China

  • 09 Nov
    AMAT is down more than 50% from its top – has it finally found bottom?

    AMAT is down more than 50% from its top – has it finally found bottom?

    Throughout most of this year, semiconductors have been perhaps the most distressed sector of the market. Before bottoming at the end of the October, the sector had dropped a little over 21% from its high point in mid-March as measured by the iShares Semiconductor ETF (SOXX), and is still down nearly 15% as of Thursday’s close. This is a sector that is dominated by large-cap, well-known names like Intel (INTC), Texas Instruments (TXN), and Qualcomm (QCOM), to name just a few. More →

  • 08 Nov
    Why government gridlock could be a good thing for these 2 sectors

    Why government gridlock could be a good thing for these 2 sectors

    October was a rough month for the stock market, proven by the decline of the NASDAQ and Dow Jones Industrial Average into clear correction territory, while the S&P 500 halted its own slide just shy of that mark. It was enough to put a lot of investors and analysts on edge and start to wonder if the good times were finally coming to an end.

    What a difference a week makes! After closing out the worst October, and one-month period in a decade, the market has rebounded strongly over the last week. The Dow is up a little over 6.6%, the NASDAQ 8.3%, and the S&P 500 6.7% in that time. This week may have provided an unexpected catalyst for the market to push back and retest the all-time highs set in late September. Mid-term elections on Tuesday left Democrats in control of the House of Representatives, while Republicans kept their spot in the driver’s seat in the Senate.



    Depending on your political view, a divided government may not be a good thing; major reforms or initiatives from either side of aisle become more difficult without one party in control of both houses of government. It isn’t unreasonable to suggest that one of the reasons President Trump could afford to be as confrontational as he has, with a consistent, “my way or the highway” attitude about everything from tax reform, trade and most certainly his major staff advisors and political appointees is because Republicans controlled Congress and the Senate. That usually meant that even if a lot of Republicans and conservatives criticized his approach, the party at large generally fell into line behind him.

    As an investor, it’s not always easy to separate investing discipline and objectivity from political opinion and preference. That becomes harder when politics have a clear and direct impact on economic progress and market behavior. The Tax Reform Act at the end of last year is a good example; the tax savings that became available almost immediately to corporate America were certainly a catalyst for the market’s recovery from its first correction at the beginning of the year. In that light, the impact that midterm elections has on the market now could come from the government’s likely inability for the next couple of years to push any major changes.

    I’ve always believed that if there is anything the market really doesn’t like, and is most likely to react negatively to, it’s change. Investors like predictability, and we rely on measurements that offer a certain level of reliability to guide investment decisions. The status quo means that the things we use to drive our decisions remain relatively constant, and we don’t have to worry as much about changing our method or our approach. When something threatens to change the investing landscape, investors naturally get nervous.



    After eight years of a long, sustained bullish run that made a lot of investors think the easiest and best way to make money way in the stock market was to buy a passive index fund and just let it ride – “invest it and forget it,” if you will – the market rediscovered volatility this year. A big part of that was influenced by openly aggressive and confrontational politics from the Trump administration. Tariffs imposed every one of America’s largest and most important trading partners may indeed prove to have been the right move in the long run, but the tensions that came from seeing those long-standing trade relationships continue to keep the market on edge. A split government may not be able to put the cat back int the bag of things the Trump administration has already put back in place, the lack of consensus is also likely to make continued progress and changes that much harder to come by. The hope that the market seems to be keying on right now is that a natural check from a split House against the Oval Office could help restore the status quo and give investors a return at least some kind of  predictability that can help keep the stock market’s bullish trend in place.

    Assuming this happens, it’s entirely possible that the market could stage yet another broad-based rally to a new set of all-time highs. Which are the sectors that might be the biggest beneficiaries? I think there are two; here they are.



    Industrials

    While a divided House may blunt many of the reforms and initiatives the Trump administration still has plans for, one of the things that both sides seem to agree on is the need for improved infrastructure. A major spending bill may be hard to come by, but any progress on this front should act as a positive for this sector. Consider also that tariff and trade concerns have put major pressure on the sector throughout the year; even with the sector’s rebound since the end of October, which is about 10% from October 30th to now as measured by the SPDR Industrial Sector ETF (XLI), it remains down by a little over 10% from its 52-week highs. That gives the industry lots of room to rally even more, with increased chances that the absence of political complications could contribute even more.

    Semiconductors

    This sector has been one of the biggest underperformers throughout the year, as pricing and supply pressures among chipmakers have pushed stocks lower. A major argument for the President’s aggressive trade stance towards China has centered around the semiconductor industry and concerns about intellectual property protections and even theft. Many of the pricing pressures that have pushed semi stocks lower may not abate quickly. I also think, however that a changed political reality could force the Trump administration to try to make a trade deal with China more quickly than it might do otherwise; and I would expect that to provide at least an emotional reason for investors to start making new bets on a sector that has been beaten down by almost 15%, based on the Ishares Semiconductor ETF (SOXX) from its 52-week highs.


