Fly with Delta Airlines

7/27/14

                  It’s a big week ahead for Wall Street, with still more earnings on deck, issues in Ukraine and Gaza not going away, but more importantly, a lot of US economic data on tap.  The two most important days this week will be Wednesday and Friday.  On Wednesday morning, Economists will release the updated GDP figures, including revisions.  The economy detracted by 2.9% in the first quarter as a result of a terrible winter across the country.  Expectations are that Q2 GDP will come in at 3.2%, and anything less may have a negative impact on the stock market.  More importantly on Wednesday afternoon, the Fed will release minutes from its latest FOMC meeting.  There’s no question they will continue to taper their bond purchases to stay on pace for ending in October.  What will be of importance is what the Fed hints at in regards to raising interest rates.  A weaker than expected GDP number may help policy makers decide to hold off rate increases until mid to late 2015.  We also want the Fed to clarify what metrics they are going to use to determine when to raise rates.  Inflation pressures seemed to have subsided with the inflation rate well below the Fed’s 2-2.5% target, which I think is more important to when rates increase than the unemployment data.  I expect the Fed minutes will show dissent among certain Fed policy makers but that rates will stay near zero until mid 2015. 

                  Friday will be another key day with July’s non-farm payrolls report.  After last month’s huge upside surprise of 288,000, economists are expecting a slightly lower number of 250,000.  However, the more important figure to watch is wage growth.  Wages have only increased about 2% in the last year, but after adjusting for inflation, that’s only about a 0.5% increase.  Fed Chairman Janet Yellen has stated that she wants to see wage growth normalize at around 3-4% annually, otherwise there will remain too much slack in the labor market, so keep your eye on the hourly wages figure. 

                  No matter what happens to the broader market this week, I recommend you buy shares of my favorite airliner, Delta Airlines.  I purchased shares of Delta a couple weeks ago and added to my position on Thursday’s sell-off.  On Wednesday, Delta reported a great second quarter of earnings with EPS up 6% at $1.04/share, compared to estimates of $1.03/share, and revenues increased 9% to $10.60B.  Passenger load factor, which measures Delta’s efficiency in filling seats and generating revenues was 86.3%, up from 84.4% YoY, and higher than the industry average of less than 80%.  But that’s not all.  Delta, which has improved operating margins in each of the last few years, improved 59% YoY to 14.9% and Delta expects that to continue in Q3, forecasting margins between 15-17%.

                  While Delta’s passenger load factor is better than competitors United Airlines and American Airlines, the reason I like Delta so much, and more than any other airline stock is because of what they did in 2012.  A few years ago, Delta made a risky cost-cutting move by purchasing a refinery in Trainer, PA from Phillips 66 for $150M.  Airlines are fighting for margin growth and this purchase will have a continuous positive impact on cutting expenses.  On Wednesday, Delta solidified itself as having the highest margins in the industry with the lowest capital costs per passenger, most of that coming from lower fuel costs.  Delta reported fuel costs for the quarter were $2.93/gallon, far superior than the industry average of $3.08/gallon, due to fuel hedging but mainly because of it’s purchase of the Trainer refinery.  Not only is the refinery lowering fuel costs, but it’s also profitable, producing 70,000 barrels/day with profits in Q2 of $13M.  Delta’s management said the refinery is giving the airliner a big tailwind for the rest of the year and going forward in 2015.  Delta now expects Q3 fuel costs to drop 17% QoQ to $2.88/gallon, where the rest of the industry should remain above $3.05/gallon.

                  Based on the technical set up, I like Delta at these levels.  Looking at a daily chart, Friday’s close of $38.06 is just above the 78.6% Fibonacci retracement, and if the market were to sell off, Delta has bounced of a long-term uptrend line twice, giving the stock support around $36.  I would recommend buying 50% of your position this week and the rest if the stock sells off to $36.  While the stock is already up 39% YTD, I think Delta still has a lot of room to run.  Carrying out trendlines and Fibonacci retracements, I am putting a $52 price target on Delta, representing a 37% gain from Friday’s close.  The stock is still incredibly cheap, trading at a 40% (P/E 10x) discount to the S&P 500 based on 2015 earnings estimates. 

                  All eyes will be focused on events in Ukraine and Gaza, but on the home front, Wednesday and Friday will be big days of economic data.  I still believe that all sell-offs induced by issues abroad, are great buying opportunities, so begin buying Delta Airlines this week and let the money roll in.                

My current positions: Long Ford (F), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Coach (COH), Citibank (C), Delta Airlines (DAL) Biogen Idec (BIIB), El Pollo Loco (LOCO), and short IBM (IBM), short SUGAR, short GAS, and short CORN.

