Risk

  • 21 Nov
    Wait…what? Did Bezos really just say AMZN is doomed to fail?

    Wait…what? Did Bezos really just say AMZN is doomed to fail?

    Last week in Seattle, Amazon (AMZN) held an all-hands company meeting. When asked by an employee about the company’s future, founder and CEO said something that I don’t think most people would expect of any CEO, much less the CEO of one of the most disruptive companies in the world. “Amazon is not too big to fail,” he said. “In fact, I predict one day Amazon will fail. Amazon will go bankrupt.”

    At first glance, his comment seems pretty surprising, especially given the way the company has expanded its presence from a simple online bookseller to a purveyor of just about anything and everything you might be able to imagine. Not content with simply operating as an online retailer, and with establishing a dominating presence, Amazon is one of the most aggressive companies in the world when it comes to identifying opportunities to move into new businesses. No longer just an online retailer, AMZN has really expanded its business model over the past decade or so.

    To keep pace with the tablet market, the company introduced its own line of e-book readers and tablet computers with the Amazon Fire product line. In a move that now seems prescient, in 2006 the company launched Amazon Web Services (AWS), aimed at cloud computing and data services; according to recent reports, they now own about 34% of the U.S. cloud market, putting them firmly in the driver’s seat in that arena. Another smart move was the introduction Amazon Prime in 2005; initially started as a paid membership shipping service, in 2012 it was expanded to include streaming video and music content, and now stands as a strong competitor in the streaming media business with Netflix (NFLX). They also made a big splash last year when they finalized a merger with Whole Foods Market, giving them a foothold in the grocery market that put big-box retailers like Walmart (WMT) and Target Stores (TGT) on edge.



    So why would the CEO of one of the most aggressive and disruptive companies with such a take-no-prisoners attitude about business make such a provocative statement? I think that when you read further, you get a good into the mindset that makes Bezos such an interesting figure in world business. He didn’t just stop at predicting his company’s doom; he expanded the discussion, explaining that large companies generally have lifespans that cover about three decades – not ten or more. 

    How could a company prolong its otherwise inevitable demise? By learning to “obsess over customers,” said Bezos. “If we start to focus on ourselves, instead of focusing on our customers, that will be the beginning of the end.” What I think you see is a glimpse into the mindset of an executive that has grown his company into one of the largest companies in the world by refusing to stand pat – not only by attacking new markets fearlessly and being willing to take big risks, but also by always looking for new ways to make the their customer’s lives better.

    What does this mean for an investor? The stock has been one of the biggest growth stocks of this bull market, increasing in price from a low in late 2008 in the mid-$30 range to a September high above $2,050. Since that high, the stock has dropped a little over 27%. Does this represent an opportunity to buy in at a discount? The problem is that just because a stock may have entered its own bear market territory – and 27% certainly means that bears are running a lot harder right now than bulls with AMZN – it doesn’t automatically mean the stock is a good value. AMZN has some very impressive fundamentals behind it, but as I think you’ll see, the value proposition offers conflicting information that to me translates to an increased level of downside risk.



    Fundamental and Value Profile

    Amazon.com, Inc. offers a range of products and services through its Websites. The Company operates through three segments: North America, International and Amazon Web Services (AWS). The Company’s products include merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. It also manufactures and sells electronic devices. The Company, through its subsidiary, Whole Foods Market, Inc., offers healthy and organic food and staples across its stores. The Company also offers a range of products like whole trade bananas, organic avocados, organic large brown eggs, organic responsibly-farmed salmon and tilapia, organic baby kale and baby lettuce, animal-welfare-rated 85% lean ground beef, creamy and crunchy almond butter, organic gala and fuji apples, organic rotisserie chicken. AMZN has a current market cap of $731,2 billion.

