Preferred Picks

Depending on your views of the market and broader economy as a whole, you might be considering non-equity options right now. I maintain a ‘screener’ of about 40 preferred shares that I keep an eye on. Here is a quick update on a few of my current picks.

Wells Fargo Preferred ‘P’ (WFC-P) has 5.25% coupon rate, issued at $25 a share. It is currently trading for about an 8.4% discount at $22.90 a share, which gives it an effective return of 5.73%. Wells Fargo currently carries a BBB+ rating from S&P’s.

JPMorgan Chase Preferred ‘D’ (JPM-D) has a 5.50% coupon rate, issued at $25 a share. It is currently trading for about an 8.3% discount at $22.92 a share, which gives it an effective return of 6.00%. JPMorgan carries a BBB rating from S&P’s.

Barclays Bank Preferred ‘C’ (BCS-C) has a 7.75% coupon rate, issued at $25 a share. It is currently trading at about a 3% premium at $25.74 a share, which gives it an effective return of 7.53%. There are very few preferred with a yield this high, at such a small premium. Barclays is only carrying a BB rating. S&P defines the BB rating as below:

‘BB’—Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.

Offshore drilling industry takes a punch

Seadrill Ltd (SDRL) which I had recommended and added to in March of this year, is down about 11% since my additional purchase and post. The stock is down over 26% year to date, not counting the three rather large dividend payments (~9%). Things are worse over at Transocean Ltd (RIG), where they are down over 29% year to date. The picture is no prettier over at Ensco (ESV) down 21.5%, Rowan (RDC) down 24%, Diamond Offshore (DO) down a whopping 33% year to date. The industry as a whole is taking a pretty big hit.

Backlog, or lack of backlog in the current market, is often used as the gauge of future earnings in the offshore rig market. Currently the market is lacking that line of oil and gas companies looking to lock up rigs on day rate for the coming years. This is a cyclical industry, and the stocks may have further to fall before it picks back up.

I still think Seadrill (SDRL) is a hold, and it might be a decent buy opportunity for those looking to make a contrarian play. That said, the market as a whole is very near its highs, and this sector is struggling to avoid 30% year to date decline… Proceed with caution.

Apple Rallying to 52-Week Highs

Should Apple Really Be Rallying to 52-Week Highs After Earnings?
By Jon C. Ogg July 23, 2014 11:00 am EDT

Apple Inc. (AAPL) feels like its stock is defying history and logic after earnings. The company’s third-quarter report was bland enough that it should have allowed traders and investors a chance to take profits. Yet the stock is rising and has quite amazingly and surprisingly hit new 52-week highs, so we wanted to take a look at what is driving the cart here.

For starters, the earnings report had at least some disappointments. iPad sales were soft, yet Tim Cook said he wasn’t concerned. By our take, international sales were weak as well, with sequential slowing in China, Japan and the rest of Asia being more than expected.

Now consider this. Since Apple’s last earnings report, the stock was already up 27% going into Tuesday’s earnings on a close-to-close basis. It looked as if Apple was priced for perfection and nothing short of that. The stock had peaked just above $97 last week, but even after the seven-for-one split there had hardly been any serious pullbacks. Usually you see some pullback going into or slightly after an effective split date formally enacts a split. Not so here.

One solid metric was that Apple’s margins continued to rise. This is even after Tim Cook was showing strong R&D spending, and Apple has also become an acquirer. The real focus here seems to be that investors are positioning themselves for a very strong iPhone 6 launch later this year. An order for 80 million units of the larger format phone was reported.

As far as all of those old analyst price target hikes, the consensus price target is almost $101, now that analysts have raised and raised their price targets. The latest news from analysts was that the new street-high price target is now $135 for Apple. This is a significant reversal of a company that was considered partly lost as recently as a few months ago.

One driving force is that Apple shares appear to have been under-owned by institutions. Whether or not that remains the case, it seems hard to believe, but Apple’s share performance after earnings was impressive. A gain of nearly 3% to $97.45 (a new 52-week high to boot) in mid-morning trading on Wednesday should speak for itself when many Apple watchers might have expected the stock to see profit taking.

