Shesa's APRIL 2019 INVESTMENT BLOG
APRIL
2019 - INVESTMENT BLOG
By
Shesa Nayak
U.S. Stock Market Update
The U.S stock market
run continues towards a new all-time high. Now all the indexes are at a
striking distance to make new high. Second quarter earnings season has already
kicked-off, many banks and financial institutions have come out with good
earnings. The big technology gorillas will start reporting their earnings in
next few days/weeks. Analysts are projecting negative earnings in the current
quarter. As I say, earnings are like play-offs or super bowl for the corporate
world, so let’s see how it goes. These earnings will have tremendous impact on
the direction of stock market. The trade negotiation still continues between
U.S and China. If president Trump’s remark is to be believed, then trade deal
should be signed by end of May. But we may have to wait and watch. Many people
wonder, despite mediocre economy why the stock market still keep rising? Is it
still a good time to invest? Or it’s sensible to remain on the sideline and
wait for further decline? I will pen my opinion as usual. Before that, let’s
take a quick glance of U.S stock market major indexes.
| Indexes | Close (12/31/18) | Close THU (4/18/19) | Change in 2019 | % Change in 2019 | All Time High | All Time High | Diff % |
| DOW | 23,327.46 | 26,559.54 | 3,232.08 | 13.86 | 26,769.16 | -209.62 | -0.78% |
| S&P 500 | 2,506.85 | 2,905.03 | 398.18 | 15.88 | 2,940.91 | -35.88 | -1.22% |
| NASDAQ | 6,635.28 | 7,998.06 | 1,362.78 | 20.54 | 8,133.30 | -135.24 | -1.66% |
| BTK | 4,220.85 | 4,645.24 | 424.39 | 10.05 | 5360.22 | -714.98 | -13.34% |
| NBI | 3,251.08 | 3,286.56 | 35.48 | 1.09 | 4165.86 | -879.30 | -21.11% |
Major Economy News
Personal Income: February saw personal income gain 0.2%,
less than expected, but better than the 0.1% decline in January.
Retail sales increased 1.6% in March, the strongest gain since September 2017.
Economists polled by Refinitiv expected a gain of 0.9%. This is good news since
investors were getting little concerned that economy is cooling down.
Unemployment Report: The U.S. economy added 196,000 jobs in March. The
March figure was also significantly higher than expected 175,000. The
unemployment is holding at about 3.8% overall.
Negatives in the economy
Factory goods orders: In February, new orders for manufactured goods made in the US fell 0.5%
from previous month but better than analyst estimates of 0.6%.
U.S. home construction
fell 0.3%
in March. It can be noted that housing starts have fallen 9.7% so far this
year. Builders are pulling back from their construction of single-family houses
and apartments
GDP growth: US economy advanced an annualized 2.2% on
quarter in the fourth quarter of 2018, below a 2.6% estimated by economists.
Other key economy news
Donald Trump on Fed: On April 14, president Trump said “if the Fed had
done its job properly, which it has not, the Stock Market would
have been up 5000 to 10,000 additional points, and GDP would have been well over 4% instead of 3%...with
almost no inflation”. Quantitative tightening was a killer, should have done
the exact opposite”.
China GDP: On Wednesday, 4/17 China said
that its economy expanded by 6.4% in
the first quarter of 2019 surpassing the analysts were projection of 6.3%.
Apple
and Qualcomm settled their disputes: As
part of the settlement, all legal action worldwide between the two companies
will be dropped, and Apple will buy Qualcomm chips again. Qualcomm shares rose 40%
after the news but Apple was almost unchanged.
Why are
Health-Care stock going down?
Healthcare/biotech stocks have been going
down for last couple of weeks. The Biotech index and Nasdaq Biotech Index have
fallen more than 15%. The market is getting nervous due to the talk about “Medicare for all” message by the presidential democrat candidates. Almost 80% of health-care stocks were below their 50-day moving
averages, according to Bespoke Investment Group. By comparison, 90% of tech stocks were above their 50-day
averages. Is it a concern? I think it’s a short-term hurdle but if we look
at longer term then it could be an opportunity to accumulate. I don’t think
“Medicare for all” is feasible. It looks to me like a political gimmick. But
many times, stock market goes on emotion rather than fact – sell first and
then think.
