Shesa's NOVEMBER 2018 INVESTMENT BLOG

November 2018 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Update  

Since early October stock markets have been on a mess. There is no respite and downturn continue irrespective of great earnings and strong economy. Of course, there have been some black spots in the economy but volatility in the stock market is astronomically high. DOW Jones has lost 2,483 points off its peak. Both DOW and S&P 500 have given up their gains for the year.  NASDAQ is barely on positive side. Many investors could have lost their gains of 2018 and possibly some of 2017. Why is the doom and gloom? There are few concerns: high interest rates, tariffs, the US-China trade war, crashing oil prices, the fading effects of tax cuts and of course missed revenue expectations by major technology companies, particularly by FAANG companies. It’s not only small investors are losing money; Amazon CEO Jeff Bezos has lost over $40 billion since his net worth peaked in September at $168 billion. And Mark Zuckerberg has lost roughly $34 billion from his peak worth in July and is now worth $52 billion. Under such volatile market where none of the stock is spared, every strategy fails unless one has hedged the portfolio heavily. It’s all doom and gloom for now! But the question is, should an investor take whatever money is left on the portfolio and run away to preserve remaining fund? Can the market bounce back before the end of the year? I will share my thoughts on all these but before that let’s take a quick glance to the U.S stock market major indexes.

	2018
Indexes	2-Jan-18	Friday Close (11/25/18)	Change in 2018	% Change in 2018	All Time High
DOW Jones	24,719.22	24,285.95	-433.27	-1.75	26,769.16
S&P 500	2,673.61	2,632.56	-41.05	-1.54	2,940.91
NASDAQ	6,903.39	6,938.98	35.59	0.52	8,133.30
BTK (Biotech)	4,222.21	4,544.24	322.03	7.63	5360.22
NBI	3,356.61	3,251.08	-105.53	-3.14	4165.86

Some important Economy News

Interest Rate – Will Fed increase rate in December?

There may be many negatives surrounding the stock market right now which I will discuss later on. But the question is, whether FED hike interest rate when it meets on Dec 18-19? It has gone on the record and 74.1% feels that of the that Fed will increase the rate. Hence, it’s very likely that they may hike quarter point (.25%) in December. But once it’s done, most likely they may soften the tone for future rate hike next year. If that happens, it will be a big positive of the market.

Two important economy news to expect next week:

• WED, Nov 28: GDP growth for Q3, expected to be 3.5%.
• THU, Nov 29: Fed Open Market Committee (FOMC) minute.

Both of these can move the market in either direction.

For more U.S. Economic news and data please click on the following link: http://www.marketwatch.com/economy-politics/calendars/economic

Source: Marketwatch.com

EU Meets on BrExit this week: Finally, time has come for Britain to leave the EU, the legal divorce treaty and political declaration on the two sides' future ties was signed by British Prime Minister Theresa May and the leaders of the 27 union states staying on together after Brexit.

The EU leaders backed Theresa May's Brexit withdrawal agreement on Sunday. This will be put for vote by parliamentary approval on Dec 11. The PM may have top time to get it approved but if it happens there will be some stability and it could be a positive news for the stock market.

What is really going on with the stock market?? Time to Bailout?

As you are all aware the volatility started since October 3^rd and continued till Oct 29. After that we saw some bounce in the stock market till Nov 7 due to the news that U.S and China may have some trade deals. But that did not last long, there were confusions within the republicans and investors realized that it was a hoax. After that, again volatility has continued till date. But why is such volatility? What’s wrong that none of the stock is spared? It has been horrific two months in the stock market and bloodbath continues as I write this blog. Let’s see the possible factors impacting the stock market.

Negatives: Reasons for market Corrections

·      Market Sentiment: In last couple of months stock markets have become ugly from a sentiment perspective. It’s felt like there has been no place to hide during the recent selloff. Investors have plenty of worries, including higher interest rates, oil prices, China’s economic health and a changing political outlook following the elections. I would say that investors sentiments have been “terrible”.  A bunch of previously hot trends, from FAANG stocks to marijuana to biotech are all struggling off late. The recovery in oil has abruptly reversed in last few weeks; crude prices are now in freefall. Sometime stock market goes more with sentiment rather than real fundamentals and I believe we are at that position right now.

