All Eyes on Apple

4/25/15

About a month ago, I said that despite what most analysts think, it would be corporate earnings that propel the markets to new all-time highs, which happened on Friday with the help of Starbucks, Google, Amazon and Microsoft. Last week was the busiest week of earnings, and the strong performance from many companies greatly outweighed the less than stellar US economic data. I have always believed that the best gauge of the health of he US economy is to listen to what the companies are saying when they report earnings, and so far, the only headwind seems to be a stronger dollar, which has actually traded lower over the last 2 weeks. So far, profits for the S&P 500 companies that have reported are down 2.6%, much better than the negative 4.6% that was expected. I see earnings continuing to beat expectations this quarter, which should push the markets even higher.

Monday could be the most important day of earnings this entire quarter, with the largest company in the world reporting. All eyes will be on Apple, as they always are. Apple is the largest component in the S&P 500 and Nasdaq and now the 5^th largest influence in the Dow. So where Apple goes on Tuesday when market open, so goes all three indices.

The big question on everyone’s minds will be how successful the initial launch was for the Apple Watch. Although successful Apple Watch sales would be great, Apple still remains an iPhone story, and I believe the company will impress. China remains a strong market for them and there are still a ton of people who never upgraded to the iPhone 6 last fall. I also expect Apple Pay to continue to be a driver of future growth, along with the company reaffirming margin expansion. However, the most important part of the report that I am anxious to hear about is their capital return program. I expect Apple to announce another increase of both the dividend and buyback program, which should lift the stock to new all-time highs. As for the Apple Watch, analysts are expecting a light first year of sales, with an average of 10 million units shipped. While that seems light compared to current iPhone and iPad sales, that figure would outsell the iPod and iPhone in their first year of sales. The Apple Watch will be a very successful product in the future, but is not the reason to own Apple. With that said, you don’t have to go out and buy Apple Monday before they report in the afternoon. Let Apple report earnings, if the stock rallies, wait for an analyst to eventually say that Apple has topped out, and then buy it on a sell-off.

On Tuesday afternoon, red-hot Twitter will report earnings. I like Twitter long-term and would be looking to buy it on a pullback. When I look at Twitter, I see a company that has turned things. They used to be a company that had been completely lost and is now one that has figured out how to simplify the product and grow it’s user base. Expectations are going to be high for Twitter, but if they can beat this quarter, I would look for the stock to rally to $65 this year.

Oil giants, Exxon and Chevron, report earnings on Thursday and Friday, respectively. Oil has rallied sharply off the lows, up 25% since mid-March, so I am interested to hear what both companies see for the near-term future of oil prices. Both companies are paying hefty dividends and it’s if they announce dividend increases, you know both are in good shape, and would be a buying opportunity. However, I would recommend skipping both stocks and buying ConocoPhillips (COP) instead. Conoco has outperformed both Exxon and Chevron over the last year, pays a higher dividend, and has better margins and stronger revenue growth.

Also this week, the Fed will meet on Tuesday and Wednesday, and while nobody expects them to announce an interest rate hike, investors will be listening for clues as to whether the hikes will come in June or September. Unfortunately, there’s no telling how the markets will react to whatever the Fed says, so don’t worry about trading around the meeting.

Last week I made some changes to my portfolio, swapping out of Macy’s and into L Brands. While I still like Macy’s long-term, L Brands has been reported very strong monthly sales and I see more growth from them. I also sold out of my position in Whole Foods and bought Dr. Pepper Snapple and Down Chemical. I am going to be looking for a lower entry point in Whole Foods because I believe in the company long-term, but lately the stock has been getting absolutely hammered, and acting very poorly. 

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB),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), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), United Rentals (URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), Sanderson Farms (SAFM), Southwest Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Dr. Pepper Snapple (DPS), and long UnitedHealth Group (UNH) CALLS and Mobileye (MBLY) CALLS.

