Shesa's NOVEMBER 2019 Investment Blog
November 10, 2019
NOVEMBER 2019 - INVESTMENT BLOG
By Shesa Nayak
U.S. Stock Market Update
The stock market stormy season seems to have gone! November has started with a bang. All major stock indexes DOW, NASDAQ and S&P 500 have hit their all-time high in last few days. Interestingly, U.S stock market momentum is pushing all other world stock market indexes for positive return despite their lackluster economy. Meanwhile, third quarter earnings season is underway and 71% of the companies have already reported their earnings. The notable good earnings came from some of the big technology powerhouse like Apple, Microsoft, Facebook, Intel and Alibaba. Overall, earnings from corporate America have been much better than expected. The Federal reserve further reduced 0.25% interest rate on the last FOMC meeting on October 30. This was third consecutive interest rate cut by Federal Reserve this year.
Last Friday, president Trump said that U.S and China are working to finalize a “phase one” trade deal which will be signed by him and Chinese President Xi Jinping. He also said that U.S. has not agreed to scrap tariffs on Chinese goods, though Beijing would like him to do so and that a deal may not happen this year. This is contradictory to what China said about reduction of tariff. In my view, we should see some sorts of deal in next couple of months. This along with good earnings from corporate America has taken the stock market to new high despite mixed economy data. Furthermore, we have entered into the period of best six months of stock market (NOV – APR). There are few more catalysts pointing towards further momentum in the stock market. So, can we expect the market to continue making new highs to end the year with a bang? Or shall we see the fate of last December where stock market was decimated. I will share my views but before that let’s take a look to the stock market indexes.
Major Economy News
| Indexes | 12/24/18 (LOW) | Close (12/31/18) | Close FRI (9/6/19) | Change in 2019 | % Change in 2019 | All Time High | Diff % |
| DOW | 21792.2 | 23,327.46 | 27,681.24 | 4,353.78 | 18.66 | 27,774.67 | -0.34% |
| S&P 500 | 2351.1 | 2,506.85 | 3,093.08 | 586.23 | 23.39 | 3,097.77 | -0.15% |
| NASDAQ | 6192.92 | 6,635.28 | 8,475.31 | 1,840.03 | 27.73 | 8,483.16 | -0.09% |
| BTK | 3890.37 | 4,220.85 | 4,582.68 | 361.83 | 8.57 | 5264.81 | -12.96% |
| NBI | 2816.54 | 3,251.08 | 3,469.61 | 218.53 | 6.72 | 4165.86 | -16.71% |
Major Economy News
Fed again cuts Interest Rate by 0.25%: On 10/30, as expected the Federal Open Market Committee (FOMC) lowered the benchmark funds rate by 0.25% to a of range of 1.5% to 1.75%. Fed also indicated that it may pause rate cuts from here and possibly wait for inflation to strengthen before making the next move. The "Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for federal funds rate,” the statement said. The Fed cited U.S. gross domestic product growth below 2% and ongoing trade war concerns as reasons for the latest cut. It wants to help stimulate economic growth.
GDP Growth
U.S. economy grew by an annualized 1.9% in the third quarter of 2019, beating market expectations of 1.6% following a 2.0% expansion in the previous three-month period.
U.S Job Growth top expectations
The labor department reported last Friday that nonfarm payrolls rose by 128,000 in October easily beating market expectations of 89,000. This is good news for the economy.
Unemployment Rate and Hourly wages
The US unemployment rate increased to 3.6% in October 2019 from 3.5% in September in line with market expectations. Over the month, the number of unemployed persons increased by 86,000. However, the average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents (0.2%) from the previous month to $28.18 in October 2019.
U.S ISM Purchasing Managers Index (PMI)
The Manufacturing PMI rose to 48.3 in October 2019 from a decade-low of 47.8 in September but missing market expectations of 48.9.
ISM Service Index: The Institute for Supply Management reported Tuesday, 11/5, that its service index grew to 54.7% last month, up from 52.6% in September. Any reading above 50 signals growth and less than 50 signal contraction of economy.
