A Closer Look at the Tech Sector
Posted by Eddy Elfenbein on August 11th, 2017 at 6:43 pm

Jeff Reeves writes at U.S. News & World Report:

Surprising values and dividend potential. Many investors have been enamored with big names lately – Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOG, GOOGL). But “tech is a broad category” and the timing may be right to look beyond these fashionable names of the moment and think long-term, said Eddy Elfenbein, portfolio manager of the AdvisorShares Focused Equity ETF (CWS).

Elfenbein points to Microsoft Corp. (MSFT), a sleepier tech name that is currently a holding in his fund because of great management under CEO Satya Nadella, who has orchestrated “an impressive turnaround” from the Steve Ballmer era a few years back.

(…)

But it’s not unrealistic for tech to fall out of favor after a pretty long run for the sector. Elfenbein warns that it’s dangerous to assume every name in the sector has certain growth ahead of it and investors have to do their homework.

“We’re in the ninth year of a bull market, so many of the previous strategies have been played,” he says. “That leads to a premium being placed on growth.

Conversely, this is a punishing environment for companies that miss those growth expectations. He points to International Business Machines Corp. (IBM) and Qualcomm (QCOM) as examples of tech stocks that yield more than 4 percent but have actually declined year-to-date because of sluggish growth outlooks.

Inflation is Still Low
Posted by Eddy Elfenbein on August 11th, 2017 at 12:01 pm

This morning we got the CPI numbers for July, and they show that inflation is still quite low. Both the headline and core rate rose by 0.1% last month. In the last year, both headline and core are up 1.7%.

Here’s a look at the monthly seasonally-adjusted core rates going back a few years:

The decline during March was a clear outlier but the four following months haven’t seen much of an uptick.

Here’s the real Fed funds rate based off core inflation:

I think this chart says a lot. You can see that even when the Fed does nothing, it’s tightening because inflation is getting softer. In the last 11 months, real rates have gone from -2% to -0.6%.

CWS Market Review – August 11, 2017
Posted by Eddy Elfenbein on August 11th, 2017 at 7:08 am

“The only perfect hedge is a Japanese garden.” – Eugene Rotberg

On Thursday, the S&P 500 dropped by 1.45% to close at 2,438.21. This was the index’s biggest drop in nearly three months. I should restate that—this was the biggest drop by far in the last three months. Put it this way: Since May 18, Thursday’s drop was five times greater than the damage of the sixth-largest loss.

The point is that in historical terms, Thursday’s loss really ain’t that big a deal. But in terms of 2017’s volatility, Thursday was an earthquake inside a hurricane next to shark attack.

The reason behind Wall Street’s fearfulness isn’t hard to miss. Wall Street and the world are increasingly concerned by the behavior of North Korea. The United Nations Security Council voted unanimously to impose sanctions on North Korea. Bear in mind that the UNSC is rarely unified on anything. Despite Thursday’s bout of selling, defense stocks like Lockheed Martin, Northrop Grumman and Raytheon all made new 52-week highs.

In this week’s CWS Market Review, I’ll bring you up to speed on the latest happenings on Wall Street. I’ll also cover Cinemark’s reassuring earnings report. Plus, I’ll preview next week’s earnings report from Ross Stores. We also had some good news for the Buy List. Snap-on is spending $500 million to buy back shares. But first, let’s look at how Kim Jong Un has spooked the U.S. stock market.

Should We Worry About North Korea?

On Tuesday, the Dow snapped a 10-day winning streak. This streak got a lot of attention in the financial media, but I can’t say I was terribly impressed. For one thing, most of the increases were very small. In the history of the Dow, there have been 17 win streaks of 10 or more days. This last one has the smallest cumulative gain of all of them.

We also have to remember that the Dow is a price-weighted index. As a result, a company like Goldman Sachs has the second-highest weighting in the index even though it has the fifth-smallest market value. The S&P 500 is weighted by market value, and it barely budged during the Dow’s winning streak. In fact, the S&P 500 fell four times in those 10 days. It was precisely companies like Goldman Sachs and JP Morgan that helped power the Dow to its new highs.

