Shesa's MAY 2017 INVESTMENT BLOG

            May 21 2017

MAY 2017 INVESTMENT BLOG

Shesa Nayak

U.S. Stock Market Commentary: There is no end to the stock market rally. Market was driven by good earning reports, particularly from industrial, technology and financial sectors. The stock market have/had some concern that Donald Trump may get impeached because of his possible involvement with Russia. Hence, the market reacted by pulling down all the indexes on Wednesday, 5/17. After that the markets have bounced back to some extent. However, it’s not only U.S stock markets making new highs but also emerging markets have been performing even better, as far as returns are concerned. We discuss about it but let’s first 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	20,804.84	1,042.24	5.27
S&P 500	2238.83	2,328.95	142.54	6.37
NASDAQ	5383.12	6,083.70	700.58	13.01

Economic Reports

The U.S. GDP grew only at 0.7% annual rate as the government cut back on defense spending. This is very negligible. That was the weakest performance since the first quarter of 2014 as consumer spending barely increased and businesses invested less on inventories

On the positive side, he labor market reacceleration in the month of April helped drive the unemployment rate down to 4.4% — a level not seen since the dot-com bubble of 2000. It boosted Wall Street’s confidence and lifting the Dow Jones Industrial Average back over the 21,000 levels though it came down with the news of Donald Trump’s controversies.

For more economy reports please visit the following link:

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

Source: Marketwatch.com.

How did U.S. Corporates perform in Q1FY17?

Now that most of the companies have already reported their earnings, let’s take a quick look on how they performed with their earnings, revenue, projections and valuation.

·       Earnings and Sales: As of Friday, 5/19, 95% of the companies in the S&P 500 have reported their earnings for Q1FY17, 75% of the companies have beaten the earnings estimate and 64% of the companies have beaten the revenue estimate.

·       Earnings Growth: For Q1, the earnings growth rate for the S&P 500 is 13.9%, which was projected to be 9% earlier. This will mark the highest (year-over-year) earnings growth for S&P 500 since Q3 2011 that was 16.7%. The upside earnings estimates and upside earnings surprises was led by the Industrials sector, not technology or financialsJ.

·       Earnings Guidance: For Q2 2017, 68 S&P 500 companies have issued negative EPS guidance and 33 S&P 500 companies have issued positive EPS guidance.

·       Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.3. This P/E ratio is above the 5-year average of 15.2 and 10-year average (14.0).

TrumCare, Tax Re-forms: Will it happen?

As you may be knowing TrumCare got barely passed through the house. There are significant limitations of the proposed healthcare policies as I had written in my blog before - twenty five million people going out of insurance, people at the age group of 55-65 requiring to pay significant amount of extra health premium, pre-existing conditions are under the mercy of state governments and so on. These are really very concerning. There are three upcoming special elections to be held in about a month to replace outgoing Republican House members. In two of those races particularly Montana and Georgia can go either to Republican or Democrat. Assuming that even one or two seats goes to Democrats, it could spell death for Trumpcare.

How about Tax reform? I am really not excited with the proposed plan. I don’t see much benefit for middle-income group as he plans to remove all itemized deductions, except only mortgage interest. What happens to the property taxes and other taxes that people pay? What about other deductions? Corporate tax is being planned to cut to 15%! Not sure, how that huge deficit of 20% corporate taxes deduction will be compensated from current 35%? Whether all the corporates like Apple who has 200+ billions of cash sitting abroad will bring all their money after paying 15% Tax? I doubt.. They may bring some cash but don’t expect that they will bring hundreds of billions of dollar overnight…

Despite all these uncertainties stock market is excited and we should be too. As long as there are good returns on investments why should we be concerned! But always it’s better to have a PLAN B, in case table is turned..

Please note that we have passed the best 6 months of stock market (NOV – APR), now we have entered the worst 6 months (MAY – OCT). Someday, profit taking will start. But when will that happen is guesswork at this point. Hence, it’s little scary to chase the high-flying sectors. However, with all these, one market that excites me is “Emerging Markets”, particularly China and India whose economy are growing over 6.5% whereas U.S. GDP growth was just 0.7% in Q1.

Why to invest in emerging markets?

A few months ago, I believe in Dec/Jan, I wrote how emerging markets are cheaper comparing to U.S. stock market and that I saw good value in it. I believe so far it’s going in the right direction. I also included EEM in my Blog Portfolio in November 2015 and so far it has returned over 27%. The Emerging market equities are far outpacing U.S. stocks this year. I also believe that there is further room to run for the group, should the U.S. dollar weaken further. The iShares MSCI Emerging Markets ETF (EEM), which is in my blog portfolio, has gained more than 15% so far in 2017 and 29% in last one year. Undoubtedly, the depreciated U.S. dollar has helped the emerging markets. Because they get more USD for the same goods, resulting in better profit. Also, the corporations have to pay less interest for their debt in terms of USD.  In addition, it also helps the commodity prices due to same reason. As a matter of fact, they get better return for commodities, such as Oil, Gold, Silver, Copper etc. Moreover, we could see some of the Chinese companies like BABA, JD, NTES have come up with excellent Q1 results. The depreciating dollar is not the only factor but that’s also one of the factors. I think these companies have a great future prospect in months and years to come. If dollar depreciate further then it may in fact result in higher crude oil prices, which would benefit some emerging economies largely tied to the price of oil.

