at home (pun intended) and from across the pond will also play a major role in determining market direction this week. The Housing sector will once again be in focus and despite its fits and starts, the industry is holding up. Once rates start to rise, and that depends on the Fed Heads, there could be a rush to lock-in historical low rates and when we could see the real demand for housing return.
If the economic news worsens in Europe, the ECB (European Central Bank) will come under more pressure to do something to get economic growth going. However, compounding the problem are the Russian sanctions that will act as a double-edge sword going forward.
This week, the VIX, the M/F closes, and the small-caps will once again be my point of interest. However, my main focus will be on the Nasdaq. Thursday’s close above 4,450 was money and the suit-and-ties failed to notice Friday’s push toward not only 52-week highs but 14-year peaks as well.
The upper-end of my early March near-term fluff target for the Nasdaq has been 4,500 with 4,800-5,000 possible by yearend. Tech reached its 52-week high of 4,485.93 on July 3rd. A week later, the index tested a low of 4,351 on July 10th. Two weeks afterwards, on July 24, the Nasdaq made a run to 4,485.50. Two weeks after that, on August 7th, the Nasdaq was at 4,321 and had broken below its prior July low.
Fast-forward to now, two weeks later, and the Nasdaq is knock, knock, knocking on heaven’s door. My point is, volatility has been extreme with 3%-4% price swings from weeks to weeks but support held and a break out of this mini-trading range could be powerful.
I will be watching the 4,485 level on the Nasdaq for clues of a possible short-covering rally this week and a run past 4,500. A rising tide tends to lift all boats and if Tech breaks to new highs, the other indexes should follow suit.
The conflict between Russia and Ukraine will once again be the good or bad wild card that could help or hinder the market but other geopolitical headlines from Israel, Liberia and Nigeria are also in play.
Bond yields continue to tank and has Wall Street worried but I predicted earlier this summer the 10-year note could fall to 2%. I don’t actively trade the bond market but it has also been one of my bullish thesis for a higher stock market all year as the low yields will continue to drive investors towards the stock market.
At some point, the bears will show up, perhaps this week, but all signs are still pointing towards a continued rebound with a possible breakout on the horizon.
Ahead of Monday’s open, futures look like this: Dow (+44); S&P 500 (+5); Nasdaq 100 (+10).
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2. Is Proofpoint (PFPT) Theft Proof for Your Portfolio?
Key of Technicals Used In Following Article
With an increasing amount of cyber crime and more need for internet security, Proofpoint (PFPT, $39.04, down $0.34) is an interesting play and a company worth watching.
Proofpoint was founded in June 2002 by Eric Hahn, who is the former chief technology officer (CTO) of Netscape Communications. Hahn graduated with a bachelors of science and later a Ph.D. in computer science from Massachusetts’ Worcester Polytechnic Institute. He began his career at Bolt, Beranek, and Newman, later known as BBN Technologies and became a subsidiary of Raytheon (RTN). At Bolt, Beranek, and Newman, Mr. Hahn worked on ARPAnet, the precursor to the internet. He then joined Lotus Development Corporation and ran its cc:Mail division. In 1992, he founded and became chief executive officer (CEO) of Collabra Software, a leading groupware, also known as collaborative software, provider of information sharing and group conferencing applications within and between organizations. It was acquired by Netscape in 1995.
Eric Hahn sits as the chairman of the board. In last week’s Weekly Wrap, I emphasized the importance of a good management team (to managing the actual operations) and board of directors (for setting the company’s vision).
CEO Gary Steele joined the company in 2002. Before joining, he served as the CEO of Portera, an applications company delivering solutions for the professional services industry. Under Steele’s leadership, Portera grew from having a high burn rate (negative cash flow) to $20 million in revenue. Other important members are Kevin Harvey (founder and general partner of Benchmark Capital) as a director, Douglas Garn (vice chairman, president and CEO of Quest Software) as executive consultant, Jonathan Feiber (general partner at Mohr Davidow Ventures) as a director, Dana Evan (CFO and executive vice president of VeriSign) as a director, Sydney Carey (CFO of 10gen) as a director, and Anthony Bettencourt (president, CEO, and chairman of Coverity) also as a director. He also serves on the management team.
CFO Paul Auvil has over 20 years of experience in finance, technology, and corporate leadership, including four years serving as the CFO at VMWare. CTO Marcel DePaolis was the vice president of engineering, applications, and operations at Webraska (formerly AirFlash), the leading provider of location-based software and solutions. Mark Fishwick is the vice president of the company’s global customer service. He has 25 years of experience in running international customer service organizations, including four years as vice president of client services for Postini (owned by Google).
