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26 Feb

Monday February 27, 2017

by

Good afternoon,

A late-day buying spree on Friday tipped the DJIA to an 11-straight days of record highs, the longest streak of new highs since the Reagan administration (1981-89).  The S&P500 and NASDAQ closed the week at new all-time highs, as well, but the DJTA and Russell 2000 failed to follow with 0.77% and 0.38% declines, respectively.

The VIX closed the week at 11.47, ending the week below its 200-week moving average for the 16th-straight week.

The following quote I found this weekend encapsulates my sentiments of the past few weeks.  It comes from an analyst I’ve never heard of, but he’s ‘spot on’ with his assessment of the markets.

“The heightened political risks in the U.S and Europe have revived an appetite for safe-haven assets with gold becoming an investor’s popular choice,” Lukman Otunuga, research analyst at Cyprus-based FXTM, told CNBC on Friday.

The rally since the Trump win at the polls has created a last-man-standing scenario for global investors, as Japan continues to sink with no GDP growth and zero interest rates, while Europe dies by 10,000 cuts of a once-promising experiment gone completely ‘pear shaped’.  

In a little more than two weeks, we’ll likely see Geert Wilders become the Trump-like prime minister of The Netherlands, which may certainly beget a bump in the polls for Mlle. Le Pen in France, another populist candidate vying for the top political spot in France on May 7.  The latest odds of a Wilder win is more than 80%.

Okay, so investors have on balance been shying away from Europe.

And Japan?  Here’s an unbelievable statistic about Japan’s GDP.  Today’s Japan’s GDP is approximately the same as it was in 1992.  After 25 years, Japan’s economy has gone nowhere, and is still on track to go nowhere.  And interest rates in Japan are zero-to-negative.  What a basket case.  Would you invest in Japan?

What’s left?  China?  Forget that.  Capital is fleeing after the slower-than-expected economic growth reported in China.  You can always tell when China’s capital flight intensifies.  Just follow the Bitcoin price, which just smashed a three-year record this week.  Enough said about China.

The same for SE Asia.  With the Trans-Pacific Partnership (TPP) trashed by President Trump during his first week in office, Malaysia, Thailand, Cambodia, Vietnam, and Philippines now find themselves scrambling to replace stable trading partners that the TPP had promised.  And a pretty good barometer of the outlook for SE Asia may be gleaned by watching the ringgit-gold price, which settled Friday at only 1.3% from an all-time high.  

While the battle of words between President Trump and Mexico President Enrique Peña Nieto have focused the media upon the value of the Mexican peso, the Malaysian ringgit has fared far worse, shifting attention away from the dismal prospects of SE Asia and its three-decade-long role, along with China, S. Korea and Taiwan, as an important exporter of goods to the West.

I’m amazed how little press Trump’s executive order to cancel the TPP got, because the negative implications to global trade are huge.  Don’t get me wrong, I’m no fan of TPP, not by a long shot, but the withdrawal of the US-centric trade agreements has put additional pressure on SE Asian currencies.  So, SE Asia is out, too.

So what is global capital chasing these days?  Bonds, blue-chip stocks and gold.  The globe’s investment capital is seeking safe-haven securities.  Period.  As some analysts have said of the global economy, it’s a slow-motion train wreck in progress.  I agree.  The average NYSE stock is down more than 23%, but the headlines only report the major indexes, which are heavily weighted in favor of blue chips.

More evidence of capital flight into safe-haven assets came on Friday.  The German two-year bill reached a record-low yield of minus 0.958% at the close of trading this week.  Wow.  And dollar-gold is attempting a breakout above the $1,265 level, while blue-chip stocks continue to defy a S&P 500 Shiller p/e of 29.34-times, a print just shy of p/e of 30-times registered immediately prior to Black Thursday of 1929.  

Conclusion: Safe-haven buying is all the rage right now until we get more clarity about France’s political situation.  In the meantime, Dow Theory tells us to stay long US stocks, as dividend-paying stocks make as much sense as holding US Treasury.  Doesn’t it?  

At an average of 2.66% dividend rate, owning the DJIA appears as attractive as buying a 2.31% rate of the US Treasury 10-year note, and is certainly more attractive than the 19-basis-points yield on a German 10-year note and seven-basis-points yield on the Japanese 10-year note.  Can we now see why US stocks remain elevated?

Okay, I haven’t talked about the oil market in a while, so let’s start with my analysis of the latest Commitment of Traders (COT) report.  From the report, we see open interest at an all-time high (number of contracts, not dollar amount), as far as I can tell.  Commercial shorts haven’t been as net short in WTIC since the run-up of the oil price to as high as $147 per barrel during the 2007-8 commodities buying mania.  And inventory builds at Cushing have been reaching weekly record highs, while production increases and rig counts rise.  Is the oil market anticipating a lower US dollar?  I don’t think so.  

Instead, I view the oil market as vulnerable to a sizable downdraft as we approach May.  The stock performance of Exxon-Mobile (XOM) ranks at the very bottom of the list of DJIA 30 stocks, with a YTD performance of minus 10.17%.  XOM is telling us something, and I’m listening.  The oil market may soon be in trouble.  

