Shesa's JANUARY 2016 INVESTMENT BLOG

        17 Jan 2016

JANUARY 2016 Investment Blog

Shesa Nayak  

Wishing all of you a VERY HAPPY and PROSPEROUS NEW YEAR. Welcome to my first investment blog of 2016. I hope this year will bring all of us "better return on our investment". With that wish let’s straight jump to the market news.

U.S. Stock Market Commentary: The Stock market across the globe seems to be under major correction since the beginning of this year.  It's not good news! But it does not necessarily mean that the January trend will continue though out the year. Why is the downturn? There are many factors: profit taking, China’s currency devaluation, North Korean nuclear test, tension between Saudi Arabia and Iran, Fed minutes, and more over plummeting commodity prices. On the positive side, U.S. added almost 300,000 jobs in December. We saw a similar situation in 2011 but at that time stocks were cheaper in valuation and Fed was there for the rescue. But today, it’s totally a different scenario. So what can we expect going forward and what should be our strategy? There would be some strategy shift this year from the lessons learned during 2015. But before that, let’s first see the stock market indexes, I have depicted for 2015, Year-to-date and from 2012-2015.

A glance to U.S. Stock Market (2015, 2016, Year-to-date, 2012-2015 trend):

Note: I have put the graph in picture format so clarity may not be great!

Above, we could see the Return of the indexes in 2015 and previous years. 2015 ended in negative territory and this has been very ugly for the market thus far.  It will be a lengthy blog this month so I want to straight jump to the important facts. 

What can we expect in 2016?

I do not want to be a fortuneteller and make any specific prediction. As I keep telling, market takes its own course and it’s under no body’s control. So it’s better to follow the market. As we go, we keep learning new lessons and we should avoid repeating the same investing mistakes going forward. I believe this year could be a rocky ride. It would be more of a trading then investing environment.

• U.S. Stock market may gain 5-7%: The investment communities still feel that U.S is the safe heaven. The unemployment rate remains at 5%, GDP growth is about 2-3%.  Low gas prices helping to curtail inflation and helping consumers to spend, more importantly this is election year wherein Stock market tends to do well with the hope that the next politicians in power would do better.
• Sectors Performance: Though biotech sector is beaten down heavily it can still continue to out-perform other sectors. In addition, consumer discretionary and select retailers may continue to benefit due to low oil prices and high employment. A few Technology stocks could do well. I may be a stock picker market.
• Interest Rate: On Dec 16th Fed raised the interest rate almost after 10 years, since June 2006. At that time, the economy was hot and unemployment was at 4.4% and the housing bubble had yet to burst. This time, the Fed hiked rates not because the economy is hot, but because it wants to give itself some room if the economy starts to cool down. Stock markets are heading towards bear territory and I doubt Fed will raise rate further unless there is a significant change in the economy scenario. I think Fed is far too rosy in their forecast. The fact is, economy can adjust to higher interest rates but the market has a different story to tell as we see it stumbling. Also reminding readers that this is election year!
• Risks: Every year brings some risks and 2016 will not be risk free. We are already seeing it from market action. We can expect high volatility, China economy is cooling, Commodity still not bottomed, Fed is unclear, instability in middle east, increased risk of terrorism, uptick in inflation and so on…Now let’s discuss more below the strategy section.

Strategy for 2016

Market is on a roller coaster ride and getting scary. Is it time to panic? Yes, it’s a usual human psychology, so one can’t say to be fearless. However, history demonstrates that the key to long-term investment success is not doing something absolutely brilliant. It's not doing something terribly foolish. But we all still keep doing something wrong. However, learning from our mistakes makes us better investor, as long as we do not repeat it. There will be down days, down weeks and maybe even down years. Irrespective of whether up or down the “stock market ultimately moves in only one direction... “up”. We should not forget that. A lot of market pundits now claim that it is the beginning of the long-awaited bear market. It could be, nobody knows. But we need not panic and take wrong decision. As long as we behave rationally it should be fine in long run. Making the right investment decision is key. Any lesson(s) learned in 2015 should be avoided in 2016. In my own experience in 2015, when I bought something and then sold partially after certain points gain did much better than when I bought something and hold with the anticipation of a bounce. Why was that? When the market is volatile taking profit is of utmost important. I believe similar trend of market volatility would continue in 2016. This may be a year of significantly more volatility. As a matter of fact, I am outlining some investment strategy shift for my self:

