The Fed Is Buying Stocks Again, DIS Earnings

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I’ll never forget it. It was 11:50am Friday March 26, 2021. I was short stocks, mainly tech stocks, and doing quite well when, all of a sudden and out of nowhere, stocks started to rip higher. From breaking down they went to exploding higher without rhyme or reason. I believe the NASDAQ ripped higher by ~2% in that time period into the close. It went from being a great week to a miserable weekend but I had a suspicion: The Fed was buying stocks. I resolved to cover all my shorts at the open on Monday.

Something similar happened on Friday April 9 and it happened again today (Thursday May 13). I remember texting with my buddy as the market was breaking down that today would be a good test of my theory. If I was right that the Fed was buying stocks, they’d come in as the markets went from up big to red. And that’s exactly what happened. Now I’m more sure than ever: Beware shorts because The Fed is buying stocks. As big as this Bubble is, it’s probably unshortable because the Fed is surreptitiously intervening directly in the stock market to prop it up.

Let’s move on to Disney (DIS, Market Cap $326 Billion) 1Q21 Earnings. On an overall basis, DIS reported a 13% decline in Revenue but a 32% increase in Adjusted Diluted EPS to 79 cents/share. Digging down, Media and Entertainment Revenue was +1% while Parks, still impacted by COVID, was -44%. Disney+ added 8.7 million subscribers in the quarter to 103.6 million. Segment Operating Income for Media – Direct to Consumer, which includes Disney+, ESPN+ and Hulu, was -$290 million as the company is focused on growth not profitability for now. DIS stock closed the after hours session -3.89% to $171.40 which is about 15% below its All Time Closing High of $201.91 on March 8.

Posted by Greg Feirman  ·  Link  ·  Comments Off on The Fed Is Buying Stocks Again, DIS Earnings

Wednesday Review, Technical Overview: Tech & Reopen Value, The Feds Hands Are Tied

May 13, 2021 at 5:11 am  ·  Category: Federal Reserve, Inflation, Market Commentary, Technical Analysis, YouTube

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The catalyst for Wednesday’s selloff was a hotter than expected April CPI Report. Overall inflation came in at +4.2% year over year and +0.8% month over month. Core CPI, which excludes food and energy, was +3.0% year over year and +0.9% month over month. As a result, the yield on the 10 Year Treasury jumped 7 basis points to 1.695% and stocks got hit hard. The S&P was -2.14%, the NASDAQ -2.67% and the Russell -3.26%. NYSE + NASDAQ Advancers to Decliners were 1,350 to 6,298. Including unchanged issues, only 17% of securities traded on the two major exchanges, about 1 of 6, advanced on the day.

Let’s move on now to a technical overview of the market starting with the S&P 500. The S&P closed at an All Time High of 4,233 on Friday but has sold off 4% so far this week to 4,063. Technically, no damage has been done as it sits 14 points above its 50 DMA at 4,050. However, when we look beneath the surface and especially at Tech a different story emerges.

The NASDAQ has suffered significantly more technical damage. It is down ~8% from its April 26 All Time Closing High and sits smack between its 50 DMA and 200 DMA. In addition, as you can see in the chart in Ian McMillan’s tweet, the Advance/Decline line and % of stocks above their 200 DMA are rolling over. There is real trouble here.

Things look about the same for the NASDAQ-100 ETF (QQQ), the most important ETF in the market. The false breakout I was tracking for the last couple of weeks looks to be a done deal at this point and the QQQ is down more than 7% from its All Time Closing High of $342.01 on April 16. It also sits squarely between its 50 DMA and 200 DMA.

Next, let’s take a look at Apple (AAPL), the most important stock in the market with a market cap of almost $2.1 trillion. AAPL closed Wednesday right on its 200 DMA for the first time during essentially the whole post-COVID rally. Obviously, a close below the 200 DMA would get a lot of investors attention.