Keeping in view of aforesaid positives, this month I have decided to add another emerging market ETF that is really doing well. Let’s discuss..

Emerging Markets Internet and eCommerce ETF (EMQQ)

EMQQ is an Exchange Traded Fund (ETF). The investment seeks to provide investment results that correspond generally to the price and yield performance of Emerging Markets Internet & Ecommerce index. Normally the fund invests at least 80% of its total assets in securities of the index or in depositary receipts representing securities of the index. The index is designed to measure the performance of an investable universe of publicly traded, emerging market Internet and ecommerce companies.

The major holdings of EMQQ include- Tencent Holdings, Alibaba (BABA), JD.com (JD), NetEase (NTES), BIDU, CitiCorp.com (CTRP), Mercadolibre Inc (MELI), Momo Inc (MOMO) etc. Out of these, 71% of the holdings are related to Information Technology and 23% consists of Consumer discretionary. As far as counties exposures are concerned, China has 60%, South Korea 11%, Russia: 9%, Argentia: 6%, India: 1.5% (this is little strange!). Since Indian stock market is doing pretty well this composition should be more. However, if we see the holdings then we do have most of the good Chinese companies and exposure to other emerging countries too. Now let’s see the Return on Investment (ROI) as of 4|30|17:

	Year-To-Date	6 months	1 Year
EMQQ	39.01%	32.93%	30.81%

Current Price: 32.65
Inception Date: 11/12/2014.

Net Asset: 84.5 Million.

Expense Ratio: 0.86%.

Dividend Yield: 0.52%.

Price-Sales: 4.42, Price-Book: 3.82.

This is a small and reasonably new fund. In 2015, it had a negative return of 23.46%; in 2015, it returned 30.15% and for Year-to-date 39.01%. However, there is a significant opportunity in the emerging markets as I wrote earlier. These companies would grow further. Emerging markets will be an engine of world economic growth for decades to come. I have already put a small portion of my portfolio and will continue to keep adding depending on market situation. For long term, emerging markets have better growth opportunities comparing to highly valued U.S. Stock market.

Risks and Opportunity: If the U.S. stock market goes south then it could impact the emerging market as well. So, EMQQ is no exception. However, considering the valuation and growth prospects of the emerging markets this fund is a great way to get invested for better return on investment with mitigated risk.

Shesa’s Blog Portfolio (updated: 5/21/17)

Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	% Change	My View (see disclaimer).
STOCK
AAPL	54.09	152.96	1/25/13	183%	Accumulate
BIDU	86.43	188.76	4/18/13	118%	HOLD
SLW (WPM)	21.8	21.08	10/1/13	-3%	BUY below $19.
FB	47	148.06	11/13/13	215%	HOLD
TSLA	135	310.83	11/13/13	130%	HOLD
MA	78.06	117.58	12/12/13	51%	HOLD
AMZN	311.73	959.84	4/12/14	208%	BUY below $900.
MO	52.03	70.9	9/13/15	36%	HOLD
BABA	67.28	123.22	2/21/16	83%	BUY
JBLU	20.44	21.26	4/24/16	4%	SOLD@21.26 on 5/19
JD	23.45	41.06	5/22/16	75%	BUY
ABX	22.21	16.65	7/4/16	-25%	HOLD
XON	26.37	23.39	7/4/16	-11%	BUY
LUV	36.89	58.04	9/5/16	57%	HOLD
RIO	38.76	41.38	12/18/16	7%	BUY
PVH	92.82	100.41	1/22/17	8%	BUY
JUNO	23.13	23.64	2/19/17	2%	BUY
KITE	82.25	70.71	4/16/17	-14%	BUY
ETF
GDX	26.88	22.86	4/1/13	-15%	HOLD
INDA	31.94	32.23	3/15/15	1%	BUY
INCO	34.46	40.58	5/15/15	18%	BUY
IHF	139.1	139.39	8/16/15	0%	HOLD
XLY	77.76	89.25	8/16/15	15%	HOLD
PJP	69.43	59.7	10/18/15	-14%	SOLD@59.7 on 5/8
EEM	32.5	41.15	11/15/15	27%	BUY
IYG	112.83	107.17	3/19/16	-5%	BUY
EMQQ	32.65	32.65	5/21/17	0%	NEW BUY
MUTUAL FUND
FBIOX	117.73	196.42	3/1/13	67%	Accumulate
PRHSX *	52.48	66.73	2/2/14	27%	Possible Sell
FSCHX *	128.91	156.93	4/12/14	22%	BUY
FSCRX *	27.17	31.27	10/25/14	15%	HOLD
GASFX *	28.19	29.86	12/20/14	6%	Possible Sell
PRMTX *	61.72	87.8	12/20/14	42%	Accumulate
MINDX *	26.48	30.43	6/14/15	15%	Accumulate
MCDFX *	13.84	15.83	12/9/15	14%	Accumulate
FSRPX *	95.32	120.94	1/15/16	27%	Accumulate
FBSOX *	38.65	46.19	3/20/16	20%	Accumulate
TGLDX	33.73	36.85	11/20/16	9%	BUY
* Indicates dividend adjusted