With the recent war of words over North Korea, investors are starting to feel anxious. The South Korean economy punches above its weight in the world economy. There are several prominent Korean corporations like Samsung and Hyundai. But in the last two weeks, the South Korea ETF (EWY) has lost more than 7%.

Over the past several months, Wall Street has brought back its old habit of freaking out in the short-term over something that turned out to be nothing major. Remember the Brexit panic? The S&P 500 had its biggest daily drop in nearly a year. But shortly after that, cooler heads prevailed and doomsayers were yet again proven wrong.

Nearly the same thing happened after last year’s election. At one point on election night, the Dow futures were down more than 800 points. The end of the world never came, and the Dow is sitting on a nice 20% gain since the election.

My point isn’t to defend or criticize any of these political events. Rather, I’m encouraging you not be swept up by unreasonable fears. Stock prices are like a global blood-pressure machine. Historically, the U.S. stock market has been able to rally during highly-unsettling times for the country and the world. Any drop in U.S. equity prices is good for stock-pickers.

On our Buy List, there are a few stocks I like in particular. Ross Stores (ROST), which reports next week, is a good value here. I also like Danaher (DHR), which was has been quite weak lately. DHR looks particularly good below $80 per share. I also like Alliance Data Systems (ADS). The stock is currently going for a little more than 10 times the company’s estimate for next year’s earnings. ADS has also increased its buyback program by $500 million. That’s an impressive sign of confidence. Now let’s take a look at last Friday’s earnings report from Cinemark.

Cinemark Is a Buy up to $43 per Share

Last Friday, Cinemark (CNK) became our final Buy List stock to report earnings for the second-quarter earnings season. The movie-theater chain said they earned 44 cents per share last quarter. That was one penny below estimates.

What’s interesting is that shares of CNK dropped sharply going into Friday’s earnings report. That’s largely because a competitor, namely AMC, completely bombed its earnings report. Traders naturally think that whatever’s hurting one company in a sector must necessarily be hurting its competitors as well.

For Cinemark, that’s not the case. So even though they missed earnings by a penny per share, last Friday’s results relieved investors who feared the worst. Looking at the details, Cinemark´s quarterly sales rose by 0.9%. Concession revenue per person, which is the real moneymaker for CNK, rose by 8.9%.

“We continue to be pleased with the consistency of our financial performance, including our second quarter’s global revenue growth, record food and beverage per caps, and year-over-year box-office results that again exceeded the North American industry,” stated Mark Zoradi, Cinemark’s CEO. “We remain optimistic about film content for the remainder of the year, as well as the future growth potential that our strong foundation and strategic initiatives provide for our Company.”

Cinemark’s screen count is up to 5,926. I’m keeping CNK’s Buy Below at $43 per share.

Earnings Preview for Ross Stores

Ross Stores (ROST) will report its fiscal Q2 earnings after the closing bell on Thursday, August 17. Ross is one of my favorite retailers, but the shares have been struggling this year. It’s actually our single-worst performer YTD, with a loss of 14%. Part of the reason isn’t so much about Ross but the impact of online shopping on the entire retail sector. There have been countless stories this year about how Amazon is devouring the retail world. In fact, others retailers like Macy’s and Target have been hit worse than Ross.

Still, I’m an optimist on Ross. If you understand Ross’s business model, you see that Amazon isn’t much of a direct competitor. For their Q2 report, which ended on July 29, Ross sees earnings ranging between 73 and 76 cents per share. That’s compared with 71 cents per share for last year’s Q2. That sounds about right. For comparable-store sales growth, Ross sees an increase of 1% to 2%.

I’ve been particularly impressed with Ross’s operating margins. Retail is all about keeping control of costs, especially for a deep discounter like Ross. In May, Ross raised its full-year earnings forecast. The company now projects 2017 earnings between $3.07 and $3.17 per share. The previous range was $3.02 to $3.15 per share. For context, Ross made $2.83 per share last year; however, this year will include an extra business week. Ross estimates that will add eight cents per share.

I’ll be paying close attention to Ross’s guidance for Q3. I’m expecting something around 65 to 68 cents per share. There’s a good chance I’ll raise my Buy Below on Ross, but I want to see their guidance first. Don’t give up on Ross!