  • 25 Oct
    Fundamental strength alone isn’t enough to make TXN a good buy right now

    Fundamental strength alone isn’t enough to make TXN a good buy right now

    The last couple of weeks have seen market volatility return in a big way, and with it fear seems to be increasing quite a bit this week. I think part of it is because investors are starting to realize how close the market is right now to an important inflection point. As of yesterday’s close, the tech-dominated NASDAQ had officially dropped more than 10% below its last all-time high, which was reached back in late August. To add insult to injury, both the Dow and the S7P 500 have given back almost all of the gains they’ve achieved since the last correction that ended in March of this year, and are now slightly lower for the entire year. More →

  • 12 Oct
    These 2 sectors have taken the biggest beating from the latest market rout

    These 2 sectors have taken the biggest beating from the latest market rout

    There’s really nothing like a little bit of volatility in the stock market to make people sit up and take notice. Whether you’re a seasoned, everyday investor or a relative neophyte putting a couple of hundred dollars each month into a 401(k) account, the last couple of days have prompted just about anybody that is trying to make their money work for them with the stock market wonder what is going on. More →

  • 06 Aug
    Trade war fears are making MU look like a fantastic bargain

    Trade war fears are making MU look like a fantastic bargain

    No matter how much the market tries to focus on something else, it seems like the trade war always manages to find its way to the front and center position of market commentary and awareness. That was true again over the weekend as the Chinese government countered the Trump administration’s latest proposal of $200 billion in new tariffs with $60 billion of their own against U.S. goods. It keeps worries about what the actual impact and effect of a long-term trade war with our country’s largest trade partner is going to be. It’s definitely one of the most obvious factors that has contributed to the market’s increased volatility throughout the year, and I think it is going to continue to hold people’s attention throughout the year.

    Naturally, one of the things this kind of uncertainty should make you do is to think about how it is going to impact the investment decisions you decide to make. In this day and age, it’s hard to find publicly traded companies that aren’t doing business in some way with China or other parts of the world, like the E.U., where the trade war is front and center – either by selling their products there or having them manufactured and produced there and then bringing them back home. The global nature of our economy, and the interconnectedness that we now live in means that even the smallest of companies are likely to have some element of exposure to global trade risk. That reality means that companies with known ties to China and other parts of the world are subject to even greater price volatility and general market risk.



    The semiconductor industry has been an interesting proxy for trade war risk  since mid-March when the saber-rattling first began in earnest. As measured by the iShares Semiconductor ETF (SOXX), the sector dropped a little over 50% by the end of April. It has rebounded a bit since then, but remains about 6% below its March high point. That has put a significant amount of pressure on a lot of big names in the sector like Intel Corporation (INTC), Applied Materials, Inc. (AMAT), Micron Technology, Inc. (MU) and Lam Research Corporation (LRCX), to name just a few that all remain well below – by at least 15%, if not more – their 52-week highs. And while I don’t think you should discount or dismiss trade war risk for these companies, I do think that a proper amount of perspective can help to determine how significant their risk really is versus what the market perceives their risk to be. It can also help to determine if a stock’s discounted price because of trade war fears could offer an under-appreciated bargain opportunity for value investors.

    MU is a great example of what I mean. Last month, the company made headlines – but not in a good way  – when they confirmed that a court in China had granted a preliminary injunction banning its Chinese subsidiaries from selling its products in the country. The stock has shown some resilience since that news broke, but remains under pressure, down nearly 20% from its high around $65 in late May. The perception, of course is that the measure, which seems clearly intended as a targeted countermove to U.S. tariffs, is going to have a significant negative impact on MU’’s business. The reality, however is quite different; the company estimated when they confirmed the injunction that the impact would only be about 1% of total revenue for the quarter, or about the same percentage that Chinese sales made up of their revenues over the last year. In the meantime, demand appears to remain strong, as the company also reaffirmed their own forward estimates of revenue. Another element that has contributed to strength for MU is the fact that supply of DRAM/NAND memory chips lags demand, which is keeping their pricing strong. It is possible that the negative revenue impact from the China sales ban could simply intensify the shortage; that could act as an extra pricing tailwind in the near-term.

    As you’ll see next, there really is a lot of like about MU’s business right now, and while the stock’s negative price performance does suggest short-term risk exists, the fact is that does look like a very good value play right now.



