Weekly Portfolio Summary

Took last week off, since there hasn't been a lot to add to past summaries.  Clearly, this was the week we were waiting for.  On Thursday, the US Fed announced that it will be keeping rates at the same low rates as they're at due to concerns they've seen in waning strength in some of the US economic metrics they've been seeing lately, inflation is not growing, and there are a number of concerns about the global economy.  With the market having fallen rather hard with worries of the global economy, China, and anticipation that the Fed would raise rates, you'd think the market would jump after their announcement, right?  Sorry, that isn't what's happened.  How can that be?  Well, I think we were in a lose-lose situation.  Yes, the markets fell due to global economic concerns and raising rates - which would also cause further strength in the US dollar and potentially have serious impacts to other nations.  However, what happened was in the last week or two, we saw the market gaining some strength and heading up, although slowly.  What I believe happened was people started betting that the Fed wouldn't raise as we saw industrials and financials to gain some pricing in their stocks.  They were trading on the concept that earnings would go higher due to strength in the market place.  So instead of recognizing the value the Fed is providing by allowing our economy to maintain our strength without tightening rates (and it could be argued that a .25% raise wouldn't hurt that strength at all, given our low rates now), people started latching onto the potential signs of weakness and are fearing number cuts due to under performance.  I also think there are a number of traders just locking in the gains they received by betting that the Fed wouldn't raise (sell the news concept).  It's been just over a day since the announcement.  To start betting that everything is going to collapse seems to be extremely premature and without a lot of warrant.  Nothing has really changed from 2 weeks ago, outside the fact that the Feds decision helps allow global economies to strengthen, allows us to maintain strength, and keeps rates so low that stocks are the place to be for capital appreciation.  

Now that the Fed decision is out of the way until December (though the thought process is we won't see changes until 2016 now), we now have to understand what the decision means and what the next focal points in the market will be.  We are now less than 3 weeks away from the next earnings season.  So first, we have to assess what this decision means to overall market themes:

  1. Continued lower rates is typically good for stimulating purchasing.  This means restaurants, retailers, travel & leisure, and housing are typical benefactors
  2. Continued lower rates should mean the US Dollar doesn't gain any further strength.  This is positive for international companies based in the US
  3. Low interest rates mean people will be looking for safety and yield.  Utilities, CPG companies, and healthcare typically result in places to "hide"
  4. Businesses that rely on a strengthening dollar or rates have not grown as well as other stocks in the history of this bull market
Second, we have to make sure we factor in anything the Fed spoke about which can impact stocks:
  1. Global economic weakness
  2. Continued downward pressure on oil and other commodities
  3. Some weakness in US consumer, pricing, and other indexes, but generally strength in the US
  4. Low inflation
  5. Strong job growth
When combining these items and looking at both current and future (6+ months) potentials, here are some themes I feel I see and will focus the direction of my portfolio
  1. Stocks are going to get harder to own - stocks are, by far, the best way to enhance your wealth over long periods of time.  We've had a heck of a bull market since 2009 where the market has more than tripled itself.  I expect this growth to slow down into something much more normal.  This means expect some good and bad years, but an average of about 7% returns on a year.  Picking the right stocks becomes much more important in these environments.  Sometimes picking stocks just able to plod with the market will be a solid strategy.
  2. The US economy is the tide to lift all boats - The US economy is leading the rest of the world out of recessions, similar to how it led them into them, for the most part.  Each country/region is at a different stage, but they will start getting better.  This generally means that the US might be a great place for stocks right now, but over the next couple years, it will become more "mediocre" in comparison to some other markets.  I expect Europe to be the first area to start taking off.  The rest of the world isn't so clear right now.
  3. Interest rates in the US will go up again - this means high yield stocks, MLPs, and REITs will become harder to own as the risk of stock vs. the security of treasuries will shift.  This won't happen overnight, though.  When the 10-year gets to the 3-3.5% range, this is when we'll start to see true value in those bonds.
  4. Americans have jobs, have money, and are currently spending cautiously - The pain of the great recession won't go away easily.  It's akin to what happened to people back in the years of the Great Depression.  My grandparents were frugal, and many that grew up in that time were as well.  I expect similarities here.  People are getting out, forming households now, and making purchases.  Those purchases, however, are about value (not cheap - but bang for buck) and experience.  Companies that have a reputation for providing one or both, will be important and material goods will waver for some time.
  5. Oil prices likely to stay low for some time - Whether it be a stock sector, market, or commodity, when you see a true crash, it's extremely rare to ever see it surge back to recovery.  As rates go up, so will the US dollar.  This typically means that commodities become or stay less valuable and this is likely to take awhile before they recover.  Since it was one of the last to fall, I expect oil to be one of the last to recover (I don't think coal ever will) - barring anything major that either cuts or shows the world is running out of supply.
  6. We are in a scientific renaissance - Not directly related to everything above, but I strongly feel we've entered into some form of scientific revolution.  The need for businesses to profit in what have been extremely complicated economic times where they had to focus on doing more with less money has generated all kinds of new ideas, pushed frequently by in advancements in technologies and sciences.  This applies to how businesses operate, using technology to take out a portion of lower-skilled work forces that have existed for decades, if not forever and it applies to medical advancements.  Biotech, healthcare services, and how patients are treated, monitored, and care for themselves are just beginning to take massive transformations from the ways of old.
Looking forward, there's not much going on.  We're still 3 weeks from earnings and they're going to tell us just how bad companies are doing (hint: I don't think it's all that bad).  In the meantime, I'm getting feeling that we'll hear even more (sigh) about the Fed's decision, the doom it means, and the doom that comes in December when they'll "undoubtedly raise rates."  While it seems the merry-go-round just isn't done spinning yet, be careful, because it might finish on a moment's notice, sending things flying.

