Several things went right for ESI over that time period. They announced a narrower loss, which led investors and bearish short covering to force the stock higher. Also, on May 17, news was released that a Republican backed bill was being considered by the House of representatives to put a freeze on the interest rate for the Stafford student loan for two years. Without this bill being passed, the interest rate on the Stafford loan, one of the more popular student loans, will double to 6.8% on July 1, impacting 7 million undergraduates. On that day, ESI jumped by double digit % points, since student enrollment is strongly tied to interest rates, further sending shares higher and causing bears to cover their short positions.

The bill was just approved by the House yesterday.

Now it will need to get past the senate and the President to become a bill.

What makes things interesting is that the President may veto the bill because he has a different agenda. “In his budget proposal, Obama included flexible rate student loan rates pegged to 10-year Treasury bills. The president did not limit interest rates but included a smaller added interest rate. His plan also expanded income-based repayment options and loan forgiveness.”

“The Republican-backed the bill would allow students to dodge a scheduled rate hike for students with new subsidized Stafford loans next month, but rates could rise in coming years. Democrats largely opposed the measure — which they branded the ‘‘Making College More Expensive Act’’ — while the Republican chairman of the Education Committee labeled the legislation a starting point for negotiations with the Senate and White House.”

So you can see that we have a lot of potential for this bill to not get passed, due to dysfunctional government gridlock. I think that the headline risk here for the education companies in the short term is that they could trade off in the event that Obama vetoes the proposed bill.

So in one month’s time, ESI’s gone from a consensus bear trade, to a consensus bull trade. Being the contrarian that I am, I think it’s time to take the other side of this trade and be bearish on ESI.

I think the main fuel to the rally has been short covering. So let’s take a look just at the shares short stats:

As of Apr 15, Short interest was 19.10 (which equates to 19 days to cover all open short positions)

As of May 1, Short interest had dropped to 9.3 (leaving 9.3 days to cover), with a total of 8.75 million shares held short.

The May 15th data is not out yet, but doing a rudimentary analysis of the volumes traded on up days vs. down days since May 1 till today, 11.6 million shares were traded on up days, and 6.3 million shares were traded on down days. That results in a net difference of 5.3 million shares traded on up days. If we subtract 5.3 million from the 8.75 million shares that were held short as of May 1, we’d only have 3.45 million shares short currently. That’s a big drop in bearish sentiment, and less fuel for any further short squeeze rallies.

Also overall option implied volatility of 65 is near its 20-week average of 66, according to Track Data. This tells me that large moves in ESI shares are starting to become discounted (doubted) by options traders, and further adds to the notion that surprises to the upside are less likely going forward, and we should expect to see a reversion to the mean, and for ESI to start dropping back towards it’s longer term moving averages. It’s 20 day moving average is currently $22.36. With shares trading right now at 24.70, I’d expect to see shares drop down to $22 as the move upward retraces and starts a consolidation. If the proposed bill should get vetoed I would not be surprised to see shares suffer a sell-off that drops the stock down to the $20 level which is where shares closed on their earnings release, and also nearby its 50 day moving average.

Current price = 24.70
Price target = $22.20
Stop = 25.50
Reward/Risk: roughly 3:1

One company in particular has a trifecta of advantages working to its favor: 1) a strong dividend with real room for expansion through FY13 and FY14, 2) committed insider buying, and 3) a recent technical breakout of a downtrending channel. Combined, these factors point to a profitable short term and long term future for its investors.

SeaDrill Limited (SDRL) has the most modern fleet of deep-sea drillers in the industry. It provides offshore drilling services to the oil and gas industry, including drilling, completion, and maintenance of offshore wells. It has a market cap just north of $19B with a P/E of 17.4. And it may be remaking certain aspects of the traditional ultra deep sea drilling industry, starting with its focus on how it returns cash to shareholders.

