Daily Archives: September 28, 2018

Uncategorized

Market Preview: Tariffs and Tesla Stall the Market

Markets traded flat on Friday as they absorbed the latest in the Elon Musk saga, and as pundits began to ponder the possibility of a protracted trade war with China. Tesla (TSLA) has vowed to stand behind its embattled CEO as the SEC is leveling charges of fraud surrounding his tweet about taking the company private. In its initial thrust, the SEC is demanding that Mr. Musk be removed from the board of Tesla. The stock traded down around 14% to lows not seen since April. As the first full week of tariffs went into effect between the U.S. and China, there appeared to be little movement to resolve the differences between the two countries. The fear now is that unlike Mexico, China may take a firm stand resulting in a lengthy and costly trade war between the two global giants. Tariffs may now dominate headlines well into the fourth quarter.

Cal-Maine Foods (CALM) and Stitch Fix (SFIX) kick off October earnings on Monday. Cal-Maine is up slightly on the year. Last quarter Cal-Maine’s CEO warned that proposed tariffs were impacting feed stock for the egg producer. Analysts will be looking for the concrete impact of those tariffs on Monday. Stitch Fix has done nothing but reward investors after going public late last year. But, some worry that a new service being rolled out by Amazon (AMZN) may cut into the data driven clothing provider’s market share. Investors will want to listen closely to any clues on how competition is impacting the company.  

Monday’s economic calendar includes, the PMI Manufacturing Index, ISM Manufacturing Index and construction spending. Construction spending is expected to rise .1% for August. The number is being closely watched as it is a key component in GDP, and economists fear rising prices may be impacting growth. While the FOMC was the focus this week, there are several economic numbers being released next week as the fourth quarter of 2018 gets into gear. Tuesday we’ll see Redbook retail numbers. New mortgage applications, ADP employment, the PMI Services Index and ISM non-manufacturing data will all be released on Wednesday. Jobs will be the focus on Thursday with both the job cuts report and jobless claims being released. We’ll close the first week of October on Friday with employment situation numbers and international trade data.

Tuesday, Pepsico (PEP) and Paychex (PAYX) report earnings. Pepsico should give an update on its recently announced acquisition of SodaStream. Lennar (LEN) and Pier 1 Imports (PIR) report on Wednesday. Analysts will be watching Lennar closely for an update on costs and the lack of construction workers plaguing the industry. Closing out the earnings calendar on Thursday (no earnings are currently scheduled for Friday) are Constellation Brands (STZ) and Costco (COST). Analysts are expecting both strong earnings and an increase in membership levels from the bulk retailer.

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Dividends

My Personal Plan for Big Gains (and Income) by 2020

Something strange is happening in the investment-bank and hedge-fund world: a growing sense that the next recession (which, by the way, Wall Street has long been wrongly predicting for years) finally has a due date: 2020.

The number of Wall Street firms predicting this date is staggering.

Bloomberg’s Joe Wisenthal has collected a few predictions, such as one from Moody’s Analytics chief economist Mark Zandi, who said 2020 will be the economic “inflection point,” and Société Générale’s economic team, who said the likelihood of a 2020 recession has risen due to, among other things, a tight labor market and higher borrowing costs.

Even former Federal Reserve Chairman Ben Bernanke is getting in on the act, saying a boom “is going to hit the economy in a big way this year and next year. Then in 2020, Wile E. Coyote is going to go off the cliff.”

Doom and Gloom = Cheap 7%+ Dividends for You

This all sounds scary, but the stock market doesn’t care—it’s been too busy surging to new highs:

What, Me Worry?

Stocks’ 10% year-to-date gain means that, if this trend continues, we’ll see a 13% total return for the S&P 500 for all of 2018. That’s far from the kind of market Wall Street seems to be panicking about.

So let’s dig into the fears behind this gloom and doom, and why there’s nothing to fear at all. Then I’ll show you 2 funds you can buy now that will get you all that is best about this still-strong US economy.