Housing starts: On 10/17, the Commerce Department announced that housing starts declined 9.4% to 1.256 million units in September. Single-family housing starts actually increased 1.2%, but the pace of growth has slowed a bit from the 12-year high in August.
Industrial Production: Fed announced that industrial production declined by 0.4% in September, which was worse than the economists’ consensus estimates of a 0.2% decline.
Vaping age to be raised to 21: President Donald Trump said Friday that the administration plans to raise the vaping age to 21 “or so” as part of its plan to curb teen vaping. As you may be aware, vaping illness has caused 39 fatalities across several states in last few months. President Trump also suggested that the administration may be backing off plans to ban flavored e-cigarettes.
Current Market Situation - should we expect the rally to continue?
Historically the month of September and October are being volatile. And this year was no exception. The trade negotiations with China continued and a possible Phase One agreement. China wants more trade talks before committing to the terms laid out in Washington. A few days ago, the Chinese Ministry of Commerce and U.S trade representative had a phone call and it was reported that both sides had a “serious and constructive” discussions on “core” trade points and talked about arrangements for the next round of talks to resolve outstanding issues. If things go well, it can be signed sometime in probably in November. The BrExit still keeps lingering as the agreement are hardly “done deals.”, and the House of Commons offered little detail whether Britain will finally exit the European Union. Adding to the geopolitical uncertainty, Hong Kong is descending into violent chaos, and hostilities in Syria and Middle East never cease. The investors keep debating on “how long this longest-running bull market can extend itself?”. While much of the developed world outside the U.S. is struggling with economic contraction, Europe officially in recession, the U.S. continues to do well despite some grey spot in the economy.
Notwithstanding to Geopolitics and trade tensions the U.S stock market keep going up. There is some impetus that keeps pushing the market up. What are those? Let’s see:
- Interest rate cuts: This is helping the economy by making money available cheap. The Fed is doing all it can to boost stock prices. It’s really trying to keep this bull market well and alive. And that way it’s keeping the economy alive.
- Fed seems to be out of way: Unless there is some good uptick in inflation it’s unlikely that Fed is going to hike interest rate again. Hence, this is a green signal for the stock market to move further up.
- The earnings have been better than expected: The S&P 500 and NASDAQ hit an all-time high this week despite the trade war and other concerns. As I said earlier, 71% of the S&P 500 companies have reported earnings, out of which 76% of companies have reported a positive EPS surprise and 61% of companies have reported a positive revenue surprise
- Trade Deal: Some trade deal can be expected in next few weeks or months. It may not be great deal per se but U.S election is approaching next year, and president Trump will try to cut a deal with China. In my view, the trade deals may happen phase by phase rather than everything at once.
- Three consecutive rate cuts: When it has happened in the past the stocks have returned 20% in 12 months on an average, following three consecutive rate cuts. It has happened in 1975, 1996, 1998. Now we have the same opportunity in 2019.
With all the aforesaid facts, we can still expect the stock market has enough fuel to continue the rally. So, it’s in contrast to what people were so concerned about “bear market”. As long as stock prices keep moving up, it’s still a good time to buy stocks. Now that NASDAQ and S&P 500 have hit new high those are bullish signal. One key sector missing the rally is biotech. Last Friday, it had some good run, I believe that there will be sectorial rotation and biotech sector should bounce back. As long as we are in the uptrend market can still go up. There could be some consolidation, but we can see the trend to continue till the end of the year provided U.S and China deal is signed. But it’s too early to call for a year-end rally though I am optimistic that we may end the year on a high note. As experienced traders say “a market top is a process, while a market bottom is an event.” In other words, the stock market tops typically take about 6-12 months to form, while stock market bottoms happen all of a sudden after a stormy sell-off and difficult to know that the market bottomed. After that storm the index may never revisit those lows again. If you recall, S&P 500 hit 666 closed at 676.53 points, DOW closed at $6547.05 and NASDAQ closed at 1268.64 on March 9, 2009. And see where these indexes are in 10 years!! Probably we may never see those level again barring some disasters..
