Sunday, January 31, 2016

Weekly Portfolio Summary

The market turned out to have a positive week overall, as did my portfolio, though I under performed the S&P 500 yet again.  The moves, while positive, aren't exactly something that is causing any euphoria with me at this point.  We were so over sold, as a market, that this was bound to happen.  I'd even go so far as to say that the fact that the market has been going up slightly via violent upward and downward swings gives me more reason to be cautious of this move as a sign of more downward trends to come, rather than upwards.  Let's dig into this a little more.  There are a couple people that focus on very different styles of technical analysis.  I do this because I'm an amateur and I dive more into fundamentals than technicals when researching.  I've found them to be respectfully accurate (no one is accurate all the time, after all) and recently have been more right than wrong.  Oddly enough,  both of them and their different styles are indicating that this rise is nothing more than an oversold bounce and that markets are due to turn back downwards sometime next week.  While I find it interesting that both of these styles indicate the same thing, it's just as much the fact that I don't hear anyone showing technicals of how or why the market is about to go higher.

Additionally, the Fed had their monthly meeting this last week.  Results were not as positive as I was expecting.  While they did indicate that inflation is not as much a concern with oil prices down so much, they also talked about economic strength.  In reality, it's not so much about what was said, than it was about what wasn't said, though.  Nowhere in the statement did the Fed show signs of changing course from the four rate hikes they spoke of in December.  To not back off when there are numerous signs of economic weakening both locally and globally can be a little worrisome and investors wanted to hear it being taken off the table to relieve that worry.  So the game of "will they raise or won't they," will continue to go on for some time.  For now, we have earnings announcements to keep people busy.  In a couple weeks, I anticipate focus will begin to shift.

Put these previous two factors together and combine them with the items I felt need to be addressed to allow a change in market sentiment and you get a big fat goose egg.  The Fed didn't change their tune, China is still a concern, though a lesser one right now while the government is pumping funds into their stock market.  I don't have new information on Earnings guidance, but the strong dollar has clearly been a factor for many international companies.  Finally the geopolitical space is mostly quiet, but there's a slow simmer there, too, with North Korea talking about more missile tests, and the U.S. testing China over some man-made islands they are trying to take claim to.  In all, there's not a ton to get happy/excited about.  The question is whether or not most of these concerns are priced into the market.

The week ahead will be quiet for my portfolio, but should be an active week in general.  We have the OPEC situation going on where people are hoping they will cut back production in their special gathering to help boost prices, we have the January U.S. jobs report on Friday.  If that is higher than expectations, the market is likely to get crushed as this good news will be translated into Fed actions - meaning they'd be more likely to do the 4 rate increases they've been speaking to.  North Korea is talking about more missile tests again, and who knows what next to expect from China.  I hesitate to think the action in the market over the last five to seven days is enough to make me believe a bottom is in place yet.  There are not just one, but at least two technicians that I respectfully follow the writings of who have called for a chance for things to turn negative again during the coming week.  This market seems to ve been charged mostly by the technicals as well, as we've certainly sold off past reasonable marks for at least some of the industries.  Earnings guidance, not results also seem to be a major factor to the direction of the market.  The next two weeks are loaded with earnings for companies, meaning much of the forward story is yet to be told.

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 a combination of 12-18 month outlook on stock direction and market driven need for capital preservation or appreciation.  The ratings may not necessarily directly results in moves I make due to financial positioning and cost basis.


Twos:
Citigroup (C, $42.58, -1.94%) - 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.  Unfortunately, the current market conditions are fearful of banks and systemic risk, which I don't believe exists.  For Citigroup's stock to stabilize, we'll need to see oil prices stabilize (which might be starting to happen, though that is still at risk), some more clarity of the assets and risk they're holding in the oil patch, and China to stabilize (which is also possibly starting to happen, but through government propping).  It seemed the conference call created some uncertainty in these areas and is my belief to be why the stock was particularly beaten.  Despite the rate hike, bonds haven't been getting stronger and there is little confidence the banks earnings power will increase at this time.  The charts show a turn off of over sold marks, but nothing truly positive.  This looks more like short sellers taking profits right now. The $40 mark seems to be a good spot for the current floor and I can see the bounce from over sold territory taking us to around $45.  My portfolio holding went green again due to yesterday's 5%+ surge.  I still think there is multi-year upside for the company once current conditions stabilize.  I have estimated TBV to grow 5% in 2016 to a price that's a little below $63.75.  Current conditions make me believe that the best price C can get is 0.9 times TBV, though if banks become favorable again, I believe that multiple to be more like 1.4 times.  As such, my price target is currently at $57.50.  Citi is 14.1% of my portfolio.