I wanted to follow up on Continental Building Products (CBPX). Last week, the wallboard folks missed on their earnings report by three cents. The stock, however, reacted rather dramatically. Last Friday, CBPX jumped 8.4%. Then on Monday, it dropped by 5.4%. This is unusual but not unheard of. The stock seems have to calmed down lately. This week, I’m dropping my Buy Below on CBPX down to $23 per share.

A few weeks ago, Snap-on (SNA) beat earnings, yet the stock fell after the report. The earnings looked fine to me. Apparently, the company is trying to take advantage of the reduced share price. This week, Snap-on announced a new buyback plan worth $500 million. That’s worth about 5.6% of the SNA’s current market value.

Good news for CR Bard (BCR). This week, shareholders voted to approve Bard’s merger with Becton Dickinson (BDX). According to Bard, “approximately 99%” of the vote was in favor of the merger. There wasn’t much doubt about the outcome, but it’s nice to see such a strong vote.

As a reminder, the deal calls for BCR shareholders to get $222.93 per share in cash plus 0.5077 shares of BDX. That currently values BCR at $323.57 per share. The stock is currently going for a slight discount (about 1.4%) relative to the deal’s price. That’s common because there’s always a chance that the deal could fall apart. It’s highly unlikely but not impossible. The discount has gradually diminished since the deal was announced in April. Bard said the merger will officially take place sometime in Q4.

HEICO (HEI) has been very strong recently. Over the last six weeks, the shares are up 21%. If you recall, HEICO had a very good earnings report in May. The company has already raised guidance twice this year. I’m raising my Buy Below on HEICO to $90 per share.

That’s all for now. We’ll get some key economic reports next week. On Tuesday, the July retail-sales report comes out. The June report was not very good, so I’ll be curious to see if there’s been any improvement. On Wednesday, we’ll get the minutes from the last Federal Reserve meeting. Then on Thursday, the next industrial-production report comes out. This data series has been improving in recent months. 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

Morning News: August 11, 2017
Posted by Eddy Elfenbein on August 11th, 2017 at 7:03 am

A 62% VIX Surge Isn’t How Bulls Hoped August Would Start

A Battle Over Goldman’s Hunger Bonds Is Being Waged in Florida

NEO Co-Founder Banks On Blockchain To Build A Smart Economy

The U.S. Nuclear Industry’s Last Hope Seeks Help From Trump

Who Owns Anbang of China? A U.S. Labor Union Wants to Know.

China Is Investigating Tencent, Baidu and Weibo for Breaching Strict Cyber Laws

China Mobile: Special Dividend Not Enough

Snap Stumbles Through Another Disappointing Quarter

Snap, Blue Apron Fuel Worries About Overheated IPOs

Nordstrom Gains After Surprise Sales Growth Reassures Investors

Britain Bans Betting in Soccer, But Not For `The Lizard’

Uber Investor Sues Travis Kalanick for Fraud

Joshua Brown: Who Coulda Seen This Coming?

Ben Carlson: The Biggest Common Investment Errors

Michael Batnick: 在庫バブル

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Morning News: August 10, 2017
Posted by Eddy Elfenbein on August 10th, 2017 at 6:50 am

In Debt We Trust for U.S. Consumers With $12.7 Trillion Burden

Tesla Meets With California, Nevada on Autonomous Truck Testing

Lego Swaps Out CEO Piece After Eight-Month Tenure

Toshiba Gains as Auditor Finally Gives Tick of Approval

Generic Drug Price Slump’s Latest Victim: Mylan Profit Goal

Valeant Pharmaceuticals: A Lesson In Value Traps

Kraft Heinz Hopes a Line of Oprah Products Will Boost Sales

Office Depot Admits Amazon Is Stealing Its Business and Shares Slide 25%

Too Many Starbucks Are Spoiling The Brew

John Malone Feels How Nice It Is to Be Wanted

Dalio’s Quest to Outlive Himself

Krispy Kreme Celebrates Solar Eclipse With Limited Edition Chocolate-Glazed Doughnuts

Jeff Miller: Aaron Brown Wins Silver Bullet: Why Context is Needed in Reading Charts

Cullen Roche: Do Index Funds Increase Consumer Price Inflation?

