Looking across industries and sectors to gauge where we are as earnings winds down next week
This group of names is eclectic and varied in style, but in addition to having something for everyone, they may give us a gauge of the general market. No FAANG here – but I will talk about some other themes that can still be interesting in 2018.
Market reaction to earnings so far
The S&P500 Index (SPY) basically dropped 4% when earnings starting mid-month, but has now rebounded 2%. Reactions have been…interesting. Netflix flew, Google sputtered, and now Facebook is flying. Staples (the segment – not the stock) have gotten crushed on higher commodity prices, worsening margins, and low-ish growth. Caterpillar talked about a “peak” and scared everyone. And all this is going on with the backdrop of 3% interest rates (TNX). Right now, the S&P500 is up .83% in April – over the last 10 years that number has averaged +2.2%. So we are definitely lagging the normal return barring a huge move up in the next 4 days. So stock picking is important, and here is what we are watching.
Alibaba and JD.com
These stocks (BABA) (JD) both report in the next couple of weeks and are really sitting on the lower end of a range that goes back 6 months at least. I don’t think tariffs really hit them and they are still growing like weeds. Whether you think they are like Amazon years ago in the US, or don’t like that comparison, both have great positions in the Chinese online retail market and have the opportunity to grow really fast in the years to come. Alibaba’s EPS growth looks to accelerate from 27% this year to 38% in calendar 2019 and is only trading at 27x estimated 2018 EPS. I put these in the “China is tainted, but these stocks are screening as GARP (growth at a reasonable price) stocks here”.
OK, I know Autozone is up on O’Reilly’s (ORLY) report, but I swear I liked it yesterday! After a long winter, people have to fix their cars, especially since the roads are usually worse after a bad winter. I know that some are worried about this being Amazoned, but I think most people don’t order carburetors online. Plus they have a service business as well. The stock got bludgeoned 25% from $800 to $600. The company is showing mid-teens eps growth for a low-teens multiple (11.9x 2018e). I put this in the “If Amazon doesn’t kill the whole industry, Autozone (AZO) is cheap”
The stock (SMG) ran up quickly last year as one of their divisions, Hawthorne Gardening, caters to the cannabis industry. The stock was almost $110 in January when earnings came in slightly worse than expected for the normally loss-producing December quarter. Hawthorne was weak as well even though management felt like it would bounce back. The stock dropped all the way to $80. And now the company is buying a hydroponic company that will also cater to the marijuana business. So we have a lot of moving parts. But the good news is even with all the hand-wringing Hawthorne is only 10% of the business, and the marijuana industry does not look like it is going away. Today the company is trading at 16x next year’s estimated earnings that should grow in the 15-20% range. On top of that, we get a 2.5% dividend yield. Cannabis is hard to invest in in the U.S. So call this the “Backdoor Cannabis play at a decent valuation.
I know, I know. But this thing now has a 6.2% yield! I know risk-free 10-year is now 3% – but last I checked, 6 is double 3. Also there are a couple of potential catalysts. The Time Warner deal could still get through – it could. You can never count on this administration to stick with their plans. If that were to happen, AT&T (T) would be insanely cheap. Direct TV is struggling, but there is an argument to be made that 5G will cause a big phone upgrade. On a forward PE basis, this stock is as cheap as it has been since 2008. Call this “If anything goes right, this is just too cheap to ignore”.
Yes Fortnite is a big deal now, but gaming – console, mobile, and desktop does not seem to be going anywhere. Take-Two (TTWO) is in front of big franchise launches of Red Dead and Grand Theft and their sports titles look interesting as well. You would be getting the stock $30 below its high, and currently, the company is expected to grow earnings around 20% for the next 3 years while the forward multiple looks to be at the low end of its range around 20x. Call this the “thematic comeback at the right price”.
Conclusion – you may notice that all these stocks I am watching end up being “at the right price”. Of course, we can’t know if that is the case. But when the market gets dicey and uncertain like this, these thematic plays thrown out for one reason or another are interesting additions to any portfolio that may have taken it on the chin.