Shesa's DEC/JAN 2018 INVESTMENT BLOG

            Jan 1, 2018

(DEC) - JAN 2018 INVESTMENT BLOG

Shesa Nayak

Wishing all my blog readers across the world “A very Happy and Prosperous New Year-2018 and hope this year brings great Return on Investment”. Apologize for not able to put my DEC blog. It was a calculated move, I waited for tax reforms and year to be completed. It enabled me to do diligent research and provide a broad view of the market and expectations for 2018. I am hopeful that my analysis would be beneficial for my blog readers. This month’s blog will be little lengthy so request your patience!

U.S. Stock Market 2017 Recap: 2017 was one of the most exciting and enriching year for the investors. The stock markets invariably went up and up without having any major correction. It’s difficult to envisage such stock market performance without any major hurdles. The year started with presidential election where Democrats were expected to win but Republican turned the wheel and Donald Trump became the president of USA. On the election night, DOW crashed about a thousand points but next day the stock market bounced back and after that it never looked back, except a small hick-up here and there. Donald Trump had to struggle in a chaotic environment, but stock market went up and up. Finally, one accomplishment the Republicans have/had in the form of Tax Reforms that was signed by president Trump on Friday, 12/22/17. In the whole process, 2017 seemed to be one of the best stock market performance without any major entangle. Now the question comes to mind is whether 2018 would replicate 2017 stock market performance? I will provide my view on what to expect in 2018 but let’s first look at stock market performance for 2017:

 U.S STOCK MARKET INDEX

INDEXES	1/3/17	Friday Close (12/29/17)	Change in 2017	% Change in 2017	All Time High
DOW Jones	19762.6	24,719.22	4,956.62	25.08	24,876.07
S&P 500	2238.83	2,673.61	434.78	19.42	2,694.07
NASDAQ	5383.12	6,903.39	1,520.27	28.24	6,954.98
BTK (Bio)	3116.15	4,222.21	1,106.06	35.49	4329.04
NBI	2828.2	3,356.61	528.41	18.68	4165.86

Quick update on Interest Rate

On 13th December, the Federal Reserve raised its benchmark interest rate a quarter point to 1.5% and upgraded the growth forecast for next year. The Members FOMC members raised its GDP estimate from 2.1% to 2.5%. In Q3 GDP growth was 3.2%. However, growth is projected to come back down to 2.1% in 2019 and 2% in 2020. They also raised inflation forecast for 2018 from 1.6% to 1.7%. The Fed statement noted that the jobs market "will remain strong". The current unemployment rate in U.S is 4.1% and it’s anticipated that it will fall to 3.5% by the end of 2018.

For more U.S. Economic news and data please look at here: http://www.marketwatch.com/economy-politics/calendars/economic   

Source: Marketwatch.com

A look back to my 2017 Blog Portfolio

As said before, 2017 was an outstanding year for stock market and I believe all the investors who invested money in stock market must have been rewarded handsomely. My blog portfolio obviously performed better than the market though it’s hard for me to track exact %age gain. My yardstick is against S&P 500. Please note that, it’s hard to over perform the stock market cause as an investor it’s better to keep 10-20% cash at any given point of time for any unknown eventuality. It depends on what type of portfolio one has viz. Conservative, Aggressive, very aggressive. My personal portfolio is little aggressive but not highly aggressive. In my personal experience, conservative portfolio did not bode well for me. The reason is, if a few stocks do not perform well in a conservative portfolio then it’s very hard to perform better or as good as the stock market. But that’s just me, everybody should have their own strategy of investing.

Champions of my Blog Portfolio: Some of the champions in my blog portfolio were GBTC that went up 18&% in 2.5 months and KITE went more than 120% in 3-4 month. Some other big winners AMZN, JUNO, BABA, FB, AAPL, JD, MA, PVH, BIDU, LUV, INCO, FBSOX, FSRPX and so on. About 90% of the holdings were in green and 15% red.

Under Performers: There were few of under performers like UA, ABX, XON­­­­­­, GDX, MOMO. Out of these, I still have faith on XON and MOMO. I will have to hold these two stocks for a few months and determine the next step.

Some of my Choices for 2018: JUNO, EXEL, BABA, AMZN, AAPL, GBTC, INCO, FSRPX, PRHSX. Please note that strategy may change depending upon market situation.

2017 Best Performing Sectors

Sector	1 Year Performances
IT	35.51%
Materials	20.51%
Consumer Discretionary	19.92%
Healthcare	19.68%
Financials	219.43%

What to expect in 2018? Will it be a replication of 2017?