·      FAANG Stocks are hammered: As we are aware FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks are the major constituents of the stock market index. Almost all these companies beat the profit forecast but failed to meet revenue forecast -or- projected less revenue forecast for next quarter (Q4). Add to that, the chip giant NVIDIA projected that next quarter revenue will be almost 20% less. Nvidia plunged almost 28% in last few days and 51% from its 52-week high. All these were like a tremor waiting to happen, hedge fund and shorts were waiting for such a golden opportunity. Technology sector always leads the market but there is no leader now. When stock indexes fall every stock gets beaten but small/medium cap stock gets hammered hard and fast. In addition to that, the biotech sector (NOT healthcare) has been decimated. The small cap stocks are already in the bear market falling more than 30-40-50 or even 60% in many cases. When there is no king in a kingdom there will be chaos and that’s what is happening now in the stock market. The FAANG are in disarray and it needs a leader. Who can that be? Apple, Amazon, Netflix? We will wait and watch!

·      Trade war/tariff: This is nothing new. We have been hearing this since last 6 months. But it’s always the talk of the town. The major causalities are Asian markets and Chinese ADR stocks. The superior stock like BABA, Tencent, BIDU could not withstand the impact. In fact, BABA has lost almost 30% of its value from its pick. Other Chinese stocks too have become baggers. If the Asian market do not recover then it would be difficult to see a major bounce in U.S market.

·      Interest Rate: Everybody expected that there will be 4 rate hikes, including December 2018 this year. In 2019, there is a possibility of 3 rate hikes. However, visualizing the tariff issues, lack of major inflation and looking to the housing market, why does Fed really need to increase rates? The U.S. Federal Reserve said that the "impetus" to economic growth will be "wearing off in the next year or so," while continuing to insist on the need for tightening credit conditions. The “impetus” meaning “corporate tax cut” will be wearing off then why can’t FED give a pause and wait before raising the interest rate? I will discuss it in the positive side of this.

·      Homebuilder confidence plummeted to the lowest level in more than two years. Actually, I would link this to the interest rate. Rising mortgage rates and continued home price growth are hurting affordability. It has a major impact on the economy because lack of home sales will reduce the sale of big-ticket items like furniture, home upgrades, TV, Car etc.

·      Global Economies are Slowing: The second largest economy in the World “China economy is slowing”. The Chines stock market can be termed as “under recession”. Also, their consumer spending is in its slowest pace in months. Germany said its GDP contracted at a 0.8% annualized rate in the third quarter, the first quarterly drop in three years, and the lowest rate since early 2013. The Euro Zone economy grew at a nominal 0.7% -- its weakest showing since 2013. Japan’s economy shrank to 1.2%, after expanding 3% in the last quarter. India economy is not doing great either, though GDP looks spectacular @8.5%, the stock market does not signify that. The assembly elections in India are scheduled to take place across five states from 12 November and 7 December. Add to that, the general election is coming in 2019. So, all in all, U.S economy is on the strong foot and most other economies are faltering.

·      Year End Sales by Money Managers: A lot of money managers and financial institutions sale the losers to take capital loss. Or they take some profit from the stock which had a good run. They also rebalance their portfolio. All these contributes to selling of equities.

Can we expect stock market to Turnaround by end of this year?

I already discussed the challenges being faced by the stock market at present. So, the question is, will the market rebound by the end of the year? Well, nobody can predict anything with certainty, particularly under such roller coaster environment. When market recovers it recovers slowly but when market falls it really falls like a big rock, “hard and fast”! However, I personally feel that there is a good possibility of market turnaround sooner than later.  Why do I feel so? What are the positives? Let me outline the positives now.

Economy: U.S economy has been growing at a blistering pace this year despite the weakness in home builders sector. U.S. GDP grew at 3.5% for the third quarter. Unemployment remained at 3.7%, the lowest rate since 1969. Even wages and salaries rose 3.1% in the third quarter, the biggest increase in a decade. But it looks like the stock market do not care these at the moment. However, these are facts and that should prevail at some point of time.

Retail sales and Black Friday Sales:  As I have written a few times in my previous blogs, I do expect to have a strong retails sale for the remaining part of the year due to strong economy, employment and wage growth. Based on CNBC - Adobe Analytics, online Black Friday sales jumped 23.6% to $6.22 Billion this year comparing to previous year. The Friday after Thanksgiving this year was also the first day in history to see more than $2 billion in sales stemming from smartphones. It’s anticipated that online giant Amazon will contribute more than half of Q4 earnings growth for S&P 500. Also, this year Cyber Monday online sales are expected to set a new record of $7.8 billion, up nearly 18 percent from last year. We will get a complete picture of thanksgiving sales in next few days. If sales are good then it should boost the confidence of Wall Street on consumer confidence that people are willing to spend money. As we all know, consumer spending is 70% of U.S. GDP. Hence, it will be an impetus for next quarter earnings and market rebound. Not to forget the fact that, we are entering the historically strongest portion of the year for the stock market.

