Stock of the Week: 2015

Sunday, December 27, 2015

On to 2016

12/27/15

As the year comes to a close this week, I’ve decided to give you 4 bold predictions for 2016:

The S&P will actually end the year down at least 5% in 2016.

Since hitting an all-time low in early 2009, the S&P is up a whopping 209%, having never closed lower in a single year (this year may be the first but it’s over yet). So why on earth would I think the stock market will actually rollover in 2016? There are a few reasons. When I look at a monthly chart over the last 10 years, the S&P looks to be forming a rounded top, which is usually a bearish indicator. So on a technical basis, stocks may be out of gas in the near-term.

On the fundamental side of the market, there are a lot of reasons to be bearish. The market this year was led higher by high momentum names like Amazon, Alphabet, Facebook and Netflix. When I see markets being led by just a few names all year long, and most of those names are high multiple stocks, I tend to be a little concerned that the stock market can continue higher. In a healthy market, you will have multiple sectors leading the charge and different names leading at different times of the year. Next year, we will also be heading into an election year, which means great uncertainty, especially if it comes down to Trump v Clinton. Markets hate uncertainty, which should send stocks lower. If you look at the last 4 election years, beginning in 2000, the markets ended -9.1%, +10.9%, -37%, and +16%. On top of that, we’re facing rising interest rates in the US, while the rest of the globe is cutting rates. The US dollar continues to remain strong, wage growth remains stagnant and the economy just isn’t growing fast enough.

WTI crude oil will bottom but average $50/barrel

At this time next year, I believe you will be able to look back and say, “I should have bought Exxon at $80.” In January 2008, oil bottomed at $33.20/barrel, re-tested that level in February, and then proceeded to rally almost straight up 245% over the next two years. I’m not saying the same thing will happen, but earlier this month, oil hit a multi-year low of $34.53, and has rallied about 10% in the last couple weeks. Right now, the oil industry is a game of chicken between OPEC and the US to see who is going to break first and cut down dramatically on oil production. There are a lot of US energy companies that are in danger of bankruptcy, and it’s my belief that oil will bottom when as some of these heavily levered energy companies like Chesapeake, start to falter and look to be acquired or fold. Look for the oil rally to begin early next year.

The 7-year biotech rally will finally come to an end

That’s right…without question; biotech stocks have been the single hottest sector since the financial crisis, with the biotech ETF (IBB) rallying an insane 494%. That’s an average annual return of about 71%. So how can I be so stupid as to think the IBB will actually be DOWN for the year? For starters, biotech is having its worst year since 2010, up just 11%. While that is about 12% more than the broader market, that’s a really bad year by biotech standards. Additionally, with Hilary Clinton being the likely Democratic Presidential candidate, and given how anti-pharma she has been on the campaign trail, I can see additional pressure on all of the biotech firms to justify drug prices, which could send shares lower. Having said all of that, there will still be outliers in the group, so I recommend sticking with the big cap names with a strong pipeline and great balance sheet like Gilead, Celgene, Regeneron and Amgen.

Big reversal in the Netflix vs. world

Content is king in the media industry and I’m sorry, but Netflix doesn’t have the best content, despite what the stock price indicates. YTD, Netflix is up about 140%, while competitors like Disney, Time Warner, CBS are up 12%, down 25% and down 16%, respectively. Earlier in the year, Disney warned of weaker-than-expected ESPN revenue due to cord cutting, and Time Warner and everyone else followed, sending the entire media sector sharply lower. I think Netflix’s luck is running out. I see user growth slowing, content costs rising and revenues and earnings contracting. Earlier this year, Time Warner began offering its stand alone service for HBO, which is the solution to consumers cutting the cable cord. CBS’s Showtime did the same thing and more and more channels should follow in 2016. Nobody has better quality content than HBO, so I would be a buyer of Time Warner and a seller of Netflix in 2016.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Time Warner (TWX), NXP Semiconductors (NXPI), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan (AGN), FireEye (FEYE), Humana (HUM), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies.

Jeff Lewison

Sunday, December 13, 2015

Fed Week

12/13/15

This is an important week for the markets, not only because we’re coming off the biggest weekly drop for stocks since August, but mostly because oil continues to make new lows, junk bond funds are cutting off redemptions, and the Fed is set to announce an interest rate hike on Wednesday afternoon.

With OPEC’s recent announcement that they will not be cutting any production, it is becoming very clear that the oil industry is becoming a game of chicken, to see who is willing to shut down production first; the US or the rest of the world. So far, nobody has been willing to budge, and will more Iranian oil coming to the market with the reduced sanctions, it’s almost certain that oil is headed lower in the near-term. Lower oil should be good for equities as companies and consumers will reap the benefits of savings, however, lower oil prices tend to be an indicator of a slowing global economy. However, it’s my belief that oil prices are and will remain stubbornly low not because of a demand problem, but because of a supply problem. Global oil production has never been greater so don’t confuse low prices with a poor economy. A great way to play low oil prices is by buying up retailers and restaurants that are doing well such as TJX Companies (TJX), Nike (NKE), Home Depot (HD), Darden (DRI) and McDonalds (MCD).

It’s almost certain that the Fed will announce a 0.25% rise in interest rates on Wednesday, however that is already priced into the market. What will be important on Wednesday is how the Fed positions future rate rises to investors. My expectations are that the Fed will raise rates on Wednesday and will likely not do so again until closer to the middle of 2016, where the hope is that the global economy will be on stronger footing. If the Fed signals quicker rate rises (potentially 3 or 4 next year), then I fully expect the markets to dramatically sell-off.

Monday is going to be a critical day. If junk bond funds continue to disallow redemptions, that will continue to create liquidity issues and I would expect investors will need to raise cash by selling out of winning equity positions. Nothing was immune to last week’s selling, especially not the market leaders like Facebook, Neftlix and Amazon. If you have time today, it’s not a bad idea to review your portfolio and pick out stocks that you don’t see a lot of catalysts ahead that will move the price. I usually do not like to do much buying or selling in the last 6 weeks of the year because you typically have low volume and crazy price action for no apparent reason. This December is a little different, as you have junk bond funds imploding, potentially the first rate hike in years and oil at multi-year lows.

