At Least We Didn’t Trade Away Our Advantage for 23 Blankets and Some Wampum
Am I ticked? Truth is I am mostly just relieved that we have some level of entente for a few weeks. I don’t believe that Trump who is a lover of drama will take this reality TV show off the screen for too long. Perhaps this is the art of the deal; reel the fish in and then give it more line to tire it out. The problem is I am now not sure who has who on the line. For a moment, I thought we were on the boat and China was in the water. Perhaps, if there is some goodwill coming out of China in the next few weeks, will we hear about more tankers carrying American crude, gasoline, and LNG docking in China? Will China approve the Mellanox (MLNX) acquisition by Nvidia (NVDA)? Will it announce Visa (NYSE:V), Mastercard (NYSE:MA), and American Express (NYSE:AXP) approvals to operate in China without JVs?
We have not heard about these items. If we don’t, then the chances of real progress in phase 2 are just fairy tales, and we are in the water, not the boat. Right now, it makes sense politically for Trump to get some business for the farmers to bolster the Midwest vote. But who is this really benefiting? The Chinese need our hogs. I mentioned this last week. Most of the world’s hog supplies have been ravaged by African Swine Fever. It is highly lethal and highly contagious. It has already wiped out nearly 60% of Chinese pork. it is also devastating in many regions of European and Russian hog supplies. ASF is lethal to 90% of those infected. There is even news that ASF has reached the Koreas, destroying what little pork population the NoKos have. Chinese unrest over food costs is a very real concern as is unrest in Hong Kong.
So President Xi is arguably even more vulnerable than Trump, even though Xi famously “President for Life”. Why else did the communists overreact to a tweet of one NBA General Manager Daryl Morey (Who?) in support of Hong Kong? China State TV halts all NBA broadcasts and a loss in sponsorship of the NBA by major Chinese companies. One would think that the US would hold out for more than some hot air about currency manipulation and intellectual property rights. But as Bloomberg points out, some of the stickiest issues remain quite sticky: China’s alleged IP theft, the forced transfer of tech secrets, and the unusually generous subsidies it hands out to domestic companies are still there. Don’t get me wrong. I am happy that we aren’t jumping up tariffs again this week. Stability is good for the stock market, and the December deadline is still on the calendar. So what am I ticked about?
This is the same friggin’ deal that was on offer in February. Look at all the chaos and agita this to-ing and fro-ing has created. Maybe that was the point, maybe that is how we get to phase 2. Maybe, maybe not. My take is this is a process that will outlast this president and maybe even the next. This week I commented that we may be seeing a trial separation going on between the two powers. Right now that title “We May Well Be Seeing The Divorce Between China And The U.S. – Perhaps A Trial Separation Will Do The Trick” hasn’t aged well; it may just happen – eventually. I am thankful and hopeful that we can at least get on with trading stocks for the next several weeks. Let’s hope there aren’t more sudden moves…
Stocks for the Long Term
As promised, I will now feature a few long-term investment ideas every Sunday.
Wells Fargo (WFC) reports this week as do a bunch of other big banks. I think WFC is finally in an interesting place, with the hire of Charlie Scharf who has demonstrated abilities in Fintech. WFC has a lot of levers to pull and under a growth-oriented CEO focusing on new products and new initiatives, it could grow revenues. It currently gives a 4.2% dividend. I would wait for the earnings report before investing. The CEO will likely “Kitchen Sink” the report and take as many write-offs as possible.
Kinder Morgan, Inc. (KMI) has been in on my long-term investment list for years. As far as this quarter is concerned, KMI will likely beat estimates. Rising exports in crude, distillates, and LNG will boost those earnings. KMI recently completed (September 25) and already operating a new pipeline, bringing more crude from the Permian Basin. That new volume is not in the estimates; also the rising nat gas demand through LNG as well. For the purposes of the long-term investor, the concern is to the extent of how this supports current dividends and the ability to raise dividends in the future. In my opinion, the consumption of oil and other hydrocarbons will be growing steadily for at least the next 10-15 years. Therefore, KMI is an excellent long-term investment, regardless of whether it beats earnings estimates this week. KMI is dividend is currently at 5%. That dividend is safe and likely to be raised over time.
