Morning News: July 9, 2018
Posted by Eddy Elfenbein on July 9th, 2018 at 7:08 am

Legal Marijuana Is Coming to Canada. Investors Catch the Buzz.

Trump’s And China’s Tariffs Could Do Permanent Damage To Soybean Farmers

U.S. Exporters Will Be a Surprise Loser From Tariff Fight

Ford: Potential Impact From Lower Global Auto Tariffs

Leandra English Clocks Out

Xiaomi, a Chinese Technology Darling, Slumps After I.P.O.

Tencent’s U.S. Music IPO Reflects More Upbeat Recording Industry

China’s Cosco Gets U.S. Security Clearance to Purchase Shipping Rival

HBO Must Get Bigger and Broader, Says Its New Overseer

Dreams of Goldman Doing Big Takeover Meet Stress Test’s Reality

Inside China’s Dystopian Dreams: A.I., Shame and Lots of Cameras

Takeaway From the New Billionaires Ranking: Zuckerberg and Bezos Don’t Give Away Enough Money

Jeff Miller: Inflation on the Horizon?

Roger Nusbaum: Sharpening The Pencil On Factor Funds

Michael Batnick: These Are the Goods

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June NFP = +213K
Posted by Eddy Elfenbein on July 6th, 2018 at 12:03 pm

The June jobs report is out, and the numbers are pretty good. The U.S. economy created 213,000 net new jobs last month.

The unemployment rate ticked up from 3.8% to 4.0%. Actually, I dug into the decimals and the increase was closer to 0.3%. That’s the largest monthly increase in the unemployment rate since November 2010.

Part of the effect is more workers joining the labor pool. That can create the oxymoron of more jobs leading to a higher unemployment rate. After nine years of economic expansion, the jobs-to-population ratio is still lower than at any point from 1987 to 2008.

Here’s the growth of NFP along with a trend line that increases by 201,000 each month. They seem quite similar.

Morningstar on Check Point
Posted by Eddy Elfenbein on July 6th, 2018 at 9:58 am

From Morningstar:

Check Out Check Point

Check Point Software Technologies (CHKP), an Israel-based network security incumbent, has adapted its product portfolio in recent years to strategically position itself as enterprises migrate toward hybrid cloud environments. Its expertise in software-defined security environments, relative to peers’ reliance on physical infrastructure, should result in margin expansion.

As mobile and cloud become more important for customers, the potential vectors of attack become increasingly serpentine, which we think could expand Check Point’s market opportunity. Check Point excels because of its large-enterprise-focused model and a broad product portfolio, yielding high renewal rates and a growing recurring revenue base. Further, we think the company’s ability to churn out new offerings allows it to meet the rapidly evolving technological needs of its client base. Check Point continues to earn exemplary marks in its threat detection rates from independent reviews. We estimate that nearly 70% of the company’s revenue is recurring, and we see switching costs from its mission-critical security offerings for sprawling enterprise clients whose demands necessitate a vendor with ubiquitous solutions like Check Point. The company’s focus on software blade subscriptions (suites of integrable software products that can be selected or deselected based on the client’s preference) sold into the enterprise allows Check Point to extract respectable pricing from clients and post outstanding gross and operating margins.

Check Point’s Infinity product represents the next iteration of its management console. We think clients are in a consolidation phase as they limit security subscriptions to a single vendor, which should benefit Check Point based on its reputation and expansive product portfolio.

Check Point is a market leader, but secular trends such as the growth in cloud computing, the Internet of Things, and artificial intelligence remain on the periphery. We see these themes as potential avenues for disruption, but because each spawns added threats to Check Point’s client base, they create additional vectors for Check Point to secure.

