Shesa's FEBRUARY 2016 INVESTMENT BLOG

        21 Feb 2016

FEBRUARY 2016 Investment Blog

Shesa Nayak

U.S. Stock Market Commentary: Since the beginning of this year stock markets have been trending down around the world. There seems to be too much negativity; fed uncertainty, plummeting crude oil price, concerns over the health of European banks, and uncertainty over slowing growth in China. It is having turmoil in the global stock markets. However, last week the stock market suddenly bounced back around the world. So, how can investors play such volatility? Obviously, it’s a very complicated question but I will analyze what possibly could be done to mitigate the portfolio risks and still expect reasonable return on investment. First, let’s take a look to Market Indexes.  

Will Fed raise Interest Rate again?

As I wrote in my previous blog, Fed took the right decision at the wrong time. When they raised interest rate in December, the emerging markets were already in some sort of recession due to strong U.S dollar and plummeting commodity prices. Even U.S. economy seems to be trending towards a recession. U.S. corporates can’t continue to generate major sales and profit when other countries are struggling to buy their (U.S) goods and services; it’s as simple as that!  In the fed minutes released last Wednesday, it said “The decline in the U.S. stock market warranted a pause until financial conditions settled down, most members at the Federal Reserve agreed”. The officials are obviously worried with the recent development. I am not surprised with such a statement and I do not anticipate any interest rate increase in the foreseeable future. If they do, we could get into recession, and market could plunge another 15-20%.

Are we already in Recession or bear market?

There are many media reports indicating that we are already in a recession and going into a bear market. Some financial institutions claim that they have already sold all stock and sitting with cash on the sideline. Some reports says there are 50-50 chance that we may be approaching towards a recessions. May be they are right! I don’t have their sophisticated analytical tool to analyze and find out what is true. I don’t know but let’s analyze.

I personally think we could be trending towards a bear market but I see only 30-40% chance. We may not get into recession but it depends upon a large number of parameters as indicated below. My comments are underlined:

• The inflation picked up to 2.2% last week, job numbers and consumer spending was marginally better. But there are lots of negatives and uncertainties. Fed should not raise interest rate further. Moreover, they should bring it down to ZERO. Positive: Fed statement was softening. Negative: Another rate hike could be horrific.
• Commodity prices, particularly oil and metals should stabilize. Positives: Slowly we are seeing some stabilization.
• U.S. Dollar index should NOT keep rising. Positive: it has fallen to about 96 from 100. If dollar picks up again then there could be trouble.
• Emerging markets, Europe and Japan should bounce back. Positive: Last few days these markets are bouncing.
• U.S GDP growth should not trend negative. In Jan 2016 it was 0.7%. Negative: It is likely that it could fall further next quarter.
• Election & Best half of the year: We are in the best half of the year. If it does not yield better result than I am not very optimistic about 2^nd half of the year. It also depend how China will come with their next 5 year plan package, and of course U.S. Election. Uncertain/Neutral.

The above factors are very critical but above all market sentiment (Greed/ Fear) drives the market. The sentiment is not very good at this time but it could change very fast. Now let’s discuss my strategy under different scenario.

Scenario 1: If current market situation is a Correction: If stock market falls more than 10% from its top, usually it’s a called correction, which we have already encountered. If it’s just a correction then it’s time to deploy the cash, particularly in biotech and commodity, which was hardest, hit. Also look for growth and value equity for better return on investment. Selective emerging market equity can also be good, particularly India and China.

Scenario 2: What if we are trending towards Recession or we are in Recession?