    Fundamental and Value Profile

    Micron Technology, Inc. (MU) is engaged in semiconductor systems. The Company’s portfolio of memory technologies, including dynamic random-access memory (DRAM), negative-AND (NAND) Flash and NOR Flash are the basis for solid-state drives, modules, multi-chip packages and other system solutions. Its business segments include Compute and Networking Business Unit (CNBU), which includes memory products sold into compute, networking, graphics and cloud server markets; Mobile Business Unit (MBU), which includes memory products sold into smartphone, tablet and other mobile-device markets; Storage Business Unit (SBU), which includes memory products sold into enterprise, client, cloud and removable storage markets, and SBU also includes products sold to Intel through its Intel/Micron Flash Technology (IMFT) joint venture, and Embedded Business Unit (EBU), which includes memory products sold into automotive, industrial, connected home and consumer electronics markets. MU has a market cap of $60.8 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings more than doubled – growth was 128%, while sales growth was above 40%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize their business operations. Net Income as a percentage of Revenues for MU is very impressive at more than 43% for the last twelve months and improving to nearly 50% in the last quarter.
    • Free Cash Flow: MU’s free cash flow over the last twelve months is more than $7.5 billion. Cash and liquid assets are also almost $7.1 billion, against only about $5.9 billion of long-term debt.
    • Debt to Equity: MU has a very conservative debt-to-equity ratio of .20. As already observed, their available cash and liquid assets is about $1.2 billion higher than their long-term debt, and with their high operating margin, there is clearly no issue with the company’s ability to service, or even to liquidate their debt.
    • Dividend: MU does not pay a dividend.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MU is $25.45 per share. At the stock’s current price, that puts the Price/Book ratio at 2.05, versus a historical average of 2.26. The historical average puts the stock’s “fair value” at about $57.50, which is only about 10% away from its current price. That’s not very compelling by itself, but there are a couple of other measurements that, put together, offer what I think is an enhanced perspective. The stock’s P/E ratio – which, admittedly, I usually discount – right now is very low, at 5.12 times earnings compared to an historical average of 9.02. Also, their Price/Cash Flow ratio is 4.2 versus an historical average of 7.02. Those measurements are each 40% their historical averages. I think a 40% increase in the stock price is probably over-optimistic even as a long-term target since the stock’s 52-week high around $65 is higher than the stock has been since mid-2000 (the end of the “dot-com boom”); but it does put that high within sight, meaning that the opportunity in the stock right now is nearly 20%. That’s a very nice opportunity from a value-based standpoint!



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend until May of this year and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock’s decline from late May’s high at around $65 puts the stock in a clear, intermediate-term downward trend. More recently, the stock has round strong support in the $52 price range, just a little above the 38.2% retracement line. That support level also coincides pretty well with trend support from the 50-day moving average (not shown), indicating that the stock’s long-term trend should be expected to hold its strength for the foreseeable future. A break below $50, however would put the stock’s price decline above 20% and into bear market territory; I would take that as an early warning sign the long-term trend could reverse, with a further drop below $45 – about where the 50% retracement line sits right now – acting as confirmation of a bearish trend reversal.
    • Near-term Keys: The question for a long-term, value-oriented investor is whether you would be willing to endure the kind of potential decline that could come if the stock breaks its current long-term trend support. I think the stock offers a great value right now; but if you think the stock’s current bearish momentum is going to extend further, it could be better to wait to see if the stock offers an even bigger value by consolidating around $45 per share. Short-term traders should wait to see the stock break above current pivot resistance around $57 before trying to buy the stock or work with call options to take advantage of a bullish swing. A drop below $50 could offer a reasonable short-term opportunity by shorting the stock or working with put options, with $46 as a pretty attractive near-term target price.


  • 03 Aug
    Why CAT’s 20% drop could be a value trap

    Why CAT’s 20% drop could be a value trap

    When you put a big part of your investing focus on bargains, emphasizing value-based fundamental analysis to determine whether a stock is worth your time and money, you inevitably end up filtering through a lot of different stocks, but cast most aside. I think that is useful, because being more selective helps you narrow the universe of stocks you’re paying attention to at any given time. The problem, however is that sometimes the metrics a value investor learns to rely on can give you a false sense of whether a stock really fits a good description of a good value. That can lead you to make an investment in a stock that might be down from a recent high because it looks like it’s available now at an attractive price compared to where it was; but in reality it’s a bit like trying to catch a falling knife – the only real way to avoid getting cut is to get out of the way and let the knife fall to the floor. These kinds of situations are also called value traps, because they provide numbers that lure less careful investors in and motivate them to make an investment at some of the most dangerous times possible.

    I think Caterpillar Inc. (CAT) is actually one of those traps right now. My opinion differs from most other analysts and “experts” out there, who point to the company’s solid earnings growth over the last year, and the stock’s decline in price since January of this year of more than 20% as reasons that investors should be treating the stock as a great value opportunity right now. They’ll also point to a popular valuation metric, a stock’s P/E ratio, as a clear indication that the stock is undervalued and something you should be paying attention to right now. I’ll admit that at first blush, I thought the stock might be a good opportunity, too; but the more I drilled down to really look at some of the other data points that are important to me, the more concerned I got.



    Another risk element that investors seem to be trying to shrug aside right now when it comes to stocks like CAT is the fact that while the U.S. seems to have found some sense of resolution – or at least a path to it – in trade with the European Union, the same can’t be said of discussions with China. Today, on top of existing tariffs that already amount to more than $34 billion against its single largest trading partner, President Trump proposed another $200 billion in new tariffs, prompting what seems like the customary Chinese response to retaliate in kind. The market’s reaction was pretty ho-hum; could it mean the investors are beginning to accept trade tension as a normal state of affairs? If they are, then I think it means they are becoming desensitized to that risk, and that is a troubling indication all by itself.

