There Go the Biotechs...Again

9/27/15

It was another tough week for equities, led sharply lower by the healthcare and biotech sell-off induced by Hilary Clinton on Monday. Clinton called into question the high drug costs that consumers face and is proposing that a certain amount of revenue from the sale of those drugs go directly into R&D. That alone, sent the IBB iShare Biotech ETF (IBB) down 5.5% from the highs, leading to a 13.1% drop for the week. However, if there’s anything that you should have learned about what to do when people who have no idea what they’re talking about try to take down biotech stocks (see Janet Yellen’s bubble call twice), you should know that once the dust settles, all of these stocks will continue to go higher. With the IBB closing at $310.24 on Friday, the ETF closed at its lowest level of the year, and while the sell-off is completely unjustified, much like the broader market sell-off that we’re seeing, I still think you have to wait to buy any biotech stock, no matter how strong the company is. Gilead, Regenergon, Celgene, and Amgen are all in very strong financial positions, trading at historically low relative P/Es and have major pipelines, yet, because they are the biggest stocks in the IBB, they got lumped in and sold off. Those four stocks are the ones that should be on your radar if you are looking for exposure to biotech, however, as I mentioned, I would wait until that sector stabilizes. The two levels that I am watching in the IBB are $305.96 and $283.56. The first is the 52-week 38.2% Fibonacci retracement and was very strong support early in the year. The latter is the 23.6% retracement, and also the low tick on the August 24^th crash. My advice is to see what happens this week. Friday’s sell-off came on about 4x average volume, so if the biotech sector can rally hold and rally back this week, then you know you have a level to trade against.  

This is the last week before earnings season kicks off in October, and to finish off September, we’ll get earnings from retail giant, Costco on Tuesday morning. I’ve been in Costco for a while now and continue to like the stock into earnings. Very little of Costco’s business comes outside of the United States, so this is mainly a play on the strong dollar and US consumer, which the economic data indicates, is alive and well. Analysts are expecting quarterly earnings to grow 5% to $1.66 and revenues to rise 4.5% to $36.33B, both numbers weighed down by its gas sales. Costco has a history of beating on earnings, but in this market environment, it would be beneficial to wait and see how the stock reacts. If the stock rallies, wait until the next market drop to get in.

The other event to keep you eye on this week is the September jobs report on Friday. This will be the last jobs report prior to the October Fed meeting. Fed Chairwoman, Janet Yellen, has said that markets should expect a rate hike sometime this year, meaning October or December, however given the fact that they failed to raise rates this month despite strong US economic data, I don’t really trust anything she says anymore. Economists are expecting an add of 190,000 jobs in September, however its too hard to predict how markets will react if that actual number comes in higher or lower than expected.  A negative reaction could give you another great opportunity to buy those stocks on your shopping list that you didn’t think would ever pull back.

Finally, if you’re looking for safety in this volatile market, look no further than the largest company in the world, Apple. This recent market pullback began on August 19^th, and since then the S&P is down 7.8% while Apple is down just 1.5%, despite the fact that almost everyone on the street thinks the company is doing horrible in China. I know there are plenty of companies that are actually trading higher in the same time frame, but Apple has only been driven lower on fear of the Chinese consumer not wanting to buy any Apple products, not because of any realistic data. In fact, if you look that the quarter that Nike reported on Thursday, you know very well that the Chinese stock market and Chinese economy are completely separate, and that the consumer is doing just fine. But the fact that Apple hasn’t fallen with the broader market, to me, means that the stock is heading higher and if the market starts to rally, Apple will lead the Nasdaq charge. Sales of the iPhone 6S went on sale this past weekend, and early indications are that it will be the most successful weekend launch ever…mainly because for the first time ever, the phone will be on sale in China at the exact same time.

Given how the markets have traded over the last 45 days, there is no reason to run out and chase a stock on your list. If you’re looking to buy Costco and the stock rallies before you can get in, then just wait. Don’t get caught up in market rallies because every rally since this correction began has been met with sharp selling pressure. Keep your shopping list ready with names that I have previously talked about like Lennar, Constellation Brands, Costco, Home Depot, Apple and more. Focus on buying high quality stocks that have reported strong quarters, with good guidance and have gotten cheaper in the last couple months simply because of investors taking risk off the table.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Time Warner (TWX), 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), GoPro (GPRO), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies.