Cedar Fair (FUN, $54.13, -1.95%) - 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 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.  Currently, the capital spend is fairly heavy to achieve growth, but the results have been positive.  This will need to be watched.  With oil down so much, it becomes more likely they would benefit from more cash in consumers' pockets.  After a brief selloff, the stock has stabilized again, going above the $52.50 mark that has been a line of support the last 6 months.  Also, even in the deepest of selloffs, the stock couldn't get below $50 again (where I was hoping to buy more). It's hard to say we found a bottom at this time, though if we do drop below $50 again, the $45 - 48  range is still strong support.  In fact, I'm starting to feel a turn back downwards is more likely.  The price of the stock has recently been surging at rates that many indicators are now at or approaching over sold areas.  The stock would have to break and hold a $54.50 - $55 point to prove me wrong. My guess is if the market creates another selloff, this stock will hold above $50.  Uncertainty with the Fed looms over the stock some, despite its strong yield.  The Fed's steady stance will continue to put some rate pressure on the stock.  I am looking for the company's 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 (5-year earnings growth estimates are 25% annually, so I'm essentially estimating the stock to an extremely cheap 0.88 PEG ratio), putting my price target at $62, but noting that it has a lot of potential in a favorable market.  I look to buy more below $50, hopefully seeing some stability or support at the same time.  Cedar Fair is 14.6% of my portfolio.

Home Depot (HD, $125.76, +102.43%) - 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 as 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, which could be impacted by the rates as well as the impacts it could have on job markets.  I have a 2016 estimate for EPS of $6.16 and a price target of $148.  The 200 day moving average continues to provide a line of support and I think it will continue to.  Given the current news we have to work with, anything below the 200 day is unreasonably oversold and potential for excellent buying opportunities, for those interested.  I do want to bear just a little warning, as if the price flattens at these rates, I do see a head and shoulders pattern forming.  As I'm way too far above my cost basis, I won't participate in more purchases.  I think the stock has shown the action necessary to indicate it has a bottom in place.  The stock can go all the way back down to $114 for a short period of time, but I believe we've reached levels that have some proven and reliable support.  Due to this, I've upgraded the stock.  HD is 14% of my portfolio.

Pepsico (PEP, $99.30, +37.35%) - 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 dollar strength has leveled off.  This will provide 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, it seems.  I believe I can still get away with an earnings multiple of 22 times, 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.  Additionally, most indicators are showing a bounce from oversold levels and it looks like we could be filling out a reverse head and shoulders pattern that started forming back in June.  That said, we're just as likely to be filling out a regular head and shoulders pattern if the stock continues to rally.  Though we did break through the 200 day moving average, we quickly recovered back above it without hitting the Aug 24 levels.  All of these are typically bullish indicators, with some potential to push to $110 in the next 6 months.  It's a battle right now, but things are looking more favorable than not.  This is a stock that is building my belief that we've reached a bottoming process.  I won't say the stock can't go a few dollars lower, however, I believe we have support overall in any further selloffs - at least until earnings are announced.on February 11.  As such, I have raised its rank.  PEP is 11% of my portfolio.

Threes:
Honeywell (HON, $103.20, +142.50%) - 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 extremely reliable in both good and bad times as it's become pretty easy to expect you'll get exactly what they say most of the time.  Fears of a deflating cycle were quite premature.  While the company's Performance Materials and Technologies businesses suffer mostly from the downfall of oil prices, it's other businesses have been strong - especially the Aerospace businesses.  Orders are up for their various airplane components, defense spending is up, and their automotive business is growing faster than the industry as they continue to grow their share in both gas and diesel turbos.  Stock prices surged after the announcement on Friday and the move was so swift and large that it's kind of thrown many of the indicators I watch off a little.  I almost expect the stock to sell off some because it moved too far too fast and people are likely to lock in some gains.  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.  Should things turn, I expect the $94-97 range to continue to hold based on these earnings results.  HON is 16.7% of my portfolio.