And when I say “best,” I’m talking huge dividends up to 10%, and long-term performance that tops the market’s return, too.

But first, let’s dive into 3 fears that are driving the market today, so we can see what’s setting up the 2-fund opportunity I’ll show you toward the end of this article.

Hysterical Fear No. 1: An Inverted Yield Curve

By far, the biggest panic of 2018 has been over the yield curve.

When the difference between the yield on the 2-year US Treasury and the 10-year US Treasury goes negative for longer than a few days, America falls into recession. This is pretty much clockwork: it’s happened every time for decades, making this the most reliable recession indicator.

And the yield curve—that is, the difference between these two yields—has been narrowing since February 2018, when the market’s last major sell off hit:

A Worrying Indicator?

Note, however, that the fast decline from February to July has abated, and we are now about where we were in July.

This doesn’t mean an inverted yield curve isn’t coming (it still looks likely), but it isn’t coming yet. And since a recession typically happens about 12 to 18 months after the inverted yield curve appears, we still have plenty of time to tap the market’s rising gains (and dividends), starting with the 2 funds below.

Hysterical Fear No. 2: Declining Profits

The second fear is so silly it almost isn’t worth taking seriously—until you realize a close look at this fear shows just how wise it is to buy stocks now.

And that worry is that corporate profits are perfectly positioned to start falling.

That sounds bad—until you look into why they are so well positioned to fall: because they’re so absurdly strong right now.

Let me quote FactSet: a “record-high percentage of S&P 500 companies beat EPS estimates for Q2.” That sounds good—and then when you realize just how high expectations were, you realize this isn’t just good, it’s amazing.

Despite expectations of 23% earnings growth (itself higher than the first quarter’s 20% rise), the market reported 25% growth. A staggering 80% of companies beat expectations—far beyond the former record holder, the first quarter of 2018.

Earnings Crush (High) Expectations

Here’s the Chicken Little logic: with earnings growth this high, how can it possibly get any higher?

Of course, this is an old fear we saw in the third quarter of 2014, when oil prices were crashing and pundits warned that a 2008-style disaster was about to unfold. Here’s what the market has done since then:

62% Gains in Just 4 Years

The bottom line? If you sell into today’s fears, expect to miss out on gains like these.

Hysterical Fear No. 3: Tariffs, Tax Cuts and Trump

The 3 “Ts” that are driving many financial fears are largely political, with a lot of attention honing in on two moves by Donald Trump.

The first move was the 2017 tax cuts that many economists have said could overheat the economy. The second, and more alarmist, fear is that Trump’s tariffs, specifically those aimed at China, will result in a trade war that kills US exports.

The trade-war fears largely drove the market correction in February, but there’s just one problem: the tariffs are too small to matter. Even at their recent expansion to $250 billion in imports, tariffs on Chinese goods represent about 1% of America’s economy. And those tariffs are effectively a tax of about 13% of those $250 billion—meaning the actual impact on the US economy is about 0.17% of GDP.

These are microscopic numbers. Yes, they could increase—but until they do, the drag on the economy from tariffs is too small to matter, meaning it’s too early to respond from an investment point of view, no matter what your politics may be.

The Right Response

Still, these fears feel like they warrant some type of response, so what should it be?

Simple! As canny contrarians, we’re going to pounce on these overdone worries and buy stocks now.

But what’s the best way to do it?

If you choose to buy stocks individually, you’ll need to invest a lot of time and/or money in research. Pick a low-cost index fund like the SPDR S&P 500 ETF (SPY) and you’ll likely enjoy a strong return. But that return will, by definition, be mediocre, because SPY doesn’t try to pick winners or losers. Plus, SPY’s dividend yield is a joke at 1.7%.

Then there’s the path less traveled: high-yield closed-end funds (CEFs) that invest in many S&P 500 stocks and offer a shot at better price gains, along with a higher income stream (and not just a little higher: payouts of 7% and more are common in CEF land).