What's driving all the buying in stock market?
Since the beginning of
the year stock market is on tear. Most of the market indexes are approaching to
their new highs. Despite the projected drop in profit for first quarter wherein
analysts are projecting negative profit
growth (-4.3%), why do the stock
market keep rising despite many grey areas in the economy? Let’s take a look to
some of the facts behind the market rally.
Huge Money sitting on the sideline
If you recall, I wrote this in my January
blog “December 2018 was the worst
month since the great depression of 1931”. During that time, it was mainly two factors that
created panic - FED and Trade Deal.
Many investors sold their equities during that time with the fear that market
would go down further. However, since the beginning of this year, the stock
markets have been rallying across the globe. U.S stock markets (S&P 500)
has gone up 15.9%, China Shanghai Index have gone up more than 31%. But there are still astronomical
amount of money sitting on the sideline looking for the opportunity to get in,
the fear that they do not miss the huge rally! As a matter of fact, whenever
the market goes down, investors are trying to take the opportunity to buy
stocks. The fact
that, if you don't get in and buy, you'll
miss out on the big rally is getting more investors to unpack their cash and get invested in the market.
Federal Reserve is out of way
The Fed laid out the plan to watch core
inflation to reach 2% or more before it would act. Since the global economy is
not at great shape, I do not think Fed is going to raise interest rate, at most
I will think of one more interest rate hikes this year. This is a very good
sign for investors. Whenever, there is no fear of Fed, market has mostly done
well. Because Fed is probably the only institution which can derail the stock
market.
Economy: Job growth, unemployment rate, wage
growth, retail sales still remain robust.
Housing Market/Low Interest Rate: Home-loan rates have dropped to the lowest in more
than a year. According to BOA, since November, the rate on a 30-year
mortgage dropped from 4.94% to 4.06%, the most rapid decline since
2008. This is causing the housing market to bounce back gradually. As you know,
housing market was one of the grey spots in U.S economy. The U.S.
10-year Treasury is sitting near 2.5% which determines the benchmark mortgage
rate. A strong housing market can really boost the economy.
April is one of the strongest months: April is one of the strongest months historically,
lagging only November and December. Most of the April's gains come in the second
half of the month, as Tax Day passes and the first quarter earnings
announcement gets under way. This year, April is lining up to be a strong month
overall. Based on a recent report, it revealed that a positive start to the month
of April is a good omen for the rest of the month. Since 1945, when the S&P
500 kicks off April with at least a 1% gain, the index is up an average 4.2% in April.
Trade Deal: Let’s not forget one of the most
important factors “trade deal negotiations” between U.S and China. This keeps
hope alive that the deal could materialize ultimately, and it can happen
sometime soon, probably in next few weeks. President Trump says by end of May.
We have to keep a closer eye on this.
Presidential 3rd Year
Since 1945, the
third year of a president’s first term
in office has averaged a 17% return. What’s the
reason behind starting from 1945? Because when it comes to presidential cycles,
that was the first four-year term with term limits. Each year has its
own unique seasonal trend, but this third year has consistently been the best. It
only has one negative return in the past 11 first-term presidents. Under former
president Barack Obama, we saw a 1% loss. Prior to that, the worst year was
1947, with a 1% return. Every other third year has produced returns of more than 10%, and as high as 34%. That leaves us plenty of room to continue
climbing in 2019.
Strong U.S. dollar
The strong U.S
dollar and rise in the stock market is pulling money from outside U.S and
become the prime destination for global investment.
Earnings season is the impetus for stock market. Already Q1
earnings have started coming. It’s a
key parameter determining the direction of the stock market. Hence, we mostly
see the stock market goes up on optimism. However, if the Corporate worlds fail
to deliver then market could take south.
