Shesa's JANUARY 2015 INVESTMENT BLOG

                        11 January 2015

JANUARY 2015 Investment Blog

Shesa Nayak  

U.S. Stock Market Commentary

Hello and Welcome to my January 2015 investment blog.

The DOW Jones Industrial Average closed last Friday at 17737.37, S&P 500 closed at 2044.81 and NASDAQ closed at 7404.07 points. Last week was the 1^st full trading week of the year and what a roller coaster ride it was! On Monday and Tuesday the stock market went down like a rock and then bounced back sharply, again came back lower on Friday. Last Thursday the job report revealed that U.S. businesses added 241,000 new jobs in December, above economists' expectations of 226,000. As a matter of fact, the stock market zoomed more than 1.8% and DOW gained 323 points on that day. Jobless claim declined another 4,000 to 294,000. Unemployment rate came down to 5.6% from 5.8%.

 US Stock market review for 2014

Let’s take a quick look at the stock market during 2014. Undoubtedly, it was another good year for the stock market. The Dow finished the year up 7.5% at 17823.07, S&P 500 rose 11.4% to 2058.90 and Nasdaq soared 13.4% to 4736.05 points. This was the third straight year that S&P 500 Index scored double-digit gains. There were many uncertainties from Russia invading Ukraine, Ebola, Oil prices; economy concern in Europe, Japan, China, Federal Reserve etc. but the stock market always rebounded. I am glad that many of my analysis for 2014 came very close. Please refer to my JAN 2014 blog for further details. It’s available in my blog archives. I do not want to predict the future. Market takes its own course. However, we can always analyze based on existing micro and macro-economic environment. I may be right or I may be wrong! Overall, stock market has been going up for past several years. So one question comes to the mind, has the market reached to its top? Will the market start correcting? Unfortunately, I have no idea if we have reached a market top or not. If I say that I know the top or bottom then I am a fool. But I always try to do my own due diligence to ascertain certain things. So, let’s discuss what I think about 2015 and then the readers can draw their own perspective.

What can we expect for 2015?

 Positives

• It’s the mid election year. I could expect about 10+% appreciation in the Stock market indices from here. As we enter to the third year of the Presidential term, it tends to be a strong year for the market, if history is any proof.
• Third quarter GDP growth for 2014 was 5%. It’s now running at a 3% annual rate, and the past two quarters have exhibited the strongest economic growth in 12 years. This year’s GDP is expected to be around 3%.
• Oil and other commodities prices such as Gold and Silver could stabilize with no major upside catalyst. We could see some trading range variation.
• Due to lower gas prices; transportation, retail and consumer discretionary sector are anticipated to benefit and hence better investment opportunity.
• Biotech and technology sector could continue to do well.
• Fed may not raise interest rate until 2^nd half of 2015 or later. This could continue to fuel more stock buybacks, which further boost EPS and stock price.
• Unemployment rate could stabilize around 5.5%. Currently it stands at 5.6%.
• On international front, China may further cut-down interest rate resulting in appreciation of stock market. Indian stock market may strengthen further
• Small-to-mid-cap stocks could out-perform large cap. Since the October lows, small and mid-cap stocks have been leading the market higher due to strong dollar which impacts multi-national companies.

Challenges

• Russia and Gulf still seems have major political uncertainty and further crisis may dampen the stock market.
• Japan and Europe is almost in deflationary environment and do not see much improvement there. They may still struggle with their economy and chances of more quantitative easing. China still has mediocre economy growth.
• We can expect more corrections and fluctuations in the stock market. We could anticipate corrections in each quarter after the earnings announcements, as trading volumes come down.

My investment strategy for 2015

• Adjusting my portfolio by selling some of the losers. Expect to see a few changes in my blog portfolio as well.
• Diversify my portfolio to the sectors doing well such as Biotech, Transportation, Consumer discretionary and Retail sectors, some allocation to energy sector.
• Diversify into emerging market specially China and India for better growth.
• Re-visit on commodity (Gold and Silver) and un-load some portion of portfolio.
• User stop/training stop, take profit whenever required and avoid major loss.
• All the above factors can change as market changes and those are not written on the wall. We should be adaptive to the market situation and adjust our portfolio as situation demands, failing which, could be devastating.

