Sunday, January 10, 2016

Weekly Portfolio Summary

Happ...  Ummm New Year!!!  Wait, that's not good either.  How about "Here's your ass, I think you lost it on Wall Street back there?"  Yep, that's kind of how the week went.  Not that I'm totally surprised.  I did expect the year to start on a somber note, after all.  However, few were ready for this kind of response and I can't say I was one of them.  Oh well, I did enter the week with a decent cash position, so that's somewhat helpful.  

Some of that cash position was put to work on Friday, as Citigroup fell to prices I wasn't sure I'd see anymore, and then kept falling.  All much to my displeasure.  It's hard to believe there's a bank stock, well capitalized and protected from the financial burdens of the Great Recession, now trading at lows not seen since early 2014, much less back when we were wondering if the Fed would raise rates.  It's also trading about 30% below tangible book value, which is why I felt I had to make my move.  If now feels like there's some more down side, but with earnings coming up, will that continue, or will we finally find a reason to be more positive?

Back to the overall markets.  Everything took a pretty stiff beating this week, oil down 10%, the S&P 500 down 4.51%, and my portfolio taking a 5.43% drubbing.  Key themes were tensions between Iran and Saudi Arabia, a nuclear bomb test in North Korea, and a Chinese stock market that too many are relying on at a time it's faltering under it's own inexperience and a shrinking economy. The overall sentiment of the market is that it just wants to go down.  On Friday, the S&P 500 closed down 1.08% - almost closing on the lows for the day.  While the day wasn't particularly brutal, compared to Thursday, it certainly shows signs that Monday isn't about to fair well - at least at the start.  I feel like we're setting up for that big crash, that big capitulation.  I have no experience in the market and I doubt anyone can really call such a thing without being purely lucky though.  In the end, there are values out there and you have to pick away to find them and step into them very slowly at times like this. 

There is one thing that could either help the market, or send it reeling even further.  That thing is earnings.  Fourth quarter reviews kick off on Monday with Alcoaa - not a company I have in my portfolio, but one I watch carefully as an indicator and as I've had some interest in it.  Things start getting interesting come Thursday, when JP Morgan announces their results for the year.  This will be important in setting the trend for banks, as it is often considered best in breed of the banking sector.  Their results will impact the sector, and then on Friday Citigroup follows up, as does Wells Fargo.  We hear all of these results and we'll likely have a really good feel for whether my purchase of stock Friday was ill-advised or not.

So it's a new year, new beginning, new experiences, and clearly we're starting on a difficult note.  I said historically that the market can be tough to navigate the first year of a rate hike and so far, I seem to be getting proven right.  I do believe this will get better again, though, so hang in there.  Be prepared for some pain, make sure you have cash to work with, and let's see what we can do.


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, 46.13) - 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. Despite the rate hike, bonds haven't been getting stronger and there is little confidence the banks earnings power will increase at this time.  As such, they've taken a beating over the last few weeks.  In all honesty, there is little in the charts that look good right here either.  Citi has broken all long-term trends to the down side and the only saving grace I can see right now is a market reaching toward an oversold point and the fact that earnings are coming this next week.  We will have to key in on earnings of Citi and the sector to see if I have too much skin in the game for the short term.  I still think there is multi-year upside for the company, though.  My price target remains at the $60.50 mark.  Citi is 15.2% of my portfolio.

On Semiconductor (ON, 8.53) - Selected for its strength in getting the most out of power, key components in the automotive space, and potential industrial growth due to its cameras and sensors, this stock has taken a beating as of late.  While much of this is related to China market correlations, I do see some risks worth bringing a little more caution to my outlook - particularly in relation to automotive peaking and China being about 31% of business.  In a recent post, I lowered my 2016 guidance to $0.92 and my earnings multiple to 12x earnings due to potentially slowing growth in some key areas.  The company won't announce fourth quarter earnings until mid-February, most likely, so we won't have more to go off of until then.  Technical indicators are bearish, but appear to be reaching what I believe are limits.  My downside risk is about $8 while my price target is currently at $11.  ON is 7% of my portfolio.