In looking at the S&P 500, I expect the markets to go back down and re-test the 38.2% Fibonacci retracement of 1970, which would be a 2% drop from Friday’s close. Stocks will have to stabilize at those levels or else the S&P is headed right back down to the yearly lows of 1867. I don’t think we’re in jeopardy of a drop back to the 52-week lows, but it’s also very hard for me to see the markets stage any meaningful rally into years end. With that said, you could have some great opportunities in the next few weeks to pick up stocks of companies that are unfairly beaten down because of profit taking and broader market pullbacks. Use the next couple weeks to research a couple stocks that you have wanted to buy, and make sure they are right for your portfolio. Stick with names that are near 52-week highs, have reported strong quarterly earnings and are in a sector that will benefit from low oil prices.

Jeff Lewison

Sunday, November 22, 2015

Not All Retail Sucks

11/22/15

Last Friday, it looked as if the market was ready to roll over, with retail and restaurants getting clobbered. But what a difference a week makes, with equities staging their biggest weekly gains of the year, with the likes of Home Depot (HD), Costco (COST) leading retailers out of the gutter and Amazon (AMZN), Alphabet (GOOGL) and Apple (AAPL) rallying the tech sector. So with many stocks pushing up to 52-week or all-time highs, where can you look for gains going into the end of the year? I would look at 2 retail stocks that are actually doing very well despite their recent stock performance.

Under Armour (UA)

After hitting a new all-time high of $105.89 in September the stock has gotten hammered, falling 15% to close at $92.01 on Friday, other than the fact that the stock is very expensive, trading at 68x FY16 earnings. However, valuation doesn’t seem to matter with Amazon and Netflix, so why should it matter for Under Armour, a company that actually make a lot money. On its most recent earnings call, management said they expect to maintain its 25% or more sales growth next year, including strong sales of its high-margin footwear business. Most companies would kill for that kind of growth. Under Armour’s stock sell-off was punctuated by horrible earnings from Macy’s and Nordstrom, which sent every retailer lower. But don’t confuse poor sales at Macy’s and Nordstrom for poor sales at Under Armour. The future of Under Armour is in its own company-operated stores, along with its international expansion. They most recently opened stores in Brazil and the Middle East, which helped contribute to its Q3 74% international sales growth.

Additionally, Under Armour continues to be a big player in the wearable fitness devices, which is expected to grow into a $6B industry over the next year. It has 140M users in its connected fitness community.

On a technical basis, the stock reacted exactly as it was supposed to on a sell-off, trading right around Fibonacci retracements and putting in a bullish 5^th wave down from all-time highs at $84.80, which just so happens to be the 50% retracement from 52-week high to low. Since bottoming out, Under Armour has rallied 8.5% in the last three days, giving you a short-term bottom to trade against. I expect Under Armour to continue to push back to new all-time highs and yield big gains for your portfolio.

TJX Companies (TJX)

Not all retailers are created equal. That’s why when I saw TJX Companies trade down to $64 last a week ago, I decided to add to my position heading into their own earnings. TJX didn’t trade lower because of anything to do with their business, but instead got crushed because Macy’s, Gap, and Nordstrom all reported disappointing earnings and guidance. But TJX isn’t like any of those three retailers. This is a market where off-price retailers still dominate and more importantly, so does home furnishings. The latter is the biggest reason to be a buyer of TJX, as the parent company owns and operates low-cost, home furnishing outlet, Home Goods. Those stores accounted for 6% same-store sales growth, with net sales growing almost 13% to $960M.

Last week, TJX beat on the both, the top and bottom lines, posting Q3 sales of $7.8B, ahead of the estimated $7.7B. Same-store sales were up 5%, marking the 27^th straight quarter of same-store sales growth, led by an increase in customer traffic. While inventory build up is what is plaguing most retailers, TJX says inventories were up 6%, a number which management is comfortable with, as it provides more flexibility to deliver fresh merchandise to every store.

In a sign that of good things to come, TJX raised its FY16 sales guidance, where the company now expects same-store sales to rise between 4%-5%, up from 3.5%.

TJX has done everything right for a long time now and I don’t see that abating anytime soon. They have brought in better quality products, are catering to a market that is still going very strong, and with its Home Goods business, puts itself in a position to take advantage of the continuously strong housing market.

TJX rallied about 10.5% off the new 52-week low on Monday to close at $70.15 on Friday, right at the 50% retracement. You don’t have to wait for the stock to sell off again to get in, as I think there is still about another 15% upside to go. At the same time, TJX does pay a 1.20% dividend and continues to add value for shareholders through buybacks.

Don’t give up on all retail. Macys hasn’t been operating well for over a year and Nordstrom did not do a good job of managing inventory. Cool companies like Under Armour are still a hit with consumers, and the low-end retailers and housing market are alive and well, a sweet spot for TJX.

Jeff Lewison

Saturday, October 31, 2015

Earnings Continue

10/31/15

It’s an important week ahead, with not just big earnings releases but also on Friday, we’ll get the October non-farm payrolls number, which could send stocks on a volatile ride, because as you know, the number will be closely watched to determine what the Fed will do in December. For the most part, earnings have been lackluster, some good and some bad, yet the broader market had it’s best month in 4 years. As I wrote a few weeks ago, the market is only rallying on hope that Fed does NOT raise rates this year. I still am in the camp that believes the Fed should start raising rates and probably should have months ago, but that’s beside the point. If you’re looking at the S&P, 2061 is a key level, which is the 200-day moving average. That has to hold in the short-term or else the markets are likely going right back down to 2035. So with that said, here is a look at what’s on tap this week and where the opportunities are:

MONDAY (CAH, V)

Cardinal Health (CAH) reports on Monday, and this is a name that I probably have never talked about before. However, I bring it up now, because I think it offers a strong buying opportunity for a healthcare company that could yield nice long-term profits. The company is trading at just 14x FY16 earnings, pays a 1.88% dividend, and has a strong balance sheet. Cardinal is focused on growing its China business, has a strong partnership with Bayer Healthcare, which just reported a good quarter and is committed to its generics business. Cardinal closed on Friday at $82.20, above key support at $80, so I think your risk is limited. I’m a buyer of Cardinal Health.

Visa (V) also reports on Monday, and whether you like Visa or Mastercard better, doesn’t matter…they are both outstanding and both will continue higher. On Thursday, Mastercard reported another strong quarter hitting an all-time high, leading many to think Visa’s quarter will be similar. I tend to agree and would be a buyer on any sell-off, which is almost surely to happen, based on pure profit taking. There is a lot to like about Visa, including mobile payments, its growing international usage, increased dividends and reduced rebates (Mastercard actually showed an increase in rebates). With that said, Visa isn’t cheap, trading at 26x FY16 earnings, but the company is growing its earnings by 25%, so I’m okay paying up for that growth.

