Cyber Security

8/31/14

                  On Wednesday, JPMorganChase announced that their systems were hacked, which is just one of the many companies that have suffered a cyber attack in the last couple years.  Everyone remembers the issues that Target had, and Michael’s Crafts stores along with PF Changs restaurants, were also affected in the last year.  Cyber security is becoming ever more important in this day and age and I think now is a great time to invest in this sector.  There are many ways to play this, all of which are great long-term holdings for your portfolio since I don’t think cyber attacks are going away anytime soon.

                  The most exciting stock in the sector is without question, a small company with a market cap of just under $5B; FireEye (FEYE).  The company’s products combine threat prevention systems that provide threat protection from network to endpoint for inbound and outbound network traffic.  FireEye deals in three main sectors: retail, healthcare and government.  FEYE reported strong Q2 results in early August, beating on both the top and bottom line.  The company reported revenues of just under $95M, up 184% YoY, allowing management to increase it’s FY14 guidance by almost 5% to $427M.  At the same time, billings increased 153% to $113.8M.  FireEye is rapidly growing its customer base too, rising more than 100% over the last year, and while they reported a loss of $0.55/share in Q2, that was better than analysts expected.  One short-term negative for FireEye other than it is a very expensive stock, is the rapidly growing expenses as management expects investment in R&D to total 125% of FY14 revenues.  But with more and more cyber attacks occurring, I think this will be money well spent.  Closing at $31.14 on Friday, FireEye is down 40% this year and down 68% from all-time highs made on March 5.  But, I think you can buy the stock right here as it looks to have put in a double bottom at around $26.  The stock was up 11% last week, aided by not only news out of JPMorganChase but also by a well-timed upgraded by Stifel to a “buy” with a $45 price target.  I happen to agree with the call but with a $42 price target, representing a 35% gain.

                  The second stock I like in this sector is an Israeli based company called Check Point Software Technologies (CHKP).  It’s products offer network and data security and management solutions for enterprise networks and services.  Last quarter, CHKP reported stellar earnings of $0.89/share, beating analyst estimates by $0.11.  Management went on to raise Q3 earnings and revenue guidance above consensus estimates.  With a market cap of almost $14B and with $3.6B in cash, it’s one of the biggest companies in the space and management cited they are looking for possible M&A targets.  CHKP, which grew total subscriptions by 14% YoY, continues to be a big focus for management, as it will be bring in a consistent revenue stream for the future.  The stock isn’t to expensive, trading at just 18x 2015 earnings, and with its close of $71.02 on Friday, is just $0.14 off all-time highs that were made earlier in the day.  The stock is up about 10% YTD, outpacing the S&P 500 and there is still plenty of room to run.  If you are going to build a position in this stock for your portfolio, but some next week, but then wait for a move back to $68, which is around the 78.6% retracement, and then buy the rest of your position.  I can easily see the stock headed to $81, giving you a 14% gain.

                  Lastly, the third stock I like in the cyber security sector is one I bought near the low on Thursday’s sell off, which is Palo Alto Networks (PANW).  Palo Alto provides its clients with its market leading, Next Generation Firewall protection amongst a host of other products and services.  Its clients consist of enterprises, service providers and government entities.  Palo Alto recently settled a patent dispute that was hanging over the company, as it paid almost $200M to Juniper Networks.  Last quarter, Palo Alto surprised analysts with another stellar quarter and CEO Mark MacLaughlin stated that the results were driven by continued strong product demand, robust service growth and a rapid market-share gain in the large and growing strategic enterprise security market.  Its customer base already consists of more than 16,000 customers in over 120 countries and they continue to beat out competitors in their space for new business.  Palo Alto is already up 48% this year, but is down 3.3% from all-time highs made on August 14^th.  Even with the sharp gains, I think the stock moves higher and will hit $100 in the next 12 months.  While the company reports earnings on September 9^th, I think you can still buy the stock beforehand, and if it pulls back, pick up some more.