Jeff Lewison

Earnings Central

7/20/14

It was a roller coaster ride in the markets this week, with the S&P first falling Tuesday on the back of Janet Yellen’s ill-advised comments regarding social media and biotech stocks being overvalued.  Not only is it ridiculous that the Fed Chairman is acting as if she’s now a stock analyst, but to say biotech stocks are overvalued couldn’t be further from the truth.  Biotech P/Es are roughly 40% below all-time highs and according to ISI’s Mark Schoenbaum, current P/E levels are in line with the historical median.  To that I say; Ms. Fed Chairman…stick to what you know.

                  After the markets closed on Wednesday, Barack Obama issued a new round of targeted sanctions against Russia, as war in Ukraine had yet to subside.  Couple that with Israel raining war on Hamas, and you have fear in the market.  While the markets opened strong on Thursday, they were quickly slammed by news that a Malaysian Airlines plane was shot down at the Ukrainian border, with all signs pointing to Russian separatists as the culprit.  Then later in the trading day, word broke that Israel was sending ground forces into Gaza for a quick, targeted strike against Hamas.  The S&P fell 23 points (1.2%), the worst drop since April and the Nasdaq was hit the hardest, falling 1.4%.  The VIX (fear gauge) soared about 32% and the world looked as if it were ending. 

                    Since this bull market began, every geopolitical sell-off was an opportunity to buy the dip, which I did and hopefully you followed my lead.  Stocks rallied hard Friday, wiping out all the losses from Thursday’s macroeconomic news, led by, much to Janet Yellen’s chagrin, tech and biotech.  So what led to Friday’s rally?  Investors took the night to realize that none of these events negatively impact the global economic recovery.  Right now is very much an earnings story and so far, they have come in very strong.  You also have Hedge Funds being very underweight the market and losing investor money month after month, so these hedge funds have to start buying every single market dip. 

Last week, I mentioned that earnings would be in full swing, led by the banks and tech.  Early in the week, JPMorganChase, Bank of America, Goldman Sachs and Merrill Lynch all reported strong quarters, including surprisingly better than expected trading revenue.  Then Thursday after the close, 2 tech stocks veered off in separate directions.  IBM reported a better-than-expected quarter, however sales dropped again, which sent it lower.  I predicted last week that IBM would rally to $195 and sell-off from there.  I sold the stock short on Thursday at $195.37 and will stay short for now.  The other tech giant to report Thursday night was Google (full disclosure: I added to my Google position during Thursday’s sell-off prior to earnings).  Google reported another monster quarter, sending the stock to $605.  Prior resistance has been at $597, and with Google shooting through that level, that should now act as support.  I recommend buying Google against $597. 

                  As for this week, Russia vs. Ukraine and Israel vs. Hamas will still be a focus, but it’s important to realize that if a stock sells off that doesn’t have anything to do with these macroeconomic events, you should go in and buy as long as the fundamentals and technicals are still in place.  With that said, there are a number of big earnings reports this week, so keep your eye out.  Apple will report earnings after the close on Tuesday, sitting just a couple percent off of all-time highs.  It’s going to take a huge quarter for Apple to continue its run as the stock has rallied 26% since it last reported.  With Apple introducing a bigger iPhone 6, iWatch, iTV, iANYTHINGYOUCANTHINKOF, I would buy Apple on any pullback if earnings disappoint.  I would be a buyer around $84, which would be a roughly 11% drop from Friday’s close.  If the stock rallies to new all-time highs, then move on.    

                  On Wednesday, Facebook will report quarterly earnings and I think it will once again surprise to the upside.  They reported about as good a quarter as you could last earnings period, and the stock is up 8.5% since then.  Google and Facebook tend to trade hand-in-hand, and with Google reporting a monster quarter, I think Facebook does the same and rallies to new highs.  As you know, I recommended buying Facebook when the stock sold off to the mid-$50s, so hopefully you took my advice.  If you missed the opportunity, I would hold off and look for a better entry point in the future. 

                  On Thursday, auto stocks, Ford and GM will report earnings.  GM continues to put up huge monthly sales figures despite the massive recalls.  The stock is cheap and chart is strong, so I recommend buying before they report.  Ford hit a new 52-week high on Thursday and this stock has been red hot, up 15% YTD.  I think Ford will have a strong quarter and increase full year guidance and should also be bought before they report.  Working with Alcoa on developing more full efficient cars and trucks will be Ford’s driver of the future, no pun intended. 

                  Starbucks will also report on Thursday.  I have been a longtime holder of Starbucks stock and last recommended buying it when coffee prices were at multi-year highs and Starbucks was trading at $70.29.  Since then, the stock has rallied 11% and the company has increased coffee prices on bulk coffee in stores and for certain drinks.  Starbucks Teavana stores are only getting better and the company has been introducing new food and drink items.  I’m looking for Starbucks to show international strength and improving US sales. CEO Howard Schulz will likely touch on mobile payments and an improved in-store experience that will continue to drive future business.   

