Shesa's FEBRUARY 2017 INVESTMENT BLOG

      19 February 2017

FEBRUARY 2017 INVESTMENT BLOG

Shesa Nayak

U.S. Stock Market Commentary: U.S. stock markets are still in honeymoon period after Donald Trump’s presidency. All the major stock market indexes (DOW, S&P 500 and NASDAQ) are at all time high. The stock rallies continue. The question comes to mind, should we remain invested? Should we take some profit out of the table? Should we buy more? Trent is our friend, so should we follow the trend? These are the questions most investors facing today. As usual, we can discuss these but first let’s take a look at the Stock Market Indexes.

U.S. Stock Market Indexes

U.S. Indexes	3-Jan-17	Friday Close	Change this Year	% Change in 2017
DOW Jones	19762.6	20,624.05	861.45	4.36
S&P 500	2238.83	2,351.16	112.33	5.02
NASDAQ	5383.12	5,838.58	455.46	8.46

Will Fed raise Interest rate again in March?

Federal Reserve Chairwoman Janet Yellen signaled Tuesday that the central bank could consider raising short-term interest rates at its next policy meeting in March if the economy continues to strengthen as expected. Though, I will not rule out the possibility, I think the likely scenario could be around May-June timeframe. Reminding the readers that, last time the rate raised was on Dec 14, 2016. Despite good economy reports, the GDP growth last quarter was merely 1.9%. The personal income rose only 0.3% based on data released Jan 30. In my view, raising rates again in March is too early which may not bode well for the economy. Well, let’s wait and see how it goes..

Economic Reports

Please visit the following link to view the economic report:

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

Source: Marketwatch.com.

Q4 2016 Corporate Earnings

I will provide earnings update for some of the key companies of my blog portfolio later on. First, let’s see the overall earnings for Q4FY16.

• Earnings Update: As of Friday, 2/17, 82% of the S&P 500 companies have declared their earnings for Q4 2016, out of which, 66% of companies have beat the EPS estimate and 53% of companies have beat the Revenue estimate.  Overall earnings growth is 4.6%, making it first time the S&P index has seen year-over-year earnings growth for two consecutive quarters since Q1 of 2015.
• Earnings Guidance: For Q1 2017, 61 S&P 500 companies have issued negative EPS guidance and 29 S&P 500 companies have issued positive EPS guidance.
• Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.6.

My view on Stock Market so far after Trump’s presidency

We are one month into Donald Trump’s presidency. There are anxieties all around because of his unpredictable actions. Let’s put this into perspective. Before president Trump took office, we heard many counterarguments in media, “Calm down, he’s not really going to build a wall at Mexico’s expense or ban Muslims from the country.” However, since Trump took over office in January, it was clear that these controversial stances were not just campaign rhetoric. He started signing a flurry of executive orders on immigration restrictions, started talking about wall. Also, there was latest news last Friday that Trump administration considered a proposal to mobilize as many as 100,000 National Guard troops to round up unauthorized immigrants. A few days ago, in an interview with Fox News, he told that Tax proposals and replacing Obama care would take time and planned to be towards the end of the year. A few days later, he said, they are planning to publish the proposals in next few weeks! It becomes difficult to predict the next action and what executive order he may sign next day!

Irrespective of all these, Wall Street have been going north and making new highs on daily basis… Why is that? So far, it’s all hope and anticipation of tax cuts and reforms, infrastructure spending, creating millions of jobs and so on. I certainly agree on one aspect, he seems to be laser focused on creating jobs. If he succeeds, it will be good for economy. Employment generates income, which in-turn increases consumer confidence and consumer spending. This is 70% of U.S. GDP. Having said that, let’s see another fact. His emphasis is “Made in the USA”, which is good. But how can you be competitive and produce it cheaper when you try to produce everything here by importing raw materials and higher labor cost?  As I wrote in my last months’ blog, being a protective economy, no country in the world has been prosperous in the long run. Think about India, China, Japan, Singapore or any other nation for that matter. Globalization is the “key” for growth, to make goods cheaper, competitive and profitable.

