Despite the fact that we got a lot of solid earnings reports
throughout the week, the S&P was in complete sell-off mode on Thursday and
Friday, led lower on sinking commodities, worries about a slowing global
economy and a horrible quarter by Biogen, which sent the entire red-hot biotech
sector lower. The drop in equities to end the week is a little concerning. On a
technical basis, the S&P failed at a key resistance level of around 2135
and is headed towards the 200 day moving average of 2064. That’s the first
level to watch this week, followed by 2050, which was the early July low. If
both levels fail, then expect another 2% drop to 2010 before finding support. I
have to say that there are a lot of factors in play this week, which could
easily send the market lower from here.
While earnings will continue to roll in, the run on just
about all commodities is leaving investors concerned about the global economic
growth. Despite an oil rally early in the summer, the commodity hit another
bear market on Friday, down more than 20% since the beginning of May, taking
most energy related stocks down with it. Gold, silver copper, grains, and
cotton are all sitting at or near a five-year low. With concerns that the
Chinese economy is slowing, these commodities will all continue to move lower
until evidence of stability in China begins to show. As far as market impact
goes, it’s still all about energy and I’ll even throw in copper. Right now I
cannot recommend buying anything in the energy sector except for the refiners,
who benefit from lower oil prices, until oil finds some sort of stability. As
for copper, the industrial metal is used in construction across the globe, so
copper will actually give you a good read on the strength of the global
economy. Those are the two commodities to pay attention to because if they
continue lower, then I expect equities to move lower as well.
As far as this week goes with earnings and other events,
here is what to watch for:
TUESDAY (BP, MAS, DHI, GILD, TWTR)
BP (BP) reports earnings before the bell, and is the first
of the big integrated oil names to report this quarter. BP is currently
yielding a roughly 6.5% dividend, which is concerning given that the company
expects to earn only $2.41/share, which is LESS than their current dividend
yield. The stock has actually held up pretty well when compared to Exxon,
Chevron and ConocoPhillips, but as I mentioned previously, the energy sector is
dead money right now.
Masco (MAS) and DR Horton (DHI) report before the open on
Tuesday, and both will give a good reading on the housing market. Both stocks
are doing well this year and both were sitting near 52-week highs until the end
of the week, and I think both stocks will put up strong quarters. I believe the
housing market is strong and you can continue to own these names, along with
Home Depot (HD). If I’m wrong and both companies come up short or offer weak
guidance, expect the market to sell off.
Biotech giant, Gilead Sciences (GILD), reports after the
close, and investors will be on edge with this one. GILD fell sharply on Friday
on the heals of Biogen’s terrible quarter, but that’s mostly because of selling
of the Biotech ETF, IBB, which Gilead makes up about 10% of. The stock is
already down about 10% from all-time highs hit just a couple weeks ago, and
every sharp sell-off in the name has proven to be an opportunity. This time
should be no different, but given the past market reaction on Gilead’s
earnings, I would wait until after they report. Gilead has a tendency to report
monster quarters, but similar to Apple, investors look for anything negative,
which leads to the stock trading lower the following day. Since it’s a biotech
company, the moves in the stock can be huge, even though the fundamentals don’t
match those of most biotechs. Gilead trades at a measly 10x next year’s
earnings (cheaper than Apple), pays a dividend, has a massive market cap of
$165B and it’s PEG rate is a miniscule 0.50 (also less than Apple).
Additionally, they have a strong drug pipeline that will aide it well into the
future. The key with this quarter is going to be if management offers any clues
as to future acquisitions. The company has a ton of cash, and it was an
acquisition that got them their blockbuster Hep C drugs, Solvaldi and Harvoni.
If the company reports another blowout quarter, but doesn’t offer any guidance
on future take-outs, the stock will drop and you should buy.
Lastly on Tuesday, I will be waiting to hear from Twitter
after the close. While I own it for the long-term, I don’t see any reason you need
to buy it right now. The management team (or lack there of) sucks and until
they put someone in the CEO position that knows how to run this company the
right way, and admit that they suck, I see more downside from here. There were
a lot of rumors circulating around lately about Google being interested in
buying Twitter, but that’s just not going to happen anytime soon. I have no
expectations for Twitter this quarter, and while I think the new management
team may get a pass on Tuesday, there’s no reason to rush into buying Twitter
this week.