Please note that if we get into recession then the world leaders have little left in their fiscal and monetary arsenals to mitigate the threat. Europe and Japan already have negative interest rate. China is struggling and it has been cutting rates and increasing various stimulus packages. Fed Chairwoman Janet Yellen said that negative interest rate is not warranted in U.S but banks should be ready to deal, if such a situation arrives. In this scenario, bear market could be imminent. In this case, I would like to do the following:

Keep selling stocks when market bounce and have good amount of cash available to deploy when time comes. Losers who are less likely to bounce fast could be sold early. Accumulate Gold and Silver related equity. These are called ‘safe heaven’ and we have already seen gold bounced handsomely. Look for stable dividend paying stock. Start doing dollar cost average or take very small new positions in solid company which has potential to bounce back as soon as market bounce back. I am not comfortable with keeping 100% cash and sit on sideline because nobody knows when the market bottoms. We may look to enter but that’s very difficult to predict.

It’s very hard to predict which scenario “we are in” or “we will be in”. There is no bulletproof method for any kind of scenario. Ultimately, it’s our money and our strategy that can win or lose the end game. Last month I elaborated about my strategy for down market. You can refer to my “January Blog” for further reference. Volatility will be the name of the game in 2016.

Is it good time to buy Commodity?

My personal opinion: “Yes” but with caution.

Gold, Silver and other precious Metals: As said, these are ‘so called safe heaven’. It would be wise to allocate some percentage of the portfolio to precious metal (probably 5-10%) or little more. One can buy Gold bullion or coin. I prefer liquidity; Gold and Silver related equity is a better option for me. A few weeks/months ago these were devastated and nobody bothered to pick up. Of course, I did pick up some. The gold and gold related stocks are already going higher since mid-January.  Investment demand for gold is returning as global stock markets are trending down.  And as investors seek to re-diversify their portfolios with gold, the dead gold miners’ stocks are going up fast. We have already seen gold bounced more than $150 in last few weeks. Thus far, it has been the best performing asset class in 2016. Silver is little behind but it’s also gaining handsomely. Off late, other metals such as copper and others have started picking up.

Oil & Crude: Earlier this week, Saudi Arabia, Qatar, Russia and Venezuela reached the agreement to cap their crude output if others do the same. They agreed to bring the production to January level. This is first time in many years Russia and Saudi Arabia are negotiating. Also, Iran's oil minister said this week that the country supports "any measure" to boost oil prices and voiced its support for a plan to stabilize and boost prices laid out by those four influential oil producers.  As we know, stock markets have been rattled by the slump in oil prices, which has hammered the stock prices of energy companies. Now it has spilled over into worries about losses for banks as they have landed huge sum to this rattled industry. At this point Oil stock should be looked more as trading rather than investing. The energy industry gathers in Houston on Monday (2/22) where Saudi, Russia, OPEC secretary and other oil companies will be participating. This event could provide a direction about future oil price.

Bottom Line: In my opinion, oil & crude prices have bottomed or nearing bottom. Eventually I do expect higher crude oil prices and expect more currency devaluations going forward going to summer. Also, we could also see higher gold and silver prices in 2016 and 2017. But nothing goes straight up or down. So it needs strategy and patience. A word of caution: the precious metals and energy sectors are extremely volatile. If the economy gets into recession it could further go down. So it’s better not to get overexposed.

A word about India and China market: These markets are certainly down but “not out’. These countries still have exceptional growth comparing to any other markets in the world. This is a phase not going to last forever. I may be wrong but I continue to accumulate where I see good opportunity. Indian budget will be presented in next few days. China 5 year plan is anticipated to be revealed around mid-March. After the aforesaid critical events, we may know which direction the markets will take.

Skechers U.S.A., Inc. (SKX)

Skechers is the country’s second leading athletic footwear brand, located in Manhattan Beach, California. The company designs, develops, markets, and distributes footwear for men, women, and children, as well as performance footwear for men and women under the Skechers brand name worldwide. It operates through four Domestic Wholesale Sales, International Wholesale Sales, Retail Sales, and E-commerce Sales. The stock had gone as high as $54.53 before stumbling down a few quarters ago. But the company is bouncing back nicely. Despite the fact that retail environment within U.S are struggling due to foreign currency headwinds, the company’s sales witnessed solid growth in the last quarter. Currently, it is trading at $31.88. We have about almost 41% discount to its 52 high.