I still believe WTIC may possibly reach $60 before an anticipated selloff due to an equally possible and impromptu announcement by the Trump administration that it will now focus its foreign policy efforts upon the eradication of ISIL.  

But I’d rather be long stocks and dollar-gold at this time.  The COT report for gold doesn’t reveal commercial shorts piled so sky high as we see in the oil market, and US stocks still have upward momentum until we know more about France’s political situation.

And for those falling the silver market, the situation in that market is this: the COT report shows a massive commercial short position, which, in the past, has implied lower prices in the near future.  Therefore, expect some serious volatility in the silver market in the coming weeks, because it is possible that the shorts may get equally massively squeezed.  I’m aware of the fact that a short squeeze in the silver market is statistically unlikely, but this market has been dangerously under-supplied for many months due to production cuts made during the precious metals bear market of 2011 through early-2016.

There will come a day when the CFTC invokes an emergency ‘cash settlement’ scenario in the silver market.  Are we that close to a CFTC ‘save’?  I really don’t know, but a cash settlement (force majeure) may certainly happen a lot sooner than many traders may now believe.  If the gold market breaks out above $1,300, we may finally see an epic short squeeze in the silver market.  But I remain guardedly optimistic, as they say.

This week, watch dollar-gold, German and French two-year bill rates for a troubling trend of widening; the US 10-year Treasury rate; DJTA (need a rebound); Russell 2000 (need a rebound); and the euro for further declines.  Also keep an eye on how US stocks perform against the dollar/yen and dollar/euro crosses.  A falling stock market during yen and euro weakness is a very bad sign.  If US stocks rise during weakness in these two currencies, all is apparently well.  

Okay, let’s talk about the stocks I’m watching now.  

This Week’s JBP Stock Ideas

My current portfolio: LQMT, CROX, KNDI, WTW and LC and ANGI

Last week I alerted that I had a good-til-cancel (GTC) order to buy 1,000 shares of WTW at $12.40 per share.  Thursday, my order was filled.

I also filled 2,000 shares of LC at $5.65, Tuesday.  I’ve had LC on my Watch List for a while, and waited for a much better price.  Although I was expecting a better quarter from LC, I’m delighted that I’m in the stock at a 17% discount from the high of $6.79.  The thesis for my purchase hasn’t changed; the turnaround in the company is in progress.

I also bought 2,000 shares of ANGI at $5.84, Tuesday, a trade of which I’ll talk a little about in the body of the second half of this report.

Sientra (SIEN), a Watch List stock, closed strongly higher this week, settling at $9.78, up $0.73.  There was no company-specific new to account for the nice rise this week.  

A couple of website were linked from Google News to articles about SIEN that turned out to be ‘click bait.’  I tried to find why the stock was having a good run, but I can’t find any news.  Strange.  Apparently, some insiders know something that I’ve only surmise, which is the company may be on a good mend and will surprise this quarter.  Either that, or a deal has been made (or in the making) that hasn’t been announced.

And, finally, Groupon (GRPN) is back on my Watch List (see commentary, below).

SIENTRA (SIEN)

Sientra (SIEN), a maker of silicone breast implants and a budding successful turnaround story from an unfortunate factory stoppage at its third-party manufacturing facility in Brazil, Silimed Industria de Implantes Ltd.  A little more than a year ago, due to a European regulatory agency issuing a marketing suspension of all products made at the Brazil plant, after flaws were found in some silicone implant products made at the facility, trouble came to Sientra, but through no fault of theirs.  

Although Sientra manufactured implants at the plant employed production standards approved by the US FDA, and were independent of other processes at the facility, Sientra voluntarily suspended operations in September 2015 until a third-party inspector verified Sientra’s implants were not among those produced by the methods of other Silimed customers exporting to the European market.  

Following the news of Sientra’s voluntary production suspension, the share price of SIEN crashed to as low as $3.34 by mid-November, from a high of $26.67 reached in late-June.  

As a result of the work stoppage, Sientra’s revenue plummeted in Q1, Q2, Q3 of this year to a fraction of the company’s Q3 2015 peak sales performance.  But since the stock’s November low, SIEN is coming back steadily following an announcement in early-February 2016 that stated the Brazilian plant is again operating and shipping product.

Previous customers who suspended orders to Sientra are coming back to the company, who, at the height of Q3 2015, supplied between 7% and 12% of all implants to a US market, with estimates ranging from $200 million and $300 million per year of revenue, and growing.

On December 5, 2016, SIEN soared to as high as $10.22 (27.6%), following a news release by the company of an FDA pre-market supplement (PSA) approval for the company’s four new implant styles and shapes.  These new products will be added to its present line of nine offerings.  The company expects to begin delivery of the four new implant in Q4 2017.

My take: I like the stock for its hidden future trend of higher revenue, as the results of a survey conducted by the company of the customers affected by the work stoppage at the Brazilian plant indicated that nearly all customers expect to order Sientra products again when they become available.  