My final thought

It would not be a good idea to keep a lot of cash on the sideline as bull market is expected to continue for at least next several months in 2015. I expect January to be a good month due to possible good earnings season and new pension funding, despite the fact that we saw some correction in the beginning of the year. Biotech, transportation, consumer discretionary, retail and technology sectors are expected to continue to do well this year. It’s better to make adjustments to the portfolio along the way and invest in these asset classes to get better return on investment. As usual, we can have some cash to take advantage of any correction rather than getting out of the market. Please note that 80%-90% of returns happens on less than 10% of the trading days. If we miss those days then our returns can suffer dramatically.

Should we invest in Oil Sector now?

Lot of folks have been asking me whether it’s a good time to invest in Oil sector since oil has been beaten down heavily? This is a million dollar question. No body knows whether it’s bottom or not. Gas prices are down more than 50% in past few months from $100 to $48 a barrel at present. I still feel that it has not bottomed yet, though I may be wrong. But I have started adding a little bit of energy/oil to my portfolio. Depending on the market situation, I may add some more position once I feel more comfortable. I personally prefer ETF and LEAP on energy sector over stock. Keep an eye on these energy ETs: XLE, ERX and OIH.

Well, based on my earlier assessment of asset class let’s see what stocks can be bought now:

Gilead Sciences (GILD): Gilead Sciences, Inc., a biopharmaceutical company, discovers, develops, and commercializes medicines for the treatment of life threatening diseases in North America, South America, Europe, and the Asia-Pacific. The company has large number products for treatment of HIV, liver disease, chronic angina, stress and other diseases. Gilead Sciences is one of the leaders in biotech industry. A few month’s ago its drug Solvadi and Harvoni got approved by FDA that will treat hepatitis C by taking just one pill per day at a cost of $1000.  However, the number one pharmacy manager who manages prescription drug program for insurance company “Express Script” granted the exclusive right to competing drug made by AbbVie. Those move wiped out about $20bn of market capitalization for Gilead. Its share price fell to as low as $85 before bouncing back. However, again there was a little twist in the game. Last Monday, CVS/Caremark, the number two pharmacy benefit manager, said that Gilead’s pills would be the preferred treatment for sufferers of the disease. The interesting fact is that the Express Scripts/AbbVie deal has not impacted Gilead's forecasted earnings, as they have not yet made any amendment to their earnings. What this could mean is that, there may not be any short-term impact but could impact in longer term. Well, now let’s analyze company’s fundamental.

Market Cap: $154.2 Billion

Revenue: $20.7 Billion, quarterly revenue growth of 117.1%

Profit: $9.41billion, quarterly profit growth 246.3%

Earnings Per Share (EPS): $5.61

PE Ratio: 17.24

Forward PE: 9.80%

PEG Ratio: 0.49, Price/Sales: 6.92

Institutional Holding: 94.3%

Return on Equity (ROE): 74.8%

Total Cash: 6.3B, Debt: 9.41B

From aforesaid data, we could see that it’s an outstanding company with excellent fundamentals. We may wish that we could have bought it earlier when it came down to $85 but it does not work the way we wish and market takes it own course. Anyway, to me, company’s fundamentals look exceptional at this moment and it can be one of the best opportunities to pick some shares for long term. At present, it is trading at $102.21, 12.5% discount to its 52 weeks high. I have already bought some and will keep adding if the price falls further.

Now let’s take a look to into this ETF. As said earlier, due to low oil price transportation sector is going to be a prime beneficiary. Hence I thought of adding this to my blog portfolio.

iShares Transportation Average (IYT)    

IYT tracks the investment results of an index composed of U.S. equities in the transportation sector. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the transportation index.

Why I am buying this? As said before, the oil prices have plunged 50%, from about $100 to $50 per barrel over last few months. We are paying about $2.50 per gallon rather than $4 a few months ago. That's certainly not good news for companies that produce it. But it's very positive for the consumers, transportation companies, auto retailers, chemical companies, virtually every business those are directly or indirectly consuming oil. The gas price is still anticipated to go lower before further recovery. Based on my study, low oil price is likely to provide about $1 trillion economic stimulus in 2015 to US economy. Subtract about $150 billion in cancelled projects and tax loss but you still have an $850 billion net benefit. In the whole process, I could see that the main beneficiary is transportation sectors as they are the prime consumer of oil. Hence I think IYT could be a good opportunity to invest now. The major holdings of the ETF are FedEx, UPS, Union Pacific railway, Norfolk, J.B Hunt, C.H Robinson world wide etc. Rather than buying a single company stock it’s better that we diversify by buying the ETF to minimize risk and maximize return. Now let’s take a look at its performance.