Sales & Profit: The Company reported a 34% increase in fourth-quarter profits exceeding analysts’ expectation. It earned $29.4 million, or 19 cents per share, compared with $21.9 million, or 14 cents per share, a year ago. Sales for the quarter grew 27%, $722.7 million from $569.7 million in the year-earlier period and widely beating estimate of $648 million. Net sales for the year 2015 were a record $3.147 billion compared with sales of $2.378 billion in 2014. For first quarter of 2016, Analysts project sales in the range of $885–$920 million and earnings per share between 50 cents and 55 cents. The company seems to be comfortable with that.

Stores Update: Skechers operated 796 branded stores internationally, owned and operated by joint ventures, franchisees and distributors. The company plans to open about 250–275 more stores during 2016. Management aims at a total Skechers store base of over 1,650 by the end of 2016. Please note that, Skechers still do not have stores in India yet!

Company Fundamentals:

Market Cap: $4.98 Billion

Revenue: $3.16 Billion. Revenue per share: $20.67

Profit: 232 Million

Earnings Per Share (EPS): $1.50

PE Ratio: 21.25, 

Forward PE: 12.91, Price to Sales: 1.55

Quarterly Revenue Growth: 27.1%

Profit Growth: 34.3%

Institutional Holding: 93.7%

Return on Equity (ROE): 20.8%

Total Cash:  508 Million

Debt: 84.6 Million,   Beta: 0.38

52 Week High: 54.53, Low: 21.63, 52 week change: 41.7%

Risks ad final thought:  Skechers is turning the tide from lackluster performance a few months ago. The company has solid fundamentals and it seems to be back on track. I do see nice growth and value in this company. I already have some positions and I may buy more when required. I always prefer to 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 required. Recession risk is there for every company so Skechers is no different.

Alibaba Group Holding Limited (BABA)

BABA going IPO was one of the hottest IPO ever! Many of my friends were asking me whether they should buy Alibaba when it went public in Sep 2014. I am not a stock advisor. However, my answer was “I will think of buying BABA if it goes below $70”. Now that time has come, hence thought of putting in my Blog Portfolio. 

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in China and internationally. It operates Taobao Marketplace, Tmall, Alibaba.com, Alitrip, 688.com, an online AliExpress and so on.. The company has built a solid, global commerce ecosystem that delivers physical and digital goods to consumers and logistics services to merchants. The development of delivery in China rural markets, category expansion and growth in services are key focus areas that could support long-term growth. A few days ago BABA said it has bought 33 million shares or a 5.6% stake in Groupon. I think this is a very good move. It will provide BABA an international presence other than being king of Chinese Internet marketing. The GDP growth in China was 6.9% in 2015, which is 3 times better than of U.S. However, the negative scary headlines have made investors so nervous that it could reap maximum gains from a Chinese sector. The fact is that, China remains one of the world’s fastest-growing major economies, probably behind India in terms of GDP growth. Hence, this is the opportunity to buy one of best and dominant company at a very depressed price. The stock has a 52-week high of 95.06 and currently, the stock is trading at $67.28. Thus, we have about 29% discount from its top. Now let’s look at the fundamentals:

Market Cap: $164.57 Billion

Revenue: $14.53 Billion. Revenue per share: $5.90

Profit: 10.62 Billion

Earnings Per Share (EPS): $4.13

PE Ratio: 16.31, 

Forward PE: 3.02, Price to Sales: 11.2

Quarterly Revenue Growth: 110.50%

Profit Growth: 31.90%

Institutional Holding: 93.7%

Return on Equity (ROE): 34.68%

Total Cash:  18.53 Billion

Debt: 8.70 Billion,   

52 Week High: 95.06, Low: 57.20, 52 week change: -21.28%

Opportunity & Risk: Visualizing the company fundamental this is one of the best stock we can find from China in the form of ADR. China may be down but not out. It’s still growing more than 3 times faster than U.S and the company’s sales and profit is remarkably well. The Chinese market is still struggling to get a direction as growth has come down and the stock market is struggling. I already have some positions and I may buy more when required. As said, I always prefer to 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 required. I strongly believe that BABA is a strong candidate for long run.

