Shesa's JUN 2017 INVESTMENT BLOG

            JUN 25 2017

JUN 2017 INVESTMENT BLOG

Shesa Nayak

U.S. Stock Market Commentary: The stock markets in U.S keeps making new high. Now that the earnings season is over, it was expected that market would take a pause. However, the stock market rally continues. Biotech sector was lagging behind but it has exploded in last few days. Meanwhile, Fed raised interest rate on June 14^th but that has/had no major impact on the market. The question is how long these rallies will continue? That’s a great question to ask. The answer is “nobody knows..”. ‘Sell in May and go away’ concept have not worked for last couple of years! So, let’s keep enjoying the stock market momentum as much as we can. Such phenomena are rare, so why complain? As usual, let's first see the U.S. Stock Market Indexes.

U.S. Indexes	3-Jan-17	Friday Close	Change this Year	% Change in 2017
DOW Jones	19762.6	21,394.76	1,632.16	8.26%
S&P 500	2238.83	2,438.30	199.47	8.91%
NASDAQ	5383.12	6,265.25	882.13	16.39%

Economic Reports

Positives

• Unemployment fell to 4.3 percent in May which was better then previous month’s 4.4.%. Jobless claim also reduced. Inflation was only 1.5%.
• Producer Price Index (PPI): 0%,
• Consumer Price Index (CPI): -1%.
• GDP forecast for Q2 is due on July 1, which is expected to be 3% compare to 1.2% in the previous quarter. We have to wait and watch for this number.

Negatives

• Consumer sentiment was down to 94.5%.
• Retails Sales were down -0.3%. Housing starts and Building permits also fell.

For more economy reports please visit the following link:

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

Source: Marketwatch.com.

Fed raised Interest rate:

On 14 June, the Federal Reserve announced a 0.25% interest rate increase to 1.25%. The last time the interest rate was at same level in 2008. After that, the interest rate remained at 0.25 percent for the next 7 years, 83 months to be specific. Reminding the blog readers that Fed had also raised interest rate after 7 years in December 2015, Dec 2016 and March 2017.  The Fed officials say 4.3% unemployment is sustainable in the long run. But inflation fell to 1.5 percent in April, has run below the Fed's 2 percent target for years. One of the reason could be falling oil prices, retail sales

The Fed officials also said they expect one more rate hike in 2017, bringing the total for the year to three. In addition, they expect to begin allowing the $4.5 trillion balance sheet to shrink by an initial $10 billion a month and then keep reducing that in a phased manner. A smaller Fed balance sheet delivers less downward pressure on longer-run borrowing costs.

Sectors to Watch

With all the stock market rallies, is there anything still left to buy? There is no doubt that most of the equities have become expensive but there is always something to buy. Here are some sectors in my view still worth giving a look:

Biotech: As I said above, Biotech sector was falling behind other stock market indexes like DOW, S&P and NASDAQ. But it looks like there is some sectorial rotation of money and biotech sector has rallied significantly in last few days. This was the best weekly performance of 2017, as word from Washington indicates Donald Trump's expected action on drug prices may not be as bad as investors feared, though no action has been taken yet!

Moreover, drug pricing isn't the only issue affecting stocks: investors believe that progressive moves from the new Food and Drug Administration commissioner, positive clinical trial data, and hopes for tax reform and a return to mergers and acquisitions are all driving biotech higher. It can also be noted that the biotech indexes are still not at all time high. For Example, BTK – NYSE Biotech Index all time high was about 4310 and NBI - Nasdaq Biotechnology Index all time high was about 4211. On Friday these indexes closed at 4016.86 and 3354.13 respectively. So, I believe there is still some room to go up and make new high. There are still prospective companies in this sector available at cheap price. You can see my Blog Portfolio. Sometime it needs some risk and patience.

Commodity: First let’s talk about Gold. Gold came under pressure as it came closer to Fed’s meeting for interest rate. Once interest rate was raised, it fell further after interest rate hike. The downbeat tone continues to cloud the gold market, as recent comments from Federal Reserve officials raised expectations for further increases in interest rates later this year. A higher rate is expected to reduce the demand for gold in favor of investments that do offer a yield. However, if you read my earlier blogs and history is any evidence then Gold does better during interest rate hike period. So, I prefer to have some position in gold and/or gold related equity for sure. Last Friday Gold was trading at $1257.80 per ounce.