    Multinational stocks, and especially those with major operations in China, remain at risk if trade tensions continue as they are, or escalate even further. And let’s not forget that while the E.U. have, for now at least, agreed to hold off on further tariffs against each other and work toward compromise, it doesn’t mean that situation has been resolved. CAT is one of the companies that I think could be the most dramatically affected. That affect may not be showing up in earnings reports or sales numbers yet; but the risk that it will increases more and more with every week, month, and quarter that continues with trade affairs as they are. To my way of thinking, that puts something of a jaundiced eye on any currently glowing numbers. Just about every analyst report I’ve been able to find on CAT forecasts stable to growing revenues along with continued earnings growth for the foreseeable future, and under most circumstances I think that should be a good thing; but the thing that is setting off warning bells for me is that none of the reports I have found discuss trade or tariffs as risk factors.



    Fundamental and Value Profile

    Caterpillar Inc. (CAT) is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The Company operates through segments, including Construction Industries, which is engaged in supporting customers using machinery in infrastructure, forestry and building construction; Resource Industries, which is engaged in supporting customers using machinery in mining, quarry, waste and material handling applications; Energy & Transportation, which supports customers in oil and gas, power generation, marine, rail and industrial applications, including Cat machines; Financial Products segment, which provides financing and related services, and All Other operating segments, which includes activities, such as product management and development, and manufacturing of filters and fluids, undercarriage, tires and rims, ground engaging tools, fluid transfer products, and sealing and connecting components for Cat products. CAT has a market cap of $82.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by almost 100%, while sales growth was almost 24%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize their business operations. Net Income as a percentage of Revenues also improved from about 6% for the trailing twelve months to more than 12% in the most recent quarter.
    • Free Cash Flow: CAT’s free cash flow over the last twelve months is more than $3.7 billion. Cash and liquid assets are also more than $7.8 billion, which does give the company quite a bit of financial flexibility; however these numbers are offset in my analysis by the stock’s very high debt to equity ratio
    • Debt to Equity: CAT has a debt-to-equity ratio of 1.59. Their long-term is more than $23.5 billion and marks CAT as one of the most highly leveraged companies in the Heavy Machinery industry.
    • Dividend: CAT currently pays an annual dividend of $3.44 per share, which translates to an annual yield of 2.49% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CAT is $24.99 per share. At the stock’s current price, that puts the Price/Book ratio at 5.52, versus a historical average of 3.62. The historical average puts the stock’s “fair value” a little above $90 per share – more than 34% below the stock’s current price. Some analysts like to point out that the stock is trading about 32% below its historical Price/Earnings ratio as an indication the stock is undervalued, but I view Book Value, and the Price/Book ratio as a better measurement and more indicative of a company’s intrinsic value.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend until January of this year and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock’s decline from late January’s high at around $173 puts the stock in a clear, intermediate-term downward trend, with the stock trading near to the lowest point of that trend around $135 per share. The stock is hovering around a major support point, marked by the 61.8% Fibonacci retracement line, and if that line holds, it could give the stock some momentum to start pushing higher to reclaim its highs from earlier in the year. On the other hand, a drop below $135 would mark a clear break through support that would give the stock room to drop as far as the 88.6% retracement line around $120 in fairly short order. That’s more than $15 of near-term risk if support is broken, and about $18 of legitimate risk right now. Even if the stock does rally from that support point, it should find major resistance in the $150 range, where the 38.2% retracement line sits, meaning that a bullish investor stands to make about $12 per share if he’s right; but he could lose $18 per share if he’s wrong. That’s easy math that should make anybody hesitate.
    • Near-term Keys: If you’re looking for a good reward: risk trade opportunity for CAT, watch to see if the stock pushes below support around $135. If it does, there could be a very good opportunity to short the stock or use put options, with a target price around $120, and a stop loss a little above $136 per share. That’s a set up that offers $15 of reward, against only a couple of dollars per share of risk.


  • 11 Jul
    AMAT is about to break down despite great fundamentals

    AMAT is about to break down despite great fundamentals

    For the last week or so, I’ve noticed that the market seems to be trying to shrug worries about trade tensions aside and focus on other matters, like continued strength in the U.S. economy as measured by things like unemployment and payroll figures, along with corporate earnings that generally seem to keep coming in with healthy growth. This morning, however, trade is once again rearing its ugly head, as overnight the Trump administration published a fresh list of proposed tariffs on an estimated $200 billion of Chinese goods. Not surprisingly, China is promising to retaliate and accusing the U.S. of using bullying tactics to try to get their way. I’ve also heard some rumbling over the last couple of weeks about the flattening yield curve and the chances it could invert, which a lot of experts would read as a leading indicator of a looming recession. I’m not so sure that a flattening curve right now is as problematic as some think. There are some interesting global factors at play right now, including negative interest rates in Germany and Japan that make short-term U.S. Treasuries more attractive worldwide than what we’ve seen happen historically. On the other hand, an extended, long-term trade conflict with China and our other biggest trade neighbors could be a catalyst that drives up costs, not only in the U.S. but across the globe to the point that recession becomes inevitable.