Robust Switching Costs Result in Narrow Moat
We believe that the mountainous undertaking of deploying a large enterprise network firewall, coupled with the macro trend of cybersecurity product consolidation, benefits Check Point’s relatively diverse ecosystem of available offerings and creates a robust degree of switching costs, resulting in a narrow economic moat. Typically, the rapidly evolving nature of the cybersecurity industry has made it difficult to construct a moat, particularly as malicious actors have shown a propensity to outpace the ability of security providers to detect, protect against, and respond to new malevolent threats. However, we believe Check Point is in a league of its own because of its operational reputation, the fairly high attach rate of its core firewall business, and its comprehensive suite of integrable software subscriptions. These factors yield unparalleled margins and returns on invested capital among the security vendors we cover. Check Point’s many services, which include supplying firewall, endpoint, and mobile protection, among many others, become embedded in the IT infrastructure of large organizations. We believe any potential benefit of switching to a competitor would pale in comparison with the costs of implementation and training required when deploying a new solution, not to mention the risks of a potential breach allowed by technology from a less reputable vendor.

Check Point originally established itself as a pre-eminent supplier of network firewall technology. A company’s IT security teams would install a firewall to limit the access into internal IT environments. Check Point was well positioned to build share in large enterprises thanks to its long record of reliability, innovation, and an international presence. We believe firewalls benefit from a multiyear refresh life cycle. Recently, the industry has undergone a metamorphosis as network security has become increasingly complex, with organizations moving away from the data center. Software as a service, endpoint protection, mobile, and the hybrid cloud have all made the IT environments increasingly byzantine. As Check Point has built subscription-based software offerings to meet the protection needs of its customers across each of these potential penetration vectors, switching costs have become entrenched.

Check Point offers a plethora of solutions, including small and midsize and enterprise firewalls, endpoint protection, mobile security, malware protection, advanced threat protection for public, private, and mobile cloud environments. We see this as a more complete solution set than certain rivals have. We conclude that with each subsequent product or subscription a customer purchases from Check Point, the stickier the relationship becomes. Many current clients began using Check Point’s firewall product and added a software blade product as their businesses grew. Given the Internet of Things, whereupon a customer’s light, lock, or thermostat may eventually need protection at the enterprise level, we believe complexity will only increase.

We believe there is evidence of product consolidation, with clients now wanting all their applications managed in one place, by a single vendor. In the past, the cybersecurity market was characterized by companies that specialized in one niche. Today, however, for many businesses it no longer makes sense to have separate cybersecurity vendors for each area. Thus, as enterprises and small and midsize businesses consolidate under one platform, we believe Check Point will benefit as it arguably has the most comprehensive suite of subscription-based offerings. Threats to its customers can be managed under one console. Check Point anticipated this trend, as it expanded its software blade offerings to cater to a multitude of clients, allowing customers to mix and match subscriptions to fit their needs as their respective businesses scale. We believe the recently launched Infinity product cements this trend; as clients use several of Check Point’s offerings in this single console, switching costs increase.

Large and New Competitors a Concern
One concern for Check Point remains the secular shift away from the data center to public cloud infrastructure vendors such as Amazon (AMZN) and Microsoft (MSFT). While AWS and Azure provide basic security features, we believe they lack the cohesive offerings and functionality that incumbent firewall vendors like Check Point can provide, in addition to what security-conscious enterprises have historically shown they have needed. Amazon, Microsoft, and Google (GOOG) could conceivably build out their respective software offerings, which could be supported by their scale and marketing power as enterprises migrate to the cloud.

Newer voracious competitors such as Palo Alto Networks (PANW) and Fortinet (FTNT) have adopted an aggressive go-to-market strategy, with Palo Alto spending 50% of its revenue on sales and marketing (compared with Check Point’s 23% in 2017). These competitors have attempted to disrupt incumbents such as Check Point, Cisco (CSCO), and Juniper Networks (JNPR). The firewall space was disrupted by Palo Alto’s launch of its next-generation firewall, demonstrating that a competitor can take share with an innovative offering. We can’t rule out the threat of other innovative startups over time. Check Point may need to respond to this intense competition with renewed investment in sales and marketing, potentially weighing on margins. Finally, we think Check Point has been marred by execution issues with regard to relaying the breadth and depth of its product portfolio to clients and shedding its reputation as an “old world” firewall vendor.