As I say, I am neither a fortune teller nor forecaster on what the future holds. However, I can provide my assessment of what can be anticipated in 2018. I had a tentative projection for 2017 and thought 10-15% would be good, however, the market went beyond 20%. That’s a good stock market performance. I will be very happy if I can be pleasantly surprised in 2018 too! For 2018, possibly 10-15% ROE can be expected. Why so? As we could see stock market had a marathon run in 2017 and replicating the same performance could be gargantuan task. But why do I expect even 10-15% ROE? There are several factors that bode well for the market.

I do feel that we may see better first half and a bumpy 2^nd half. I do anticipate very good earnings for Q1FY18, possibly infrastructure spending bill to come and then the market may become bumpy with lot of volatility. So, as an investor one should be prepared to have all strategy in place when to take profit, when to get out or when to short sell. I do not expect same smooth sailing that we saw in 2017. But what will make the market to go up? Let’s see the facts.

Tax cut: Most of the tax cut news is already factored into the market run. There are many sectors who are currently paying more than 30-35% tax rate viz. retail, transportation, financials, utility etc. That means, these sectors will have savings directly adding to their bottom line. However, it can be noted that many of the gains have already factored into these sectors.

Infrastructure Spending: Based on the news, Trump is also expected to unveil infrastructure spending in next few months. If the spending budget is approved then it’s going to boost the economy.

Mergers and Acquisitions: I guess one of the primary growth of stock market this year would be mergers and acquisitions. The tax cuts will facilitate corporates to repatriate and bring billions of dollars to the country which are currently stacked outside U.S. This would result in increased dividend, mergers & acquisitions, potentially higher wages, better employments, and that could further trigger consumer spending and economy as a whole.

GDP growth: GDP is expected to grow at 3% level for the third straight quarter when fourth quarter numbers is published in January. If that happens, this would be first time since 2004-05. With the tax legislation passed a few days ago and global growth posting its best levels in years, we can expect earnings growth to come around 10% to 15% range in 2018. As a matter of fact, I believe the market could go up 10-15% in 2018.

What would be my focus area for 2018?

Emerging Market: I will continue to buy/hold the emerging market stocks, particularly China and India. I do feel that with 6-7% GDP growth, these markets are much better than U.S market which has GDP growth of 2.5-3%. Please not that 3% to 6% is not extra 3% rather it 100% better. Hence, I will continue to buy/hold these stocks unless economy scenario changes or there are other fundamental issues. I have many stocks, ETF and Mutual Funds for these markets. Please refer to my Blog Portfolio.

Financials:  In an increasing interest rate environment financials are expected to do better. Moreover, it can be noted that financials had a big run up during 2017. IYG and XLF are some of the ETF that can be better choice. Bank of America (BAC) is another choice.

Technology: Tech was the best performing sector in 2017 with a ROE of about 35%. If market does well, technology will continue to do well. I do expect many mergers and acquisitions due to billions of repatriations of cash. Some preferred stocks could be AAPL, AMZN, BABA, JD, FB, NVDA, MA. MF: FBSOX.

Retails: I do anticipate that Retail sector would come with excellent results in Q1FY18. It’s not only the sales but also tax cut will help this sector because currently retail companies pay higher taxes and that will come down substantially. I do expect AMZN, PVH, BABA, JD, FSRPX etc. to come with great result.

Commodities: I anticipate that commodities could do better in 2018. Particularly, oil stocks which are down largely are expected to come with better results and better fundamentals hence better ROE. I also expect Gold to do better in 2018. I have sold my positions in TGLDX but still having GDX, some mining and silver stocks. If market goes down watch for gold to go up. I will not be surprised to see it go to $1400 or beyond.

Watch for Bitcoin and Blockchain related equities: I believe Bitcoin, Ethereum, Bitcoin cash, Litecoin, Ripple would continue rising this year. However, it will be like roller coaster up and down. Making a calculated risk is warranted. We have to make the trend as our friend. This is because a trend in motion tends to stay in motion until a serious event or crisis breaks the trend. So, despite its great prospects, I will not be investing too much into this area. May be 2-3% of the portfolio value should be OK even if it goes down. Also, I avoid directly buying these stuffs rather go through some fund like GBTC.

Will 2018 be the year of Biotech sector?

I believe biotech will outperform other indexes in 2018. This will be one of my major focus area this year. But why do I think Biotech would do well this year? Let me put my thought the logic behind it.