Cedar Fair (FUN, 53.53) - 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.  Fortunately, this stock has shown to help provide some capital preservation in the rough week we had.  The company is essentially off of business until late spring, so outside of earnings, I don't anticipate much news to drive the stock.  Just don't let that lull you into a sense of complacency either.  Currently, the capital spend is fairly heavy to achieve growth, but the results have been positive.  This will need to be watched.  The charts continue their negativity, and there is still room for more downside.  If this stock were to push to its August 24 lows (a point many people on TV are saying is possible), the stock could get below $51 (Low was $50.92).  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.  The favorable message from the Fed makes the income portion of this stock still strongly favorable with its 5.8% yield, so long the principle isn't at risk.  I am looking for earnings growth to get better again, but for now am playing a conservative $2.80 estimate for 2016.  With interest rates rising, I want to get more conservative with my multiple, so I'm going to lower it to 22 times earnings, putting my price target at $62.  I look to buy more below $52.50  Cedar Fair is 11.1% of my portfolio.

Twos:
Honeywell (HON, 98.43) - 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 problem is the cycle at least feels less favorable right now.  I have stated in my annual review that I believe that automotive is about to stall out in sales.  Honeywell has had a bit of success in this space with their turbo chargers and that's likely to get weaker.  However, they are diversified and I expect other later cycle segments to improve when we see more proof of economic expansion. My estimate for 2016 is $6.55 with a 17 multiple.  That puts my 2016 target at $111, though I believe a favorable market can push things up to $120.  I'm hoping the stock can hold around $97, however, the Aug 24 low is $91.57 and that is certainly in play.  Technical indicators are bearish, though a couple have crossed into oversold territory.  Given the market, I would expect maybe a bounce and then move lower again, until that overall sentiment changes.  HON is 16.2% of my portfolio.

Ionis Pharmaceuticals (IONS, 56.88) -  A new year has brought a significant change in how this stock has been performing.  As we closed out the year, the stock was taking off.  In the first week of 2016, the stock fell 8.15%.  While much of this is driven by market sentiment, such that people started raising cash buy selling stocks that had moved, a new risk has surfaced as well.  As the year opened, the biotech sector currently has the most companies looking to do an IPO, about 20, if I recall.  If these really happen, we'll see quite the stress on existing companies as big money managers usually sell off holdings they have to raise cash to get a "big win" out of an IPO.  This is what's known as an oversupply of stock.  Every time this happens, biotech takes a 20% hit, minimally, oftentimes more in the 40%-50% range (especially on an individual stock basis).  Since I'm not fully positioned, thic can create buying opportunities.  This and the speed of rate hikes will be things to watch for this  year.  The charts aren't ugly.  The stock broke though its 200 day moving average and then popped right back above, trying to maintain it.  The stock has also reached oversold territory in a couple spots.  On a difficult down day, IONS was up over a percent.  It's possible there's some underlying strength here, but I'm not interested in buying more until it's under $50 again.  Coincidentally, the August 24 low was in the middle to lower $40s, and is a potential spot to be watching for.  I 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.  Ionis Pharmaceuticals is 9.3% of my portfolio.

Pepsico (PEP, 97.21) - 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 new environment.  I see two benefits for this company right now.  First, we're nearing the point where the stronger dollar won't be the impact on earnings that it was because strength has leveled off.  This will provided better year over year comparisons.  The second thing is the benefits of lower oil and how much that will increase the company's margins.  Longer term, multiple rate hikes do pose a threat in how favorable the stock is in the overall market, but worrying about that now is getting a little ahead of myself, I believe.  I believe I can still get away with an earnings multiple of 22 times earnings, with my guidance for 2016 $4.86.  This puts my target at about $107.  Technically, the stock has been relatively flat for the last year.  There are lots of signs of consolidation and resting before what is typically a new leg higher.  Right now, the 200 day moving average is holding as a strong floor for the stock (around $97), but if it breaks, we still have some strong support around $94, with an August 24 lower risk of $90 - though I don't see this particular stock testing those lows.  PEP is 10.7% of my portfolio.

Home Depot (HD, 123.90) - 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 early on 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.  I have a 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, and has started to take a little bit of a beating.  The charts are negative now, however we're approaching overbought levels, as 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 200 day moving average appears to be an extremely strong floor of support, but that means we can still go down about $5 from here.  HD is 13.6% of my portfolio.