Jeff Lewison

Forget Greece and Focus on Earnings

4/19/15

Stocks were in full flung sell-off mode on Friday, with the Dow and Nasdaq down more than 1.5% and the S&P falling more than 1%. So what was behind Friday’s pullback? By the time I woke up, the S&P futures were already down 16 points, or almost 1%, so to say that any corporate earnings or US economic data (CPI reading indicating inflation may be picking up) is the culprit is a little ridiculous. The markets were down because of two things; 1) China announced they were tightening rules on margin lending, sending Chinese markets sharply lower and 2) the same old story about Greece, and the concerns that the country will default on its bonds and exit the Eurozone, which may hurt European banks and slow global economic growth. I have said many times throughout this bull market rally that these Greek induced sell-offs should be a reason to buy US equities, and this time is no different. Many of the stocks that were down on Friday, have absolutely nothing to do with anything going on in Greece or Chinese stock markets. UnitedHealth Group, which rallied about 3.5% after it reported a great quarter on Thursday morning, beating on all metrics and raising guidance, fell about 2.4% Friday. Costco, an almost entire domestic company, fell less than 2% on Friday. My point is; the noise in Greece has just given you a nice discount to buy high quality names at lower prices, and likely will continue next week.

Earnings season will be in full swing this week with many tech giants like Google, Facebook, Microsoft and Amazon all reporting. Out of those four stocks, the only one I really like is Facebook. While I am not a user of the product, I think the company is doing very well and will report ANOTHER quarter of strong results. Now, Facebook has reported very strong results the last 4 quarters and each of the last two times the stock sold off. I think this time may be different because the stock has been acting poorly going into earnings. If you’re already long, then stay long, but if you are looking to build a position in Facebook, I would buy half prior to earnings on Wednesday afternoon, and the other half after they report.

As for Google…I completely sold out of my entire position a couple weeks ago after it was clear the EU was going to be suing Google. The lawsuit, whether they settle or not, will be a huge drag on the stock, but more importantly, I believe Google has lost its way. They continue to lose ad market share to Facebook and Twitter, and also continue to throw cash away on projects that are not coming to fruition. The only thing that could save Google right now is announcing a shareholder friendly plan for their $70B+ in cash. If they report a bad quarter but announce a buyback or dividend, I expect the stock to rally. But until then, I’d stay away.

Also this week, we’ll hear from defense stocks like Lockheed Martin, Raytheon and Boeing, all of which I like a lot (I already own LMT). The defense sector has been very strong over the last 6 months and I see that continuing. Lockheed, Boeing and Raytheon report on Tuesday, Wednesday and Thursday, respectively, and I think you can buy all three prior to earnings.

Later in the week, I will be paying attention to Starbucks, Dr. Pepper, General Motors and DR Horton, which all report on Thursday. Starbucks has been one of my favorite stocks, places to frequent for that matter, and I believe it is one of the best stocks to own for a long-term investment. The company has reported greater than 5% same-store-sales growth for the last 22 quarters, and I don’t see any reason that won’t continue. They have outstanding growth in China and Europe and continue to dominate the US markets, and are a leader in mobile payments, which at some point will lead to them license our their technology. Starbucks is also going to begin rolling out delivery service this summer in New York and Seattle, and along with great new products like Greek yogurt parfaits and a revamped food menu, Starbucks will continue to deliver excellent results for years to come. No matter what they say on Thursday, I want you to buy Starbucks and let it ride.

I am interested to hear from General Motors because it seems like all the negativity surrounding the ignition switch problem seems to be behind the stock. General Motors has been reporting very strong monthly sales figures, buying back stock and increasing the dividend, so I expect a good quarter out of them. Much like the auto industry being strong, I think the housing market is also continuing to get better, which is what I believe we will hear from homebuilder, DR Horton. Homebuilders have been on a tear this year, with DR Horton and Toll Brothers (my favorite in the group) up about 12% this year. Because these names have already rallied so much, I wouldn’t recommend buying DR Horton before they report because a good quarter is already priced in, but with the stock trading at just 12x next year’s earnings, I like DR Horton.

Earnings season is alive and well, but no matter how good some of these companies do, news out of Greece will continue to dominate the markets. As has been the case over the last couple years, any Greece induced pullback should be used as a reason to buy names at a discount, instead of selling. Get your shopping list ready for the likes of Facebook, Starbucks, General Motors and DR Horton.

For full disclosure, last week I opened a new position in Southwest Airlines (LUV) after hearing how great of a quarter Delta Airlines had. The only negative to their quarter was the impact of a stronger dollar, something that Southwest, being mainly a domestic airline, doesn’t have to be concerned about.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Facebook (FB), 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), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), United Rentals (URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), Sanderson Farms (SAFM), Southwest Airlines (LUV), and long UnitedHealth Group (UNH) CALLS and Mobileye (MBLY) CALLS.