                  Lastly on Thursday, Amazon reports after the close.  Since Amazon last reported, they increased the cost of Prime, introduced a new Fire phone, signed a streaming deal with HBO, and introduced a monthly membership for unlimited Kindle books.  But all of these events will lead to future and not past revenue streams and Amazon is still a sales and margin story.  While I think sales will come in strong, I don’t see margins improving much right now because they are still losing money on every kindle and phone they sell and the price point for Amazon TV is too high.  The stock is up 11% in the last 2 weeks and I would not be a buyer into earnings.  Wait to see what they say and if the stock sells off, I would pull the trigger.  Use $309 (23.6% Fibonacci retracement) and $328 (38.2% retracement) as your entry points to build your position. 

                  With everything that is going on in the world, don’t get caught up in a selling frenzy.  Instead, buy high quality stocks that sell off just because of broader market weakness.  Look for the next big down day in the market based on geo-political events, because that will be the market pricing in the worst-case scenario.  As long as earnings continue to impress, and I fully expect them to, I see downside of just about 1.5% from Friday’s close, with support in the S&P at 1952. 

                  For full disclosure, I did buy more Google on Thursday’s sell off before earnings.  I also bought Citibank on Monday and Delta Airlines on Thursday’s sell off.      

My current positions: Long Ford (F), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Coach (COH), Citibank (C), and Delta Airlines (DAL), short IBM (IBM), short SUGAR, and short GAS.

Jeff Lewison

Prepare For Earnings

7/14/14

                  In what should have been a relatively quiet week, the S&P finished down 1%, with most of the losses coming Wednesday on the heels of a possible bankruptcy for Portuguese bank, Banco Espirito Santo.  When the markets opened on Wednesday morning, the S&P was down about 20 points, not because of problems in Portugal, but because investors got spooked that this could be the start of another European debt crisis.  The last time the markets saw a 10% correction was in 2011, which was fueled by the European debt crisis.  But this is not 2011, ECB (European Central Bank) President Mario Draghi will absolutely do everything in his power to keep the European economy headed north, so do not be spooked by negative news from Portugal.  After all, the total market cap of every publically traded stock in the country is less than that of Home Depot. 

One thing you can take away from Wednesday’s price action is that this bull market is on edge right now, and investors are looking for any reason to sell because they simply don’t buy into the fact that the economy truly is getting better.  As usual, investor’s first reactions were to sell the headline before actually understanding the situation.  Hopefully you used this pullback to your advantage, which yielded some nice profits in just 2.5 days.  So with that, one of the most important things to remember when investing in the stock market is to fully understand the news before making a buy/sell decision.  Never trade on just the headline. 

Taking a look ahead to this week, earnings will be in full swing, starting Monday morning when Citibank reports and Tuesday with earnings from JPMorgan.  Last week I recommended buying Citibank, which sold off throughout the week.  I still reiterate a “buy” rating on Citi and I think you could see a nice pop Monday.  With Citibank, make sure to pay attention to what they say about the regulatory issues they’re having and what they expect to pay the government in lawsuits.  The market has priced in about a $10B lawsuit, so if Citibank says it expects to come in between $5-$7B, the stock should rally.  Either way, Citibank is still trading at about 0.7 times book value, which is incredibly cheap and I believe the negative news is all priced in.  JPMorgan earnings will be all about what they say regarding the housing recovery.  Wells Fargo issued a warning that consumer lending hasn’t been as strong as they expected, but auto lending and commercial lending is making up for the gap.   If JPMorgan issues the same warning, I expect the market to use this as another reason to sell everything from housing stocks to biotech. 

Later in the week, I will be paying attention to Google and IBM.  I have been bullish on Google for a longtime and I expect them to have another real strong quarter.  Unfortunately, Google never offers any guidance so a strong quarter for Google doesn’t necessarily mean investors will be happy.  If you haven’t been in the Google trade, do not buy before earnings.  Wait and see if the stock pulls back and buy it if it does and hold it for the long haul, otherwise move-on.  Also on Thursday, we’ll hear from IBM.  If there is ever a company that absolutely needs to report a strong quarter, it’s IBM.  The last 4 quarters, IBM has dropped 2.4%, 6.3%, 3.3% and 3.3%, respectively.  Since the beginning of the year, the stock is flat and down about 4.5% in the last 52 weeks.  With expectations so low right now, I think IBM will finally get back to beating earnings, which could send the stock to $195 (up 4% from Friday’s close).  However, that’s not enough for me to get excited about, because $195 will act as resistance.  Looking at a 1-year daily chart of IBM, the stock triple bottomed at $172, which also built the head of an inverted head-and-shoulders formation.  If you are looking for an entry point into IBM, wait for a pullback to $179, which you could see if they disappoint Thursday.  Begin buying at $179 and if the stock pulls back to the $172 support and holds that level for a fourth time, buy it hand-over-fist. 