Jeff Lewison

Look to Homebuilders to Grow Your Portfolio

9/20/15

It’s no surprise that stocks finished at the lows of the day on Friday, as the Fed cowardly decided not to raise rates this month, putting even more uncertainty in the market, something that investors absolutely hate. Now, investors are left wondering when exactly is the “perfect time” to raise rates. The Fed blamed global economic uncertainty for not raising rates this month, but who’s to say something new won’t come up during their next two meetings in October and December? What if China really is a lot worse than we thought? Will the Fed continue to wait even though the US economy doesn’t justify that decision? The reality is, the US economic data DOES justify a rate hike, and a 0.25% increase won’t really have a negative affect on anything. But instead, the Fed lost all credibility by not acting on the strong data after saying they were data dependant, and we’re now left wondering and debating for at least another month.

So, now that interest rates will continue to remain low for what will likely be at least another three months, I believe that if you’re looking for a new investment for your portfolio, you should look no further than the housing sector. You already know that I think Home Depot is best of breed and will continue to be so, but there are other areas in housing that could yield great returns. If you’re looking for a homebuilder, take a look at Lennar (LEN). Now, Lennar does report Q3 earnings on Tuesday morning, so I would suggest waiting a little to get in, but you should definitely keep your eye on this one. Analysts are expecting Lennar to show a 21% increase in revenues and for quarterly earnings to come in relatively flat YoY. However, for the year, analysts expect the company to grow earnings by 16% to $3.25/share.

Lennar is one of the biggest players in the multifamily rental properties, which has been red hot for the last couple years, being a big reason the stock is up 29% in the last 12 months and up about 15% YTD. The rental market has not shown a lot of signs of cooling down, and with a rise in student loans, new college graduates are unable to secure a mortgage, forcing them to continue to rent.

On Friday, Lennar closed down 2.30% at $51.75, just below the 78.6% Fibonacci retracement of $52.07. With a 13.5% short interest in the stock, a negative reaction to earnings could give you the perfect opportunity to get in this name. The price I would be looking to be a buyer at is between $48-$49. Lennar closed just above $48 on Tuesday, August 26, which was the day after the Monday market crash, and a level the stock held on the following Wednesday. The 61.8% retracement is at $48.96, which since closing above on August 27, is a level Lennar has held onto. The low of Monday’s crash is $46.77, which is exactly the 50% retracement, so use $46 as your sell level and you have a maximum risk of 6%. My 12 month target for the stock is $63, giving you a potential upside of 29% if you buy at $49.

The Fed is giving you a chance to take advantage of one of the big bright spots in the US economy, housing. After you add Home Depot to your portfolio, take a look at Lennar.   

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB),Time Warner (TWX), 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), GoPro (GPRO), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies.

Jeff Lewison

Check Out These Two Under-the-Radar Names

9/7/15

After another brutal week for stocks, with the S&P closing down about 3.5% for its lowest weekly close since the beginning of October, it’s becoming very clear that there’s more pain ahead (despite the fact that I don’t believe it’s justified). The jobs number on Friday didn’t help matters, as the unemployment rate fell to 5.1%, which is what the Fed has been targeting. The problem with that is investors are interpreting that to mean the Fed will indeed raise rates when they meet on September 16 and 17. The GOOD news is that a rate hike is being priced into the market right now, so if the Fed decides to stay still, markets should actually rally. As I’ve said before, I believe the Fed should and needs to raise rates, and probably should have months ago, and that even when they do, the US economy will continue on its steady growth path.

With last week’s technical levels being breached, the next three levels to watch in the S&P are 1895 (23.6% retracement), 1867 (the low on August 24) and if all else fails, 1821, which is the October 2014 low. While there is more short-term pain, you should use that for your long-term gain. Most high-quality stocks are in a correction and a lot are even in a bear market (20% drop from the highs), despite the long-term fundamental remaining intact. I have been saying that you need to use these sell-offs to buy stocks that are on your shopping list, so if you don’t have that list ready, then it’s best to start thinking about it. To help you get started, here are two stocks that I really like for your portfolio:

Constellation Brands (STZ)

Constellation Brands is the producer and distributer of many alcoholic beverages, with its portfolio consisting of popular beer, wine and liquor. Among their many brands are Modelo, Corona, Pacifico, Robert Mondavi wines, Svedka vodka, Ravenswood wine, Black Velvet whiskey and Casa Noble tequila. If this stock proves anything, it’s that it is operating at a much higher level than its competitors. On Thursday, while the entire market is facing a correction, Constellation came within $0.13 of all-time highs, and on Friday, closed at $127.52, just 2.2% from the August high. In July, Constellation posted strong Q1 results in all segments, with its beer sales leading the way, posting 11% sales growth and 10% volume growth. Constellation beat estimates by growing earnings by 18%, gross margins increased 130 basis points, and revenues also came in above expectations at $1.63B, which was up 7% YoY. The company’s beer products make up 2/3 of the U.S. beer industry volume growth, and it’s the company’s beer sales that have allowed them to increase FY16 EPS guidance. The company now expects to grow beer sales by 10%, which translates into operating income growth of about 15%. Additionally, a large majority of Constellations wine portfolio is in the low-end wine business, with makes up more than 90% of all wine purchased. 

