Stay the Course

6/29/14

                  Just a few months ago, stocks were down about 5% and everyone under the sun was calling for a market correction.  Since the February lows, the S&P is up about 12%, putting it up 7% for the year.  Despite this strong rally, there are still too many analysts calling for a 10% pullback, but my advice to you is to stay the course and continue to build on positions that you have nice gains in, and look for stocks that have sold off sharply because of temporary bad news. 

                  I think the technology sector will continue to outperform in the second half of the year.  If you’ve missed the moves in the chipmakers like Intel, Qualcomm, and Micron Technologies, move on.  My favorite tech stock right now is Google, which is the ultimate diversified technology investment.  With Google, you have search, drones, mobile, driverless cars, home automation, and whatever other technological advances they will think of next.  Google looks as if it wants to rally back to new all-time highs, but if you can get a pullback to $550, which is the 50-day moving average and looks to be strong support over the last month, you need to be a buyer.  My 12-month price target on Google is $688, which represents a 17.5% gain from Friday’s close. 

                  One sector that has not performed very well this year has been retail.  Macy’s, Michael Kors, Tiffany and Kate Spade have led the way this year, but stocks like Amazon, Coach, and Costco have all underperformed.  I still like the leaders and continue to hold Macy’s as a core position, but I think you can look at adding a small position to your portfolio with a name like the last three that I mentioned.  I like Amazon at these prices but would rather wait for a move back down to $312.  Amazon is still the biggest and best retailer in the US and with a move into tv, mobile and most recently groceries, they are setting up for long-term success.  I would look for a move back to $375, which is about a 16% gain from Friday’s close. 

                  I also think its time to start looking at Coach.  Just last week, management lowered their full year outlook, so lower expectations are now already priced into the stock.  Coach bottomed out on Wednesday at $33.60, which is the lowest it has traded since February 2010.  I believe all the negative news is already baked into the stock price and the sentiment is so overwhelmingly negative, that it’s actually a strong buy for a trade only.  Coach sports a 3.9% dividend and trades at about 16x forward earnings, cheaper than competitors like Kors, Tiffany and Kate Spade.  Coach has traded down at these levels before which led to 73% gain over the next 5 months.  While I don’t think that you’ll get a 73% gain this time around, I can see Coach trading back up to $40 in the next 3 months, giving you about a 20% gain in that time frame.  If you are buying Coach, don’t risk a whole lot; use $32.80 as your stop. 

                  Retail stocks are the best gauges for the overall economy.  If the economy and consumer sentiment are strong, these stocks will rally the most.  I think everything from job growth to GDP, will come in better than most analysts expect over the next 6 months, and retailers like Macys and Michael Kors will hit new all-time highs.  But I also see beaten down stocks like Coach and Amazon staging a comeback.  Tech names like Facebook, Tesla, and Apple should continue to outperform, but look for Google to actually lead the way.  

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Macy’s (M), Boeing (BA), Disney (DIS), Google (GOOGL), Facebook (FB).

Jeff Lewison

Capitulation Is Your Friend

6/15/14

                  Back on April 6^th, I recommended buying General Motors (GM) because I felt all of the bad news about recalls and possible lawsuits was already priced into the stock.  At that time, the stock was trading at $34.81, and while GM fell down to $31.70 a couple weeks later, you would still be up about 2.5% since I recommended it.  GM closed Friday at $35.63,just above the 38.2% Fibonacci retracement of $35.23.  If you missed the recent drop in GM, I think you can begin building your position in the stock this week and complete the position if the stock sells off close to $34.  GM’s reputation hasn’t been affected as much as many investors thought it would, as evidenced by it’s May sales which increased by more than 12% YoY, and I think the stock goes back up $40.

                  That brings me to the topic for this week, which is, when you have a high quality stock that sells off sharply because of a negative event, it’s almost always a good idea to buy and hold, rather than sell.  On December 13, 2013, Anadarko Petroleum (APC) cratered, closing down 7.5% to $78.30, after news broke that Anadarko would be forced to pay a $10.459B bankruptcy settlement, a much larger figure than the market priced in.  Had you bought the stock on December 13, you would have been profitable almost every second of the time you held the stock.  Anadarko Petroleum closed on Friday at $109.37, up about 40%, and hitting a new all-time high.

                  Back in June 2010, BP hit a multi-decade low of $27.02 in the wake of the April Deepwater Horizon oil spill.  By late June, all the negative news, including the lawsuit that was expected was already priced into the stock.  Had you bought BP in June 2010 and held it through today, you would have about a 93% gain, with BP closing on Friday at $51.68, it’s highest level since the May 2010.  Anyone who sold on that news, or avoided the stock because they thought it would go to zero, ended up missing out on some big gains.

