Sunday, December 13, 2015

Weekly Portfolio Summary

It's been a disastrous week for this average Joe's portfolio.  As the market has taken quite a hit, with the S&P 500 down 3.8%, my portfolio has taken a 5% hit.  The biggest losers were Isis Pharmaceuticals, Citigroup, and Honeywell.  Before I get into those particular holdings, let's talk about the overall market.  The hit the market is taking is very much in line with the strong November employment numbers we got last Friday.  The numbers were so strong that since then, we've heard various Fed members making comments that we are as good as assured to see a rate hike - likely a quarter point - resulting from Wednesday's Fed meeting.  It's these realities, in combination with the downturn in the energy markets (primarily oil) that the market is reacting to.  A raising rate environment is a whole new investing environment than I've been working with for the last 5 years.  A rising rate has a number of impacts.  First, the US Dollar typically gets stronger when rates rise.  This means commodities tend to lose value in the US because it takes less dollars to buy the commodity - likely a secondary impact to the oil markets outside of last week's decision from OPEC to not lower production.  Second, while raising rates, which are at nearly zero, a quarter point is not much of an impact, many people believe that 1 rate hike will mean more hikes to come soon after.  This is important because a few hikes make bonds and other savings vehicles like CDs a better place to store money you're not willing to risk.  This means people start vacating safety stocks like utilities, packaged goods companies, MLPs, and other high yield offerings in favor of traditional safety.  Many things I've heard and read indicate that it's not the rate hike, but rather how the Fed talks about it on Wednesday that will really drive the ongoing direction after the meeting.  If there are strong statements indicating that this is the only hike for a period of time to see how the economy reacts and that they're ready to act, should things go wrong,  reduces the current rush to leave the safety stocks because the yield competition isn't quite there yet.  The final thing that higher rates do - at least for a little while - is make the value of future earnings smaller.  This is done in a couple ways.  First, international companies can't make or increase their earnings very easily because the strong dollar results in a lower translation of money made into US dollars.  The second way is that as rates rise, it means there's a higher level of inflation that exists.  Inflation causes the value of today's money to be worth less in the future because it will cost more to pay for things.  With current rates and conditions, 10 dollars today might be worth $9.99 two years from now.  But as rates rise, that same 10 dollars could only be worth about $9.41 two years from now, given a 3% compound annual inflation rate.  All of these things are factors that now need to be taken into consideration as I review my portfolio and decide what holdings I need to have.  We'll get into that in a little bit.

Now for my worst performing holdings.  I feel like I'm looking at a game of "One of these things don't look like the other," here.  As I think about all of the events going on, though, I think I can come up with the reasons why all 3 sold off so strongly.  First, , ISIS is a biotech stock that had a huge jump from their lows earlier this fall.  Combine this with higher rates and you have a company people are a little bit skittish about because people are less likely to pay up for future earnings if the value of those earnings is going down.  That said, when this bearish sentiment wears off, and I believe it will this week, it's likely to be one of the stronger bounces as people search for safety stocks that can grow no matter the situation.  Another factor is Friday's announcement of Phase 1/2 studies for an antisense therapy for a branch of ALS.  It seems there are some doubters of this therapy, stating it poses medical risks, and that may also pushed the stock down further.  While ISIS was down 9.5% for the week, the IBB was down 3.57%, the majority of that gap was created on Friday with the news announcement.  Next up is Citigroup.  This one is a lot harder to determine what's going on.  If the factor was an increase in the Fed Funds Rate, you would expect Citigroup and other banks to be on the rise as their ability to make more money is right on the horizon.  So what's the deal?  I suspect the culprit is tied to what we've seen happening related to the Oil industry - particularly in its relationship to high yield (junk) bonds.  Junk bonds have become a hot topic because there's concern there's a huge bubble out there about to burst because oil and gas companies have been taking out large loans to pay for over priced properties, and high dividends and with prices so low and going lower, there's an expectation that people can't pay and are about to go out of business.  When that happens, the banks that lent the money get stuck holding the bag.  While you can't argue that fact, I'm starting to wonder if we're seeing an overreaction.  Typically, when rates rise, banks tend to go up.  That's the pattern I understand.  Though no pattern is ever guaranteed to stay the same, I cannot find a case right now where the banks don't have more earning capacity in front of them.  I believe we're coming into an opportunity to buy on panic.  Finally, that leads me to Honeywell, which was down 6% on the week.  This is pretty simple to explain because this has everything to do with rising rates and a stronger US Dollar and the impact that has to global companies to increase earnings.  Honeywell has consistently been a top industrial performer and I feel this is a situation where the stock is going to be getting oversold due to the group it is in.