    • Earnings and Sales Growth: Over the past year, earnings increased a more than 1000%, while sales improved about 29%. Growing earnings faster than sales is hard to do, and generally isn’t sustainable in the long term, but it is also a positive mark of management’s ability to maximize its business operations. In the last quarter, earnings increased about 13.5%, while sales increased nearly 7%. The company operates with a margin profile that improved from 4% in the past twelve months to 5% over the last quarter.
    • Free Cash Flow: AMZN’s Free Cash Flow is more than $15.3 billion, which is impressive in terms of sheer numbers is very impressive, but considered against the scope of the size of their business gives a hint into the narrow room for error AMZN works with. Their Free Cash Flow Yield is a modest 2.07%.
    • Debt to Equity: AMZN has a debt/equity ratio of .63, which is a conservative number. Their balance sheet indicates more than $29.7 billion in cash against $24.6 billion in long-term debt.
    • Dividend: AMZN does not pay a dividend.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for AMZN is $80.01 per share. At the stock’s current price, that translates to a Price/Book Ratio of 18.69. The stock’s historical Price/Book ratio by comparison is 20.56 and puts the top end of the stock’s long-term price target at around $1,645 per share. AMZN may be down since September by more than 27%, but that translates to just about 10% of upside potential. The real conflict comes when you factor in the stock’s Price/Cash Flow ratio, which is trading more than 41.5% above its historical average that puts a contrasting target price at only $882.32 per share.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: AMZN’s downward slide since September is impressive in both its speed and and depth; the strongly bearish momentum certainly also implies that the worst could still be yet to come, with major support for the stock sitting at around $1,400 per share. A drop below that level could see the stock test the $1,300 level, with an even deeper low in the $1,200 level not out of the question. The stock has major resistance at around $1,600 per share and should be expected to act against any kind of sustained rally.
    • Near-term Keys: A short-term bullish trade is very speculative right now, and will continue to be unless the stock can push up to about $1,650 per share. That is a pretty good price level that could signal the long-term downward trend is about to reverse. A much higher probability set up will be seen if the stock breaks down below $1,400 per share. That could provide a good signal to short the stock or start working with put options. The spread between the target prices offered by the Price/Book and the Price/Cash Flow ratios is so extreme that it’s hard to justify the stock as any kind of value-based investment.


  • 20 Nov
    Is AVY another great bargain in the Materials sector?

    Is AVY another great bargain in the Materials sector?

    In yesterday’s post, I wrote about the Materials sector as a segment of the economy that seems have started to attract the interest and attention to institutional investors. Sector rotation is an approach to market analysis that suggests that if you want to find good investments in any market, it’s a good idea to pay attention to where institutions – mutual funds, investment banks, and insurance companies, to name just a few – are putting their money to work for them.  More →

  • 19 Nov
    Is WRK a smart choice in a sector that is gaining institutional favor?

    Is WRK a smart choice in a sector that is gaining institutional favor?

    The month of October put investors on notice that volatility in the stock market wasn’t going to go away anytime soon. I think it makes sense; investors are becoming more and more aware of the difficulty associated with extending an unprecedented period of economic expansion. More →

  • 16 Nov
    FDX is nearing bear market territory – should you pay attention?

    FDX is nearing bear market territory – should you pay attention?

    Throughout most of the year, stocks that are considered cyclical in nature – think autos, airlines, transportation, and energy, to name just a few – have been among the most volatile stocks in the market. That has included companies in the air freight & logistics industry; and while there are a number of players in the industry, the two biggest and most recognizable names without question are United Parcel Service, Inc. (UPS) and FedEx Corp. (FDX). More →

  • 14 Nov
    AAPL is down big since October – how much is it actually worth?

    AAPL is down big since October – how much is it actually worth?

    Apple Inc. (AAPL) is one of the biggest companies in the world; in August of this year, with the stock pushing nicely above $200 per share, they were the first company in the modern era to officially cross the $1 trillion dollar threshold. And over the last ten years, it is without a doubt one of the biggest performers throughout the course of the bull market. Along with its big tech brethren like Alphabet (GOOGL), Amazon (AMZN) and Microsoft (MSFT), AAPL has long been one of the companies that the rest of the market seems to have taken its cues from. More →

  • 13 Nov
    How close is the S&P 500 to a level that you should REALLY start to worry?

    How close is the S&P 500 to a level that you should REALLY start to worry?

