No Love For The Bear

The stock market is nearing all-time highs.  In fact, it seems to keep reaching new ones on a regular basis.

Advancers are leading decliners.

Percentage of stocks above their 20/50/200 DMA is higher than stocks which are not.

The only thing that the bears can take some comfort in with these charts is that some of the volume and oscillators are indicating a possible downward trend.

Yes, there has not been a whole lot of love for the bears lately and they are feeling left out.

The contrarian would say, this means we are due for a correction.

The conformists or anti-contrarians say lets keep the party going.

The realists say, perhaps we should look for stocks or sectors holding up well enough but not yet joining the party.  Perhaps stocks with some “safe” characteristics such as dividends would be nice to include too.  Perhaps these are just waiting for the right invite.

The chartists say the overall market is doing well.  SPY and DIA charts look strong . . .

Though, the QQQ is perhaps looking a bit extended.

So where do we look for stocks and or sectors holding up well just waiting to rally?

Mr. Bull, I’d like you to meet Mr. Financial Sector.  He’d like to join the party.  He’s just waiting for the right conditions.   Like . . .

–          Financial Reform

–          Tax Reform

–          Inflation and Rate increases

Those are the tickets that will get him out on the dance floor dancing the happy dance.

The technical charts for the financial sector look promising.  They look like they are poised for a breakout.

Of course, bulls are hoping for an upward breakout, and the bears are hoping for a breakdown.

Unfortunately for the bears, there are the three catalysts, previously mentioned, just waiting to kick in.  And they are pretty strong catalysts.

Unfortunately for the bulls, the current administration and congress is painfully dysfunctional.  When and if all this is going to happen is anybody’s guess.

So until then, we wait and hopefully enjoy the ride.

What Would You Tell Trump To Do?

Today marks the 100th day in office for POTUS Trump.  Depending on who you ask, and which news agency you follow, you will get different answers on how successful he and his administration has been.

One thing is clear.  It is not anything like anybody would have imagined.

Trump himself admits “I thought it would be easier” and that he “missed his old life”.

So, on this 100th day of judgement and reflection, what would you like to tell Trump?

IBD recently asked this very question to a bunch financial experts.  Their answers might be a little bit surprising.

“The biggest problem we face is not saving enough money for retirement”.

“Social Security needs to be reformed”

The president and congress could start by looking at increasing not only the age limits but mandatory contributions.  Yes this is a political hot potato and good luck getting Americans to be mandated to be told what to do with their money or allowing the government to take even more of it away, but the problem exists and the system needs to be fixed.

“People need to be financially educated and make wise investment decisions”.

Addressing financial literacy early and often throughout the educational system is key.  A standardized curriculum, similar to math, science and history, which focuses on the basics of balancing budgets, how saving plans work, compounded interest, mortgages, loans, managing debt, what different investment vehicles are available and what banks and other financial institutions have to offer.

“A Lifetime Plan”

Instead of the voluntary approach to learning, saving and investing, there should be a mechanism in place which contributions are required.  To a certain extent, some companies are already doing this.  I for one have seen mandatory 1% 401K contribution and AD&D and Life insurance policies put into place.

And yes, I have heard many an objection to this.  But anybody who has worked in HR or a leadership position in a company and has the “experience” of an unexpected death or disabling injury occur to a co-worker or their family knows how valuable these contributions and plans can be.

“Tweak Deductibles for everyone”

An example of this is Health Care Costs.  Corporations can deduct it as a business expense.  Why not make all health costs deductible for everyone?

So, what would you add to the list?

Buy USA

The Trump Rally.  We all know it.  We can see it in the charts.  It is based on expectations.

Expectations for:

  • Spending on infrastructure
  • Tax reform
  • Easing of business, environmental and financial regulations

Since November 8th, the markets have been on an absolute tear.

  • S&P + 7.25%
  • DOW + 10.40 %
  • NASDAQ + 8.99%

So, do we all hop on board the rally train?  Is it too late?  With the indexes and many stocks at all-time highs, many folks are beginning to wonder if we are due for a pull back.  The chartists in my investment club certainly think so.

With so many charts looking like this:

multiple-top

It is easy to see why folks are waving the warning flags.

But I believe potential winners can be found in any market.  You just have to know how to look for them.

With this Trump administration doing so many different things, I started thinking about the constraints of my search.

This is what I came up with.

A USA based company that:

  • Does little international business.
  • Exposed to the full USA tax rate. This would also mean benefiting from proposed reductions.
  • Not dependent on international trade or directly impacted by tariffs or immigration or offshoring work.
  • And, since the up and coming economic demographic includes millennials, a company with a good mobile presence or crowd sourcing platform.
  • And was not at all time or 52week highs.