    With respect to China, the Semiconductor industry has seen a lot of negative price pressure for the last few months, because so much of the fabrication and production of semiconductor products comes from that country. The Trump administration’s tariffs against China imports are intended to protect U.S. technology and intellectual property (or so they want the world to believe) but at the same time many of them penalize American companies that use Chinese manufacturers to produce their finished product. That puts the entire sector at risk, which includes companies like Applied Materials, Inc. (AMAT), who provide manufacturing equipment, services and software to the sector.



    AMAT is down about 28% since early March, when President Trump first started rattling the tariff saber. That’s a big drop over that period that has forced the stock into an intermediate-term downward trend. The strength and momentum of that trend appears to be approaching an inflection point right now, and assuming the U.S. and China won’t stop pointing fingers and actually find a way to come an agreement anytime soon, I think there is a real chance that AMAT could break down to levels it hasn’t seen since late 2016. This is a risk that belies the company’s overall fundamental strength and strong financial position; in the long run, I think that strength will set up an interesting value proposition at some point down the road. For now, however, the downside risk from those external, geopolitical factors far outweighs any long-term opportunity.

    Fundamental and Value Profile

    Applied Materials, Inc. provides manufacturing equipment, services and software to the global semiconductor, display and related industries. The Company’s segments are Semiconductor Systems, which includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation; Applied Global Services, which provides integrated solutions to optimize equipment and fab performance and productivity; Display and Adjacent Markets, which includes products for manufacturing liquid crystal displays, organic light-emitting diodes, upgrades and roll-to-roll Web coating systems and other display technologies for televisions, personal computers, smart phones and other consumer-oriented devices, and Corporate and Other segment, which includes revenues from products, as well as costs of products sold for fabricating solar photovoltaic cells and modules, and certain operating expenses. AMAT has a current market cap of $45.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased 54%, while sales increased almost 29%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. The company’s Net Income versus Revenue was almost 25% in the last quarter, which indicates their operating margins are very healthy.
    • Free Cash Flow: AMAT’s Free Cash Flow is strong, at more than $3.6 billion. While this number declined from about $4 billion in its most recent quarter, it has increased consistently since late 2015 when it was a little under $1 billion.
    • Debt to Equity: AMAT has a debt/equity ratio of .75, which is manageable despite its increase from .62 in the last quarter. The company has more than $5.3 billion in cash and liquid assets, which means they they have plenty of liquidity, against $5.3 billion in total long-term debt.
    • Dividend: AMAT pays an annual dividend of $.80 per share, which at its current price translates to a dividend yield of about 1.77%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for AMAT is $6.99 per share. At the stock’s current price, that translates to a Price/Book Ratio of 6.45. The average for the Insurance industry is 5.3, while the historical average for AMAT is 4.06. That is a  pretty good indication the stock remains overvalued right now despite its decline since March. A move to par with its historical average would put the stock a little above $28 per share, which is actually below the technical bottom I’m forecasting if the stock’s current downward trend continues to assert itself.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The chart above covers the last two and a half years because I want to give you an idea of how far AMAT has come; the impressive rise from around $15 that started at the beginning of 2016 to a high above $60 is remarkable by any measure. The stock’s terrific run was driven in no small part by the company’s fundamental strength, and those fundamentals remain solid, so there is an argument to be made that the stock should remain higher than it where it started. Given that the stock has dropped almost 30% in just four months despite its fundamental strength, however also provides some context for how much downside risk I think there is in the stock from external forces. The stock is sitting on a strong support level around $45 right now, which I’m highlighting with the blue horizontal line. If it drops below that point, its next likely support level would be around $40 (yellow horizontal line). Another break below that level could easily see the stock drop all the way to around $30, which would mark a 33% drop from the stock’s current level, and a 50% total drop from its March highs. Bullish upside is also limited right now by the bearish strength of the intermediate trend, shown by the green moving average line. The stock would have to break above $50 with strong upward momentum and buying volume before any reversal of the intermediate trend could be confirmed.
    • Near-term Keys: Watch the $45 support level. A break below that point is a strong indication the current downward trend could resume its momentum; the best trading probabilities in that case would come from bearish trades, such as buying put options or short selling the stock. If the stock starts to reverse higher from $45, be patient and wait for the stock to break above $50 before considering any kind of bullish trade.


  • 02 Jul
    SWKS is an interesting proxy for Semiconductor sector risk

    SWKS is an interesting proxy for Semiconductor sector risk

    As trade tensions continue to linger, one of the sectors that I think is going to keep seeing pressure on a global scale is Semiconductors. A recent study indicates that while this sector remains the second-largest exporting industry in the United States, its global market share has eroded, with much of its production, and even research and development investments shifting to China, Taiwan, and much of Asia. This is no doubt a part of the reasoning behind the Trump administration’s push to impose tariffs on Chinese technology imports. It is a core reason that while demand for semiconductors is likely to remain strong, costs are also likely to increase the longer the standoff between the U.S. and China continues. The question about what semiconductor producers will do – passing the costs on to their customers, or absorbing the costs themselves – isn’t encouraging for investors, because either option poses problems.