The SDRL Dividend

Based on P/NAV (Price/Net Asset Value), SDRL trades at a significant premium compared to its peers such as RIG, DO, NE, ATW, and RDC. It has had a premium going back to 2005 but has seen it expand significantly in recent years. NAV is a key metric when evaluating asset-heavy oil and gas companies, especially offshore drillers, since the vast majority, if not nearly all, of their value lies in the producing or future producing assets they own. However, NAV – and hence the P/NAV ratio – is more relevant to companies that do not pay a substantial dividend. NAV is an ideal benchmark to serve as an anchor in placing market values on a company given current rates.

SDRL, on the other hand, has a shareholder friendly dividend policy. Therefore, because its assets are used to generate the maximum amount of cash to investors, the stock will trade more in line with market demand for yield rather than simply the aftermarket value for deep sea rigs. Furthermore, because SDRL operates the most modern fleet of rigs, it commands a higher return profile on its assets than its peers.

Just how shareholder friendly is SDRL’s dividend policy? The stock currently pays $3.36 per share – a yield of 8.40%. In fact, SDRL’s yield in the post-Macondo (Deepwater Horizon spill) period has averaged near 8.5%. While the yield has fluctuated between a low of 7% and a high of 11%, this degree of consistency during a challenging period for offshore drillers inspires confidence for investors seeking a reliable source of income. SDRL management has repeatedly emphasized their commitment to growing their dividend and has displayed this commitment through accretive actions such as new-build developments and asset acquisitions. Analysts expect the company to increase the payout to $3.51 in 2014 and $3.88 in 2015. This commitment to dividend growth should provide a worthwhile degree of support to the stock during negative sentiment cycles.

Insider Buying

As will be depicted below, SDRL has an overhead resistance near $42. This price was first reached on Feb. 29, 2012 when Hemen Holding Limited, SDRL’s largest shareholder, announced it would sell 24M shares, bringing to abrupt halt the stock’s rapid ascent and marking a rather precipitous top. This reduced Hemen’s stake in the company from 28% to 23%. Although Hemen later repurchased 6M shares in June 2012 to bring their stake back to 25%, the stock has since shown that the $41 – 42 level is a significant resistance level and psychological barrier.

However, if institutional selling served as the catalyst to form resistance, perhaps insider buying will serve as the catalyst to break through it. In its recent 20-F (an SEC filing for the registration of securities from foreign private issuers since SDRL is headquartered in Bermuda) filed on April 30, it was shown that John Fredriksen, Chairman and President of SDRL, and Tor Olav Trøim, a board member, bought 2M and 1M $40 Jan 15 call options respectively at a price of $1.07 on April 18. This bodes well for the upcoming 1Q13 quarterly results, scheduled for May 28.

Technical Breakout

SDRL recently broke out of a short term downtrending channel – while also conforming to a longer term uptrending trading pattern.

First, the breakout of the short term downtrending channel. Largely bucking the trend of the S&P since November of last year, SDRL’s performance struggled, along with other offshore drillers. After repeatedly testing its $42 resistance from August through October 2012, the stock initiated a gradual decline, putting in lower lows throughout.

At the end of April the stock appeared to consolidate at the top of this channel but – perhaps prompted in part by the 20-F filing on April 30 – suddenly broke out moderately heavy volume, confirming a break of the downtrending channel.



With the run-up from $35 to $41, SDRL potentially could pull back to test the upper bound of the channel – near $38. This would be a best-case scenario for entry given the technical behavior of the stock over the last two weeks. If the stock does not retreat however, it will likely remain below its $42 resistance prior to the earnings announcement on May 28.

From a longer perspective, the breakout of this 7 month downtrending channel confirms a multi-year uptrend going back to the crisis lows from 2008-09. Each breakout from the consolidation period has pushed the stock to new highs – with the exception of the most recent phase in which the stock did not break $42. This makes the resistance level a pivotal price: if the stock fails, it could signal a long term reversal of this uptrend; if the stock breaks through – and a break to new highs is the expected outcome of a long term ascending triangle – the stock could see significant upside over the next 2-3 months.



I recommend one of two entry opportunities on a break above $41 with a provisional short term exit at resistance at $42 if the stock consolidates. Or an entry following a bounce off support at $37.50 if the stock falls back to the top of the prior channel following earnings. In either case, a break above resistance at $42 is confirmation that the stock is heading much higher and targets should be set near $45-50 per share.