Check Point is in exemplary financial health. It now has $4 billion in cash and marketable securities on its balance sheet. We expect the company to perennially buy back its own stock. Check Point has historically been opportunistic in its acquisitions, only buying businesses that it believed to be well below fair value or in instances where management believed it could not build the product internally. Given the cash balance and decelerating growth, we would be amenable to bolt-on acquisitions to move the company into high-growth areas.

CWS Market Review – July 6, 2018
Posted by Eddy Elfenbein on July 6th, 2018 at 7:08 am

“Economics is extremely useful as a form of employment for economists.”
– John Kenneth Galbraith

I’ll be honest: this is a slow time for the stock market. Most of the big-time money guys are chilling in the Hamptons. Trading volume has been dead. Plus, this week the stock market closed early on Tuesday and was shut all day on Wednesday.

Yep, it’s summertime on Wall Street. Soon, however, things will get a lot more interesting. Second-quarter earnings season is set to begin in a few days. Most of our Buy List earnings reports will start coming out later this month. Of the 25 stocks on our Buy List, 21 will report earnings over the next few weeks.

In this week’s issue of CWS Market Review, I want to review some of the recent economic news. The good news is that the economy is behaving pretty well. What concerns me, however, is that the Trade War is quickly moving from rhetoric to reality. This could be trouble for the economy. I’m not the only one concerned. So is the Federal Reserve. Later on, I’ll update you on some of our Buy List stocks. I’m pleased to report that our Buy List has been beating the market quite soundly over the past few weeks. Before I get to that, though, let’s focus on where the economy is headed.

The Economy Is Improving, but a Trade War Could Spoil It

The jobs report for June will come out later today. I’ll have a chance to address it later, but we do know that the report for May was very good. Unemployment fell to its lowest level since the 1960s. The jobless rate for women hasn’t been this low in 65 years. The consensus on Wall Street is for the economy to have created 190,000 net new jobs in June.

Earlier this week, we got a preview of the jobs report with the ADP private payrolls report. According to ADP, the economy added 177,00 new jobs last month. In the last reading, initial unemployment claims fell to 231,000. That’s quite strong. We’re not far from the best report since 1969.

While the labor market looks better, the overall economy is growing, but not very fast. This could change soon. We won’t get the first estimate of Q2 GDP until the end of this month, but expectations are high. Q1 GDP came in at 2.0% (that’s annualized and adjusted for inflation). The economy has pretty much stuck to 2% for the last few years. Policy makers couldn’t have done a better job if they had tried, but the Atlanta Fed now estimates that the economy grew by 4.1% in the second quarter. That would be amazing if it turned out to be right. The New York Fed’s model is less optimistic, predicting 2.8% growth for Q2.

What about earnings? There the outlook is quite good. Wall Street expects Q2 earnings of $38.65 per share for the S&P 500. (That’s the index-adjusted number. Every point in the S&P 500 represents about $8.5 billion.) If that forecast is correct, it would be an all-time record. It would also be a healthy 27% jump over last year’s Q2. Bear in mind that these forecasts are usually a bit low.

What’s notable is that the Q2 earnings forecasts have been increasing. Typically, the forecasts start out high and are pared back until they’re slightly under the actual results. (That’s right. On Wall Street, it’s expected that you’ll beat expectations.) This time, expectations are much higher thanks to tax reform. At the start of the year, the Street had been expecting Q2 earnings of $35.95 per share. The current estimate is already 7.5% above that.

It’s not just earnings. We’ve also seen good news on the dividend front. During Q2, dividends for the S&P 500 rose by 8.1% over last year. This year, the S&P 500 will probably pay out $53 per share in dividends. That works out to a yield of just under 2%. On a side note, the S&P 500 has tracked a 2% dividend yield fairly closely for 15 years. The only exception was during the financial crisis. After that blew over, we went right back to 2%. A lot of people are paid a lot of money to value the stock market. Yet simple arithmetic probably would have done a better job.

We’re also concerned by the direction of Fed policy. The central bank has already raised interest rates twice this year. Two more hikes are probably coming. The Fed seems very likely to raise rates again in late September and possibly once more just before Christmas. Soon, this will put a squeeze on the economy.