                  There are many companies in the cyber security sectors, but out of all of them, these are the three I like the best.  FireEye will give you the higher risk/reward so if you are looking for a momentum stock with a good entry point and can handle some risk, go with that one.  I also would recommend buying stock in 2 of the three and staying a little diversified in the sector.  Figure out how much of your portfolio you want designated to cyber security and buy 50% in one company and 50% in another.

My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Coach (COH), Citibank (C), Delta Airlines (DAL) Biogen Idec (BIIB), Buffalo Wild Wings (BWLD), Whole Foods (WFM), Wells Fargo (WFC), Michael Kors (KORS), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), and Palo Alto Networks (PANW). 

Jeff Lewison

The Comeback In Housing and Energy

8/24/14

                  If you remember back in late February when all was looking good, all of a sudden biotech and social media/new tech stocks began to get hammered, with leaders Gilead Sciences, Facebook and Google falling 25%, 24% and 17%, respectively.  The Social Media ETF (SOCL) fell 30% and Biotech ETF (IBB) dropped 25%.  The IBB has since rallied almost all the way back and the SOCL is up 26% since hitting the low on May 5^th.  Meanwhile, Facebook is up 35%, Gilead Sciences is up 64% and Google has rallied 16% off the lows.  Other leaders in those sectors like Biogen Idec, Regeneron, Celgene and Amgen have made new all-time highs since that sell-off.  Stocks like Twitter, Yelp and LinkedIn have all rallied more than 55% off the lows.  There went your correction in tech, social media and biotech.

                  There has also been a correction or near correction in aerospace and airline stocks.  Names like Boeing, Honeywell, and Lockheed Martin, have gone through sell-offs of 18%, 8% and 9% respectively.  Lockheed has rallied to new all-time highs, Honeywell has rallied back 6% and Boeing is up 8% from the lows made just two weeks ago.  From this year’s high-to-low, Delta dropped 19%, American Airlines fell 22%, and United Airlines was down 15%.  Even leaders Southwest Airlines and Jet Blue have suffered 5-8% drops this year.  The Transport ETF (XTN) fell 8% from the highs this year, only to then rally back 7% in the last couple weeks.  Southwest and Jet Blue are making new highs every day, United Airlines has since made a multi-year high and Delta is up 11.5% in just the last two weeks.  The correction in aerospace and airlines is over.   

                  Financials like Citibank, Goldman Sachs, Morgan Stanley, Visa and Mastercard have all suffered corrections this year and have all rallied back by at least 10% from their lows.  I still think there is a lot of value with the financials and would still recommend buying names like Wells Fargo, Morgan Stanley and Blackstone Group (BX).  But again, the correction in the financial sector is over.

                  While there is still plenty of value in financials and aerospace, there are two sectors right now that are going through a correction and are about to break out of it; housing and energy.  If you pull up a chart of the Spider Homebuilder ETF (XHB), you’ll see that housing stocks have suffered a 15% drop from February 26^th to August 1^st.  Since bottoming in early August, the ETF is up 8.8%.  We got strong new housing starts and existing home sales data this week that really pushed the homebuilder index higher, gapping up 2% on Tuesday and hasn’t looked back.  Many of the housing stocks were aided by a near perfect quarter from Home Depot on Tuesday, as well.  The do-it-yourself retailer ended the week up 8.7%.  While I would wait for a pullback closer to $86.50 to buy Home Depot, there are other places to put your money to work in the meantime.  I recommend buying Toll Brothers (TOL) based on both technicals and fundamentals.  On Tuesday, Toll Brothers gapped above the 50% retracement of $34.80 and closed at $35.57 on Friday, up 5% for the week.  Toll Brothers caters to the higher-end consumer, with an average purchase price of $706,000, up 22% YoY.  In the second quarter, they delivered 1,218 homes, which was up 67% in units and 36% in dollars.  They report earnings on September 3^rd but I think you can buy ahead of earnings. 

