Shesa's FEBRUARY 2019 INVESTMENT BLOG

February 2019 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Update  

The U.S stock market saw strongest January Since 1987, thirty-two years ago the stock market had rallied the way it happened this year.  There is a saying “as January goes, so goes the year”. So far, the stock market indexes are up almost 20% since the market hit low on 24 DEC 2018. Truly, it has been an incredible run! Meanwhile, rounds and rounds of trade negotiations between U.S and China continues. Last week U.S delegation went to China and this week Chinese delegation comes to Washington for further discussions. Federal Reserve has taken a U-turn on its stance. The government shutdown has ended. These are all positive for the stock market. Investors who had some courage to accumulate the shares at cheap price must have been rewarded, but if they panicked and pulled out of stock market then unfortunately missed the boat. But economy is no more super strong as it was a few months ago, some cracks have already started appearing. The Q4 earnings season is almost at its last phase. I will analyze how 2019 is expected to turn but before that let’s take a quick glance of U.S stock market major indexes.

Indexes	Close (12/31/18)	Close FRI (2/15/19)	Change in 2019	% Change in 2019	All Time High	All Time High	Diff %
DOW	23,327.46	25,883.25	2,555.79	10.96	26,769.16	-885.91	-3.31%
S&P 500	2,506.85	2,775.60	268.75	10.72	2,940.91	-165.31	-5.62%
NASDAQ	6,635.28	7,472.41	837.13	12.62	8,133.30	-660.89	-8.13%
BTK	4,220.85	5,000.56	779.71	18.47	5360.22	-359.66	-6.71%
NBI	3,251.08	3,520.69	269.61	8.29	4165.86	-645.17	-15.49%

Major Economy News

Fed did not raise interest Rate in February

As anticipated, Fed did not increase the interest rate and took a dovish stand. The central bank voted unanimously to hold its policy rate between 2.25% to 2.5%. The Fed changed the language to "further gradual increases" and replaced the earlier statement “more rate hikes likely”. They also said it "will be patient” as it determines what future adjustments to the target range for the federal funds rate may be appropriate.

Mixed economy environment

We still have good employment, wage growth, low inflation, supportive Fed and not so negative trade negotiations between U.S and China. However, we are gradually turning into a mixed economy environment. In other words, economy is neither too great, nor too bad! Let me discuss some of those factors.

Retails sales: On Thursday, 2/12, the commerce department said that retail sales plunged 1.2% in December. It was shocking for some economists who expected a 0.2% gain. The stock market reacted negatively with new fears of recession. The analysts are already slashing Q4 GDP growth to about 2.4%. Also, the jobless claim showed a slight increase for a third week in a row. I am not really too concerned about retail sales visualizing such a strong holiday sales and government shutdown and stock market downturn during the month of December, it dented the consumer confidence and retail sales. Govt shutdown has delayed publishing of many key economy results.

Consumer Confidence (-ve): Declined sharply to an 18-month low of 120.2 in January, down from 126.6 in December. This was the third straight monthly decline and well below economists’ consensus estimate of 124. This is an important barometer as consumer tend to spend when they feel comfortable. However, consumer spending could further slow dramatically in the first quarter due to record holiday spending and record January cold in the Midwest and Northeast. It is expected to curtail consumer spending figures that account for almost 70% of GDP.

Job growth (+ve): On Friday, 2/8, Labor Department announced that 304,000 payroll jobs were created in January, substantially above consensus estimate of 170,000. This marked the 100^th straight month of net job creation. The unemployment rate actually rose to 4% from 3.9% in December, due to more workers entering the labor market. Also, the federal government partial shutdown caused some contract workers to seek other jobs, which substantially boosted the number of workers looking for jobs. 

Strong U.S Dollar: There are a few reasons why the U.S. dollar continues to be strong:

·      The U.S. is experiencing stronger GDP growth comparing to other developed nations

·      Fed has raised interest rates substantially comparing to most other reserve currencies

·      Many other developed countries are struggling with their economy growth

Strong U.S dollar is negative for multinationals but good for small/medium companies who do not export abroad.

