The selling pressure didn’t let up last week, as the S&P
got off to it’s worst opening 2 weeks of the year ever. The S&P is down
about 8% YTD and is 12% off all-time highs, having taken out the lows from last
August. From a technical perspective, the S&P is completely broken down, so
if 1864 can’t hold, then the next level of support is down at 1821, which would
be a 15% drop from all-time highs, and the low from 2014…and a level to where I
see the market going. It’s hard to picture the market dropping much further
than that because I honestly don’t believe the fundamentals warrant it. But it
is also hard to see the market rallying very much, other than a brief bounce
higher before continuing lower.
While there are a plenty of reasons to be a market bear, ranging
from the rapid drop in oil prices to slowing growth in China, there are still
reasons to be bullish or at least neutral, which is my stance. In the
long-term, low oil prices is a net-plus for the US economy and the also the
stock market. Energy stocks make up just about 6% of the S&P 500, compared
to about twice that amount just a few years ago. Additionally, low energy
prices are good for the consumer, which in turn, is good for companies. Another
reason why I don’t see 10% downside like a lot of investors predicted this week
is because investor pessimism is near all-time lows. It’s impossible to go a
day without hearing someone making comparisons to 2008, when the global economy
was in free fall, corporate balance sheets were filled with debt and housing
(the biggest component to economic growth) was crashing. In a recent survey
investor survey, only 17.9% of those polled believe the S&P will trade
higher in the next 6 months, making it the worst sentiment since 2005. When I
see investor sentiment that low, I tend to take the contrarian view.
Earnings kicked off last week, led by the banks, and will
continue this week with some big reports that could not just move the
individual stock, but also the market.
DELTA
Prior to the market opening on Tuesday, Delta will be the
first airline to report Q4 earnings and a lot is expected out of the largest
airline by market cap. Analysts are again expecting record profits led by lower
fuel costs and increased domestic traffic. However, the key metric for airlines
is PRASM (passenger revenue per available seat mile). Delta forecasted PRASM to
be down about 1.5%, so anything better than that, will be positive for the
stock. The guidance is also going to be key for Delta. Investors need to see
capacity growth remaining flat this year, reducing pricing pressure and
increasing PRASM. Unless you get that, Delta and the rest of the sector will be
in trouble.
Despite oil prices sinking about 17% this year, the airline
stocks have not been immune to the market sell-off, with Delta falling 12%
already YTD. Despite that drop, Delta is still about 29% above its August low.
$43.50 has been key support for the stock, which is about the 50% retracement
from the 52-week low to high. Delta is actually one of the stocks I like going
into earnings, and while you won’t be able to buy it prior to that, you should
certainly look at the stock if it can hold $43.50, post earnings. I like Delta
long-term, especially if oil continues lower and stays low for years to come,
as many analysts and economists predict.
NETFLIX
Ordinarily I would say that Netflix is in no way a market
mover, however with Netflix being one of a handful of stocks that led the
market higher, Tuesday afternoon’s report will be a big one. If Netflix
disappoints, it will be bad news for the other momentum stocks like Facebook,
Amazon and Google, which will then be even worse for the broader market. For
those who have followed me, you know that I have never been a fan of Netflix.
The service itself, save for a few random shows, leaves a lot to be desired and
the stock is way overvalued. Netflix is down 9% this year, in-line with the
broader market, but I believe there’s more downside to come. Netflix is
currently trading at about 434x FY16 earnings and these high momentum, high P/E
stocks are going to get punished in this market if there is any hiccup in the
earnings report.
Netflix is expected to report a roughly 65% drop YoY in
earnings, with Q4 profits coming in at $0.02/share and revenues increasing 23%
to $1.82B. Netflix greatly disappointed last quarter in US growth, with most of
the subscription growth coming internationally, at the expense of profits. I
believe expectations are still too high for subscriber growth. In addition,
Netflix is spending more and more on original content, which is a concern if
subscriber growth doesn’t beat expectations. I also feel that they are, and
will continue to lose the content war to the likes of Time Warner. I think
Netflix has to show subscriber growth of about 3.55M in order to move higher, a
number I don’t see it hitting.
If you are looking to take a position in Netflix, I would
wait until after they report since $95 has been good support for the stock.
That would be about a 9% drop from Friday’s close of $104.04. Whether it gets there
or not, I still don’t like the stock and prefer you to be in HBO’s Time Warner,
which is actually up 7.7% YTD and looks like it’s finally bottomed out.
STARBUCKS
On Thursday, Starbucks will report after the close. The last
couple quarters, Starbucks had been trading at or near all-time highs heading
into earnings, which meant that they had to produce a blow out quarter to
continue higher…and that’s exactly what happened. While other companies have
been struggling in China, Starbucks has been growing. To show how confident
CEO, Howard Schultz, is in the Chinese consumer, he announced last week that
they would be opening up 500 new locations in each of the next 5 years. The
company is also enjoying very strong US same-store sales growth, led by an increase
in traffic and check size at the hands of its mobile app. Starbucks will look
to continue is streak of 5% or more same-store sales growth.
Starbucks has been doing everything right for years and I
see that continuing. Starbucks was up 46% last year and has been an
out-producer this year, down only 3.3% YTD. The problem right now is that
Starbucks is pricey, trading at about 27x FY17 earnings, so as usual, they will
have to report another ridiculous quarter to move higher. Despite its high
multiple, Starbucks remains one of the best operators, with one of the best
management companies and one of the best and consistent stock performers. If
there is any weakness after earnings, I want you in the name. If you’re relying
on hope, then you should hope it sells off to $53.04, which is the 50%
retracement. Although Starbucks is one of my largest positions, I intend to buy
more at $53.
These are difficult markets to navigate right now. Just
about everything is vulnerable to dropping except for US treasuries (TLT) and
gold (GDX). But down at these levels, I think you can start buying some dividend
paying stocks with strong balance sheets. Utilities like Consolidated Edison
(ED), Southern Company (SO), Verizon Communications (VZ) and NextEra Energy
(NEE) are all paying big dividends and have held up well this year. At the same
time, names like Coca Cola (KO), Kellogg (K) and Clorox (CLX) are paying nearly
3% and have outperformed YTD. Those are stocks that you should be looking to
add when the market sells off, and those are the names that should do well in a
sideways to lower market.
This past week, I sold out of my entire position in Facebook
at $99.87 and will be looking to buy it back around $86. At the same time, I
added yield to my portfolio by taking positions in Altria (MO) and
Bristol-Myers Squibb (BMY). Altria is in a recession-proof business of
cigarettes and pays a 4% dividend and Bristol-Myers pays 2.4%, has a strong
drug pipeline and has been a strong buy on every sell-off. Lastly, I started a
position in Constellation Brands (STZ). On January 7, Constellation reported a
monster quarter, beating just about every metric and raising guidance across
the board, which sent the stock up as much at 7%. Just like Altria, the alcohol
business is nearly recession-proof and with Constellation trading below where
it was prior to earnings, it’s becoming a steal.
My current positions: Long
Gilead Sciences (GILD), Starbucks (SBUX), 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,
Altria (MO), Constellation Brands (STZ), and Bristol Meyers Squibb (BMY).
Jeff Lewison
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