Shesa's FEBRUARY 2014 Investment BLOG

2 February 2014

FEBRUARY 2014 Investment Blog

Shesa Nayak  

Market Commentary

Welcome to my FEBRUARY investment blog. Let’s take a quick glance to the current market phenomena and what we can expect going forward.

As I predicted in my January blog, this year is not going to be a smooth ride. There could be a lot of fluctuation in the stock market. We have already started seeing that in last couple of weeks. I will write in more details later. Let’s take a quick look to the market. The DOW Jones Industrial Average closed the month at 15698.85, tumbling more than 5%. This was Dow's worst January since 2009. The S&P 500 lost 3% to close at 1782.59 and NASDAQ lost about 2% to close at 4103.88. On 30^th January, government reported that the GDP grew at 3.2% in fourth quarter of 2013, modestly beating expectations and the market did shot up. Business and consumer spending rose, and exports surged 11.4%. Pending home sales declined 8.7% in December, the lowest reading in over two years. The inventory of new homes rose to five months from 4.7 months in November. Median home prices rose 0.9% after seasonal adjustment. Business, consumer spending rose, and exports surged 11.4%.

Now let’s analyze why the Market is down last couple of weeks?

Again reminding the readers that we can expect to see a lot of volatility now and going forward. But let’s take a quick glance on issues surrounding the stock market.

Uncertainty on Emerging Market: It's the uncertainty surrounding the health of emerging markets, which seems to be weighing most heavily on investors at the moment. The China manufacturing index and currency crisis to mention were primary reason for the market decline. China Purchasing manager Index was 49.6 for January, which indicates contraction in economy, as it was less than 50. But the question is why does the emerging market matter so much to Wall Street? Obviously, Emerging markets seems to be the future growth engine of the global economy and that’s a very important source of profits for U.S. corporations. These developing economies were both recipients and beneficiaries of massive cash inflows in the past several years as investors looked for bigger returns. However, the Federal Reserve started pumping about $85 billion every month that is a staggering $1.2 trillion of bond buying program resulting into lots of liquidity. This triggered cash outflow from emerging markets and bringing the cash back to more stable markets like USA and hurting the developing nations in the process. But it’s always a give and take relationship. If emerging markets fail then they will be buying less of goods/services from US corporates and that will decline their high profitability. In addition, now the countries like Turkey and Argentina have hard time to service their debt. There is weaker currency in Turkey, Brazil, India and few other emerging countries. This would results in higher inflation and less buying power due to strong US dollar.

FED Move: On January 26^th, which happened to be the final meeting of Federal chairman Ben Bernanke, it was decided to further cut down its massive bond-buying program. The Fed said, it would reduce its bond-buying program to $65 billion in February, down from $75 billion in January and $85 billions since September 2012. Though this was expected, market is looking for some opportunity to book some profit. Current Vice Chair Janet Yellen is scheduled to preside from next Fed meeting in March as successor to Ben Bernanke. Let’s see how it goes...

Corporate Earnings: The market had factored in for a stellar quarter from corporate America. Overall, earnings were good but not as good as it thought to be. There were some earnings disappointment from many big power houses like Apple, Google, Boeing, AT&T, IBM, Intel, AMZN, MA to name a few. Please note that, though Google missed earning forecast by 18 cents still the stock went up!

Now let’s jump to our February recommendations. This month I am writing about one Mutual Fund and one Dividend paying stock. Just to remind all investors that during such volatility of stock market it’s better to have some cash available, preferably 15-20% to take advantage of any major correction. But how much cash you should have depends upon your age, risk tolerance, source of fund and so on. So there is no bulletproof answer for that. Anyway, I have a lot of earnings update at the end of this blog on my earlier recommendations. Please spend some time on reading those as we plan to invest in a diligent manner.

MUTUAL FUND

T. Rowe Price Health Sciences (PRHSX): If you recall, I recommended FBIOX a few moths ago at around $128 and now it’s at $205. This is a humongous return on investment and I hope some folks are invested!! I still think this is one of the best mutual funds in biotech sector. However, this month I am writing about another great biotech Mutual Fund (PRHSX). This fund has given tremendous return in last several years. Please remember that past performance is not always the reflection of future. But in my analysis, I do see a lot of variables impacting a fund viz. performance during up/downturn, cost, tenure of Fund Manager, Beta and other critical factors before deciding to buy. Please note that Mutual Funds are long-term investment and not short term trading. Therefore, please buy only if you have longer time horizon.  Also you should keep buying such good funds and keep adding small recurring amount each month or every few months. Anyway, let’s look to this fund.