TUESDAY (H, TSLA)

Hyatt (H) reports earnings on Tuesday, and this is an intriguing stock, not because of what they report, but because of its recent discussions with Starwood to take over their hotels in a cash and stock deal. A deal would help Hyatt better compete with larger operators like Hilton and Marriott, giving it close to 500,000 rooms. The deal would also greatly expand Hyatt’s global presence, since currently almost 75% of Hyatt properties are in the US, while Starwood properties are made up of 55% in the US and 45% international. With all that said, I do not recommend buying Hyatt before they report because the stock is pretty expensive. A Starwood purchase would be the big catalyst so hold off on buying the stock until there’s more clarity as to whether or not the deal will go through, but its worth watching.

Tesla (TSLA) will be the big mover on Tuesday, when it reports after the bell, and the company needs to report a big quarter to save it, as its currently sitting a major support. Tesla is expected to report a 36% rise in revenues to $1.26B, but more importantly, analysts are expecting Tesla to have delivered 11,580 vehicles, up 49%. The most important part of the earnings call will be around the Model X (SUV). Elon Musk needs to update investors on how many Model X SUVs will be delivered to customers, with only a handful being delivered as of the end of September. They also need to show an improvement in China, where it has really struggled picking up business. If you want to be in Tesla, wait until after they report and buy in the afterhours, if you’re able to. If the stock sells off to $182, the 52-week low, and Model X deliveries sound good, then buy the stock against $175.

WEDNESDAY (FB, AGN, FEYE)

Facebook (FB) is the big report on Wednesday afternoon, and similar to Apple, Starbucks and Gilead, it usually doesn’t matter how great the quarter is, the stock is likely to sell-off. Facebook has consistently reported monster quarters, yet saw its stock drop, and every single time, the stock has previously been trading at or near all-time highs. This time is no different, trading at $101.97, I expect profit taking on Wednesday afternoon. But that should be used to buy the stock if it comes back to $93. Facebook has been taking market share from Google and Twitter and everyone else out there, and has a lot of other revenue streams. It’s hard to imagine Facebook will disappoint, so use any weakness to get long.

Allergan (AGN) was all over the news late this week, when reports surfaced that Pfizer was in talks to buy them out, in what would be the largest merger of the year. Allergan has done everything right as of late. They continue to grow through strong acquisitions, sold off its generic business to Teva, in a move that would essentially eliminate all of its debt and held off being acquired by Valeant, which as we’ve seen in the last couple weeks, was a great decision. I think Allergan blows the earnings out of the park, and despite rallying about 12% since Thursday morning; the stock still has a lot of room to run, trading about 10% off all-time highs. I’m a buyer of Allergen.

FireEye (FEYE) also reports Wednesday afternoon, and since hitting a new 52-week high back in June, the stock has gone in a straight line down. Last quarter, the company reported better-than-expected results in just about every category, yet the stock still sold off sharply on the heels of its CFO leaving the company. Since then, there have not been any fundamental changes in the company, yet analyst after analyst has come out and downgraded the stock, which has sent it to new 52-week lows that it hit on Friday. There has been a lot of talk that competitors like Cisco, Palo Alto Networks and others are gaining market share, however there hasn’t been any specific data to back to claim. I think FireEye is still doing really well, and is the go-to cyber security company, especially for the government. I can’t recommend buying FireEye before they report, but I do believe there is a lot of bad news priced in and if the company impresses as they have the last few quarters, the stock could soar, especially given that there is a huge short interest of 14%.

THURSDAY (DIS)

About 90 days ago, Disney (DIS) reported a relatively strong quarter, however warned that content revenue, namely ad revenue from his TV stations, would be less than originally expected. That sent the stock down 26% in a matter of week, which as the stock has since regained almost everything it lost, was just utterly ridiculous. On that sell-off, I had continued to recommend buying Disney, which had you done so, would put you in a great position going into Thursday’s earnings. I still love Disney here and expect them to report another great quarter, with improvements in TV ad revenue, strong theme park attendance, especially domestically, and oh yeah, Star Warsmania is in full affect and the movie doesn’t even come out for another month and a half. You should continue to own Disney into earnings and if it sells-off again, keep adding to your position.

If you’ve followed the markets over the past couple weeks, you’re well aware of the issues that Valeant is having, and how with the stock dropping 50%, with seemingly no end in sight, Pershing Square Activist investor, Bill Ackman, is being taken out to the woodshed, suffering paper losses of about $2B. Yesterday, Ackman put hosted a marathon conference call for over 4 hours, which, the more he talked, the more the stock dropped, falling another 15%. At the same time that all of this is going on, Ackman has been taking it on the chin in his “short” Herbalife position, which is now up over 100% YTD. For a very short-term trade, you can look at the Ackman spread (buying Herbalife and selling Valeant). Markets having been turning against a lot of the activist investors and they seem to be attacking Bill Ackman in every position. I don’t see that letting up anytime soon, so the trade still works.

Jeff Lewison

Monday, October 26, 2015

Big Earnings Coming Up

10/26/15

A huge week of earnings ahead, arguably the biggest, and if you blink, you’ll probably miss half of them. But I will highlight the stocks where I think a lot of opportunity exists and hopefully you will have a chance to take advantage.

TUESDAY (Apple, Twitter, Gilead Sciences)

I might as well start with the largest company in the world, Apple (AAPL), which reports after the bell. As usual, no matter how strong the quarter is, investors and analysts will always find something to complain about. All eyes will be on iPhone sales and China sales, both of which think will be strong. The street is expecting about 51M iPhones sold in the latest quarter and guide of around 67M for the holiday quarter. When Apple last reported, Tim Cook said that they didn’t see a lot of customer upgrading their phones prior to the iPhone 6S release, however, now that the new phone is out, I believe upgrades have significantly increased. If Apple surprises with in-line iPhone sales and strong China sales, then the stock SHOULD rise. I like that the stock is 15% off the all-time highs going into earnings where as in the last few quarters, Apple had been trading at or just under all-time highs into earnings. I’m a buyer of Apple into earnings, but if you want to limit any risk, you can wait and buy after they report, using $103 as your target price, which it hasn’t closed below since last October.