Negatives
Though stock
market is going up but please note that there are many grey areas in the
economy. Here are some of those:
• Global Economy is still slowing down, particularly Europe
• Slower Earnings Growth ( -4.3% expected in Q1)
• Tough Y-O-Y comparison
• Home Market/new home construction are still below expectation.
• We will be completing, so called best 6 months period of the market on
April 30.
Major Stock
Market Performances across the World so far in 2019
Indexes
|
52 week (% age change)
|
YTD % Change
|
DOW
|
7.68%
|
13.86%
|
S&P 500
|
7.87%
|
15.88%
|
NASDAQ
|
10.54%
|
20.54%
|
China Shanghai Index
|
6.49%
|
31.15%
|
India BSE Sensex
|
14.01%
|
8.52%
|
Japan Nikki
|
0.17%
|
10.92%
|
Hongkong Hang Seng
|
-2.75%
|
15.75%
|
Germany: DAX
|
-5.68%
|
10.67%
|
UK: FTSE 100
|
0.1.79%
|
10.88%
|
Source:
Wall Street Journal
Sectorial
Performances since Year-to-Date (U.S Stocks)
IT
|
25.56%
|
Industrials
|
21.58%
|
Consumer Staples
|
20.46%
|
Energy
|
17.16%
|
Financials
|
14.78%
|
Real Estate
|
14.78%
|
Materials
|
14.11%
|
Consumer Discretionary
|
11.99%
|
Utilities
|
8.26%
|
Health Care
|
-0.69%
|
Source:
CNN Business
Why do I think Cannabis investing has significant future potential?
If you read my
March blog, I wrote about a Cannabis company “Canopy Growth Corp (CGC)”. In this
month’s blog, I will be including another Cannabis related stock. The reason is
that, I see a tremendous future potential of this sector in
coming months and years. The cannabis industry is anticipated to be the fastest growing industry in America. In the single biggest push to legalize marijuana in all
50 states, House Bill 420 seeks to remove marijuana as a controlled substance
and regulate it just like alcohol. According to a White House insider, a major overhaul in
marijuana legislation can be done any moment but nothing can be said with
certainty. I know there were lot of hype with marijuana stock earlier,
but that phase is gradually diminishing, and we are in a position where we
can accumulate for future gain. I am outlining some of the catalyst why
I think this sector has great future potential.
The FED may pass the STATES
Act
As you know marijuana is still illegal
according to federal law though many states in U.S have already legalized. However,
the federal prohibition could end
any time. It’s not a question whether it will happen rather when it will
happen? It’s difficult to predict but it could happen in months
or years ahead. The Congress is expected to vote on the STATES Act that would formally entrust
marijuana laws to the states. As long as residents follow their state’s
laws, the federal government would not be able to intervene. This bill is
expected to come in next few weeks or months. If the bill passes it would be a
big positive for the industry and banks should be able to land money to this
industry which is restricted in the current environment.
Next Presidential Election
The next presidential election in 2020 is
expected to be the first presidential race with a focus on candidates’ views of
marijuana and legalization. Currently there are about 12 governors in office
who are pro-marijuana. Based on some survey, two-thirds of adults in the
country in favor of legalization, so politically it becomes damaging not to support it. It’s estimated that
about 75% of Democrats support legalization, about 53% of Republicans now back
the legalization of marijuana.
Economy benefits are too
compelling to ignore
Job
creation and Tax revenue are two major catalyst which excites the government
(state or Fed) to generate significant amount of revenue. Economic benefits are
too compelling for the governments to ignore.
President Trump
The presidential election is coming in about 1.5 years, November 3, 2020
to be specific. Marijuana legalization is going to be one of the important
issues as many democrats and republicans have already started talking. Donald Trump has said he
will “probably end up supporting” the STATES Act. He may push medical-marijuana
legalization nationwide, as lot of states have started supporting. Also, he is
a business man, so he probably understands the economy benefits better.