Howard Lindzon: The Content Wars…Will it Bubble? …and Collateralized Content Obligations (CCO)

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The Baby Step Rally
Posted by Eddy Elfenbein on August 9th, 2017 at 12:04 pm

The Dow’s winning streak finally came to a close. From the Washington Post:

In early Tuesday trading, the Dow hit a new record high of 22,167. Eddy Elfenbein, portfolio manager at AdvisorShares, called the historic string of winning sessions ‘pretty impressive,’ but added that ‘these are actually pretty baby steps as far as the up days for the Dow. So in aggregate, we’re not talking about a rip-roaring rally; it’s just that they’ve all been consecutive.'”

I agree with myself.

Morning News: August 9, 2017
Posted by Eddy Elfenbein on August 9th, 2017 at 7:08 am

U.S. Seeks Import Duties on Chinese Aluminum Foil

As Stocks Reach New Heights, What’s Trump Got to Do With It?

No-Name U.S. Oil Driller Gets Shot at World’s Biggest Reserves

These Sugar Barons Built an $8 Billion Fortune With Washington’s Help

Vantiv and Worldpay Just Agreed Terms for Their $10 Billion Merger

NEO Completes Rebranding; Announces Blockchain Partnerships

Mazda’s New Invention: Diesel Without The Diesel

5 Principal Reasons Why I’m Still Short Tesla

Priceline Tumbles as a Weak Outlook Overshadows Better-Than-Expected Earnings

Uber Employees Fear Layoffs as the Company Plans to Shut Down Its 500-Employee Car Leasing Unit

McDonald’s, Walgreens Sued Over Sweetened Beverage Tax

How Disney Wants to Take on Netflix With Its Own Streaming Service

Damore Went From Intern to Pariah in Google Tenure Ended by Memo

Ben Carlson: 10 Questions

Joshua Brown: Nope., So You Want To Be a Rap Superstar and Dream Hoarders: My Reaction

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Cramer Talks to Snap-on’s CEO
Posted by Eddy Elfenbein on August 8th, 2017 at 4:13 pm

Disney Reports after the Close
Posted by Eddy Elfenbein on August 8th, 2017 at 1:02 pm

Disney (DIS) is set to report earnings after today’s closing bell. In addition to being a Dow component, Disney is an important media conglomerate:

Disney is set to report its quarterly earnings Tuesday after the closing bell, and one portfolio manager said it could have far-reaching implications for the market given the media giant’s many different properties both in the U.S. and abroad.

“This is kind of a bellwether for so much of the U.S. economy,” said Eddy Elfenbein, portfolio manager at AdvisorShares, referring to Disney’s vast array of assets, which include broadcast, cable, movies and theme parks. “But what I’m going to be looking for is in their cable subsidiaries, [such as] ESPN,” Elfenbein said Monday on CNBC’s “Trading Nation.”

ESPN has traditionally proved quite profitable for Disney, Elfenbein said, but has not fared well recently.

“They’ve been bleeding subscribers recently, and that’s caused a lot of attention from Wall Street. So, I want to see how those numbers are, and how the ESPN business is shaking out,” he said.

Morning News: August 8, 2017
Posted by Eddy Elfenbein on August 8th, 2017 at 7:05 am

China Takes Away the Punch Bowl

Chinese Trade Data Misses and Export and Import Growth Slows

Drop In German Trade Activity Feeds Into Global Stimulus Debate

Hedge Fund Sues to Have Puerto Rico’s Bankruptcy Case Thrown Out

Trump’s Stalled Trade Agenda Leaves Industries in the Lurch

Gundlach, Wary of Pricey Market, Sets Cap on DoubleLine’s Growth

Tesla Seeks $1.5 Billion Junk Bonds to Fund Model 3 Production

Mazda Announced Breakthrough in Long-Coveted Engine Technology

Avis, Stung by Falling Used-Car Prices, Reports Disappointing Results

Wells Fargo, Awash in Scandal, Faces Violations Over Car Insurance Refunds

Pizza Vending Machines at Little Caesars

Time Inc Misses Revenue Estimates as Advertising Sales Slip

If Retail is Dying, Why is Money Pouring Into Malls?

Michael Batnick: If This Is 1929…

Jeff Carter: Should Valuation Be A Disqualifier For Investment?

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