Shesa's JUNE 2014 INVESTMENT BLOG

                        21 June 2014

JUNE 2014 Investment Blog

Shesa Nayak  

USA Stock Market Commentary

Hello and Welcome to my June investment blog. The US Stocks saw a modest gain this Friday, pushing S&P 500 and DOW Jones Industrial to a string of record closes and lifting NASDAQ to its strongest finish in 14 years. The DOW closed this Friday at 16,947.08, S&P 500 closed at 1962.87 and NASDAQ closed at 4,368.04 points. Both DOW and S&P 500 are at a striking distance for 17,000 and 2,000 marks. Now it will be interesting to see whether NASDAQ will be able to shatter its all time high of 4572.73 set during April 2000. 

On other economy news, the US manufacturing expanded at a healthy pace, US employers added 217,000 jobs in May, unemployment benefits claim dropped, Merger & Acquisitions continues. On the world front, Indian new government is expected to present its new budget in mid-July, Russia and Ukraine tension have not boiled over wider conflict, China manufacturing slump appears to have bottomed out but Iraq’s new eruption of violence has made investors worried resulting into rebound in commodity prices, such as, Gold, Silver, Oil etc.

Current Stock Market Trend è The trend is your friend

The US Federal Reserve still plans to keep interest rates near zero for a “considerable period,” even after it has stopped purchasing bonds. And with businesses playing a game of catch-up during the second quarter, it’s shaping up to be a strong quarter in terms of economic growth.

Apple Inc. (AAPL) has been on tear after the earnings announcement. It has gone up from $525 to $637 before splitting its stock 1:7. On another note, the stock market phrase “Sell in May and go away” did not seem to have worked on the conventional wisdom this year to the stock market. As we say, “trend is your friend”, so we must continue with the trend. Despite the unexpected contraction of economy in first-quarter which saw negative GDP growth, it could not stop the S&P 500 from breaking through record highs. The market is trading higher due to the following major factors:

• Anticipation that we should see robust second-quarter GDP growth create strong sales and earnings growth. The GDP expected to be on track for 3.8% annual growth.
• Earnings are likely to be bolstered even further by the continuous stock buyback programs by US corporation.
• Weak U.S. dollar creating profits for multi-national US corporations. 

As the stock market keeps going up proportionately the risk keeps increasing to remain fully invested.  If we see the statistics for last several decades then it shows that the stock market return from the month of May – October is either negative or very negligible. However, that does not mean that we sale all our equities and sit with cash, earning nothing, and then keep waiting for the market to come down. If history does not repeat and the market continues to climb higher as it’s doing at the moment then we lose the biggest gain. Hence, it’s better to have our own strategy on how much to get invested and how much cash we should have. I believe that there should be some good buying opportunity in next few weeks before the Q2 earnings.

Opportunity in Emerging Market

According to a research report by Jeffries, $6.5 billion worth of investors’ capital has flown into emerging-market funds since March 2014. This is in contrast to what we saw in 2013, when emerging-market funds saw net capital outflows in excess of $24 billion. Only in the month of May the investors have pumped in about $44 billion to the emerging market, the highest monthly total since 2012. The good news is that the opportunity to earn great profits from emerging markets is far from over. While India and South Africa might be doing better, the rest of the world's emerging markets have been absolutely crushed lately, and conditions are ripe for good returns. With the current political change of power in India, it could be more business friendly resulting into larger in-flow of funds to Indian stock market, thus getting better ROI. The US stocks are now trading at high valuation where P/E ratios for stocks are about 20, which is higher than average. With U.S. stocks trading at high valuations and momentum plays cooling off, investors are starting look to emerging markets as the next undervalued growth story.

Now the emerging markets have started picking up. We could see that there are some outstanding earnings from many of the Chinese blue chip companies. A lot of those could be cheap by any measure considering their revenue and profit growth. In addition, USA market has shoot up and Chinese market has been down since past couple of years. As a matter of fact, I do see some compelling opportunity in US listed Chinese ADR stock. Hence, it makes perfect sense to take some risk and invest certain %age of the portfolio to that market. As such, this month I will be writing about one very good mutual fund that embody Chinese small cap stocks and one solid Chinese internet stock. Before I write, I caution the investor that these are volatile and aggressive in nature so we must be diligent on how much we should invest depending on our risk tolerance level.

Qihoo 360 Technology Co. Ltd. (QIHU)

A few weeks ago QIHU reported its quarterly earning which was quite spectacular. Revenue soared 141% to $265.1 million, and adjusted earnings more than quadrupled to $73.3 million, or $0.54 per ADS. Analysts were expecting net income of $0.34 per ADS on just $228.1 million in revenue. Qihoo 360 has been consistently blasting through analyst profit targets with ease lately. Despite this the stock is down almost 25% from its 52 week high of $124.42. The company has a large audience for its portal, browser, and security software and hence it's not a surprise to see folks conveniently leaning on Qihoo 360 for their search requests on PCs and mobile. It’s undoubtedly a tough competitor to the market leader BIDU. Both BIDU and QIHU have a lot of space to grow and have very strong fundamentals. I already have BIDU in my recommended list but now I do see QIHU also extremely compelling. Fundamentally this stock looks solid with a very reasonable future P/E of around 22. The Stock currently trade at $88.66 and could be bought around $85.