The S&P Industrials (XLI) and the S&P Financials (XLF) are the two quintessential Reopen Value sectors. They have been leading the S&P higher in recent weeks despite weakness in Tech and the NASDAQ. However, that has begun to change this week. The XLI is down ~4% this week and just avoided a buying climax* on Monday, surging well into new all time high territory before falling back to close up just 10 cents from Friday. It closed yesterday below its 50 DMA for the first time in three months. The XLF is down ~3% this week and did suffer a buying climax on Monday (barely) surging into all time high territory before closing 3 cents below Friday’s close.

[* A buying climax is when a security surges to a 52-week high intraday before closing back below the previous day’s close. It is a sign of technical exhaustion and often marks at least a short term top].

Let’s try and put it all together. Tech had been the leader of this bull market since 2009 until it started faltering earlier this year. The S&P, however, continued to chug higher led by Reopen Value, mainly XLI and XLF. Reopen Value has started to get hit this week, however, dragging down the S&P 500. In other words, Tech and Reopen Value have been the drivers of this market. With both of them breaking down, unless something changes, this market has nothing to stand on as I wrote yesterday morning.

From a macro perspective, yesterday’s hotter than expected April CPI Report puts the Fed in a tough spot. If markets fall further, the Fed would be taking an enormous risk with inflation and the dollar were it to step in with more liquidity. Put another way, the infamous Fed Put may have been taken out of play by yesterday’s April CPI Report leaving markets to fend for themselves – and they are struggling. Combining this fact with the deteriorating technical picture starts to confirm my premonition yesterday morning that last Friday may have marked a significant top.

Posted by Greg Feirman  ·  Link  ·  Comments Off on Wednesday Review, Technical Overview: Tech & Reopen Value, The Feds Hands Are Tied

Is The Rotation From Growth to Value or Offense to Defense?, Monday’s Bizarre Internals and What They Might Mean

May 12, 2021 at 2:02 am  ·  Category: Market Commentary, Stocks, Technical Analysis, YouTube

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Most analysts have been characterizing the current rotation in markets as from Growth to Value. However, while on Monday the S&P 500 Value ETF (IVE, -0.02%) outperformed the S&P 500 Growth ETF (IVW, -1.95%), on Tuesday growth (-0.43%) outperformed value (-1.35%). This calls into question the Growth to Value narrative.

Dave Keller argues in the above tweet that the move is more about Offense to Defense. He makes this argument by comparing the performance of the S&P Consumer Staples Sector (XLP) with the S&P Consumer Discretionary Sector (XLY). The former outperformed the latter on both days: 0.76% > -1.78% (Mon) and -0.87% > -1.13% (Tue). The same thing applies to the equal weight ETFs, RHS and RCD: 0.99% > -0.63% (Mon) and -1.34% > -2.01% (Tue). The numbers, therefore, seem to support Keller’s contention.

However, if correct, this means that it is not a rally from Offense to Offense, from Tech to Value Reopen, which would maintain a risk on character to the market. Offense to Defense is by definition risk off. Keller’s point, while I don’t think the above argument proves it, makes some sense to me and suggests that something more sinister could be taking place in markets. Just a thought.

A closer look at Monday’s bizarre internals also suggests potential market exhaustion. The major indexes were both notably down with the S&P -1.04% and the NASDAQ -2.55%. NYSE + NASDAQ Breadth was unabashedly negative at 2095 Advancers to 5496 Decliners, as you’d expect on such a big down day. The anomaly was that 44% of S&P components hit 52-week highs – the most since 1943. So while the great majority of the market was getting hit, a very substantial number of S&P components bucked the trend to make 52-week highs. However, the sixth highest number since 2004 of S&P components also experienced buying climaxes as can be seen in the above chart by Sentimentrader. A buying climax is when a stock surges to a 52-week high before selling off to close below the previous days close. It suggests market exhaustion in the particular security. I’m not sure what to make of this but yesterday’s action might give us a clue.