Stay tuned.

http://247wallst.com/technology-3/2014/07/23/should-apple-really-be-rallying-to-52-week-highs-after-earnings/#ixzz38Ju9KuiH

Apple & IBM Partnership

Apple Inc. (AAPL) announced Tuesday of this week that it had signed a global “enterprise mobility” deal with International Business Machines Corp. (IBM). Under the deal, IBM employees will recommend Apple's smartphones and tablets to enterprise customers. The two companies will develop apps geared towards enterprise clients across various industries. IBM stands to get a big boost by selling its software and services to businesses seeking to manage their employees’ Apple devices (either BYOD's or devices to be sold by IBM).

From an Apple standpoint, the move was greeted with some ho-hum attitude by many analysts, who cited the already high market saturation Apple's iOS devices have in the US.

Piper Jaffray analyst Gene Munster led the chorus of shrugs at news of the pact:
"In terms of the benefit to Apple, we do not expect the partnership to have a measurable impact on the model given that Apple has already achieved 98% iOS penetration with Fortune 500 companies and 92% penetration with Global 500 companies,"

However, the fact remains that iOS is on less than half of enterprise devices in some markets, and in iOS's best market Android still commands one of every five mobile business devices.

Jim Edwards, from Business Insider noted:

Once you sell a company on a new device, that company is probably locked in as a customer for years to come, through several device upgrade cycles and all sorts of software add-ons.

If you've ever worked for a company that has forced you to use the worst devices and software you've ever seen, and wondered why that's the case, this is the answer. It's not that your IT department is incompetent. It's that it is genuinely difficult to move thousands of employees off one computing platform and onto another.

Where Apple may stand to gain from this partnership is through IBM's already existing enterprise customer base. Undoubtedly some of those customers will not be using iOS devices yet, and IBM may be able to make headway in getting those customers onto iOS devices. The benefit to Apple being that IBM will handle this with their own global sales force, while Apple sits back and sells the devices.

Will this make a notable difference to the top or bottom line at Apple?

Once again, Piper Jaffray analyst Gene Munster had the following to say:
[It] is unlikely to be the make or break factor for a large corporation in utilizing iOS. We note that if half of the Fortune 500 were to each purchase an incremental 2,000 iPhones and 1,000 iPads above what they were planning to purchase as a result of the IBM deal, it would mean about a half a percent to CY15 revenue.

Is GoPro the Apple of action sports?

Yesterday GoPro (GPRO) started trading on the NASDAQ. The stock shot up more than 30 percent (from the IPO price) in their market debut Thursday, following an initial public offering that valued the sports camera maker at about $3 billion.

Like all ‘regular investors’, the IPO price ($24/share) was not something I was able to obtain. I was able to get shares at $29.50 shortly after it started trading freely on the NASDAQ.

I bought GoPro because I kept coming back to one thing “they might be the Apple (AAPL) of sports cameras” or whatever you might call that niche. I myself own a GoPro, but am somewhat embarrassed to admit it has not been used. At about $300 a piece they are not cheap, but also very affordable for what they are. Reminds me a bit of Apple iPhones, not cheap, but a decent price for what they are. GoPro sells a ton of accessories; mounts, waterproof cases, harnesses, floats, etc… Apple sells a ton of accessories…

Ok, antidotal at best so far, right?

Why do people like myself, and many of my friends go and get a GoPro? Hell, I have not even used mine yet.
The GoPro captures the same “it factor” that Apple captured, first with the iPod, then with the iPhone. Apple has milked that “it factor” for the past 2 to 3 years while the iPhone has been the inferior product on the market. It is only now that people are starting to consider leaving the iPhone for more powerful, larger, faster, generally “better” phones… Bring this back around to GoPro…

I think GoPro can milk this “it factor” for a while to come. They are the #1 action sports camera by miles, most people can’t even name a competitor product. Sure Sony, and others have products out there, but can you name them? I think GoPro can ride out a single product line, with accessories, for another few years without having to branch out too far from their core area.

