Stock of the Week: October 2014

Friday, October 17, 2014

Capitulation Wednesday

10/17/14

In another week of extreme volatility, the broader markets finished on a positive note and gave you a level to buy against, but there may still be more headwinds ahead. Among those reasons for the market sell-off, are a slowing Chinese economy, possible recession in Europe, free-falling oil prices, analysts concerned about lower guidance, Ebola, Russia/Ukraine, ISIS, Fed rate hikes and just about anything else you can think of. My opinion is that there is no fundamental change in the US economy and I think what you’re going to hear from the high quality companies is that sales, revenues and earnings are strong and will continue to be so, and that the higher US dollar is offset by sharply lower oil prices.

These last three days of trading were very important, starting with Wednesday. If you remember, that was the day that the Dow dropped 460 points and the S&P plunged 54 points almost instantaneously…only to then immediately rally back and finish the day relatively strong. A lot happened on that day that contributed to what I believe was the market capitulation and low for the move. On Wednesday, there was a string of bad news that hit the market within a couple hours of each other, which sent stocks in a free fall. First, retail sales numbers came in very light, especially when you back out iPhone sales. That was a concern because a lot of investors expected consumers to use the money they are saving on lower gas prices, to go out and buy goods. Then there was news that Abbvie was pulling out of deal to buy Shire, which would have given Abbvie the chance for a tax inversion. Shares of Shire plunged about 30% on the news, which caused major losses for hedge funds that bet on a deal getting done. Losses on that trade forced those funds to liquidate other assets, sending stocks lower on the open. But what I believe to be the biggest culprit of the drop was news that another Dallas Nurse had contracted Ebola, which we later learned had actually boarded plane just 2 days prior to the diagnosis. The Ebola story broke at roughly 3:30am CT, which sent the S&P futures down about 32 points over the next hour. On top of that, I also saw major capitulation in buying of treasuries as the 10-year yield sank below 2% for the first time since June 2013, only to snap right back and end the day around 2.10%. Volume on Wednesday in both stocks and treasuries were at their highest levels in more than three years. When I look for capitulation, I look for the market or stock to make a dramatic drop on extreme volume, only to rally back, usually to end the day sharply higher. While there wasn’t really a follow through on Thursday, Friday’s price action was encouraging. Instead of dropping sharply, stocks rallied sharply, with the S&P closing up 24 points or 1.29%, ending the week almost 4% off the lows on Wednesday.

The other market that I was watching this week was crude oil, which I believe has bottomed out at $80 barrel. Oil hit a low of $79.78 on Thursday morning, only to gain back 3.1% to close at $82.25 on Friday. It was no surprise that once oil bounced off $80, we saw the stock market rally, led by the energy and transport names that have been so beaten up over that last month. Off the lows on Wednesday, Cheniere Energy (LNG) rallied 17%, EOG Resources (EOG) soared 12.5%, Delta Airlines was up 14.2% and Union Pacific (UNP) gained 10.6%. I believe these two sectors offer the long-term investor the best risk/reward right now because they have been so beaten down, mainly due to fears of Ebola. On Thursday, Delta announced better-than-expected Q3 earnings, which sent the stock higher. But the most important note on the call wasn’t what they did last quarter, it was more about what they expect going forward. Delta expects fuel costs, which make up about 45% of their input costs, should drop about $0.20/barrel to $2.70 from Q3 to Q4, prices they haven’t since 2010. While lower fuel costs are important, the most important thing management said on the conference call was that they have seen 0 impact from the Ebola scare. Remember, the transportation sector had been hurt the most from the Ebola headlines, and when you have stocks that trade on fear, historically they have been great buys, and this time is no different. You know I love Delta, but they do have the most exposure to Africa, so for a more domestic play, I like Southwest Airlines (LUV). As for energy names, I think you have a great opportunity to buy EOG Resources and Cheniere Energy, my two favorites. EOG will give you exposure to both oil and natural gas, while Cheniere is strictly a natural gas play.