Jeff Lewison

Earnings Season

4/12/15

Earnings season kicks into high gear this week with most of the big banks set to report throughout the week. JPMorgan and Wells Fargo both report Tuesday morning, followed by Bank of America on Wednesday and Goldman Sachs and Citibank on Thursday. While I own Wells Fargo, I’m very cautious on the banks right now. Although the Fed is expected to begin raising interest rates later this year, it’s going to be a long time before banks start profiting from a steeper yield curve (when the spread between long-term and short-term interest rates widens). All of these bigger banks benefit from rising rates so until that happens, I don’t see a lot of growth in the financials. However, with that said, there are two big positives for a lot of these banks, the first of which is a housing recovery. Lenders like Wells Fargo and JPMorgan are going to be the big winners of low mortgage rates and I expect to hear both companies remain optimistic about lending. The homebuilders and housing related stocks have all been on a tear this year and Wells Fargo and JPMorgan should confirm the housing market is doing just fine. The second positive among the financials is that most of all the big lawsuits should be out of the way right now. That was a major problem for the likes of JPMorgan, Citibank, BofA and Goldman Sachs, so now those banks can focus on the future and not have to worry about government intervention. I have the financial sector rated as a “hold,” but if you have to buy one because you want exposure to the industry, stick with Wells Fargo or Goldman Sachs. Wells is best positioned to take advantage of the housing recovery and pays a 2.60% dividend and Goldman Sachs is the best bet to take advantage of another year of strong M&A action.

Delta reports earnings on Wednesday morning, and if you are looking to get into an airline stock and want to hold it for the long-term, this may be your best shot. While Delta is best positioned to take advantage of lower oil prices by owning their own refineries, they are also being negatively impacted by a stronger dollar. They have more international exposure than names like Southwest Airlines and Spirit, and in the last couple months, have reported weaker-than-expected passenger revenue BECAUSE of currency headwinds. I think a lot of the negativity is already priced into the stock, with Delta being down 15% from all-time highs in January. If the stock continues to sell off because of weak near-term currency guidance, I think you pull the trigger around $40.

On Thursday, along with the banks, healthcare giant, UnitedHealth Group (UNH) will report. I bought UnitedHealth last week in anticipation of another really strong quarter. The healthcare stocks have been on fire the last couple years, and I expect that to continue. There is a lot of consolidation in this sector and a lot of future growth. UnitedHealth just announced the acquisition of pharmaceutical benefits manager, Catamaran, which should boost future earnings even further. The company has also kept a floor under the stock price with strong share buyback programs and a 1.26% dividend.

Also on Thursday, Schlumberger (SLB), the largest oilfield services company in the world, reports earnings, and will be an important one to watch. The stock is well off the lows in mid-March, but is still down 25% from its 52-week high. I am a firm believer that oil has bottomed and that some of these energy stocks can, and should be bought. I am interested to hear what the company says about the future of oil prices and to see if margins are stabilizing. If you are looking for exposure to energy, I would be a buyer if the stock pulls back to $85 or breaks out above $92. 

Lastly, on Friday, industrial giants, Honeywell and GE report earnings. GE, formally where money went to die, just rallied about 11% on Friday after announcing they are ridding themselves of almost all of their GE Capital division. Going forward, only 10% of all revenues will come from their financial division, but only time will tell whether they have made the right decision or not. While GE has been a good company, the stock has been horrendous. If you have owned GE since before 2008, you are likely STILL under water on your position. The good news on the stock is that they have announced a $50B buyback, which will act as big support, along with their 3.25% dividend. My advice is to stay away from General Electric, and stick with Honeywell (HON). The stock has been on a tear lately, rallying almost 60% over the last two years, and outperforming GE by about 25% over the last three years, despite GE’s 11% rally on Friday. Honeywell sports a 2% dividend, has a strong balance sheet, and great management team lead by CEO, David Cote.

Earnings are going to come fast and as I wrote a couple weeks ago, expectations across the board are very low. Most investors also expect guidance to be weak because of the strong dollar, but I believe a lot of the bad news is already priced into some of these stocks, and more of the risk is to the upside. I expect the rally in the dollar to cool off slowly and move lower, so currency headwinds will be less of an issue long-term, so use short-term weakness in these stocks to buy them.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Facebook (FB), 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), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), United Rentals (URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), Sanderson Farms (SAFM), and long UnitedHealth Group (UNH) CALLS and Mobileye (MBLY) CALLS.

Jeff Lewison