As of the writing of this post the stock has opened up the first hour of trading +22% at $38.55

Microsoft - Upgraded

I have some personal experience with the new product offerings from Microsoft (MSFT), and there are some strong indications now that they are starting to “get it”. I was quite disappointed when they chose to not make the Surface tablet a ‘loss leader’ to get people onto the windows tablet (Win8 RT). However when the second generation Surface Pro2 came out we purchased a few to replace aging laptops for some executives. They have made excellent laptop replacements, and I have really come around to using the device as my everyday business computer. I turned in my old laptop and have been 100% on the Surface Pro since the second week I had it. I see similar behavior in the other users.

The Surface devices are a small part of the puzzle, but critical in my mind. These devices push people towards the full Microsoft offering which is becoming more and more heavily focused on their Cloud Platforms; Microsoft Office 365 and Azure. Moreover they are learning how to commercialize “service offerings” around what used to be simply licensed products. So while the end of their cash cow businesses was easy to spot and kept me from investing in MSFT, they have (unexpectedly) found a way to monetize those licenses as service offerings.

After maintaining a "market perform" rating on Microsoft (MSFT) for the past three years, one analyst has finally changed his tune and upgraded the stock to "outperform."

On Tuesday's episode of "Fast Money," FBR senior analyst Daniel Ives explained why he thinks now is the best time to own Microsoft.
"You finally feel like there's a pilot on the plane after 10 years of pain," he said, reflecting his belief in CEO Satya Nadella's vision. Part of that vision, according to Ives, centers on Microsoft's Office 365 and cloud strategies. "Everything we see in cloud really signifies a turnaround," he said. "We could view a $4 billion to $5 billion revenue stream."
Nadella's mobile strategy, including the decision to offer free Windows on mobile devices smaller than nine inches, could be another positive catalyst, Ives said. "What he's starting to do on mobile, and the turnaround, we could see an incremental 40 cents to annual earnings, and that gets us incrementally positive on the name," he said. Ives' boldest call focused on Microsoft's future in the handset market. "I think they could go from 2 percent market share to 10 percent. … Nokia is the X variable," he said.

Microsoft was the second-best performer in the Dow Jones Industrial Average on Tuesday, helped along by FBR Capital's upped rating and price target.

Value in big software names?

Value has ruled in software lately, and some of the top names have languished during the recent move to near record highs. Software analysts at UBS say they have spoken to clients and investors who have signaled to them that they may be ready to rotate back into the top growth software names as soon as late summer.

Here are the three top names to buy at UBS now.

Adobe Systems Inc. (ADBE) is a top tech stock that was manhandled during the sell-off in growth names that started in mid-March. The stock has still not recovered to where it was trading then, even though it has outperformed the Nasdaq composite. The company announced in the spring the availability of Lightroom mobile, a companion app to Lightroom desktop software, only available as part of Adobe Creative Cloud. The new Lightroom mobile app brings powerful Lightroom tools to the iPad, delivering photography essentials, such as non-destructive processing of files, and utilizing new Smart Preview technologies to free professional-class photo editing from the confines of the desktop. The UBS price target for this top name is $80. The Thomson/First Call price target is $72.81. Adobe closed Monday at $66.93 a share.

Oracle Corp. (ORCL) has sputtered over the past year, but it has finally started to perk up, and like Adobe has outperformed the Nasdaq also. The stock could still be giving investors a prime entry point. The technology giant is making a push into cloud computing, application virtualization and software-defined networking. The latter two should be key areas of revenue growth going forward. The UBS team also believes the company’s new database cycle is still in early innings with the move to 12c. The new separately priced 12c in memory option is coming soon, and they agree with many on Wall Street that the cloud/Fusion apps are improving rapidly. Shareholders are paid a 1.1% dividend. UBS has set a $42 price target, but the consensus target is at $42.51. Note that Oracle closed Monday $42.70.

Red Hat Inc. (RHT) is another high beta technology name that makes it onto the UBS screen for top growth stocks to buy. The company is the world’s leading provider of open source software solutions, using a community-powered approach to reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers support, training and consulting services. This may be a top play for investors as the stock has underperformed the Nasdaq year-to-date — down 8.2% versus the 3.8% gain for the index. The company crushed Wall Street estimates in the most recent earnings cycle, and it could be poised to continue its winning ways for the rest of 2014. The UBS price target is $64, and the consensus target is $64.37. Red Hat closed Monday at $51.43.