Alternatively option traders may choose to buy to open the July $41 calls prior to earnings for $1.00 per share or less. A break above 42 per share could be used as a trigger to add to the existing position.

Novice investors may be familiar with the double bottom reversal pattern (“W” shaped patterns). That pattern is a bullish one typically. The psychology behind it is that investors initially drop the stock to a certain price, then there is a reaction back upward (creating a V reversal), and then shares selloff one more time but only down to the original low, and then shares reach a buy point when the price reaches the high achieved during middle of the “W” pattern. Novices look for that pattern to develop a bullish thesis on a stock prices’ future movement. Well, an easy way for novices to find when an index is turning bearish is to look at that index’s inverse ETF, and spot when the inverse ETF is forming a double bottom pattern.

The S&P 500, SPY, has an leveraged inverse ETF called the Proshares Ultra short, ticker symbol SDS. In general the price pattern of the SDS is inverse (or mirror image opposite) of the SPY.

On the 5 day chart of the SDS, we are starting to see a double bottom form, which is bearish for the SPY, but bullish on the SDS. Now may be a good time to set up a bearish market trade, as the double bottom formation is showing a breakout on today’s trading action. I’d expect for a short 5-10 session trading time horizon on this pattern, with a price objective of $40 and a stop at $38.

Current price = $38.50
Price objective = $40
Stop = $38
Reward/Risk Ratio: 3:1

For those of you unfamiliar with rare earth metals, they are by their name, “rare” and difficult to cultivate, yet they are an important component in technology like iPads, and in electric vehicles made by Toyota. Rare earth metals are very controversial right now because China has the largest available natural supply, but have been monopolistic.

That leads us to the opportunity that is Molycorp. MCP has been the biggest player in Rare earth metals outside of China for several years and recently reported an earnings shortfall that was narrower than analyst estimates, and sales that beat the forecast. That sent MCP shares up 22% on May 10th.

Shares have sold off a little since May 10th, but are perking back up today. Options volumes today are titled towards calls currently tracking at 20 calls to 3 puts. The shares also have a high level of short interest (30% of float is short), so there’s good potential for a short squeeze to occur. I see upside up to $9.50 from here with downside to $6, with shares currently trading at $7.20

Spectrum is a valuable resource allowing for the use of devices like smartphones and tablets to do such things like streaming movies, audio and other video. Spectrum is a finite resource, which raises the stakes even more. So valuable is spectrum that all of the telecom players worth their salt are trying to do all they can to gain more of it. They’ve set their sights on Clearwire, the smallest of the players because it is seen as being the best viable source to acquire more spectrum. In fact, Clearwire has emerged as somewhat of an industry darling as the larger companies are blanketing it with unsolicited offers. It currently has three suitors that have made bids as high as $5.5 billion.

The players are include SoftBank/Sprint, Verizon (NYSE: VZ) and Dish Network (NASDAQ: DISH). Of the three offers, we give the least credence to that of Verizon if for no other reason than the significant regulatory hurdles it would face. Verizon, the largest wireless carrier in the country, would likely find it difficult to get the federal government to give it more spectrum. Just last year it received approval from the Justice Department to buy spectrum from several cable companies for $3.6 billion. The approved agreement was a boon for it, with the main plus being it was better positioned it to lead its competitors. However, although unlikely to complete, the pressure provided by VZ is welcome for this trade.

That leaves SoftBank/Sprint and Dish. While we see Dish’s jump into the fray as admirable, the Softbank/Sprint deal is the more likely one to complete. There are a myriad of reasons to be cautious about Dish’s deal, including the satellite providers’ ability to finance and run a wireless provider. However, there are many reasons to believe that the offer from SoftBank/Sprint will lead to more growth opportunities for the combined entity as it competes as a distant third player in the wireless communications space.

The advantage for Softbank/Sprint is that Sprint owns about 51% of Clearwire already. However, the deal got cloudier when Dish offered to buy the company for $5.5 billion in January. This was higher than Sprint’s offer in December to buy the remaining stake it has in Clearwire for $2.2 billion.