Twitter (TWTR) will also be reporting after the close and the stock is up 48% since hitting an all-time low of $21.01 in August. They are making some positive changes with “Moments,” however I still don’t see user growth, which is still the key metric for the company. However, with that said, I think you can trade Twitter prior to earnings if you are looking for a speculative trade. Since breaking back above the 23.6% retracement of $28.68 on October 7^th, the stock has held that support 7 different times. The company already pre-announced earnings so there shouldn’t me much of a surprise here, so I think your downside is limited.

Gilead Sciences (GILD) will kick off earnings for the big biotech companies and with the company trading at roughly 8x 2016 earnings, I can’t find a single reason not to own this one. The company is the leader in Hep C sales so we want to make sure the company says that those remain strong despite Hilary Clinton’s push to lower drug prices. Gilead is expected to grow earnings by about 63% YoY and revenues by around 20% so as long as those numbers align tomorrow, you should be long.

WEDNESDAY (GoPro, NXP Semiconductors)

I used to own GoPro (GPRO) and unfortunately, it turned out to be one my worst trades. I bought post earnings 3 months ago and it went in a straight line down despite reporting a huge blowout in earnings, revenues and sales and raised guidance. I still contend that the stock is incredibly cheap, trading at just 15x 2016 earnings and a PEG ratio of 0.53, both significantly discounted to the S&P 500. It’s currently trading at $28.79, about 8% off all-time lows. The company has a very unique product that to this date has really not been duplicated, however investors expect significant competition in coming years, which is part of the reason the stock has been getting hammered. Much like Twitter, GoPro could give you a very unique trading opportunity with a massive short interest of 28%. If you’re looking for a high risk, high reward speculative trade, I would look at buying GoPro prior to earnings.

NXP Semiconductors (NXPI) will already be on the move prior to reporting, as it will be heavily influenced by Apple’s earnings. NXP is one of my absolute favorite tech/semiconductor stocks out there are is also very cheap, trading at 14x 2016 earnings with a PEG of 0.61. NXP is down 25% from all-time highs, which is ridiculous because of how well the company is actually doing. However, with all that said, none of it matters. The semiconductors are a very hated sector right now and until that sentiment turns around, these stocks probably aren’t going a lot higher. I would hold off.

THURSDAY (Starbucks, Exxon Mobil)

The Apple of the food industry, Starbucks (SBUX) reports Thursday after the close and like last quarter, it’s trading at all-time highs heading into earnings. Starbucks is going to have to report a blowout quarter to avoid a selloff because the stock is expensive, trading at about 33x 2016 earnings. Starbucks is one of my largest positions and I am not taking anything off the table because one thing investors should learn over the years is to never bet against CEO, Howard Schultz. He seems to have Starbucks light years ahead of every food service company in the world. Mobile pay, mobile order, great experience, and high prices should keep this stock rolling. Starbucks should be a staple of every single portfolio, but wait until after earnings to buy and hope somehow, someway, the stocks sells off on profit taking.

Oil giant, Exxon Mobil (XOM), reports earnings on Thursday. Of course, earnings and revenues are expected to significantly decline but that’s already known. What I’m interested in hearing is how strong the balance sheet remains, their outlook for the oil industry and that the dividend is safe. Back on August 30^th, I recommended buying Exxon Mobil when the stock was trading at $75.07, and since then, it’s up 8% and holding the 50% retracement. On a daily chart, the stock is forming a strong inverted head-and-shoulders formation, and I see the stock headed back to $94 in the next 12 months. Buy Exxon Mobil.

There are many other big earnings coming this week, such as Bristol Meyers, Alibaba, Amgen, ConocoPhillips, LinkedIn, etc...But I have given you a few names to follow which could yield great results for your portfolio.

Jeff Lewison

Monday, October 12, 2015

Banks & Industrials

10/12/15

Last week we saw a big market rally on hope that the Fed will hold off on raising interest rates until at least early next year, possibly earlier. Additionally, Chinese markets were closed for a few days last week, which aided US equities. But the S&P is coming up to major resistance at 2020, just 6 points higher than Friday’s close. So as I advised last week, do not rush in to buy stocks, thinking that you missed the rally. I fully expect equities to fall again, which will give you another chance to buy those stocks that you have been waiting for.

With that said, it will be a busy week of earnings led by the banks and major industrials. This week, we will hear from bank giants, JPMorganChase (JPM), Wells Fargo (WFC) and Bank of America (BAC). With interest rates remaining low for what will likely be until next year, and banks not making a lot on net interest margins (NIM), I will be looking to hear what they say about the housing market, and how strong their mortgage portfolio is. Wells Fargo is the lending leader so this will be more important for them than their competitors. I also want to see how the investment banking divisions of JPMorganChase and Bank of America are doing. With large banks not being able to grow through NIM, they need to rely more heavily on M&A and IPOS. I don’t like the banking sector right now because I see limited near-term upside. But if you are looking for a long-term holding, I would recommend first Wells Fargo and then JPMorganChase. The later would be best to buy at the $58.13 level, which is the 23.6% retracement. For Wells Fargo, I would rather be a buyer around $53.50, and only if the stock can hold that level. $53.49 is the 50-day moving average, and the stock hasn’t closed above that indicator since early August.

Delta Airlines (DAL) reports on Wednesday, and I expect them, along with all of the major airlines to do very well. We all know that the airlines are benefiting greatly from the consistently low oil prices. Delta is expected to report fuel costs of roughly $1.85/gallon, compared to about $2.90/gallon last year. Delta recently updated investors on their quarterly performance, raising operating margin guidance and announcing unit revenue, the most important measurement of an airline’s performance, will be down less than originally expected. Delta is trading just off all-time highs, so a lot of the good news is already priced in. But I still like Delta among the best of all the airlines, so I would be a buyer against $45, which seems to be a key turning level.

Lastly, on Friday, industrial giants, General Electric (GE) and Honeywell (HON) will report. I have never really liked General Electric and I still don’t like it. While it does pay a 3.30% dividend, the stock is completely flat, up just $0.22 in the last 2 years, compared to its industrial counterpart, Honeywell, which is up 12% in the same time frame and also pays a 2.04% dividend. Honeywell is my favorite industrial stock and tends to do just about everything right. The company has its hands in almost everything, from aerospace to power generation systems to performance materials and technologies. They do have some international exposure so I am looking to hear what they say about China. I think things are going to be strong for Honeywell, but you don’t need to go out and buy the stock after it reports. If you look at the stock performance after each time Honeywell reports, the stock tends to sell off each time and bottom out about 6-7 days later. I would to be a buyer of Honeywell around $97.50, which is the 38.2% retracement and the top of a gap on a daily chart. That’s a key support level in the stock, and a great entry point for a long-term position.

