Shesa's AUGUST 2015 INVESTMENT BLOG

            16 Aug 2015

AUGUST 2015 Investment Blog

Shesa Nayak  

U.S. Stock Market Commentary

Hello friend, Welcome to my monthly investment blog. First let’s take a quick look to the U.S. Stock Market Indexes.

Last Friday, the Dow Jones closed at 17,477.40, up 69.15, S&P 500 closed at 2,091.54 up 8.15 and NASDAQ Composite closed at 5,048.24 up 14.68. As expected, the market has been trending down as earnings season has almost come to an end. I do believe that market could remain in a trading range for next few weeks before getting a complete direction. The sentiment indicator is still extremely complacent meaning that the long-term bullish trend may not continue.

Why is the correction in Stock market? I could attribute the market down-turn to the following reasons:

• There are earnings decline of 1% in the last quarter (Q2) and analyst believe that the decline will continue in next quarter
• The market have been largely impacted falling commodity prices and the strengthening U.S dollar
• Expectation that FED will increase Interest Rate in the near future
• Decline in Chinese stock market and currency devaluation by Chinese central bank. We will discuss more on this later on.

Important Economy News

• Interest Rate: On Monday, 8/10, Fed Vice Chair Fischer said that the first monetary policy tightening move would likely take place once inflation shows signs of returning to its target 2%. Currently, inflation stands around 0.2%, which means that Fed may not raise interest rate before December or early next year. I think FED may raise 0.25% in December and then they would be done.
• On Tuesday, 8/11, Stock market took a hit as China devalued its currency causing concern across all equity markets across the globe
• On Friday, 8/14, Producer prices increased 0.2% in July; consensus expected an increase of 0.1%. Also Industrial production increased 0.6% in July

A quick glance to Q2 Earnings:

• Most of the S&P 500 companies have finished reporting their earning for Q2 FY15. According to factset.com 73% have reported earnings above the estimate and 51% have reported sales above estimate. Overall there was earnings decline of 1.0%. The previous earnings decline was in Q3 of 2012. So how come we see so many companies reported earnings above estimate? As I perceive, the earnings beat was mostly due to revised/reduced estimates by the Analyst. Secondly, the commodities sector has substantial decline in their earnings.
• For the next quarter(s), analysts are expecting year-over-year declines in earnings and revenue to continue through Q3 and Q4 FY15
• The main reason of earnings miss in last quarter was attributed to Currency (strong U.S dollar), ongoing Europe problem and China problem

Leading sectors for 2015: The following sectors have been performing well year-to-date: Real Estate, Health Care, Technology, Consumer Cyclical, and Financials. As far as real estate is concerned one can have an investment property or invest in any mutual fund, REIT, stock etc.

What is new in my current month’s blog?

In a volatile and changing market scenario it’s extremely important to put the money in right sector/stock to get better Return on Investment (ROI). As an investor, it’s of paramount importance to adapt to the changing market situation and adjust our portfolio accordingly. Hence, I have decided to make some amendment to my blog portfolio this month. I may continue to do so going forward. A few days ago, I sent an update to my Google group members and sold Chimera Investment (CIM). It was a laggard. I am putting that money in a better equity. As a matter of fact, I have included 3 new positions in my blog portfolio this month: AXP, IHF and XLY. These are investments that can be hold for long term unless these sectors perform badly. Please expect to see more such changes going forward. Now let’s quickly go to the first recommendation of blog portfolio.

American Express Company (AXP)

We all know American Express (AXP) as a credit card company like Master Card and Visa. However, it has more operations comparing to other credit card companies.  American Express along with its subsidiaries provides charge and credit card products, travel-related services to consumers and businesses all over the world. It operates through four segments: U.S. Card Services, International Card Services, Global Commercial Services, and Global Network Merchant Services.