Finally, with oil prices down about 7% in the last three weeks, now is a good time to buy some of the refiners that sold off a couple weeks ago on higher oil prices and news that the US will begin exporting unrefined oil.  This goes along with my theme of the last few weeks, that one big negative news event usually leads to a great buying opportunity.  The oil boom is still alive and well and stocks like Tesoro (4.7% off the highs), Phillips 66 (7.8% off the highs), and Valero (15% off recent highs).

Last week, I did sell my position in Toll Brothers, as the stock has been range bound all year.  While Toll Brothers is performing as well as any company out there, the stock continues to get hammered on any negative news from the housing market in general. 

       

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

Jeff Lewison

Bears, Copper and Citibank

7/6/14

                  Last week’s shortened trading ended with the Dow and S&P closing at record highs and the Russell 2000 and Nasdaq closing at 13 year highs on the back of a much stronger than expected nonfarm payrolls report showing the US created 288,000 jobs in June.  However, the Bears will harp on the fact that consumer spending is still down because the jobs being created are not leading to wage growth and the labor force participation rate is at it’s lowest levels in about 40 years.  This is something that I have noticed every time an economic report comes out that indicates expansion…too many people make excuses for why things are actually getting better.  When June auto sales came out much higher than expected, pacing to sell almost 17 million cars this year, analysts across the board blamed the higher number on the winter weather this year, skewing the numbers for the last few months.  When May new home sales reached levels not seen for more than 6 years, Bears were quick to point out that new home sales have been very inconsistent and shouldn’t be trusted.  That is the biggest clue of them all that this market is going to continue to trend higher.  Until the Bears turn the corner and finally realize that things are actually getting better and quit making excuses for a stronger economy, there is no reason to be worried.  

                  Back on March 16, I recommended taking a contrarian view on copper and put a price target of $3.30 on the industrial metal.  Thursday’s close of $3.2795 was the highest level it’s traded at since late February.  At the same time, I recommended taking positions in Freeport MacMoran (FCX), Southern Copper (SCCO) or the Copper ETF (JJC).  If you took my advice, you would have gains of 24%, 17.4% and 12.7%, respectively.  At this point, I would recommend taking profits on all of these positions.  I can see another 1.5% gain in copper prices before pulling back, but there’s also too much hype about how strong that market is, and especially how strong Freeport MacMoran has traded, essentially since I got behind it.  Just last week, Jim Cramer did an entire segment on the technicals of the stock, calling for it to go higher and there are more and more bullish articles being written about Freeport.  If you bought back in March, you have just about tripled the gains of the S&P in the same time frame, so take your gains and look for another trade. 

                  The next driver in this bull market kicks off this week in form of earnings.  Alcoa leads the way as usual, but one stock that I think you could buy before they report earnings and reap nice rewards on is Citibank (C).  Citibank has become the redheaded stepchild of the banks, with one problem after another arising.  They have failed countless stress tests as well as their most recent issues with the $400 million Banamex fraud in Mexico.  Sticking with my theme from last week, looking for broken stocks, but not broken companies, I think Citibank is a way to get great reward, with little risk.  For banks, it’s more important to look at price/book value more so than price/earnings, and on a price/book value, Citibank is trading at just .72, which is cheaper than JPMorganChase, Wells Fargo, Bank of America, Goldman Sachs and just about every other bank out there.  Not only is Citibank incredibly cheap right now, but come earnings season, the only surprise I see coming is to the upside.  All the negative news is already priced into the stock and expectations are so low that even an “in-line” quarter should send the stock higher.

                  Looking at the chart, the stock has formed a strong base between $46-$47 since the beginning of February, which will act as support for the stock, come earnings on July 14.  After trading at a 52-week low of $45.18 on April 11, Citibank hasn’t traded below $46 since.  In fact, that was the only second time since April 2013 that Citibank has traded below $46.  Come Monday, I would be a buyer of Citibank, which I am giving a 12-month price target of $55, representing a 14% gain from Thursday’s close. 

                  Earnings season is upon us, and I think it’s going to be a good one.  The economy is improving despite the constant bearish calls.  Use those Bears to your advantage.  Once those analysts finally realize that things actually are getting better and change their view to bullish, that’s when you want to be cautious and start taking profits because at that point, all the bullish news has been priced in.  For now, keep on keeping on and ride the bull market higher.  For full disclosure, I did put my money where my mouth is and bought Coach last week, as I recommended you do the same.

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), Coach (COH).

Jeff Lewison