Pension Fund buying Cannabis stock
On last Wednesday, I read a
report which indicated that Swedish government pension fund is investing in pot
stocks? It looks like they have Aurora Cannabis and Canopy Growth as part of
the index fund. A note to the reader, Sweden is not the first government entity to buy marijuana stocks. Earlier,
Canada's Public Sector Pension Investment Board bought Aurora, Canopy
Growth, Aphria, and Cronos Group. Last year, California Public Employees' Retirement System also invested
in Tilray. One should
not buy because funds are buying, however, it gives a lot of confidence to
investors about the long-term prospects of the industry. It instills other
institutions and investors to jump in.
Marijuana may be declassified
Now marijuana is treated as Schedule 1 drug (like heroin, Cocaine). But it’s obviously
not like that. In fact, its much safer than many other drugs and have less side
effects. Hence, it’s just a matter of time before the Drug Enforcement
Administration (DEA) moves marijuana down from schedule 1 to schedule 2, 3 or 4)
as a matter of fact it can be bought anywhere. Also, allow for more medical testing
of marijuana at universities and research centers, which will lead to even more
positive medicinal breakthroughs.
Globalization
It’s anticipated that there will be more
legalization in the European Union, South America, Africa and Australia. The
odds of a European country legalizing of marijuana for recreational use looks
to be promising in 2019.
Hemp and CBD
Many of the CBD companies coming around to hemp-derived cannabidiol
(CBD) oil…the non-psychoactive “cousin” of marijuana that won’t get a person
high. You can say it’s beer vs. RumJ.
CBD has been used by wellness and medical professionals for years as an
alternative treatment for anxiety and depression to chronic pain to the
reduction of inflammation etc. CBD is now considered one of the most beneficial
compounds available to humans, and it does not have the nasty side effects that
many drugs do.
Gaining wider acceptance
Now
that the corporate world has jumped in, there are many financial institutions
have started coverage of Cannabis companies. Just a few days ago Bank of America
set a US$52 target price for Canopy Growth Corp. and US $11 for Aurora (ACB). Just
a few weeks ago, Jefferies Financial started its first coverage of
seven cannabis companies. We will keep seeing more and more such analyst coverages.
Even people are
celebrating in thousands together. Just to give you a perspective, on 4/20, last Saturday in
San Francisco's Golden Gate Park, Hippie Hill was again the site of
celebration. Last year, more than 15,000 attended the event, which has
transformed from a small informal gathering into a full-blown festival of
corporate sponsors and commercial booths selling smoking devices, T-shirts and
food. Lyft offered a $4.20 credit on a single ride in Colorado and in select
cities in the U.S. and Canada. Carl's Jr. is using a Denver restaurant to
market a hamburger infused with CBD, a non-intoxicating molecule found in
cannabis that many believe is beneficial to their health.
Aurora Cannabis
(ACB)
Aurora Cannabis as its name
suggest is a Cannabis company located in Alberta, Canada which has production capacity
of more than 625,000 kg of cannabis per annum and sales, operations in 24
countries across five continents. Aurora is one of the world’s largest and
leading cannabis companies. If you read my blog last month, then I wrote
about another cannabis company – Canopy Growth Corp (CGC). So, why am I again including another company in the same
business? The answer is “I do see a tremendous growth potential in this sector
for next several years”. It’s no more a speculative hype industry rather it’s
becoming a growth sector with immense potential for patient long term investors.
Aurora’s rapidly increasing production
capacity gives it a leg up on many of its competitors. It’s expected to top
1 million KG of cannabis production in foreseeable future. On April 10, ACB announced its latest and largest Sky Class facility known as
Aurora Sun, which is currently under construction in Canada. This facility will
be expanded to 1.62 million square feet and the company is projecting an
expected production capacity at Aurora Sun in excess of 230,000 kg of
high-quality cannabis per annum. The Sky Class facility is designed to deliver massive
scale, low cost production, and high-quality cannabis. This will facilitate to meet the long-term
growth in global demand, especially the higher margin international medical
markets. Because ACB primarily focuses on the medical
marijuana industry rather than recreational use. Though, the market for medical
marijuana is not huge at this time but margins are quite high.