Stocks to Trade
Apple (AAPL) shares climbed 2.66% to hit a record high. With Friday’s gains, Apple is up around 50% year to date. When big-cap stocks break out of a long-held trading range to break to all-time highs, it tends to move in that direction strongly. I have used this quote from Legendary chart analyst Louise Yamada makes the case for “The bigger the base, the higher in space.” So let’s look at a chart and do some casual calculations to see how high AAPL can fly. Before we start let me say AAPL is, of course, a long-term investment as well.
In the above chart, I put in some lines of where I see the base, and the previous high. I discount the December drop since that drop was, in my opinion, a “Flash-crash” type event. So to my eye, AAPL has some 50 points of upside possible. Of course, that isn’t happening tomorrow, but 270-280 over the next 18 months is possible. You’ll see an analyst upgrade of AAPL with a price target of 260, and I wonder if the analyst took a peek at the chart as well.
Roku Inc. (ROKU) surges
ROKU surged 4.71% after Citadel Securities disclosed a 5% stake in the streaming-device maker. Roku also got a boost from an RBC Capital Markets upgrade. In my opinion, ROKU does have more upside, but I think it’s gotten a bit ahead of itself. If you got long via options and you believe the stock is going higher, you can move the call spread up and out. I closed out my call and am waiting for a pullback to possibly get back in.
Stock Picks – Long Shots
Pluralsight (PS) last month saw insider buying and of late a slew of upgrades. Looking at the news flow, PS is being sued by everyone and their cousin. Here is a table of the insider buys. I am sorry I didn’t flag it, but I did notice the upgrades so I took another look…
Gary L Crittenden, Director
17.11 – 17.11
Terrell Karenann K, Director
17.10 – 17.10
Stewart Bonita C, Director
17.15 – 17.15
Director and Beneficial Owner
17.19 – 17.19
I think PS warrants a position on our watch list. I think it belongs with the Cloud Services list alongside Workday (WDAY), and also in the Small Business Champions list. The chart looks great, and the above chart is forming a “Cup and Handle” pattern – very bullish… Human capital is becoming a precious resource, understanding the potential of your workforce and training them for new technology, standards and methods is valuable. Small businesses’ biggest challenges are hiring qualified workers, and with cost-effective, cloud-based training solutions, they can compete with the big boys. Let me qualify that assertion by saying that I don’t know if they are being embraced by small- and medium-sized businesses, it is just a logical conclusion. PS had a bunch of upgrades since August and with the insider buying. I think it’s an interesting but pretty speculative play.
Bed, Bath & Beyond (BBBY): When there is a lot of excitement about a stock, I tend to want to go in the other direction. The new CEO at BBBY does have me thinking that it could have more upside. Telsey Advisory know retail, and it already had a 14 PT on it when it was barely double digits well before this news. For it to raise to 16 (see below), now that has my attention. In late April, a group of activist investors – Legion Partners, Macellum Capital Management, and Ancora Advisors – released a brutal presentation slamming Bed Bath & Beyond’s leadership. As a result five directors stepped down in April, before Temares followed suit in May.
The company announced this Wednesday that Mark Tritton will serve as Bed Bath & Beyond’s next CEO, shortly after news broke that Tritton would be leaving his post as Chief Merchandising Officer at Target (NYSE:TGT). Tritton has been credited with the turn-around at Target, though it took several years at Target to fully regain its leadership role among retailers. Long-term readers will know that I believe the CEO can make a tremendous difference in the fortunes of a stock. I ascribe to the “Jockey, not the Horse” matters, and the fact that Tritton wants to be compensated largely in shares is a very good indicator that he believes he can make things happen. While BBBY has a 7% dividend, in no way is this a “Long-Term” investment in the traditional way. I would not be surprised if Tritton cuts the dividend severely. On the other hand, this is not a day-trade. In fact, BBBY might have some selling coming in, now that the news about the new CEO is out. So maybe wait for a pullback and consider this a long speculation, not for the retirement account, but you’re going to need some time to build a position.
Netflix (NFLX): Credit Suisse Group begins coverage at a Buy with PT $440.