I am guessing that a number of the S&P stocks that made 52-week highs Monday were from the quintessential Reopen Value sectors, the Industrials (XLI) and the Financials (XLF). However, these sectors were sold hard Tuesday with the XLI -1.49% and the XLF -1.77%. These are the stocks that have been leading the S&P higher while the NASDAQ has rolled over. If they, too, are now rolling over, this market doesn’t have a leg to stand on.

I’ve tried to pull together a lot of technical data in this piece to make the far from air tight case that the market may be exhausted. The next few days should tell us if this is the case as neither the quintessential Reopen Value sectors, XLI and XLF, or Tech as represented by the NASDAQ and QQQ should be able to rally much and the rotation from Offense into Defense, Consumer Discretionary into Consumer Staples, should continue. I’m not much for top calling as I’ve failed at it too many times in the past but if things play out this way it is on the table.

Posted by Greg Feirman  ·  Link  ·  Comments Off on Is The Rotation From Growth to Value or Offense to Defense?, Monday’s Bizarre Internals and What They Might Mean

A Divergence Between The NASDAQ and The S&P, The Reopen Trade Has Gotten Ahead of Itself: MAR & SPG

May 11, 2021 at 12:17 am  ·  Category: Fundamental Analysis, Market Commentary, Stocks, Technical Analysis, YouTube

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A very important divergence is taking place in markets between the tech led NASDAQ and the broader market as represented by the S&P 500. While the S&P continues to power ahead, tech and the NASDAQ are breaking down.

This bifurcated market was on illustration Monday as you can see in the above tweet of the performance of stocks in the S&P by Mansi. Big Tech, as represented by the stocks in the upper left of Mansi’s chart, got hit hard, while most Value, as represented by the stocks in the lower right of Mansi’s chart, were green on the day.

Another way of making the same point is that the iShares S&P 500 Value ETF (IVE) was essentially flat (-0.02%) on the day while the iShares S&P 500 Growth ETF (IVW) was -1.95%. The largest components of the Value ETF are stocks like Berkshire Hathaway, The Big 4 Banks (JP Morgan, Bank of America, Wells Fargo and Citigroup), Walt Disney, Johnson & Johnson and Pfizer, Verizon and AT&T and Walmart and Procter & Gamble. The largest components of the Growth ETF are the Big 5 (Apple, Microsoft, Amazon, Google, Facebook) and other big, popular tech names like Tesla, Nvidia, Paypal and Netflix.

This is not a one day thing. As you can see in the charts in the tweets by David Zarling and the Equilibrium above this divergence has been occurring basically since the beginning of 2021. This is extremely important as Tech as represented by the QQQ has led this bull market from the very beginning going all the way back to 2009 as you can see in the 20+ year chart showing the ratio of the QQQ to the SPY by the Equilibrium. It is being disguised by the strength in the S&P which contains a representative mix of stocks but should not be overlooked. Whether the S&P can continue to power ahead for too much longer without its generals is a big question mark.

The question takes on added urgency as the value led Reopen Trade appears to me to have gotten ahead of itself. This was on display in two earnings reports from Marriott (MAR) and Simon Property Group (SPG) on Monday.

Let’s start with Marriott (MAR, Market Cap $46 Billion). With 7,662 properties and 1,429,171 rooms worldwide, Marriott is a bellwether of international travel. And what their report Monday morning showed is that international travel is very far from 1Q20 levels, much less 1Q19. Take a close look at the first table above. What it shows is that Revenue per Available Room or REVPAR, the key metric in the hotel industry, for 1Q21 was -46.3% compared to 1Q20. Occupancy was -15.3% and Average Room Rate -24.5%. Take a look at the second table above and you can see that things are even worse when compared to 1Q19. REVPAR was -59.1% consisting of a 30.4% decline in Occupancy and a 26.4% decrease in Average Room Rate. However, if you look at the stock chart, the stock is essentially already back to its February 2020 highs! In other words, MAR stock is running way ahead of its fundamentals and trading mostly on narrative.

