Shesa's June - July 2019 Investment Blog
JUNE
/ JULY 2019 - INVESTMENT BLOG
By
Shesa Nayak
U.S. Stock Market Update
It has been eventful
past few weeks. The Dow Jones Industrial Average rallied 7.2% in June notching
its best June performance since 1938. The S&P 500 posted its best first
half of a year since 1997, soaring 17.3% and reaching an all-time high despite
the disruption of trade talk between U.S and China. However, U.S president
Donald Trump and China president Xi Jinping hold their highly anticipated
bilateral meeting at the G-20 summit in Japan. Both the leaders reportedly agreed
to proceed with trade negotiations after a series of escalations and tariff
battle threatened to disrupt the global economy. They agreed to hold off on new
tariffs at this time. This is a very welcome sign for the stock market and
global economy. Hopefully, this is a positive step in the right direction. I do
expect some bounce back in stock the market Monday. Meanwhile, the Federal
Reserve changed its tone causing investors to believe that Fed may cut 0.25%
interest rate in their July meeting. However, contemplating the latest meeting
between Trump and Jinping, if market bounces back then I do not think that Fed
will be in a hurry to cut the interest rate. I will discuss more on this later.
After a couple of weeks, second quarter earnings will kick-off by corporate
America and as we know earnings and future forecast by the companies are key
parameters for stock market directions. So, will the stock market momentum continue
and drive the stock prices to further high? I will further analyze but let’s
take a glance to the stock market indexes.
| Indexes | 12/24/18 (LOW) | Close (12/31/18) | Close FRI (6/30/19) | Change in 2019 | % Change in 2019 | All Time High | Diff % |
| DOW | 21792.2 | 23,327.46 | 26,599.96 | 3,272.50 | 14.03 | 26,951.81 | -1.31% |
| S&P 500 | 2351.1 | 2,506.85 | 2,941.76 | 434.91 | 17.35 | 2,964.15 | -0.76% |
| NASDAQ | 6192.92 | 6,635.28 | 8,006.24 | 1,370.96 | 20.66 | 8,176.80 | -2.09% |
| BTK | 3890.37 | 4,220.85 | 4,788.12 | 567.27 | 13.44 | 5425.4 | -11.75% |
| NBI | 2816.54 | 3,251.08 | 3,427.99 | 176.91 | 5.44 | 4165.86 | -17.71% |
Major Economy
News
GDP: U.S first-quarter GDP grew at 3.1%
comparing to 2.2% in the last quarter. Though, consumer spending was weak but stronger
business investment did offset the deficiencies. This is a very welcome sign
for the economy.
Consumer sentiment: The University of Michigan said Friday its final index of consumer
sentiment was 98.2 this month, down from May’s reading of 100.0.
US Housing starts was 1.269 million vs. 1.239 million
expected.
Dollar Index closed below 200-day simple moving average
since March 2019. This has helped Gold and Oil prices to up.
Historic move on
Cannabis law: The U.S. House of Representatives voted in
favor of an amendment that would stop
the federal government and its agencies from interfering with legal cannabis
programs, individuals and businesses in compliance with state, territorial or
tribal cannabis laws.
Where
will the stock market go from here?
The situations keep changing time by time and so also the stock
market keeps fluctuating. The question is, where will it go from here? I do see
four major determinants that would decide future stock market direction.
Here are my findings:
(i)
U.S China Trade deal
(ii)
Interest Rate
(iii)
Second Quarter Earnings (Q2)
(iv)
More than 5% dip in “May” brings good return
historically
(v)
Overall Economy
Now
let me discuss these factors one by one to substantiate my argument.
(i)
U.S China Trade deal - how it impacts the stock markets
and economy
Several weeks ago, the trade deal was
almost 90% done but turned out to be a failure. There was chaos all around
until last Friday night and suspense that what would be the outcome of Trump
and Xi Jinping! As you may be aware, president Trump and president Xi Jinping had
their bilateral meeting at the G-20 summit in Japan. Both the leaders reportedly
agreed to proceed further with trade negotiations. There have been escalations and tariff battle between U.S and China that threatened
to disrupt not only U.S and Chinese economy but the global economy. If the report is to be believed, U.S.
do not plan to levy any new tariffs on China’s goods at this time. As I have
written time and again, tariff and trade barriers between two of the world
largest economy are disruptive. It’s just not a matter of a few percentage of
tariff which impacts certain industry, but the indirect impact is humongous and
contagious.