My Take: NFLX reports on the 15th. At this point, you should wait for the earnings report and not expect a jump to $440. NFLX is up like 30 points going into earnings, so it may just sell off no matter how good the domestic subscription numbers are. If you bought in for a trade, you may want to take some profits tomorrow or hedge.
Morgan Stanley (MS): Upgraded by Sandler O’Neill from Hold to Buy.
My Take: I respect Sandler O’Neill on banks. That said, if MS is going up on earnings so is WFC. I even like GS better, because of its new relationship with AAPL powering the Apple Credit card. So GS for a trade over MS…
Match (MTCH): Upgraded by Oppenheimer Market Perform to Outperform PT $89.
My Take: I think MTCH is a buy all day long. The lawsuit by the FTC and the competition from Facebook (FB) are just nits.
Bed Bath & Beyond: Upgraded by Telsey Advisory Group Market Perform to Outperform PT from $14 to $16.
Apple: Upgraded by Longbow Research Neutral to Buy $260 PT
Square (NYSE:SQ) was upgraded by analysts at Susquehanna Bancshares Inc. from a “neutral” rating to a “positive” rating. They now have a $77.00 price target on the stock. 24.1% upside.
My Take: SQ is a disrupter that has yet to be completely understood. It is not just about payments; it is a Small Business Hero in that it is a source of funding that the small mom and pop shops desperately need. I think SQ goes higher than $77. I think it goes back to $100. There was another broker that downgraded SQ with a $49 PT, and they just see it as a payment provider; they don’t get it.
Workday was upgraded by analysts at Goldman Sachs Group from a “neutral” rating to a “buy” rating. They now have a $223.00 price target on the stock. 27.9% upside.
Johnson & Johnson (NYSE:JNJ) was upgraded by analysts at Sanford C. Bernstein from a “market perform” rating to an “outperform” rating. They now have a $155.00 price target on the stock. 18.1% upside.
Twilio (NYSE:TWLO) is now covered by analysts at the Royal Bank of Canada. They set an “outperform” rating and a $135.00 price target on the stock. 22.4% upside.
Cloudflare (NYSE:NET) is now covered by analysts at Needham & Company LLC on Tuesday. They set a “buy” rating and a $22.00 price target on the stock. 33.6% upside.
My Take: NET is an interesting Internet services provider. $22 PT is a pretty aggressive level. I respect Needham, but if you get 10-15% on a trade, don’t wait for 30%
Roku was upgraded by analysts at Macquarie from a “neutral” rating to an “outperform” rating on Wednesday. They now have a $130.00 price target on the stock. 6.9% upside.
To sum up: I think we are going higher this week, if just for putting the trade stuff behind us. I suspect that this good feeling will carry us through the earnings season. That said, I would be very careful about putting on new positions going into a company’s earnings report. I suspect that CEOs and CFOs will be very wary of forecasting aggressive earnings for the fourth quarter. Many of the names that I am enthusiastic about, like WDAY and TWLO or a ServiceNow (NOW) or Okta Inc. (OKTA), will “sandbag” their earnings report and pull back analyst expectations. This is a dance that happens every quarter, but I think this time, executives have legitimate concerns about growth. I think contrary to predictions, Q3 will show positive earnings and that overall global growth will have bottomed going into the new year. But recency bias will set in and all this dour noise will wend its way into projections. So what to do? Keep an eye on the companies reporting earnings this week. Tomorrow is largely quiet on the score. If you are speculating in some names that are reporting, and if you have a full position, consider lightening up a bit, or sell some out-of-the-money calls against your position. You can use that to help fund a Put option to protect the downside. Additionally, if you are interested in a name wait for the earnings report, if they blow expectations out of the water, you can likely jump in and scalp some points. If on the other hand, I am correct, a lot of good names might be going on sale; wait a few days and look to pick up some shares.
As far as my activities, I went long calls on Tesla (TSLA). As I charted out this week, TSLA will gain momentum once it firmly breaks out above 250. I got in a little early, and it reports next week, so I suspect the stock runs up into next week. I will look to reduce my position before earnings
Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long TSLA and short UBER. I expressed these trades by Call and Put options respectively