Shesa's MAY 2014 INVESTMENT BLOG

                        11 May 2014

MAY 2014 Investment Blog

Shesa Nayak  

Market Commentary           

Welcome to my MAY 2014 investment blog. As usual, let’s take a quick glance to the current market phenomena and what we can expect going forward.

The DOW Jones Industrial Average closed this Friday at 16,583, just edging past its former closing high of 16,581 set on April 30. S&P 500 closed at 1,867.02 and NASDAQ closed at 4,025.24 points. Both DOW and S&P are trying to set new highs but NASDAQ has been very volatile off late. Last few weeks have not been very exciting news for the NASDAQ investors.  Earning season and Russia tension continues to dominate the stock market volatility.

Current Stock Market Trend - should we be concerned?

We could see that stock market has been volatile from the beginning of 2014. Most of the market heavy weights have come out with their earnings. A lot of those companies have been beaten down significantly, either due to missed analyst expectations or lack of exciting projections for the forthcoming quarter. Particularly biotech, cloud, commodity and Chinese stocks have been hit very hard. However, Apple (AAPL) was the exception whose share price did shoot up $45 after the earnings announcement. The earning season is about to end and once it’s over there are further chances that market correction would continue. Should we be concerned of these corrections? Of course, we should be concerned about any market correction. However, please note that it also provides us a great opportunity to buy some great stocks that we could not able to buy earlier. Many folks ask me whether we should buy fundamentally superior stock with good revenue and earnings growth or buy conservative stock in such a volatile market environment. I do not have any concrete answer to that. It all depends on your investment strategy, risk taking capability, retirement age and so on. But I fell that a hybrid approach could be a better choice. As people say, sell in May and go away! Should we do that? I do not agree with the "sell in May, and go away" strategy because the first-quarter earnings announcement season is starting to wind down, and profit taking is normal at this point in any earnings season.

Is there a bubble in the Stock Market?

Many market pundits say that the market is behaving the same way it did during 2000 Internet bubble. Agreed, some of the momentum stocks ran up like crazy but they have also lost 30-40% of their values off late. Now let’s analyze some facts that may provide the readers some comfort.

·     Based on my study, NASDAQ was trading around 194 times to their earnings in the year 2000. But now it’s trading about 20 times to their earnings. This means, we are certainly not on bubble, and the valuation is still pretty attractive. But if we feel that any particular stock is on bubble then the best strategy is to avoid it.

·     ROI: Based on my available information, the middle of election year has seen a correction of about 8 - 19% on the stock market, which starts around the 2^nd quarter and ends in 3^rd – 4th quarter. Just to remind the readers that we are now in 2^nd quarter. However, once the correction is over, next year after the mid election year the stock market has returned about 32% on an average, which is highly impressive. Hence we must have a pro-active investment strategy to achieve better Return on Investment. As we know, past statistics may not always be true but it provides us some good input to take our decision. It’s impossible to predict the stock market or time the market. The best way could be to remain invested and have some cash available as cushion to take advantage of the market correction.

Opportunity for long-term investment at this point – My thought:

·      Buying Gold/Silver/Commodity can be bought for long term. I see good opportunity to buy leap for 2016, only if one can take some calculated risk. Please note that gold usually bottoms around Jun-July timeframe

·       Buying dividend Paying Stocks with solid fundamentals

·     Continual accumulation of great Mutual Funds, ETF, Stock during the market correction/down-turn by keeping an eye of sectorial rotation of funds

·     Emerging Market: Fundamentally strong Chinese large cap companies, which are beaten down. One needs to be very, very selective in this sector. Otherwise it’s better to invest in mutual fund. I feel that Indian stock market is little pricy at the moment. Hence, I am not too excited at this point to invest in Indian stock market.

I have a lot of updates this month so I will have only one stock in the buy list for this month. So let’s straight jump in there..

Bank of America Corporation (BAC): As we know Bank of America provides various banking and financial products and services for individual consumers, small and middle market businesses, institutional investors, corporations, and governments in the United States and internationally. The stock had all time high of about $53.85 in 2006 before the financial crisis. Now it’s trading around $14.74. A few days ago, the company announced that it committed an error of about $4 billion in reporting of its capital levels. This was attributed to company's acquisition of Merrill Lynch during the financial crisis in 2008. Earlier, it had announced that the government is seeking as much as $13 billion in damages related to the origination and sale of toxic mortgages. This would be in addition to the $9.3 billion the bank has agreed to pay to the Federal Housing Finance Agency (FHFA) and more than $50 billion in total settlements the bank has agreed to pay since the crisis. As a matter of fact, first quarter income was reduced.  In addition, the company suspended its recently approved buyback plan and dividend increase. This was obviously not good news for the investors. Hence the stock is beaten down in last few weeks.

Now let’s analyze the good part of BAC. The consumer banking business grew around 15% and the brokerage asset also increased almost 21%. Their Global Wealth and Investment Management division is growing rapidly. The rising interest rate environment going forward could be another catalyst wherein the Bank would benefit the most. As we know, the interest rate is expected to go up. Warren Buffet, the world’s so called greatest investor invested $5 billion in Bank of America in 2011. I am sure that he must have done due diligence before investing such huge amount. Based on Yahoo finance, currently BAC has a PE ratio of about 20 and Forward PE of about 9.8. Once the dust settles, it would also potentially re-instead its share buyback and dividend payment plan. The stock has come down about 18% from its 52 week high. Visualizing these entire situations and looking to the fundamentals, the recent decline could be seen as a good long-term investment opportunity for patient long-term investor. A good idea could be to buy some stock now and then keep adding once the dust settles.