Let me explain about trade impact, when there are tariffs imposed in an industry, let’s say
agriculture; it will impact famers and their equipment makers, suppliers etc.
This may impact the food prices and so also consumption. The revenue and profit
growth slow down for the industry. In retaliation, U.S bans import of
technology, so that industry gets impacted. The revenues and earnings of the
impacted sectors will come down. The stock
market will react to all such bad news and the stock index falls. Once stock market starts falling, investors will get scared and sell not only the stock of
the same industry but also other equities in their portfolio because they don’t want to invest under risks and uncertainties. Once stock market starts falling, business will cut their spending, stop recruiting, start laying
off employees. The investors will find
their net worth going down due to stock market downturn. The general public
will get scared because of lack of job or sources of income. The consumers’ confidence comes down and they
will minimize or cut their spending and try to save for their bad days under such
uncertainties. The whole economy slows
down and gets into recession. During recession, there is no growth or
lack of growth for many months or years. The above example is just for the
understanding of the reader on how the overall economy gets impacted, so it’s
not just 10-25% tariff rather the spiral
effect. It does not necessarily mean
that it may get that ugly but when market sentiment changes the same
stock which was trading at $100 a few days/weeks ago may become $10-20 without
much change in fundamentals. Sometime Wallstreet does not necessarily go with
fundamentals but sentiment. More buyers, less sellers take the stock prices up
(north); less buyers more sellers take the price south (down).
(ii)
Interest Rate
On June 18, the Fed kept interest
rates unchanged at the meeting, as expected. Although, the federal reserve did
not signal that rate cut is coming this year, but it did drop the word “patient”
from its statement and said it would “act
as appropriate” to sustain the economy. The
central bank’s rate projections released alongside the statement showed that 8
Fed members see a cut this year, which traders took as further sign the
central bank was close to cutting rates. Fed Chairman Jerome Powell also said
in a news conference after the announcement that some Fed officials believed
the case for easier monetary policy had strengthened. The market is
going with the assumptions that Fed will cut interest rate in July and again in
September. Despite the fact that, almost 80% analysts expect rate cut in July,
I beg to defer visualizing the latest development on trade deal front. If the
negotiations between U.S and China resumes, and stock market instill confidence
of better business environment then stock market may go up further. If economy
is at better shape, then I doubt that Federal Reserve will cut interest rate.
But it all depends on how the market plays out and second quarter earnings are
reported by corporate world. These may provide further insight whether there “will”
or “won’t” be interest rate cut.
(iii)
Second Quarter Earnings (Q2)
For Q2 2019, the estimated earnings decline for the S&P
500 is -2.6%. The first quarter (Q1) came out to be -0.4% earnings (better than expected 3% decline). If -2.6% is
the actual decline for Q2, it will mark first time index report two straight
quarters of year-over-year declines in earnings since Q1 and Q2 of 2016. The earnings
revisions have further declined in last few months. This could be that, analysts
are cutting down their forecasts due to ongoing trade tensions between U.S and
China. The companies are unsure what would be the impact without a trade
deal. So basically, I will say “business under uncertainty”. The bottom
line is that, if earnings come better than expected and the companies forecast
better days ahead then stock market will continue to run upward. But I doubt
that many companies will come with future forecast because of the cloud
surrounding with “tariff”. Though, things
may fall in place and negotiation may resume but you never know when Trump will
surprise with another tariff. So, caution is
warranted. It’s always better to take some chips of the table and have some cash
as and when opportunity arises and reinvest the money wherever there is an opportunity.
This rotation has to be done to get better return on investment.
(iv)
U.S Economy
U.S economy may not be at its best but
still it’s much better than most of the economy in the world. Consistent
performance of U.S stock market and strong U.S dollar makes it a better place
for international investors. U.S. first-quarter GDP grew at 3.1% comparing to
2.2% in the last quarter. The overall unemployment rate is almost at 50 years low,
wage growth is reasonable, consumers are spending, and economy is still solid.
