Weekly Portfolio Summary
Another week goes by with the market swinging relatively wildly on news or lack of news related to geopolitical impacts. While Greece has agreed to terms for bailout version 3, which includes tax hikes and deep spending cuts, China now becomes the focal point as they devalued their currency 3 times this week. The devaluation is concerning to many emerging market investors because it makes people wonder what does that say about the growth of the Chinese economy. We already knew it was slowing to 5% or so, but this could be an indication of something much bigger. Should the economy only be growing at 2%-3% or less, it's no better than the US economy, and frankly, the US is much safer to invest in at that point. As such, all companies known for doing strong business in that area are getting hit hard. Additionally with WTI oil falling below it's previous lows in the $43 range, this accelerates the fears/worries about our own economy going into a recession, though, I really feel like this is more about way more supply than demand - even if that demand has been growing this year. Which stocks have been performing well? High growth stocks, particularly in the tech space, like Amazon, Google, Facebook, and Netflix. Domestic-based companies aren't doing bad either - particularly specialty retailers like Nordstroms, or Home Depot, some of the restaurants, and finally, consumer & packaged goods companies. Essentially secular growers, safety stocks, and US based consumer spending.
Going into the next week and generally for the rest of the month, I don't expect a lot to be different. August is just one of those months where while a lot happens, not a lot tends to happen. It seems while the trend is down some, it's also very flat overall, as has been the case for the majority of the year. In my portfolio, my final earnings release of this quarter will arrive on Tuesday when Home Depot (HD) reports. Analysts are estimating earnings of $1.71 on revenues of $24.69B. While I believe the company is capable of beating these numbers, I'm not so convinced that the stock will react to it. The stock has run up 6% in the last 3 weeks as we go into this announcement. While the performance for the stock over the course of the gyrations of the last 3 months is a little less than 6% on what was a strong quarter, there's certainly more risk should the company miss than there is more benefit if they hit or exceed. I'm not saying the stock is in trouble, but reaction to the quarterly statement and the short term repercussions has more down side risk than up side.
Ones:
Cedar Fair (FUN, 54.56) - Cedar Fair continues to work on solid growth of revenue while earnings are growing a little slower than expected due to increased investment. The company, as a whole, continues to execute to plan, however, the stock has been stuck in the mud as it it tied to MLPs, a group more pronounced by it's pipeline (energy related) cohorts. Due to the relationship, it's possible the stock will continue to stay stalled out, though it's also possible it breaks our in September. Technically, the stock seems to have some support with the 200 day average as it typically pops back up if it drops through. However, it also has the 50 day average as a current ceiling. This pattern usually sets up for a breakout, but the question is which direction, which I'm currently guessing is to the up side. I lowered my earnings estimate due to the second quarter results to $2.65 with a fair multiple around 25. This gives a price target of $66.25. Cedar Fair is 12.4% of my portfolio.
Citigroup (C, 57.59) - Legal fees appear to be subsiding after Citi made its second quarter earnings announcements. This provides much clearer visibility into the company's earnings, which is one of the reasons the stock has jumped. It is the cheapest stock in the money center banking industry, still coming in under it's tangible book value while the average stock is 1.6 times TBV. I believe this provides a lot of value in the stock when interest rates start to rise. Before then, the stock could be volatile as people place bets on the next rate hike vs. other events lowering treasury yields. I still see downside risk to around the $54-$55 range while I've now raised my overall guidance on the stock's prospects. The company is capable of earning over $5.50 in earnings, and I estimate TBV to be at $60.50 at the end of the year and place a 1.25 times TBV value to the stock, giving a price target at about $75.50. While I doubt the stock will climb that far over the next 5 months, it gives perspective on where fair value might lay. Citi is 14.6% of my portfolio.