But as I said earlier, Chinese companies are very volatile, if the investor(s) can’t digest such price movements then better to stay away. Coincidently, there is also higher reward and that’s up to each individual how much of the portfolio value should be conservative/aggressive. However, such aggressive stock should be bought in a phased manner by adding some now and then keep adding more if it falls further.

Oberweis China Opportunities (OBCHX)

This is a very good mutual fund that I could see with solid potential for investment in the Chinese market without exposing ourselves to any individual stock. This also provides a good exposure to the emerging market. The fund has given very good return in last several years. Though, past performance is not always the reflection of future return, that’s a major determining factor. As I keep saying, Mutual Funds are long-term investment and not short term trading. Therefore, I would like to buy keeping longer time horizon in mind.  The minimum investment for this fund in Fidelity is $2500 but some brokerage like Merrill Lynch allow to invest $1000 as minimum amount. The minimum subsequent investment is $100. I would invest 2-3% in the beginning and then keep adding to that every now and then.

Let’s look to this fund performance as of 3/31/14:

	Year-to-date	1 Year	3 Year	5 Year	10 Year	Life of Fund
OBCHX	-6.18%	+27.17%	+4.64%	+18.64%	N/A	+15.57%

NAV: 16.14

Morningstar Rating: *****

Minimum Investment: $2500 or $1000 some brokerage

Load: No Load in most of the brokerage. Always avoid any load/transaction fees.

Expense Ratio: 2.07% (above avg.)

Beta: 1.39 è Risk: this is little aggressive fund

Fund Manager tenure: James Oberweis, 9 years  (since 10|3|2005).

Watch List for June:

Direxion Daily Gold Miners Bull 3X Shrs (NUGT)

This month I am adding this ETF to my watch list. I wanted to recommend it when it was around $30 but now that it has gone up almost 40% in last couple of weeks. Hence, I am keeping it to my watch list. I will add to my buy list when time is right. NUGT is an ETF – Exchange Traded Fund. This ETF fluctuate almost 3 times to the up/down depending on the gold price movement and very aggressive.

Portfolio Updates

Stock Profile (updated 6/21/2014)
Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	My Opinion (see disclaimer)
STOCK
AAPL	58	90.91	1/25/13	BUY
BIDU	86.43	174.49	4/18/13	HOLD
GG	27	27.30	4/1/13	SALE
GOGO	14	18.41	9/1/13	HOLD
SLW	22	24.85	10/1/13	BUY
FB	47	64.5	11/13/13	HOLD
TSLA	135	229.59	11/13/13	BUY
AGNC	20.02	23.73	12/14/13	BUY
MA	78.7	73.81	12/12/13	BUY
EXEL	5.82	3.71	12/12/13	HOLD
NLY	10.77	11.65	2/2/14	BUY
KO	38.55	41.69	3/9/14	BUY
KNDI	19.4	13.23	3/9/14	HOLD
AMZN	311.73	324.2	4/12/14	BUY
BAC	14.74	15.45	5/11/14	BUY
QIHU	Below $85	88.66	22-Jun	BUY - New
ETF
GDX	27	25.82	4/1/13	BUY
EDC	25	30.87	1/2/14	BUY
MUTUAL FUND
FBIOX	128	200.25	3/1/13	Accumulate
PRHSX	60	63.73	2/2/14	Accumulate
FSCHX	142.24	153.46	4/12/14	Accumulate
OBCHX	16.14	16.14	22-Jun	BUY - New

APPPLE Inc (AAPL): Apple did split its stock 7-for-1 and was available to all shareholders on June 9, 2014. After split, currently it’s trading at $90.91. It concluded its WWDC on 2^nd June and announced the latest version of its Mac operating system, OS X Yosemite and iOS 8. iPhone 6 and iWatch is rumored to be releasing during the fall. I still see the stock as a buying opportunity. However, seeing its run up I will be cautiously optimistic. I feel that this is a great stock for any portfolio with long-term objective in mind.

Goldcorp Inc. (GG): I am selling this stock. Though gold may be doing better in future, I fell that there are other better opportunity. Rather, I would like to be little aggressive and buy NUGT at the right time rather than holding this one.

Major Economy Report to expect next week (week of 6/23/14).

Monday: Existing Home Sales

Tuesday: New Home Sales, Consumer Confidence

Wednesday: GDP – Third Estimate, Durable Orders

Thursday: Initial Unemployment Claims, Personal spending

Friday: Michigan Sentiment

Folks, that’s all for today. Next month I would be writing about some other interesting stock, ETF/MF. Stay tuned! 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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