Hopefully you had a chance to buy the stocks that you have been waiting to buy. If you missed out on some of those names that have already rallied 10-15% from the lows on Wednesday, don’t chase these names because I think you’ll get another chance. While I do think the low for this move in, I can easily see the market push lower early next week one last time. The 200-day moving is the key level to watch on the upside. That was support on the way down, so it is now resistance on the way up. The longer the market stays below that level, the more negative it is for stocks. Everyone who was waiting for a correction to begin buying had their shot this week. I did some buying and hopefully you didn’t get scared away and bought yourself. This coming week is important for where we go the rest of the year. We really need to see the S&P break through the 200-day moving average of 1906; otherwise it could be a rough end to the year.

Just like it’s bad idea to panic and sell, it’s also a bad idea to panic and buy thinking that you missed your chance. Be patient and wait for another opportunity in the energy and transportation names. If another negative Ebola headline comes out, you will get another chance to buy. This is the sell-off you have been waiting for, and if you are in for the long haul, you should have your list of stocks ready to go. If you already have enough energy and transportation in your portfolio, look to buy stocks of companies that report strong quarterly earnings like Honeywell, CSX, Goldman Sachs, and Alcoa just to name a few.

For full disclosure, on Wednesday, I added to my positions in KMI, COP and TWX, and added Darden Restaurants to my portfolio. This week, I will be looking to buy EOG Resources around $86 or Cheniere Energy around $65.

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), Whole Foods (WFM), Wells Fargo (WFC), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), and Darden Restaurants (DRI).

Saturday, October 11, 2014

That Was Brutal

10/11/14

After suffering one of the most volatile weeks in years, and the biggest weekly loss in almost 2.5 years, a lot of investors are left wondering how bad is this going to get. While the S&P is only down 5.5% from all-time highs a couple weeks ago, it is still the largest drop from peak to trough in years and the pace at which we dropped is quite concerning. Looking at the Nasdaq, the situation is even worse, down more than 6% from all-time highs. Unless you have a very conservative portfolio or hedged your positions with put options, you are probably in worse shape that the indices. On Friday, the semiconductor stocks all gotten a major beating after chipmaker, Microchip Technologies came out and said that there is a correction going on in the semiconductor space. That sent big names like Intel, Micron, NXP, Taiwon Semiconductor and almost everyone else in the sector down more than 5%. The biggest issue I have with that is every investor in the world was listening to what a tiny ($7B market cap) company that was flat for the year, underperforming competitors by more than 30%, has to say more than what Intel said a few weeks ago, that there isn’t a slowdown coming. With crude oil falling to the lowest levels since July 2012 on weak global demand, energy stocks and transports continued to collapse on Friday, with names like Trinity Industries, Conoco Phillips, Delta and Southwest Airlines, Caterpillar, Exxon Mobil, and many more falling into correction or bear market territory.

There are two ways to deal with this market right now if you are not able to buy/sell options. As long as you have a long-term outlook and investment time horizon, there’s nothing to worry about and this should be viewed as a buying opportunity. While I wouldn’t necessarily go in and buy everything right now, I think there are some great opportunities to get stocks on the cheap and you should have your shopping list ready to go. Tech stocks like Google, Microsoft, and Facebook are all oversold, as are the chipmakers that I previously mentioned. Transports like Trinity Industries which builds railcars for transporting crude oil across the US, should not be down 31% in the last few weeks…that is a buy, as are the big oil and gas stocks. On top of a possible recession in Europe, the Ebola virus has really beaten down airliners like Delta, Southwest, American and United Airlines. Those are all long-term buys as well.

The second way to deal with this volatile market, is by buying low beta names…that is, stocks that have low volatility and won’t move as much as the broader market. Names that have held up very well in the last few weeks and even rallied are utility stocks that pay dividends of more than 3.5%, like Exelon (EXC) and Consolidated Edison (ED). Telecom companies like Verizon and AT&T, paying more than 4.5% to wait, are also good plays here because their dividend acts as support for the stock. Another stock that has done really well is CVS. While it’s trading near all-time highs, there’s still more room to run. The last stock that you can own in this market is one that really just trades by itself and doesn’t really move with the broader market, Apple. The tech giant has outperformed the Nasdaq by about 6% in the last three weeks, dropping only about 1%.

