Saturday, January 10, 2015

Weekly Portfolio Summary

So the holidays are past us and it's time to get into the swing of my portfolio routine.  The year has started out a little on the volatile side of things.  The expected "Santa Claus Rally" was a complete flop this year as the last 5 days of 2014 and first 5 days of 2015 were met with more losses than gains in the S&P 500.  Oil continues its painful descent as it's reached new multi-year lows and related companies slowly begin to slash dividends and production forecasts.  Likewise, retail and restaurant companies have seen continued interest as we continue to get evidence that consumers continue their recent strength.  Finally, we received a jobs report today which stated that the country grew more jobs in December than people expected (250k vs. 240k), however, wages were down.  Apparently this was something people wanted to get concerned with, however, I'm not.  While it's not great for individuals that wages aren't growing, it's great for stocks.  Solid growth with no inflation and low interest rates pushes people to take the risk of the stock market.

Honeywell and NPS Pharmaceuticals will be involved in conferences this week.  I expect neither of these to be mind blowing as we've entered a quite time prior to earnings season.  The bigger of the two would likely be NPSP at the JP Morgan Healthcare Conference as more information about this potential sale (which was announced as initiated earlier this week and should have completed today) of the company may come up.  Finally, earnings season starts next week.  While none of the companies in my portfolio will be announcing, there are results and calls you might want to pay attention to.  

Alcoa announces on Monday and gives a great perspective on how the industrial markets are doing.  On Wednesday I expect the movement of my shares of Citi to be almost completely based upon how both Wells Fargo and JP Morgan do with their 4th quarter announcements.  Both banks have consistently been considered better than Citi in the pundocracy, so if both of these do poorly, it's highly likely Citi gets hammered too.  On Thursday Slumberger and Intel announce.  While Slumberger isn't a driller like Ensco, they seem to have a great eye into the overall markets and aren't the least bit afraid to tell everything exactly as it is.  This could be a really difficult day for anything oil related and their call has potential to give insight into offshore drilling.  Intel I think is worth watching only because it's a semiconductor stock - a very large one to boot.  Even though the fact that it's in the same industry is about the only strong similarity between it and On Semiconductor, that bit alone could impact the direction of my stock.  

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.


Ones:



Twos:
Ensco PLC (ESV, 29.27) - Ensco likely has a long year in front of it.  Oil continues to work to find its bottom and as oil drops, this stock is typically impacted as well.  There are still a lot of worries around the need for the company to cut it's over 10% dividend and this weighs on the price as well.  Keeping an eye on what we hear from Slumberger in their fourth quarter conference call and keeping an eye to what Transocean (RIG) does will likely be keys.  Estimate and production cuts haven't really started happening yet and until they do, I don't think it's worth trying to get into the rest of my position in this stock.  At this point, I want to keep my energy holding light and wait for expectations to be so low they can't be missed.  This is when the stock will likely start to rebound.  How fast/far is far from known at this point.  I currently believe both my target price of $52 on 2014 earnings of $6.54 (personal estimate) is high.  At this point, I don't have much other information to go with.  I'll readjust as I get information better suited for my estimates.  Ensco is 8% of my portfolio.

Encana Corporation (ECA, 13.04) - This stock started recovering after their conference call regarding their CAPEX plans for 2015 displayed an on-going effort to spend more and produce more, primarily in their oils and gas liquids.  However, it shortly started dropping after that.  80% of their spend is focused on 4 oil plays and this equates to 65% of their free cash flow for the year - based on $70 oil.  We're nowhere close to those numbers and I continue to believe we won't be getting near there in 2015 without some serious risk event or some other event which dramatically increases demand (quickly accelerating Europe/China would fit this bill).  For now, people seem to like what they hear and it's allowing me to recover some of the value on my position.  I'm over positioned in energy and I feel Ensco is the better opportunity between my two holdings.  Oil and gas needs to show stabilization we can trust.  I'm lowering earnings estimates to $1.55 for 2015 and am also lowering the multiple I think people are willing to pay to 12.  That puts my price target at $18.60 ECA is 3.4% of my portfolio.

Citigroup (C, 50.78) - After taking a hit due to its international business nature, the stock has started to recover from the low $50s it had dropped to.  There continues to be some international risk due to Russia and the contagion effect it may or may not have, but I believe Citigroup has this impact well contained and minimized.  Instead we have new developments as the 10-year treasury has dropped below 2%, putting larger pressure on the banking industry's profit margin, or NIM.  Add into this reports regarding Citigroup keeping bonuses flat to down compared to last year for their bankers and traders and you start getting a lot of speculation that we're going to hear a lot of bad info in the fourth quarter report.  Key technical factors, like the 200 day moving average, are in play now which make rushed buying risky.  Let these metrics help you determine whether or not we're at a buying time or in for more pain.  Just be patient.  Typically banks trade around 1.5 times book value, but these have been anything but typical times for banks and those old standards may or may not apply. 2015 book value and price target continue to be $63.  Citi is 9.9% of my portfolio.

