Thursday, October 30, 2014

About Face

Just as fears of widespread Ebola virus swarmed the stock market earlier this month, the acceptance that the illness might be contained has returned the market to its previous levels. Put simply, stocks fell 6% in the first two weeks of October and then rallied 6% over the last two weeks.

This type of zig-zag recovery masks a market that is really flat overall. After the volatility, when the smoke clears, we are right back where we started.  It will be difficult for the market to push too much higher after this latest advance. We are still in a “long dry road”, which is a metaphor for a begrudgingly slow advance for stocks. We are also in a very slow economy with considerable economic headwinds throughout the rest of the world.

The brightest opportunities for investment appear in the industrial sector of the stock market. Other areas don’t look nearly as attractive.  Consumer spending is likely to be muted. Job growth and wage increases are barely happening according to most recent data. The principal engine of retailing, Amazon, reported disappointing sales this month. This suggests many consumer related companies will see little progress in their stocks. In addition, financial companies face headwinds from low credit spreads. Social stocks and story-stocks like Tesla have already been played out and investors have been setting expectations too high.

The industrial sector, instead, retains considerable value based on the business outlook for these companies. Companies like Cummins, Chicago Bridge and Iron, Eaton, Parker Hannifin, Paccar, and United Technologies are representative of these companies. We plan to add to our holdings in these stocks.

Overall, we plan for a flat market for the remainder of this year. This will emphasize stock and sector selection in order to make solid gains in the fourth quarter. 

Friday, October 3, 2014

Seeking a Cornerstone

Wanted: Investment manager seeks fun loving stock that can continuously travel to new heights, no matter what. This stock must be able to overcome market corrections from political turmoil.  It also needs to gracefully shrug off any general economic worries. This stock must love to frustrate all of its doubters and maintain an unwavering sunny disposition despite all circumstances. If any possible disappointment should happen, this stock must be able to recover quickly so that no one will remember why it went down in the first place. If you are a candidate for this request, please make yourself known in a clear and concise manner.

The flattish stock market that we are experiencing seems tethered to the dock. After a sell off early in October, the S&P 500 was only up 6% for the year and the DOW was virtually unchanged. The market makes very little progress in either direction.

In order for portfolios to grow, it is imperative that investors dig out and discover standout performers. This might imply singling out small companies that can grow to magnificent proportions from relative obscurity.

Or, as is more often the case, an enterprise that is already a juggernaut simply runs away from the field and catapults itself to new heights by generating more rapid growth than anyone expects.

Such is the case at Netflix which has been the market’s number one stock over the past two years for all stocks at a relevant market capitalization. In spite of this gain, Netflix may be just scratching the surface of its potential.

Netflix is known primarily for streaming movies made by other companies. It has shaken up the TV world by offering original television content  like smash hits “Orange is the New Black” and “House of Cards”.

Most recently, Netflix has announced a foray into making its own original movies. A sequel to “Crouching Tiger, Hidden Dragon” will be a Netflix property. In addition, Netflix has signed Adam Sandler to make four feature films. Netflix’s plans include a suite of pay per view offerings at $5.99 that would be a significant increment to its $7.99 monthly service.

Netflix reached 490 per share in September before succumbing to profit taking. It dropped as low as 437 this month before recovering slightly.

In the months ahead, this company should regain its royal state as investors become more convinced about its bright prospects. Netflix should be a cornerstone for our investment portfolios and we plan to buy these shares this quarter.

Thursday, September 11, 2014

What are we doing with Alibaba?

Next week marks the highly publicized IPO launch of Alibaba. Alibaba is an ingenious blend of Google and Amazon in the grand ecosystem of China. It provides e-commerce along with corralling revenue from paid search. Its success story rivals the most successful technology companies that have ever come to the marketplace.

Alibaba plans to offer 320 million shares with an initial indicated price range of between 60 and 66. Facebook, by comparison, offered 421 million shares at 38 on its initial day. At the estimated price range, Alibaba would rank in size as one of our top 20 largest companies by market capitalization, ahead of IBM and Amazon, and trailing Facebook by a slight amount.

Alibaba is a profitable engine. According to its accounting, they generated $1.7 billion in profits from $6.5 billion in sales last year. They boast a staggering 48% operating margin.

On any IPOs like this, we try to gain as many shares as we can for our clients. Since the size of this offering vastly exceeds GoPro, which came out earlier this summer, it is likely that our clients will be able to participate.

Will Alibaba provide profits ? Yes, most likely. The enthusiasm for this offering is enormous. The picture is more murky over the longer term. Alibaba faces intense competitive pressures from the likes of Baidu and Tencent as it seeks to protect its fat margins and cash flows.

We plan to invest in this company during this IPO phase/craze. At this point, our intentions would be to hold it only for the short term, which means, only for a few weeks.

Friday, September 5, 2014

Building a better portfolio

A key component to “making assets thrive” is investing in companies that are truly representative of the best in industry. These businesses are fascinating, captivating, and are changing the landscape of business. Examples of these are Facebook, Linkedin, Netflix, and Tesla. These have been premier stocks over the past two years. Naturally, companies like these are superb investments for a portfolio.

Buying and holding long term winners remains challenging. Often times, a stock like Tesla, for example, will appreciate 50% only to retreat 25%. Then, you ask the question, will it recover or fall further?

Our aim is to markedly improve our work at finding solid long term holdings for our client portfolios. This means a laser focus on research which can determine which stocks are worth holding for the long pull. These would be stocks that we would intend to hold through market fluctuations. This period would ideally exceed one year. We also want to identify these core holdings and communicate them to you. Your expectation should be that these stocks will be a cornerstone of your long term investment gains.

One of these stocks is Gilead Sciences, a drug research firm. Among other products, Gilead’s main drug is Sovaldi which treats Hepatitis C. The market for this drug is huge and growing. The World Health Organization estimates 130-150 million people are infected with this virus. Gilead estimates sales of this drug alone to be north of $14 billion in 2014 following its approval in December 2013. Meanwhile, total companywide sales for 2014 are estimated to be north of $24 billion. This is up from $11 billion in 2013! The impact of the products from this accelerating drug company could be far reaching. In the category of breakthrough medicine, Gilead holds the characteristics of a good long term investment.