Keep your eye on earnings. You don’t need to rush out and buy anything this week immediately after earnings. Take the time to read through the conference calls and wait for a pullback. Among the financials, I like Wells Fargo the best. Delta will get you done in the airline sector, and for the industrial stocks on Friday, skip General Electric and go with Honeywell, post-earnings.

Jeff Lewison

Sunday, October 4, 2015

Earnings Season

10/4/15

After a very disappointing jobs number on Friday morning, it looked as if the market was headed for the August 24^th lows, with the S&P falling as much as 1.5% shortly after the open, only to spend the rest of the day rallying back to close UP 1.4%. So with a jobs number so bad, why did equities actually rally instead of continuing to sell off? The answer is simple…look no further than the bond market, and you will see that the market now does not expect the Fed to begin raising rates until next year…at the earliest. On Friday, the rate on the 10-year Treasury note closed below its August 24^th rate at 1.989%. At the same time, the Fed Funds rate predicts a 5% chance that the Fed will raise rates in October and only a 30% chance the Fed acts in December. There’s now talk that the Fed may even have to do another round of QE, something that I find to be a little ridiculous. My take is that while the September jobs number was a letdown and the downward revision for August was also bad to see, it’s just one indicator and a blip in the otherwise pretty strong US economic data.

Looking ahead to this week, earnings season begins on Tuesday with reports from PepsiCo (PEP) and Yum Brands (YUM). I don’t really like either stock, as PepsiCo’s stock has gone literally nowhere in the last 12 months. It’s in a struggling industry and although it sports a 3% yield, there’s no catalyst to really move the stock. As for Yum, there are also better options in the food service industry, but with such a big presence in China, I am listening to what they say about the Chinese consumer going into the end of the year, which I think is stronger than most economists expect.

On Wednesday, one of my favorites, Constellation Brands (STZ) reports before the bell. This is a stock that I recommended weeks ago and has held up very well during the recent market volatility. Constellation has two of the best imported beer brands in the world, Modelo and Corona, and I think they will report another strong quarter. Constellation is sitting just 2% off all-time highs that it hit a couple weeks ago, but I still think you can buy it before they report and after if the stock sells off.

On Thursday, we’ll hear from pizza chain, Dominos (DPZ). Despite the recent market turmoil, Dominos is still up 13.5% YTD, vastly outperforming the S&P and most other restaurant stocks. I think the pizza is still terrible, but I do like the stock. Mobile ordering, much like Starbucks, has been the key driver of strong sales and will continue to do so in the future. Dominos has held the $103 (61.8% Fibonacci retracement) level since gapping up on earnings back in April, and bounced off that level on Friday to close at $106.88. The stock isn’t cheap, trading at about 27x FY16 earnings, but when compared to Starbucks, Yum Brands, Darden Restaurants and many others, it’s actually relatively cheap. However, with EPS expected to grow 21% this year and 15% next year, it’s priced to perfection and I would wait until after they report to hear what they say. If the report is strong and the guidance is good, but the stock goes lower on the back of a bad equities tape, look to be a buyer against $103.

Despite the strong rally into the close on Friday, I think the selling is far from over. Markets hate uncertainty, and the only certainty in this market is uncertainty. Some members of the Fed say they want to raise rates, some say they don’t. Some say they are data dependent, some say they are concerned about the global economy. I am of the opinion that until they finally raise rates, the stock market absolutely will stay in this pattern of flat to lower price movements.

Hopefully by now, you have some cash on the sidelines, ready to put to work. It’s important to be patient in this market. It’s too easy to chase stocks as they rally like they did on Friday. The levels in the S&P to watch are 1970, which is the 38.2% Fibonacci retracement and 1931, the 23.6% retracement. The market has not closed above 1970 for three straight days since dropping below that level on August 24^th. I would rather see you be a buyer at 1931 or lower, which will likely get tested again this week. As for where we go from here, I think we’ve seen the lows for the year. The market tested those lows again last Tuesday and failed to break down, which shows very strong support at 1867. During earnings season, it’s especially important to not rush and chase stocks. Read through the conference calls and buy stocks of companies that report strong revenues, strong earnings, and offer better-than-expected guidance. Don’t mistake strong earnings for strong sales. You want to look for both. I think earnings overall will be very strong this quarter, but the true sign of economic and company strength is in their revenues.

Last week, I took advantage of the overselling in biotechs and bought more Amgen and Allergan. The entire biotech and healthcare sector has been overly beaten up, and should continue to be bought. The biotech EFT (IBB) saw its largest volume day in years on Monday, however what’s important to note is that it held major support at $283.55 and rallied 11% from there. I like the big cap biotechs, which at these levels are all oversold.

Jeff Lewison

Sunday, September 27, 2015

There Go the Biotechs...Again

9/27/15

It was another tough week for equities, led sharply lower by the healthcare and biotech sell-off induced by Hilary Clinton on Monday. Clinton called into question the high drug costs that consumers face and is proposing that a certain amount of revenue from the sale of those drugs go directly into R&D. That alone, sent the IBB iShare Biotech ETF (IBB) down 5.5% from the highs, leading to a 13.1% drop for the week. However, if there’s anything that you should have learned about what to do when people who have no idea what they’re talking about try to take down biotech stocks (see Janet Yellen’s bubble call twice), you should know that once the dust settles, all of these stocks will continue to go higher. With the IBB closing at $310.24 on Friday, the ETF closed at its lowest level of the year, and while the sell-off is completely unjustified, much like the broader market sell-off that we’re seeing, I still think you have to wait to buy any biotech stock, no matter how strong the company is. Gilead, Regenergon, Celgene, and Amgen are all in very strong financial positions, trading at historically low relative P/Es and have major pipelines, yet, because they are the biggest stocks in the IBB, they got lumped in and sold off. Those four stocks are the ones that should be on your radar if you are looking for exposure to biotech, however, as I mentioned, I would wait until that sector stabilizes. The two levels that I am watching in the IBB are $305.96 and $283.56. The first is the 52-week 38.2% Fibonacci retracement and was very strong support early in the year. The latter is the 23.6% retracement, and also the low tick on the August 24^th crash. My advice is to see what happens this week. Friday’s sell-off came on about 4x average volume, so if the biotech sector can rally hold and rally back this week, then you know you have a level to trade against.