The same kind of thing, though perhaps not to the same degree, applies to mall operator Simon Property Group (SPG, Market Cap $48 Billion). With 167 malls and outlets totaling 141.1 million square feet in the United States and more internationally, SPG is a bellwether of brick and mortar shopping. While improving, revenue was -8.4% and Funds From Operation (FFO), the key metric for REITs, -10.8% compared to 1Q20. SPG did not provide a comparison to 1Q19 so I gathered the data and did the calculations myself. Revenue was -14.7% and FFO -18.4% compared to 1Q19. While things appear to be closer to the previous peak for SPG than MAR, a look at the stock chart shows that this is already essentially completely priced in. Again, while to a lesser degree, SPG stock is running ahead of its fundamentals and trading on narrative.

When you combine the breakdown in Tech, which has led this bull market since 2009, with the fact that the value led Reopen Trade appears to be ahead of the fundamentals and trading to a great extent on narrative, the bull market seems to be on quite shaky ground to my skeptical eyes.

Posted by Greg Feirman  ·  Link  ·  Comments Off on A Divergence Between The NASDAQ and The S&P, The Reopen Trade Has Gotten Ahead of Itself: MAR & SPG

Tech Breaking Down, Gold Breaking Out

May 7, 2021 at 1:05 am  ·  Category: Gold, Market Commentary, Stocks, Technical Analysis, YouTube

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Many technicians are starting to note that Tech stocks are breaking down. I have been all over the false breakout in the QQQ so I’m simply going to update the chart through Thursday and point out that we’ve now closed three straight days below the February 12 close of $336.45.

The second most important Tech ETF is probably the Semiconductors (SMH). Not only has the SMH closed below its 50 DMA all four days this week but, as Brian Shannon points out in his tweet above, the 50 DMA itself has now rolled over which, according to him, is even more more important.

The third most important Tech ETF is probably the Ark Innovation ETF (ARKK). Yesterday morning I pointed out that ARKK had closed right on its 200 DMA and was “on the precipice”. During the session, ARKK was -$3.21 or -2.88% to $108.34 on about 1.5x average volume and closed below its 200 DMA for the first time since early April 2020.

On the other side of the coin, many technicians are noting the breakout in gold and gold stocks. The Gold ETF (GLD) was +$2.79 or +1.67% to $170.06 yesterday as gold futures powered through $1800/oz. The Gold Miners ETF (GDX) was +$1.15 or +3.23% to $36.76 and is now coming up against its 200 DMA. A breakout above that would likely pull in even more technically oriented investors.

Posted by Greg Feirman  ·  Link  ·  Comments Off on Tech Breaking Down, Gold Breaking Out

QQQ: Failed Breakout Watch III, ARKK On The Precipice, Mackintosh: Inflation Is Everywhere, Ethereum and Dogecoin Mania

May 6, 2021 at 3:48 am  ·  Category: Crypto, Inflation, Stocks, YouTube

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On Wednesday morning April 21, I first wrote about a potential breakdown in the QQQ. Yesterday morning, I revisited the subject after the QQQ broke below its February 12 closing high around $336 to close around $330 on Tuesday. This morning I want to briefly revisit the subject as it tried to bounce yesterday, reaching $333 at the open before selling off into the close to finish down $1.11 or 0.34% at $329.03.

There are two reasons I’m keeping such a close eye on the QQQ. One, it is the most important ETF in the market dominated by leading stocks like Apple (AAPL, 10.95% of the QQQ), Microsoft (MSFT, 9.50%), Amazon (AMZN, 8.32%), Google (GOOG/GOOGL, 6.93%), Tesla (TSLA, 4.24%), Facebook (FB, 3.78%), Nvidia (NVDA, 2.69%) and Paypal (2.31%). Two, its components make up a significant percentage of the S&P and NASDAQ. Failure here would almost surely mean failure in the major indexes as well.