(v)
Stock Market dip in “May” brings major bounce
If we see the historical evidence each time there
is more than 5% decline in the month of May,
there is significant gain in the next year. Let’s see the statistical evidence since
1950. These kinds of falls happened 8 times in the past 69 years and
let’s see how the gains have been:
|
Year
|
Loss in May
|
1-Year Return
|
|
1956
|
-6.6%
|
4.9%
|
|
1962
|
-8.6%
|
18.7%
|
|
1966
|
-5.4%
|
3.4%
|
|
1967
|
-5.2%
|
10.8%
|
|
1970
|
-6.1%
|
30.2%
|
|
1984
|
-5.9%
|
25.9%
|
|
2010
|
-8.3%
|
23.5%
|
|
2012
|
-6.3%
|
24.5%
|
|
2019
|
-6.6%
|
??
|
If
you see the table above, the stock market soared above 20% half the time. And
on an average, stocks jumped 18% over the next year. That's much better than
the typical 8% a year the market has returned since 1950. Of course, the
history does not repeat always and there is no guarantee that it may happen again,
but it provides some positive framework.
The
doldrum in Cannabis stock is an opportunity for long term investors
Off late, the Cannabis stocks have taken a beating. The whole
sector seems to be in doldrum. Last week, Canopy Growth (CGC) reported its Q4 earnings. Its revenue soared 313%
year over year to 94.1 million Canadian dollars, driven by the opening of
Canada's recreational marijuana market in October, which brought 65% of total
gross revenue. Net loss widened considerably to $323.4 million, per share basis
CA $0.98 vs. of $0.31 estimated. Because company is investing heavily in growth
various growth initiatives. This result was not liked by the investors and CGC
was punished. Other than that, the volatile market and lack of momentum
investing is causing the sector to be little boring for now. However, it’s
still a good time to invest in Cannabis stock contemplating its future growth
potential.
Just
to let the readers know that it’s not only smoking, drinking, body lotion or
gel but cannabis firms are
starting to brand themselves as wellness companies, which all relates back to our health
spans to stay healthy. CBD has shown signs of reducing inflammation, promoting a sounder sleep,
helping to fight stress and anxiety, improving heart health, and alleviating
cancer-related symptoms.
Recent studies have also shown that CBD could help play a role in the treatment
of arthritis. There are more than 50 million Americans suffering from arthritis as of August 2018. Though, CBD may
not be a direct cure, it could help alleviate some pain. It can be noted
that, in the states with legalized medical
marijuana, healthcare spending
by the government has declined by over 10%. The two stock, CGC and ACB which
are in my blog portfolio seems to have great future potential and hence I keep
accumulating whenever opportunity arises.
Major Stock Market
Performances so far in 2019
|
Indexes
|
52 week (% age change)
|
YTD % Change
|
|
DOW
|
12.20%
|
15.4%
|
|
S&P 500
|
10.42%
|
18.54%
|
|
NASDAQ
|
6.60%
|
20.66%
|
|
China Shanghai Index
|
-
|
19.45%
|
|
India BSE Sensex
|
-
|
9.22%
|
|
Japan Nikki
|
-
|
6.30%
|
|
Hongkong Hang Seng
|
-
|
10.43%
|
Source:
Morningstar, Wall Street Journal
Sectorial Performances
since Year-to-Date (U.S Stocks)
|
IT
|
26.02% (TOP)
|
|
Industrials
|
20.07%
|
|
Consumer Staples
|
20.40%
|
|
Real Estate
|
17.33%
|
|
Financials
|
15.87%
|
|
Consumer Discretionary
|
14.38%
|
|
Utilities
|
12.77%
|
|
Materials
|
12.74%
|
|
Energy
|
11.12%
|
|
Health Care
|
7.02%
|
Source:
CNN Business
Now
let me discuss about my current month’s inclusion to my Blog Portfolio.
New Age Beverages Corporation (NBEV)
New Age Beverages
Corporation (NASDAQ - NBEV) is a Colorado and Utah-based company
dedicated to inspiring and educating consumers to "live healthy." The
Company sells healthy drinks and recently introduced some CBD products. It sells
the products through traditional retail, e-commerce, direct-to-consumer, and
medical channels across 60 countries around the world. It has various brands of
products viz. Tahitian Noni, TeMana, Búcha Live Kombucha, XingTea, Coco-Libre,
Marley, and others.