Donald Trump’s meeting with China President: Mr. Trump and Chine president Jinping are scheduled to meet at the G-20 summit in Buenos Aires, Argentina on 30 November. Though, it may not be a long meeting but it will set the tone for the future direction on trade war between U.S and China. As you may be aware, Trump is threatening to put 25% tariff starting Jan 2019. My feeling is that, there would some positive development and optimism that U.S and China trade war may not be as bad as it is anticipated. Mr. Trump is also aware that stock market may not like his adamant approach and the market would react seriously, failing some positive outcome. The main success of his presidency has been stock market performance. If that fails, then you know… Hence I anticipate the meeting to be positive sentiment and that may bring some fire to the stock market either way! It talks fail, we may see more bloodbath on the street!

Interest Rate and Fed Statement: Based on the survey there is 74.1% chance that Federal Reserve will hike .25% interest rate in December. Looking to the current geopolitical situation, tariff, trade war, subdued housing market and controlled inflation, even if Fed hikes rate in December they may soften their tone for next year rate hike. Now most analyst are expecting only one interest rate hike next year, comparing to 3 rate hikes anticipated earlier. If that happens, I believe this may give a big boost to stock market going forward.

Earnings: Stocks are much cheaper right now than even a couple of years ago. As I said, most of the stocks have been hammered over 20,30,40 or even more than 50%. The earnings growth rate for S&P 500 is 25.7% highest since 2010. It can be noted that 78% of S&P 500 companies have reported a positive EPS surprises and 61% have reported a positive sales surprise. As a matter of fact, the forward 12-month P/E ratio for the S&P 500 is 15.6. This P/E ratio is below the 5-year average 16.4. However, it can also be notes that the revenue and earnings growth will decelerate next quarter (Q4) and next year. Here are the current projections:

Sales & Earnings Expectations:

	Earnings Growth	Sales Growth
Q4 2018	13.9%	6.8%
FY2018 (whole year)	20.5%	8.9%
Q1 2019	5.3%	6.4%
Q2 2019	5.8%	4.8%
FY2019 (whole year)	9.0%	5.3%

There are many great companies who are trading at 20, 30, 40% of their 52-weeks high. It looks to me like more than 60-70% companies of S&P 500 are trading in bear territory, meaning that they are down more than 20%!! All these tax selling will happen during Nov/Dec and then those stock will become too cheap or already too cheap to ignore. And I am sure that it’s not out of the radars for money managers and financial institutions. This will give opportunity for the fund managers/institutions to grab those. The earning deceleration will also restrict Federal Reserve to hike too many interest rates.

International Money: U.S market is still better place to invest. If you see overall world stock indices U.S is still a better place to invest. So, international money will still keep pouring into U.S stock market. There are trillions of dollars sitting on the sideline. Once market start recovering there could be flood of money returning into stock market within and outside of U.S.

What should be the strategy under such a market environment?

I guess every strategy fails under such highly volatile environment wherein it’s difficult predict where the market will go in next few minutes, forget about hours, days, months and year(s). I wrote about my strategy in my October blog. Please refer to that blog to find more. I would like to point out a few addition things though. Since the market is down so much, cashing out is not an advisable strategy for me. I think long term, but I also have a trading portfolio wherein I can have a short-term focus to buy some good companies at dip and sell at bounce. In such cases, I go little aggressive. But what is purely long term, I sometime do dollar cost average and keep accumulating. Once I realize that it does not make good sense to keep it, I just get out. I determine based on many different factors, such as revenue, earnings, market condition, momentum, growth, risk/reward and so on. When markets are so unpredictable, the best strategy is to have “your own strategy” which suits you. I say this because of the following reasons:

·      You know your investment objectives (Short/Long term)

·      Your risk tolerance capability and risk mitigation strategy

·      Your available capital to deploy

·      Your Cash requirement in short/long term

·      Your Emotional stability

·      Your expectation of return on investments (ROI)

·      Your ways of investing viz. Short term, long term, aggressive, conservative, moderate etc

·      Your ability to learn lessons from mistakes and avoid repeating it

·      Your willingness to take quick decision on a highly volatile market situation

·      And of course, Your knowledge/experience/awareness about stock market and so on…

I hope it make sense? What I have written above is not from any book or article rather it’s my own decades of experience in the stock market. Despite all these we may fail. But in that case, at least “we can blame ourselves” and analyze what went wrong? What can we do differently in future? The ultimate object is to make money out of the stock market. What I write on my blog is my own thinking process. So, it may/may not suit others. Hence, devise your own strategy and trade/invest accordingly.

