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 5th 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
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