Some more important Economy News

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

What’s happening in the Stock Market?

As I said in my opening remarks “The U.S stock market saw the Strongest January Since 1987, 32 years ago the stock market had rallied the way it happened this year”.  According to The Stock Trader's Almanac, the January barometer has been correct 58 of 67 times (about 87%) based on the data from 1950 and 2017. However, it does not necessarily mean that it’s going to happen this year. We just saw one of the worst Decembers in decades. Moreover, it gives us some facts which we can keep in mind. The volatility may continue but at slower pace, particularly driven by news. I expect that it would form a trading range in the months to come. Since FAANG stocks are hit hard, it’s difficult to predict who will be the next leader! The earnings momentum will continue to decelerate due to more difficult year-over-year comparisons, slowing global growth, strong U.S dollar and not so strong U.S economy. We could see that stock markets are up significantly in last few weeks. You can see the table again just to find where the market was in a few weeks ago and where it is now. You could see that almost all indexes have gone up almost 20%, Biotech being TOP (see below).

Indexes	% Change in 2019	% Change from LOW
DOW	10.96	18.77
S&P 500	10.72	18.06
NASDAQ	12.62	20.66
BTK	18.47	28.54 (Top)
NBI	8.29	25.00

What lesson did we learn from here? We learned two lessons surrounded around stock market emotion (Greed and Fear). Before the downturn it was greed because everything was going up so why to take profit (greed)? When the market became wildly volatile and corrected there were fear not to invest. Those who did not invest, probably missed the boat of the stock market bounce. If you were a long-term investor, then most of your equity might have bounced back. Those who took some profit and had cash available, it created a great opportunity to deploying the cash in a phased manner for better ROI. That’s the reason it’s never a good idea to “all in” or “all out” in the stock market.

Now that most of the earnings have come out, the market is becoming more news driven. The market continues to deal with trade negotiations between U.S and China in a phased manner, government shutdown, Federal Reserve, Global economy are some key factors. The domestic economy has shown some cracks off late as mentioned earlier. Among all these, U.S and China trade talk is of paramount importance. This along with Fed were the key attributes that shattered the stock market in December. Now Fed is on the sideline. The trade talk between U.S and China continues in a positive note as Chinese delegation arrives in Washington this week for the 4^th round of discussion. Even if they may not be able to conclude the negotiations, there could be some positive developments. Both U.S and China are showing optimism in this regard. Let’s see how it plays. But this is one of the major factors that could influence the stock market outcome this year.

What Revenue and Earnings tells us about 2019?

Scorecard: For Q4 2018, 79% of the companies in the S&P 500 have reported results for the quarter, 70% of those have reported a positive EPS surprise and 62% have reported a positive revenue surprise.

Earnings Growth (Q4): The earnings growth rate for the S&P 500 is 13.1%. This would be the fifth straight quarter of double-digit earnings growth for the index.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.0. This P/E ratio is below the 5-year average (16.4) but above the 10-year average (14.6). So, market is fairly priced.

Source: FactSet

Below is the latest Revenue and Earnings projections for 2019.

Quarter	Revenue Growth	Earnings Growth
Q1	5.7%	-0.8%
Q2	5.1%	1.6%
Q3	4.9%	2.7%
Q4	6.0%	9.9%

We could see that above numbers do not look terrible, but they are not as good as spectacular numbers that we saw during 2018. Moreover, these numbers are a far cry from the double-digit earnings growth the investors were accustomed to during the past few quarters. Many analysts are concerned because interest rate have been rising which can potentially increase the interest expenses for borrowed money or debt. Hence, it could particularly impact all those companies who does not have enough cash and rely on getting financed from outside source. This will impact their EPS. In addition, now that tax cut effect has subsidized, we can anticipate less share buyback comparing to last year. As a matter of fact, this could also impact EPS because corporate world won’t be able to reduce the number of shares. Thus, as far as earnings are concerned, next year seems to be little gloomy unless the analyst community slashes the earnings estimates to a large extent. However, we must remember that these are just estimates and positive things may happen, like trade deal, Fed cutting interest rate and so on. The future is unpredictable, we can simply analyze based on the fact available at this time. So far, we have/had strong earnings, but future remains uncertain considering many known and unknown variables.