Why Apple Is Still Cheap, and Why Amazon Isn’t Cheap Yet

From 24/7 Wallstreet

With April finished, it is time to ask which of those two darlings of volatility — Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) — offers interested shareholders a better value now.

The short answer right now is probably Apple, even if the stock is trading at more than $590 and the company is still the most valuable on the planet. The main argument in its favor are, first, its price-to-earnings (P/E) ratios: 14.66 on a trailing 12-month basis and 12.01 on a forward basis. And second, the stock price itself: up 5.3% this year and 17.9% since the end of January.

The fundamentals of Apple remain strong. The company beat revenue and earnings estimates in the first quarter. It sold 44 million iPhones, when Wall Street was expecting 38 million. The iPhone generated $26 billion in revenue by itself — 57.1% of total revenue. The one blot on the earnings report: Revenue grew just 4.7% from a year earlier. Net income was up 7%.

But the news for shareholders was outside sales and profit. Apple announced on April 23 it was boosting its share buyback program to $130 billion by the end of 2015. It boosted its dividend by 8%, and it is splitting its shares seven-for-one. The news cheered investors. The shares rose 12.5% in the next five sessions.

If Apple comes up with new products, like a new larger iPhone, an Apple television, a wearable device that people will buy, or something else with a “wow” factor, then the stock is a bargain.

Amazon’s stock has struggled of late, falling nearly 10% in April, on top of a 7.1% decline in March. As of Wednesday’s close at $303.13, the shares were off 23.7% for the year. They bottomed at $288, down some 29% from their peak close of $407.05 on Jan. 21.

The shares are trading significantly below their 200-day moving average. Their relative strength index — an indicator of momentum — is around 37.40. It was as low as 18 in mid-April, a signal that it was seriously oversold.

Amazon also has the problem of its ungodly P/E ratios — 472 times trailing 12-month earnings and a forward P/E of nearly 60.

On the other hand, its record of staggering growth cannot be denied. Revenue has grown an average 32% A YEAR since 1999. Keeping up that growth rate is getting harder, however. Last year’s revenue of $74.45 billion was up 21.9% over 2012. And 2012′s revenue growth was 27.1%, which was down from 40.6% the year before.

There is that constant argument from the company that it must invest billions each quarter to ensure its future and that top-line growth is all important. So, in the first quarter, capital expenditures totaled $1.1 billion, up from $670 million a year earlier. Much of the investment was in fulfillment infrastructure in Spain, Italy and, above all, China. But it also spent $128 million in website development and is investing heavily in new video programming and its rapidly growing cloud-computing business.

With Wednesday’s close, Amazon shares were up 5.6% from the $288 bottom last week and were attracting buyers in pre-open trading Thursday, but that is after an ugly sell-off. The question going forward is whether that buying can be sustained. The answer may be that Amazon and CEO Jeff Bezos have to do more than assure shareholders that all that investing will actually boost earnings. In the meantime, recovering all of a 27% stock-price loss will take time.

By Charley Blaine
May 1, 2014 9:25 am EDT

Apple Inc.

In its 23-April earnings, there was big news from Apple Inc. (AAPL); it is splitting the stock on a 7-for-1 basis. Trading on the split-adjusted basis will start on June 9, 2014.

Apple’s board approved an increase to the dividend, declaring a dividend of $3.29 per common share. Most importantly they said they also plan to increase Apple’s dividend on an annual basis. Additionally, the board also increased the share repurchase authorization to $90 billion from the $60 billion level announced last year.

Out of that news on 23-April, the stock has been propelled to a 52-week high today (28-April, trading in the $585-$590 range). The all-time high was $705.07 in September 2012.

Offshore Oilfield Services

Wunderlich Securities had the following to say in their most recent release about the Offshore Oilfield Services sector as a whole.