Shesa’s Blog Portfolio

Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	% Changes	My Opinion (see disclaimer)	Comment
STOCK
AAPL*	54.09	96.04	1/25/13	78%	HOLD
BIDU	86.43	164.47	4/18/13	90%	HOLD
SLW*	21.8	15.55	10/1/13	-29%	BUY
FB	47	104.57	11/13/13	122%	BUY
TSLA	135	166.58	11/13/13	23%	HOLD
MA*	78.06	86.79	12/12/13	11%	HOLD
AMZN	311.73	534.9	4/12/14	72%	HOLD
VIPS	22.68	12.56	11/23/14	-45%	HOLD	Decide after earnings
GILD*	100.92	87.44	1/11/15	-13%	HOLD
ALNY	89.1	63.52	2/6/15	-29%	BUY
SFUN*	9.57	5.21	6/14/15	-46%	HOLD	Decide after earnings
MO*	52.03	60.56	9/13/15	16%	BUY
ILMN	171.15	151.31	1/15/16	-12%	BUY
SKX	31.88	31.88	2/21/16	0%	NEW BUY	Use 25% Trailing Stop
BABA	67.28	67.28	2/21/16	0%	NEW BUY	Use 25% Trailing Stop
ETF
GDX*	26.88	18.38	4/1/13	-32%	BUY
INDA	31.94	24.34	3/15/15	-24%	BUY
ASHR*	28.46	23.12	3/15/15	-19%	BUY
INCO	34.46	27.82	5/15/15	-19%	BUY
IHF*	139.1	112.3	8/16/15	-19%	HOLD
XLY	77.76	72.74	8/16/15	-6%	BUY
PJP	69.43	59.97	10/18/15	-14%	HOLD
EEM	32.5	30.24	11/15/15	-7%	BUY
MUTUAL FUND
FBIOX	117.73	167.1	3/1/13	42%	HOLD
PRHSX	55.17	58.86	2/2/14	7%	HOLD
FSCHX*	135.91	121.41	4/12/14	-11%	BUY
FSCRX	27.3	24.71	10/25/14	-9%	HOLD
GASFX*	28.31	25.03	12/20/14	-12%	HOLD
PRMTX*	63.38	64.34	12/20/14	2%	Accumulate
MINDX	26.94	23.2	6/14/15	-14%	BUY
MCDFX	14.11	12.33	12/9/15	-13%	BUY
FSRPX	95.46	96.38	1/15/16	1%	BUY
* Indicates dividend adjusted

Positions closed in after my last blog:

Equity	Sales Price	Date Sold	Gain / Loss (%age)
EGO	2.09	1/19/16	-39%
AXP	55.41	1/22/16	-31%
BAC	11.65	2/12/16	-19%
GOGO	9.9	2/16/16	-29%

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

Major Economic Report next week (week 2/22/16)

TIME (ET)	REPORT	PERIOD	FORECAST	PREVIOUS
TUE, FEB. 23
8.30 A.M.	Consumer confidence	FEB.	96.9	98.1
9.45 A.M.	Existing home sales	FEB.	5.40 million	5.46 million
WED, FEB. 24
10 A.M	New home sales	JAN	528000	544000
THU, FEB. 25
8.30 A.M	Weekly jobless claims	20-Feb	-	N/A
8.30 A.M	Durable goods orders	JAN	3.3%	-5.0%
FRI, FEB. 26
8.30 A.M	Gross domestic product (GDP)	Q1	0.3%	0.7% (Q4)
10:00 AM	Consumer sentiment	FEB	0.92	0.91
10:00 AM	Personal income	JAN	0.4%	0.3%
10:00 AM	Consumer spending	JAN	0.4%	0.0%
10:00 AM	Core inflation	JAN	-	0.0%

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 MARCH 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 data is represented from various source and I can't assure of 100% accuracy.

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