    Today’s stock is a company with a great fundamental profile, and that operates in what is likely to be one of the biggest growth areas of the entire technology space. Skyworks Solutions Inc. (SWKS) built its business by providing connectivity solutions to mobile devices like smartphones. It remains a key supplier for Apple’s (AAPL) iPhones, but has also diversified its business into the Internet of Things (IoT) space with applications for autos, smart home devices, and industrial equipment. Why do I think this is going to be such a big deal for future growth? The short answer is 5G. Most of the companies that will be providing the backbone of 5G connectivity – wireless towers and so on – are required to complete the buildout of their respective networks by 2020 or they will lose the 5G spectrum leasing rights they have collectively invested hundreds of billions (and quite possibly trillions) of dollars into. As those networks come online, demand for IoT devices that can connect to them are sure to be in high demand, on a consumer and industrial level. That said, SWKS has big exposure in Asia, with Goldman Sachs reporting earlier this year that the company derives 85% of its sales in China, and so prolonged, unresolved trade tensions and tariffs could significantly erode their profit margins.



    Fundamental and Value Profile

    Skyworks Solutions Inc. designs, develops, manufactures and markets semiconductor products, including intellectual property. The Company’s analog semiconductors are connecting people, places, and things, spanning a number of new and unimagined applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets. Its geographical segments include the United States, Other Americas, China, Taiwan, South Korea, Other Asia-Pacific, Europe, Middle East and Africa. It operates throughout the world with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America. It is engaged with key original equipment manufacturers (OEM), smartphone providers and baseband reference design partners. Its product portfolio consists of various solutions, including amplifiers, attenuators, detectors, diodes, filters, front-end modules, hybrid, mixers, switches, and modulators. SWKS has a current market cap of $17.6 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing almost 13% while sales increased about 7.25%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long term, but it is also a positive mark of management’s ability to effectively maximize the company’s business operations.
    • Free Cash Flow: SWKS has very healthy free cash flow of more than $1.2 billion over the last twelve months. This is a number that has more than doubled since mid-2016.
    • Debt to Equity: SWKS has had zero debt on its balance sheets since the beginning of 2015, which means that all of its operating profits can be used to fund research and development, expand its offerings, and bolster its cash and liquid assets. As of the last quarter, the company had more than $1.8 billion in cash, an increase of 80% from mid-2016 when it was a little under $1 billion.
    • Dividend: SWKS pays an annual dividend of $1.28 per share, which at its current price translates to a dividend yield of 1.32%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SWKS is $22.34 per share. At the stock’s current price, that translates to a Price/Book Ratio of 4.30. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Semiconductor & Semiconductor equipment industry is only 4.1; this is also the historical average for SWKS. That generally implies SWKS is fairly valued at current price levels. On a Price/Cash Flow basis, however, the stock is trading more than 34% below its historical average, suggesting a long-term price target of $128 per share.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red, diagonal line traces the stock’s upward trend trend dating back to July of last year. It is also the basis for calculating the Fibonacci retracement lines on the right side of the chart. The stock sitting practically on top of the 38.2% retracement line and has used this level for significant support multiple times since December of last year. That could give the stock another bounce, with short-term upside around $102 per share. Under current market conditions, that would likely require some kind of macroeconomic catalyst such as easing trade tensions rather than a quantitative, fundamental basis. If the stock breaks below $94, the next likely support is around $87 per share, which is also where the 50% retracement line sits. Assuming the U.S. – China trade relationship continues to deteriorate, the next likely support level around $80, or even lower is certainly not out of reach.
    • Near-term Keys: If the stock breaks below $94 as just mentioned, I believe the stock should easily drop to as low as $87 before finding any kind of significant support. An additional break below $87 would confirm a legitimate downward trend that could keep the stock dropping to somewhere between $65 and $71 per share. These could be interesting opportunities for shorting the stock or working with put options. If the stock does recover bullish momentum and manages to break the $102 level, there could be an attractive opportunity to work with the long side by either buying the stock outright or using call options.


  • 26 Jun
    EMN dipped below $100 today. Is it a good buy?

    EMN dipped below $100 today. Is it a good buy?

    Trade tensions seem to have finally caught up to the market, as the last week has prompted investors to start selling. Despite today’s rally, the S&P 500 is off about 2.2% from a high point around 2,788 earlier this month. Those tensions have particularly followed U.S. stocks that do a significant portion of business overseas, and even more specifically those with major exposure in China. EMN fits that description; as of March of this year, the company estimated that 28% of its business came from the Asia/Pacific region, with the lion’s share of that business in China. That has pushed the stock off of its all-time highs around $110 in the last couple of weeks to its current price. A drop of about 10% in price marks a significant retracement and correction of the stock’s long-term trend, which is still more than 50% higher than it started a year ago. The stock is approaching an important support level that could mark a major turning point for investors.