1-Year Total Return	25.36%
3-Year Total Return	23.58%
5-Year Total Return	18.69%
10-Year Total Return	10.35%
Life	12.33%

Visualizing above returns and current lower Gas price, I have already taken some position and would like to add to it. Currently, it trades at 158.94, 5.3% discount to its 52 week high. So it would be not be a bad idea to pick some now and keep adding more if it falls further. But as I said earlier, we should be adaptive to the situation and adjust out portfolio as situation demands as we may go wrong sometime.

Blog Portfolio (Dividend Adjusted)

Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	% Changes	My Opinion (see disclaimer)
STOCK
AAPL	56.12	112.01	1/25/13	100%	BUY
BIDU	86.43	226.9	4/18/13	163%	BUY
GOGO	14	15.25	9/1/13	9%	HOLD
SLW	22	21.7	10/1/13	-1%	HOLD
FB	47	77.74	11/13/13	65%	BUY
TSLA	135	206.66	11/13/13	53%	HOLD
AGNC	18.02	21.94	12/14/13	22%	BUY
MA	78.7	84.44	12/12/13	7%	BUY
NLY	9.52	10.81	2/2/14	14%	HOLD
KO	37.33	43.03	3/9/14	15%	HOLD
KNDI	19.4	13.07	3/9/14	-32.6%	BUY
AMZN	311.73	296.93	4/12/14	-5%	HOLD
BAC	14.64	16.98	5/11/14	16%	BUY
QIHU	85	57.79	6/22/14	-32%	HOLD
BX	33.33	34.21	8/24/14	3%	BUY
VIPS	22.68	22.68	11/23/14	0%	BUY
GILD	102.21	102.21	1/11/15	0%	NEW - BUY
ETF
GDX	27	20.71	4/1/13	-23%	HOLD
DUST	15.33	17.35	7/20/14	13%	SOLD @17.35 on 1/9/15
NUGT	27.38	15.54	9/21/14	-43%	HOLD **
IYT	158.94	158.94	1/11/15	%	NEW - BUY
MUTUAL FUND
FBIOX	124	230.71	3/1/13	86%	Accumulate
PRHSX	55.17	69.89	2/2/14	27%	Accumulate
FSCHX	141.21	145.64	4/12/14	3%	BUY
OBCHX	14.26	14.27	6/22/14	0%	BUY
FSCRX	27.3	29.39	10/25/14	8%	BUY
GASFX	29.71	29.93	12/20/14	1%	BUY
PRMTX	63.52	64.22	12/20/14	1%	BUY
** DIV are included in suggested Price after end of the year. Hence price is adjusted.

Note: Sold DUST @17.35 though I have little bit for hedging.

These are the positions sold from my Blog portfolio during 2014:

Sold GG @27.30 (+1%) on 6/21/14.

Sold EXEL @1.90 (-67%) on 9/2/14.

Sold EDC @27.05 (+8%) on 9/29/14.

Note: I may sell a few losers going forward. You will get an alert if you are part of shesagroup_invest@googlegroups.com alias.

Economy News to watch next week (week /1/12/15)

Wednesday: Retail sales, Business Inventories

Wednesday:  Weekly jobless claims

Thursday: Initial Claims for Unemployment, Producers Price Index (PPI)

Friday: Consumer Price Index (CPI), Industrial Production

Also you can go to the following URL:

http://www.marketwatch.com/Economy-Politics/Calendars/Economic

Source: Marketwatch.com

Folks, that’s all for today. Wish you good investing! Stay tuned for my next month’s blog. Hoping for a journey to another great year in the stock market! Thanks for your time. If you want to get alert on my action then please subscribe to shesagroup_invest@googlegroups.com. Please feel free to send me your comments and suggestions or alert request 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 solely my own opinions. Please contact a professional money manager to buy/sell any security. I do not earn any commission by writing the blog. I have position(s) on whatever security I write on my blog and avoid recommending any security that I do not own or follow.

Note: Click on Blog archives to read all my Blogs and updates.