February once again saw a continuation of the underperformance for the offshore oilfield services group which began in late 2013. The weakness remained broad with all but two companies in our coverage universe underperforming the OSX. Most companies in the space reported 4Q13 results that were ahead of or in-line with consensus estimates. However, commentary from company management during 4Q13 conference calls was consistent with the belief that both the floating market for offshore drilling rigs and the offshore support vessel markets look to be facing a period of 12-18 months of oversupply. We continue to believe the negative sentiment that investors were focused on during 2H13 is likely to continue through at least the first half of 2014.

There are two companies in this space which I already own, Seadrill (SDRL) and Vantage Drilling Company (VTG). Vantage (VTG) is down 6.7% year to date, and Seadrill (SDRL) is down 16.26% for the same period. Wunderlich maintains a buy on both stocks, with a price target of $51.00 for Seadrill (SDRL) verses about a $34.00 current price. They have a $3.00 price target for Vantage (VTG) verses about $1.70 current price. Here are a few reasons I will be holding and adding to both of these stakes.

Vantage Drilling Company (VTG) From Wunderlich’s latest report on the company:

Vantage has 7 rigs working (3 drillships, 4 jack-ups) that, in combination with the company's management business, gives it the greatest flexibility and cash flow generating ability in the company's history. With the majority of Vantage's capacity for 2014 booked, the company can begin to focus on delevering. We believe the company should be able to pay down ~$200 million in 2014 and beyond without impacting the company's newbuild program. We believe it would not be unreasonable for the company to bring its debt-to-cap ratio down about 1000 bps from ~85% to 75% by the end of 2015. On the jack-up side, Vantage sees modern high specification units fully utilized and in very high demand. The current bids for modern jackups in Asia are generally in the $165-$175k/d range, and it's about $10-$15k more than that in West Africa.

Seadrill (SDRL) Since its September highs in 2013 Seadrill (SDRL) is down over 26%. One thing Seadrill has to offer, that others in the sector do not currently, is a very high dividend. Since the stock has trailed down 26%, that dividend is now just over 11%. For many stocks this would be looked at as a fairly risky dividend, with the expectation that it could be cut. Seadrill on the other hand has stated time and time again that they have no financial constraints preventing them from maintaining this dividend level. Furthermore, they have a track record of continuing to raise the dividend. In their most recent quarterly release it sounds as though they will look to use their available cash flow to fund share buybacks and other capital projects. Wunderlich had the following to say:

In the past Seadrill has been aggressive in making increases to its quarterly dividend and did so again in 4Q13 raising the dividend to $0.98. Seadrill noted that it sees limited value in increasing the dividend past its current yield and would likely focus capital allocation toward share repurchases, acquisitions, and reducing debt. Seadrill has established a dividend capacity fund that will preserve ~20% of the net proceeds from any future MLP dropdowns. We believe that Seadrill's current dividend is sustainable.

Looking forward at 2015, the company has 72% of its 2015 capacity booked. It was in the processes of finalizing two more contract for 2014 capacity that would result in 98% of 2014 capacity being booked. The current P/E for the stock is under 7, that combined with an 11% dividend makes this stock too hard to pass up on. In my case I have added to an existing stake in the company.

Are dividend paying tech stocks undervalued?

Big, cash-rich technology companies are drawing intense scrutiny these days from frustrated shareholders and activist investors, but they also have found some new fans.

Take famed Oakmark Fund manager Bill Nygren. He thinks the market is undervaluing technology stocks—or, at least, looking at some of the bigger names through the wrong lens. They look a lot like the consumer product companies of the 1980s to Nygren, featuring moderate top-line growth and relatively inexpensive valuations. Intel, for example, is selling only at 11 times next year's earnings, Nygren noted. The technology industry is returning lots of capital to investors, too, and not just in the form of stock buybacks. "It's a good place to look for dividends," he said.