Arora is a very popular brand like Canopy growth.
And branding
matters a lot when there are large number of players
in the market and it matters for the investment community to determine where to
put their money. Particularly, this is highly significant for institutional
investors. Please note that, out of the total approx. $30 trillion of U.S stock
market 82.5% are institutional investors and remaining 17.5% are everyday investors/traders.
Global Market
The Germany medical cannabis market is one of the first markets to open
up outside of the Canada and U.S. Germany is expected to be another major market over a period of
time though it has very low sales comparing to its Canada
market at present. The company also says that it has operations in 24
countries. There may not be much revenue from international market at this
point of time, but these will keep growing. On April 4, the Federal Institute
for Drugs and Medical Devices of Germany awarded ACB in the public tender to
cultivate and distribute medical cannabis along with two other Cannabis
companies.
So far, Arora does not have
any major partnership. If you recall, I wrote in my last blog that Constellation
Brands invested $4 billion in Canopy Growth (CGC). Altria invested $1.8 billion in Cronos (CRON). Arora being
one of the largest producers of cannabis it has an advantage
to get a bigger partnership. I am anticipating that it
could attract major investment from corporation in the foreseeable future. So,
the question comes to mind is, how ACB is managing its growth? Recently the
company issued convertible notes to have plenty of cash to grow its business. Though,
this further dilute the value of existing shareholders, the company could make
use of the cash to good use. Last year, ACB bought MedReleaf for CAD$3.2
billion. Recently, on April 10, Aurora increased its stake to 33% in
another marijuana company known as Medicine Hat. All these acquisitions and production facility investments potentially increase the company’s scale
and accelerate the growth. Other than the CBD market, vaping is expected to be a $2+ billion market by 2020 and ACB is the first
licensed producer to have been approved by Health Canada. This can be significant. I believe THC/CBD blended cartridges is also
likely coming up next and that would further increase its market potential. ACB
is a company with good technological innovation behind its products line which differentiates
it from others in the industry.
Constraints: Having said all good things, valuing a cannabis company is a
tedious task. The company still losing money on an operational basis and difficult
to predict when those will stop. But as I understand, all the growth companies
go through the same phase in the early stage of their growth. Be it Amazon or
Netflix or any company for that matter. Other fundamentals are not really worth
mentioning at this time except 363% revenue growth the company had. Revenues
are increasing and expected to keep increasing for years to come. When legalization
takes place in U.S and other countries the revenue may shot up further and may
see a lot of consolidation in the industry.
One of the problems though for Aurora Cannabis is that, it
doesn't appear willing to enter the U.S. market until federal government
legalize marijuana. But I am very hopeful that they will be keeping a closer eye
for some sort of acquisition and presence in USA. No company can afford to
ignore U.S market. Because U.S. market
in 2018 was estimated to be around $11.0 billion out of the $12.9 billion global
cannabis market according to Arcview Market
Research. The U.S. market is expected to grow significantly and account about
70% of the global market by 2022.
ACB is second to CGC in terms of
market capitalization of $9.10 billion.
Currently, the stock is trading at $9
with 52-week high of $12.52, so a discount of 28% from its 52-week high. I have
been accumulating this stock over last few months. I would not like to buy such
speculative stock at once as it’s too risky. Hence, I do prefer buying in a
phased manner and taking some profits whenever needed. I see that cannabis
industry has a great future potential. It’s better to invest in the market
leader(s) rather than buying unknown stocks as it carries significant amount of
risk. I have seen many such penny stocks get even bankrupted. So, I will prefer
to stay away from unknow names.