Bottomline: Stock markets have bounced back with a bang, but how long will it sustain is difficult to predict. I am still positive about the stock market, but caution is warranted and. Since portfolio values have goes up it’s better to take some chips out of the table and remain invested.

Is China recovering and worth investing?

Earnings for U.S corporations are anticipated to diminish for next few quarters. But what about China or India? I am out of India stock market as there are lot of uncertainties and below par return this year. China is also slowing, and Europe is in the danger of a recession. However, I still feel that some of the Chinese stocks have greater potential for time to come. After taking a beating last year, it looks like Chinese stocks have hit the bottom. There are lot of negative headlines about Chinese economy. Undoubtedly, China is slowing and unless there is trade resolution they are in danger of recession.

As I have written in many of my previous blogs (you can refer to the world market table of my previous blogs), Chinese stock market have been hit the hardest. So, when a sector or country suffers major selloff and then it stabilizes, it’s less likely to experience additional major declines. But the major catalyst is “trade deal”. Reminding my readers that China export about $550 billion worth of goods and commodities to U.S. When a stock market declines continuously, many investors get panicked, they wait for certain period and then sell thinking it’s time to get out of the stock market. Probably, that was the situation for Chinese stock market till December last year. Now, those bad news and negative expectations are factored in to the stock price. Also, expectations have been lowered. When sentiment becomes extreme negative, hated, and the market forms a consolidation, that’s the time things starts getting better. China has taken many steps in last several months on landing, reducing bank reserve, making structural changes etc. So, in my view “worst is over” barring failure to make the trade deal. I think the risk is minimized and reward can be better. BABA came with strong revenue and earnings a couple of weeks ago. It’s a company in the making for future and a dominant eCommerce player. I will wait for the earnings of IQ, JD, BIDU, MOMO, WB, VIPS, BITA in the weeks to come. I believe IQ is another compelling stock for longer term. I am not talking about short term stock price rather keeping a long term perspective.

Some investment strategies to be remembered

Some successful investors say cut your losers early. This is very easy said than done. Because we run into emotions (greed and fear) which takes over. If a company is great, then one should keep accumulating its share during the bad days as stock price goes “On Sale” or even “Clearance Sale”.  One thing that we can control in investing is downside risk. We can't make a stock go up, but we can keep losses to a reasonable level if we act right. Some investing approach works at certain time but it does not necessarily mean that it will work 100% of the time. Losing money is not favorable, but the process is correct. Too many times we focus on the outcome, for example, "wow, I made money... this must work!” But that’s a wrong notion. We have to trade/invest depending on market situation.

In trading, rationalization and ego are the enemy. We have a desire to figure things out and be right. We hate being wrong more than we hate losing money. Many times, traders lose money because their desire to be right prevents them from doing right — from making decisions that protect and grow wealth.

When a strategy isn’t working, it’s easy to give up. If it was wrong, we must amend it but if it was right then rolling with the punches is probably the best advice I try to remember. A winning strategy is proven very hard to come as we keep learning time and again. But remembering the lessons learned during turbulent time or at least minimize those mistakes are of paramount importance. In a volatile market that we had during Oct-Dec 2018, it feels like no strategy works and everything is bull sh**. However, sticking with right strategy rather than panicking during such turbulent markets can be rewarding in the end.

Major Stock Market Performances across the World so far in 2019

	52 week (% age change)	YTD % Change
DOW	2.63%	10.96%
S&P 500	1.59%	10.72%
NASDAQ	4.2%	11.46%
China Shanghai Index	-16.15%	7.56%
India BSE Sensex	5.29%	-0.72
Japan Nikki	-3.77%	4.43%
Hongkong Hang Seng	-10.33%	7.95%
Germany: DAX	-9.25%	7.02%
UK: FTSE 100	-0.80%	7.56%

Sectorial Performances in last 1 Month (U.S Stocks)

Industrials	11.68%
IT	8.75%
Real Estate	8.43%
Heath Care	7.97%
Financials	6.0%
Energy	5.90%
Materials	5.76%
Utilities	5.27%
Consumer Staples	4.85%
Consumer Discretionary	3.97%
Communication Services	2.86%

Source: Merrill Lynch.