Should we try to time the market?
Is timing important to Buy a Stock? Absolutely! Buying the stock in right time is very significant. As there is a saying “buy low, sell high”. Buying the right stock at right time is extremely important. But nobody can do that with perfection despite how genius you are and how much research you do. That’s the reason we need to do dollar cost average by buying stocks at different time and holding it for a reasonable period to get better return on investment. Sometime it needs lot of patience and emotion to keep holding a loser. But if the company is good then in most situation it may bounce back after a period of quit time. If there is still no bounce and capital is on hold then we may have to pull the trigger to find a better alternative stock/equity. Moreover, my main point here is about “timing the market” meaning timing the entry and exit from stock market. Here are some of my thoughts:
Avoiding all-in or all-out
The way it’s difficult to time to buy a stock the same way timing the market is extremely difficult. Nobody knows the market top or market bottom. Hence, selling everything from the Portfolio or having no funds to buy when opportunity arises may not be a good strategy. I have written a few times about the pros and cons of this strategy on my earlier blogs. Today, I will bring a point where many investors ask, “what if I know the top or bottom?”. Frankly, there are very good chance that we may be wrong in our perception. Most of the pundits fails on this approach. Because it's very difficult to know when the moving wheel will stop, and stocks will start trending down. That happens because the market may provide a lot of "false negative" signals far in advance – like current slowing of global growth, an inverted yield curve in July and August, lower earnings and high valuations of stocks, so on and so forth. These are some indicators, but nothing is written down on the stone that market will fall. Similarly, the same follows when we go upward in the market. If we take that perception and exit from the market, in other words “sell all the holdings” and the market further goes up. So, obviously we are losing immense upside potential.
Secondly, it’s difficult to predict the bottom and when exactly to get into the market! You may think that it was just a bounce and wait for market to come down and we can keep waiting but market may start trending up, up and away. Based on the research, U.S. equities have returned about 6.5% per year – after inflation, so missing a market rally may be expensive. Add to that, if you have cash without investing, then that’s an average loss of more than 3% per year in the purchasing power of cash. It would be worse if there is higher inflation. Many times, the market-timers miss out on big recoveries far too often because the data that got them out of the market still looks bad, but the stock market keeps going up. The current market situation has some resemblance to that scenario. Other way round, knowing when to buy can often be harder than knowing when to sell because markets tend to recover before economic data points actually improvements. A market-timing strategy where you sell most of your portfolio could be appropriate if there is an urgent need of money or when somebody want just to preserve existing wealth rather than capital appreciation.
Is U.S - China Phase-I deal is DONE?
U.S and Chinese delegation team had discussion to reach to a deal on the week of October 10th. They are further working on drafting the agreement with greater details. The paperwork is being prepared and hopefully signed sometime this year. The timing keeps changing, so it’s unpredictable when it will be signed unless it’s done! Based on current understanding the phase-I deal is expected to be that China plan to buy more American farm products. Also, the proposed hike on existing tariffs will be suspended for now which was supposed to kick-off from October 15. Even if phase one deal is signed, I do not expect too much. Why I say this is because none of the structural issues were addressed during the talks e.g. IP theft, cyber hacking, Huawei’s blacklisted products, forced transfer of technology to gain access to markets, selling of products and commodities at below market rates to endanger U.S. companies. I do not think there will be any tariff reduction which have already been implemented in last few months. So, I am not sure how much effective the trade deal will be even if it’s formally signed. It seems to be more of a political show for both president Trump and Xi Jinping. Since U.S election is just little over a year, China could be looking to delay the deal to get more clarity on U.S election. Because it’s extremely important for president Trump to show something meaningful for his next election and for that matter “trade deal” is very significant. As I have said times and again, economy and stock market are Trump’s strength, if it goes down, then it could be troubling for him. As such, I hope and wish that he should do something substantive to keep the stock market zooming but we will see how it goes.