Next, I want to talk about Cathie Wood’s popular Ark Innovation ETF (ARKK). This ETF was a terrific performer from the March 2020 COVID lows through mid February 2021, drawing huge inflows from retail investors along the way. However, ARKK has been under enormous pressure since as the highly speculative growth stocks Wood favors have lost their luster for the moment. It closed yesterday (Wednesday) at $111.55 – nearly 30% off its February 12 closing high of $156.58. And, as Greg Harmon points out in his tweet above, it is now sitting on its 200 DMA and testing its 38.2% retracement from the March 2020 COVID lows to the February 2021 highs for the third time. It’s make or break time for ARKK.

We could be at a generational turning point for finance. Politics, economics, international relations, demography and labor are all shifting to supporting inflation….

Investors are woefully unprepared for such a shift, perhaps because such historic turning points have proven remarkably hard to spot….

If we are at a turning point, the cost of being wrong is high. Investors who are buying 10-year Treasurys at 1.6% will lose horribly from higher inflation. Even hitting the Fed’s target of 2% over the period would mean a loss of spending power. If inflation picks up to the 1990s average of 3% it would be extremely painful, and if fears took hold that 3% could turn into the 1980s average above 5%, Treasurys would be massacred.

James Mackintosh, “Everything Screams Inflation: Investors are woefully unprepared for what may be a once-in-a-generation shift in the market”, WSJ, Thursday May 6 [SUBSCRIPTION REQUIRED]

I’ve been pounding the table hard on inflation lately. On Thursday morning April 22, I wrote about how Procter & Gamble and Kimberly Clark were raising prices on some products in their consumer staples portfolios. Just this Tuesday morning I wrote that “Inflation Is Set To Roar”. In the wake of Fed Chair Jerome Powell’s dismissal of inflation concerns last Wednesday, more and more people are talking about it. Lyn Alden came out later that day with a sarcastic tweet about the CPI as a measure of inflation. James Mackintosh has written a piece, “Everything Screams Inflation”, for this morning’s Wall Street Journal that is sure to get a lot of attention. While Mackintosh is cautious about calling for a “generational turning point”, I’m more adamant: It’s coming. On Tuesday, I talked about how to play it via the precious metals and their miners.

Lastly, I’d be remiss if I didn’t touch upon the insanity taking place in crypto land. With Bitcoin trading sideways over the last few weeks, many crypto investors have moved on to Ethereum and even Dogecoin. As you can see in the tweet from J4 above, Ethereum has gone parabolic versus Bitcoin! Even further down the food chain is Dogecoin which is now trading at 60 cents with a market cap of $90 billion according to Holger Zschaepitz. It’s to the point where rappers like Meek Mill and NFL players like Richard Sherman are in Dogecoin.

Elon Musk, who has been pumping Dogecoin on Twitter, is set to host Saturday Night Live this weekend. If he mentions Dogecoin, all hell could break loose. I’m considering taking a small position today just in case he does. I might add a little Ethereum as well. Charlie Munger is probably right when he said of crypto that the “whole damn development is disgusting and contrary to the interests of civilization”. But I have FOMO. Why should everyone else have all the fun? Party responsibly friends. This ain’t your average bubble.

Posted by Greg Feirman  ·  Link  ·  Comments Off on QQQ: Failed Breakout Watch III, ARKK On The Precipice, Mackintosh: Inflation Is Everywhere, Ethereum and Dogecoin Mania

QQQ: Failed Breakout Watch II, Semis Under Pressure

May 5, 2021 at 2:19 am  ·  Category: AMZN, Apple, Market Commentary, Stocks, Technical Analysis, YouTube

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Two weeks ago this morning I led with “QQQ: Failed Breakout Watch” (Top Gun Financial, Wednesday 4/21). Well, yesterday the QQQ broke down below its February 12, 2021 closing high of $336.45 to close at $330.14. This is especially noteworthy given last week’s “Blowout Big Tech Earnings” (Top Gun Financial, Thursday 4/29). This is important: When a stock or security can’t rally on good news (really great news in this case), it suggests that it’s all priced in already.

