Unfortunately on Wednesday, the Fed didn’t really give any
more clues as to when we can expect the first interest rate hike, which means
that markets will remain on edge and will be trading off of every single piece
of economic data, none more important than this Friday’s jobs number. As of
last Friday, the market was pricing in a 38% chance that the Fed beings raising
rates in September and 68.4% chance for December, and those numbers will change
on a daily basis. Economists are expecting Friday’s jobs report to show an
increase of 215,000 jobs in July, but just because the economy created that
many jobs doesn’t mean the market will rally. So, it’s important to not get
caught up in the day-to-day market gyrations. Use market pullbacks to buy
stocks that you are waiting to get into, which should be the companies that
reported good earnings with strong guidance.
With that said, here’s a look at what earnings are on tap
for this week:
TUESDAY (AET, CVS, DIS)
Before any of these company report earnings, we’ll get China
PMI data, which will certainly control where the US markets go on Tuesday. The
Chinese markets have been extremely volatile and if this number disappoints, it
could send their markets into another tailspin. I still don’t believe that the
drop in the Chinese markets correlates into a drop in Chinese consumer
spending, so I reiterate that if US equities fall on worries in China, you
should be a buyer rather than a seller.
The biggest earnings report of the day will be when Disney
(DIS) reports before the bell. Like Starbucks, Disney is a stock that should be
a core holding for any long-term portfolio. The problem is that if you aren’t
in it already, it’s been a long time since you’ve had a chance to buy on a
pullback. Disney is one of those stocks that simply won’t go lower, already up
27% YTD. The stock has had an incredible run into earnings, and this season we
have seen these types of stocks fall victim to profit taking post-earnings.
Analysts are expecting the company to report earnings of $1.42 on $13.22B in
revenue, which I see Disney beating, helped by strong growth in its theme park
business. If the company gives conservative guidance for FY15, then expect the
stock to sell-off, which should finally give you a chance to get in. If by some
miracle, the stock falls to $112 (78.6% retracement), you should buy with both
hands, as I see very little reason the stock cannot continue its strong
performance for years to come.
Tuesday is also a big day for healthcare, with Aetna (AET)
and CVS Health (CVS) reporting in the morning. CVS has been on fire and I
continue to see the stock outperforming. Their recent deal to buy Target’s
pharmacy business will bring strong revenue growth for the future, and their
desire to move more towards promoting a healthy lifestyle fits in with what is
really important to consumers. CVS is an absolute buy.
After a flurry of merger news among the health insurers,
things have settled down and these stocks have continued to drop.
Unitedhealthcare, Cigna, and Humana have all reported strong quarters, with
Unitedhealth even raising guidance, and all three have sold off since. Aetna
closed at $112.97 on Friday and is now down 17% since hitting an all-time high
in late June, sitting right at a key technical support level of $112.83 (100-day
moving average). I like the healthcare space and they will all continue to
benefit from a strong US dollar, so as long as Aetna says things are good, I
would be a buyer.
WEDNESDAY (GMCR, TSLA, JACK)
You will get a couple good trading opportunities after the
close when Keurig Green Mountain (GMCR) and Tesla (TSLA) report earnings.
Keurig has been absolutely horrible this year, trading down to multi-year lows
following the disaster of their new Keurig 2.0 machine. Expectations for the
stock have come in sharply and all that has to happen for the stock to rally is
that they say that things are bad, but not as bad as you think. The stock is
already down about 45% YTD after the company lowered FY15 guidance in each of
the last two quarters. Now, analysts expect a 20% drop in earnings to
$0.79/share on revenues of $1.04B (1.5% increase YoY). The stock has come in so
much that it’s trading at just 18x FY16 earnings and a PEG rate of 1.37, which
is far cheaper than the likes of Coca-Cola, Pepsi and Dr. Pepper Snapple. On a
technical basis, the stock has support at the $69 level and the three-year
38.2% Fibonacci retracement is $73.56. I think you can buy the stock and risk
down to $69. The stock has a big short interest, so any little positive piece
of news will result in short covering, sending the stock higher.
The other trading opportunity that you will have after the
markets close on Wednesday is with Tesla. If you’re really daring, you will
buy…or sell Tesla prior to earnings, but the stock is really sitting in no-man’s
land at $266.15. The stock has failed twice in the last year at $290 so I think
your upside is capped there. The downside levels that I am watching are $249
and $237, which would be a drop of 6.3% and 11%, respectively. $249.39 is the
61.8% retracement and $237ish is the 100-day moving average and 50%
retracement. If you want to be in Tesla, my advice is to set an afterhours
trading buy stop at $237 and hope it gets there on the report. I don’t
recommend being in Tesla (long or short) before earnings. In fact, if you look
at the last three times the company reported, it has opened lower and rallied
sharply into the close, so look for that opportunity this time as well.
One of my favorite stocks is Jack-in-the-Box (JACK), which
also reports Wednesday afternoon. Last time these guys reported, they beat every
estimate in every category, except Qdoba same-store sales (although overall
same-store sales sharply beat estimates), including raising guidance, and the
stock still dropped 4%. I believe Jack is the best-run restaurant behind
Starbucks, and can be bought before, during and after earnings. Jack is going
to benefit from the strong US Dollar, new menu items, outstanding franchise
model, and an improving US employment picture. Although there is way more to
Jack than its Qdoba sales, that seems to be all analysts actually care about,
so if they are unsatisfied with how those sales look, use that to your
advantage and buy it.
THURSDAY (AGN, EOG)
On Thursday, I’ll be focusing on two stocks going in
opposite directions. Allergan (AGN) reports before the bell and after recently
selling off its generics business to Teva, the stock has been on fire. Allergan
is up 29% YTD but is still very cheap, trading at just 16x FY16 earnings (lower
than the overall market) and a PEG rate of 1.30. Management continues to say
that they are looking to acquire another company, with the most recent
speculation being biotech giant, Amgen. Although it seems unlikely since Amgen
has a market cap of $134B, it is still very possible. The Teva deal allowed
Allergan to essentially wipe out all of its debt, so the balance sheet is as
good as it gets. I think Allergan is one of the best in the healthcare industry
and would be a buyer on any pullback. The stock is priced for perfection going
into earnings, so I suggest you wait until they report.
EOG also reports on Wednesday, but after the close. Like the
rest of the energy sector, this one is a no-touch. EOG has a very strong
balance sheet and can afford to cut production, but either way, I cannot
recommend buying any energy other than the refiners, until I see a sign that
these stocks have bottomed. With ConoccoPhillips, Exxon Mobil and Chevron all
reporting less than stellar earnings last week, and then proceeded to hit three
year lows, I don’t see EOG taking off any time soon. No matter how good of a quarter
they report, do not buy it.
As I mentioned, Friday could be the big day for markets. All
eyes will be on the jobs data, and the jobs data only. The problem is that
there is no way to know how the markets will react to a good, bad or in-line
jobs number. The best thing to do is to ignore the actually number because the
market reaction will only be about what it expects the Fed to do in September.
Use any market pullbacks to buy the stocks on your shopping list, and any
rallies to sell stocks that you aren’t too excited about any more.
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), 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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