Return:  1 year: 51.4%, 3 year: 30.4%, 5 year: 27.8% and 10 year: 15.31%.

Minimum Investment: $2500, Morningstar Rating: *****

Load: No Load on MLL and few others trading Co. Avoid any load/trans fees.

Expense: 0.79%, Beta: 1.03

Please note, this fund is closed in Fidelity for new investors. But you can buy this fund with other brokerage firms where there are no transaction fees. In MLL this fund is still available for new investor. If you have account in Fidelity and did not buy FBIOX then you can re-think. I am recommending another biotech fund because this year biotech sector may have another good year as many of the key drugs patent expiring. And overall the sector is performing pretty well.

Risk(s): Biotech funds are very volatile and this fund has a new fund manager since February 2013. I will keep providing more mutual funds going forward. Stay tuned!

STOCK 

Annaly Capital Management, Inc. (NLY)

If you recall, I wrote about AGNC in my December blog. Today I am writing another mREIT (Mortgage REIT) company that pays a reasonable dividend of about 11.5%. Annaly Capital owns, manages, and finances a portfolio of real estate related investments in United States. It has a very low PE of        3.05 and forward PE of about 9.2. In last few quarters, the Revenue and Earnings growth have gone negative. But it has a Book Value of 16 which means that it’s selling on discount to its BV. In a rising interest rate environment these REIT are subject to Fed's actions, which will have major repercussions. But as we know, market factors in those negative sentiments ahead of time. Of course, there are additional risks associated to the high yield dividend paying stock because they fund the dividend by issuing additional shares, which dilutes the equity float. However, all these REITs are beaten down significantly. In addition, if you observe then you could see that during the down market this stocks is not going down too much. Because when market keeps fluctuating or goes downward, investors tend to look for dividend paying conservative stocks.  So it is worth considering to initiating a position 2-3% of the portfolio value, keep accumulating some good dividend and minimizing risk during downturn. This stock also has a great return on equity of about 22.65%. It plans to report earning next week. You can wait and take your decision accordingly.

STOCK Updates

It has been a great earning season. It’s important to look how the recommended stocks performed. So let’s take a quick look:

Apple (AAPL): Apple’s 1st quarter 2014 result was declared on 1/27/14. Earning for the quarter was pretty good as expected. The earnings per share came in at $13.1 Billion or $14.50 per share, 41 cents a share over consensus estimate. This was first quarterly year over year earnings gains in five quarters.  Revenues came in at a whopping $57.59B, $130mm over expectations. Domestic cash reserve was $34.4 billion at the end of the quarter and it has about $150.8 billion in cash, short and long-term securities. It also declared a dividend of $3.05 per share. But why was the stock down $44 on 1/28 even though Apple beat the forecast? The company forecasted Q2 revenue between $42 billion and $44 billion (as opposed to expectations of $46 billion). This is $2-3 billion less than what the analyst had forecasted. Also some analyst felt that deal with China Mobile may not generate the amount of revenue they anticipate. But on the positive note, Tim Cook also confirmed that Apple would be entering new product categories in 2014. Though, he did not specify which product but please take a look to my November blog to see further details. It’s trading with a future PE of about 10.8. If you take its humongous cash reserve into consideration, PE could be around 6. That's a ridiculously cheap valuation considering the P/E ratio for the S&P 500 is about 16. Hence, I still think it’s a BUY for long-term investment.

Facebook (FB):  The social-networking giant reported Q4 earning on 1/29. It was a great quarter. It reported net income of $780 million on revenue of $2.6 billion in the quarter. Analysts had projected net income of $703.5 million on revenue of $2.3 billion, according to Thomson Reuters. Excluding expenses, Facebook was expected to earn 27 cents per share but it reported 31 cents per share. For the full year, Facebook revenue increased nearly 55 percent to $7.87 billion, beating analyst estimate of $7.64 billion and profit of 88 cents against projected 84 cents. It did not forecast anything for Q1 but analysts are expecting first-quarter revenue to grow 46.7 percent on the year to $2.14 billion and adjusted earnings to increase about 80% to 22 cents. As I mentioned on my previous blog I wanted to see this earning to update my comment. At this point, revenue, profit, and momentum look good. It is a good BUY or add to existing position.