• Use of trailing STOP at 20-30% below the BUY price as a discipline. This strategy would help protecting from any major loss. Depending on the type of equity (Conservative/Aggressive) tailing stop will be determined while buying. Irrespective of how much research we do occasional losses are fact of life. So accept it and move on.T
• Taking profit as and when equity goes up a certain %age points and re-invest the same money elsewhere or wait for the same equity to come down to add more position.
• Sale losing equities: When we buy any equity, it’s with the fact that it would do well. But for some reason if the strategy does not work or market corrects than it’s better to sale the weak stocks and either have cash or buy superior stock. You may see me selling of losers in the days to come.
• Focus on leading sectors and buying selective STOCK, Mutual Fund and ETF.
• Stock selection could be mixed with conservative and growth oriented. Gradually starting to accumulate some great companies when it's cheap now could provide better return in long run. Patience is key.
• Abstain from including 3X equity in my Blog Portfolio and avoid very high volatile equity barring some promising long-term investment opportunity.
• Selectively diversify into emerging markets:  I will continue to focus particularly India and China. There is terrible negativity surrounding emerging markets. But I expect India and China to consolidate and perform better in the later part of the year. Obviously, political and economy situation could be the driver. The emerging markets have more value comparing to U.S. Per Barron’s, in terms of trailing book, Asia has been this cheap only 3 times in the last 20 years, during the Asia Financial Crisis of 1998, 2002, and the Great Financial Crisis of 2009. The region rebounded every time over the following 12 months on average gaining 58%. Per my study, only the U.S. currently represents humongous 36% (appox.) of the world's total stock market capitalization. Emerging markets represent only 24%. In the next 10 years India may repeat the growth China saw in the last 10 years and it could even get bigger provided Indian politicians gets little better. It’s for us to decide whether it’s worth some risks? I personally think so.
• What about Commodity? I am emphasizing on Oil, Gold and Silver. This sector has been devastated. Oil is at 13 years low now and reached to below $30 a barrel. Precious metals have been at decade low. Should we catch the falling knife? NO. We may be approaching the bottom but no body knows when is that going to happen! There are too many dependent variables associated with these viz. U.S. Dollar, OPEC, Middle-East uncertainties, volume of production, momentum traders, ETF selling etc.. So what do we do? In my experience, when there is a terrible sentiment, everybody starts to run away that may be the time to keep adding. As Warren Buffet says, when there is blood on the street it’s time to buy. But we are no Warren Buffet..still we can learn something whenever and wherever applicable. I presume Oil could trade between $25-$60 range in worst and best-case scenario. Gold could trade between $1020- 1250 depending on market situation. If there will be a bounce then it may be advisable to download some stuff. At this point, cautious approach may be the right way to go. I feel a limited buying with long-term perspective can be worthwhile.

Now let’s talk about this month’s inclusion to my blog portfolio. This month I have included an excellent stock and a great Mutual Fund.

Illumina Inc. (ILMN)

To me Illumina seems to be the stock of the future. I have talked about this in some of our investment meet. Now I think time is right to add to blog portfolio. Illumina, Inc. is a biotechnology company founded in 1998 and is headquartered in San Diego, California. The company provides sequencing and array-based solutions for genetic analysis in USA, Europe, Latin America, Asia, Middle East, and South Africa. Thirteen years ago there was a greatest scientific breakthrough wherein Human Genome Project determined the sequence of the 3 billion-plus chemical building blocks that make up the human DNA code. Almost 99.9% of the people DNA sequences are similar across all human beings but the remaining 0.1% constitute very critical information that differentiate each human with their unique genetic blueprint. This genetic profile identifies various types of illness such as Cancer, Diabetics, Heart attack, Alzheimer, Multiple sclerosis and many other diseases.  Illumina controls 80% of the genomic sequencing market. This is great news for its shareholders. Almost a decade ago, the process of sequencing an individual genome for full set of DNA was costing about $1 million. But today, the same cost about $1000.