This is the last week before earnings season kicks off in October, and to finish off September, we’ll get earnings from retail giant, Costco on Tuesday morning. I’ve been in Costco for a while now and continue to like the stock into earnings. Very little of Costco’s business comes outside of the United States, so this is mainly a play on the strong dollar and US consumer, which the economic data indicates, is alive and well. Analysts are expecting quarterly earnings to grow 5% to $1.66 and revenues to rise 4.5% to $36.33B, both numbers weighed down by its gas sales. Costco has a history of beating on earnings, but in this market environment, it would be beneficial to wait and see how the stock reacts. If the stock rallies, wait until the next market drop to get in.

The other event to keep you eye on this week is the September jobs report on Friday. This will be the last jobs report prior to the October Fed meeting. Fed Chairwoman, Janet Yellen, has said that markets should expect a rate hike sometime this year, meaning October or December, however given the fact that they failed to raise rates this month despite strong US economic data, I don’t really trust anything she says anymore. Economists are expecting an add of 190,000 jobs in September, however its too hard to predict how markets will react if that actual number comes in higher or lower than expected. A negative reaction could give you another great opportunity to buy those stocks on your shopping list that you didn’t think would ever pull back.

Finally, if you’re looking for safety in this volatile market, look no further than the largest company in the world, Apple. This recent market pullback began on August 19^th, and since then the S&P is down 7.8% while Apple is down just 1.5%, despite the fact that almost everyone on the street thinks the company is doing horrible in China. I know there are plenty of companies that are actually trading higher in the same time frame, but Apple has only been driven lower on fear of the Chinese consumer not wanting to buy any Apple products, not because of any realistic data. In fact, if you look that the quarter that Nike reported on Thursday, you know very well that the Chinese stock market and Chinese economy are completely separate, and that the consumer is doing just fine. But the fact that Apple hasn’t fallen with the broader market, to me, means that the stock is heading higher and if the market starts to rally, Apple will lead the Nasdaq charge. Sales of the iPhone 6S went on sale this past weekend, and early indications are that it will be the most successful weekend launch ever…mainly because for the first time ever, the phone will be on sale in China at the exact same time.

Given how the markets have traded over the last 45 days, there is no reason to run out and chase a stock on your list. If you’re looking to buy Costco and the stock rallies before you can get in, then just wait. Don’t get caught up in market rallies because every rally since this correction began has been met with sharp selling pressure. Keep your shopping list ready with names that I have previously talked about like Lennar, Constellation Brands, Costco, Home Depot, Apple and more. Focus on buying high quality stocks that have reported strong quarters, with good guidance and have gotten cheaper in the last couple months simply because of investors taking risk off the table.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Time Warner (TWX), NXP Semiconductors (NXPI), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan (AGN), FireEye (FEYE), Humana (HUM), GoPro (GPRO), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies.

Jeff Lewison

Sunday, September 20, 2015

Look to Homebuilders to Grow Your Portfolio

9/20/15

It’s no surprise that stocks finished at the lows of the day on Friday, as the Fed cowardly decided not to raise rates this month, putting even more uncertainty in the market, something that investors absolutely hate. Now, investors are left wondering when exactly is the “perfect time” to raise rates. The Fed blamed global economic uncertainty for not raising rates this month, but who’s to say something new won’t come up during their next two meetings in October and December? What if China really is a lot worse than we thought? Will the Fed continue to wait even though the US economy doesn’t justify that decision? The reality is, the US economic data DOES justify a rate hike, and a 0.25% increase won’t really have a negative affect on anything. But instead, the Fed lost all credibility by not acting on the strong data after saying they were data dependant, and we’re now left wondering and debating for at least another month.

So, now that interest rates will continue to remain low for what will likely be at least another three months, I believe that if you’re looking for a new investment for your portfolio, you should look no further than the housing sector. You already know that I think Home Depot is best of breed and will continue to be so, but there are other areas in housing that could yield great returns. If you’re looking for a homebuilder, take a look at Lennar (LEN). Now, Lennar does report Q3 earnings on Tuesday morning, so I would suggest waiting a little to get in, but you should definitely keep your eye on this one. Analysts are expecting Lennar to show a 21% increase in revenues and for quarterly earnings to come in relatively flat YoY. However, for the year, analysts expect the company to grow earnings by 16% to $3.25/share.

Lennar is one of the biggest players in the multifamily rental properties, which has been red hot for the last couple years, being a big reason the stock is up 29% in the last 12 months and up about 15% YTD. The rental market has not shown a lot of signs of cooling down, and with a rise in student loans, new college graduates are unable to secure a mortgage, forcing them to continue to rent.

On Friday, Lennar closed down 2.30% at $51.75, just below the 78.6% Fibonacci retracement of $52.07. With a 13.5% short interest in the stock, a negative reaction to earnings could give you the perfect opportunity to get in this name. The price I would be looking to be a buyer at is between $48-$49. Lennar closed just above $48 on Tuesday, August 26, which was the day after the Monday market crash, and a level the stock held on the following Wednesday. The 61.8% retracement is at $48.96, which since closing above on August 27, is a level Lennar has held onto. The low of Monday’s crash is $46.77, which is exactly the 50% retracement, so use $46 as your sell level and you have a maximum risk of 6%. My 12 month target for the stock is $63, giving you a potential upside of 29% if you buy at $49.

The Fed is giving you a chance to take advantage of one of the big bright spots in the US economy, housing. After you add Home Depot to your portfolio, take a look at Lennar.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB),Time Warner (TWX), NXP Semiconductors (NXPI), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan (AGN), FireEye (FEYE), Humana (HUM), GoPro (GPRO), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies.

Jeff Lewison

Monday, September 7, 2015

Check Out These Two Under-the-Radar Names

9/7/15

After another brutal week for stocks, with the S&P closing down about 3.5% for its lowest weekly close since the beginning of October, it’s becoming very clear that there’s more pain ahead (despite the fact that I don’t believe it’s justified). The jobs number on Friday didn’t help matters, as the unemployment rate fell to 5.1%, which is what the Fed has been targeting. The problem with that is investors are interpreting that to mean the Fed will indeed raise rates when they meet on September 16 and 17. The GOOD news is that a rate hike is being priced into the market right now, so if the Fed decides to stay still, markets should actually rally. As I’ve said before, I believe the Fed should and needs to raise rates, and probably should have months ago, and that even when they do, the US economy will continue on its steady growth path.