Major Stock Market Performances across the World so far in 2018

	As of Today (% age change)	As of my Oct Blog
DOW	-1.75%	2.93%
S&P 500	-1.54%	3.52%
NASDAQ	0.52%	7.90%
China Shanghai Index	-22.0%	-22.88%
India BSE Sensex	2.71%	0.76%
Japan Nikki	-4.91%	-1.02%
Hongkong Hang Seng	-13.34%	-14.57%
Germany: DAX	-13.35%	-10.56%
UK: FTSE 100	-9.56%	-8.30%

Sectorial Performances (1 Month, 3 Month, Year to date)

Sector	Performance			Price per Earnings (P/E)
	1 Month	3 Month	Year-To Date
Communication Services	-7.50%	-8.76%	-13.42%	22.6x
Consumer Discretionary	-5.00%	-11.70%	+0.07%	16.5x
Consumer Staples	+0.02%	+0.54%	-4.27%	15.1x
Energy	-9.03%	-15.04%	-12.66%	14.0x
Financials	+0.42%	-8.36%	-6.94%	15.2x
Health Care (Top performer)	-1.34%	-3.66%	+8.41%	18.2x
Industrials	-2.71%	-9.74%	-8.54%	15.7x
IT (3rd)	-8.47%	-12.98%	+2.07%	14.8x
Materials	+1.01%	-10.30%	-13.32%	13.2x
Utilities (2nd)	+0.25%	+1.23%	+3.15%	17.1x

Source: Bloomberg.com

Now let me discuss about the stock that I plan to include to my November Blog Portfolio.

Shopify Inc (SHOP):

Shopify Inc. is a Canadian company which provides cloud-based multi-channel commerce platform for small and medium businesses in Canada, U.S, U.K. Australia, and internationally. Its platform provides merchants with 360 degrees view of business and customers in various sales channels, such as, Web and mobile storefronts, physical retail locations, social media, and marketplaces. It enables companies manage products and inventory, process it, ship orders, make payments, build customer relationships and provides analytics. In other words, it provides customizable online-retail websites to quickly bring their offerings online and have flexibility as they scale their operations and as they grow.  

The company has been growing at faster pace and still has plenty of room to grow. Shopify is performing extremely well since last several quarters. During the 3^rd quarter which was concluded a couple of weeks ago, the company came with a strong quarter. Sales increased 57% to $270.1 million and its core business Merchant Solutions exploded 68% to $149.5 million. Shopify is currently firing on all cylinders. Despite that fact, the stock has come down from its 52-weeks high of $176.60 to $134.8, 24% less of its peak. The company is trading currently at $134.81, which is 15 times sales and looks little expensive. Having said that, visualizing its 57% revenue growth, I see it as reasonably valued stock. If Nasdaq continues to slide, SHOP is likely to go down with it. But as soon as the market bounce back, it can run away. Because it does not only have growth but also momentum on its side despite such terrible market condition.

As it’s a growth company, there is not much fundamentals to talk about. However, I will still provide some key metrics.

Fundamentals:

Market Cap	$14.43B	52 Week High	176.60
Trailing PE	N/A	52 Week Low	92.41
Forward PE	192.59	Total Cash	1.58B
Price to Sales	15.16	Total Debt	N/A
Revenue / Sales	952.18M	Book Value	15.63
Quarterly Revenue Growth (yoy)	57.50%	Beta	2.14
Profit / Earnings	380.25M	Institutional holders	75.64%
Quarterly Earnings Growth (yoy)	N/A	% Held by Insiders	0.35%
EPS	-0.64	Return on Equity	-4.96%

My Take: This may be suitable for long term growth investors. I have bought the stock in a phased manner and continue to accumulate. When it bounces back, I will not hesitate to take some profit. For such growth stock one should never buy everything at once rather keep accumulating over a period of time. The current market condition is so volatile that nothing can be predicted on which direction it would take and where this stock will go. It depends on how the overall stock market behaves and particularly, how NADAQ performs. Based on the latest report of thanksgiving  retail sales, I expect that the company may have a great 4^th quarter which comes to an end on 31^st December. I feel that this is just the beginning for SHOP. So, I am invested now!