·      Performance: After underperforming the overall market in 2015 & 2016, biotech sector performed in line in 2017. DOW, S&P, NASDAQ have hit new all-time highs numerous times. On the other hand, biotech indexes are still due for their all-time high, particularly Nasdaq Biotech Index (NBI) which is still down about 20% from its all-time high and looks relatively cheap. It’s is due for its piece of share in 2018.

·      Valuations: The industry has recently undergone a significant correction and valuations are far more reasonable for most of the biotechnology stocks. Looking back to mid-2015, these stocks are now far more lucrative than those days!

·      Biotech M&A Volume is expected to accelerate in 2018: Now that tax reform has passed, it becomes easier for companies to repatriate cash held overseas. There are a lot of biopharma companies that have the assets to go on major shopping sprees. The corporate tax rate dropping to 21% from 35% as well as R&D write off criteria being defined the large companies could buy many small/medium companies. Many large companies hold billions oversees, for example, Pfizer: $22 billion, Amgen: $39 billion), Merck: $20 billion, Celgene, Gilead and many more companies having billions of dollars oversees.  Last year, there were two major deals Gilead buying KITE at $11.9 billion and CVS Health acquired Aetna for about $69 billion. However, we can see some major acquisitions in 2018. Some of the oncology companies like JUNO, EXEL, Incyte, Blue Bird, ALNY seems to be some of the major acquisition targets. But the question is why will they acquire? Now let’s discuss the other compelling reasons.

·      Generic Drugs coming faster:  The FDA is engaged heavily in streamlining processes and accelerating approvals to usher in further competition. Generics approvals in the first two months of the agency's new fiscal year, which began in October, were up over 50% compared to last year. That doesn't bode well for pharmaceuticals and larger biotechs because consumer can buy drugs at cheaper price. In order to keep the revenue stream they need acquisitions.

·      Expedited FDA Approvals: After Trump administration took charge of Whitehouse, there were new leadership at the FDA in 2017 and that provided impetus to developmental firms. In addition, generic drugs, the FDA has also focused on making drug discovery less costly and time consuming. This is especially true in the rare disease area where FDA has leaned towards approval of drugs for indications with no other effective treatments. FDA has also taken measures to reduce priority review from 10 months to 6 months, fast-track process, Breakthrough Therapy programs focused on reducing the duration of clinical trials. These processes are designed not only to expedite approval process but also saving millions of dollars companies and coincidently saving human life by bringing drugs faster to market place.

·      Aging Drugs: Some of the drug makers most profitable products are aging, those are decades old, pipelines are dry and facing new competitions from small/medium biotech companies with new and innovative drugs. Many big companies possibly have lost their way during the last several years, as they made easy money and neglected their pipelines. Thus, there is not much choice for them but to acquire other companies with potential innovative drugs to generate revenue growth and bolster their pipeline.

Keeping all these factors in mind, I think that biotech sector is set up for a solid 2018, with small/medium caps outperforming the big giants. As such, I will not be surprised if biotech sector with good pipelines of drugs will outperforms all other sectors in 2018. Only time will tell…But one has to keep in mind that this sector is highly risky and highly rewarding and hence caution is warranted. It’s not that only small/medium biotech will do well, there are some large cap value and growth stock should also do well. As such, I will be adding one such great biotech stock to my blog portfolio this month.

Some final thoughts for 2018

The stock market may have run too hot since Trump’s election, particularly with the hope of tax cut. Now tax cut is out of the way. The market rallies have investors overextended and may not able to push prices higher. So, it’s a major risk. However, I do expect first quarter of 2018 would be great. There may be lot of mergers and acquisitions pushing the stock market higher particularly in first half of the year. I see some risk in the 2^nd half of the year. Certainly, 2018 may not be a smooth ride like 2017 and we can expect lot of volatility probably in the 2^nd half of the year. Possibly, we can still see 10-15% ROI in 2018. Biotech may be the sector to watch in top of my list. If market goes in a different direction than what is anticipated, we should be ready to quickly change our strategy!

Some tips that I try not to forget in 2018 from my personal experience

Take Profit when required: It’s always better to trim an equity and take some profit when it goes up to certain %age. One can define his/her own strategy. Nobody lose money by taking profit rather one always gains. One can always buy back the stock again if it’s too good. Remember Warren Buffets first principle “Not to Lose Money”.

Let the winner run: Once above step is done let the winner grow till any major fundamental or economy change happens. Not to keep worrying on daily basis. If I am not comfortable I will just get out.

Not to hesitate to take loss: Not all the investment will always be winner irrespective of how good you are or how much research you do. It’s better to cut the losers, possibly early.