Stock Profile (updated 5/11/2014)
Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	My Opinion (see disclaimer)
STOCK
AAPL	400, 443	585.54	1/25/13	BUY
BIDU	86.43	152.85	4/18/13	BUY
GG	27	24.85	4/1/13	BUY
GOGO	14	11.93	9/1/13	HOLD/Sell on bounce. See update.
SLW	22	22.27	10/1/13	BUY
FB	47	58.53	11/13/13	HOLD
TSLA	135	203.78	11/13/13	BUY (see update)
AGNC	$25.3, $20.02	23.1	6/1/13, 12/14/13	BUY
MA	78.7	74.38	12/12/13	BUY
EXEL	5.82	3.45	12/12/13	HOLD/Sell on bounce. See update.
NLY	10.77	11.62	2/2/14	BUY
KO	38.55	40.87	3/9/14	BUY
KNDI	19.4	11.44	3/9/14	HOLD (see update)
AMZN	311.73	292.24	4/12/14	BUY
BAC	14.74	14.74	5/11/14	BUY - New
ETF
GDX	27	23.73	4/1/13	BUY
EDC	25, 25.45	27.15	7/1/13, 1/2/14	BUY
MUTUAL FUND
FBIOX	128	176.8	3/1/13	Accumulate
PRHSX	60	59.23	2/2/14	Accumulate
FSCHX	142.24	146.51	4/12/14	Accumulate

STOCK Updates

APPPLE Inc (AAPL): Apple reported its Q2 earnings on April 23. Revenue came in $45.64 billion that beat Wall Street expectations of $43.54 billion, increase of 4.6%. Earnings per share (EPS) also beat handily at $11.62, above $10.18 estimated by Wall Street. Apple is also splitting its stock 7-for-1 on record date of June 2 and will be available to all shareholders on June 9, 2014. After the earning the stock went up from $525 to $601. I still see it as a buying opportunity but seeing its run up I will be cautiously optimistic. However, I feel that this is a great stock for any portfolio with long-term objective.

TESLA Motors (TSLA): Last Wednesday Tesla reported fiscal first-quarter earnings of 12 cents a diluted share, excluding one-time items. It reported revenue of $621 million. The company was expected to report earnings of 8 cents a share, excluding one-time items, on revenue of $683.5 million. After the result the stock pulled back. Tesla is projecting Model X to be released in 2^nd part of 2015 and that’s what market did not like. However, as a long- term investor I see it as a buying opportunity to accumulate its share.

Facebook (FB): Facebook also came with its Q1 earnings on April 23. Revenue increased 72 percent to $2.5 billion, beating analyst estimate of $2.36 billion. Net income almost tripled to $642 million, or 25 cents per share, from $219 million, or 9 cents, a year earlier. Profit excluding some items the adjusted EPS was 34 cents per share. It’s still a buy for long term but I would be very cautious after buying Whatsapp with a whooping $29 billion. I am still wondering how FB will generate revenue and justify such a humongous buy out!!

Kandi Technologies (KNDI): The stock has come down about 35% from the buying point. One can stick to the investment discipline. However, I am willing to hold this stock for little longer as I feel it has a great potential.

GOGO Inc. (GOGO): AT&T and Honeywell said that they would be partnering to enter into the in-Flight Wi-Fi market. After this news the stock was hammered more than 35% in one day. Obviously, it was an over-reaction. AT&T will be entering the market in later part of 2015. GOGO is the current market leader and they have acquired a lot of market share so it should be such a big deal. However, we can’t fight against the market! At the moment, I will hold this stock and sell it once it bounces up.

Amzon.com Inc. (AMZN):  On April 24, Amazon reported its first quarter result. Revenue increased 23% to $19.74 billion in the quarter and beating analysts' consensus of $19.42 billion. Earnings per share, however, came in at $0.23, which was slightly below consensus estimates of $0.24 per share. The apprehension for investors was that unit sales growth slowed, increasing by just 23% vs. 25% in the previous quarter. International sales were lagging. This triggered major sale-off. I may hold little position now and may add little more if there is further correction.

EXEL, Inc. (EXEL):  EXEL has lost almost 40-50% of its value in last few weeks. The company had some disappointment over Prostate cancer drug trial as the company was asked to continue to the final analysis that is expected later this year. This is being taken by market as negative and stock got hammered. Unless there is a major catalyst it will not go much higher. I will look to sell most of my position with any bounce, probably before the ASCO summit later this month.

Economy Report to expect next week

Tuesday: Retail Sales, Business Inventories.

Wednesday: Producer Price Index (PPI)

Thursday: Initial Unemployment Claims, Consumer Price Index and Industrial Production

Friday: Housing Starts and Building Permits

Folks, that’s all for today. There could be further corrections going forward but one should not get panicked. Thanks for your time in reading my blog. Please feel free to send me your comments and suggestions to shesa.nayak@gmail.com

Disclaimer: This blog is meant to provide my personal 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.

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