So there you have it. Hopefully you have cash on the sidelines to put to work in stocks that you have been waiting to buy at a discount. If you’re in for the longhaul, buy high quality stocks that have been beaten down because of profit taking and investors running scared. If you’re in for the short-term, look for low beta names paying big dividends. Keep your eye on the S&P this week. 1905 is the 200-day moving average and has been significant support for a couple years. If the S&P can’t hold that level this week, then will absolutely be more downside coming. Hedge Funds are getting margin calls on some of their long futures positions, which means they are selling the positions they have gains in. That’s why I like buying those stocks that shouldn’t have dropped like Google, Facebook and Trinity Industries, because I believe they will be buying them up again going into the end of the year.

Jeff Lewison

Saturday, October 4, 2014

And The Best IPO Is...

10/4/14

While the S&P closed on Friday 41 points off yesterday’s low, the index still finished down 0.8% for the week. Thursday’s low marked a 4.6% drop from the highs made just a couple weeks ago, but I think that low of 1926 will be support for the rest of the year. It took a lot of trial and error, but 1926 happens to be the current 120-day moving average, which is a level that the S&P has not closed below since November 2012. In fact, since that time, the S&P bounced off that level 8 straight times, including thrice this year alone. The fact that the market rallied almost 2% in the last 1.5 days makes me incredibly bullish for the rest of the year. The markets were already oversold, but given the ebola concern, problems with Russia/Ukraine, a slowdown in China, a slowdown in Europe, protests in Hong Kong, a weak US housing market, and a strong dollar, the S&P should not have rallied that much, which makes me believe the markets are headed for another new all-time high. With that said, in order to really be in the clear, I need to see the S&P close above 1975, which was the previous support level. If stocks can’t close above that level this week, then I expect the S&P to make one more push lower to the 120-day moving average before rallying into years end. Q4 earnings kick off next week and I believe that will be the catalyst to take the markets higher.

With all the Alibaba hype over the last few months, I feel like I should mention it…so there, I mentioned it. Forget Alibaba because the best IPO this year is in the auto sector, Mobileye. The company engages in the provision of automated driver assistance technologies. In short, they have revolutionized the future of the auto industry by helping drivers improve safety and avoid accidents. Mobileye’s technology can be found in cars made by BMW, General Motors, Volvo, Ford and many others. Not only are they going to be the biggest player in driverless car technology but right now their technology is what controls lane departure warnings, pedestrian collision warnings, speed limit indications and more. Last quarter, Mobileye reported a $0.01 earnings beat of $0.05/share and revenues increased 90% to $33.7M, also above estimates. On the earnings call, management said that their technology was already installed in 3.9M vehicles and expects to be in 160 car models by the end of the year, and 237 by the end of 2016. While a majority of their sales are to car manufacturers, they are growing in the after market where their systems need to be professionally installed, however they predict that by early 2015, they will have self-installation systems available in retail stores.

This stock is not for the faint of heart. If you are someone that watches the market every single day, and may not be able to handle a sudden 5% drop, then you may want to stay away. But if you are someone who wants a very high growth stock with a lot of volatility then Mobileye is the way to go. Now, the stock is already up 60% from where it opened on its IPO day, having closed on Friday at $57.70 after hitting a new all-time earlier in the day. So I do not recommend going out and buying it right now. Instead, be patient and wait for the stock to come in a little bit, and buy in blocks. I would look to buy 25% of your position around $54 and then the other 75% if the stock gets back down to $50, which is right around the 61.8% Fibonacci retracement and a strong support level over the last couple weeks. This stock, along with GoPro tend to trade by themselves, being the new momentum names, so just because the market is rallying, doesn’t mean Mobileye is going higher. My advice is to put in your orders now so that if the stock sells off, you’ll already be in position to buy it.

I put my money where my mouth is last week and bought NXP Semiconductors with an average price of $66.22. It only made sense that as soon as I recommended it, the stocks suffered one of its worst weeks in months, despite also receiving an upgrade and price target increase by Sterne Agee. I thought the sell-off was nothing more than profit taking and took advantage of that.

A couple months ago, I wrote an article about how you need to be ready to take advantage of completely irrational reactions by certain stocks to news stories. My case in point was just this week when every airline and cruise stock got hammered on reports that an Ebola case was found in the US. Does anyone really think that people are going to cancel their trips or decide not to take a vacation because of an Ebola case? The sell-off was ridiculous and I took advantage and added to my position in Delta Airlines. Delta has rallied about 8% since the low on Wednesday’s sell-off and most of the other airlines are up similar amounts.

Jeff Lewison