2 Funds Set for Big Gains (and Dividends) as Wall Street Frets

Our first pick is the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), which provides a mix of equity exposure and insurance on a big market slide to provide returns, because this fund uses call options (a kind of insurance against stock exposure) to limit downside risk.

It also boasts an outsized 6.7% income stream that’s nearly 4 times the S&P 500’s average yield. Plus, SPXX has closely tracked the market in terms of overall performance while providing that bigger income stream:

SPXX Hands You Your Win in Cash

Or you could snap up the Liberty All-Star Equity Fund (USA) and its incredible 10% dividend yield, as well as its portfolio of mid-cap and large-cap US stocks. This one has actually beaten the “dumb” index fund over the last decade, too:

A Massive Return Over the Long Haul

Whatever path you take, it’s pretty clear that now is not the time to panic—even as we keep our eyes peeled for whatever 2020 may bring!

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Uncategorized

10 Stocks to Sell in October

Source: Shutterstock

With Halloween a little over a month away, both kids and adults are prepping for the fright-filled holiday. But since October also represents the start of the fourth quarter, it’s an ideal time to consider which stocks to sell.

I say this because several names, whether they’re standout performers or backmarkers, gained on the back of a generally improving economy. But with our politics hitting a very sour note ahead of the midterm elections, the markets have lost their sheen. More importantly, the China tariffs casts a dark cloud on most sectors.

Therefore, getting rid of stocks to sell helps to protect our portfolio from unforeseen events. That’s the easy and obvious part. The more difficult component is separating the winners from the duds.

For this list of companies to avoid, I’m staying away from stocks that have already suffered severe declines. Typically, these names can temporarily skyrocket due to a short squeeze or simply a reactionary move. Instead, I’m going bearish on organizations that have done well this year, but whose premiums have gotten too rich.

So with that intro out of the way, here are my choices for stocks to sell in October:

Stocks to Sell in October: Dillards (DDS)

Source: Shutterstock

Department stores and the broader retail sector have experienced a surprising comeback in 2018. Left for dead due to declining foot traffic and competition from e-commerce companies, the retail rally proved brick-and-mortars are still relevant.

Unfortunately, Dillards (NYSE:DDS) didn’t receive the memo.

Sure, DDS shares are up big, gaining 29% since the start of the year. Therefore, it seems strange that I would include it in my stocks to sell list. Here’s the deal: I doubt that DDS will continue positively surprising Wall Street. In its most recent quarter, Dillards managed an uninspiring revenue growth rate of 2.5% to $1.5 billion. In comparison, Nordstrom’s (NYSE:JWN) sales growth jumped over 7% to $4 billion.

My biggest concern is that brick-and-mortars lack a compelling growth story. Some competitors will makes it, but not all. That leaves DDS in a tight spot, which might explain traders’ hesitation over the last several weeks.

TripAdvisor (TRIP)

TripAdvisor (TRIP)

Source: Shutterstock

TripAdvisor (NASDAQ:TRIP) has enjoyed a stunning performance in 2018. Since the January opener, TRIP stock has skyrocketed 51%. This is despite the fact that since the end of July, TRIP shares evaporated close to double digits.

So why am I including TripAdvisor on a list of stocks to sell in October? I’m just not sure that the company’s equity is worth its rich premium. Currently, TRIP is trading at 30-times forward earnings. The average for the global leisure industry is 18 times forward earnings.

The other concern I have is declining revenue growth. In its most recent second quarter earnings report, TripAdvisor registered $433 million in sales. This was an improvement of only 2% year-over-year. To put this into greater context, TRIP achieved over 8% YOY growth in Q2 2017.

People may be traveling more often now, but TRIP stock isn’t enjoying the benefits.

Under Armour (UAA)

Under Armour (UAA)

Source: Shutterstock

Having covered Nike (NYSE:NKE) for its earnings report, I can better appreciate the difficulty involved in the sports-apparel market. Nike, for all its successes and brand popularity, didn’t impress many analysts for their fiscal Q1. To succeed here requires that you fire on all cylinders.