    If you were watching the market sell off again yesterday, you probably started to wonder as I did if the market was really starting to follow through on the bearish sentiment that drove it back into correction territory for the Dow and the NASDAQ. The S&P plunged nearly 2% amid worries that the entire tech sector, which has paced and even led the market throughout its bullish trend since 2009, has finally peaked. The “FANG” stocks – Facebook, Apple, Netflix and Alphabet, and Amazon – all led the selloff as reports indicated that demand for Apple’s (AAPL) iPhone has weakened.

    If you’re listening to the talking heads on market media outlets, it’s even easier to buy into the negative hype, as more and more of them wring their hands and talk about the end of the bull market. The to remember, however is that while a correction always precedes a legitimate bear market, not all corrections are followed by a bear market. In fact, corrections are entirely normal, and even healthy; they are one of the things that makes a long-term upward trend sustainable. During its nearly ten-year bullish run since 2009, the stock market has experienced numerous pullbacks and corrections.



    Does that mean that all of the angst, worry and concern is overblown? I’m not sure; the truth is that the longer the market holds an upward trend, the greater the major trend reversal risk becomes. The truth is that when the market’s long-term upward trend does finally reverse – and make no mistake, it certainly will – the drop is likely to be extreme. First, consider that since bottoming in late 2009, the S&P 500 has more than quadrupled value; next, consider that in the last two bear markets, from 2008 to 2009 and prior to that, from 2000 to 2002, the downward trend shaved 50% or more from that index each time. As of yesterday’s close, the S&P 500 closed a little above 2,700 with its all-time high in late September coming at around 2,900; that means that if the market is actually starting the latest, inevitable slide to bear market territory, the bottom might not be seen until the index is around 1,400, or even lower.

    I think the real question isn’t if the market is going to reverse; it isn’t even when, despite the talk that seems to be dominating market news right now. Even the question of why or how it could happen is less important at the moment than identifying the point that I think every smart investor should be ready to acknowledge the reversal could actually be happening.

    Analysts like to use percentage declines as a barometer for how severe the latest drop from a high is. 10% is generally accepted as the level at which the market is officially in a corrective phase. The market’s drop in October put things in the second corrective phase of the year. Where is does the bear market come to play? The next percentage level is 20% – which for the S&P 500 would be around 2,300 based on its September highs. We’re still more than 400 points away from that point, which is why you might see some analysts maintaining their generally bullish stance right now.



    I like to use trend and pivot analysis on the broad market to supplement these generally accepted levels. I think the market is closer to a legitimate bearish signal than the 20% minimum suggests, and it is another reason a lot of people are wringing their hands right now. Here is what I’m seeing right now.

     

    This chart is for the S&P 500 SPDR (SPY), the ETF that matches the movement of the index. The prices shown on the right for the stock don’t equate directly to the S&P 500, but the percentages between prices are consistent, so this is a good proxy chart for the index. I’ve drawn a horizontal red line along the bottom of the chart using the previous low points the S&P 500 tested during the first correction of the year. That levels corresponds roughly with the 2,600 level for the index; as of yesterday’s close the market is a little less than 5.5% above that point. It came near to that point in October before rallying strongly towards the last couple of days and into the beginning of November.



    This red line is what I think most investors should be treating as the signal point; not necessarily for the point where the market has finally turned to bear market conditions, but rather the point where the market can actually confirm a legitimate downward trend. We’re not quite there, although the drop from the market’s pivot high a few days ago is a warning sign. If the index drops below its October pivot low, the market will officially be in a short-term downward trend. If that is then followed by a drop below the red line I’ve drawn, I think you’d be smart to say that the downward trend  is more likely to extend into an intermediate time frame, which could last anywhere from just a couple of months to as long as nine months.