SODA: SodaStream declared the preliminary result on 1/13 and said it anticipates full-year net income of about $41.5 million on revenue of approximately $562 million. Its prior outlook was for net income of $54 million on revenue of about $567 million. Analysts were expecting about $564 million. Though Revenue was near expectation the company have hard time maintaining profitability. Its stock dropped 26% after the company revised its full-year guidance downward. SodaStream has declined about 40% since Oct. 29, the day before the company reported third-quarter sales that fell short of analysts’ estimates. At this point I would prefer to SELL the stock. But if you are a patient investor then you can hold keeping long term in mind.

EXEL: Exelixis Inc. shares maintained around $7, which is up about 18% since I had mentioned in my December Blog. I posted some update on this cancer drug manufacturer a few days ago. BUY.

MasterCard Inc. (MA) Last Friday, it reported fourth-quarter earnings per share (EPS) of 57 cents. The results missed the Consensus Estimate of 60 cents but outpaced the year-ago quarter figure of 49 cents. Revenues increased 12.2% year over year to $2.13 billion for the quarter. For the whole year its revenue increased to 12.9% at $8.35 billion and net income increased 14.6% year over year to $3.18 billion. If you are a long-term investor it may not be a bad time to initiate some position, if you did not. BUY.

GOGO: As stated before, GOGO happens to be very volatile.  There are a couple of reasons. First, there is more equity in Float after the locking period completed in November.  Secondly, a few days ago, the CEO told in CNBC that there is no plan to sell the company. This disappointed many investors. I do feel that it’s a good acquisition candidate by any carrier or airline or company like Google and Apple. I would wait and see how the earning comes out on 2^nd week of February. At this point it could be a good idea to HOLD or take a very small position if one did not do earlier.

EDC:  My last month’s recommendation did not perform well. It has gone south for last few trading sessions. But as I said, it needs patience and courage to co-op with volatility. It is primarily due to China growth concern and the on-going currency issue in Turkey, Brazil, India and some other nations.  But I would not be concerned too much as long there is long-term perspective in mind. Any positive news from China economy bounce could be a major catalyst. But as said, this is a very high volatile and risky ETF.  So please be judicious while taking your decision. BUY.

BIDU: Company is set to Report earnings next week. If the report is good it will be a good buying opportunity. The stock has corrected almost 16% along with many other Chinese stock as a judge ruled that prevents Chinese joint ventures of the world’s Big Four auditing firms from auditing U.S.-listed Chinese companies for six months. Let’s see how it goes. But in my opinion it may not be too serious as this could cause potential problem in diplomatic relationship. BUY if earning is good.

AGNC: It plans to Report earning on Monday, 2/3/14.

TSLA: Company expects to report earnings on 3^rd week of February.

Economy Reports to watch Next Week:

Monday: Construction Spending.

Tuesday: Factory Goods Orders.

Thursday: Initial Claims for Unemployment, Balance of Trade Report.

Friday: Unemployment Rate Report. This is the most important report that will be released wherein the Labor Department will announce the official unemployment rate for January. Also Consumer Credit report is due on the same day.

Folks, that’s all for today. It has been long enough! Thanks for your time in reading my blog. This month I was not able to write about the strategies, the blog has gone several pages. I will try writing some new recommendations and strategies in my next blog. Please note that, sometime I send ALERT messages exclusively to my Google group. If you are interested, send me an email and I will add you there. Please feel free to send me your comments and suggestions to shesa.nayak@gmail.com

Disclaimer: This blog is meant to provide my own opinion rather than professional recommendation to buy/sell any stock, ETF, mutual fund or any other security(s). As an investor, it’s your hard earned money and you decide what is best for you. The above are merely my own recommendation(s) and please contact a professional money manager to buy/sell any security. I do not earn any money by writing such blog. I have position on whatever security I write on the blog and avoid recommending any security that I do not follow.

Note: You can read all my Blogs in the following location: 

Shesa's BLOG Archive