Weekly Portfolio Summary

With earnings season virtually over, it appears we've entered into an information void.  Outside of the occasional Fed or ECB story, we are lacking any true information that people can leverage to decipher how the next quarter is going to look.  With this lack of information, I can't help but notice increased volatility, focus on mostly irrelevant data reports, and more discussions around what kind of decisions people think major entities will be making 3 months from now or more.  While the links aren't obvious, it's hard for me to not think the lack of hard information and the increased volatility aren't linked.  Let me help put a little of this in perspective.  The biggest hub-bub right now is the results from the jobs reports and everyone arguing about when the Fed is going to raise rates.  Honestly, does this really matter to anyone that isn't trying to trade on short timelines?  If the Fed raised rates from near 0% to 0.5% this month, or 3 or more months from now what impact does it have on people investing for years ahead?  The general group-think right now is that people fear the rate hikes and believe stocks need to go down because of it.  I'm not so sure of this.  People have ran to the Treasuries for safety, despite low rates.  They've also ran to stocks with high yields to compensate for low rates in treasuries.  Since people want/need yield, I actually expect people to run to treasuries in place of bond-replacement type stocks (Utilities, REITS, MLPs, some of the staples) when rates start rising enough.  They want that safe dividend rather than one with more risk.  At the same time, an increase in rates acknowledges the growth of the economy and people will run to stocks to be able to capture that on-going earnings growth.  These certainly won't be increases of proportions that people will be happy with keeping cash in savings accounts or CDs.  What I see playing out as most likely is more of a rotation of stocks and bonds, potentially leaving both mostly flat in terms of indexes, but there will be sectors that perform well and others that become weak.  It's not like we're at high rates and everyone is going to bail on stocks here.  We will see short-term gyrations.  If people believe in the growth enough, they may leave the bonds for stocks - meaning stocks will go up and yields will be pressured.  It's less likely at this stage people will leave stocks for a low rate of return when the economy is picking up steam.  This needs to be a play of keeping your eyes forward.  Expect a pullback - we may even be entering one now as prices compared to earnings are a little high given the current info.  However, I have to say I doubt anything serious or long-term will happen.  Could we do a "recessionary pullback (20% down)?"  Yeah, it's possible, but I don't think the odds are favorable.  Even if it does happen, without dramatic change in what we're seeing from both companies and the economy, it will be very short-lived.  Keep powder dry, be ready to pounce.

As I said, we're in a quiet period here for stocks - particularly for my current portfolio.  With the facts changing on Ensco, I'm looking for a replacement I can find an opportunity in - likely out of the energy sector.  The other big thing that happens is the CCAR results will be announced on Friday.  This will be a huge point for Citigroup, as they've failed to get approval to return more cash to shareholders 2 of the last 3 years.  While I don't believe they'll fail again with as much attention as they've put into this in the last year, failure would hit the stock pretty hard.  If they do start returning capital, then the stock is more likely to pop.  Certainly a catalyst moment.

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.


Citigroup (C, 53.06) - 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.  I've failed to get a better price as the trend has continued up since the technicals turned.  Friday will be a big day and I'm expecting it to be positive.  As such, I may enhance my position on any pressure early in the week. Citi is 9.9% of my portfolio.

Home Depot (HD, 114.45) - 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, 101.87) - 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 and the company is releasing new pieces of technology that hasn't been considered as potential earnings. 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. Getting a price below $100 is a reasonable buy and less than $95 is an unlikely gift unless the market goes into a correction.  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% of my portfolio.

Isis Pharmaceuticals (ISIS, 70.44) - 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.  However, a rising interest rate was a factor to a 50% sell off around this time last year as well.  While there were other factors in that sell off, it's worth keeping an eye on.  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.  In fact, prices have risen enough that I could consider selling out of the position to lock in gains and wait for it to pull back again, if I see signs that make this action worthy.  Isis is 4.4% of my portfolio.

On Semiconductor (ONNN, 12.90) - 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.  The stock seems to have topped out in the immediate term and the last few days have me a little on edge.  If the market is poised to take a down turn, I want to lock in my profits - at the very least on my trade.  Down side risk includes weather phenomenons, or sudden macro economic changes to the industry as well as increased competition.  Those changes could make the stock price fair to overvalued at $12.  Current research puts my price target at $15.  On Semiconductor is 12% of my portfolio.

Pepsico (PEP, 96.17) - 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% of my portfolio.

Ensco PLC (ESV, 22.85) - 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% of my portfolio.