Intel (INTC) is currently paying 3.62%, Cisco (CSCO) is paying 3.5%, and Microsoft (MSFT) is paying 2.96%

While these yields are not overwhelmingly high, compared to certain telecoms (AT&T (T) 5.70% and Verizon (VZ) 4.58%), the top tech companies are keeping pace with the broader utilities (Vanguard Utilities ETF (VPU) 3.58%). While the Utilities ETF gives a much broader exposer, hand picking a couple top tech stocks probably makes good sense. For a broader technology sector play you can pick up iShares US Technology ETF (IYW) and earn a 2.31% yield or Vanguard Information Technology Index ETF (VGT) yielding 2.12%

Technology dividends are still fairly low compared to a traditional dividend-rich sector, like utilities. But that means there's still lots of room for dividend growth, said Diane Jaffee, portfolio manager of the TCW Dividend-Focused Fund. At year-end 2013 the technology sector's average payout ratio was only 20 percent of cash flow, compared to 36 percent for the S&P 500, she noted.

Jaffee's fund has been buying dividend-paying tech stocks, including Microsoft, Cisco, Intel and Microchip Technology. For some tech giants, an increasing dividend profile is nothing new, but Jaffe is still betting on larger payouts. Intel has increased its dividend for 10 years and Microsoft for 12 years.

Bull Market Rivals '90s at Half Valuation

A very interesting article today from Bloomberg/Business Week:

During the stretch that lasted from March 1995 to March 2000, computer and software makers surged 754 percent, compared with 200 percent in the next-best industry, banks. By contrast, since March 2009, consumer-discretionary shares have jumped 324 percent, banks are up 259 percent, and industrial companies have risen 243 percent. The group with the smallest increase, phone companies, is up 68 percent.

...

After pulling $300 billion from mutual funds and ETFs that buy American equities from 2008 through 2012, they’ve since deposited almost $170 billion, according to data compiled by Bloomberg and the Investment Company Institute.

Vanguard High Dividend Yield (VYM)

Today shares of Vanguard High Dividend Yield ETF (VYM) entered into what some call “oversold territory”, it traded as low as $58.36. “Oversold” can be defined by looking at the Relative Strength Index (RSI), a technical indicator used to measure momentum. A stock may be considered “oversold” when the RSI reading falls below 30.

In the case of Vanguard High Dividend Yield, the RSI reading hit 29.2. The current RSI reading for the S&P 500 is just above 33.

VYM’s low point in its 52 week range is $52.09 per share, with $62.38 as the 52 week high point

I currently hold ISHARES INC EMERGING MARKETS DIV ETF (DVYE), which is down 9.27% YTD. VYM is down 5.84% YTD, slightly worse than the S&P500 which is down 5.23% YTD. Extending the comparison out to 1yr shows DVYE -21.32%, VYM +11.51%, and the S&P500 +15.76%. The dividend yield for DVYE is 5.06%, while the dividend yield for VYM is 2.98%.

Emerging markets have been getting hammered since the start of 2013, and the trend does not look to be reversing. It may open an opportunity to either add to a stake in DVYE or open a new stake in that fund. VYM, by contrast, has doubled in the last 5yrs, and is up 16% since its inception in 2006. For anyone looking to add a dividend fund to their accounts, VYM is starting to look very appealing at these prices. If the down trend in VYM, and the broader market, continues I will look to add this to my long-term retirement accounts.

Small Cap Picks

I believe that the overall economy is healthy, and that the business cycle is generally on the upswing. I travel for work and pleasure and see that the airline industry is doing quite well, see my pick of AAL which is up 35% YTD (just over a month). I also know that when I was a consultant I did not think twice about paying for onboard WiFi, as it was just another, relatively inexpensive, business expense. I think that combined with the families I see traveling (buy TV keep the kids entertained) position in-flight entertainment in a good spot. To that point I have made an entry stake into Global Eagle Entertainment (ENT)

Global Eagle Entertainment Inc. (ENT), formerly Global Eagle Acquisition Corp., is the full service platform offering both content and connectivity for the worldwide airline industry. Through its combined content, distribution and technology platforms, the Company provides airlines and the millions of travelers they serve with the offering of in-flight video content, e-commerce and information services. Through its Row 44 subsidiary, the Company utilizes Ku-band satellite technology to provide airline passengers with Internet access, live television, shopping and travel-related information.

My timing may not have been ideal, as the market tanked the following day, putting the stock down about 4% from my purchase price. I believe this is a mid-term to long-term play, I will be keeping an eye on the stock but not looking at it day-to-day, as I do believe this one may take some time.