This was my initial screen.

neworder1

Ticker Company Sector Industry
ABAX Abaxis, Inc. Healthcare Medical Laboratories & Research
AMGN Amgen Inc. Healthcare Biotechnology
ANET Arista Networks, Inc. Technology Diversified Computer Systems
BSTC BioSpecifics Technologies Corp. Healthcare Biotechnology
CTSH Cognizant Technology Solutions Corporation Technology Business Software & Services
DORM Dorman Products, Inc. Consumer Goods Auto Parts
ELLI Ellie Mae, Inc. Technology Application Software
EPAM EPAM Systems, Inc. Technology Information Technology Services
EXLS Exlservice Holdings, Inc. Services Business Services
FIZZ National Beverage Corp. Consumer Goods Beverages – Soft Drinks
GRUB GrubHub Inc. Technology Internet Information Providers
ICUI ICU Medical, Inc. Healthcare Medical Instruments & Supplies
ILMN Illumina, Inc. Healthcare Biotechnology
INGN Inogen, Inc. Healthcare Medical Instruments & Supplies
LMAT LeMaitre Vascular, Inc. Healthcare Medical Instruments & Supplies
MEET MeetMe, Inc. Technology Internet Information Providers
NEOG Neogen Corporation Healthcare Diagnostic Substances
PETS PetMed Express, Inc. Healthcare Drug Delivery
REGN Regeneron Pharmaceuticals, Inc. Healthcare Biotechnology
SCMP Sucampo Pharmaceuticals, Inc. Healthcare Drug Manufacturers – Other
SEIC SEI Investments Co. Financial Asset Management
SLP Simulations Plus, Inc. Technology Business Software & Services
SPSC SPS Commerce, Inc. Technology Application Software
SSD Simpson Manufacturing Co., Inc. Industrial Goods Small Tools & Accessories
SYKE Sykes Enterprises, Incorporated Technology Information Technology Services
VEEV Veeva Systems Inc. Technology Healthcare Information Services
WBMD WebMD Health Corp. Technology Healthcare Information Services

Interestingly enough, one of the companies on this list was just mentioned in an IBD feature article which fits the criteria to a tee.

GrubHub (GRUB)

grubhub

The “I-want-it-now” millennials are pushing more services online, and GrubHub has the largest online food ordering platform in the U.S.

It also fits what they call “A Favored Trump Trade” idea.  Here is why.  Nearly all its business is conducted in the U.S.  and, consequently, GrubHub is currently swallowing a tax rate of approximately 40%.

Credit Suisse estimates a 5% reduction in their effective tax rate would drive 10 cents to 12 cents of incremental earnings per share on an annual basis.

Currently the stock is working on the right side of a consolidation pattern and is showing good strength in it’s recovery attempt.

With a quarterly report right around the corner, this is definitely one I am adding to my watch list.

Note: I am not currently invested in nor do I plan on investing in stocks mentioned in this post within the next week.  They are simply ideas for further research. 

What other stocks do you see fitting well into this new world order?

Braking News and Research

no_brakes

Peter Lynch once said, “buy what you know”.  For this post, perhaps we should say “buy what happens to you”….

During the last week of 2016, the brakes on my wife’s car failed.  No the pads did not wear out.  Nor did the drums.  A no, nobody cut the brake lines, but the result was basically the same and could have been equally disastrous.

We have an older model Chevy Suburban whose brake lines were corroding and just happened to pick a “convenient” time to burst.

Note:  I really do not understand how this is not a recall since most everyone I talk to about older GM models knows about this and can relate a similar “repair” story.  GM even has a kit just for this purpose so people do not have to refabricate parts and installation.

My wife was driving our son and his friends back from basketball camp and after she had dropped everyone off at their respective homes and gone up and down some major hills, she was traveling along a four lane road back home when another car pulled out from a side street.  Now normally this should not be an issue but this person felt inclined to swerve across three lanes in front of her instead of just pulling out into the first right-hand lane.  And of course it was at this point that she discovered that the brakes had failed.  Fortunately nothing bad happened but it was scary.

So we called the tow truck and had the Suburban towed to our local brake shop.  It took them a whole extra day to get around to checking it out because of the current backlog.  Then another three days to get the parts ordered and perform the repairs.  At the time I didn’t think too much about this because it was the holiday weekend and they were on a skeleton crew, but still it was terribly inconvenient to be down to only one car.

Needless to say this event was the genesis of much conversation.  You know, stuff like movies are made out of:

–          “How to escape out of a car under water.