                  Last July 30th, stocks like Potash Corp. and Mosaic Co. sold off drastically, dropping 16.5% and 17.7%, respectively.  On July 29^th, news broke that Russia’s Uralkali was quitting one of the world’s two biggest potash cartels, which would open up a huge price war for potash.  Had you bought Mosaic and Potash on that news instead of selling, you would have an 11% and 14% gain in each stock, with both stocks filling in the gap on the chart that was made on the morning of July 30^th.

                  How do I identify if I should buy the stock, and/or when I should buy a stock that gets hit hard on negative news?  If I see a stock that has strong long-term fundamentals that sold off because of an isolated negative event that probably won’t have a long-lasting impact on the company, I would be looking to buy.  General Motors is the largest automaker and there’s no way that GM is going out of business.  Toyota Motors had a larger recall that GM a few years ago and they seem to be doing just fine today.  What you want to look for in price action is a capitulation day, which usually indicates panic selling.  Investors sell huge volume in the stock to get out, before really thinking about the long-term affect.  In the case of Potash and Mosaic, the stocks opened on July 30^th down more than 20% from the previous close.  Both stocks rallied all day, closing near the highs of the day on massive volume.  106 million shares of Potash were traded on July 30, when the average daily volume is under 5 million shares.  A day like that is what investors look for to determine capitulation and will use the low of that day to buy against.  On December 13, Anadarko Petroleum opened at $73.60, which was not only the low of the day, but the lowest point all year, only to close about 7% higher.  That day, more than 38 million shares changed hands, when on average, volume doesn’t get much higher than 5.5 million. 

                  You never know when a major lawsuit or negative event will happen or to which stock it will happen to.  But it’s always good to keep some cash on the sidelines, waiting to take advantage of the next Anadarko Petroleum or BP.  When you see a large sell-off, make sure to think before acting.  Take a look at the volume and look for a stock that opens at or near the low of the day, but closes near the high of the day.  If the underlying company is one that will be around for the long haul, you have should be looking to be a buyer. 

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Macy’s (M), Boeing (BA), Disney (DIS), Google (GOOGL), Facebook (FB), short WHEAT.

Jeff Lewison

Draghi and Jobs

6/1/14

                  The S&P ended the month of May up more than 2%, ending Friday at new all-time highs of 1923, but the week ahead could determine where the market goes over the next month.  The two most important macro-economic events of the week come Thursday and Friday morning.  First on Thursday, European Central Bank (ECB) President Mario Draghi will do his best Ben Bernanke presentation, when many investors are expecting him to announce the European version of quantitative easing to better fight stagnant deflation.  The iShares MSCI Emerging Markets EFT (EEM), which tracks European markets is about 15% off the lows of the year made in February, while the S&P is up just 8.5% in the same time.  I think the move in the emerging market stocks is overdone and the rally over the last four months has been all about Draghi announcing quantitative easing on Thursday, which should be a “sell the news” event.  Additionally, the EEM daily chart looks tired.  While the S&P has been making new highs almost daily last week, the EEM was down 1.3%, closing on the low for the week.  Since making a yearly low on February 3^rd, the EEM has also completed a 5^th wave up on a daily and weekly chart, which is a bearish indicator.  For a short-term trade, I recommend actually selling the EEM short against $44, which would be the highest level since January 2013.  I am looking for a move lower to $40, which implies a drop of more than 6%.  Even if Draghi doesn’t announce quantitative easing, investors will be concerned that deflation will continue to hinder economic growth, and that alone should send investors running for the hills.

                  The other big event of the week comes Friday morning, with the announcement of May non-farm payrolls.  Given last month’s strength and much improved weather conditions, economists are expecting another strong month.  Currently, economists are calling for 200,000 jobs and the unemployment rate increasing from 6.3% to 6.4% due to more people looking for jobs.  I’m not so much concerned about the actual number or the rate.   I want to see wage growth and stronger labor market participation.  Inflation is slowly starting to pick up, and if wage inflation doesn’t move with it, that means less purchasing power for consumers, which would lead to lower GDP, slower sales growth and a weaker housing recovery.  Unless the wage growth and job participation numbers greatly surprise to the upside, I think the market sells off on Friday.  But I see the S&P rallying throughout the week so any sell-off on Friday will likely just eat into some of the weekly gains.  If you are looking to take on new stock positions, I would wait until Friday morning and look to pick up your stocks on a sell-off.

                  Last week I mentioned keeping an eye on the Russell 2000 (RUT) because the small cap index will determine the path of the broader market.  The Russell was up 2.8% last week, gapping up on Wednesday morning above a key downtrend line and above the 200 day moving average.  Continue watching the Russell because I think it continues higher again this week, which will rally the same tech stocks that rallied last week like Google, Facebook, Netflix, etc…

                  Thursday and Friday will be important days in the market.  For a trade, selling the EEM could give you a 6% return in just a few short weeks.  Use what I think will be a sell-off on Friday’s unemployment data to add to current positions or build new ones.

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Macy’s (M), Boeing (BA), Disney (DIS), Google (GOOGL), Facebook (FB), long COPPER.

Jeff Lewison