On Thursday, the Fed released the minutes from its last meeting. This is the one where they decided to lift rates. The FOMC members were impressed by the strength of the economy. However, they said they were concerned over issues related to trade. “Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending.”

I share this concern. We’ve already seen that Harley-Davidson is looking to shift some production outside of the United States. Starting on July 6, the U.S. government will impose a 25% tariff on Chinese goods shipped to the U.S. Not surprisingly, China has said they’ll hit back. I don’t think anyone really “wins” a trade war. The Chinese stock market has been getting crushed recently. Honestly, these opening shots in the trade war probably won’t hurt the U.S. economy very much. The problem is how far this escalates. Let’s remember that China holds a cool $1.2 trillion in U.S. Treasuries, so it’s wise not to anger them too much.

Speaking of the Treasury bond market, the spread between the two- and ten-year Treasuries is now down to 29 basis points. One more hike could push it negative. The 2/10 spread hasn’t been negative in more than 11 years. This isn’t something to worry about now, but it could become a major theme in 2019. I talk about the 2/10 spread a lot, but I want to caution you not to think of it as a panic button. Since 1976, whenever the 2/10 spread has been between 0% and 0.50%, the stock market has gained an average of 13% the following year.

The proper outlook for us as investors isn’t one of fear but of prudence. This is related to a theme I’ve talked about recently, the market’s more defensive nature. Since June 6, the S&P 500 Low Vol Index is up 1.91% while the S&P 500 High Beta Index is down 4.42%. But before then, the market was all about High Beta. If we measure starting in early 2016, High Beta had a lead of more than 50%. That’s why the defensive market can last for a while.

It’s precisely this turn towards defensiveness that connects the themes of a tightening Fed and a looming trade war. Fortunately for us, the defensiveness has been a net position for our Buy List.

Buy List Updates

I want to be careful not to overstate this, but our Buy List has been acting much better than the overall market recently. As we know, the market can be very fickle, especially in the short term. This is why we’re so focused on the long term. Still, I want to highlight some of our improved performance.

Since June 1, our Buy List is up by 3.23% (not including dividends) while the S&P 500 is up a scant 0.07%. The Buy List is now up 2.82% for the year. This is the highest level for the Buy List since mid-March. Let’s look at some individual names.

Shares of Church & Dwight (CHD) touched a new 52-week high on Thursday. The stock has rallied impressively in the last month. I think of CHD as a classic defensive stock because a recession won’t have much of an impact on their household products.

Three months ago, CHD reported Q1 earnings of 63 cents per share. That was two cents better than estimates. The company also reaffirmed full-year guidance of $2.24 to $2.28 per share. CHD increased its expected sales growth to 9%. For Q2, they expect earnings of 46 cents per share. This week, I’m lifting my Buy Below on Church & Dwight to $57 per share.

Becton, Dickinson (BDX) is quietly turning into a nice winner for us this year. Through Thursday, shares of BDX are up 13.1%. With the last earnings report, Becton raised its full-year guidance by five cents per share at both ends. The company sees 2018 coming in between $10.90 and $11.05 per share. I’m raising our Buy Below to $250 per share.

Cerner (CERN) was our big disappointment last earnings season, as the company lowered guidance. At one point, CERN got down to $52 per share. Lately, however, the stock has acted much better. On Thursday, the shares closed at a three-month high. I hope to see improvement in the next earnings report. This week, I’m raising our Buy Below on CERN to $65 per share.

Sherwin-Williams (SHW) is another stock that’s turned a corner for us. The company started off the year on the wrong foot. Two months ago, SHW got down to $362 per share. The company now expects full-year EPS of $18.35 to $18.95. On Thursday, it broke $410. I’m lifting our Buy Below on SHW to $414 per share.

That’s all for now. We’ll start getting some early earnings reports next week. There’s not much in the way of economic reports although I’ll be on the lookout for Tuesday’s Small Business Optimism report. Also, the CPI report will come out on Thursday. So far, inflation has been fairly well contained. Typically, when unemployment gets this low, pricing pressures increase. We haven’t seen much of that yet. Let’s hope it continues. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Syndication Partners

I’ve teamed up with Investors Alley to feature some of their content. I think they have really good stuff. Check it out!