In the JP Morgan health conference, last Monday the company said that it is seeking to build on its strength in DNA sequencing and launching a new company that will develop and market a test to detect genetic evidence of cancer by doing the blood test rather than biopsy or CAT scan. Bill Gates and Jeff Beoz of Amazon is the major investor in there. “Genomic sequencing and analysis gives doctors and patients vital information for the diseases and various treatment options making it possible not only for cure but also prevention of critical diseases at very early stage”. Illumina dominates the market all over the world. It has a huge customer base including academic, government labs, drug developers, hospitals, doctor’s office and so on.. It sells them multimillion-dollar machines, develop and upgrades the software that handles genomic data. It launched X10 sequencer that can decode human genome at a cost of mere $1000. At present, the world market for sequencer is estimated to be about $2.3 billion and expected to grow 10 fold in not so distance future.  Currently, the stock is trading at $171, which has 52 weeks high of $242, that’s almost 30% discount. I have already added some position. The earning result will come on Jan 26. That will provide even better picture about future direction.  Now let’s see the Company Fundamentals:

Market Cap: $25.06 Billion.

Revenue: $2.14 Billion. FY2017 expected to be about $2.5 billion.

Profit: 511 Million

Earnings Per Share (EPS): $3.42, FY2017 expected $3.60

PE Ratio: 50.03, Forward PE: 45.88

Quarterly Revenue Growth: 14.5% expected 16%

Profit Growth: 26.4%

Institutional Holding: 93.1%

Return on Equity (ROE): 31.3%

Total Cash:   1.44 Billion

Debt: 1.1 billion,    Beta: 0.12

Risks: Biotech sector is a highly volatile and Illumina is no exception. The stock is not cheap either. In addition, this year is the election year and political change could make some impact. However, this is a stock to be invested for future barring any exception. I believe the company has a great future. As a principle I will buy in a phased manner and put a 25% trailing stop from the buying price to eliminate major downturn risk. I would not hesitate to make dollar cost average if it falls further.

Fidelity Select Retailing Portfolio (FSRPX)

This mutual fund invests at least 80% of assets in securities of companies principally engaged in merchandising finished goods and services primarily to individual consumers. This is one of the best mutual funds that we could find in Consumer Cyclical (Retail + Consumer discretionary).

Why do I like this fund? The sector has been performing quite nicely in last several years and under such downturn environments too. The fund is composed of some of the great companies like Amazon, Home Depot, Netflix, Priceline, TJX, O’Reilly, L Brand, AutoZone etc. I could say that this is one of the best performing mutual fund under any market condition. Now that consumers are spending due to better employment and lower oil prices, it should continue to perform better. It has almost exceeded 50% better return or even more comparing to S&P 500. This is a mutual fund that we can hold for long term and expect a very good rate of return barring any major exception. I have already invested in this fund since last few years and keep accumulating. Now let’s see the performance below:

Now let’s look at the fund’s performance as of 12/31/2015:

	1 Year	3 Year	5 Year	10 Year	Life of Fund
FSRPX	18.41%	24.06%	19.76%	14.02%	13.80% (from 1985)
S&P 500	1.38%	15.13%	12.57%	7.31%	10.37%

NAV: $95.46.     NTF: No Transaction Fee in Fidelity. Please check your brokerage.

Net Asset: $2 billion

Fund Inception:  12/16/1985   

Morningstar Rating:  ***** (5 Star)

Minimum Investment: $2500.00

Load: No Load and No Transaction Fee in Fidelity.

Expense Ratio: 0.81% (LOW) è It’s very low comparing to industry average.

Beta: 1.02 è Risk: This is little more volatile than the market move.

Fund Managers: Deena E Friedman since 7/1/2014

Risks: FSRPX is primarily a Mutual Fund that invests in consumer cyclical. If the sector fails to perform due any stock market uncertainty like political, economic, consumer spending etc. then it could impact the mutual fund performance. I will put  trailing STOP at 25%. If the stocks go below 25% it should be sold next day.

Shesa’s Blog Portfolio (I will be updating the Blog portfolio with any new Sale as part of the strategy to cut down major losses, if the equity goes certain %age point. It could be anywhere from 15-30%. So I suggest my readers to keep checking whenever they get a chance to see any update). Thanks!!

Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	% Changes	My Opinion  (see disclaimer)	Earnings Date / Comment
STOCK
AAPL*	54.09	97.13	1/25/13	80%	HOLD (trimmed)	1/26/16
BIDU	86.43	163.92	4/18/13	90%	HOLD	16-Feb
GOGO	14	14.63	9/1/13	5%	HOLD	N/A
SLW*	21.8	11.15	10/1/13	-49%	HOLD	N/A
FB	47	94.97	11/13/13	102%	BUY	Updated on 1/28/16, based on earnings.
TSLA	135	204.99	11/13/13	52%	HOLD	N/A
MA*	78.06	88.71	12/12/13	14%	HOLD	29-Jan
AMZN	311.73	570.18	4/12/14	83%	HOLD	28-Jan
BAC*	14.44	14.46	5/11/14	0%	HOLD	Sold on 2/12/16@11.65. Updated on 2/14/16. <-19%>
BX*	33.33	24.64	8/24/14	-26%	SOLD
VIPS	22.68	14.06	11/23/14	-38%	HOLD (trimmed)	N/A
GILD*	100.92	91.84	1/11/15	-9%	BUY below $95	2-Feb
ALNY	89.1	75.98	2/6/15	-15%	BUY below $80	N/A
SFUN*	9.57	5.65	6/14/15	-41%	HOLD	N/A
EGO	3.4	2.28	7/17/15	-33%	SOLD	Sold on 1/19 @2.09. Updated on 1/21/15.
AXP*	80.62	62.91	8/16/15	-22%	SOLD	Sold on 1/22@55.41.Updated on 1/22. <-31%>
MO*	52.03	57.2	9/13/15	10%	BUY	28-Jan
ILMN	171.15	171.15	1/15/16	0%	NEW BUY	Trailing Stop @25%
ETF
GDX*	26.88	13.09	4/1/13	-51%	HOLD	N/A
INDA	31.94	25.18	3/15/15	-21%	BUY	N/A
ASHR*	28.46	22.67	3/15/15	-20%	BUY	Dividend of $8.20 paid on 12/28
USO	16.8	9.3	3/15/15	-45%	SOLD	Sold on 1/11@9.30.<-45%>
INCO	34.46	29	5/15/15	-16%	BUY	N/A
IHF*	139.1	114.31	8/16/15	-18%	HOLD	N/A
XLY	77.76	71.5	8/16/15	-8%	BUY	N/A
PJP	69.43	63.02	10/18/15	-9%	HOLD	N/A
EEM	32.5	28.45	11/15/15	-12%	BUY	N/A
MUTUAL FUND
FBIOX	117.73	188	3/1/13	60%	HOLD	N/A
PRHSX	55.17	61.5	2/2/14	11%	HOLD (trimmed)	N/A
FSCHX*	135.91	115.91	4/12/14	-15%	HOLD (trimmed)	N/A
FSCRX	27.3	23.79	10/25/14	-13%	HOLD (trimmed)	N/A
GASFX*	28.31	23.13	12/20/14	-18%	HOLD (trimmed)	N/A
PRMTX*	63.38	63.95	12/20/14	1%	Accumulate	N/A
MINDX	26.94	24.43	6/14/15	-9%	Accumulate	N/A
MCDFX	14.11	12.25	12/9/15	-13%	Accumulate	N/A
FSRPX	95.46	95.46	1/15/16	0%	NEW BUY	N/A
* Indicates dividend adjusted

Positions closed in JAN 2016

Equity	Sales Price	Date Sold	Gain / Loss (%age)
USO	9.3	1/11/16	-45%
BX	24.64	1/11/16	-26%

Note: Some more losers would be sold in future to accommodate better performer.

Major Economic Report next week (week 1/18/16)

TIME (ET)	REPORT	PERIOD	FORECAST	PREVIOUS
TUE, JAN. 19	Home builders' index	Jan.	62	61
WED, JAN. 20
8:30 AM	Consumer price index	Dec.	0.00%	0.00%
8:30 AM	Core CPI	Dec.	0.10%	0.20%
8:30 AM	Housing starts	Dec.	1.218 mln	1.173 mln
THU, JAN. 21	Weekly jobless claims	Jan. 16	280,000	284,000
FRI, JAN. 22
10:00 AM	Existing home sales	Dec.	5.16 mln	4.76 mln
10:00 AM	Leading economic indicators	Dec.	--	0.40%

Source: Marketwatch.com. Also you can go to the following URL for more updates:

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

That’s all for today. Wish you good investing! Stay tuned for my FEB 2016 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. The author is NOT responsible for any buying/selling and it's solely reader's decision.

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