WEDNESDAY (FB, NXPI, Fed Minutes)
Facebook reports after the close on Wednesday, and given the
run it’s had since Google’s quarter, it’s hard to see the near-term upside in
the stock. The last two quarters, FB has knocked the cover off the quarter, yet
the stock sold off each time, this should be the same. Facebook hit a new
all-time high of $99.24 early in the week, and while I think the stock goes
much higher than $100, I would wait and see how it trades after the report.
NXP Semiconductors (NXPI) also reports late Wednesday night
(report usually comes out around 7 or 8pm CT), and much like Skyworks
Solutions, I expect another strong quarter from NXP. The problem here is that
nobody cares. NXP is the biggest player in NFC (near-field communications…think
ApplePay), as well as being a big part of the smart car, but as long as worries
about China’s economy persist, the stock will get hammered, much like we saw on
Friday. NXP is already in a bear market since hitting $114 in May, yet not a
single thing has changed fundamentally, other than the stock is now a whole lot
CHEAPER! It gets lumped in with all of the high-priced semiconductors stocks,
yet NXP trades at just 14x 2016 earnings with a PEG ratio of 0.60, which is
more favorable than Intel, Oracle, Cisco and the previously mentioned, Google.
NXP is a strong buy and should be a core holding in your portfolio.
Before FB and NXPI report, the Fed will release minutes from
its July meeting being held this Tuesday and Wednesday. Investors will be
looking for clues as to whether or not a September rate hike is on the table.
If it is, expect stocks to sell off, as the market has not priced that in. This
will be the most significant event of the week, more so than any earnings
report, but it will have a short-term impact, so if the S&P sells off to
the 2010 level on the heels of the Fed minutes, I would be a buyer of equities.
Just because the Fed begins a rate hike in September, doesn’t mean they will be
raising rates every quarter. The hikes will be very slow and very the Fed will
be cautious, so long-term, you could be looking at a good buying opportunity.
THURSDAY (AMGN, FEYE)
Biotech giant, Amgen, reports after the bell, and just like
Gilead, has a strong pipeline and is very cheap (forward P/E of 15 and PEG of
1.45). But also like Gilead, it still falls in the biotech category, and will
have a big move on earnings. Amgen is also well off its all-time high, so if
you see the stock down sharply early in the week, I would buy half prior to earnings
and the other half after earnings.
Also after the bell, cybersecurity firm, FireEye (FEYE) will
report, and if Fortinet is any indication, FireEye should have another strong
quarter. The stock was on a tear this year, along with Fortinet and Palo Alto
Networks, but has since sold off, falling 15% since hitting a 52-week high in
late June. A few downgrades hit the stock, not because the business has gotten
worse, but because the stock was up about 80% YTD. I expect FireEye to do well
again, as the entire space is red hot, and I am a buyer of FireEye into
earnings.
FRIDAY (CVX, XOM)
The two largest integrated oil names in the business,
Chevron (CVX) and Exxon Mobil (XOM) will report before the open on Friday.
These two will give you a true indication of the energy sector. Both stocks are
at multi-year lows, but both have strong balance sheets and pay good dividends.
But with oil continuing to fall, the guidance that Chevron and Exxon provide on
the future of the business will matter a heck of a lot more than the previous
quarterly earnings. As I mentioned at the beginning, there is no reason to own
these names right now, nor is there any sign that these stocks are bottoming. I
would continue to stay away.
Last week I bought GoPro on the after hours earnings
sell-off, and continue to believe it’s headed to $70. I also sold my entire
stake in Dr. Pepper Snapple. While I don’t think you can really get hurt in
DPS, I just don’t see a lot of upside right now. The carbonated beverage
industry remains very challenged and I didn’t like their last quarter very
much.
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), Costco (COST), AMGEN (AMGN), Home Depot (HD), Allergan (AGN),
FireEye (FEYE), Humana (HUM), Marathon Oil (MRO), GoPro (GPRO), and long LAS
VEGAS SANDS (LVS) CALLS.
Jeff Lewison
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