David Knight leads the company’s Information Security Products Group, and has served as CTO of Cisco’s (CSCO) Collaboration Software Group, where he was responsible for product and technical vision and strategy, product management, and user experience. Andrés Kohn is responsible for the company’s email archiving business and has been responsible for setting product direction. He was director of product management at Critical Path and responsible for the global direction of their messaging products and services.
Darren Lee is responsible for the company’s Information Archiving and Governance Products Group. He was founder and CEO of NextPage, a leading provider of Information Governance solutions.
Tracey Newell serves as executive vice president of worldwide sales and has more than 20 years of experience in high tech sales leadership, including serving as executive vice president of Global Sales at Polycom.
Senior vice president of marketing Tara Ryan has more than 20 years experience in managing global marketing for technology companies. Executive vice president of corporate development Manish Sarin is responsible for acquisitions and execution worldwide. He has more than 15 years of experience in defining inorganic growth strategy, identifying and evaluating acquisition targets, structuring and negotiating transactions, and helping integrate the acquired companies.
Vice president of corporate strategy Michael Yang is responsible for worldwide legal affairs including licensing, intellectual property protection, compliance and corporate governance. He has more than 15 years of international business and legal experience.
On July 21, 2003, Proofpointlaunched its first product, Proofpoint Protection Server for medium and large businesses, after raising $7 million as its first significant round of venture funding, known as a Series A round. The product attempted to accurately identify spam email by using different attributes to differentiate between spam and valid email. The company was backed by Mohr Davidow Ventures, Benchmark Capital, and Stanford University. An additional $9 million in Series B funding led by New York-based RRE Ventures was announced in October 2003.
On April 20, 2012, Proofpoint sold 6.3 million shares, 100,000 more than initially planned, to the public for $13 each, above the expected range of $10 to $12, raising $81.9 million. Shares opened for trading at $16.85, but closed the day at $14.80. Only 17.5% of its outstanding shares were sold in the IPO, valuing the company at approximately $468 million.
At the time of its IPO, the company’s software, sold on a subscription basis, was used by about 2,400 customers around the world, including 26 of the Fortune 100 companies. It marketed its products through its own sales team and through distributors and resellers, as well as through strategic partners such as International Business Machines (IBM), Microsoft (MSFT), and VMware (VMW). In 2011, Proofpoint’s revenue rose 26% to $82 million, and it reported a net loss of $20 million compared to a loss of $21 million in 2010. CEO Gary Steele claimed that the cloud transition really captivated the interest of the large enterprise.
Since the company’s IPO, it has made three acquisitions.
- In July 2013, it acquired Abaca Technology, which is known for its engineering strength, technical talent, and email filtering & protection algorithms.
- In August 2013, it acquired Amorize Technologies, a leading developer of cloud-based System-as-a-Service (SaaS) anti-malware products.
- In October 2013, it acquired Sendmail, a leading provider of solutions that simplify business messaging complexity and reduce IT infrastructure costs for enterprises throughout the world.
Each of these acquisitions are expected to add on to the company’s existing technologies. For full year of 2014, the company expects Sendmail to contribute approximately $5.0 million in revenue, half of which is from the renewal of maintenance contracts, and the other half being new sales of Proofpoint solutions to Sendmail’s customers.
The company makes money by subscription and hardware and services. Its products include Proofpoint Enterprise Protection, Proofpoint Enterprise Privacy, Proofpoint Enterprise Archive, Proofpoint Enterprise Governance, and Proofpoint Essentials. Over time, the company has retained over 90% of its customers.
- Subscription revenue includes licensing of its platform and its associated solutions and services on a per user, per year basis. Subscriptions are typically one to three years in duration. The company expects subscription revenue will continue to grow and remain above 90% of total revenue.
- Hardware and services revenue includes hardware appliances and training and professional services for those customers that seek to develop deeper expertise in the use of its solutions or would like assistance with complex configurations or the importing of data. The company expects hardware and service revenue to generally remain below 10% of total revenue.
On July 24, 2014, the company reported results for the 2nd quarter ending June 30.
- Revenue was $46.4 million, up 46% from the same quarter a year ago.
- Adjusted EBITDA rose to $0.1 million from -$0.9 million the same quarter a year ago.
- GAAP gross profit rose to $31.1 million from $22.3 million the same quarter a year ago.