SoftBank is already in negotiations to buy Sprint for roughly $20.1 billion. The deal, which was supposed to be completed this year, involves several moving parts. One of those entails Sprint buying the remaining stake in Clearwire. Sprint needs this deal because SoftBank would infuse the company with much-needed cash, to the tune of at least $8 billion.

Just as Sprint and Clearwire shareholders were getting used to the idea of being acquired by a Japanese company, Dish threw its hat in the ring. It also upped the ante by offering $25.5 billion to buy Sprint, which trumped SoftBank’s bid.

So, you now have an offer by Sprint to buy Clearwire so that it can in turn be bought by SoftBank. You also have an offer by Dish to buy Clearwire and Sprint. To get an idea of how much the deal could help Sprint, one has to look no further than its earnings for the last quarter. It reported losses of $-.22 per share, which has become the norm for the last several years. Things weren’t great for Clearwire either. Losses were $-.31 per share last quarter, which also conforms to a multi-year stretch of losses. However, what these companies lack in revenue and earnings they make up for in valuable assets.

Broken down, Sprint’s offer for CLWR is $2.97 a share, while Dish’s is $3.30 a share. That’s left some of Clearwire’s shareholders’ balking at Sprint’s offer while management is endorsing it. Dish’s offer, though commendable, raises leverage questions. It will have to raise at least $9 billion to make the deal happen. We think its less likely that DISH will prevail but they may do a good job of driving Softbank’s bid up.

Sprint summed up its choice of suitors earlier this year by releasing the following statement:

“In contrast, the DISH proposal includes a series of interdependent commercial agreements, debt and equity purchases and spectrum sales, which together with the other conditions required by DISH to complete the transaction, makes the proposal not viable. In addition, the DISH proposal would require Sprint to voluntarily waive rights that it holds as a stockholder of Clearwire and that it possesses through various vendor and customer contracts that significantly predate Sprint’s proposed acquisition of the remainder of Clearwire. Sprint does not intend to waive any of its rights and looks forward to closing the transaction with Clearwire and helping consumers across the country realize the benefits of this combination.”

Despite management resistance from Sprint and Clearwire we don’t think Dish’s Chairman, Charles Ergen, will back down in the near term and that presents an interesting opportunity for traders. CLWR and S have both fallen on news this week that the executives at Sprint and Clearwire are urging shareholders to take the Sprint/Softbank deal. However, if shareholders resist it could encourage DISH to up the ante a little and put pressure on Sprint/Softbank to improve their terms.

If that happens before the official shareholder vote on May 21st, we expect to see both S and CLWR much closer to the value of the Dish offer per share. Investors could certainly play this with an outright long position in either or both stocks, or with call options. There is plenty of risk in the trade, but CLWR is the belle of the ball and bullish pressure seems likely. Traders looking to take a leveraged position on S and or CLWR should look at the June at the money call options. We like the June 7 calls on S and the Jun 3 calls CLWR. Investors are very active in both options already and the recent dip has brought prices low enough to be worth the risk.

As a continuation on my short squeeze theme (ESI and LQDT trade ideas), SODA is also a stock that I think can benefit from continued short squeeze action.

On May 8th, SODA reported impressive earnings, saying first-quarter net income climbed 20 percent as usage of its carbonated beverage machines continued to grow in the U.S. The company’s results beat Wall Street’s view. It also boosted its full-year adjusted earnings and revenue forecasts on Wednesday, citing the quarterly performance.

Shares sold off on the news because investors had been positioning for an earnings beat ahead of the announcement. That pullback though was short lived, and today’s movement in the shares on a long white candle shows extreme bullishness and commitment of traders to move the stock further to the upside.

LQDT recently reported earnings on May 2nd, delivering a profit that met Wall Street’s expectations, but came up short on beating the revenue expectation. Liquidity Services, Inc. reported adjusted EPS income of $0.48 per share. By that measure, the company met the mean analyst estimate of $0.48. It missed the average revenue estimate of $140.65 million, reporting $130.32 million.