With last week’s technical levels being breached, the next three levels to watch in the S&P are 1895 (23.6% retracement), 1867 (the low on August 24) and if all else fails, 1821, which is the October 2014 low. While there is more short-term pain, you should use that for your long-term gain. Most high-quality stocks are in a correction and a lot are even in a bear market (20% drop from the highs), despite the long-term fundamental remaining intact. I have been saying that you need to use these sell-offs to buy stocks that are on your shopping list, so if you don’t have that list ready, then it’s best to start thinking about it. To help you get started, here are two stocks that I really like for your portfolio:

Constellation Brands (STZ)

Constellation Brands is the producer and distributer of many alcoholic beverages, with its portfolio consisting of popular beer, wine and liquor. Among their many brands are Modelo, Corona, Pacifico, Robert Mondavi wines, Svedka vodka, Ravenswood wine, Black Velvet whiskey and Casa Noble tequila. If this stock proves anything, it’s that it is operating at a much higher level than its competitors. On Thursday, while the entire market is facing a correction, Constellation came within $0.13 of all-time highs, and on Friday, closed at $127.52, just 2.2% from the August high. In July, Constellation posted strong Q1 results in all segments, with its beer sales leading the way, posting 11% sales growth and 10% volume growth. Constellation beat estimates by growing earnings by 18%, gross margins increased 130 basis points, and revenues also came in above expectations at $1.63B, which was up 7% YoY. The company’s beer products make up 2/3 of the U.S. beer industry volume growth, and it’s the company’s beer sales that have allowed them to increase FY16 EPS guidance. The company now expects to grow beer sales by 10%, which translates into operating income growth of about 15%. Additionally, a large majority of Constellations wine portfolio is in the low-end wine business, with makes up more than 90% of all wine purchased.

With the company’s strong performance being led by its Mexican beer sales, as an investor, you do have to be concerned about craft beers gaining market share. However, even as craft beers have been gaining on the likes of Miller, Coors, and Budweiser, Constellation’s beers have held in there. Corona remains the #1 selling imported beer in the US and #5 selling beer overall, while Modelo ranks as the #2 imported beer in the US. What also aides Constellation is the growing population of Hispanics. According to the 2014 Census, 17.1% of the total U.S. population declare themselves Hispanic. Adding in the nearly 9 million estimated illegal immigrants, you have about 20% of the U.S. population or 63 million people, of Hispanic decent. By the end of 2015, Hispanics are estimated to have almost $1.5T in buying power in the U.S, so Constellation should greatly benefit versus it’s rivals.

Constellation isn’t cheap when compared to the S&P, trading at about 25x forward earnings, however it is cheaper than the industry as a whole and in-line with the consumer goods sector. But you should be more willing to pay up for a company that is expecting to grow earnings by 12% this year and 15% next year. Just to give you a comparison, Anheuser-Busch is trading at 40x forward earnings and declining EPS growth, Molsen Coors is trading at only 17x forward earnings, but is also expecting EPS to be down 10% YoY.

Looking at the chart, the stock has been on fire, up 30% YTD, which is outperforming the S&P by 37%. Although Constellation fell a couple weeks ago during the panic selling on August 24^th and 25^th, the stock is right back to where it was before the world was coming to an end. In this market, it’s almost impossible to find a stock trading at or near all-time highs, so when you do find one, you know the company is executing on all cylinders. The 78.6% retracement is $119.78 and on August 24^th, the stock traded down to major support at $115, which is a level it hasn’t closed below since March 6^th. My target for this stock is $150, which represents another 18% gain from Friday’s close.

HASBRO (HAS)

For those unfamiliar with the company, Hasbro is the maker of toys and games such as Play-Doh, Monopoly, My Little Pony, Nerf and most recently Jurassic World, Marvel and Star Wars. Hasbro last reported huge second quarter earnings on July 20^th, sending the stock up more than 6% to all-time highs. The company reported better-than-expected net profit growth of 25% thanks to its tie-ups with Jurassic World, Marvel, Star Wars and strength in Play-Doh. While the company reported a 3.8% drop in revenue because of a stronger dollar and difficult comps, that was still better than expected, and better than its closest competitor, Mattel. Hasbro remains well positioned for future growth with their deal with Walt Disney to sell merchandise linked to Star Wars, Marvel, Frozen and more. Additionally, if you thought Play-Doh was a thing of the past, guess again, because the last two years have been the best in the company’s 60-year history of selling the stuff.

If you aren’t a big Star Wars fan, you wouldn’t have known it, but last Friday was actually Force Friday, where some of the new Star Wars: Force Awakens toys were first released, and almost all of the items were gone in seconds. A Target spokesman said the “crowds and excitement were not unlike any we’ve seen on Black Friday.” The most popular items seemed to be Hasbro’s action figures, followed closely by Lego’s millennium falcon and Funko’s bobbleheads. Star Wars mania is only going to get stronger as we move into the holiday season and will be an annuity stream for Hasbro for many years.

Hasbro sports a 2.50% dividend, which is historically low, but that’s only because the stock is up 37% YTD. However, since hitting an all-time high on that superb earnings report, Hasbro is down 11%, along with the rest of the market. The company is expected to grow earnings by 7% YoY in FY15 and 21% next year, which is excellent growth for a company trading at 18x FY16 earnings.

The stock is holding on to key technical levels, closing on Friday at $75.37, above the 100-day moving average of $74.63 and 61.8% retracement of $71.80. I don’t think you need to rush out and buy it on Tuesday, but if you could pick it up around $72, you will be in good position for the future. There is major support around $69.50, which is where the low from when the stock gapped higher on its Q1 earnings in April, and where the stock opened on the August 24^th crash.

If you are looking for stocks to add to your basket, there are many places to look, including the obvious names like Apple, Disney, Facebook, etc…But two under-the-radar names that could yield big results in years to come and are drastically outperforming this year are Constellation Brands and Hasbro.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC), Time Warner (TWX), NXP Semiconductors (NXPI), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan (AGN), FireEye (FEYE), Humana (HUM), GoPro (GPRO), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies, long Exxon Mobil (XOM) SEPT CALLS and short Freeport MacMoran (FCX).

Sunday, August 30, 2015

It's Pandemonium

8/30/15

I don’t think it’s necessary to recap what happened last week, because unless you live in a box or were on a secluded island for the week without wi-fi, you know exactly what happened. The end result of an 1100 point drop in the Dow on Monday, a more than 600 point drop from high to low on Tuesday, and then major rallies the rest of the week resulted in a more about a 1% gain for all of the major averages this week. Last week, I advised NOT selling the farm, but that it was okay to lighten up if you really didn’t like one of your positions. I also said to wait for the capitulation day to start buying, which is really what happened on Monday morning, which saw the largest volume in more than 4 years. All hell broke loose; it was pure pandemonium and panic selling, and hopefully you took advantage and did some buying like I did.