Is it time to buy? Take profit? Sit on the sideline? Frankly, the stock market is not cheap with 17.6% forward EPS. I do understand that, as an investor one should follow the trend. As I see, putting new money could be little risky. However, I see one sector, which is potentially little cheap is “Biotech”. That’s because Trump is touting to repeal and replace Obama Care and reduce the price of drugs. My personal view is that, taking some profit out of table is certainly a good option. Sitting on the sideline without investing is certainly not advisable. Those folks who got out of the market in 2008-09 and never invested could have lost half of their portfolio value, which must have been disappointing. Should I buy equity now? In the stock market there are always some stocks to buy at any given point of time. But certainly, it has to be judicious. It’s very risky to jump in to the crowed just because somebody said something or saw on TV or read an article. Doing our own homework before putting hard earned money is the best prescription.

Is GOLD good investment now?

I think so. Here are my thoughts on both positive and negative side:

Positives:

• The Political uncertainties due to Donald Trump’s signing flurry of executive orders have generated tremendous uncertainty. In addition, there are major uncertainties over forthcoming elections in France, Germany and Italy. Possible confrontation of U.S with Mexico, China etc.
• The Islamic gold law, which was announced on December 5, 2016, (please see my Nov-Dec blog) is scheduled to come online by March 31. It hasn’t truly gone into effect so far. This may open a major gold buying by Islamic nations and their central banks.
• China could take control of Pricing of Gold: China opened the Shanghai Gold Exchange in 2016. Traders buying futures on the Shanghai exchange are required to deposit the equivalent of physical gold. In London and New York exchange only 1 in 252 paper gold contracts is backed by actual real bullion.  The traders buying futures on the Shanghai exchange are required to deposit the equivalent of physical gold. Not 252 to 1… but 1 to 1.
• The reduction in supply of gold, as mining companies struggle to produce more. Many companies did cut their exploration and production in last couple of years due to low gold prices.
• Higher Inflation: January consumer price index (CPI) came in at 2.5%, which is near a 5-year high.

Negatives:

• Rising dollar can put dent on gold price. However, USD has been trending lower as Donald Trump warned, “Dollar is too strong”.
• Interest Rate: This is not good for gold because gold does not earn any interest, except in India. Hence, investor may not be interested to buy gold. Rather, if you see my previous blog, gold has done well during the period of rising interest rate mostly due to anticipated inflation.

A quick glance to GDP growth in India and China:

India's gross domestic product advanced 7.3 percent year-on-year in the third quarter of 2016. We may see some negative impact of demonetization in the coming quarters.

China’s GDP growth was 6.7%, its slowest pace in 26 years as the country had to deal with debt and internal consumption problem.

Despite their own challenges, I still feel that these countries can still provide better ROI. For more, see my last month’s blog.

Now let’s discuss about the stock for this month’s inclusion to my blog portfolio.

Juno Therapeutics, Inc. (JUNO): It’s a biopharmaceutical company, engages in developing cell-based cancer immunotherapies. Immunotherapy is the most exciting development in cancer treatment ever. As I understand, immunotherapy empowers body’s immune system to destroy the invaders. It doesn’t target cancer cells. Rather, these drugs administered through a pill or IV trigger the immune system to kill the cancer cells while leaving healthy cells intact and in many cases cancer disappears. JUNO develops cell-based cancer immunotherapies based on its antigen receptor and T cell receptor technologies to genetically engineer T cells to recognize and kill cancer cells. The company has long pipelines for lymphoblastic leukemia, ovarian cancers; non-small cell lung cancer, breast cancer, pancreatic cancer, prostate cancers; colorectal cancers etc. Juno Therapeutics has collaboration agreements with Celgene Corporation (CELG). Industry analysts estimate that in 10 years, immune-based treatments will generate sales up to $70 billion per year. That will make them the most valuable class of drugs in history. If JUNO succeeds, then it would be one of the major players in the market.

Why do I like JUNO?