That brings me to Under Armour (NYSE:UA, NYSE:UAA). UAA achieved a remarkable turnaround this year. Since the start of 2018, shares have gained around 46%. But after peaking in early June, UAA hasn’t really looked the same.

Much of the bearishness is fundamental. Under Armour is losing traction with teenagers, which is a critical demographic. They’re the ones not only buying the products, but using them in athletic competitions. Plus, if you can’t win with American teens, you’re going to have difficulty internationally against dominant force Adidas (OTCMKTS:ADDYY).

Finally, UAA simply doesn’t have the financial resources to go toe-to-toe with the big boys. If you’ve made a profit, this is one of the stocks to sell in October.

Qualcomm (QCOM)

Qualcomm (QCOM)

Source: Shutterstock

This is an incredibly controversial idea, so allow me to caveat this upfront: we’re talking about stocks to sell in October, and not indefinitely. And with that specific framework in mind, I’m temporarily going bearish on Qualcomm (NASDAQ:QCOM).

Immediately, QCOM bulls will respond that the 5G rollout is upon us. With next-generation high-speed internet, Qualcomm’s revenues should blow through the roof. Plus, the company’s legal battle with Apple (NASDAQ:AAPL) should either blow over or perhaps move towards Qualcomm’s favor. Either way, we’re looking at an optimistic environment for QCOM stock.

From a longer-term perspective, I agree. But technically, QCOM has shown weakness in recent trades. If I know anything, it’s that the market is always right. Furthermore, I’m reminded of the fact that the first 4G phone rolled out in 2010, yet QCOM experienced significant turbulence that year before ultimately rising higher.

Yes, 2010 wasn’t a great year for the broader economy. However, I can also say the same this year specifically regarding the ongoing China tariffs. Bottom line: QCOM is a long-term buy, but for right now, it’s a risky trade.

National-Oilwell Varco (NOV)

National-Oilwell Varco (NOV)

Source: Shutterstock

If you’re in the broader oil business, life is good. Crude oil prices have steadily increased throughout this year. The international benchmark Brent Crude is $82 per barrel, and technically, it looks set to break back into triple-digit territory.

So it sticks out like a sore thumb when a sector player like National-Oilwell Varco (NYSE:NOV) signals weakness. I get the point that NOV stock is up over 19% year-to-date. However, shares have been riding a losing streak since the first of August, which is worrisome.

The other reason I don’t care for NOV is that you can easily find better deals in the oil market. National-Oilwell Varco trades at 43 times forward earnings, whereas the industry average is a little over 21x. Moreover, NOV pays out a pittance in dividend yield, less than 0.5%.

Again, for the inherent risk you’re taking in the oil sector, you have far better options.

Tesla (TSLA)

Tesla (TSLA)

Source: Shutterstock

For quite some time, I’ve supported Tesla’s (NASDAQ:TSLA) Elon Musk. Whatever troubles TSLA was facing in the markets, at the end of the day, I trusted Musk and his potential. We’ve all witnessed what this modern-day Einstein has accomplished.

Meeting sales targets for an automobile company? This should be child’s play compared to launching a convertible to Mars.

Unfortunately, we have one little problem: Musk at times has proven to be more a child than an adult. Whether it was his cryptic tweet that drew an SEC investigation, or his outbursts against analysts asking questions that are “not cool,” Musk has gone off the deep end.

TSLA has always suffered significant challenges, primarily with its car-production goals. But now, the company can’t even rely upon run-of-the-mill leadership, let alone a disciplined, focused CEO. Musk’s volatile behavior magnifies whatever ails TSLA. Bottom line, I’m out, and not just for October.

Wells Fargo (WFC)

Wells Fargo (WFC)

Source: Shutterstock

I have reservations towards big banks. As bellwethers of the underlying economy, we should see a correlation between consumer confidence and rising bank stocks. And actually, we’ve seen exactly that since President Donald Trump assumed office. But recently, things look shaky.