As I said above, financials sector is one of the leading performers this year. Hence I decided to include AXP. Currently, AXP is trading at $80.91; it had a 52-week high of $94.89. The stock has come down from about $95 to $80, about 15% from its 52- week high. Why is the drop? Let’s first discuss the negatives. There are two key reasons. First, American Express lost its contract with Costco to VISA. Secondly, in February a court ruled that American Express violated U.S. antitrust laws by barring merchants from asking customers to use one credit card over another. Thirdly, its earning was hit hard due to strong U.S dollar. With all these negatives surrounding, why do I still prefer AXP? Here are my thoughts:

• The company is trading at about 15% discount which seems to be a good entry point for this 700 pound gorilla
• It has added “Apple Pay” to its corporate card and strong consumer spending helps AXP and the whole industry to generate more revenue and profit
• Despite strong U.S dollar the company beat earnings expectation last quarter though missed on revenue
• This is one of the largest holding of Warren Buffet. Berkshire Hathaway holds about 15% of the company’s shares. As we know, Buffet does not invest in companies which he does not believe
• Fundamentally it happens to be a superior company comparing its peer viz. MA, VISA. So, now let’s look at the fundamentals: 

Market Cap: $81.01 Billion

Revenue: $31.76B (more than double the revenue of Visa)

Profit: 589 million

Earnings Per Share (EPS): $5.69

PE Ratio: 14.24, Forward PE: 14.26

Quarterly Revenue Growth: -4.4%, Profit Growth: -3.70%

Institutional Holding: 84.5%

Return on Equity (ROE): 28.1%

Total Cash: 21.32B

Forward Annual Dividend: 1.40%

AXP is a solid company with strong fundamental. I believe that it’s a very good long-term investment opportunity unless anything changes significantly. I already added to my portfolio and add more if it falls further.

Risk: American Express is not without any risk. It has to gain market share and increase its revenue and profit growth. Continued strong U.S dollar could further impact its revenue and earnings. But in my view it’s a good entry point for long-term investment.

iShares U.S. Healthcare Providers ETF (IHF)

IHF is an Exchange Traded Fund (ETF) that tracks the investment results of an index composed of U.S. equities in the healthcare providers sector. This is   an excellent fund in the health care sector. This fund embodies many health care providers such as, United Healthcare, Cigna, Aetna, Anthem, HCA holdings, Express scripts and so on..

Why do I like this fund? The healthcare sector has been performing very well in last several years. There are mergers and acquisitions, solid industry fundamentals, promising new drugs, increasing health care spending and Obama care play a major role that makes this fund a compelling long term investment. As we know, America’s population is getting older. It’s estimated that around 10,000 baby boomers turn 65 every day. In next 15 years, there would be around 75 million Americans going over the age of 65. And as people get older they need more healthcare attention. In addition to all these, it has also a strong ROI. Let’s analyze the performance:

Year to Date Return	18.33%
1-Year:	35.22%
3- Year:	31.45%
5-Year:	25.96%

From the aforesaid table, we could see the exceptional return the fund has provided. As I say, past performance is not guaranteed for future return but we can make our decision visualizing the fundamentals, momentum and market situation. The Beta for IHF is 0.87 indicates that it fluctuate less than market which is very good. This is such a fund that we can go long term or even for our next generation unless any significant changes happen in the healthcare sector or industry. I have already taken some position and will keep adding on any further correction. I would not like to buy all at once rather in a gradual manner and keep adding to this for months/years to come. IHF is currently trading at $139.39, about 5% discount from its 52 week high of $146.77.

Risks: Biotech sectors provide greater risk and also greater return for investors. It provides great return does not mean that we should put all our money in one basket. I will keep within 3-6% of my investment portfolio.