Oil: Oil has come down to almost $41 as the oil inventory piled up in U.S. It seems there is more production than consumption. Add to that, there are conflicts among the OPEC countries like Saudi Arab, Qatar, and Iran etc. Hence, there is fear that Oil price may come down to $30 level. Last Friday, Oil traded at $43.17 per barrel. However, I don’t buy that theory. Why is that? U.S oil shells are producing more oil but once prices comes down they will be making losses rather than making profit. Also, as they keep draining more oil the oil field won’t be producing as much. Many small oil companies depend on Bank landing. Due to the hike in interest rate that would be expensive to get those loans. Furthermore, summer is still ahead wherein oil prices goes up. History may change but considering the above facts, I have taken some position in oil during last couple of weeks. Let’s see how it plays out..

Should Equity be sold now?

As I noted in my last blog, we have already entered to the worst 6 months (MAY – OCT). However, “sell in May and go away” concept has not worked for last couple of years. But undoubtedly, market just can’t keep going up and up. So, it is better to be vigilant of the market situation. It’s not good to panic too early (fear) or not be too brave (greed). In my opinion, there could be many strategies; here are some of my thoughts:

• It’s better to either put a trailing stop based on own comfort level.
• Wait for some days to see how market behaves and then start taking profit.
• Take some profit if it has gone up above certain %age.
• Keep a watch list of some stock/equity one would like to buy in case of correction. Keep an eye on biotech sector.
• Buy some of the good companies, which have future potential but down now and potentially good for long term. These categories of stocks need patience but beneficial in long run in my experience.
• Do nothing and just sit keeping a long-term bias. This may be very risky…

MSCI adds stocks to emerging markets index

MSCI stands for Morgan Stanley Capital International, the first global market indexes, created in 1968. This is a very famous index. In a long-awaited decision, MSCI said Tuesday, 6/20/17 that it plans to add Chinese shares to its benchmark emerging markets index. This is very good news for the China market. Let’s see some highlights on its benefits:

• MSCI said it will add 222 China A Large Cap stocks on a gradual basis beginning next year – August 2018 and I believe some more in DEC 2018. This would be very helpful for Chinese large cap stocks as they would be part of the mega index. This long awaited decision took 4 years to be materialized.
• The MSCI Emerging Markets Index is tracked by an estimated $1.6 trillion in assets, as of the end of June last year.
• The addition of the mainland Chinese A shares could be an impetus for the world's second-largest stock market, which has until now drawn limited foreign investor interest because of high volatility, frequent trading halts and limited foreign investor access to the Shanghai and Shenzhen stock markets.
• BABA, JD, BIDU and EEM are anticipated to benefit because of this.

Now let’s see about for this month’s addition. I am adding a Retail stock this month to my Blog portfolio.

Under Armour Inc (NYSE: UA): The company develops, markets, and distributes branded performance apparel, footwear, and accessories for men, women, and children in North America, Europe, Middle East, Africa, Asia-Pacific, and Latin America.  As I said in my Economy update, Consumer sentiment is down and retail sales are down too. UA is the single worst performing stock in the S&P 500. Over the past year, it is down 53%. With all these negatives why I am still adding this stock to the portfolio? Surprising, is not it? Well, that’ true but there are reasons for doing that. Let’s see..

I also said “Buy some of the good companies, which has future potential but down now and potentially good for long term. These categories of stocks need patience but beneficial in long run”. Under Armour falls into this category.  The stock is almost near its 52-week low. And there are good reasons to believe that a rebound is at hand. The stock performed poorly over the last several months because sales and earnings came in below expectations. Also, the stock is not that cheap. We will see fundamentals later on. Now that the expectations are greatly reduced, and the stock valuation is better, let's revisit this story...

The company sells its products online and through hundreds of major retailers and it owns more than 180 factory stores. At this time, sporting manufacturers like Nike, Skechers are also not great, as some sporting goods retailers have busted. That's a contributing factor to the company's declining sales growth rate.

However, others retailers like Dick's Sporting Goods and Amazon are now picking up rapidly. The strength that lies with Under Armour is its high-quality products, big-name sponsorships and widespread distribution. Several of the best athletes in the world wear Under Armour gear, including Super Bowl champion Tom Brady, Golden State Warrior basketball great Stephen Curry and PGA Tour phenom Jordan Spieth. A few months ago, it reached a 10-year-agreement with major League Baseball to become the official on-field uniform provider beginning in 2020.

Sales: Grew at only 7% in the most recent quarter, they are likely to soon hit a double-digit as the company still has so many markets to tap. It has an annual sale of $4.9 billion. The U.S. market for sportswear, including shoes, is $104 billion and Worldwide estimated to be $282 billion.

Strength: Despite the fact that UA is relatively new to footwear, sales are increasing at a 36% rate in USA and expanding at 55% internationally. Polls shows that Under Armour brand is strengthening with consumers and demand for athletic wear remains strong. On the Forbes 2016 list of the Top 25 Most Innovative Companies, Under Armour is No. 6, ahead of Amazon and Netflix.