Positions closed since last Blog

Equity	Sales Price	Buy Price	Date Sold	Gain/Loss	Comment
PJP	59.70	69.43	5/8/27	-14%	The pharma ETF have gone south in last year or so. The uncertainty surrounding healthcare reforms is further risk. Hence sold.
JBLU	21.30	20.26	5/19/17	4%	This airline stock is stagnant and not really moving up. Better to put the money somewhere else for better ROI.

Company Updates:

Interxon (XON): The shares of the company did shot up 21% on 5/11 after the earnings. I sent an update on this to by investment group. Here is a quick glance of the quarter.  Revenue increased 24% to $53.7 million beating analyst expectations of $48.8 million. However, it incurred a loss of $31.4 million, or $0.26 per share worse than analyst’s expectation. However, the company said on earning call that this year they may potentially have multiple revenue sources from health, food etc. As I aid in my previous blog, if the company succeeds then it could become a 10 beggar.

KITE pharma (KITE): After the earnings, the company lost nearly 15 percent of its share value. It reported a net loss of $90.399 million, a wider loss than $45.125 million for the previous year. However, that was not the main reason. The news that drove its shares down was the reports that a patient enrolled in a trial for Kite's CAR-T therapy KTE-C19 recently died from multiple organ failure. As we know, any death on drug trial is not good news for the company. However, the company noted on the conference call that there had been no clinical hold to the ongoing trial and all relevant details about the case were already provided to FDA. KITE also guided 2017 revenue of $325 million to $340 million and there was no change on that. 

My Take: I know such trials are very risky and it has a major impact on the stock. However, these are the risks associated to biotech. I believe that this is an opportunity keeping longer time horizon in mind. Hence, I added some more stocks of KITE as it was beaten down. In short term, it may be volatile and risky but I feel that long term prospects for this company is still compelling.  Coincidently, risks must not be forgotten…

Earnings Updates

Apple (AAPL): Reported an EPS of $2.10 per share vs. $2.02 per share expected by Analysts. Revenue was $52.9 billion vs. $53.02 billion. iPhone shipments were 50.8 million vs. 52 million expected. Revenue guidance Q3: Between $43.5 billion and $45.5 billion vs. $45.6 billion expected. However, this stock has been going up. As you could know, Warren Buffet also bought few millions of Apple shares few months ago. It looks to me that institutional investors are accumulating the stock resulting in higher stock price. There is hope from investment community that Trump tax cut plan would help Apple to bring hundreds of billions of dollars from its oversees account and increase share buy back, dividend and employment. Let’s wait and see. < Accumulate when stock is down >.

Facebook (FB)

EPS: $1.04 vs. 87 cents expected by Analysts. Revenue was $8.03 billion vs. $7.84 billion expected. Monthly active users: 1.94 billion vs. 1.91 billion expected. Per my observations, these days Facebook has lot of junk advertisements. This is OK for now but I feel there could be some repercussion in future < HOLD >.

Amazon (AMZN)

EPS: 1.48 vs. $1.12 estimate.

Revenue: $35.7 billion vs. $35.3 billion.

AWS Sales: $3.66 billion, in line with estimates. < BUY below $900 >.

Master Card (MA)

Earnings per share: $1.01 vs. 95 cents estimated.

Revenue: $2.734 vs. $2.651 billion estimated.

MasterCard reported a 12.7 percent increase in quarterly profit. < HOLD >.

BIDU: Its revenue of $2.45 billion was up 6.8% over the prior-year quarter and was largely in line with expectations. Earnings of $258.1 million were 10.6% lower year over year, but they beat expectations by a wide margin. < HOLD >.

Alibaba (BABA): Reported revenue of $5.61 billion, up 60% year over year and beating the consensus estimate of $5.2 billion (35.87 billion yuan). Adjusted earnings rose 37% to 63 cents a share, but missed the consensus of 66 cents (4.53 yuan). Investors initially sold the stock but after that the stock bounced back. This is one of the companies to hold for long term. < Strong Buy >.

JD.com:  Earnings per share 15 cents vs. 1 Cent estimated.

Revenue: $11.1 billion vs. 10.6 Billion estimated. Annual active customer accounts increased by 40% to 236.5 million in the 12 months ended March 31.  < BUY>.

That’s all for today. Wish you good investing! Stay tuned for my JUN 2017 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 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.