Risk: As I said in my previous blog, Marijuana stocks are very highly volatile and risky. One must be extremely careful
and allocate some portion of the portfolio, possibly no more than 2-4% in any
given stock. Many times, these stocks are driven by news sometime causing
enormous fluctuations from time to time. Despite the fact that many countries
and U.S states have legalized marijuana, federal government is yet to legalize,
hence it carries significant risk. If the stock market goes south, then the momentum
stocks are hit the hardest. Having said all that, it also provides a great opportunity for patient and risk-taking investors
willing to take some calculated risk for long term. Conservative investors who can’t take
volatility should stay away from such investment. Every investor should analyze their own investment framework and
determine what is best for them before putting the hard-earned money. For
me, I do prefer to do my due diligence and take a calculated risk because I
feel that this industry can’t be ignored. Hence, I am invested.
Shesa’s Blog Portfolio (Updated on May 18, 21, 2019)
Equity
|
Suggest Price
|
Current Price
|
Suggest Date
|
% Change
|
My View
(see disclaimer) |
STOCK (All prices are in USD)
|
|||||
51.63
|
203.86
|
1/25/13
|
295%
|
HOLD
|
|
86.43
|
171.02
|
4/18/13
|
98%
|
HOLD
|
|
47
|
178.28
|
11/13/13
|
279%
|
BUY
|
|
135
|
273.26
|
11/13/13
|
102%
|
HOLD
|
|
77.18
|
240.89
|
12/12/13
|
212%
|
HOLD
|
|
311.73
|
1861.69
|
4/12/14
|
497%
|
BUY
|
|
67.28
|
186.94
|
2/21/16
|
178%
|
BUY
|
|
26.33
|
20.9
|
8/20/17
|
-21%
|
HOLD (trimmed)
|
|
32.14
|
35.67
|
11/25/17
|
11%
|
SOLD
|
|
206.96
|
209.99
|
3/18/18
|
1%
|
HOLD - trimmed
|
|
36.53
|
25.8
|
5/28/18
|
-29%
|
BUY (Long term)
|
|
14.04
|
19.03
|
7/4/18
|
36%
|
HOLD - trimmed
|
|
26.13
|
23.19
|
9/18/18
|
-11%
|
BUY (Long term)
|
|
134.81
|
220.72
|
11/25/18
|
64%
|
HOLD - took some profit
|
|
297.57
|
360.35
|
1/6/19
|
21%
|
HOLD
|
|
17.66
|
18.06
|
2/17/19
|
2%
|
BUY - Added more
|
|
45.89
|
44.56
|
3/17/19
|
-3%
|
BUY
|
|
ACB
|
9
|
9
|
4/18/19
|
0%
|
NEW ADDITION
|
ETF
|
|||||
INCO
|
34.46
|
42.99
|
5/15/15
|
25%
|
SOLD
|
139.1
|
154
|
8/16/15
|
11%
|
HOLD - trimmed
|
|
77.76
|
110.6
|
8/16/15
|
42%
|
HOLD
|
|
EMQQ
|
32.65
|
34.27
|
5/21/17
|
5%
|
SOLD
|
58.52
|
48.77
|
2/11/18
|
-17%
|
SOLD
|
|
MUTUAL FUND
|
|||||
11.46
|
19.32
|
3/1/13
|
69%
|
HOLD
|
|
47.25
|
71.45
|
2/2/14
|
51%
|
HOLD
|
|
59.45
|
114.67
|
12/20/14
|
93%
|
Accumulate
|
|
MCDFX
|
12.37
|
17.15
|
12/9/15
|
39%
|
Accumulate
|
9.05
|
16.1
|
1/15/16
|
78%
|
Accumulate
|
|
37.32
|
68.31
|
3/20/16
|
83%
|
Accumulate
|
|
43.66
|
49.7
|
9/24/17
|
14%
|
Accumulate
|
|
11.72
|
12.14
|
10/21/18
|
4%
|
HOLD - trimmed
|
|
Note: Dividends are not adjusted on the price.
|
|||||
Positions
CLOSED since last Blog: NONE.
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
or 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. 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.
Great post about the intraday trading market. Keep updating with more informative blogs.
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