The main reason I’m interested in LQDT is its high short interest of 35% of float. The market conditions right now are scaring shorts like crazy (take TSLA, GMCR and ESI for example).

LQDT’s earnings results may have been lukewarm at best, but the overlal market bullishness that I expect to continue will force shorts to cover their positions in LQDT. I see upside potential for LQDT to fill its previous gap down from $41, and rise potentially all the way up to $48

Current price = $36.50
Stop = $34
Target = $48
Reward/Risk = 4.5:1

XONE’s printers are different from SSYS and DDD’s in that “ExOne uses a wider range of materials to print products. These materials provide the ability for ExOne printers to make production-grade objects and castings out of stainless steel, bronze and glass, silica sand and ceramics. ExOne focuses primarily on printers for large industrial companies with big capital spending budgets, such as aerospace, automotive, heavy equipment, and liquid and gas transmission.”

XONE does not directly compete with SSYS and DDD because their end market users are not the same. In their 10k they state, “We believe that we are an early entrant into the additive manufacturing industrial products market and one of the few providers of printing solutions to industrial customers.”

Its primary competitors do not make 3D printers. Rather they use a laser-based metals printing process, also called laser sintering or laser fusing. Like ExOne, they start with powders but fuse the materials with high-energy lasers. The largest companies in this field are Germany-based EOS, Germany-based Concept Lasers, and Swedenbased Arcam.

Analyst Lewis, here again, thinks ExOne is not seriously threatened by these competitors. While the laser-based systems can achieve very fine feature detail they are more expensive, he said.

“The laser-based systems are good for very high-value, low-volume, finely featured products,” he said. The 3D printers do not achieve the same degree of precision as laser sintering but are faster and better suited for higher volume.

“We think ExOne is in a faster-growing niche,” said Lewis. “We believe that 2013 will represent the first year of positive earnings for ExOne and that growth will ensue from there.”

XONE is highly shorted with about 32% of the float currently short. The company has its skeptics, but that high short interest can continue to fuel the stock higher if XONE puts up a solid earnings number.

Taking a look at the stock chart, I’ve drawn 2 Fibonacci extension drawings. One with anchors at the February 8 high and the February 19 low. Another with anchors at the Apr 12 high to the Aprl 18 low. Those 2 drawings both result in an upward price projection at the 261% fibonacci extension of $48.70-$48.75. So with that price objective, and with a stop limit at the most recently surpassed Fib extension @ $42, we have a risk of $2, and a reward of about $5.

According to sources, Hutchinson Technology is experiencing more insider buying during May than at any other time this year. There are 2 analyst buy ratings, 1 neutral, and 0 sell. The target price is $3.80. However, according to one analyst, the book value is $6.26.

Watching this stock might be interesting.

Chico’s Fashion (CHS) perhaps sits somewhere in the middle: its performance has by no means been making investors want to kiss their quarterly statements but neither has it been exasperating. After a very robust summer in 2012, the stock has ambled its way slowly downward, giving back roughly half of the gains it made after breaking through a key resistance level – and taking its time to do so.

The market continues to show strength. But with its now 6 month trend looking almost too textbook, and perhaps showing a bit of complacency, it may be beneficial to look at a stock whose volatility and trading range are almost quaint.

Synopsis of CHS

CHS is a specialty retailer in a highly fragmented women’s apparel industry that represents a $110B market in the US. The company uses a multi-brand strategy that currently consists of four lines – besides its namesake, it also operates White House | Black Market stores, Soma Intimates, and Boston Proper, a specialty online and catalog-based retailer, acquired in September 2011.

CHS was a pioneer in developing customer loyalty programs among clothing retailers and their long history with these programs, including the Passport Club at Chico’s and the Black Book with WHBM, has paid off. Nearly 50% of all brand sales come from members in one of these loyalty programs.

For a seasoned chain, the company is planning on significant growth in store count. It sees room for at least 120 stores every year. For FY 2013, it plans to open between 135 and 145 new stores with a focus on the WHBM and Soma brands. CHS currently operates 614 Chico’s, 401 WHBM, and 194 Soma’s (among other retail and outlet stores). But of its planned 2013 openings, only 28-32 will be in the Chico’s brand while 54-58 will be WHBM stores and another 28-32 in Soma.