    I think that despite the stock’s getting solid fundamental profile, and recovery to the stock’s previous highs is anything but a given, especially given the preference shown so far by both the U.S. and its trading partners to escalate trade tariffs. The market abhors any kind of conflict that could impact trade, and so I think the near-term risk for stocks like EMN is that the absence of satisfactory resolutions is going to limit their upside. The larger risk is that those tensions could force prices even lower and push these stocks into longer-term downward trends. EMN is very close to what I think it is an important signal point that investors can use to plan their strategy in either direction.



    Fundamental and Value Profile

    Eastman Chemical Company (Eastman) is an advanced materials and specialty additives company. The Company’s segments include Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. In the AFP segment, it manufactures chemicals for products in the coatings, tires, consumables, building and construction, industrial applications, including solar energy markets, animal nutrition, care chemicals, crop protection, and energy markets. In the AM segment, it produces and markets its polymers, films, and plastics with differentiated performance properties for end uses in transportation, consumables, building and construction, durable goods, and health and wellness products. The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support its specialty operating segments. Its product lines in Fibers segment include Acetate Tow, Acetate Yarn and Acetyl Chemical Products. EMN has a current market cap of $142.6 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew almost 22% while sales grew about 13%. Growing earnings faster than sales isn’t easy, and over time isn’t really sustainable, but it is also a positive mark of management’s ability to maximize their business operations.
    • Free Cash Flow: EMN has generally healthy free cash flow of $939 million over the last twelve months. This number has improved markedly since June of last year, when free cash flow was a little over $650 million.
      Debt to Equity: the company’s debt to equity ratio is 1.12, which is a little high; levels at 1 or below are preferred. However, the company’s balance sheet indicates operating profits are more than adequate to service the debt they have.
      Dividend: EMN pays an annual dividend of $2.24 per share, which translates to an annual yield of 2.22% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for EMN is $39.40 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.55. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Chemicals industry is 2.8, and the historical average for EMN is 3.0. That translates to about 15% upside in the stock right now, which would push its price a little above its 52-week highs.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

    • Current Price Action/Trends and Pivots: Since early March, the stock has operating within a range between about $100 on the low side and $110 on the top end. The chart above uses the red diagonal line to trace the stock’s upward trend from August of last year to its peak in March, and then calculate Fibonacci retracement levels. Today’s movement has the stock possibly breaking the first level of Fib support. That’s interesting, but the real signal is at the next level, shown as the 50% retracement level (technically not a Fibonacci number, but still often an important level of emotional price activity) at around $97 per share. That range also coincides with the stock’s long-term trend line as calculated by a 200-day moving average and which is taken by technical traders as an important indicator of the stock’s long-term trend. The stock could use that level as support anywhere between its current price and $97, which would generally confirm the long-term trend. On the other hand, a break below $97 could mark a critical reversal point where the long-term trend shifts from up to down.
    • Near-term Keys: Watch the stock’s activity between $100 and $97 per share. A pivot back to the upside, with a push above $101, would certainly suggest the stock should at least push back into the $110 range and could offer a good short-term bullish trade by buying the stock or using call options. A break below $97 would probably not see any kind of pause in downward momentum until about $93 per share, or in more extreme cases, possible as low as the $85 to $86 range. If you don’t mind working with downward price patterns and trends, that could be an opportunity to short the stock or to work with put options.


  • 15 Jun
    U.S.-China trade war could really hurt WMT

    U.S.-China trade war could really hurt WMT

    This morning marked the opening of yet another chapter in the drama that is U.S. trade diplomacy. The Trump administration announced this morning that U.S. Customs and Border Protection will begin to collect tariffs on the first $34 billion worth of Chines imported goods on July 6. This is the next step in the implementation of duties first announced in March of this year on approximately 1,300 different finished goods imported to the U.S. by its largest trading partner. The final $16 billion of a proposed $50 billion total of tariffs is still under review.

    This is a clear escalation of the two nation’s ongoing trade dispute, and not surprisingly China responded quickly, saying that they will act quickly to “take necessary measures to defend our legitimate rights and interests.” They have previously threatened their own set of tariffs on a wide ranging list of U.S. product ranging from soybeans and meat to whiskey, airplanes and cars.



    It’s one thing to watch the news and listen to talking heads wring their hands and bemoan the negative effects that an extended trade war would have on economic growth. And that’s not to say that they’re wrong; over the long-term, a trade war could bleed into virtually every part of the U.S. economy. Keep in mind that virtually every kind of finished product uses steel or aluminum, which is the basis for the first round of tariffs that Trump first started talking about three months ago. The real question for the average American is where those negative effects are most likely to be seen hitting their wallet. I think one of the first, and most vulnerable places can be found not far from where you live. Walmart Inc. (WMT) sources 75% of its merchandise from China, and that puts one of the largest retailers in the country literally on the cutting edge of what is happening right now.