Buy good stock when they are cheap and avoid buying bad stock which are cheap. Sometime a good company stock is beaten down just because of a small revenue/profit miss or trial failure that did not satisfy the street, take advantage of such wall street reactions and emotions, that may be beneficial in long run.

Buy Stock in a phased manner: No one knows how far down an equity can go irrespective of how much analysis you do. Hence buying in phases helps to do a dollar cost average. I also see further dip as buying opportunity rather than getting panicked. If I am not comfortable I will get out.

Diversify the portfolio: It’s always better diversify the portfolio with equities from different sectors, countries as one feels comfortable. Also, how great a stock is, usually I restrict to maximum 4-6% of my portfolio value. Future is uncertain, once momentum is lost or bear market creeps in, it could be disastrous. Also, don’t forget to hedge the portfolio when required.

Trend is the friend: It’s better to invest on the sector(s) which are doing better and where the big money is following. Sometime those may be expensive but still gives better ROI. Also, there could be some equity in other sector(s) which may be on clearance sale so keep an eye on that too😊.

Tax Reforms: Here is a quick glance to the Tax brackets after the Tax Cut proposal aspproved.

Single
Rate	Taxable Income bracket
10%	0 to $9,525
12%	$9,525 to $38,700
22%	$38,700 to $82,500
24%	$82,500 to $157,500
32%	$157,500 to $200,000
35%	$200,000 to $500,000
37%	$500,000 and up
Married filing jointly
Rate	Taxable Income bracket
10%	0 to $19,050
12%	$19,050 to $77,400
22%	$77,400 to $165,000
24%	$165,000 to $315,000
32%	$315,000 to $400,000
35%	$400,000 to $600,000
37%	$600,000 and up

Now let’s discuss the stock which I have included to my Blog Portfolio for January 2018.

Celgene Corporation (CELG)

Celgene Corporation discovers, develops, and commercializes therapies to treat cancer and inflammatory diseases worldwide. It offers wide ranges of drugs related to multiple myeloma, myelodysplastic syndromes (MDS), and mantle cell lymphoma; psoriatic arthritis, chemotherapy product to treat breast, non-small cell lung, pancreatic, gastric cancers, leukemia, acute myeloid leukemia, non-hodgkin lymphoma and solid tumors to name a few. It’s one of the mostly acclaimed company in the field of cancer drugs.

I do remember that almost a decade ago, I bought this stock and also suggested some of my friends to buy it when the stock was probably around $4-5 on split adjusted. I kept the stock for a few years and then thought of getting out after grabbing about 700% return. However, the stock continued to ride and went as high as $147 last October. On October 19, after the market close, the company announced that it was stopping a clinical trial testing GED-0301 in Crohn's disease because the drug didn’t appear to be helping patients. Then came the roller coaster and share started falling till $98 before bouncing back to current level $104.36. The company suffered another setback a few days ago when a late stage study on its lead cancer drug Revlimid in combination with Roche Holdings’ Rituxan failed. Obviously, these are not good sign for the company. But why do I still like this stock?

Why do I like Celgene? I like this company and the stock because it’s one of the 800-pound gorilla in cancer drug manufacturing. Celgene undoubtedly is one of the great company whose share have really become cheap after the major drop. It has solid fundamentals and substantial scope for future growth but it’s currently trading like a value stock. This has given a great opportunity for the long-term investors to accumulate some stock in the beginning of 2018. I have already mentioned a lot of reasons why I think biotech can be one of the hot sector to watch this year. I believe CELG is a stock to won for long time unless there are further failures. This is a great company and a great stock available at cheap price with forward earnings of just 11.9. The Company does not only have compelling pipelines of drugs but also excellent partnership with many small/medium companies who have tremendous future potential. Some of those are JUNO, BLUE, AstraZeneca, Agios Pharmaceuticals etc. Now the stock is trading at $104.36 and had a 52-week high of $147.17, which means 29% discount to its high. I will not be surprised to see this stock bounce back in next few months and make a new all-time high. Now let’s see the fundamentals

Let’s see look at the fundamentals now:

Market Cap	82.16B	52 Week High	47.17
Trailing PE	24.46	52 Week Low	94.55
Forward PE	11.94	Total Cash	11.79B
Price to Sales	6.57	Total Debt	14.28B
Revenue / Sales	12.5B	Book Value	12.51
Quarterly Revenue Growth	10.2%	Beta	1.21
Profit / Earnings	3.43B	Institutional holders	82.02%
Quarterly Earnings Growth	477.8%	Return on Equity	44.52%
EPS	4.27

Risk & Opportunity: Biotech is not an easy sector to invest in. It can be enticing and punishing at the same time. Investors have to be prudent to distribute the risk. A couple of failures have made CELG share cheap. It’s difficult to predict with certainty on anything but in my view CELG will bounce back and possibly bounce back in 2018. I have already invested after the stock was beaten down and may keep doing so, whenever opportunity arises. If market tanks then everybody goes down but I do not see significant downside for CELG unless some other major debacle happens. Under such circumstances, I may get out but for now it’s a great stock to add to my portfolio. I think this stock meet of my criteria “buying great companies when they are cheap”. Let’s see how it goes!