–          “How to stop a run-away car”.

And, the pros and cons of a floor/pedal emergency brake vs. a hand brake near the drivers seat.

Fast forward a day or two past getting the Suburban back and my daughter asks if I can pick her up at the local Merchants Tire and Auto if she drops her car off for an oil change.

“Sure, I can do that”.

Well about 20 minutes later she calls and says she is taking her car to Jiffy Lube because Merchants says it will be 2 days before they can get around to it and that the next “open” appointment they have is 2 weeks away.

“Really? Two days for an oil change?”

“Yup”

“So you don’t need me to pick you up?  Are you going to just wait at Jiffy Lube?”

“Yes”

“To what?  Pick up or Wait”

“Wait”

“OK”

Well, about an hour later I get a frantic call from my daughter who is yelling speaking quite loudly …

“What Did They Do To My Car!”

“What’s wrong”

“It just sped up and wouldn’t stop and I almost crashed and every time I turn it on it just races really fast and it scared the !@#$ out of me and They Broke My Car!”

Well, to make a long story short the throttle cable in her car runs right next to the air filter cover and got knocked out of its brackets as they were doing their “inspections”.   The lead tech even drove down the road to help out and make things right.  I was hoping to get my daughters money back since they screwed up and nearly caused a serious accident.  But all she got was a coupon for a free oil change, which is pretty useless since she vows never to go back to Jiffy Lube ever again.

However, she did comment on how she knew exactly what to do based on our discussions about the suburban, no brakes and run-away cars.

Sometimes the lord works in mysterious ways.

I just wish he didn’t have such a flair for the dramatic.

So what does all this have to do with stocks and investing?

Well thinking about how busy the brake shop and Merchants were, I started thinking that perhaps this season might be a good time for auto repair businesses.  Unfortunately, Merchants is private.  So is Midas, AAMCO, PEPBOYS, and a whole host of others.  However, there are some publically traded auto part companies which still exist and could be worth consideration. After all, regardless if you you’re your car to the shop or do it yourself, one still needs to purchase the parts.  Two of the more popular and well-known brands are AutoZone and Advanced Auto Parts.

Though these could be added to any watch list, what I usually do is see how they rank when compared to their peers.

  • AAP and AZO rank 4th and 5th in their group (according to IBD)
  • AAP recently reported better than expected sales and an upgrade.
  • AZO has also seen better than expected results.
  • Both have benefited from the Trump Rally.

aap

However, they both have pretty poor overall composite ratings.

Again, maybe not a terribly bad thing if you think they might be good turnaround candidates.

When I look at peer groups within IBD it gives me a sense of how they are doing compared to their peers and, as you can see, gives me alternative stocks to research.

Since different systems classify, rate and rank stocks differently, I often go to other sites and run screens to see what else may pop up.  In other words to cast a wider research net. One such site I use is FINVIZ.

screen

For my screen, I kept it pretty simple.  I looked for stocks with positive EPS, Sales, and ROI.  Depending on my results, number of stocks, I sometimes add selection criteria to narrow it down.  In this case, I really did not have to.

I also expanded my research a little bit to include other auto part categories as well as companies which might be related to the field such as Tools and Accessories.

This is what I came up with and is a good starting point to do any additional research and comparisons.

Ticker Company Industry Market Cap P/E Price Volume
ALV Autoliv, Inc. Auto Parts 10.02B 16.55 113.28 427,803
CPS Cooper-Standard Holdings Inc. Auto Parts 1.87B 15.39 106.74 138,260
GNTX Gentex Corporation Auto Parts 5.96B 17.24 20.52 2,416,357
LEA Lear Corporation Auto Parts 9.64B 10.4 136.9 548,065
TEN Tenneco Inc. Auto Parts 3.62B 9.5 65.25 386,360
ORLY O’Reilly Automotive, Inc. Auto Parts Stores 26.93B 27.28 281.78 472,638
MGA Magna International Inc. Auto Parts Wholesale 17.39B 8.82 45.06 862,433
SNA Snap-on Incorporated Small Tools & Accessories 10.10B 19.32 173.19 228,880
SSD Simpson Manufacturing Co., Inc. Small Tools & Accessories 2.13B 24.61 44.2 216,775

What do you think of the prospects of the auto part industry?

Will their increased sales trend continue?

Will Trump Fix The Government?

trump-elect

The answer, I guess, all depends on what one thinks is broken.

  • Is it over regulation?
  • Is it inefficient?
  • Is there too much debt?

My guess is the answer is no, he will not “fix” the government, just change it.  It will be interesting to see if that change is for the overall good of the country.