    This isn’t an unrealistic argument; one of the ways WMT has always differentiated itself from its competitors is as the low-cost leader for consumers. The longer a trade war takes to find a resolution, the more their costs on the vast majority of goods that fill their shelves are going to rise. As you’ll see below, WMT simply doesn’t have much ability to absorb those costs to keep them from passing through to their customers. That begs a question that only each customer can answer: if that item – whether it be a shirt, a power tool, a toy, or an electronic gadget – that you’re used to getting from WMT costs 25% or more than it used to, are you going to be more or less likely to buy it?

    Current consumer trends suggest that in the case of luxury items – say, an $80 shirt – a lot of consumers that are already willing to pay that much for a shirt will probably also pay $90 to $100 for the same item. That is usually less true when the conversation shifts instead to bargain-priced items, like a $20 shirt. That puts WMT in the very difficult position of watching its operating margins erode even more by absorbing increasing costs to keep sales high or pass those costs to their customers, who may simply choose not to make the same purchases they used to. Neither scenario works out very favorably for the company’s bottom line.



    Fundamental and Value Profile

    Walmart Inc., formerly Wal-Mart Stores, Inc., is engaged in the operation of retail, wholesale and other units in various formats around the world. The Company offers an assortment of merchandise and services at everyday low prices (EDLP). The Company operates through three segments: Walmart U.S., Walmart International and Sam’s Club. The Walmart U.S. segment includes the Company’s mass merchant concept in the United States operating under the Walmart brands, as well as digital retail. The Walmart International segment consists of the Company’s operations outside of the United States, including various retail Websites. The Sam’s Club segment includes the warehouse membership clubs in the United States, as well as samsclub.com. The Company operates approximately 11,600 stores under 59 banners in 28 countries and e-commerce Websites in 11 countries. WMT has a current market cap of $246 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by 14%, while sales grew a little over 4%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations. Diving a little deeper, however provides a good look at the reason you should be concerned about increasing costs from tariffs on Chinese goods. As of the company’s last earnings report, WMT had more than $500 billion in revenue, with net income of almost $9 billion. Net income is calculated by subtracting the costs of doing business from revenues, which it means it provides the baseline for the earnings per share number you and I use to measure a stock’s profitability. Comparing net income to total revenues gives you an idea about what kind of profit margin the company is working with. For WMT, that number is only 1.77%, a very low number that implies they work with very narrow operating margins.
    • Operating Trends: WMT has been doing a great job of growing revenues, and since late 2014 they’ve grown from about $470 billion to their current level of a little over $500 billion. Over the same period, the reverse is true about their net income, which has dropped more than 50% from a high a little above $17 billion to just under $9 billion currently. That negative trend is also reflected in the decline of net income as percentage of revenue, which was about 3.6% at the end of 2013 but, as already observed is now only 1.77%. The company’s margins have already been under considerable pressure for some time, which further bolsters the argument they just don’t have a lot of wiggle room to work with.
    • Debt to Equity: the company’s debt to equity ratio is .46, which is low and should generally be quite manageable. WMT has also done a good job decreasing their total long-term debt since the first quarter of 2014, from more than $45 billion to a current level of about $29.4 billion.
    • Dividend: WMT pays an annual dividend of $2.08 per share, which translates to an annual yield of 2.49% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WMT is $26.44 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.15. This is below the industry average, which is 4.0, but inline with the stock’s historical average, which to me suggests the stock is fairly value right now, with limited upside potential in the long-term.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

    • Current Price Action: The stock has declined from a high around $110 in January to its current level around $83. That’s a drop of more than 25%, which at first blush might look pretty good for a stock that a lot of value investors would say has a lot of stickiness; that is, they will continue to generate high revenues even if a healthy economy begins to struggle, because consumers will continue to spend their money there. That is a true statement when it comes to WMT, but as observed above, I think the risk comes from what will happen as their costs increase. Will they continue to generate attractive profits, or will their margins erode? The risk is much higher they will erode.
    • Trends and Pivots: I’ve drawn two lines to illustrate where I think the stock’s real downside lies right now. The horizontal red line is just below the stock’s current level at about $82 and appears to be acting as good support right now. The horizontal blue line is drawn at the stock’s multi-year low, which was reached in February of last year at around $66. The red bidirectional arrow emphasizing the $16 per share difference between the stock’s current price and that low point is, I think a clear indication of investor risk right now. That’s a downside risk of just a little less than 20% right now. I also see little reason – fundamental or technical – to suggest the stock should reverse the intermediate-term downward trend anytime soon, which means that risk right now is much higher than any potential reward.
    • Near-term Keys: Watch the stock’s movement carefully over the next few days. A move to $90 would mark a reversal the intermediate trend’s downward strength and would act as a good signal point for a good bullish trade, either by buying the stock or working with call options. On the other hand, a drop below $82 would mark a major support break, with a drop to the aforementioned $66 level likely before any new significant support is reached.


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