Let’s delve in a little deeper by taking a look at the post earnings action in Apple (AAPL) and Amazon (AMZN), starting with AAPL. Here’s what I wrote about AAPL earning last Thursday morning:

AAPL reported a monster quarter with Revenue of $89.6 billion and Net Income of $23.6 billion or $1.40/share. Those numbers are +54%, +104% and+128% compared to 1Q19. 

AAPL reported a truly spectacular quarter Wednesday afternoon and yet, if you look at the chart above, it is trading significantly lower than when before it reported! This is what poker players call a “tell”: If AAPL can’t rally on the best news possible, what would cause it to rally? No matter how high quality a stock is, there comes a time when all the good news is priced in and investors are not willing to pay higher prices for it. The action suggests that’s where we are with AAPL – at least for now.

The same kind of analysis applies to AMZN. Take a look at my tweet above from Thursday afternoon for a breakdown of AMZN’s 1Q21 earnings. Like AAPL, they were superb and the first reaction was a big move higher at the open on Friday. But, again like AAPL, it did not hold and we are now significantly below where we were pre-earnings. The same analysis applies here: If AMZN can’t rally on this report, what could possibly cause it to rally?

The second most important ETF in Tech is probably the Semiconductors (SMH). We’ve all heard of the semiconductor shortage by now and these stocks were widely expected to continue rallying based on the strong demand for their products. Instead, they have broken down with the SMH closing below its 50 DMA on Monday and following through on that move yesterday.

With tech making up ~26.5% of the S&P and the two most important Tech ETFs showing some serious, and surprising, weakness, the entire market is at risk at the moment. I am quite happy in my boring, safe, high quality consumer staples like Walmart (WMT), Procter & Gamble (PG), CVS and Kroger (KR). We might not be getting rich overnight but at least we’ll avoid losing a bundle fast in a highly speculative market.

Posted by Greg Feirman  ·  Link  ·  Comments Off on QQQ: Failed Breakout Watch II, Semis Under Pressure

That 70s Show: Inflation Is Set To Roar

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I get it that the Fed doesn’t want to recognize inflation, but there is inflation – Dover Corp CEO Richard Tobin April 20

We’re working very hard to avoid or minimize allowing supply-chain issues to lead to production shortfalls. We’re not saying that we’ll definitely have a problem. We want to flag that it’s a risk that we’re managing – Caterpillar CEO Jim Umpleby April 29

The industry is facing the most challenged driver market that I’ve seen in my 37-year career at JB Hunt – JB Hunt COO Nicholas Hobbs

We’re confident in our ability to manage through transitory raw material availability and cost inflation issues. The pace at which capacity comes back online and supply becomes more robust remains uncertain – Sherwin Williams CEO John Morikis

All quoted in “From Apple To Domino’s Pizza, US Companies Scramble To Meet Surge In Demand: Supply-Chain Snarles and Labor Shortages Crimp Some Businesses Looking To Ride Rebound In US Economy; ‘Caught Flat Footed'”, The Wall Street Journal, May 3, B1 [SUBSCRIPTION REQUIRED]

‘The economy is a long way from our goals, and it is likely to take some time for substantial further progress to be achieved,’ Fed Chairman Jerome Powell said in introductory remarks for his press conference following the central bank’s policy-setting meeting Wedensday [4/28].

Mr. Powell on Wednesday was steadfast on the Fed’s willingness to look through any inflation related supply-chain problems that might emerge over the next several months. ‘We think of bottlenecks as things that, in their nature, will be resolved as workers and businesses adapt,’ he said. ‘And we think of them as not calling for a change in monetary policy, since they’re temporary and expected to resolve themselves’ – Justin Lahart, “The Economy Isn’t Too Hot for the Fed”, April 30 [SUBCRIPTION REQUIRED]

There is a very interesting dynamic playing out in the economy right now that is almost certain to result in significant inflation. That dynamic consists in the reality of inflation as described by corporate executives, some examples of which you can read above, combined with the Fed’s refusal to admit that it’s anything more than “transitory”. This means that they will not act until it is too late and inflation is out of control. Not enough attention is being paid to this dynamic. Investors are focused on the booming economy as it reopens but not on the inflation that will almost certainly undermine it.