On Tuesday, 6/18, the company said that it launched three products
from its “NHANCED CBD” brand. These products are “CBD Body Cream, CBD strength, CBD Roll-on Gel, and CBD Oil.” These CBD products have been
launched in Hong Kong and China. The company also said that it’s
preparing to launch these CBD products in an additional 58 countries during the
third quarter and fourth quarter of this year. If some reports are to be
believed then the company’s various brands of drinks and newly launched CBD
products are doing good business in various countries after its recent launch in China,
Japan, Taiwan, Australia, Russia etc. The ‘NHANCED CBD” launch in U.S during last
April is presumed to be a great success. Of course, we will know more when the
sales numbers are reported during company’s next quarter earnings. Soon it’s also
planning to launch CBD infused tea and other drinks. As I said
above, NBEV sales is product through different channels of distributions like direct-to-consumer
product consultants as well as through e-commerce website dedicated to the
brand. For my readers reference the company’s product line can be viewed on the
web site at http://www.newagebev.com to get more idea about
company’s business before investing any money.
Deals and Acquisitions:
- In December 2018, the company acquired a beverage company known as Morinda in a $85 million deal. The move opened up relationships with retail outlets internationally that would help the company to expand its presence in 60 different countries.
- On June 3, company announced to acquire New York based beverage company Brands Within Reach which has brand licensing and distribution rights to several well-known beverage brands, like Nestea, Volvic, and Illy Ready to Drink Coffee.
- On April 8, the company entered into a distribution deal with Walmart for its three flavor of Marley brand “a natural energy drink that has the taste of tea with the uplift of coffee”. This was a big news and stock had gone up more than 20% on the news.
The above deals will boost NBEV primarily in two different
aspects. First, it would add more brands to its product portfolio.
Second, and most important, it will strengthen New Age’s distribution and
logistics infrastructure helping the company to easily market its product
across many geographies and boosting its sales.
Financials and Future Growth
In the last quarter (Q1) the company’s result missed analysts’ expectations on both top and bottom line. It incurred a net loss of
$1.62 million on $58.3 million revenue, 83%
of the company’s revenue came from
Morinda (acquired company). On a year-over-year basis, NBEV’s sales surged 404%.
But excluding Morinda’s revenues, its sales fell by 13% YoY. However, the launch of the company’s CBD beverages portfolio in the second half of the year should help reignite its sales. Furthermore, it’s believed
that the current quarter (Q2) sales are looking robust but only time will tell
how good it will be once Q2 earning is declared. So, let’s wait and watch. The
company is expected to turn profitable this year and that’s a very positive
news. During the first quarter (Q1), NBEV went from negative free cash flow of
$191,000 to positive free cash flow of $11.2 million, and that doesn’t include
a $31.4 million gain from the sale of property. As a matter of fact, even
though technically it is losing money, it’s generating positive cash flow is obviously
good news for investors.
In addition, its planned diversification to additional 58
countries during the third quarter may further boost its sales and brand
recognition. I presume that the growth engine is just kicking-off and it should
gain momentum in the coming months and years. Of course, there are a lot of
work to be done before NBEV’s brands becomes household names, but it seems the
company is in the right direction.
Current Concerns
& Stock Price
After the
acquisition of Brands Within Reach the stock fell about 10% then the
stock started stabilizing. However, a couple of days ago, there was a report
published by Grizzly Research accusing the company that NBEV may have overpaid when
buying Morinda. It had had paid $75 million last December, plus $10M in stock. The
report also stated that Morinda is a multi-level marketing company in China and
may have issues with Chinese regulators. As such, the stock price was hit and
came down to about $4.30, before recovering to $4.66. It’s difficult to say about
the authentic of the report but NBEV said that the report is inaccurate, and the
company will release a detailed rebuttal. Let’s wait for the report.
Last year when NBEV said that it will introduce its new line of
CBD-spiked beverages; the stock rocketed to almost $10 in late September. The stock went
up from $1.60 to $9.99. Subsequently, the stock has retreated and now it’s
trading at $4.66, 53% below its 52 weeks high. It may be scary to some investors, but I view this correction as an
opportunity to accumulate for long term visualizing its wonderful growth
opportunity in the coming years. Short sellers interest in the stock is at an all-time high (26%).
Thus, it sets the stage for a short squeeze with any good news that may enable
rally in the stock price. But I don’t invest thinking about an event rather I
invest visualizing the future potential of a company and its stock price.