3 High Yield Stocks for Bottom Fishers

Dividend investors face an extra challenge of timing stock purchases. No dividends will be earned until shares are bought. There are several techniques on when to buy that I use and recommend to investors who follow my Dividend Hunter system. For more aggressive income stock investors, jumping into out-of-favor high yield stocks can produce excellent returns.

In my previous article, I discussed three stocks that have done well so far in 2018 (all up over 20% YTD) and which I expect to continue to post gains for the rest of the year. Buying stocks in an uptrend is the safer strategy. If the moves are driven by underlying fundamentals, you can expect the trend to continue if the fundamentals remain positive. The trade off is that rising stocks have been discovered, and usually carry lower yields. The three that I highlighted on Monday have an average current yield of 5.4%.

For investors searching for higher yields, there is the challenge in analyzing whether dividends are secure or in danger of reduction or elimination. These are often stocks that have dropped significantly in value, and most investors get scared or nervous about jumping on shares where the price has recently gone through a steep decline. Bottom fishing for high-yield stocks is a more aggressive strategy. The investor must be able to determine if the company can continue to pay dividends, and there is a need for patience. It can take months or even years for a stock to recover to pre-crash levels. The good part is that these stocks can pay double-digit yields, which is a nice wage to earn while you wait. Here are three high yield stocks that illustrate the strategy.

What Does This Huge Options Trade Mean For Oil?

When I write about large options block trades, it’s generally for one of two reasons. First, a lot of smart money is active in the options market. If a very big (i.e. capital intensive) trade occurs with options, it can often be a signal that there’s going to be action in the underlying asset.

Second, sometimes I just find an options trade very interesting and worth discussing. It could be because it’s an unusual trade or is an original way to handle risk management. Of course there are times when I write about a large trade because it’s interesting and may provide meaningful insight into the underlying asset.

A trade last week I came across meets both of those criteria. More specifically, I noticed a massive covered call trade in United States Oil (NYSE: USO).

USO is the most active oil ETF. While it has its flaws, trading USO is probably the easiest way for the average trader/investor to trade oil. Beyond trading oil futures themselves, USO is likely the most direct way to trade oil as well.

Covered calls can be intriguing to analyze because they can be successful in many different types of market conditions. However, one of the few situations which are “bad” for covered calls are when the underlying asset price blows through the short call strike. (It’s not entirely bad since you are still making money, but you could have made more money by just being long the asset.)

So, is this covered call trade suggesting there’s a limit on how far oil prices are going to rise? Let’s take a closer look at the position.

Morning News: July 6, 2018
Posted by Eddy Elfenbein on July 6th, 2018 at 4:45 am

Singapore Announces Surprise Property Curbs to Cool Market

Trade War Erupts On No. 1 U.S. Farm Export to China

Trump Says He’s a Free-Trader at Heart. He Isn’t Acting Like It.

Fed: Letting Inflation Run Too Hot Could Lead to ‘A Significant Economic Downturn’

Trump Orders OPEC to Tame Gas Prices, But Analysts Blame His Iran Sanctions For Rising Fuel Costs

Gold Ends Higher for a 2nd Session, Slips in Electronic Trade After Fed Minutes

FAA Says It Won’t Regulate Seat Size Or Legroom Despite Consumer Safety Concerns

David Einhorn’s ‘Unbelievable’ Performance

Vanguard’s Not the Only Threat to Active Managers

Hitting Cancer Early: AstraZeneca’s Bid to Outmaneuver Rivals

Credit Suisse Fined $77 Million Over ‘Relationship Hires’ in Asia

Another 9,000 Barrels of Kentucky Bourbon Lost in Second Warehouse Collapse

Jeff Carter: Contrarians Make Money, Lose Spectacularly

Blue Harbinger: Are The Bots Winning?