Home Depot (HD, 104.89) - Retail stocks have run hard over the last 6 months and Home Depot has been one of the leaders of the space.  Going into earnings, the stock is up 12.7% since they last reported.  Care should be taken with this stock around earnings.  If expectations are too high, the stock will get hit - even if it's a great quarter.  I've reiterated my earnings guidance for 2015 to $4.55 and have what I believe is a conservative estimate for 2016 of $5.23.  Management raised guidance twice on their year already and they expected a stronger second half of the year compared to the first half.  I'm also expecting them to raise the dividend by at least 20% next February to $2.26, or more depending upon earnings.  The stock is trading around 21 times fiscal year 2015 earnings and currently is growing earnings at about 21%.  Valuation may look a little high, but the PEG ratio is at about 1,which is rather cheap compared to the industry average of 1.4.  My calendar 2015 price target is $110.  HD is 13.6% of my portfolio.

Honeywell (HON, 98.93) - Honeywell has generally been trading in line with the S&P 500 so far this year.  They've already shared conservative 2015 guidance and it already appears they were wise to hedge themselves on a strong dollar/low euro.  I doubt little news will come up to change how this stock performs until they announce fourth quarter results in 2 weeks.  This management team has been incredible and I expect them to be the same in the next year.  They provided earnings guidance of $5.95 - $6.15.  My estimate on their 2015 has been $6.12 with a multiple of 18 due to how consistently this company delivers.  This resulted in my 2015 target of $110.  HON is 19.3% of my portfolio.

NPS Pharmaceuticals (NPSP, 41.91) - Since last I summarized stocks, a lot has gone on for NPS Pharma and the Biotech industry.  We've seen specialized deals between drug companies and prescription plan providers pop up, more rumors regarding a Shire buy-out of NPSP have been getting leaked, and NPSP announced they would be using Goldman Sachs to put themselves up for sale.  The sale process moved extremely quickly from what I've gathered - with initial offer period having closed on Friday.  Most information I've read so far estimates a buyout deal in the range of $42- $50.  Truth be told this sale is a little bothersome to me.  It leads me to believe that management has concerns around the Natpara acceptance with the FDA - which is 3 weeks away, and/or they have concerns that they cannot accomplish their goals to create treatments for 10 rare diseases in 10 years.  Due to all the news, the sky-rocket jump in the stock's price and the risks I'm a little concerned about, I have sold about 42% of my position at $42, taking out all of my invested money to let the rest run.  The stock has surpassed my estimates on all of the news and at this time I don't have a new price target.  I expect the stock to stay flat to down unless we see new news on a buyout or we see results from the upcoming FDA meeting.  NPSP is 10.9% of my portfolio.

On Semiconductor (ONNN, 10.355) - The current behavior of the overall stock market has slowed the trajectory of this stock, but the technicals are still intact.  The company will report fourth quarter earnings in February and I believe the company is well positioned in the semiconductor industry.  They have a lot of auto and consumer product focus, which have been faring well as various reports regarding consumer behavior come out.  The company also has a share buyback program in place that could help provide some support on pullbacks.  I do not believe the stock will be done running higher until the January - March timeline  Historically speaking, this is the trend the stock has had - minus exceptional years (2008, 2009 for example).  The price Target is at $11.  While we want to see continued growth advancements, the stock tends to sell off over the spring/summer and then can be revisited early fall.  While this shouldn't be an absolute dictator on your holding, it's something to pay attention to.  On Semiconductor is 10.1% of my portfolio.


Threes:
Pepsico (PEP, 96.82) -  After shooting over 100, the stock has pulled back into the mid-90s.  With oil prices as low as they are, we could see accelerated margin growth due to lower input costs - both for corn and oil.  This is a company that's usually hedged out 6 months in front of themselves, though, so if that is the truth, it's still only a second half 2015 story.  Most technical factors are looking positive, as the overall trend with the price staying at or above the 100 day average, however, I'd feel better if the stock breaks through $96.98 to break through the 50 day average again, as it used to do. I was worried that the stock was ahead of itself, and it was, but it doesn't appear to have rolled over.  I'm looking forward to their earnings report in February as it'll help me realign growth expectations as well as have an understanding of how much buyback impact we might see as well.  Yields are at 2.7% for now and given the drop in the 10-year, the stock has some more breathing room for now.  Just keep rates on the radar so you can react in a timely manner.  PEP is 9.4% of my portfolio and my price target is $102 for 2015 on an estimated $5.10 of earnings.