RISKs: SHOP is a highly volatile stock. If market turns further south than it can go further down. If market bounces back it can recover very fast. Depending on the market situation, this stock could be very risky or rewarding. However, as long as the company continues to put up strong top-line growth numbers, investors should eventually be rewarded, especially considering the long-term opportunity in e-commerce and based on past performance of this company. As an investor, one has to judge what is best for him/her and take the decision.

Shesa’s Blog Portfolio (As of DEC 1, 2018)

Equity	Suggest Price	Current Price	Suggest Date	% Change	My View (see disclaimer)
STOCK (All prices are in USD)
AAPL	51.63	172.29	1/25/13	234%	BUY
BIDU	86.43	182.61	4/18/13	111%	HOLD
FB	47	131.73	11/13/13	180%	HOLD (Buy on Recovery)
TSLA	135	325.83	11/13/13	141%	HOLD
MA	77.18	182.6	12/12/13	137%	BUY on dip
AMZN	311.73	1502.06	4/12/14	382%	BUY
BABA	67.28	150.33	2/21/16	123%	BUY (Added more)
JD	23.45	19.23	5/22/16	-18%	Sold @19.23 on 11/23.
XON	26.37	9.99	7/4/16	-62%	Sold @9.39 on 11/27.
PVH	92.82	110.12	1/22/17	19%	HOLD
EXEL	26.33	18.07	8/20/17	-31%	BUY
MOMO	32.14	31.67	11/25/17	-1%	HOLD
BRK-B	206.96	207.07	3/18/18	0%	HOLD
NVDA	228.71	145	4/22/18	-37%	Trimmed
EDIT	36.53	28.03	5/28/18	-23%	BUY
JKS	14.04	9.22	7/4/18	-34%	HOLD
GERN	3.77	1.53	8/12/18	-59%	HOLD (Trimmed)
IQ	26.13	19.7	9/18/18	-25%	HOLD
SHOP	134.81	134.81	11/25/18	0%	NEW ADDITION
ETF
INCO	34.46	41.9	5/15/15	22%	HOLD
IHF	139.1	189.84	8/16/15	36%	HOLD
XLY	77.76	102.02	8/16/15	31%	HOLD
EEM	32.3	39.67	11/15/15	23%	Sold @39.88 on 11/9.
IYG	112.03	123.1	3/19/16	10%	HOLD
EMQQ	32.65	27.71	5/21/17	-15%	HOLD (Trimmed)
KWEB	58.52	41.49	2/11/18	-29%	HOLD (Trimmed)
MUTUAL FUND
FBIOX	11.46	20.39	3/1/13	78%	HOLD - Trimmed
PRHSX	47.25	75.94	2/2/14	61%	Accumulate
FSCRX	24.3	24.64	10/25/14	1%	Sold @24.64 on 10/22.
PRMTX	59.45	100.72	12/20/14	69%	Accumulate
MINDX	26	27.82	6/14/15	7%	Sold @27.82 on 10/22.
MCDFX	12.37	15.66	12/9/15	27%	Added more
FSRPX	9.05	13.97	1/15/16	54%	Added more
FBSOX	37.32	57.27	3/20/16	53%	Added more
FSMEX	43.66	50.25	9/24/17	15%	Added more
FOCPX	11.72	10.48	10/21/18	-11%	Added more
* Indicates dividend adjusted

Positions closed since last blog:

Equity	Sales Price	Buy Price	Date Sold	Gain / Loss (%)
FSCRX	24.64	24.3	22-Oct	1.30%
MINDX	27.82	26	22-Oct	6.5%%
EEM	39.88	39.67	9-Nov	1.00%
JD	19.23	23.45	23-Nov	-17.90%

Note: I have sold JD based on current Chinese market downturn and risks. However, once the tariff/trade-war is subsidized, I may buy back this stock. Because, I still feel that it’s too cheap to ignore for long term. I still have some call options for this stock.

That’s all for today. Wish you great investing! Stay tuned for my next blog. Thanks for your time. If you want to get alert on my action, then please subscribe to shesagroup_invest@googlegroups.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 charge any fees or commission by writing the blog except anything from Google AdSense. 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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