Isis Pharmaceuticals (ISIS, 50.00) - While Isis reported a fundamentally sound second quarter, it only met expectations and the stock, rallying the first couple days, has since been depressed again. The biotech sector is currently out of favor and the IBB is working itself down towards its 200 DMA. The company has been busy making deals for partnerships with some of its drugs while also getting prepared for a few phase 3 efforts to move towards commercialization. This is positive progress, however, the catalysts of actually getting to the FDA for approval is one to one and a half years away. With a lack of a catalyst, increasing expense costs, and limited visible income stream at this time, there aren't a lot of reasons to see this stock press higher at this time. I believe the sector itself will have to come back into favor before the stock will be done going down, but it has been putting up a bit of a fight lately, as every day that the stock drops below $50 intraday, it typically ends the day at or above $50. All other technical indicators are unfavorable. I'm considering a small position add under $49, but don't want to get too aggressive considering my short-term bearish thesis. I continue to learn how to value a stock on the "out years." For now, my price target would be more in line with the low $60s. Isis Pharmaceuticals is 6.3% of my portfolio.
Twos:
Home Depot (HD, 119.75) - Over the last number of weeks, we continue to see data that indicates housing to be improving. This is in line with my thesis and only builds the potential that I believe is still in front of Home Depot. The short term factor appears to be related to a combination of gasoline prices and interest rates, such that if either go higher, this stock tends to get beat up. The long term thesis is that despite the run this stock has had, we're far from the end of the cycle. Household formations are increasing, people are likely to go after homes before rates start getting too high, and there are an awful lot of millennials looking to get out of Mom and Dad's basement and form their own household. The stock dipped below it's $110 floor, but has since recovered and maintained that as a floor for the last few weeks. That said, the 50 day average has been showing to be a floor of support, with the stock bouncing off that level a few times in recent weeks. It is possible that the breakout is beginning to happen, the macro pressures from China, Europe, and the Fed continue to find ways to pressure the market. I am expecting earnings of $5.30 and a multiple of 24.5. My calendar 2015 price target is still lofty at $130. HD is 15.1% of my portfolio.
Honeywell (HON, 106.08) - The combination of the strength of the US dollar as well as weakness from so many international companies (excluding Honeywell) who get earnings from China are wreaking havoc. The company posted great results for the second quarter and raised the lower end of guidance with comments focusing on accelerating organic growth as the year continues. This forced the stock to soar above the $105 ceiling it had, but the macro issues have pulled it back down to its current prices. It's hard to say if the new floor is around $102 now, or if the stock could drop back down to the bottom of its previous range. The last time the stock dropped below the 200 day average was last October when macro concerns drove the market. That was a very short-lived drop that rebounded well. That lower end of the range has been a very reliable floor to buy off of, not withstanding any significant market news outside of the dredge we've been hearing all year so far. From a charting perspective, I don't think it gets much better. It might not be growing at the fastest rate, but the stock just plods along at a nice pace in line with the moving averages - extremely reliable. Guidance now sits at $6.05 - 6.15. My estimate on their 2015 stays at $6.12 with a multiple of 18 due to how consistently this company delivers. This resulted in my 2015 target of $110. HON is 20.1% of my portfolio.
Going into the next week and generally for the rest of the month, I don't expect a lot to be different. August is just one of those months where while a lot happens, not a lot tends to happen. It seems while the trend is down some, it's also very flat overall, as has been the case for the majority of the year. In my portfolio, my final earnings release of this quarter will arrive on Tuesday when Home Depot (HD) reports. Analysts are estimating earnings of $1.71 on revenues of $24.69B. While I believe the company is capable of beating these numbers, I'm not so convinced that the stock will react to it. The stock has run up 6% in the last 3 weeks as we go into this announcement. While the performance for the stock over the course of the gyrations of the last 3 months is a little less than 6% on what was a strong quarter, there's certainly more risk should the company miss than there is more benefit if they hit or exceed. I'm not saying the stock is in trouble, but reaction to the quarterly statement and the short term repercussions has more down side risk than up side.
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.
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.