Weakness: It has some short-term challenges, including fewer consumer visits to retail stores, increased competition and widespread industry discounting. Under Armour is currently out of favor but catching up fast. Now let’s see the fundamentals:

Market Cap	8.95B	52 Week High	42.94
Trailing PE	49.62	52 Week Low	17.05
Forward PE	41.57	Total Cash	172.13M
Price to Sales	1.82	Total Debt	861.05 M
Revenue / Sales	4.89B	Book Value	4.59
Quarterly Revenue Growth	6.60%	Beta	N/A
Profit / Earnings	176.53M	Institutional Ownership	N/A
Quarterly Earnings Growth	N/A
EPS	0.39

Fundamentally, the company seems little expensive. Also, short ratio is standing at 28%, which is very high. However, I feel that buying this stock at the current price and waiting with little patience can be richly rewarded. The stock is currently trading at $19.65 and 52-week high of $42.94 that’s 54% discount. I have already bought some and keep adding in a gradual manner to do dollar cost average. That’s mostly my own approach.

Risks and Opportunity: If stock market tanks this will also go south. Since the stock is already beaten down the downside risk may not be too high. In my view, buying at current price and holding for some foreseeable period of time should be rewarding.

Shesa’s Blog Portfolio (updated: 6/25/17)

Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	% Change	My View (see disclaimer).
STOCK
AAPL	54.09	146.28	1/25/13	170%	Accumulate
BIDU	86.43	178.14	4/18/13	106%	HOLD
WPM	21.8	20.22	10/1/13	-7%	BUY
FB	47	155.07	11/13/13	230%	HOLD
TSLA	135	383.45	11/13/13	184%	HOLD
MA	78.06	124.01	12/12/13	59%	HOLD
AMZN	311.73	1003.74	4/12/14	222%	BUY below $900.
MO	52.03	76.49	9/13/15	47%	HOLD
BABA	67.28	143.01	2/21/16	113%	BUY
JD	23.45	42.95	5/22/16	83%	BUY
ABX	22.21	16.48	7/4/16	-26%	BUY
XON	26.37	25.36	7/4/16	-4%	BUY
LUV	36.89	61.92	9/5/16	68%	HOLD
RIO	38.76	39.17	12/18/16	1%	BUY
PVH	92.82	110.48	1/22/17	19%	BUY
JUNO	23.13	29	2/19/17	25%	BUY
KITE	82.25	100.66	4/16/17	22%	BUY
UA	19.65	19.65	6/25/17	0%	NEWLY ADDED
ETF
GDX	26.88	22.74	4/1/13	-15%	BUY
INDA	31.94	32.19	3/15/15	1%	BUY
INCO	34.46	41.93	5/15/15	22%	BUY
IHF	139.1	149.1	8/16/15	7%	HOLD
XLY	77.76	89.52	8/16/15	15%	HOLD
EEM	32.5	41.5	11/15/15	28%	BUY
IYG	112.83	110.1	3/19/16	-2%	HOLD
EMQQ	32.65	32.82	5/21/17	0%	BUY
MUTUAL FUND
FBIOX	117.73	218.88	3/1/13	86%	Accumulate
PRHSX *	52.48	72.04	2/2/14	37%	HOLD
FSCHX *	128.91	156.94	4/12/14	22%	BUY
FSCRX *	27.17	30.65	10/25/14	13%	HOLD
GASFX *	28.19	30.16	12/20/14	7%	HOLD
PRMTX *	61.72	90.17	12/20/14	46%	Accumulate
MINDX *	26.48	31.27	6/14/15	18%	Accumulate
MCDFX *	13.84	16.27	12/9/15	18%	Accumulate
FSRPX *	95.32	119.56	1/15/16	25%	HOLD
FBSOX *	38.65	47.87	3/20/16	24%	Accumulate
TGLDX	33.73	37.18	11/20/16	10%	BUY
* Indicates dividend adjusted

Positions closed since last Blog

NONE.

Company Updates:

Amazon's (Nasdaq: AMZN) recently announced $13.7 billion buyout of Whole Foods (Nasdaq: WFM). I think it’s a good decision. Though Amazon did not specify the objective behind buying Whole Foods, it’s obvious that it would diversify into food and grocery and possibly food delivery. The stock went up after the news. Last year, Amazon began live testing a grocery store concept, Amazon Go, in Seattle, Washington. It's all about "walk out" technology. Undoubtedly, Amazon is eating the business from Walmart and Target. We will see how it plays out in future.

That’s all for today. Wish you good investing! Stay tuned for my JULY 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 only. I do not provide any 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.

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