Major Stock Market Performances so far in 2019
Indexes
|
52 week (% age change)
|
YTD % Change
|
DOW
|
6.51%
|
18.66%
|
S&P 500
|
11.22%
|
23.39%
|
NASDAQ
|
17.29%
|
27.73%
|
China Shanghai Index
|
14.06%
|
18.86%
|
India BSE Sensex
|
14.69%
|
11.80%
|
Japan Nikki
|
5.13%
|
16.87%
|
Hongkong Hang Seng
|
8.00%
|
6.99%
|
Germany DAX
|
14.76%
|
25.28%
|
London FTSE
|
3.06%
|
9.38%
|
Source: Morningstar, Wall Street Journal
Sectorial Performances since Year-to-Date (U.S Stocks)
IT
|
38.90% (TOP)
|
Industrials
|
26.91%
|
Financials
|
25.31%
|
Consumer Staples
|
22.55%
|
Real Estate
|
22.17%
|
Telcom
|
22.22%
|
Consumer Discretionary
|
19.69%
|
Utilities
|
16.72%
|
Health Care
|
9.98%
|
Energy
|
5.82%
|
Source: CNN Business
Q3FY19 Earning at a Glance
Amazon (AMZN): On 10/24: Amazon topped its top line revenue guidance but failed on bottom line.
Revenue: $70 billion vs. $68.8 billion.
EPS: $4.23 vs. 4.62 (below expectation).
Q4 revenue guidance: $80.0 billion to $86.5 billion, much below analyst estimate of $87.4 billion. Usually, Amazon bounces back during holiday season so I still think the stock will come back. All in all, Amazon has always been a good long-term investment.
Apple (AAPL): On 10/30, Apple beat Wall Street’s expectations on revenue and earnings and provided a better forecast for next quarter despite lighter iPhone sales.
Revenue: $64 billion vs. $62.99 billion estimate.
EPS: $3.03 vs. $2.84 estimate.
Q1 guidance: $85.5 billion to $89.5 billion vs. $86.92 billion estimate.
iPhone revenue: $33.36 billion vs. $32.42 billion estimate.
Services revenue: $12.51 billion vs. $12.15 billion estimate.
Facebook (FB): Facebook has turned to its stories features for growth as it focuses more on new areas and less on existing core News Feed.
Earnings: $2.12 vs. $1.91 per share.
Revenue: $17.65 billion vs. $17.37 billion analysts forecast.
Daily active users: 1.62 billion vs. 1.61 billion expected.
Amarin (AMRN): On 11/5 the company came with another strong quarter. The company beat both on top and bottom line. Revenue increased 103% to $112.4 million. The company came with one cent profit whereas Analysts were expecting 4 cents loss! The AdCom meeting is coming on 14th November followed by the results from their Evaporate study on 17-18th November. Hoping things should be good but it’s always better to be careful, nothing can be predicted with certainty! This week and going forward it should be exciting to see how the stock goes with many catalysts expected ahead..
Alibaba (BABA): Delivered another solid quarter.
Revenue: $16.7 billion vs. $16.67 billion, Revenue grew 39.7%.
Earnings: $1.83 vs $1.54 beating analyst estimates handily. Earnings rose whooping 260%.
Cloud computing revenue was up 64% to $1.3 billion. The company added 19 million active customers, bringing its total up to 693 million.
iQIYI (IQ): On 11/7 the company reported Q3 2019 adjusted loss of 70 cents per ADS beating analysts’ estimate of -74 cents. Revenue increased 7% year over year to USD $1.1 billion. The stock soared about 14% after the earnings. The company expect fourth-quarter revenues between $0.96 billion and $1.02 billion. I liked what the company said "we believe we are on track to improve long-term efficiency through disciplined spending and investment. Going forward, we will continue to drive shareholder value by further enhancing monetization and transitioning toward a more balanced content structure”.