Cedar Fair (FUN, 54.56) - Cedar Fair continues to work on solid growth of revenue while earnings are growing a little slower than expected due to increased investment. The company, as a whole, continues to execute to plan, however, the stock has been stuck in the mud as it it tied to MLPs, a group more pronounced by it's pipeline (energy related) cohorts. Due to the relationship, it's possible the stock will continue to stay stalled out, though it's also possible it breaks our in September. Technically, the stock seems to have some support with the 200 day average as it typically pops back up if it drops through. However, it also has the 50 day average as a current ceiling. This pattern usually sets up for a breakout, but the question is which direction, which I'm currently guessing is to the up side. I lowered my earnings estimate due to the second quarter results to $2.65 with a fair multiple around 25. This gives a price target of $66.25. Cedar Fair is 12.4% of my portfolio.
Citigroup (C, 57.59) - Legal fees appear to be subsiding after Citi made its second quarter earnings announcements. This provides much clearer visibility into the company's earnings, which is one of the reasons the stock has jumped. It is the cheapest stock in the money center banking industry, still coming in under it's tangible book value while the average stock is 1.6 times TBV. I believe this provides a lot of value in the stock when interest rates start to rise. Before then, the stock could be volatile as people place bets on the next rate hike vs. other events lowering treasury yields. I still see downside risk to around the $54-$55 range while I've now raised my overall guidance on the stock's prospects. The company is capable of earning over $5.50 in earnings, and I estimate TBV to be at $60.50 at the end of the year and place a 1.25 times TBV value to the stock, giving a price target at about $75.50. While I doubt the stock will climb that far over the next 5 months, it gives perspective on where fair value might lay. Citi is 14.6% of my portfolio.
Isis Pharmaceuticals (ISIS, 50.00) - While Isis reported a fundamentally sound second quarter, it only met expectations and the stock, rallying the first couple days, has since been depressed again. The biotech sector is currently out of favor and the IBB is working itself down towards its 200 DMA. The company has been busy making deals for partnerships with some of its drugs while also getting prepared for a few phase 3 efforts to move towards commercialization. This is positive progress, however, the catalysts of actually getting to the FDA for approval is one to one and a half years away. With a lack of a catalyst, increasing expense costs, and limited visible income stream at this time, there aren't a lot of reasons to see this stock press higher at this time. I believe the sector itself will have to come back into favor before the stock will be done going down, but it has been putting up a bit of a fight lately, as every day that the stock drops below $50 intraday, it typically ends the day at or above $50. All other technical indicators are unfavorable. I'm considering a small position add under $49, but don't want to get too aggressive considering my short-term bearish thesis. I continue to learn how to value a stock on the "out years." For now, my price target would be more in line with the low $60s. Isis Pharmaceuticals is 6.3% of my portfolio.
Honeywell (HON, 106.08) - The combination of the strength of the US dollar as well as weakness from so many international companies (excluding Honeywell) who get earnings from China are wreaking havoc. The company posted great results for the second quarter and raised the lower end of guidance with comments focusing on accelerating organic growth as the year continues. This forced the stock to soar above the $105 ceiling it had, but the macro issues have pulled it back down to its current prices. It's hard to say if the new floor is around $102 now, or if the stock could drop back down to the bottom of its previous range. The last time the stock dropped below the 200 day average was last October when macro concerns drove the market. That was a very short-lived drop that rebounded well. That lower end of the range has been a very reliable floor to buy off of, not withstanding any significant market news outside of the dredge we've been hearing all year so far. From a charting perspective, I don't think it gets much better. It might not be growing at the fastest rate, but the stock just plods along at a nice pace in line with the moving averages - extremely reliable. Guidance now sits at $6.05 - 6.15. My estimate on their 2015 stays at $6.12 with a multiple of 18 due to how consistently this company delivers. This resulted in my 2015 target of $110. HON is 20.1% of my portfolio.