How to play it? Take a close look at the chart in Andrew Thrasher’s tweet above of commodity price performance over the last 12 months. What you see is that prices for economic inputs like lumber (+355%), oil (+212%) and copper (+93%) in addition to food commodities are raging. Many more examples could be cited.

But then look at the bottom of Thrasher’s chart at the worst performing commodity. Incredibly, gold, the most pure inflation play, is only +3% over the last 12 months. Gold performed incredibly in the 1970s inflation and it will again this time around as well. However, for whatever reason, investors have no interest in the precious metals for the time being. That presents an incredible opportunity to pick up the best asset to play inflation with at discounted prices. This is the kind of no brainer you dream about.

The precious metals and their miners did catch a bid Monday with GDX +3.84%, GDXJ +4.40%, SIL +4.32% and SILJ +5.85% causing Top Gun’s portfolio to have its best day ever – eclipsing our previous best from only a few weeks ago. This is just a taste of things to come IMO.

Posted by Greg Feirman  ·  Link  ·  Comments Off on That 70s Show: Inflation Is Set To Roar

My Problem Stocks: CLX, GILD, MO

May 1, 2021 at 10:26 am  ·  Category: Fundamental Analysis, Stocks, Top Gun Financial Planning, YouTube

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Since the beginning of my investment career, I’ve had an affinity for Value Traps. Value Traps are stocks that appear cheap based on quantitative metrics but are justifiably so due to low quality, deteriorating underlying businesses. Warren Buffett had this problem for the first 20 years of his career and was helped by Charlie Munger to realize that Quality is more important than Price. It was only when he made this transition that Warren Buffett became a great investor.

Therefore, I’m always asking myself: “Is this stock cheap for a reason? Is this a low quality company?” With that in mind, let’s take a look at my three problem stocks: Clorox (CLX), Gilead (GILD) and Altria (MO). While each of these companies have strong brands and I do not believe them to be paradigmatic examples of Value Traps, my concern is that they share an affinity with that dreaded category of stocks.

Let’s start with Clorox (CLX) which reported 1Q21 earnings Friday morning. After quarters of 26%, 27%, 22% and 17% Organic Revenue Growth in 2020, CLX reported a dud yesterday morning with Organic Revenue Growth of -1% resulting in a 14% decline in Adjusted Diluted EPS. One interpretation is that with COVID on the wane, demand for CLX’s portfolio of cleaning products will decline correspondingly. However, it is worth noting that CLX faced a really tough comp of +17% from 1Q20. In that context, -1% might not be that bad as it held onto most of those sales gains from a year ago.

Nevertheless, the perception appears to be that the days of CLX’s business being the pandemic sweet spot are over. I can’t disagree that the waning of the pandemic will have an inverse effect on CLX’s sales but my thesis has been that COVID will permanently alter consumer’s cleaning habits to some extent going forward. I’m not convinced this quarter disproves that thesis. All the same, there is some truth to the perception, CLX is not cheap at 24x Adjusted EPS Guidance of $7.45 to $7.65 for the fiscal year ending 2Q21 and the stock is acting terribly.

Next let’s take a look at Gilead (GILD). On Thursday afternoon, GILD reported a 12% decline in the sale of its core HIV portfolio of drugs. The stock got sold hard at the open though it rallied back for the rest of the day Friday to finish down only 0.58%. GILD is extremely cheap at 9x 2021 Non-GAAP Diluted EPS Guidance of $6.75 to $7.45, has tremendous Free Cash Flow and a dividend yield of 4.47%. In addition, I also have a sentimental attachment to Gilead because my father owned an apartment building near its headquarters in Foster City, CA that I visited many times when I worked for him part time in 2016 and 2017. Regardless, if the decline in their HIV drug portfolio continues and they can’t replace it with new drugs from their pipeline, despite its cheapness GILD is a declining business.