Fours:
Ionis Pharmaceuticals (IONS, $38.93, -32.33%) -  After a strong rebound in prices, healthcare has again taken a turn towards the unfavorable, to say the least.  The stock dropped over 14% in the last five days.  There was no real news in direct relation to the stock, but rather this was a whole sector selloff.  I believe there are two main factors to this.  The first is the U.S. Presidential race, where pretty much every candidate is berating the costs of healthcare and talking about how they intend to fight it.  As a consumer, I don't want high healthcare prices.  As a stock holder, if those prices go down, a stock's future ability to grow suffers a strong negative impact.  I think the second reason is due to the response from the Fed this last week.  While showing no indication that they intend to soften their position of four rate hikes this year, they put pressure on industries such as this, because increased interest rates make the value of future earnings smaller (the concept of Present Value and Future Value).  Both of these items create an environment of instability and uncertainty - both things that stock markets hate.  I suspect it to be an ongoing theme all the way up to November this year, unless something else changes the focus of the candidates.  Since I'm not fully positioned, this can create buying opportunities.  Technically, I reached points that I was looking/hoping to buy at previously.  However, I lack any real sense of a bottom in this stock, nor am I certain there is a bottom in the market overall.  The chart for Ionis is horrendous right now.  The stock fell back below the $40 mark again and came within eight cents of hitting the 52-week low that was set back on January 20 (this was an intraday low, not closing low.  Thus our 1 year closing low is still in September).  The good news, so far, is that the stock hasn't hit or fallen through that point, providing an opportunity for a double bottom - a positive chart indicator.  Outside of that, all technical details that I look at are pointing for the stock to go down some more.  The trend of higher lows from September continues, but is gravely in jeopardy right now.  The stock also was unable to break through the lower high trend line, as I feared last week.  This trend and the clear head and shoulders pattern forming with it is, quite frankly, scary as hell.  If the stock were to bounce again, I think it will have to rise back above $45 to break the downward trend.  On the down side, if we break through, the next weaker level of support I see is in the $33 - $36 range.  If not that, we will test the 2014 lows in the $23-$30 area (yeah, it's that bad).  I've had a $70 2016 price target for the company, however, this is based on limited abilty to calculate value of a company not generating earnings in a time when they were in favor.  Given current conditions, I have to wonder if $60 is even realistic this year (though the year is very young yet).  While I have confidence in the company's long term, the short term is under fire and if I need to raise cash, being in a losing stock that has limited potential for six months and is speculative probably isn't the right place to be in this market.  For now, I'm going to downgrade it, but I won't sell unless I really need cash.  Ionis Pharmaceuticals is 7.8% of my portfolio.

On Semiconductor (ON, $8.56, 1.02%) - While the stock has recovered a little over the last week (up 2.6%), all of the same risks I've described are still in play.  Anything tied to cell phones, an auto market that's likely peaking, stocks that have large exposure to China, numerous semiconductor earnings downfalls, including bell weather Intel - all of these represent why this stock is under such pressure.  I've called that I believe the stock can go to $8 and we reached within a few cents of that mark.  It's possible it could go much lower too.  I'm not an expert.  But given the fact that this is the time of year that stocks like this typically roar, there is very little favorable about this right now.  I might be much better served to sell now, let the market find solid ground, and then see what's going on with this company.  That said, this would be more of an action for capital preservation and cash raising than true belief that I need to get out as I've seen with other stocks.  Long term, I have a lot of faith that they can reach $12 or higher still - even with the called out risks.  But we might be at a point where we're just simply fighting too much and there are easier, better opportunities to put this cash into.  My 2016 guidance is $0.92 and I'm giving an earnings multiple of 12 due to potentially slowing growth in some key areas.  The decision on Fairchild Semiconductor was extended again, this time to February 3.  This clearly hangs over the company, but I can't tell if it's positive or negative.  Part of me wishes they'd post a $21 offer and see what happens, but I do like the discipline and willingness to lose an acquisition, of the management team, rather than putting themselves at financial risk.  Outside of that, the company won't announce fourth quarter earnings until February 8, so we won't have more to go off of until then.  I'd like to hold onto the stock until then, but the market may not allow it.  The technicals are showing some new found signs of life, though.  Of that, we see both the MACD and slow stochastics line turn into a positive cross over (albeit weak), and we see both trends of higher lows and higher highs, though this is also weak movement so far.  The NASDAQ, as a whole, has been getting more positive too.  We'll have to see how things play out this week, and what happens with earnings.  This could help determine if a bottom is in or not.  My downside risk is about $8 while my price target is currently at $11.  ON is 7.2% of my portfolio.


Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.