So all of that sets us up for the week ahead.  The FOMC meetings on Tuesday and Wednesday mean everything for the direction of the overall markets - it's that overbearing right now.  That said, we also have an analyst meeting for Honeywell, where the company will highlight their plans and guidance for 2016.  This environment isn't ideal for this kind of company, however, that's pretty much been the case for the last 5 years.  What we learn from this will be a great guidepost to how to view the macro situation over the next 12 months.  Combining this with what we learned this week from Home Depot should help give us something to build a plan of our own off of.  In summary, watch the Fed as they will help shape how the market reacts, but understand we're not in a very positive market situation right now and having cash to put to work later is likely a good strategy.  Leverage the information some reliable, key companies provide to help provide your overall picture so you can set a plan to follow as you prepare to close 2015 and go into 2016.


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, 51.11) - 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 went rather negative with prices going through the 200 and 50 moving averages.  The first line of support is around the $50 area and is a key point I'm watching and looking to purchase at/under.  The high yield situation is something to watch, though, as will a reaction from a Fed decision.  In the end, we have an extremely strong base around $47 and there are a lot more long-term positives for the banking sector than negatives.  Citi is 11% of my portfolio.

On Semiconductor (ON, 9.90) - 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.  Items to watch closely are auto sales, and China's economic indicators.  Third quarter results talked about a slower than expected automotive segment, which is worrisome, given how this is 31% of the company's revenues, and China's slowdown was a problem - though it may have flattened out now.  Add to this impacts of a higher interest rate and we are seeing some additional risk.  The stock has gone into it's positive cycle in the charts, where we tend to see it make about 3 or 4 big jumps straight up with a few minor pullbacks in between.  It's performed its first jump, however, it's pulled back all the way and then some given the overall market conditions combined with news that a Chinese company has submitted a higher offer for Fairchild Semiconductor.  While the acquisition of Fairchild appeared to be a good move, I'll become more concerned if this enters into a bidding war.  The stock is showing signs of being oversold in the short-term, but I still see long term value hidden in this stock.  My 2015 guidance was lowered to $0.84 in 2015 due to macro pressures and supply chain resets and my 2016 guidance is at $0.94.  I believe a fair multiple is 14 times earnings, given the current 12% EPS growth rate, though if we do see a turn in macro trends, the multiple could expand to 16.  My 2016 target is $13.25 (not including room for the aforementioned multiple expansion).  On Semiconductor is 8% of my portfolio.

Cedar Fair (FUN, 52.22) - The focus of this stock is a sense of safety as the stock features a good dividend as well as decent growth that coincides well with the strengthening US economy.  The time of year that the company can make money is basically at a close, so I don't expect a lot of news that is likely to impact the stock for the next 6 months.  Just don't let that lull you into a sense of complacency either.  The company is spending fairly heavily to achieve growth, but the results have been positive.  This will need to be watched.  The charts have turned negative, however, there are many indicators showing signs that this stock is reaching a point where it has bounced consistently in the last 5 years (RSI, Ultimate Oscillator, Williams).  However, those last 5 years did not have a rate increase and that is worth noting.  Right now, the stock needs to hold $51.25, otherwise it could go down to the $47-$48 range.  Considering this is an MLP, the stock has held up well, despite how MLPs are getting hammered.  If we don't get a one and done message from the Fed, there could be more pain before this gets better, though.  I am looking for earnings growth to get better again, but for now am playing a conservative $2.80 estimate for 2016.  Allowing for a continued multiple of 24, I have my 2016 price target set at $67.   Cedar Fair is 10.4% of my portfolio.