Consumer Discretionary Select Sector SPDR Fund (XLY)

I have another great health care ETF to add to my blog portfolio in future. I have decided to add XLY because consumer discretionary sector has been doing quite well. And there is no holding in my blog portfolio with regard to consumer discretionary. Hence, I chose to add this one for this month’s blog. XLY seeks investment results that, before expenses, correspond to the price and yield performance of publicly traded equity securities of companies in the Consumer Discretionary Select Sector Index. The fund has been doing substantially well in last few years. This ETF has a net asset of 11.53 billion and a yield of 1.28%. Its holding includes great companies like Amazon, Disney, Comcast, Home Depot, McDonald, Starbucks, Nike, Time Warner, Lowes and Priceline. So we do have all the flavors of consumer discretionary. Now let’s see the performance:

Year to Date Return	11.91%
1-Year:	23.46%
3- Year:	24.38%
5-Year:	22.43%

As we discussed above, it does not necessarily mean that past performance will continue in future. But in this lower interest rate and higher consumer-spending environment it makes perfect sense to include such good fund. XLY also has a Beta of 1.02 which means that it fluctuates at the same pace with market index. Currently, it’s trading at $78.36 and had a 52-week high of 80.61. We do not have too much discount on the price but I believe that it’s a good addition to get invested to consumer discretionary sector rather than buying a single stock. I have already taken some position and will keep adding over time.

Risk(s): It’s around its 52 week high and any market correction or decline in consumer spending/higher unemployment rate could bring this ETF down.

How about China and India Stock Market? Should we remain invested?

China: The economy data from China are not looking great. In an effort to increase its export Chinese Central Bank devalued its currency last week. As a matter of fact, currencies of neighboring counties viz. Australia, Indonesia, Malaysia, Singapore, Taiwan and Thailand are weakening, proliferating the risk of another Asian Financial Crisis. This also causes further strengthening of U.S. dollar and commodity deflation. Hence, I am putting a hold to Chinese investment and very careful about putting additional money. Rather, I would trim a little bit and remain invested. If things go wrong I will send an alert to my Google group members.

India: India on the other hand is not doing that bad. Inflation is very much under control, only 3.8% as it stands today. This brings hope for the investors that RBI will cut interest rate further. As I wrote earlier, India has 8% GDP growth which is highest among the emerging counties. Hence I believe that India’s prospects remain high. This makes me to think to divert some fund from China market and put it to Indian ADR stocks/fund.

Should we remain invested in Commodities?

Oil has come down to almost 6 years low and so also gold, silver and other commodities. So what to do now? I suggest putting a trailing stop and it falls below certain %age then trim some position, which I have done. Hold on to the remaining investment and wait with patience for the market to bounce back. This sector is hit hard particularly due to increasing U.S. Dollar. I remain optimistic that dollar could come down in next few months and commodities will bounce back from their multi-year lows. That would be the good time sell.

Blog Portfolio

Note: It’s always a good practice to keep taking profit when a stock goes up certain %age. I may not able to remove from my blog portfolio if I hold some position but I try to take profit/loss whenever I feel the stock has gone up/down certain %age point.

Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	% Changes	My Opinion (see disclaimer)
STOCK
AAPL	56.12	115.96	1/25/13	107%	BUY
BIDU	86.43	164.24	4/18/13	90%	BUY
GOGO	14	16.57	9/1/13	18%	HOLD
SLW	22	13.59	10/1/13	-38%	BUY
FB	47	94.42	11/13/13	101%	HOLD
TSLA	135	243.15	11/13/13	80%	HOLD
AGNC	16.54	19.94	12/14/13	21%	HOLD  (Div adjusted)
MA	78.7	97.89	12/12/13	24%	BUY
NLY	8.92	10.39	2/2/14	16%	HOLD  (Div adjusted)
KO	36	41.25	3/9/14	15%	HOLD
AMZN	311.73	531.52	4/12/14	71%	BUY
BAC	14.64	17.7	5/11/14	21%	BUY
BX	33.33	38.65	8/24/14	16%	HOLD
VIPS	22.68	20.5	11/23/14	-10%	GOOD BUY
GILD	102.21	115.6	1/11/15	13%	BUY
ALNY	89.1	105.74	2/6/15	19%	BUY
IBN	10.5	9.76	4/12/15	-7%	BUY
CIM	15.9	14.07	4/12/15	-8%	SOLD (Div adjusted)
SFUN	9.95	7.14	6/14/15	-28%	BUY
EGO	3.4	3.92	7/17/15	15%	BUY
AXP	80.91	80.91	8/16/15	0%	NEW BUY
ETF
GDX	27	14.49	4/1/13	-46%	BUY
NUGT	27.38	3.84	9/21/14	-86%	HOLD
INDA	31.94	30.57	3/15/15	-4%	BUY
ASHR	36.66	40.77	3/15/15	11%	HOLD
USO	16.8	13.99	3/15/15	-17%	HOLD
INCO	34.46	35.17	5/15/15	2%	BUY
IHF	139.39	139.39	8/16/15	0%	NEW BUY
XLY	78.36	78.36	8/16/15	0%	NEW BUY
MUTUAL FUND
FBIOX	117.73	262.09	3/1/13	123%	BUY (Div Adjusted)
PRHSX	55.17	82.17	2/2/14	49%	Accumulate
FSCHX	137.34	133.76	4/12/14	-3%	HOLD (Div Adjusted)
FSCRX	27.3	29.17	10/25/14	7%	BUY (Div Adjusted)
GASFX	28.51	28.9	12/20/14	1%	HOLD (Div Adjusted)
PRMTX	63.52	72.1	12/20/14	14%	BUY
FHKCX	30.52	31.1	2/8/15	2%	HOLD
MINDX	26.94	28.29	6/14/15	5%	BUY
** DIV are included in suggested Price after end of the year. Hence price is adjusted.

Company Updates

APPLE (AAPL): On 21^st July, Apple reported profit of $10.7 billion on revenue of $49.6 billion for its fiscal third quarter. That outpaced its results from a year earlier, when profit was $7.7 billion on revenue of $37.4 billion. <BUY>.

Amazon.com (AMZN): The Company generated a revenue of $23.19 billion, increase of 19.9 percent to $23.19 billion. It reported a profit of $92 million, 19 cents per share, compared with a loss of $126 million, or 27 cents per share, a year earlier. For next quarter, it forecasts sales would grow 13 percent to 24 percent, to a range of $23.3 billion to $25.5 billion. <BUY>.

BIDU: It reported second-quarter earnings of $1.81 a share on revenue of $2.67 billion. Analysts estimated $1.87 a share on revenue of $2.67 billion. <BUY>.

Gilead Sciences (GILD): The Company posted an actual EPS of $3.15 against analyst estimate of $2.83. It posted revenue of $8.2 billion against estimate of $7.36 billion. <BUY>.

Master Card (MA): It earned $921 million, down from $931 million a year earlier. On a per-share basis, it earned 81 cents per share. Excluding a legal settlement, earnings were 85 cents, which met Street expectations. It generated revenue of $2.39 billion, compared with $2.42 billion estimate.  <BUY>.

Facebook (FB): The Company earned 50 cents per share with revenue of $4.04 billion. Wall Street expected earnings of 47 cents per share on $3.99 billion in revenue.

NUGT: I wrote a lot on this in my July blog. My thought still remains the same. But I wanted to let the readers know that NUGT will undergo a 1-for-10 reverse split that takes effect at the opening bell on Sept. 10. Holders get one share of the ETF for every 10 they own. If it bounces back before that then I will trim some position.

Major Economic Report next week (week 08/17/15)

Tuesday: Housing Starts and Building Permits. 

Wednesday: Consumer Price Index è this is important report

Thursday: Initial Claims for Unemployment, Existing Home Sales.

Also you can go to the following URL for more updates:

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

Source: Marketwatch.com

That’s all for today. Wish you good investing! Stay tuned for my SEP 2015 blog. Thanks for your time. If you want to get alert on my action then please subscribe to shesagroup_invest@googlegroups.com. Also, 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 merely 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.

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