Lets look at regulation.

Some obvious areas for de-regulation (the GOP are generally in favor of less regulation) are in finance and energy sectors.  A lot has been written about how de-regulation will benefit businesses by lowering costs, reducing the need for red tape and making them more efficient – and ultimately more profitable.

The theory here is that as a business grows and becomes more profitable, more jobs will be created.  And this can be true to a certain extent.

However, with a lot of industries, one of the biggest drivers in business is not de-regulation but rather, innovation and automation.  As a result, many people see automation as a job killer rather than a job creator.

Recently, Amazon introduced a new concept store with no checkout lines or cashiers.  There were immediate cries of “job killer” from certain camps.  And to an extent, they may be right.  If we automate the checkout line process, there will certainly be less people working as cashiers.

Amazon has also launched the first drone delivery of a shipment.

Tesla is automating the way we drive.

Can you imagine a world with no cashiers, deliver personnel or taxi drivers? 

Technology and innovation has always disrupted not only the way we do business but the way we live our lives. This is nothing new.  What is new is that this “go” store by Amazon, drone deliveries and self-driving cars could usher in a new wave of government regulations.  Not just regulations about the technology and safety, but also about the number of jobs, or types of jobs that could be replaced.  We have “quotas” or “goals” for employment diversity, why not include AI and automation?

Just when we are repealing certain regulations, we will probably be creating more – different ones.  The regulatory environment isn’t going to shrink, it’s going to change. 

How about efficiency?

This is actually an area that Trump just might be able to make a difference.  Recent studies have indicated that not only is there waste in cost of goods within the federal government but also within job functions.  For now, Trump has focused his tweets on big government contractors like Boeing and Lockheed Martin.  In fact, these tweets just might provide short term volatility and opportunity for investors.

A professor of mine once said “The government never shrinks”. 

Will government employees be at risk for losing their jobs if their roles are deemed redundant?

Perhaps.

But for anybody whoever has been a manager within the federal government, one thing they know is how difficult it is to actually “fire” somebody.  The system is built to safeguard the employee.  Now don’t get me wrong, it is possible, just not as easy as it is on TV.  Trump and company would have to completely re-write government policy, union contracts, and change the entire “culture” of the federal government. 

It has taken years for things to get to where they are now, decades even.  Even under the best circumstances, it will take decades to fix.

For now, I see any “change” in efficiency and cost savings limited to financial obligations and the total cost of contracts of service to contractors.  Again, this only happens with new proposals and contract renewals.  So even this process that inherently has a short half-life, will take years to make any truly appreciable difference. 

So where will the short term saving come from? 

Most likely from creative accounting practices and kicking the can down the road.  Note:  not always the best long term policy.  And, I’m sure strangely familiar to folks who have been paying attention the past eight years – or even decades.

After all, one needs some quick wins to look good in the eyes of the public. 

Debt, Inflation and Jobs.

We have already seen some “quick wins” by the Trump administration.  And they aren’t even in office yet.

We just had an election which had as one of it’s focus point, jobs.  Specifically the loss of jobs in the middle class.  Now much of the reasons and blame for the loss of these jobs was off-shore policies by American business.  President-elect Trump has vowed to preserve jobs by basically taxing or punishing those who participate in this activity. And by making foreign goods more expensive than locally produced goods. 

Recently Carrier, IMHO, basically bribed hundreds of thousands of dollars out of the state and federal government to “keep” jobs from going to Mexico.  Hind-sight has found that many of these jobs are already there and that the ones being “saved” are eventually going to be replaced by robotics and automation. 

But Carrier isn’t the enemy that they have been made out to be.  In fact, they have one of the most comprehensive and progressive re-education programs today, not only for their current employees, but also for those who happen to be let go and is included in every compensation package.  Carrier realizes that people need to be re-educated and learn new skillsets to survive in today’s changing economy and landscape – not government subsidies. 

Again, IMHO, the Trump administration, state and local governments, basically throw good money after bad.  They are basically saving obsolete jobs with tax payer money. 

Instead of providing long term solutions, the Trump administration has set a precedent to go for the quick win instead of re-tooling and re-educating the workforce in a changing environment. 

The real fear that folks have with the soon to be new administration though, is not with these quick wins, but with their potential long term plans for international trade agreements, tariffs building infrastructure and modifying the tax codes. All of which would be designed to punish those who ship jobs and production overseas and reward those who keep the jobs here along with adding to the national debt.

No, I’m not convinced that Mr. Trump and company will fix government.  I am convinced however, that they are certainly going to change it. 

And along with change, there is opportunity. 

You just have to educate yourself and know where to look for it.