- The company increased fiscal 2014 revenue guidance.
At $39, the stock is below its low target of $41.00 made by the 13 analysts recorded by Thomson/First Call. Mean is $44.81, and median target is $44.00, and high target is $50.00. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock is 1.7, unchanged a week ago.
| Current Month | Last Month | Two Months Ago | Three Months Ago | |
| Strong Buy | 5 | 5 | 6 | 6 |
| Buy | 9 | 9 | 8 | 7 |
| Hold | 0 | 0 | 0 | 1 |
| Underperform | 0 | 0 | 0 | 0 |
| Sell | 0 | 0 | 0 | 0 |
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3. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 8/15/14)
The Weekly Wrap Closed Trade Track Record for 2014 is 22-4, or 85% win rate (107-11, or 91% win rate, overall since the start of 2011)
Current Trades
Apple (AAPL, $97.98, up $0.48)
Original Entry Price: $98.40 (7/28/14)
Lowered Price from Selling Options/ Dividends: $97.93
Exit Target: $120
Return: 0%
Stop Target: $85
Dividend Yield: 2.1%
Action: Shares were in a steady uptrend throughout the week following the back test to support at $94 and the 50-day MA. The 52-week high is $99.44 and Friday’s high reached $98.19. I may suggest selling a call option if shares clear $100 this week to lower the cost basis of the trade.
The company paid a dividend of 47 cents on 8/7/2014 to lower the cost of the trade to $97.93.
Pizza Inn Holdings (PZZI, $7.99, down $0.11) Stock Trades
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $16
Return: 0%
Stop Target: $5
Original Entry Price: $6 (7/9/14)
Lowered Price from Selling Options: No options available
Exit Target: $10, raise to $12
Return: 33%
Stop Target: $7.25, raise to $7.50 (Stop Limit)
Original Entry Price: $8.10 (10/11/13)
Lowered Price from Selling Options: No options available
Exit Target: $12+
Return: -1%
Stop Target: $5
Action: I added a new position last week on the move above $8. Shares cleared resistance on Tuesday at $7.75 and zoomed past $8 to $8.36 midweek. Thursday’s high reached $8.63 before Friday’s close below $8. The action has set up a run at the 52-week high of $9.09. I have set a Stop Limit of $7.50 on the second position in case a continued back test comes but I want to continue to establish longer-term positions in this company.
Previous comments:
The company recently announced further expansion plans. Pizza Inn is now on track for 200 stores. I believe this will be a $15-$20 stock in 1-2 years with insiders and mutual funds owning nearly 40% of the company. I have already recommended 2 profitable trades for the Weekly Wrap when shares were near $3.
Huttig Building Products (HBP, $4.01, down $0.09) Stock Trade
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: 0%
Stop Target: $2 (Stop Limit)
Action: Shares made a run to $5.45 in late June and my first recommendation in this name made 10%. The break below the major MA’s since has been bearish but shares appear to have bottomed. There is risk to $3.75-$3.50 on another close below $4. Near-term resistance is at $4.20 and a close above $4.25 and the 50-day MA would be bullish.
This is a small company with a big presence in the housing industry and a market-cap just south of $100 million. Huttig has been around for over 100 years and there is little Wall Street coverage with only 1 analyst following the stock.
This is a “cheap” way to play the housing sector with a quality stock. Despite the fits and starts the industry has been going through the past few years, this is a solid company with an improving balance sheet.
CubeSmart (CUBE, $18.89, down $0.10) stock trade
Original Entry Price: $18.62 (6/23/13)
Lowered Price from Selling Options/ Dividends: $18.49
Exit Target: $22
Return: 2%
Stop Target: $18.50, raise to $18.60 (Stop Limit)
Dividend Yield: 2.8%
Action: The Stop Limit of $18.50 I put in place the prior week lit a fire under shares as they finally broke out of a 2-month long trading range. Friday’s high reached $19.18 and the 52-week high is at $19.69. If cleared, low $20’s will be in play.
Near-term is at $18.75 and a close below this level would put the stock back into its range. I am raising the Stop Limit of $18.50 to $18.60 to exit the trade if there is a continued pullback. The trade would make a slight profit but I would rather move on to faster moving plays.
The company announced its quarterly dividend of 13 cents will be paid out on October 15th to shareholders of record by October 1st.
The company paid a dividend of 13 cents on 6/27/2014 to lower the cost of the trade to $18.49.
