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 24th and 25th,
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 24th,
the stock traded down to major support at $115, which is a level it hasn’t
closed below since March 6th. 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 20th, 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 24th 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).
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