Last, let’s take a look at MO. MO had been killing it this year and I was very happy with the stock until it came out two weeks ago that the Biden Administration was looking at banning menthol cigarettes and reducing the allowable nicotine content in cigarettes in general. Obviously, this regulation would have a catastrophic impact on MO’s business and the stock got hit hard though it has since stabilized. MO has long traded at a steep discount due to this regulatory risk and cigarette stock investors have gotten a stark reminder of our worst nightmare. As if that weren’t enough, MO reported a 12% decline in cigarette shipments on Thursday morning.

I’m attached to MO as well because it’s been working, sells an addictive product, has a cheap valuation at 10.5x 2021 Adjusted Diluted EPS Guidance of $4.49 to $4.62 and pays a fat 7.20% dividend. Nevertheless, the proposed regulation would suck the life out of its business. I don’t know how to quantify this regulatory risk but it’s obviously a huge overhang for the stock going forward until it gets resolved.

With my natural inclination towards Value Traps, I have to be on constant guard that I’m not slipping back into some form of the old error. These are the stocks that are currently giving me anxiety that I might be.

Posted by Greg Feirman  ·  Link  ·  Comments Off on My Problem Stocks: CLX, GILD, MO

Blowout Big Tech Earnings: AAPL, MSFT, GOOG/GOOGL, FB

April 29, 2021 at 10:59 am  ·  Category: Apple, Big 5, Facebook, Fundamental Analysis, Google, MSFT, YouTube

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This week is the biggest earnings week of the season. All of the Big 5 (APPL, AMZN, MSFT, GOOG/GOOGL, FB) have/are reporting as well as many other important companies. In this morning’s blog, I’m going to focus in on the incredible earnings posted by Apple (AAPL), Microsoft (MSFT), Google (GOOG/GOOGL) and Facebook (FB). (Amazon (AMZN) reports this afternoon and I’d expect similar blowout results based on what we’ve seen). To get as clear a look as possible at the strength of Big Tech’s earnings, I think the best strategy is to compare them with 1Q19 to avoid any distortions resulting from the impact of COVID which started to impact the global economy in 1Q20.

Let’s start with the most important stock in the market, Apple (AAPL). With a market cap of $2.27 trillion at yesterday’s (Wed 4/28) close, movements in AAPL have an outsized impact on the market cap weighted S&P 500 and NASDAQ. AAPL reported a monster quarter with Revenue of $89.6 billion and Net Income of $23.6 billion or $1.40/share. Those numbers are +54%, +104% and+128% compared to 1Q19. (EPS growth is notably higher than Net Income growth because AAPL has bought back almost 2 billion shares since 1Q19).

Let’s move on to Microsoft (MSFT). With a market cap of $1.93 trillion, MSFT packs quite the punch. While its earnings from Tuesday afternoon (4/27) were not well received with the stock down about 3% yesterday, the numbers appeared phenomenal to me. Revenue of $41.7 billion and Diluted EPS of $1.95 were +36% and +71% compared to 1Q19.

Next up: Google (GOOG/GOOGL – I refuse to call it Alphabet!). With a market cap of $1.6 trillion GOOG/GOOGL is obviously a major player. Revenue of $55.3 billion and EPS of $26.29 were +52% and +121% compared to 1Q19.

Last, let’s take a look at the baby Facebook (FB) with a market cap of only $885 billion. FB did not disappoint with Revenue of $26.2 billion and Diluted EPS of $3.30 – +74% and +75% compared to 1Q19.

On the back of AAPL and FB’s blowout earnings yesterday afternoon, the Futures are roaring this morning with NASDAQ Futures up more than 1% and S&P Futures almost 0.70%.

Posted by Greg Feirman  ·  Link  ·  Comments Off on Blowout Big Tech Earnings: AAPL, MSFT, GOOG/GOOGL, FB