Twos:
Honeywell (HON, 98.23) - 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.  After having recovered from the fall selloff, the stock has started to fall backwards again on a strengthening US Dollar.  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 and an increase of rates in the US won't help with currency translation.  It's that inability for further earnings growth that appears to be the headwind for now.  The charts went negative since last I spoke, though I see opportunities for bounces, if not turn a turn around.  The next spot down to watch is in the $94-$96 range.  If it can bounce here we could be looking at a turn around.  If not, the next price down is $90.  Medium term slow stochastics are oversold, but the MACD doesn't look ready to turn yet.  Long-term charts are showing that this is a healthy pullback, but we need to watch the MACD there as well.  Guidance is now at $6.10 for 2015.  They provide 2016 guidance Wednesday and this could be very telling for the stock.  Until then, I'm guessing another year of 10% earnings growth, putting my 2016 earnings estimate at $6.72.  I'm lowering my multiple from 18 to 17 due to pressures of the US Dollar and US Interest rates (should they go up).  That puts my 2016 target at $114.25, though I believe a favorable market can push things up to $120.  Downside risk I'd say is around $97.  HON is 15.8% of my portfolio.

Isis Pharmaceuticals (53.95) -  Again we get to see what kind of volatility a true speculative stock can have.  Were I not looking to increase my position, I would hope that I would've seen the signs it was time to step away until we reached better buying prices again.  There are now 8 drugs in phase 3 with many many others coming up behind.  All phase 3 studies are expected to be completed in 18 months or less, lining them up for approval and commercialization.  With as strongly positive (and they were very strong) as these phase 2 studies have resulted, the technologies Isis use as well as the results they're driving is appearing to be exceptionally positive for long term indications and results.  That said, I'm also seeing questions about negative side effects that have been found in mice and baboons being something that makes this technology go bust.  It's a risk to watch for, but so far does not appear to be something that will crush the company any time soon.  I still feel this is going to be a very good stock to hold for the long-term due to the therapies they produce in the future years.  The future value of those productions do come into question a little right now due to any rate hikes that may come.  I see more downside risk to the stock if we don't get a one and done kind of message and am looking for prices below $50 before I want to add to my position.  The technicals have fallen apart with no real sign of a turn at this point.  I see potential floors at $53, $50, and about $45.  I'm have a $70 target for 2016, noting that they may not have as much in revenues as this year, due to the $90M deal with Bayer we experienced as a tough compare, and there will be a lot more expenses going into getting those phase 3 studies completed.  Isis Pharmaceuticals is 8.7% of my portfolio.

Pepsico (PEP, 97.98) - 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, which we're clearly in while the markets digest our likely new environment.  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.  This isn't to say that the company is bad, just that it won't be able to grow as fast as other areas, and people seek growth.  Before that happens, the company will likely exceed expectations due to lower input costs (driven by lower oil) - especially if rates aren't expected to continue to grow a lot.  Just keep in mind it usually takes 6 months to see the impacts.  For now, I still allow a 22 multiple on the stock with my guidance for 2015 to be $4.54 and $4.86 for 2016.  This puts my 2016 target at about $107.  The stock has started to react in a way I would expect.  We're reaching the $96.50 support of the 200 day moving average and will have to see how that holds.  At this point, I see downside risk of $4-$5, while upside potential is about $6.  2015 could've been a major consolidation in preparation of another move higher, but it's way too hard for me to tell how accurate that might be.  PEP is 10.5% of my portfolio.

Threes:
Home Depot (HD, 130.44) - 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, with salary growth in the economy, 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.  That said, if rates increase rapidly, I would expect for a more rapid negative impact to the stock, as it's purpose is to focus on future earnings.  The stock has now hit my 2015 target of $130 and I have just set a new 2016 estimate for EPS of $6.16 and a price target of $148.  As expected, the stock has been pulling back, with help from the weak overall market.  That said, it's been one of the best performers over the last two weeks despite that pullback.  Long-term trends show the stock taking a breather from overbought levels, but both medium and long term indicators seem to say this pullback is quickly reaching a "too far, too fast" point, indicating we'll likely bounce or flatten soon.  The investor conference has completed and I need more time to review it, though I can say the long-term plan didn't seem to have much impact on the stock's behvior.  The Fed decision and how the stock reacts is the factor that remains.  Since this stock is up almost 25% on the year, it's possible the stock will close the year strong as funds try to bolster their portfolios with winners.  People's views on housing and retail in 2016 will determine if this stock starts to fall again at the start of 2016, or if it stays strong.  HD is 14% of my portfolio.