    An intermediate downward trend doesn’t guarantee the trend will become a long-term one, and it doesn’t guarantee the market will drop into bear market territory; however given how raw the market’s emotional state appears to be right now, I think you would foolish to discount the very real possibility that the market could easily shift from uncertainty into legitimate panic once the market breaks below the 2,600 level. If that panic extends to massive selling, we’ll see a lot of average investors getting out of their positions and you’ll hear even more about concepts like “safe havens” and “flight to quality.” These are market conditions that exist when investors start dumping stocks and moving en masse into instruments like bonds, money markets, and even to cash. That hasn’t happened yet, but pay attention to the 2,600 level for the S&P 500. If the index drops below that level, and stays below it, don’t be surprised if the selling gets even worse. That’s why even as I’m writing about stocks in this space that I think represent interesting values right now, you should be very careful about taking on any new positions. When the sell-off really starts, it will be hard to find a place to hide, which means that you should be holding stocks you’re willing to ride out over the long-term, with conservative positions sizes that make it easier to limit your overall risk even in an extended bear market.


  • 12 Nov
    Want to bet on financials? C isn’t a smart gamble yet

    Want to bet on financials? C isn’t a smart gamble yet

    One of the rising concerns that has helped keep the market on edge for the last couple of months now is the spectre that since interest rates are likely to keep rising, economic growth in the United States will inevitably have to slow or, worse reverse into a new recessionary cycle. I do think that it is true that the longer the latest expansionary cycle – which could begin to stretch into an unprecedented full decade in the next few months – continues, the more likely a new extended downward cycle becomes. That doesn’t mean the end is near, or that we know when that reversal will come; it just means that a cycle, by definition has a beginning and an end, and that in a market economy, every bullish cycle eventually and inevitably turns bearish, and every bearish cycle eventually and inevitably turns bullish.

    One of the real tricks to being able to keep your money working for you no matter what the broader economy and market’s trend is doing is being able to recognize that opportunities exist in every kind of cycle. I was reminded about that recently while listening to a few analysts talking about current market conditions. The discussion closed with the moderator asking these experts where each one thought some of the smartest places to put their money right now would be. It wasn’t too surprising when a couple of them singled out the financial sector.



    The premise is simple enough: rising rates are good for fixed-income investors, because they can get a higher yield on “safer” investments like bonds and short-term instruments. That’s usually just one piece of positive news for banks, as they see increased volume in bond purchases as well as flows into shorter-term instruments like money markets, Treasury bills, and certificates of deposit. That also gives them more money to offer to borrowers at higher interest rates, which often means that while other parts of the market are experiencing turbulence and increased volatility, financial stocks like banks become part of the “flight to quality” that are often typical of the end of a bull market.

    It is a bit of a double-edged sword, however; rising interest rates can only continue for so long before the economy inevitably begins to slow, because at some point interest rates become high enough that borrowing becomes prohibitively expensive. In the financial crisis that triggered the last recessionary cycle from 2008 to 2009, the store was made even worse by the realization that mortgage companies and banks had over-leveraged themselves with subprime loans – loans that charged higher interest rates to borrowers with poor credit quality. The problem was that when the economy began to slow, these loans became almost completely non-productive. The federal government took steps in the years following to regulate subprime lending more closely, and so there isn’t likely to be the same kind of risk now that existed ten years ago. Even so, it is a cautionary tale worth noting, because the truth is that even banks, insurance companies and investment institutions remain at risk when the economy slips into recessionary conditions.

    If you want to watch the financial sector right now, it’s smart to keep a cautious eye, and to look for stocks that represent an excellent value. Citigroup Inc. (C) is a good example; since hitting a 52-week high at nearly $81 in late January of this year, the stock began an extended slide downward, falling all the way to the $65 level by the beginning of July. It stages a short-term bullish trend from that point, rallying to around $75 in late September before dropping back to a new 52-week low around $63 in late October. As of this writing, the stock is back around $65 price level – a price that might offer a tempting opportunity for somebody looking for a good value play in the financial sector. But is C really a stock that is worth investing your hard-earned dollars right now? You decide.