                  The other housing stock I recommend adding to your portfolio is Masco (MAS).  Masco sells general building materials and operates in cabinetry, plumbing, decorative architecture and other specialty services like patios and windows.  With Home Depot reporting such strong numbers, Masco will be a big beneficiary of those sales.  Since beating estimates by $0.05/share in late July, the stock is up 16%, closing Friday at $23.50, just 1% from the 52-week high.  I still think the stock has a lot of room to run, and I am putting a $27.00 price target on it, representing a 15.3% gain.  

                  Along with the housing, energy stocks have dropped sharply from their highs led lower by oil.  Since hitting technical resistance of $100.13 in the middle of July, December crude oil futures have fallen 8.5%, closing at $92.66 on Friday. However, oil tried every day last week to break below the 23.6% retracement of $91.07, but failed to do so.  I expect that level of support to hold and I am looking for a rally in oil on a technical basis.  Fundamentally, there are plenty of reasons to be bullish on energy and energy related stocks.  With more people getting jobs, more people need to travel to work, and whether you go by car or train, you still need to drive to get to where you need to go, thus improving demand for oil.  With more people working, more people have money to go out and spend on goods and services, thus also improving demand for oil.  What is also contributing to my belief that oil and oil related stocks are heading higher is that there is so much bearish sentiment around oil that the euphoria is overpowering.  I liken this situation to everyone jumping aboard the 10% correction theory just because the market was down 2.5%. 

                  I recommend buying two stocks in particular, the first being ConocoPhillips (COP).  Conoco is paying a 3.6% dividend (higher than competitors Exxon and Chevron) and closed on Friday at $80.24, about 8% off its 52-week high.  But Conoco has held key support during this recent sell-off, bouncing off and holding the 100-day moving average.  If crude oil starts rallying, I think you can quickly see Conoco at new highs.  The other energy stock that I like is a smaller company called Talisman Energy (TLM).  Talisman is an oil and gas company involved in exploration, development, production and transportation of oil, natural gas and liquid natural gas, with interests all across the world.  Talisman is down 7% this year, closing at $10.76 on Friday, but is 12% off the lows of the year.  On Friday, the stock bounced off the 50 and 100–day moving averages and closed up 2.5% on bullish options action, representing the highest close since July 30^th.  On it’s recent conference call, Talisman talked about exploring more strategic alternatives including asset sales that could unlock value for the company.  Another big reason to like the company besides its 2.6% dividend is that Carl Ichan has amassed about a 7% stake in the company and has 2 seats on the Board of Directors.  Ichan has a history of successful investing, as evidenced by his position in Chesapeake Energy, so go out and buy Talisman this week. 

                  Last week, I closed out my short IBM position with a 4% gain.  On August 3^rd, I recommended buying the Russian stock market ETF (RSX) if it pulled back to $32.08, which it did on August 6^th.  Since then, you would have an 8% gain in two weeks.  I would recommend taking profits on a quick successful trade.  The RSX hit resistance on Thursday and failed to break through, so I think for now, the trade is over.

My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Coach (COH), Citibank (C), Delta Airlines (DAL) Biogen Idec (BIIB), Buffalo Wild Wings (BWLD), Whole Foods (WFM), Wells Fargo (WFC), Michael Kors (KORS), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), and Time Warner (TWX).

Jeff Lewison

Watch For These Support Levels

8/9/14

                  Based on Friday’s price action, it became abundantly clear that global macro economic events, most notably tensions with Russia, are the single biggest factor in the market right now.  As Barack Obama announced that the US would begin air strikes in Iraq on Thursday night, S&P futures immediately sold off and US treasuries rallied sharply.  Then, right around 6:15am CT on Friday, news broke that Russia was pulling back some of its troops from the border and ending military exercises.  S&P futures rallied 8 points on the news and the rest is history, leading to the S&P rallying 1.17%.  Yesterday, Ukrainian Rebels have started to submit to calls for a cease-fire, which will only be positive for US equities.  I’ve mentioned countless times that you should be using geopolitical sell-offs to buy this market, because once they subside, attention will be turned to the strength of the US economy and outstanding corporate earnings. 

