Sunday, September 27, 2015

Weekly Portfolio Summary

Well, last week wasn't a good week for me, as the S&P 500 whooped my portfolio, which took a pummeling.  Despite the fact that the Fed isn't raising rates yet, the market is selling off.  I'm not sure if it's people just selling in anticipation of the inevitable, or if people are scared for other reasons.  Economic data around the world hasn't been great, as some of the US indicators have been lower than expected as well.  I'm guessing this is a big reason for fear - fear that we're heading back into recession.  You do see the consumer staples and utilities appearing to hold better than other sectors lately, and though volatile, the 10-year treasury has also stayed fairly flat.  These facts do help provide some credence to the theory.  The problem with that is that those indicators are usually poor tells to how the businesses, themselves, are actually doing.  

In addition to the overall disdain to equities that we're currently seeing, the biotech sector got the stuffing beat out of it as many stocks in the sector moved down 20% or more in just that 1 week's time.  My holding of Isis Pharmaceuticals was no exception to that rule and to make it all the more painful, I failed to maintain my discipline and bough additional shares $3-$4 higher than I was saying I would - out of fear that the technicals were showing positive signs and I missed the boat.  Had I taken time to find out why the stocks were down so much at the time I purchased, I think cooler heads would've prevailed.  Shoulda, woulda, coulda, though.  And now that the stock has fallen before prices I wasn't sure we'd get to ($45), I haven't gone in and bought the rest of my position yet.  It is worth noting that the stock recovered late in the day on Friday after another vicious selloff, so we have witnessed the whoosh of all the weak hands getting out.  It's still too early to tell, though, and with pricing of specialty drugs now suddenly in the limelight, I doubt we'll see things turn around immediately.  I also don't see any specific catalysts that can suddenly put the sector back in favor just yet.  Perhaps earnings season has a chance, or maybe a new buyout happens.  It will take something fairly significant to say that biotech companies are confident that things will continue to move favorably.  In the meantime, there's still plenty of room down in a group of stocks that have gains in the last year still on the table, no dividends, and no stock repurchases to provide support.  Understand that many, if not most of these companies are still good, there's just a lot of concern surrounding their ability to achieve future earnings when people are threatening the prices they charge for critical and unique disease therapies.

The week ahead will be dominated by macro themes again - Fed rates, the strength of the US and global economies, and whatever other new catches people's attention that tend to get derived into business impacts more so than actually impacting them.  On Friday, we'll have the October jobs report (yep, we're going into a new month already).  I don't see this report being as important as September's was, but don't doubt that people will hang on every little detail and turn it into whether or not the Fed raises the rates in October, after Fed Chair Yellen made comments around still believing rates will raise this year, if data supports it, Thursday evening.  The fact that we are changing months is also something to watch out for.  September is, historically, a bad month and this year was no exception.  It's possible things start turning around in October, if people really believe we'll end the year with the S&P500 up from the end of 2014.  With third quarter earnings just around the corner, they could only add fuel to lift that rocket.  Don't react emotionally, try to have price points and be prepared.  Knowing that the calendar is a reason why sentiment, which is extremely fearful right now, can change gives you the opportunity to be in the market at the right time - even if that means you miss the absolute bottom.


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:
Citigroup (C, 50.55) - The stock will continue to be driven by the perception of where Fed and interest rates are heading and when.  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 rate 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) and 50 day SMA as ceilings in the low-to mid 50s while we still have solid support around $47.  Given overall sentiment, I'm waiting for prices closer to $47 to add more onto my position, but it seems to be a struggle to get below $50 at this time.  Have to continue to gauge what the market is saying/doing as technical conditions appear to be showing signs of a shift to a positive attitude.  Citi is 11.4% of my portfolio.

Cedar Fair (FUN, 52.92) - Compared to most stocks, this one didn't get hit near as hard as others.  It's high, safe yield and growth makes this stock a safety play and a nice long term value, as does its primarily domestic focus.  Charts did turn unfavorable, with the "death cross (50 day SMA crossing under 200 day SMA)" has gone into effect.  The current floor of support is the $51.50 - $52 range, which is why I haven't bought more stock at $52.50.  I think these levels and the market's sentiment for the stock and sector need to be watched.  While the stock is approaching oversold territories, it also doesn't have a lot else going for it just yet.  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 10.7% of my portfolio.

Honeywell (HON, 93.52) - 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 mood of the stock has certainly gotten to this one, as it's now down about 6.5% on the year and was sold with impunity in the last week.  If global economies are getting worse, this international play is going to get thrown out no matter how well it's performed over the years in bad times.  The charts are negative, with a death cross activated and many indicators not looking hot, but there are a few glimmers of hope as the stock approaches oversold territories and the downward momentum appears to have reached its peak.  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 15.8% of my portfolio.

Isis Pharmaceuticals (43.98) -  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.  The new wrinkle for the stock is that the biotech sector has reached the public eye, thanks to Hillary Clinton berating how price gouging in the biotech sector needs to be brought under control.  Companies need to show confidence that they're not gouging and some positive catalysts for things to turn anytime soon.  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.  The new publicity made charts turn very negative, very fast.  There are some signs of the stock being oversold and momentum reaching its peak, but I don't think these are enough to be considered buy signals.  Under current conditions, my downside risk is to the mid-30s and my trigger point is $37, though if conditions improve before then, I'm still looking for a $40-$42 price point.  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 4.9% of my portfolio.

Twos:
Home Depot (HD, 116.74) - 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 it appears to be making a flag pattern as the prices consolidate around the 50 day SMA.  This indicates potential to break out soon - typically to the upside.  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 13.1% of my portfolio.

On Semiconductor (ONNN, 9.33) - 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 do hurt this company and 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 accelerates.  I maintain my $0.86 earnings estimates with roughly a 15 multiple resulting in a $13 target.  On Semiconductor is 7.9% of my portfolio.

Pepsico (PEP, 93.47) - 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.  It's also a nice safety stock to have in volatile and rough times.  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 and causes 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 10.5% of my portfolio.