It’s safe to say that volatility is back in the market place
again, in a week when we saw the S&P fall almost 2% in a single session,
only to rally back on Friday and close essentially flat for the week. A lot of
attention moved away from Greece and on to China, where the Chinese stock
markets dropped as much as 35% since the middle of June, sending US equities
sharply lower on concerns that the Chinese economy will get even worse with the
markets sinking. Much of the rally in US equities on Thursday and Friday were a
result of the 14% rally in the Shanghai index to end the week. While it is
troublesome that the Chinese markets dropped so drastically in such a short
period of time, I don’t see it as a cause for concern. The Shanghai is still up
90% in the past 12 months so the only investors who got really hurt are the
ones that entered the market in the last month. Additionally, people in China
are very conservative, with only 20% of their net worth in equities and 50% in
savings and CDs. So this notion that the Chinese economy is getting even worse
just because the stock market is dropping, doesn’t make sense to me. Consumers
will still spend money because they haven’t lost a lot of it. With that said,
you have some great opportunities to buy stocks that have gotten hit real hard
because of fears in China, namely tech stocks like Apple and the semiconductors
not involved in the PC business.
Earnings season kicks into gear this week, beginning on
Tuesday morning with the two bank giants, JPMorganChase and Wells Fargo. The
financials need higher interest rates and over the last three months, that’s
exactly what they got. We’ve also heard a lot of positive news out of the
housing sector, so I expect JPM and Wells Fargo, both heavily reliant on
lending, to report good quarters. For JPM, analysts are expecting a relatively
flat quarter, with earnings rising just $0.03 on revenues of $24.72B. On the
other hand, analysts are expecting slightly better improvement from Wells
Fargo, with EPS expected to grow about 5% on revenues of $21.71B. While I own
Wells Fargo, and will continue to do so into earnings, there are better places
to put your money. If you’re looking to buy the banks, wait until the end of
the week once the market also digests reports from Bank of America, Citibank,
Goldman Sachs and Morgan Stanley.
Wednesday will be a big day for the airlines, with Delta
kicking things off before the bell. This sector, other than Jetblue, has been
in complete free-fall, despite oil going lower, and it could be up to Delta to
get this group going again. I wrote an article a while back that the airlines
were a buy on the recent dip and I continue to believe that. Oil continues to
remain low, ticket prices and fees remain high and capacity isn’t stretched
like many analysts believe. Delta was recently named as one of the companies
that the US Justice Department is investigating for collusion to maintain high
ticket prices, but in the end, I believe those allegations will be unfounded
and with all of the airlines trading above where they were before this story
came out, most investors believe the same thing. I think you buy the airlines
this week.
Netflix will report after the close on Wednesday, just 1 day
after the stock splits 7:1. I have never liked this stock and although it looks
like the programming options have improved on Netflix, expectations remain
incredibly high and it still trades at an extreme valuation of 220x forward
earnings. Valuation has never seemed to be an issue for this stock so I don’t
see that changing, but I also believe Carl Ichan knows what he’s doing with
this stock, and when he sold his entire stake a few weeks ago, you should have
too. I would avoid Netflix into earnings.
Two stocks that I am watching on Thursday are healthcare and
tech giants, UnitedHealthGroup, and Google. Both stocks are going in completely
opposite directions, with UNH trading just off all-time highs, while Google is
down 6% in the last year. Google is still very cheap and has a really strong
balance sheet, but the problem I have with Google is the same one that I have
had for a long time; they are losing market share in the industry they
dominate, while also spreading themselves thin into too many different products
and ideas that they have lost focus on their core business. Google completely
missed out on the social networking revolution, having lost a lot of
advertising business to Facebook, and while I would like to see them buy
Twitter (only for my long Twitter position), I just don’t see that happening.
Buy Google at your own risk prior to earnings, but I believe you are better off
waiting to see what they say first, and even then, I would prefer you buy
Facebook or Twitter instead.
As for UnitedHealth, they are the largest insurer in the
healthcare industry and even if the Humana/Aetna combination passes regulatory
approval, they will still be the largest. The healthcare stocks do very well
when the US dollar is strong, and since the announcement of Obamacare, the
insurers have taken off. I expect UNH to once again impress Wall Street,
sending their stock and the rest of the industry much higher. There is no
question that there will be consolidation in this industry, the only question
is which companies will combine and when these deals will go through. I am a
buyer of UNH and rest of the industry for that matter.
Lastly, one stock that I will be paying close attention to,
but doesn’t really have any bearing on the broader market, is Las Vegas Sands,
which reports after the close on Wednesday. The casino stocks, which have been
in free-fall due to clamp downs by the Chinese government on Macau VIPs, are
starting to show signs of life on news that Macau revenues, while still sharply
declining, are NOT declining as rapidly. Since bottoming on June 29th,
Las Vegas Sands is up almost 9%, trading above key technical levels. The 23.6%
retracement and 100-day moving average are right around $53.50, which is a
level that has been support since the stock broke above it on July 1st.
Sands is yielding a 4.50% dividend and given how badly the casino stocks have
performed in the last year, I believe the bad news is already priced in, and
the best thing to do is buy into earnings.
My current positions: Long
Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC),
ConocoPhillips (COP), Time Warner (TWX), Twitter (TWTR), NXP Semiconductors (NXPI),
Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box
(JACK), Under Armour (UA), United Rentals (URI), Regeneron (REGN), Restoration
Hardware (RH), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), L
Brands (LB), Dr. Pepper Snapple (DPS), Costco (COST), AMGEN (AMGN), Home Depot
(HD), Allergan (AGN), FireEye (FEYE), and Humana (HUM).
Jeff Lewison
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