    Fundamental and Value Profile

    Citigroup Inc. (Citi) is a financial services holding company. The Company’s whose businesses provide consumers, corporations, governments and institutions with a range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, trade and securities services and wealth management. The Company operates through two segments: Citicorp and Citi Holdings. Citicorp is the Company’s global bank for consumers and businesses and represents its core franchises. Citicorp is focused on providing products and services to customers and leveraging the Company’s global network, including various economies. As of December 31, 2016, Citicorp was present in 97 countries and jurisdictions, and offered services in over 160 countries and jurisdictions. Global Consumer Banking (GCB) provides traditional banking services to retail customers through retail banking, including Citi-branded cards and Citi retail services. C has a current market cap of $165.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased 22.5%, while sales increased almost 10%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of management’s ability to maximize their business operations. The company’s Net Income versus Revenue tells an interesting story, since over the last twelve months it was actually -5.4%, but in the last quarter improved to more than 18.5%, pointing to major improvement in the company’s margin profile.
    • Free Cash Flow: C’s Free Cash Flow is strong, at more than $21.5 billion. This is a number that has increased throughout 2018, but before that point had declined from a high in late 2015 of about $65 billion.
    • Debt to Equity: C has a debt/equity ratio of 1.32, which appears high, but it should be noted that most banks carry higher debt levels as a normal course of their business. It should be noted that despite the high debt/equity ratio, the company’s cash and liquid assets are more than 3 times higher than the total amount of long-term debt on their balance sheet.
    • Dividend: C pays an annual dividend of $1.80 per share, which at its current price translates to a dividend yield of about 2.73%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for C is $69.58 per share. At the stock’s current price, that translates to a Price/Book Ratio of .94, which at first blush seems very low; however, the stock’s historical average is only .8. The stock is also trading about 22% above its historical Price/Cash Flow ratio. Together, those two measurements put the stock’s fair value at somewhere between $52 and $55 per share, which is well below the stock’s current price. The stock would actually have to drop below $45 to be considered a useful discount relative to its historical Price/Book value.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The chart above displays the stock’s price action for the last year. The decline from the stock’s September peak at about $75 marks a decline over the past six weeks or so of about 12% at the stock’s price as of this writing. It has strong support between $63 and $65 per share, while near-term resistance should be seen around $69, with $72 and $75 acting as secondary resistance points if the stock can begin to stage a bullish rally.
    • Near-term Keys: A short-term trade right now is pretty speculative on this stock, no matter whether you want to trade the bullish side by buying the stock outright or to start working with call options. A bearish trade also is a very low probability proposition right now given the stock’s current support level; the only decent signal on this side would come if the stock break below $65. In that case, the next likely support level would be in the $57 to $58 range, so there could be an interesting opportunity to short the stock in that case or work with put options. While the company has some interesting fundamental strengths, I think that it remains a bit expensive right now, even with the stock’s current decline for most of the year. I wouldn’t really be very interested in working with this stock unless and until it drops into the $44 to $45 range. That would take a decline from its current price of a little more than 30%, which really the biggest reason I don’t think this is a risk worth taking right now.


  • 09 Nov
    AMAT is down more than 50% from its top – has it finally found bottom?

    AMAT is down more than 50% from its top – has it finally found bottom?

    Throughout most of this year, semiconductors have been perhaps the most distressed sector of the market. Before bottoming at the end of the October, the sector had dropped a little over 21% from its high point in mid-March as measured by the iShares Semiconductor ETF (SOXX), and is still down nearly 15% as of Thursday’s close. This is a sector that is dominated by large-cap, well-known names like Intel (INTC), Texas Instruments (TXN), and Qualcomm (QCOM), to name just a few. More →

  • 08 Nov
    Why government gridlock could be a good thing for these 2 sectors

    Why government gridlock could be a good thing for these 2 sectors

    October was a rough month for the stock market, proven by the decline of the NASDAQ and Dow Jones Industrial Average into clear correction territory, while the S&P 500 halted its own slide just shy of that mark. It was enough to put a lot of investors and analysts on edge and start to wonder if the good times were finally coming to an end.

    What a difference a week makes! After closing out the worst October, and one-month period in a decade, the market has rebounded strongly over the last week. The Dow is up a little over 6.6%, the NASDAQ 8.3%, and the S&P 500 6.7% in that time. This week may have provided an unexpected catalyst for the market to push back and retest the all-time highs set in late September. Mid-term elections on Tuesday left Democrats in control of the House of Representatives, while Republicans kept their spot in the driver’s seat in the Senate.