Limelight Networks (LLNW, $2.36, down $0.05) stock trade
Original Entry Price: $3.00 (6/9/14)
Lowered Price from Selling Options: None
Exit Target: $5
Return: -21%
Stop Target: None
Action: Shares continued their descent last week and bottomed at $2.34 on Friday. There is further risk to $2.30 and the 200-day MA and a close below these levels would be bearish. Near-term resistance is at $2.50.
Previous comments:
Shares traded to a high of $3.25 on 6/20 after Tuition Build offered roughly $645 million, or $6.55 a share, for Limelight. The company dismissed the Silicon Valley’s private-equity firm’s offer after basically saying they weren’t experienced enough to run the business.
I have been suggesting a buyout offer would come for Limelight Networks with the company’s cheap market cap and said they would make a very luscious takeover target.
Its litigation issues have decreased dramatically following their recent win against AKAM and they are open to a much bigger marriage.
Roth Capital lifted its Price Target for Limelight Networks to $4.50 from $3 following its recent court win against AKAM. I have already covered the acquisition appeal of the stock and Captain Obvious echoed those comments last week. I was hoping shares would go unnoticed by the suit-and-ties and perhaps they have been reading my updates but I have a much higher target for Limelight. I have said shares could make a run to $5, possibly $8 if the takeover talk heats up over the summer.
Apple, Google, Facebook, Microsoft and Verizon, just to name a few, could take a look at this company as it looks to build out its CDN network. Limelight has a market cap of just $280 million and would be a great acquisition target for Apple.
Hercules Offshore (HERO, $3.22, down $0.01)
Original Entry Price: $4.50 (5/30/14)
Lowered Price from Selling Options: $4.20
Exit Target: $7
Return: -23%
Stop Target: $2
Action: Shares are trying to form a bottom but there is risk to $3. Resistance is at $3.30-$3.40.
On 5/30/2014 I recommended buying shares at $4.50 and selling the July 4.50 calls for 30 cents to lower the cost basis to $4.20.
Alexza Pharmaceuticals (ALXA, $3.60, up $0.01) Covered Call Trade
Sold September 5 calls (ALXA140920C00005000, $0.15, flat)
Original Entry Price: $5.53 (3/4/14)
Lowered Price from Selling Options: $4.68
Exit Target: $6+
Return: -23%
Stop Target: $3
Action: Alexza continued to pullback following the analyst downgrade form the prior week and hit a midweek low of $3.41. Support is trying to form at $3.50 but there would be further risk to $3.25-$3 on a close below this level. Resistance is at $3.80-$4.
On 3/4/2014 I recommended buying shares at $5.53 and selling the June 6 calls for 50 cents to lower the cost basis to $5.03.
On 6/23/2014 I recommended selling the September 5 calls for 35 cents to lower the cost basis of the trade to $4.68. If shares are called away at $5 by mid-September the trade will make 7%.
Discovery Laboratories (DSCO, $1.67, up $0.01) Stock Trade
Original Entry Price: $1.68 (8/13/14)
Lowered Price from Selling Options: $1.68
Exit Target: $4.50-$5
Return: -1%
Stop Target: None
Sold October 2 calls (DSCO140101900002000, $0.20, flat) Covered Call Trade
Original Entry Price: $2.42 (1/7/14)
Lowered Price from Selling Options: $1.67
Exit Target: $4.50-$5
Return: 0%
Stop Target: None
Action: I added another position following the recent back test to $1.50. While there would be risk to $1.40-$1.25 on a drop below this level, I’m looking for shares to clear $1.75 and the 50-day MA over the near-term and to eventually work their way back to $2.
The company recently announced Phase 2 trials for Aerosurf have begun and beat earnings estimates on higher revenue.
On 1/7/2014 I recommended buying shares at $2.42 and selling the April 3 calls for 25 cents to lower the cost basis to $2.17.
On 4/30/14 I recommended selling the June 3 calls for 15 cents to lower the cost basis for the trade to $2.02.
On 6/23/2014 I recommended selling the October 2 calls for 35 cents to lower the cost basis of the trade to $1.67. If shares are called away at $2 by mid-October the trade will make 20%.
Trades on HOLD: AKS Steel Holding (AKS), DryShips (DRYS), Rambus (RMBS), Bebe Stores (BEBE), Vivus (VVUS), Dendreon (DNDN), Galena Biopharma (GALE) LEAP Trade/ Stock Trade, Zynga (ZNGA)
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4. Week Ahead
