Sunday, March 1, 2015

Weekly Portfolio Summary

Last week was extremely busy for my portfolio.  Three companies reported their fourth quarter results and results were rather mixed, as you'll see in my stock analysis reports for each.  In short, retail - especially home improvement is very strong.  Oil is extremely risky going forward - especially offshore drillers where there is a lack of demand and a supply glut that will take some significant time to work itself through. Biotech continues to get attention, but also remains volatile.  I feel I'm in a strong position should the market pause or correct itself, with a cash holding of 25% that I'm looking to put to work, much less that ever impending cash infusion I talk about doing.  

With earnings season now done for my portfolio, there should be a period here where things calm down some.  That said, there are some things going on this week worth noting.  Isis pharma will be at a healthcare conference on Wednesday.  With the number of drugs the company has in the pipeline, there's always a chance of a surprise announcement of a new partnership or some test results.  However, for this particular conference, I'm not expecting much news.  Also on Wednesday, Honeywell has their investor's conference.  It will be interesting to see/hear how things progress since they've announced their solid quarter previously as we may hear some clues to the first quarter results, which is about 6 weeks away.  Of course the big event for the week will be on Friday, as we hear the latest non-farm payroll numbers.  While I expect the jobs numbers to be adequate at least, we seem to face a lot of turmoil as people focus entirely too much on how the jobs reports may or may not affect when the Fed starts raising rates.  To me, that's nothing but a sucker's game.  Regardless, you'll likely hear how a strong number means stocks need to go down because rate increases are around the corner and conversely how a weak number means the economy is going into the garbage, and therefore you should sell stocks.  It's a can't win for winning market, essentially.  Granted, worst thing that happens is I'm the one that's wrong and stocks go higher - while I continue to hold onto a lot of cash that I might've used to buy stocks on a pullback.  That doesn't sound all bad to me (though there is a limit to how good it can be - holding money doesn't make money).

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:
On Semiconductor (ONNN, 12.75) - A superb fourth quarter earnings announcement yielded both strong results and strong projections in the auto and wireless/phone businesses it serves. While the company still expects seasonal patterns, demand is strong and inventory is down. Add into that 2 acquisitions made last year that are already producing earnings and design wins despite full integration being expected this year and a buyback worth about 22.5% of the company's current market cap over the next 4 years and I see why there's been such strength recently.  I'm currently estimating earnings of $0.86 for 2015 and am maintaining my multiple of 17.5.  I want to call out the fact that I think the stock has a 17% upside after already running over 25% in the last 3 months makes me nervous - meaning I'm not just cheer leading the stock because it's moved up.  If I'm doing my work right, though, the numbers don't lie.  It's also important to note that most analysts that follow the stock have price targets below the current stock price and most of the ones that are higher don't go above a price of $14 - despite the last earnings and guidance  We might be starting to see signs of price target changes, though.  Down side risk includes weather phenomenons, or sudden macro economic changes to the industry as well as increased competition.  We've also been recently seeing a wave of insider selling that was spooking the market.  Those changes could make the stock price fair to overvalued at $12.  Current research puts my price target at $15.  On Semiconductor is 11.8% of my portfolio.

Twos:
Citigroup (C, 52.42) - The bank will continue to be bound by the trajectory of the 10-year US Treasury until another catalyst makes the bank more appealing. The next catalyst I see is likely to be the results of the CCAR which should come out sometime in mid-March. I expect this to be a company and sector that will start growing/improving as interest rates and GDP in the US continues to grow. Additionally, we're seeing signs of economy improvement in other parts of the world, which would also improve revenues. While the rest of the world is by no means in an up trend, it does provide solace that known risks are priced in at this time. Given current circumstances, my tangible book value and price target for the stock sit at $59. Since the stock moved down so much, I feel there is still plenty of value in this stock.  While the technical indicators I've been watching appear to have indicated a change in the stock's behavior, I believe I'll find a better price to pick up some more shares. Citi is 9.7% of my portfolio.

Home Depot (HD, 114.75) - After yet another strong earnings announcement, guidance provided feels conservative from the growth trends for the last 5 years.  While home formations stay flat and access to loans continues to struggle, we learn that much of the business the company sees is due to remodeling.  Considering the strength of the market, it will leave you wondering as to how strong things can really get - but also asking how long will this remodel surge last.  In the end, the consumer continues to be a strong driving force and will be the primary driver between the home improvement retail theme.  I have estimated fiscal year 2016 earnings of $5.20 and give the company a multiple of 30 as I expect us to see the multiple expand to meet the consistent growth we've been seeing.  My calendar 2015 price target is $130. HD is 14.2% of my portfolio.

Honeywell (HON, 102.78) - I believe the company's focus on energy efficiency and safety will help them continue to surge forward. Additionally the airplane cycle is a few years from the end of it's strength. The stock will sell off for various reasons, but as long as these themes and the company's performance stays intact, those are buying opportunities. Honeywell reiterated their conservative 2015 guidance, keeping it completely in line from December's announcement. This management team has been incredible and I expect them to be the same in the next year. If the stock manages to pull back to around $95, it should be worth buying. 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 19.1% of my portfolio.

Isis Pharmaceuticals (ISIS, 68.56) - This stock is a pure long-term speculative play.  As such the stock price will swing wildly and I expect to either hold through it or work to trade around a core position with the movements of the markets to the best of my ability.  With 38 drugs currently in the pipeline and a goal of up to 10 more to be put into the pipeline in 2015, there's a lot of opportunity for wins and the potential home run.  Risks are primarily competition to solve the same issues as well as getting drugs to market.  I am not setting a price target as I don't feel skilled enough.  Current prices feel too high to increase the position, so you must wait for a decent pullback or new news that makes the current price feel cheap.  Isis is 4.2% of my portfolio.

Pepsico (PEP, 98.98) - Pepsico has announced earnings which leaves them as one of the top consumer & packaged goods companies out there today, doing even better than the surprise numbers that competitor, Coca Cola put up. Biggest encouragement has been the sudden turn to increased revenues in the North American Beverages division. These increased revenues were on lower volumes, indicating a new-found ability to increase prices successfully. There are still foreign exchange risks, particularly in Venezuela, but Russian consumers continue to hold on due to the need for primary products of milk and juice. 2015 guidance was for EPS growth of 7% off of 2014 earnings of $4.63, putting my earnings estimates at $4.95. Due to success and favorable yield, I'm giving Pepsico a multiple of 22, but note that this is a little rich and something to watch carefully. Given my multiple and earnings estimate, I have a $110 price target. PEP is 9.2% of my portfolio.

Threes:
Ensco PLC (ESV, 24.47) - Despite beating analyst expectations on for the fourth quarter, Ensco essentially disappointed investors by slashing their dividend more than expected and not providing revenue estimates due to the massive glut of rigs in or entering the market.  While all of the moves made make sense to preserve capital during rough times and align them to take advantage of the downturn, the fact of the matter is they have an issue with declining day rates due to lack of demand and oversupply of rigs.  Ensco does have a technology and performance advantage over competitors, but it won't protect them much over the coming months.  With a dividend yield of 2.4% I don't see the stock worth holding onto during this phase of the cycle because we don't know how long it will be and the stock is not likely to appreciate during that time.  I'm looking to release my holdings at a better price and take the loss for now.  When the supply situation is resolved and Ensco takes advantage of their capitalization, I would consider getting back in.  I currently expect that to be 12-18 months out, at least, though.  Ensco is 6.7% of my portfolio.