Guardant Health (GH): On 11/7, reported third-quarter earnings. Total revenue went up 181% to $60.8 million comparing to same quarter last year. Net Loss was $12.8 million or $0.14 compared to $1.94 in the corresponding prior last year. Last Friday, the stock jumped $7.69, 12%. As I have said before, the major correction in its share price is not because of company’ fundamental, rather because of trouble at SoftBank which is a major investor in GH.
Square (SQ): On Wednesday, 11/6, the company reported adjusted earnings of 25 vs. 20 cents expected, up 92% compared to 13 cents last year. The adjusted revenue rose 40% to $602 million compared to 431 million last year. Both top and bottom-line topped analysts expectation.
Now let me discuss about my current month’s inclusion to my Blog Portfolio.
Baozun Inc. (BZUN)
Baozun Inc. is a leading brand E-commerce solutions provider in China. It’s business include all aspects of the E-commerce value chain comprising of IT solutions, store operations, digital marketing, customer services, warehousing and fulfillment. The company help other companies execute their E-commerce strategies in China by selling their goods online directly to customers or by providing services to assist with their E-commerce operations. Its business ranges from China’s largest online shopping platforms – Tmall and JD.com, social mobile shopping malls, official stores and off-line smart stores. It provides customized solutions to companies and build a communication bridge with customers. The company integrates cloud computing, big data, and AI technology to build a leading e-commerce technology platform. If you recall, I wrote about a similar company Shopify (SHOP) a few months ago and the stock has really done well. Can Baozun be like Shopify?
This company may not be exactly like SHOP but I see good future potential, but one limitation is that it’s a Chinese company. The on-going trade confrontations between U.S and China has become an entangle for not only for Baozun but also many other Chinese companies. Let’s see its business performances.
Business Performances: Baozun reported a strong second quarter earnings on August 21 and beat both top and bottom line. The quarterly sales were up 47% to $248 million earnings of $0.21 per share, up 47% from last year. Moreover, Baozun's results weren't just better than last year's quarter; both the top and bottom lines handily beat estimates from Wall Street analysts. In addition to top and bottom line the company also reported solid results beyond just the top and bottom lines. The total revenue generated from merchandise sales by merchants using its platform, increased 60%, Services revenue increased 47%. The number of major brand partners increased 31% to 212, Operating income increased 47%. For the next quarter (Q3), the company will report earnings on November 21.
Despite these good numbers, Bazuon stock has not really made significant up trend and it has been in a trading range between $40-50. The stock is currently trading at $42.48, which is 24.7% discount to its 52 weeks high of $56.47. I believe the concern of ongoing trade dispute between the U.S. and China could be a fact as most of the Chinese companies are facing the same challenges. However, these seems to be near-term concerns, not structural or long-term worries. Baozun has substantial room to grow as China's middle class grows and as more merchants and brands prioritize e-commerce as part of their business strategy.
Now let’s look into the company fundamentals. This is a growth company so there is not too much fundamentals to talk about. However, I will still provide some key metrics.
Fundamentals:
Market Cap
|
$2.65B
|
52 Week High
|
56.47
|
Trailing PE
|
72.00
|
52 Week Low
|
27.81
|
Forward PE
|
25.14
|
Total Cash
|
N/A
|
Price to Sales
|
N/A
|
Total Debt
|
N/A
|
Revenue / Sales
|
784.38M
|
Book Value
|
5.25
|
Quarterly Revenue Growth (yoy)
|
47%
|
Beta
|
3.2
|
Profit / Earnings
|
288.79M
|
Institutional holders
|
67.02%
|
Quarterly Earnings Growth (yoy)
|
82.5%
|
% Held by Insiders
|
2.40%
|
EPS
|
0.59
|
Return on Equity
|
14.85%
|
Moreover, Baozun's stock looks cheap, considering its growth rate. Shares trade for less than 26 times expected earnings per share for next year. The company has an excellent revenue growth of 82% and profit growth of 47%. That’s is fantastic! Let’s see how do they come for third quarter earning which is expected on 21 November.