Among the “Big Four,” no one is having a worse month in September than Wells Fargo(NYSE:WFC). WFC stock is down almost double-digits at points since the close of Sept. 4. Wednesday’s session didn’t do the financial institution any favors, dropping 2%.

What’s going on? For one thing, WFC suffers the same issues as other major banks. Their earnings and sales growth originate from sources other than income from normal business activities (ie. lending, services, etc.).

But as my friend Will Ashworth pointed out, WFC underperforms its peers in other segments as well. For example, while jobless claims are declining, the company is “laying off as many as 26,500 employees, not a great a piece of news if you own Wells Fargo stock.”

Exactly. I don’t have any issue if you decide to take a shot on the big banks. But I’d put WFC on the list of stocks to sell.

Comcast (CMCSA)

Comcast (CMCSA)

Source: Mike Mozart via Flickr

To start this week, Comcast (NASDAQ:CMCSA) absorbed a 6% loss in the markets. The rationale for the volatility isn’t at all surprising. News stations everywhere announced that CMCSA emerged victorious in their bidding war for Sky (OTCMKTS:SKYAY).

But what did Comcast really win? The heavily indebted organization is now scheduled to assume even more debt. As so many people have argued months before this announcement, CMCSA would become unnecessarily unwieldy. Moreover, at a time when the cord-cutting phenomenon is accelerating, doubling down on traditional media seems counterproductive.

Adding insult to injury, noted analyst Craig Moffett downgraded CMCSA, questioning management’s longer-term vision. Not only that, Moffett points out that Comcast is paying a rich premium for Sky, a premium that the markets didn’t believe it was worth.

Subsequently, Disney (NYSE:DIS) is up nearly 4% for September. I’m siding with the markets and steering clear of CMCSA.

iShares China Large-Cap ETF (FXI)

iShares China Large-Cap ETF (FXI)

Source: Maher Najm via Flickr

China-based investments always attract the bulls’ interest, even if they aren’t ready to pull the trigger yet. But with the benchmark iShares China Large-Cap ETF (NYSEARCA:FXI) near the upper range of its recent consolidation channel, I think this is a great time to sell.

Like millions of Americans, I’m anxiously watching news media as we engage in a heated economic conflict with China. I’m trying to see if anybody is going to back down or offer to go to the negotiating table. But listening to President Trump speak, he relishes his “bad cop” role against the Chinese.

I don’t mind tough talk. But when you’re talking tough for its own sake, I get worried, especially if you’re the leader of the free world.

Right now, I’ve got to put FXI and most Chinese companies in my bag of stocks to sell in October. This trade war is going to last longer than most people anticipate. Plus, we should expect to see a few nasty surprises along the way.

Papa John’s (PZZA)

Papa John’s (PZZA)

Source: Shutterstock

Just recently, embattled Papa John’s (NASDAQ:PZZA) shot up 8.5% on the news that ousted founder John Schnatter is seeking private-equity firms to help take over the company. This is a perfect time to consider dumping PZZA stock.

First of all, I don’t know too many companies that want to associate themselves with Schnatter. The reward is limited, and the risk abundant. Just keep in mind that Americans today are especially sensitive to racial issues.

Second, the PZZA fiasco is one of those rare cases where the controversy becomes more pernicious as time passes. Most news media focused on Schnatter saying the N-word during a conference call. But that’s only half the story. Schnatter also accused KFC icon Colonel Harland Sanders of also using the word.

It’s an insane accusation because it’s not something that can be proven. Plus, the optics of slandering a dead man doesn’t go over well. For what it’s worth, the evidence that Sanders was racist is flimsy.

This ongoing drama will likely negatively impact PZZA stock for the simple reason that its rivals aren’t stupid. You’re not going to see Domino’s Pizza (NYSE:DPZ) make this egregious error. So while Papa John’s works hard to restore its reputation, the competition will jump to a perhaps unassailable lead.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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What is it?
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Source: Investor Place