In a completely different direction, I have opened a small stake in Synta Pharmaceuticals (SNTA). Synta is a small cap ($362M) biopharmaceutical company working in the area of cancer and inflammatory diseases. Their main drug in the pipeline, if approved, is expected to hit annual peak sales of $425 million to $600 million. Interestingly the consensus target price for the stock is a huge $15.85 a share, SNTA is currently about $5.

I'm not much for "swinging for the fences" or "home run" stocks, but this is exactly that. If the stock is able to make consensus price it would be a nice 300% return for current investors. The risk for this possible payout is quite large, if they do not get approval for their drug it could spell the end for them. In my minimal experience with these types of companies, there is a very short lead time from success of failure for the investor to make a move either in or out. A stop-loss or trailing stop-loss may be advisable.

DJIA is now down 1,000 points from its high

For all those looking for and predicting a pull-back, safe to say we are seeing it.

Chances Rise for 10% Market Drop

Chances Rise for 10% Market Drop
By Douglas A. McIntyre January 30, 2014 6:55 am EST
Original Article

The S&P 500 has dropped more than 5% in 2014, and virtually of all that has come in the past week. Much of the blame has been put on financial risks in emerging markets. Interest rates in some of these have risen as their economies have stalled. Additionally, the drop in the Federal Reserve’s bond buying has raised the fear that cheap money will be hard to come by.

However, at the heart of the drop is something that is hard to combat. Earnings reports from many large companies have been weak, forecasts have often been poor and the stocks of these firms have plummeted.

First among the companies that disappointed is Apple Inc. (NASDAQ: AAPL), which missed Wall Street’s best expectations for iPhone sales and posted a gloomy forecast. Another major component of the S&P 500 — International Business Machines Corp. (NYSE: IBM) — did almost as badly. No one was impressed with General Electric Co.’s (NYSE: GE) numbers. Figures released by the major financial firms were mostly lackluster. Citigroup Inc.’s (NYSE: C) shares are off 6% in the past five trading days, and shares of Goldman Sachs Group Inc. (NYSE: GS) are down 4%. Also among the major components of the S&P 500, Procter & Gamble Co. (NYSE: PG) disappointed as its razor customers stopped shaving.

These earnings leave only a few large companies that might report strong number to turn the perception of the earnings collapse around. Chevron Corp.’s (NYSE: CVX) earnings are expect to be less than stellar, if trading in its shares over the past week are any indication. This, in turn, leaves Wal-Mart Stores Inc. (NYSE: WMT), Amazon.com Inc. (NASDAQ: AMZN) and Exxon Mobil Corp. (NYSE: XOM).

The two large oil companies will have trouble. Exploration spending has stayed high, oil prices relatively low and there are appropriate concerns that refinery margins will not make up for these problems. Barron’s recently quoted Barclays’ reasons for a poor earnings report, and it said the run up in Exxon’s shares was over. Many of the same troubles plague its immediate rivals.

Finally, that isolates America’s two retail giants to pull the market out of the mud. Walmart probably will have earnings hampered by what was a disappointing holiday sales season. And, because its share of the U.S. retail market is so large, it cannot do much better than that market. As for Amazon, expectations for revenue have been set as high as $26 billion for the most recent quarter. Even a tiny miss would throw shares off. An outperformance will only show that Amazon continues to create unprecedented opportunities for itself, the scope of which cannot be duplicated by other companies.

Looking over all the reasons for a 10% market sell-off creates the strong impression that the sell-off will continue, and probably accelerate.

2014 Market Ideas

After a very solid 2013 which saw market returns of 26.5% in the DJIA, 29.6% for the S&P500, and a huge 38.3% for the NASDAQ many analysts are wondering if the market runs are over. There was some encouraging news from J.P. Morgan who thinks there is still 25% of the market that is undervalued.

After a strong 2013 where the S&P 500 was up almost 30%, you would think that most stocks would be close to being fully priced. That’s not what Thomas Lee, the chief equity strategist at J.P. Morgan thinks. In a new research report, the J.P. Morgan team remains confident that U.S. economic momentum is strengthening, and they continue to expect incoming data over the next few months to validate that trend. They also think that investors remain positive on equities in general, but point out that retail ownership of stocks is still low.