On Semiconductor (ONNN, 9.91) - As seems to be a theme in my portfolio as of late, I have yet another stock that announced solid numbers, and provided positive guidance, however, the stock is in another currently abhorred sector. Sell in May theory couldn't have worked out better this year, as the stock essentially peaked at the end of May and has plummeted to these levels since. The good news is that tech typically starts to go positive in 2-4 weeks as focus turns to the holiday season. This company is doing very well in hot spots, particularly auto, industrial, and cell phones. It did see a slow down in orders in June, but during their second quarter they stated that orders picked back up in July. This company does have a lot more exposure to China than I had thought and it will certainly be a concern since much of the turmoil going on now is in relation to China's struggling economy. Technical analysis indicates that we should be nearing the bottom in the stock as many indicators seem to be showing signs of being oversold on medium or long terms. I also believe the company has returned to buying back its shares when the stock drops below $10, as whenever this happens, the stock starts to turn and rise back above. These are levels I'm much happier with buyback purchases than where they were at during the second quarter and hopefully it sets the stock up accordingly. I maintain my $0.86 earnings estimates with roughly a 15 multiple. Price target also stays at $13. On Semiconductor is 9.4% of my portfolio.
Threes:
Pepsico (PEP, 99.23) - Pepsi has regained strength in its stock since the second quarter announcement. With more risk and worry in the markets, people have rotated towards CPG companies like this one for a location of "safety" against the falling treasury yields and concern for lack of growth. The stock now has advanced well above its 200 DMA and is hitting its head on the $100 price point. Dollar strength continues to be a concern, though it has stayed mostly flat since the last announcement. Dropping commodity prices are translated into tail winds and the lowering interest rates are also forcing people to look towards strong "bond alternatives" again. I do see rising rates as a risk for causing the stock to go into a phase of multiple compression and that risk equates to the stock dropping to the $81-$85 range. I don't see that as a likely risk until the Fed raises rates, the dollar shows more strength, and we see proper market signals that make people want to stay away from CPG companies. From a technical perspective, things appear favorable at this point with various positive breakout signals. There is something to be noted about the speed of the breakout, though, as some indicators show signs of being overbought. We also have a strong floor of all 4 moving averages sitting around the $96.30 mark. Because of the current conditions, I still allow a 22 multiple on the stock with my raised guidance for 2015 to be $4.50. This gives my upside target at $99. Since the stock is already at that level, is showing significant struggles to surpass that point, and has a number of longer-term risks in front of it, I had to downgrade the stock for now. I do not see downside risk that is beyond 5% right now, however, the upside feels capped as well. PEP is 12.5% of my portfolio.
Threes:
Pepsico (PEP, 99.23) - Pepsi has regained strength in its stock since the second quarter announcement. With more risk and worry in the markets, people have rotated towards CPG companies like this one for a location of "safety" against the falling treasury yields and concern for lack of growth. The stock now has advanced well above its 200 DMA and is hitting its head on the $100 price point. Dollar strength continues to be a concern, though it has stayed mostly flat since the last announcement. Dropping commodity prices are translated into tail winds and the lowering interest rates are also forcing people to look towards strong "bond alternatives" again. I do see rising rates as a risk for causing the stock to go into a phase of multiple compression and that risk equates to the stock dropping to the $81-$85 range. I don't see that as a likely risk until the Fed raises rates, the dollar shows more strength, and we see proper market signals that make people want to stay away from CPG companies. From a technical perspective, things appear favorable at this point with various positive breakout signals. There is something to be noted about the speed of the breakout, though, as some indicators show signs of being overbought. We also have a strong floor of all 4 moving averages sitting around the $96.30 mark. Because of the current conditions, I still allow a 22 multiple on the stock with my raised guidance for 2015 to be $4.50. This gives my upside target at $99. Since the stock is already at that level, is showing significant struggles to surpass that point, and has a number of longer-term risks in front of it, I had to downgrade the stock for now. I do not see downside risk that is beyond 5% right now, however, the upside feels capped as well. PEP is 12.5% of my portfolio.
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