My Investment
Strategy
As I have said
before, I prefer to keep accumulating the stocks over a period of time. I try
to buy at low and keep doing dollar cost average till it reaches my limit. I
have been accumulating this stock for last few months and current downturn
provided me further opportunity to feel excited to buy more. It can be
remembered that small cap stocks are very volatile and risky. Hence, I have two
strategy for such stock. First, buy the stock and keep accumulating but not
exceeding more than 2-4% of my portfolio. Secondly, as I foresee future
potential in this stock, I buy some leaps (stock options expiring in long
term). If and when the stock goes up, I would take some profit on options and
may be selling some stock. Buying options is a very risky proposition, so I
won’t recommend to anybody who is not familiar to such strategy. It all depends
on how much risk one is willing to take and decide accordingly.
Risks: NBEV is a highly volatile stock. In the consumer-packaged
industry branding is a key contributor to the success of a company. If NBEV succeeds
in selling its beverages and CBD products as expected, then the long-term investors
may be greatly benefited. If it fails, then the stock could fall significantly.
Moreover, no stock is immune to the performance of the stock market and that’s
a risk which nobody can withstand. Moreover, small cap stocks are hammered hard
and fast, so one must be diligent in investing the amount one can afford to
lose and not hesitate to take some profits when required. I am a growth
investor so keep looking for such opportunities and NBEV fits the bill for me.
Shesa’s Blog Portfolio (As of June 30, 2019)
|
Equity
|
Suggest Price
|
Current Price
|
Suggest Date
|
% Change
|
My View
(see disclaimer) |
|
STOCK (All prices are in USD)
|
|||||
|
51.63
|
197.92
|
1/25/13
|
283%
|
HOLD
|
|
|
47
|
193
|
11/13/13
|
311%
|
BUY below 175.
|
|
|
77.18
|
264.53
|
12/12/13
|
243%
|
HOLD
|
|
|
311.73
|
1893.63
|
4/12/14
|
507%
|
HOLD
|
|
|
67.28
|
169.45
|
2/21/16
|
152%
|
BUY
|
|
|
26.33
|
21.37
|
8/20/17
|
-19%
|
HOLD
|
|
|
206.96
|
213.17
|
3/18/18
|
3%
|
HOLD
|
|
|
36.53
|
24.74
|
5/28/18
|
-32%
|
HOLD
|
|
|
14.04
|
21.69
|
7/4/18
|
54%
|
HOLD
|
|
|
26.13
|
20.65
|
9/18/18
|
-21%
|
BUY
|
|
|
134.81
|
300.15
|
11/25/18
|
123%
|
HOLD
|
|
|
297.57
|
367.32
|
1/6/19
|
23%
|
HOLD
|
|
|
17.66
|
19.39
|
2/17/19
|
10%
|
BUY - Accumulate
|
|
|
45.89
|
40.31
|
3/17/19
|
-12%
|
BUY - Accumulate
|
|
|
9
|
7.82
|
4/18/19
|
-13%
|
BUY - Accumulate
|
|
|
64.66
|
72.53
|
5/26/19
|
12%
|
BUY
|
|
|
4.66
|
4.66
|
6/30/19
|
0%
|
NEW ADDITION
|
|
|
ETF
|
|||||
|
139.1
|
171.39
|
8/16/15
|
23%
|
HOLD
|
|
|
77.76
|
110.2
|
8/16/15
|
42%
|
HOLD
|
|
|
MUTUAL FUND
|
|||||
|
11.46
|
20.3
|
3/1/13
|
77%
|
HOLD
|
|
|
47.25
|
78.74
|
2/2/14
|
67%
|
HOLD
|
|
|
59.45
|
117.21
|
12/20/14
|
97%
|
Accumulate
|
|
|
MCDFX
|
12.37
|
16.29
|
12/9/15
|
32%
|
HOLD
|
|
9.05
|
15.84
|
1/15/16
|
75%
|
Accumulate
|
|
|
37.32
|
71.43
|
3/20/16
|
91%
|
Accumulate
|
|
|
43.66
|
56.48
|
9/24/17
|
29%
|
Accumulate
|
|
|
11.72
|
12.14
|
10/21/18
|
4%
|
HOLD
|
|
Positions
CLOSED since last Blog
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.
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