                  The easing tensions in Ukraine led many short sellers to cover positions fearing that the market would turn and rally, especially if more good news in Ukraine surfaced over the weekend.  The S&P also held a key technical level (100 day moving average), and you now have a level to trade against.  If you are looking to build positions right now, you can use Thursday’s low of 1905 as your support level.  1913 is the 78.6% Fibonacci retracement and 1914 is the 100 day MA.  The S&P also held an uptrend line at 1910, connecting the 52-week low to the low of the last market sell off in April.  With so many key technical support levels sitting right around 1910, you should be confident that the market will hold.  But beware that if the market falls below this support, all signs point to a drop down to 1850.  If you’re concerned about a further drop because geopolitical tensions are not over, then buy part of your positions now and wait to see if the market drops to 1850.  But I wouldn’t count on it.  

                  Over the last few weeks, I’ve mentioned keeping an eye on the Russell 2000 because the small-cap index led the market higher this year, then has led the market lower.  The Russell 2000 also held key support, before the S&P did this week.  On Monday, the Russell traded down to the uptrend line at 1106, connecting the 52-week low to the 2014 low.  Since then, the index has rallied 2.2% compared to the S&P, which is up just 0.5% in the same timeframe.  Keep your eye on the Russell 2000, because where that goes, the broader market will go.  The other telling point that the Russell should move higher is again, the headline on Marketwatch.com that says, “Why small-cap stocks will likely feel the most pain.”  Just like last week’s set of headlines calling for a 20% drop in the market, it will be wrong. 

                  Take some time this week to look through some of the earnings calls over the last couple months and pick out stocks of companies that reported a strong quarter and great guidance but sold off because of global events or because that particular stock rallied into their earnings reports.  Check out companies like Starbucks, Honeywell, Disney, Lockheed Martin, and airline stocks like Delta Airlines. 

My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Coach (COH), Citibank (C), Delta Airlines (DAL) Biogen Idec (BIIB), Buffalo Wild Wings (BWLD), and short IBM (IBM).

Jeff Lewison

Here Comes the Correction Talk...AGAIN

8/3/14

                  Right on queue, the calls for market corrections and bear markets come screaming out.  On Marketwatch.com alone, there are three headlines front and center about a 20% correction coming.  Yes, the Dow wiped out all of its gains for the year in a single day (Thursday), the S&P had its worst weekly percentage decline in over a year, and the Russell 2000 is now 8.1% off the highs made on July 1.  The sell off could be a result of negative housing data, recent calls or a top in auto sales, war in Gaza or Ukraine, Russian economic sanctions, Argentina default, uncertainty about the Fed, stock valuations, etc…I personally think this sell-off has everything to do with when investors expect the Fed to begin raising rates and what affect it will have on the economy.  But I don’t think the Fed will do anything to hurt the US economy and I can’t see them raising rates until inflation and wage growth start picking up, job market participation increases and housing data strengthens.  But, as I’ve said many times before, investors are looking for any reason and every reason to sell this market, so they are using this past week’s events to do so.    

                  While the fundamentals of the market are still intact, when I take a look at the technicals, two markets in particular are at key levels that need to hold.  While the S&P fell straight through the previous support level of 1950, the next support level actually held a couple times on Friday.  1913 is the 78.6% Fibonacci retracement over the last 52 weeks, and the S&P traded down to 1916 on Friday, only to bounce back and close 9 points off the low.  Furthermore, 1910 is the 100-day moving average, a technical indicator that has been support for more than a year now.  Looking at the S&P futures, 1908.50 is the 78.6% retracement, and twice on Friday, the index bounced off a low of 1910.  Any break below that level and 1852, here we come.  That would represent a 139 drop from the highs but only a 7% move.  The last time the market dropped that much was from May 2013-June 2014, and since then, the market has rallied 24%.  There hasn’t been a 10% correction in more than two years and as much as analysts and investors think it’s going to happen…I don’t see it.  The US economy is growing at a 4% clip, the job market is steadily improving although wages still aren’t growing, and corporate profits are coming in very strong.