Now let me discuss about this month inclusion to my blog portfolio.

Amarin Corporation (AMRN)

Amarin corporation is a biopharmaceutical company, located in Dublin, Ireland. The company focuses on the development and commercialization of therapeutics for the treatment of cardiovascular diseases in the U.S. It has a prescription-only omega-3 fatty acid capsule, used as an adjunct to diet for reducing triglyceride levels in adult patients.

In September 2018 the company declared some spectacular results for cardiovascular problem. I am talking about of the possible blockbuster drug known as “Vascepa”, which is designed for the treatment of patients with high triglyceride levels. A few months ago, I pinged to my WhatsApp group about this stock after they declared some spectacular results from their REDUCE-IT trial. But I thought now time has come to put it on my blog portfolio. Let’s take a look of the result before I discuss further.  The test was conducted on more than 8000 patients for several years and here is result:

·      Cardiovascular Death Reduced by 20%

·      Fatal or Nonfatal Heart Attacks Reduced by 31%

·      Fatal or Nonfatal Stroke Reduced by 28%

·      Urgent or Emergent Coronary Revascularization Reduced by 35%

·      Hospitalization for Unstable Angina Reduced by 32%

According to some doctors, it established a new paradigm for the prevention of important cardiovascular events in statin-treated patients with increased triglycerides. It’s believed that the results of this trial may represent the most significant breakthrough in preventative cardiovascular care since the introduction of statin therapy decades ago.

Why do I like Amarin?

Vascepa is anticipated to be a cost-effective way to significantly decrease mortality rates among patients with high triglyceride levels that may substantially reduce heart attack and death. As I understand, Vascepa is being sold for $349 for a 30-day supply that’s incredible considering the cost of a patient being hospitalized from heart attack or stroke!! Is it not worth spending $349? I am sure it does. I believe many insurance companies already covers it and of course they would love to cover to prevent major expenses from hospitalization. Vascepa’s sales projection is about $2.5 in next 10 years, which I believe incredibly underestimated visualizing hundreds of billions of costs incurred for cardiovascular problems. I will not be surprised to see its sales goes beyond $5 billion in next few years once the label extension is cleared by FDA and sold in other countries like Europe, Asia and Middle East. In fact, the life time sales of Vascepa could potentially go to $20-30 billion. It’s also being rumored that drug is being evaluated for multiple uses, e.g. leukemia, Alzheimer's, Crohn's, liver disease, etc. I saw a post which specified that Vascepa has a spectacular 47.39% growth in prescriptions in the 20 weeks since the Reduce-It trial was published on September 24, 2018, comparing to the previous year. What it indicates is that there is clearly growing excitement for this drug.

Now Amarion is planning to submit an application to Food and Drug Administration (FDA) to expands its label by the end of March 2019.  If approved, that may help to reduce cardiac-event and life saving for the numerous patients and sales could sky rocket.  Currently it’s approved to treat around 3.8 million Americans with high triglycerides, as an adjunct to diet.

A great acquisition candidate: When the company released its spectacular results last September, there have been several rumors that the company may be bought anytime by a large pharmaceutical or biotech company involved in the cardiovascular drug market. There is also a possibility that it can have partnership with some big pharma or biotech company and that could be humongous to gain further ground and enhance its marketing and sales. I am little surprised that company has not announced any such deal as yet! Otherwise we would not be seeing it a $17 stock. But buying a stock thinking that it will get acquired could be a terrible strategy as we do not know the outcome. In cases of AMRN, even if it’s not acquired, I think it could grow it sales considerably in future and that may reward the shareholders. Patience is the key..

Valuation: After the declaration of results in September the company’s share has sky rocketed from $3 to $17, that’s almost 500%. So, obviously it’s not as cheaper as it as few months ago. However, the potential of Vascepa is so humongous that only time can tell where the share would go. At this time, the company has a Sales of 205 million but that could grow exponentially.