    Depending on your political view, a divided government may not be a good thing; major reforms or initiatives from either side of aisle become more difficult without one party in control of both houses of government. It isn’t unreasonable to suggest that one of the reasons President Trump could afford to be as confrontational as he has, with a consistent, “my way or the highway” attitude about everything from tax reform, trade and most certainly his major staff advisors and political appointees is because Republicans controlled Congress and the Senate. That usually meant that even if a lot of Republicans and conservatives criticized his approach, the party at large generally fell into line behind him.

    As an investor, it’s not always easy to separate investing discipline and objectivity from political opinion and preference. That becomes harder when politics have a clear and direct impact on economic progress and market behavior. The Tax Reform Act at the end of last year is a good example; the tax savings that became available almost immediately to corporate America were certainly a catalyst for the market’s recovery from its first correction at the beginning of the year. In that light, the impact that midterm elections has on the market now could come from the government’s likely inability for the next couple of years to push any major changes.

    I’ve always believed that if there is anything the market really doesn’t like, and is most likely to react negatively to, it’s change. Investors like predictability, and we rely on measurements that offer a certain level of reliability to guide investment decisions. The status quo means that the things we use to drive our decisions remain relatively constant, and we don’t have to worry as much about changing our method or our approach. When something threatens to change the investing landscape, investors naturally get nervous.



    After eight years of a long, sustained bullish run that made a lot of investors think the easiest and best way to make money way in the stock market was to buy a passive index fund and just let it ride – “invest it and forget it,” if you will – the market rediscovered volatility this year. A big part of that was influenced by openly aggressive and confrontational politics from the Trump administration. Tariffs imposed every one of America’s largest and most important trading partners may indeed prove to have been the right move in the long run, but the tensions that came from seeing those long-standing trade relationships continue to keep the market on edge. A split government may not be able to put the cat back int the bag of things the Trump administration has already put back in place, the lack of consensus is also likely to make continued progress and changes that much harder to come by. The hope that the market seems to be keying on right now is that a natural check from a split House against the Oval Office could help restore the status quo and give investors a return at least some kind of  predictability that can help keep the stock market’s bullish trend in place.

    Assuming this happens, it’s entirely possible that the market could stage yet another broad-based rally to a new set of all-time highs. Which are the sectors that might be the biggest beneficiaries? I think there are two; here they are.



    Industrials

    While a divided House may blunt many of the reforms and initiatives the Trump administration still has plans for, one of the things that both sides seem to agree on is the need for improved infrastructure. A major spending bill may be hard to come by, but any progress on this front should act as a positive for this sector. Consider also that tariff and trade concerns have put major pressure on the sector throughout the year; even with the sector’s rebound since the end of October, which is about 10% from October 30th to now as measured by the SPDR Industrial Sector ETF (XLI), it remains down by a little over 10% from its 52-week highs. That gives the industry lots of room to rally even more, with increased chances that the absence of political complications could contribute even more.

    Semiconductors

    This sector has been one of the biggest underperformers throughout the year, as pricing and supply pressures among chipmakers have pushed stocks lower. A major argument for the President’s aggressive trade stance towards China has centered around the semiconductor industry and concerns about intellectual property protections and even theft. Many of the pricing pressures that have pushed semi stocks lower may not abate quickly. I also think, however that a changed political reality could force the Trump administration to try to make a trade deal with China more quickly than it might do otherwise; and I would expect that to provide at least an emotional reason for investors to start making new bets on a sector that has been beaten down by almost 15%, based on the Ishares Semiconductor ETF (SOXX) from its 52-week highs.


  • 05 Nov
    TTC has jumped 10.5% in the last week – should you ride the wave?

    TTC has jumped 10.5% in the last week – should you ride the wave?

    A few months ago, I wrote about the The Toro Company (TTC) to evaluate the stock as a potential value play based on the stock’s 18% decline since August of 2017. At the time, the stock has trading in the low $60 range, and hovering in a narrow, sideway price channel.  In late September, the stock dropped below that channel to establish a new 52-week low a little below $54 per share; but since October 26 the stock has seen an impressive rally, climbing to nearly $60 as of Friday’s close. More →

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