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, 50.29) - The stock will continue to be driven by the Fed and interest rates.  This stock was chosen on a value basis compared to the sector combined with a long-term view that as the economy (both domestic and global, though initial focus is more domestic) picks up steam, the banks will begin to profit more from it.  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.   I find a multiple in excess of one times TBV to be unlikely without a hike.  My target is set to $60.50 until conditions support more upside potential in the next 12 months.  Technical indicators provide the 200 day Simple Moving Average (SMA) as a potential ceiling under $54, followed by the 50 day SMA below $57.  Downside risk continues to be in the $47 - $50 range.  Citi is 11% of my portfolio.

Cedar Fair (FUN, 54.55) - Compared to most stocks, this one didn't get hit near as hard as others and bounced back strong.  It's high, safe yield and growth makes this stock a safety play and a nice long term value, as does it's primarily domestic focus.  After having been above some key levels, the stocks price now is barely above the 50 and 200 day SMAs, prices need to stay above these levels or the charts become unfavorable.  The stock plays into my domestic and consumer strength themes combined with the idea that people are spending more on experience than material goods, like clothes.  As a high-yield MLP, it's not without its risks, though.  Down side risk seems to be in the mid $40s right now.  I lowered my earnings estimate due to the second quarter results to $2.65 with a fair multiple around 25 which is in between it's historic and projected 5 year growth rates of 40% and 14%.  This gives a price target of $66.25.   Cedar Fair is 10.8% of my portfolio.

Honeywell (HON, 98.04) - This stock is selected as a strong cyclical play to growing world economies - especially for the aerospace and automotive industries.  The management team has been strong in lean times and I expect they'll do even better as the cycle becomes more favorable as well.  The stock appears to be going through a pattern very similar to what we saw in October of last year, where the stock plunged below its SMAs and then charged right back up to and through them.  Generally speaking, I'm expecting it to do the same again, though it might take a bit longer than last time to get above the 200 day SMA.  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 16.1% of my portfolio.

Home Depot (HD, 115.12) - This stock is my quintessential play on the health of the US economy.  I believe more houses will be built or bought in the coming years and the benefit will be seen by a company that executes well, as Home Depot does.  Even if rates do rise, I expect this stock will still perform well as people will be rushing to buy their homes before rates get too high, and a strong economy will result in ongoing home improvements for a better home experience.  The stock continues to stay above it's 200 day SMA and the chart actually looks fairly solid.  The stock could still pull back around $110, though, so it's not like there's no downside potential.  My guidance is now at $5.40.  I expect a 20-22 multiple to be fair for a company growing earnings at 14% (plus share buybacks) and I expect the growth to continue into 2016.  My 2016 price target is $130, as I don't believe market conditions will allow the price to appreciate that far before the turn of the year..  HD is 12.6% of my portfolio.

Isis Pharmaceuticals (54.56) -  Lack of near-term catalysts are one of the biggest pain points for the company right now.  They expect to maintain over $750M in cash, so we shouldn't see more dilution anytime soon, though it's something to watch out for.  Also the company has been making so many deals that I agree when analysts say it may become difficult for them to be acquired.  Despite the lack of ability to find buyers, nothing has really changed for the stock.  My thesis of speculating on this stock remains that it has the potential to use its anti-sense technology to create many medical solutions to high need conditions with minimal side effects.  It's in a sector not usually impacted by the cycles of the market, however, the risk that does exists is that people won't be willing to pay as much for future earnings.  Technical indicators are turning mostly positive, between the MACD, a reverse head and shoulders pattern in the medium-term charts and momentum improving.  There are some signs of the stock being overbought and pulling back a little, but I have a feeling that won't last much longer.  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% of my portfolio.

On Semiconductor (ONNN, 9.92) - I picked this stock for its role in the automotive and industrial sectors as well as the fact that it's a top-notch player in the energy saving technology markets.  I believe they provide a need for autos, and consumer goods to get more use out of electricity as well as they provide a lot of the camera and sensing mechanisms that's charging the automated car movement.  The charts have signaled a temporary turn around that might be losing a little steam right now.  Momentum is improving, though and I think the company is buying shares to help maintain a floor.  Stronger dollars does hurt this company as well as it does have a lot of China exposure.  While risks exists, I believe we have seen the worst of things as we now enter a time that the stock cyclically excels.  I maintain my $0.86 earnings estimates with roughly a 15 multiple resulting in a $13 target.  I think it's important to note that most people believe things are going to slow so much they're probably giving the stock a multiple in the 9 - 10 range, which puts a price target in line with the next level of support.  On Semiconductor is 8.2% of my portfolio.

Pepsico (PEP, 93.05) - I chose this stock for the strong management, it's strong and continually growing dividend, and their focus to provide food people want - be it healthy, natural, or the classics.  While interest rates will be an indicator of strength, I think it will actually be the strength of the economy that forces a loss of favor with this stock while industrials surge.  Before that happens, the company will likely exceed expectations due to lower input costs (driven by lower oil) and a cap to the strength of the US dollar due to continued low rates for now.  Just keep in mind it usually takes 6 months to see the impacts.  There are currently ceilings around the $96 mark and we might have some support around $90 under our current conditions.  For now, I still allow a 22 multiple on the stock with my guidance for 2015 to be $4.50.  This gives my upside target at $99.  This is likely to be more of a bump in the road for now, so long as organic growth can maintain in the upper single-digit areas.  Right now, I feel range bound in this name, but it's a solid, reliable name in volatile and uncertain times.  PEP is 10.2% of my portfolio.