Shesa’s Blog Portfolio (As of 1/1/18)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View (see disclaimer)
STOCK (All prices are in USD)
AAPL	51.63	169.23	1/25/13	228%	BUY on dip
BIDU	86.43	234.21	4/18/13	171%	BUY on dip
FB	47	176.46	11/13/13	275%	BUY on dip
TSLA	135	311.35	11/13/13	131%	HOLD
MA	77.18	151.36	12/12/13	96%	BUY on dip
AMZN	311.73	1169.46	4/12/14	275%	BUY on dip
MO	50.05	71.41	9/13/15	43%	BUY on dip
BABA	67.28	172.43	2/21/16	156%	BUY on dip
JD	23.45	41.42	5/22/16	77%	BUY on dip
XON	26.37	11.52	7/4/16	-56%	HOLD
LUV	36.89	65.45	9/5/16	77%	HOLD
RIO	36.41	52.93	12/18/16	45%	HOLD
PVH	92.82	137.21	1/22/17	48%	HOLD
JUNO	23.13	45.71	2/19/17	98%	BUY on dip
CYBR	42.35	41.42	7/23/17	-2%	SOLD at 41.42
EXEL	26.33	30.4	8/20/17	15%	BUY on dip
GBTC	702.51	2016	10/21/17	187%	BUY on dip
MOMO	32.14	24.48	11/25/17	-24%	HOLD
CELG	104.36	104.36	1/1/18	0%	NEW ADDITION.
ETF
GDX	26.88	23.24	4/1/13	-14%	HOLD
INDA	31.94	36.07	3/15/15	13%	HOLD
INCO	34.46	49.62	5/15/15	44%	Accumulate
IHF	139.1	156.84	8/16/15	13%	Add on dip.
XLY	77.76	98.69	8/16/15	27%	HOLD
EEM	32.3	47.12	11/15/15	46%	Accumulate
IYG	112.03	130.45	3/19/16	16%	Add on dip.
EMQQ	32.65	38.06	5/21/17	17%	Add on dip.
MUTUAL FUND (Dividends for 2017 Adjusted to buy price)
FBIOX	114.64	219.41	3/1/13	91%	Accumulate
PRHSX *	47.25	70.35	2/2/14	49%	Accumulate
FSCHX *	120.74	178.31	4/12/14	48%	Accumulate
FSCRX *	24.3	31.91	10/25/14	31%	HOLD
GASFX *	28.04	29.45	12/20/14	5%	Will SELL on 1/2/18.
PRMTX *	59.45	96.47	12/20/14	62%	Accumulate
MINDX *	26	34.31	6/14/15	32%	Accumulate
MCDFX *	12.37	17.61	12/9/15	42%	Accumulate
FSRPX *	90.53	133.17	1/15/16	47%	Accumulate
FBSOX *	37.32	54.48	3/20/16	46%	Accumulate
TGLDX	33.73	34.72	11/20/16	3%	SOLD at 34.72
FSMEX	43.66	48.1	9/24/17	10%	Accumulate
* Indicates dividend adjusted

Positions closed in 2017:

Equity	Sales Price	Buy Price	Date Sold	Gain / Loss (%)
PJP	59.70	69.43	8-May	-14.0%
JBLU	21.30	20.26	19-May	5.1%
FSLR	27.83	37.58	31-Mar	-25.9%
WPM	20.89	21.80	7-Sep	-4.2%
UA	15.15	19.65	17-Oct	-22.9%
KITE	180.00	82.25	1-Oct	118.8%
ABX	14.98	22.21	26-Oct	-32.6%
TGLDX	34.72	33.73	15-Dec	2.9%
CYBR	41.42	42.35	28-Dec	-2.2%

That’s all for today. Wish you great investing! Stay tuned for my FEB 2018 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. You can also join my WhatsApp group, if interested.

Disclaimer: This blog is meant to provide my opinion only. The information provided is to the best of my knowledge but may not be accurate. 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 accurate. 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. Anybody buying or selling the equities mentioned here would do it on their own risk.

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