Ben Carlson: Some Considerations For Investing Globally

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The Summer Rally
Posted by Eddy Elfenbein on July 5th, 2018 at 10:03 am

Historically, this is a good time of year for the stock market. I crunched all the numbers for the Dow going back toward its beginning in 1896. I found that the Dow has gained an average of 3.64% from June 27 to September 6.

That’s nearly half the average yearly gain in less than one-fifth of the year.

Morning News: July 5, 2018
Posted by Eddy Elfenbein on July 5th, 2018 at 7:06 am

Saudi Arabia Promised More Oil. So Why Are Prices Rising?

Here’s Where China Stands as Tariff Hour Nears

Why Made in China 2025 Will Succeed, Despite Trump

Beware China Equity Bulls

Philippine Policy Maker Defends Rate Action as Peso Slumps

Goldman Says Buy Commodities as Clock Ticks Toward Trade War

Martin Sorrell Seeks to Raise Up to $1.3 Billion for New Ad Venture

The ETF Portfolio For Millennials

Mobike to Refund User Deposits in Effort to Win Market Share

What’s Powering Fiat Chrysler Automobiles? Jeeps, Rams — and Muscle Cars

Ford Is Riding Its Trucks and Big SUVs to Sales Gains as Smaller Models Lag

GE’s Latin America CEO Arrested in Brazil Healthcare Fraud Probe

Howard Lindzon: Who Has The Best Business Model?

Joshua Brown: The Broker Who Saved America

Ben Carlson: A Short History of Foreign Stock Market Corrections

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Happy Fourth of July
Posted by Eddy Elfenbein on July 4th, 2018 at 8:02 am

Morning News: July 4, 2018
Posted by Eddy Elfenbein on July 4th, 2018 at 7:43 am

U.K. Services Growth Unexpectedly Jumps as Economy Picks Up

China’s Found the Perfect Patsy to Tackle U.S. Chipmakers

U.S. Auto Sales Remain Strong, but Tariffs Could Squash Momentum

U.S. Allows ZTE to Resume Some Business Activity Temporarily

AT&T is Hiking the Price of DirecTV Now, Despite Promising Lower Consumer Prices in the Time Warner Trial

Uber Is in Talks With Careem to Merge in Middle East

Facebook Is Buying A London AI Startup Called Bloomsbury

Why Dell Technologies Is A Safer Bet Than VMware At This Time

Wang Jian: China’s HNA Group Boss Dies in Provence

Why Google Cloud COO Diane Bryant Is Already Stepping Down

Barnes & Noble Fires C.E.O. Without Severance but Doesn’t Explain Why

Mining Tycoon, Once Brazil’s Richest Man, Is Sentenced to 30 Years in Prison

Nick Maggiulli: The Privilege of Knowledge

Roger Nusbaum: The Science of Blending ETFs to Create a Specific Portfolio Outcome

Michael Batnick: Animal Spirits: Black Swan Growth

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Morning News: July 3, 2018
Posted by Eddy Elfenbein on July 3rd, 2018 at 7:09 am

Oil-Importing Countries Need a Cartel to Challenge OPEC

China’s Stocks Stabilize With Yuan Amid Signs of Intervention

China to Cancel More U.S. Soy Shipments as More Tariffs Loom

U.S. Seeks to Block China Mobile’s Entry, Escalating Tension

Forget the Yield Curve. The Debt-Market Action Is in Fed Funds

Glencore Subpoenaed Over US Money Laundering Probe and Now Shares Are Crashing

Morgan Stanley, Goldman Got Help From Fed on Stress Tests

Lyft Follows Uber Into Bike-Sharing Lane, Buying Owner of CitiBike

Quartz, Atlantic Media’s Business News Start-Up, Is Sold to Japanese Firm

IPG to Acquire Acxiom Division for $2.3 Billion

When Sports Betting is Legal, the Value of Game Data Soars

Here’s How Much the Average American Taxpayer Gives to Charity — and Why It Could Fall in 2018

Ben Carlson: Sustaining Wealth is Harder Than Getting Rich

Joshua Brown: Ideologues vs Pragmatists

Michael Batnick: The Sharks Are Circling

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