Bottom line: I have been accumulating shares of AMRN for last several months. Some at lower price and some at higher prices. I still keep investing on the stock and long term call options. Amarin seems destined to continue its growth, thanks to Vascepa's outstanding top-line results. It can save lives, reduce suffering, and improve the quality of life for millions. When sales boom, so also the stock price irrespective of whether the company is acquired or not. It’s highly likely that it can be grabbed by bigger pharma company, if not, then also this company seems to have a very bright future. The stock is currently trading at $17.66 which is about 25% discount from its 52-week high of $23.34. I do not want to paint a rosy picture as future is always uncertain. However, I have already taken a reasonably good position on this stock and rest my faith for long term. If something goes wrong, I will re-evaluate my strategy. As I have written time and again, usually I never buy all shares at once as it’s difficult to predict the top and bottom of a stock. So, I tend to use phased approach.

Risks: No equity goes without risks. It depends on the stock market performance. However, small biotech stocks are more dependent on their test results. If they succeed it can send the stock to sky, if failed, it can come down to earth. So, AMRN is no exception, though I see more upside than downside with AMRN in the long run but nothing is written on the rock and thing my change, so one should invest cautiously.

Shesa’s Blog Portfolio (As of Feb 17, 2019)

Equity	Suggest Price	Current Price	Suggest Date	% Change	My View (see disclaimer)
STOCK (All prices are in USD)
AAPL	51.63	170.42	1/25/13	230%	BUY
BIDU	86.43	170.06	4/18/13	97%	HOLD
FB	47	162.5	11/13/13	246%	BUY
TSLA	135	307.88	11/13/13	128%	HOLD
MA	77.18	222.11	12/12/13	188%	BUY below 200
AMZN	311.73	1607.95	4/12/14	416%	BUY
BABA	67.28	166.15	2/21/16	147%	BUY (Added more)
EXEL	26.33	22.26	8/20/17	-15%	BUY
MOMO	32.14	30.04	11/25/17	-7%	BUY
BRK-B	206.96	205.29	3/18/18	-1%	HOLD
NVDA	228.71	139.09	4/22/18	-39%	SOLD on 1/29 @ $139.09
EDIT	36.53	20.08	5/28/18	-45%	BUY (Added more)
JKS	14.04	16	7/4/18	14%	Accumulate
IQ	26.13	21.8	9/18/18	-17%	BUY
SHOP	134.81	178.19	11/25/18	32%	BUY
NFLX	297.57	356.87	1/6/19	20%	BUY
AMRN	17.66	17.66	2/17/19	0%	NEW ADDITION
ETF
INCO	34.46	39.8	5/15/15	15%	HOLD (Trim)
IHF	139.1	185.5	8/16/15	33%	HOLD
XLY	77.76	102.02	8/16/15	31%	HOLD
EMQQ	32.65	29.93	5/21/17	-8%	HOLD
KWEB	58.52	43.86	2/11/18	-25%	HOLD
MUTUAL FUND
FBIOX	11.46	20.58	3/1/13	80%	HOLD
PRHSX	47.25	76.82	2/2/14	63%	HOLD
PRMTX	59.45	105.89	12/20/14	78%	Accumulate
MCDFX	12.37	15.65	12/9/15	27%	Accumulate
FSRPX	9.05	15.1	1/15/16	67%	Accumulate
FBSOX	37.32	64.03	3/20/16	72%	Accumulate
FSMEX	43.66	53.11	9/24/17	22%	Accumulate
FOCPX	11.72	11.11	10/21/18	-5%	Accumulate
Note: 2018 DIV are not yet adjusted for the Equities

Positions CLOSED since last Blog

Equity	Sales Price	Buy Price	Date Sold	Gain / Loss (%)
NVDA	139.09	228.71	19-Jan	-39.3

I sold NVDA but I may buy back when I see right opportunity. I still think, it’s a good company but it seems like a transition period for them at this time.

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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