                  The other chart to watch is the Russell 2000 (RUT), which I have mentioned before.  The small-cap index led the market on the way up and is leading on the way down.  On Friday, the Russell traded down to 1107 before bouncing 8 points to close at 1115.  The significance of that is that the Russell 2000 held a very key uptrend line support level, and the close at 1115 is also above the 50% retracement of 1111.  I will be watching the Russell very closely because any move below the uptrend line will likely lead to not only the Russell 2000 but also the S&P going lower. 

                  One last point of concern I have with this market is how investors are reacting to quarterly earnings.  Companies like Starbucks, Exxon Mobil, Honeywell, Google, Ford, and Trinity Industries all reported great quarters and strong guidance, yet all have sold off significantly since reporting.  On the flip side, Panera Bread and Whole Foods reported really bad quarters and weak guidance, yet both have rallied.  The difference is that Panera and Whole Foods were trading at multi-year lows while the others were trading at multi-year highs.  Instead of investors riding the winners like they have been over the last couple years, they are taking profits and moving most of their money to the sidelines.  That is the biggest change that I’ve seen during this bull market rally; a lot of companies that report great quarters have stopped moving higher, which means that investors are now feeling like the market is toping out and they are taking profits. 

While I remain cautious in the near-term and feel the market may be getting a little stretched in many investor’s eyes, by no means do I think the bull market has come to a stop.  I have used and will continue to use the weakness in the price action of great companies that have reported strong quarters and strong long-term growth to buy more, as I did with Google, Starbucks and most recently Buffalo Wild Wings (BWLD).  Buffalo Wild Wings reported another great quarter but fell 15% because they guided to just 25% growth in 2015, when analysts were looking for 30%.  However, management maintained it’s 5 year outlook, but nevertheless, investors were so spooked that growth may be slowing, they sold the stock off almost into a bear market in one day.  Use that weakness to buy the stock. 

                  One trade that I like as a speculative one is investing in the most recent US enemy, Russia.  If you want to do so, look at the Russia ETF (RSX).  Especially if you think Vladimir Putin will eventually give in to the economic sanctions, the RSX should rally.  The RSX closed at $24.07 on Friday, just below the 38.2% retracement from the 52-week low to high.  $23.08 is the key level to watch, that is the 23.6% retracement and if the market holds that level, the RSX will have built a weekly inverted head-and-shoulders formation.  You don’t have to rush out and buy the RSX on Monday, but if you get a move lower towards $23, I would pull the trigger.  Again, this recommendation is only as a speculative trade, but one that could really pay off well.

Last week was rough for equity investors, but I believe it is just a temporary pause, as the bull market will continue later in the year.  Keep your eye on key technical levels in the S&P and Russell 2000.  A break below 1908 in the S&P could mean a 7% drop is in store for the market.  With the Russell, the index has to hold 1107 like it did on Friday.  If the Russell 2000 breaks, then the Nasdaq will break, taking the high P/E stocks like Facebook, Gilead Sciences, Tesla and Amazon down with it.   Get your stock shopping list ready because there will be some great opportunities coming.  There is so much negativity right now in sectors like auto (Ford and General Motors), aerospace (Boeing and Honeywell), housing (Toll Brothers, and Home Depot) that if you are looking for stocks to own for a long time, look at those sectors because they have all sold off sharply.

                   For full disclosure, this week I sold my stake in Sunpower earlier in the week simply to take profits, sold my entire stake in El Polo Loco on Thursday because I had a 100% return in less than 2 weeks and bought shares of Buffalo Wild Wings on weakness.

                    My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Coach (COH), Citibank (C), Delta Airlines (DAL) Biogen Idec (BIIB), Buffalo Wild Wings (BWLD), and short IBM (IBM), short SUGAR, short GAS, and short CORN.