Risks: As said before BZUN is a Chinese company, hence a lot of things depend upon how the trade negotiations between U.S and China goes. The trade deal is applicable for overall stock market, but it will have significant impacts particularly on Chinese stocks. It can be noted that most of its revenue are generated in China so it may not impact the company significantly. Moreover, most of the Chinese stocks are very volatile, hence one should buy the stock in a phased manner to mitigate risk.
A final thought
My approach on this stock is to use a portion for trading and another portion for long term investment. If it goes up 15-20% I can take some chips off the table and keep the remaining as long-term investment. I have seen many times that it goes to around $50 and comes back to $40-42 range. Now that Q3 earnings is scheduled for November 21, we can expect to go up and depending on the earnings it may either go up or come down. The overall fundamentals are good, but trade negations and forthcoming earnings are important to set the right direction for this stock. So, I am cautiously optimistic. I will not put no more 2-3% of my portfolio money.
Shesa’s Blog Portfolio (As of NOV 10, 2019)
Equity
|
Suggest Price
|
Current Price
|
Suggest Date
|
% Change
|
My View
(see disclaimer) |
STOCK (All prices are in USD)
| |||||
51.63
|
260.14
|
1/25/13
|
404%
|
Accumulate
| |
47
|
190.84
|
11/13/13
|
306%
|
BUY
| |
77.18
|
274.89
|
12/12/13
|
256%
|
HOLD
| |
311.73
|
1785.88
|
4/12/14
|
473%
|
BUY
| |
67.28
|
187.16
|
2/21/16
|
178%
|
BUY
| |
206.96
|
221.31
|
3/18/18
|
7%
|
HOLD
| |
36.53
|
20.49
|
5/28/18
|
-44%
|
HOLD
| |
26.13
|
19.52
|
9/18/18
|
-25%
|
Accumulate
| |
134.81
|
297.64
|
11/25/18
|
121%
|
HOLD
| |
297.57
|
291.57
|
1/6/19
|
-2%
|
HOLD
| |
17.66
|
17.48
|
2/17/19
|
-1%
|
BUY - Added more
| |
45.89
|
21.46
|
3/17/19
|
-53%
|
SOLD on 11/18 @15.41
| |
9
|
3.81
|
4/18/19
|
-58%
|
Accumulate
| |
64.66
|
62.45
|
5/26/19
|
-3%
|
BUY
| |
4.66
|
2.62
|
6/30/19
|
-44%
|
HOLD
| |
87.53
|
71.89
|
9/1/19
|
-18%
|
Long term BUY
| |
42.48
|
42.48
|
11/10/19
|
0%
|
NEW ADDITION
| |
ETF
| |||||
139.1
|
184.66
|
8/16/15
|
33%
|
HOLD
| |
77.76
|
121.34
|
8/16/15
|
56%
|
HOLD
| |
MUTUAL FUND
| |||||
11.46
|
20.52
|
3/1/13
|
79%
|
HOLD
| |
47.25
|
78.99
|
2/2/14
|
67%
|
HOLD
| |
59.45
|
117.11
|
12/20/14
|
97%
|
HOLD
| |
MCDFX
|
12.37
|
15.91
|
12/9/15
|
29%
|
HOLD
|
9.05
|
16.67
|
1/15/16
|
84%
|
HOLD
| |
37.32
|
72.33
|
3/20/16
|
94%
|
HOLD
| |
43.66
|
56.24
|
9/24/17
|
29%
|
HOLD
| |
11.72
|
12.09
|
10/21/18
|
3%
|
HOLD - Trim
| |
Note: Dividends are not adjusted on the price.
| |||||
Positions CLOSED since last Blog
Equity
|
Sales Price
|
Buy Price
|
Date Sold
|
Gain / Loss (%)
|
EXEL
|
19.85
|
26.33
|
10-Sep
|
-24.61
|
JKS
|
16.11
|
14.04
|
30-Sep
|
14.74
|
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 investment 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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