With the company’s strong performance being led by its Mexican beer sales, as an investor, you do have to be concerned about craft beers gaining market share. However, even as craft beers have been gaining on the likes of Miller, Coors, and Budweiser, Constellation’s beers have held in there. Corona remains the #1 selling imported beer in the US and #5 selling beer overall, while Modelo ranks as the #2 imported beer in the US. What also aides Constellation is the growing population of Hispanics. According to the 2014 Census, 17.1% of the total U.S. population declare themselves Hispanic. Adding in the nearly 9 million estimated illegal immigrants, you have about 20% of the U.S. population or 63 million people, of Hispanic decent. By the end of 2015, Hispanics are estimated to have almost $1.5T in buying power in the U.S, so Constellation should greatly benefit versus it’s rivals.

Constellation isn’t cheap when compared to the S&P, trading at about 25x forward earnings, however it is cheaper than the industry as a whole and in-line with the consumer goods sector. But you should be more willing to pay up for a company that is expecting to grow earnings by 12% this year and 15% next year. Just to give you a comparison, Anheuser-Busch is trading at 40x forward earnings and declining EPS growth, Molsen Coors is trading at only 17x forward earnings, but is also expecting EPS to be down 10% YoY.

Looking at the chart, the stock has been on fire, up 30% YTD, which is outperforming the S&P by 37%. Although Constellation fell a couple weeks ago during the panic selling on August 24^th and 25^th, the stock is right back to where it was before the world was coming to an end. In this market, it’s almost impossible to find a stock trading at or near all-time highs, so when you do find one, you know the company is executing on all cylinders. The 78.6% retracement is $119.78 and on August 24^th, the stock traded down to major support at $115, which is a level it hasn’t closed below since March 6^th. My target for this stock is $150, which represents another 18% gain from Friday’s close.

HASBRO (HAS)

For those unfamiliar with the company, Hasbro is the maker of toys and games such as Play-Doh, Monopoly, My Little Pony, Nerf and most recently Jurassic World, Marvel and Star Wars. Hasbro last reported huge second quarter earnings on July 20^th, sending the stock up more than 6% to all-time highs. The company reported better-than-expected net profit growth of 25% thanks to its tie-ups with Jurassic World, Marvel, Star Wars and strength in Play-Doh. While the company reported a 3.8% drop in revenue because of a stronger dollar and difficult comps, that was still better than expected, and better than its closest competitor, Mattel. Hasbro remains well positioned for future growth with their deal with Walt Disney to sell merchandise linked to Star Wars, Marvel, Frozen and more. Additionally, if you thought Play-Doh was a thing of the past, guess again, because the last two years have been the best in the company’s 60-year history of selling the stuff.

If you aren’t a big Star Wars fan, you wouldn’t have known it, but last Friday was actually Force Friday, where some of the new Star Wars: Force Awakens toys were first released, and almost all of the items were gone in seconds. A Target spokesman said the “crowds and excitement were not unlike any we’ve seen on Black Friday.” The most popular items seemed to be Hasbro’s action figures, followed closely by Lego’s millennium falcon and Funko’s bobbleheads. Star Wars mania is only going to get stronger as we move into the holiday season and will be an annuity stream for Hasbro for many years.

Hasbro sports a 2.50% dividend, which is historically low, but that’s only because the stock is up 37% YTD. However, since hitting an all-time high on that superb earnings report, Hasbro is down 11%, along with the rest of the market. The company is expected to grow earnings by 7% YoY in FY15 and 21% next year, which is excellent growth for a company trading at 18x FY16 earnings.

The stock is holding on to key technical levels, closing on Friday at $75.37, above the 100-day moving average of $74.63 and 61.8% retracement of $71.80. I don’t think you need to rush out and buy it on Tuesday, but if you could pick it up around $72, you will be in good position for the future. There is major support around $69.50, which is where the low from when the stock gapped higher on its Q1 earnings in April, and where the stock opened on the August 24^th crash.

If you are looking for stocks to add to your basket, there are many places to look, including the obvious names like Apple, Disney, Facebook, etc…But two under-the-radar names that could yield big results in years to come and are drastically outperforming this year are Constellation Brands and Hasbro.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC), Time Warner (TWX), 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), GoPro (GPRO), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies, long Exxon Mobil (XOM) SEPT CALLS and short Freeport MacMoran (FCX).