Record of EPS and Revenue Growth

CHS has an enviable track record in delivering earnings and revenue growth, despite a customer base that is more sensitive to macro economic trends and displays rather elastic spending habits. With the exception of 2009, CHS has grown revenues every year for the last 10 years. They have also produced a CAGR of 29% in earnings since 2010.

Despite these growth trends in a fiercely competitive market, CHS is trading at the lowest P/E multiples it has seen in well over 10 years. Its multiple range for 2013 so far has fluctuated between 10x – 18x. This is compared to high end ranges of 20x in 2012, 26x in 2011, and 40x in 2010. During and prior to the recession, CHS typically traded at multiples well into the 40s and 50s. If CHS’ earnings and revenues continue to grow at their current pace, the stock would be justified in seeing some multiple expansion return, especially if current S&P averages remain the norm.

The Chart Breakdown

While the market has been busy setting all-time highs recently, CHS has not been attending the party, opting instead to meander through a gradual downtrending channel over the last 7 months. While the loss hasn’t exactly been earth-shattering – the pattern took CHS only from a high of about $19.64 to a low of $16.17 – it has caused impatience among investors who have watched stocks like KORS, GPS, TJX, URBN and other retailers do a better job of capitalizing on the broad market’s bullish run.

Could that be changing? CHS is showing signs of crossing the upper end of its channel and testing a resistance level at about $18.10. Although still at a pivotal juncture, the recent action has been bullish as the stock has made a series of higher lows over the last two and a half months, indicating that a reversal of the downtrending channel may be underway.

Volatility-wise, CHS is a low risk stock with narrow trading ranges. Even a move back down to the low end of the channel would take only $1.5 off the price of the stock. For that reason, entering at the current price in anticipation of a change in trend direction comes with low risk. For example, CHS saw a retraced breakout to the downside at the end of February. The price broke down through support on heavy volume but quickly recovered and raced back towards the top of the channel. If a similar mirror-image false breakout were to happen here, placing a stop midway into the existing channel risks only $1 of downside.

An upside breakout would likely put CHS into a new trading range with $18.10 as new support and $19.50 – 19.75 as the upper end of the range. Failing the breakout would keep CHS in its current range with $18.10 as a strong ceiling and roughly $16.75 as support.

(CHS) Chico’s 1-year: Chart Courtesy of MetaStock Professional

(CHS) Chico’s Inset: Chart Courtesy of MetaStock Professional

If the momentum behind CHS’ current rally fails to propel it to this new higher range, expect the stock to fall back down to the $16.75 – 17.00 level. For a long-term minded investor, this would represent a technically valuable entry price. The $16 level is significant – prior to August 2012 it was very strong resistance but its break through has been a game-changer for the stock. The short-lived breach of the channel support just mentioned was quickly and resolutely reversed because the stock tested this long term support level. A price in the sub-$17 range would be well protected to the downside with this support.

(CHS) Chico’s 2-year: Chart Courtesy of MetaStock Professional

Bullish Sentiment? Look to the Short Sellers

After a stock makes a run to the upper end of a trading range, a decisive question for traders watching the technical action is whether the stock can maintain sufficient bullish sentiment to break through resistance and whether an upside break can hold. The cyclicality in sentiment often disguises itself for a time, sucking in early commitments from breaks in support or resistance only to claim victims once sentiment changes. So one way to determine if bullish sentiment is running out of steam is to check short seller data. After a bullish run, especially within a defined trading channel, one would expect short selling to accumulate towards the top of the channel, indicating that bearish sentiment is gaining confidence.

However, if there is significant short covering after a bullish move, this points to a lack of conviction among sellers and hints that more upside may be expected. This is what CHS has seen. Shares shorted have fallen from 8.57M at the beginning of March to 6.56M at the beginning of April to 5.82M currently. This amounts to a 3.5% short interest, certainly insufficient to spark any kind of a short squeeze but also indicative of waning bearish pressure. And with the bears getting worn out, perhaps it is CHS’ time to join the retail party.