But that was then, this is now. As I mentioned last week, not a single thing has changed that would warrant the market to drop as it did. In fact, the economic data from Europe and the US has been pretty strong. Earlier in the week, European PMI came in much better than expected and on Thursday, the US economy was said to have grown by 3.7%, much better than economists predicted. We also got strong housing data throughout the week, which lends strength to Q3 GDP. If you listen to the earnings conference calls, it’s apparent that US sales remain robust and consumers are indeed spending. In rational markets, all of this data would be a positive sign. However, as you know these are very irrational markets, so the strong economic data is creating more uncertainty as to what the Fed will do in a few weeks, and the markets hate uncertainty. I am in the camp that believes the Fed should and needs to raise rates in September, even if it’s just 12.5 basis points. They should not be basing their decisions on the stock market, which is not an indication of the economy. The Fed has said over-and-over that they are data dependant on when to raise rates, and most of the economic data that has come out over the last couple months, have been positive for future economic growth. At the same time, the Fed needs some firepower in case the economy does regress in the next couple quarters. By raising rates in September, they will give themselves the opportunity to lower rates back down in an emergency, but I don’t think that will be necessary. While what’s happening in China seems to be a big concern for Central Bankers and investors for that matter, the reality is that a slowdown in the Chinese economy is nothing new…it’s been slowing for three years and China accounts for a whopping 7% of US exports. Although markets indicate China should heavily influence the stock price of US companies, remember this: S&P 500 companies generate almost 70% of their sales from the US and only 8% of overall revenues come from Asia-Pacific.

While you will likely still have another chance to buy stocks if you have cash that you want to put to work, I believe the markets will head higher from here into year’s end. $29B existed the market in just the past week, the largest equity outflow since 2002, so there is a significant amount of money that still needs to get back in. Put that on top of all the money that remained out of the market during this entire bull rally, and what you have is a floor underneath the marketplace. As stocks sell off, investors will be looking to get long, and as stocks rally, investors will rush to get in, in fear of missing out again on the bull market. Additionally, companies are rushing in to prop up their stock price with massive buybacks, creating additional support on the downside.

As for the technical levels to watch in the S&P, I am using new Fibonacci retracements from the all-time high of 2135 down to Monday’s low of 1867. The first level of support is the 38.2% retracement at 1970, a level that held on Friday, and which was the low from August 21^st. If that fails during the comings week’s volatility, the next support level is right around 1930, which is the 23.6% retracement, and represents about a 3% drop. To the upside, the key resistance is at 2000 and 2032, which are the 50% and 61.8% retracements, respectively.

I did put money to work this week, mostly on Monday as I took advantage of the panic. I opened a new position in Lockheed Martin (LMT), added to my positions in Disney, Apple, Facebook, Skyworks Solutions, Starbucks, Celgene, and FireEye. Then, later in the week, I bought TJX Companies on the heels of another very strong quarter, got long September call options in Exxon Mobil (XOM) and sold Freeport MacMoran (FCX), which leads me to my top SPECULATIVE two trade ideas for the short-term.

Wednesday was a unique day in the markets, not just because stocks rallied 4%, but also because we may have seen a bottom in oil, at least a near-term bottom. While oil was actually down about 2% on the day, all of the energy names actually rallied sharply. The Spider Energy ETF (XLE) was up 3.5%, outpacing oil by more than 5% on the day. While you can say that they rallied because of the broader market, I would tell you that is not the case, because the energy names have not traded with the overall market since oil’s drop began over a year ago. If you remember back in March, prior to oil bottoming on March 17^th at $42.41, the energy stocks never made new lows and actually began rallying higher on March 13^th. Since the energy stocks rally on Wednesday, crude oil is up 17% and the XLE is up 11.1% compared to the S&P, which is up only 6.5%. Of course, a lot of this recent move is short covering, but some of these big energy names with strong balance sheets are becoming very cheap and there’s anticipation of seeing more mergers in the near future, lead by Schlumberger’s purchase of Cameron on Wednesday morning. I am looking for the oil rally to continue into September, so I bought September call options in Exxon Mobil, as I look for the stock to rally to $79.50, a gain of 6% in just a few weeks. If you want oil exposure and do not want to be levered to one specific company, I recommend buying the XLE as I see the short-term rally continuing to $69.50 by mid-September, which is a 5.7% gain, and one that will likely outpace the S&P in the same time frame.

My last trade idea is another one that I put on early Friday morning, on the heels of Carl Ichan announcing his stake in mining company, Freeport MacMoran (FCX). Freeport Mac explores and mines for copper, gold, silver, oil and natural gas. As you know, those are the worst places to be right now, and its stock price reflects that, with the Freeport having dropped 55% YTD. On Thursday morning, the company announced big spending cuts, which sent the stock up 28%, and after market close, filings showed that Carl Ichan took an 8% stake in the company, sending the stock up another 20% afterhours. However, Ichan has an average purchase price between $16-$17, which means that as of Friday, best case scenario, he has a 35% loss right now. On Friday, Freeport closed at $10.50, down 16% from its afterhours high of $12.22. While it’s great that an activist like Carl Ichan came in and will try to put the company in a better position for the future, the reality is that Freeport Mac is in the worst business it could be in right now and the management team has been a major disappointment over the last couple years. Additionally, unless he is the most powerful man in the world, Ichan cannot create stronger demand for metals and energy. With a slowdown in China, these companies cannot rely on the Chinese to stock up on supplies. Gold has lost its luster with investors, there’s an abundant supply of oil and natural gas and while there is a US housing recovery going on, copper isn’t in high demand anywhere else right now. I am short Freeport from $11.60, with a scratch stop, and am looking for the stock to fall to $8.56, which represents an 18% drop from Friday’s close. I can’t see the stock going higher than $11.50, so I recommend you wait for the stock to rally a little bit and then sell it short, stopping yourself out on the upside at $11.50.

The volatility is here to stay in these irrational markets, but don’t get caught up in the panic. Stay rational and use any market sell offs to add to positions in high quality names that have already reported strong earnings and benefit from a strong US economy, with a focus on mostly domestic companies. If you are looking to add some speculative positions to your portfolio, look at buying the XLE for a short-term pop and/or selling Freeport MacMoran for further downside.

Jeff Lewison