While margin debt levels are raising some eyebrows on Wall Street, the J.P. Morgan analysts are not concerned. They are focused on the quartile of stocks that are forecasting earnings growth of 11% or greater and have a median price-to-earnings (P/E) ratio of only 11.8. This compares with the broad market, which is trading at 16.5 times earnings, which is near historical highs.

http://247wallst.com/investing/2014/01/16/j-p-morgan-strategist-says-one-quarter-of-all-stocks-are-still-cheap/

The question becomes how best to leverage your mutual funds and/or ETF’s to access those undervalued stocks. This year I plan to focus more of my long-term investing strategies on picking ETF’s over stocks. I’ll continue to focus on fixed income investing through preferred shares rather than bonds.

A look at the returns in the European markets show that the FTSE was up 14.4% last year and the CAC was up 18%, while the DAX was up 25.5%. All three of these major EU indexes trailed the DJIA return of 26.5%. This may be an indication that there is more growth available in the UK, France, and potentially the EU as a whole. Certainly European funds will be an area I research in more depth (FTSE Europe ETF - VGK).

Other areas I will look to focus on include Healthcare (Vanguard – VHT) which returned north of 40% as a sector last year, and Energy (Vanguard – VDE) which lagged the markets last year. Information Technology (Vanguard – VGT) also seems to be on a uptrend while only trailing the S&P slightly on the 1yr and 3yr trend.

Renewed Focus for 2014

I come into 2014 with renewed focus on my investments, and my strategies. 2013 was a very good year for my retirement accounts as well as my trading accounts. I finished the year with some "house keeping" that sees me rollover a net loss from a tax perspective. I also come into the year with a plan to realize some gains that are on the cusp of long-term.

I will put together a second post with details about my fixed income, ETF, and general retirement strategy later this week. For now, the early stock moves of 2014

From an individual stock prescriptive I used proceeds from my loss sales of 2013 to purchase American Airlines Group Inc. (AAL) at below book value. The airline industry has been hot, and started out 2014 even hotter. In a short week I already have +6% in gains on this long-term purchase. I intend to hold this stock through the integration of US Airways.

Holders of United Continental Holdings Inc (UAL) have been rewarded handsomely, to the tune of +71% gain over the past year (and +144% over the past 2yrs) as United completed its merger with Continental Airlines.

Clearly there is no guarantee that the economy or industry will do as well over the next two years, but as a frequent traveller it is not hard to see how these airlines are making their money. I believe this was a good buy, and even a value play in a high flying (pardon the pun) sector. Any stock trading below book value, even a forward book value, is either a bargain or on their way to bankruptcy. American is just emerging from bankruptcy and I don't believe creditors would have accepted a deal that would put them right back into it.

I am also stepping into an area that has never really been a success for me, retail. For the most part I have gotten out of every retail stock I have picked within a matter of months, and almost always for a loss. So far this looks like no exception.

Coming off a poor showing at the end of 2013, and lots of public gaffes, I took a stab at Lululemon Athletica (LULU). The stock hovered up for a day or two, before promptly rewarding me with a -16% drop today. I did not have a stop-loss in at 15% (which I sometimes do for these more risky plays), as I expected some fluctuation. I also only bought about 1/3 to 1/2 of what I would like my total stake to be. I do not plan to use this drop as an opportunity to buy the rest of my stake, as I would like to see how (if) it recovers from this latest news. If it shows an ability to recover over the next 10 days to two weeks, then I will consider doubling up on my stake (with a stop-loss order in place).

Other stocks squarely on my radar include tech stocks, many of which I already own. Atop that list would be Google (GOOG), Intel Corporation (INTC), and Apple (AAPL), all of which I have stakes in already. Also on that list would be Amazon.com (AMZN), QUALCOMM (QCOM), and Juniper Networks (JNPR). I would be looking to sell my remaining stake in Cisco Systems (CSCO) at or above $25. I will hold, but not add to, SolarWinds (SWI) which took a beating last year despite a great product.

For details on my preferred share plays, and other dividend stocks for 2014, catch my next post