Stock of the Week: December 2015

Sunday, December 27, 2015

On to 2016

12/27/15

As the year comes to a close this week, I’ve decided to give you 4 bold predictions for 2016:

The S&P will actually end the year down at least 5% in 2016.

Since hitting an all-time low in early 2009, the S&P is up a whopping 209%, having never closed lower in a single year (this year may be the first but it’s over yet). So why on earth would I think the stock market will actually rollover in 2016? There are a few reasons. When I look at a monthly chart over the last 10 years, the S&P looks to be forming a rounded top, which is usually a bearish indicator. So on a technical basis, stocks may be out of gas in the near-term.

On the fundamental side of the market, there are a lot of reasons to be bearish. The market this year was led higher by high momentum names like Amazon, Alphabet, Facebook and Netflix. When I see markets being led by just a few names all year long, and most of those names are high multiple stocks, I tend to be a little concerned that the stock market can continue higher. In a healthy market, you will have multiple sectors leading the charge and different names leading at different times of the year. Next year, we will also be heading into an election year, which means great uncertainty, especially if it comes down to Trump v Clinton. Markets hate uncertainty, which should send stocks lower. If you look at the last 4 election years, beginning in 2000, the markets ended -9.1%, +10.9%, -37%, and +16%. On top of that, we’re facing rising interest rates in the US, while the rest of the globe is cutting rates. The US dollar continues to remain strong, wage growth remains stagnant and the economy just isn’t growing fast enough.

WTI crude oil will bottom but average $50/barrel

At this time next year, I believe you will be able to look back and say, “I should have bought Exxon at $80.” In January 2008, oil bottomed at $33.20/barrel, re-tested that level in February, and then proceeded to rally almost straight up 245% over the next two years. I’m not saying the same thing will happen, but earlier this month, oil hit a multi-year low of $34.53, and has rallied about 10% in the last couple weeks. Right now, the oil industry is a game of chicken between OPEC and the US to see who is going to break first and cut down dramatically on oil production. There are a lot of US energy companies that are in danger of bankruptcy, and it’s my belief that oil will bottom when as some of these heavily levered energy companies like Chesapeake, start to falter and look to be acquired or fold. Look for the oil rally to begin early next year.

The 7-year biotech rally will finally come to an end

That’s right…without question; biotech stocks have been the single hottest sector since the financial crisis, with the biotech ETF (IBB) rallying an insane 494%. That’s an average annual return of about 71%. So how can I be so stupid as to think the IBB will actually be DOWN for the year? For starters, biotech is having its worst year since 2010, up just 11%. While that is about 12% more than the broader market, that’s a really bad year by biotech standards. Additionally, with Hilary Clinton being the likely Democratic Presidential candidate, and given how anti-pharma she has been on the campaign trail, I can see additional pressure on all of the biotech firms to justify drug prices, which could send shares lower. Having said all of that, there will still be outliers in the group, so I recommend sticking with the big cap names with a strong pipeline and great balance sheet like Gilead, Celgene, Regeneron and Amgen.

Big reversal in the Netflix vs. world

Content is king in the media industry and I’m sorry, but Netflix doesn’t have the best content, despite what the stock price indicates. YTD, Netflix is up about 140%, while competitors like Disney, Time Warner, CBS are up 12%, down 25% and down 16%, respectively. Earlier in the year, Disney warned of weaker-than-expected ESPN revenue due to cord cutting, and Time Warner and everyone else followed, sending the entire media sector sharply lower. I think Netflix’s luck is running out. I see user growth slowing, content costs rising and revenues and earnings contracting. Earlier this year, Time Warner began offering its stand alone service for HBO, which is the solution to consumers cutting the cable cord. CBS’s Showtime did the same thing and more and more channels should follow in 2016. Nobody has better quality content than HBO, so I would be a buyer of Time Warner and a seller of Netflix in 2016.

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), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies.

Jeff Lewison

Sunday, December 13, 2015

Fed Week

12/13/15

This is an important week for the markets, not only because we’re coming off the biggest weekly drop for stocks since August, but mostly because oil continues to make new lows, junk bond funds are cutting off redemptions, and the Fed is set to announce an interest rate hike on Wednesday afternoon.

With OPEC’s recent announcement that they will not be cutting any production, it is becoming very clear that the oil industry is becoming a game of chicken, to see who is willing to shut down production first; the US or the rest of the world. So far, nobody has been willing to budge, and will more Iranian oil coming to the market with the reduced sanctions, it’s almost certain that oil is headed lower in the near-term. Lower oil should be good for equities as companies and consumers will reap the benefits of savings, however, lower oil prices tend to be an indicator of a slowing global economy. However, it’s my belief that oil prices are and will remain stubbornly low not because of a demand problem, but because of a supply problem. Global oil production has never been greater so don’t confuse low prices with a poor economy. A great way to play low oil prices is by buying up retailers and restaurants that are doing well such as TJX Companies (TJX), Nike (NKE), Home Depot (HD), Darden (DRI) and McDonalds (MCD).

It’s almost certain that the Fed will announce a 0.25% rise in interest rates on Wednesday, however that is already priced into the market. What will be important on Wednesday is how the Fed positions future rate rises to investors. My expectations are that the Fed will raise rates on Wednesday and will likely not do so again until closer to the middle of 2016, where the hope is that the global economy will be on stronger footing. If the Fed signals quicker rate rises (potentially 3 or 4 next year), then I fully expect the markets to dramatically sell-off.

Monday is going to be a critical day. If junk bond funds continue to disallow redemptions, that will continue to create liquidity issues and I would expect investors will need to raise cash by selling out of winning equity positions. Nothing was immune to last week’s selling, especially not the market leaders like Facebook, Neftlix and Amazon. If you have time today, it’s not a bad idea to review your portfolio and pick out stocks that you don’t see a lot of catalysts ahead that will move the price. I usually do not like to do much buying or selling in the last 6 weeks of the year because you typically have low volume and crazy price action for no apparent reason. This December is a little different, as you have junk bond funds imploding, potentially the first rate hike in years and oil at multi-year lows.

In looking at the S&P 500, I expect the markets to go back down and re-test the 38.2% Fibonacci retracement of 1970, which would be a 2% drop from Friday’s close. Stocks will have to stabilize at those levels or else the S&P is headed right back down to the yearly lows of 1867. I don’t think we’re in jeopardy of a drop back to the 52-week lows, but it’s also very hard for me to see the markets stage any meaningful rally into years end. With that said, you could have some great opportunities in the next few weeks to pick up stocks of companies that are unfairly beaten down because of profit taking and broader market pullbacks. Use the next couple weeks to research a couple stocks that you have wanted to buy, and make sure they are right for your portfolio. Stick with names that are near 52-week highs, have reported strong quarterly earnings and are in a sector that will benefit from low oil prices.

Jeff Lewison