JUNO stock was hammered last summer, Juno Therapeutics stock was beaten up after the Food and Drug Administration halted a trial with its lead candidate, JCAR015, following unexpected patient deaths. The company said that, chemotherapy used to precondition patients before infusion with modified immune cells. However, there were additional patient deaths in November led management to shut down the study again in November. The drug has better results than the competition but safety was the major concern. It’s not that JUNO is the first to bring a T-cell (CAR-T) therapy. Despite the failures, the company still has 11 active development programs in its pipeline. It’s just a matter of time and patience to wait for little longer. The company had more than $1 billion in cash and equivalents after September quarter. It has another lead candidate (JCAR017) for an FDA submission planned for application this year and possible approval in 2018, if all goes well. So it’s a long-term investment. If it gets approved it’s estimated to generate sales of more than $2 billion each year. The stock is currently trading at $23.13, which is down 53% from its 52 week high of $49.72. JUNO is a small cap biotech company having market capitalization of $2.45 billion. There are no real fundamentals that I can discuss. The key point is, its drug pipelines and anticipated success. Since biotech stocks keep fluctuating heavily, it’s not a good idea to buy all stock at once. As usual, I use a phased approach to buy and keep accumulating. It should not be more than 2-3% of the portfolio value. In order to protect form major loss, it would be advisable to put a trailing stop 25-30% below buying price.

Risk(s): Biotech stocks are prone to high risk and high reward. If there is a failure than it could even fall 50-60%, any success or breakthrough could send the stock sky rocketed. I believe JUNO has a compelling future but it may need time and patience. Our investment decision should be made with how much risk we would like to take. Even though stock market has gone up significantly in last couple of months, I feel that that there are some cheap biotech stocks. JUNO is one of those in the leading-edge technology for cancer cure. It’s difficult to say whether its other drug planned for submission will succeed! Only time will tell how far JUNO will succeed but I rest my faith, at least for now.

Note: I also believe that another biotech company Intrexon Corp (XON), which I included in my July 2016 blog has a promising future and the stock is much cheaper now. Some investors say it’s a ten-baggers of tomorrow. The company creates biotech products in healthcare, energy, food, environmental services and even consumer goods. I have added some more positions in this stock. Let’s see…

Shesa’s Blog Portfolio (updated: 2/19/17):

Positions closed since last Blog: NONE

Earnings Updates

Barrick Gold (ABX): It earned a profit of $425 million or 36 cents per share in the 4th quarter. In the year-ago quarter, the company had incurred a loss of $2.6 billion or $2.25 per share.  Barring one-time items, adjusted earnings were 22 cents per share for the quarter, beating the Consensus Estimate of 20 cents. Revenues rose around 4% year over year to $2,319 million.

Apple (AAPL): The Company posted all-time record quarterly revenue of $78.4 billion and all-time record quarterly earnings per diluted share of $3.36. These results compare to revenue of $75.9 billion and EPS of $3.28 in the year-ago quarter. It sold more number of iPhone than estimated. The explosion problem with Samsung phone was good news for Apple. Apple shares have been rising due to the expectation that corporate tax rate will be cut by Trump administration and that would help Apple. Also, Warren Buffet increased his stake in the company.

Amazon (AMZN): Amazon earned profit of $1.54 a share vs. $1.35 adjusted. Revenue: $43.74 billion vs $44.68 billion expected by Reuters missing the estimate. The company said it expects Q1 revenue between $33.25 billion and $35.75 billion vs. revenue of $35.95 billion expected.

Southwest Airlines (LUV): Southwest Airlines reported $522 million in earnings in the fourth quarter. For the full-year, Southwest’s profits were $2.24 billion, compared to $2.18 billion in 2015. Southwest's revenues grew 2 percent to $5.08 billion as the airline’s passenger traffic grew 5.5 percent.

JetBlue (JBLU): The Company earned 50 cents per share beat the Zacks Consensus Estimate by a penny. Earnings declined substantially from the year-ago figure due to higher costs though it beat the earnings estimates.

Facebook (FB): Revenue rose 51% to $8.81 billion, from $5.84 billion in the same period a year earlier, beating analyst expectation of $8.51 billion. The company posted a profit of $3.57 billion, or $1.21 a share, up 128% from a year-earlier profit of $1.56 billion, or 54 cents a share. Excluding certain expenses, Facebook said it would have earned $4.15 billion, or $1.41 a share, topping forecasts of $1.31 per share on that basis.

Alibaba (BABA): The Company earned net income of $3.239B or $1.30 per share was up 38% year over year, and topped estimates by $0.17. The Revenue was $7.7B up 54% beating analyst estimate.

That’s all for today. Wish you a good investing! Stay tuned for my MARCH 2017 blog. 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 merely my own opinions and some of the information provided may not be correct. 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.