And there is a good reason for this nearly-perfect positive response.

First, Sientra is the only company of the three operating in the US (the other two: Mentor, Natrelle) who offers a two-year guarantee against ‘capsule contracture’, an issue of primary concern of most patients and surgeons.  Sientra’s rate of contracture is, indeed, the lowest of the three makers.  And the company also hold the distinction of offering implants with the lowest in incidents of rupture.

This is a big deal, as far as I’m concerned.  Imagine if you were undergoing an implant procedure.  Wouldn’t you want an implant with the highest reputation of product safety?  Of course, you would.

Second, patients report that Sientra implants feel more natural, which is definitely another big win for Sientra.

In short, Sientra’s implants are best of breed, which weighed heavily on my decision to engage this stock.  I expect revenue to regain the $10 million-plus per-quarter level.

Read Sientra’s Quick Fact Sheet

ABOUT SIENTRA

Sientra, Inc., a medical aesthetics company, develops and sells medical aesthetics products to plastic surgeons and patients in the United States.  The company offers a portfolio of silicone gel breast implants for use in breast augmentation and breast reconstruction procedures; and breast tissue expanders.  It also provides body contouring and other implants, including gluteal, pectoral, calf, facial, nasal and other reconstructive implants.  Sientra, Inc. was incorporated in 2003 and is headquartered in Santa Barbara, California.

Source: Finviz.com

GROUPON (GRPN)

Since the company’s earnings release on February 15, I’ve grown excited about Groupon once again.  The company is truly restructuring and right-sizing its business to most likely become more profitable than ever.  The following are bullet points that make my case for owning the stock.

  • Narrowed its reach to 15 of the most profitable countries from a peak of 46 countries.
  • The most profitable region of the world, North America, has added 1.2 million active customers during the latest-reported quarter, up 4.3% (CQGR of 18.3%), for a grand total of 51 million active users, globally.
  • Earnings released on February 15 revealed a $0.07 per share profit, a print of more than double analysts’ expectations. Billings were strong, as well, which will come in as revenue in Q1 2017.
  • On a forward p/e basis, GRPN trades at a discount of 10% to TripAdvisor (TRIP) at forward p/e of 27.84 and a 72% discount to Yelp (YELP) at at a forward p/e of 89.95.
  • Strong balance sheet, with a cash holding of $700 million; a $250 million credit facility; and NO debt.
  • Within the past quarter, the following institutions have purchases GRPN stock:  Allianz Asset Management bought 6.7 million shares.  Renaissance Technologies bought 5 million shares.  First Trust bought 4.1 million shares.  D.E. Shaw bought more than 3.1 million shares.  Vanguard Group bought 1.7 million shares.  BlackRock bought a 1.0 million shares.
  • Alibaba (BABA) owns 33.0 million shares, or approximately 6% of Groupon’s outstanding shares.
  • Headcount lowered by 2,000 (20%).  Operating earnings rate should increase (ex. Advertising).
  • Mobile phone apps downloads increased by 21%, y-o-y.

So, what do I think of this mounting evidence of a strong turnaround and apparent attractive valuation?  

I expect a double of the stock price within 12 months.  I’m waiting to get out of some of my positions to begin fishing for some GRPN shares during a overall market downdraft.  I’ll let you know.

ABOUT GROUPON (GRPN)

Groupon, Inc. operates online local commerce marketplaces that connect merchants to consumers by offering goods and services at a discount, internationally. It also provides deals on products for which it acts as the merchant of record. The company offers deals in various categories, including food and drink, events and activities, beauty and spa, health and fitness, home and garden, and automotive; and deals on various product lines, such as electronics, sporting goods, jewelry, toys, household items, and apparel, as well as provides discounted and market rates for hotel, airfare, and package deals.  The company was founded in 2008 and is headquartered in Chicago, Illinois. Groupon, Inc. is a subsidiary of The Point, LLC.

Source: Finviz.com

ANGIE’S LIST (ANGI)

As I stated at the opening of the second half of this report, I bought 2,000 shares of ANGI at $5.84, Tuesday.

ANGI has been on a slide since the first week of September, after the stock reached a high of $10.76, then tumbled below its 52-week low, following Q4 earnings on February 15.  

The company reported a fourth-quarter profit of $8.9 million, or $0.15 per share.  Analysts expected $0.03 per share.

Now what?

Since management didn’t offer guidance for Q1, the talk on the street is Angie’s management believes Q1 will be another troubled quarter.  Maybe so, but maybe not so.  Memberships have surpassed five million, an approximately 50% rise from last year.  

ANGI is one of those stocks I believe has been oversold due to the lack of guidance, which may suggest to some traders that the company is in serious trouble.  Now trading at one-times revenue, I believe the stock suffers from another case of over-pessimism.  

I also wouldn’t be surprised if Angie’s is sold.  The company’s EV of $345 million is just barely more than its market capitalization of $326.27.  Hmmm.  

I’ve done pretty well with stocks whose management does a bad job of holding investors’ hands between quarterly results.  There’s a when-in-doubt-bail-out attitude among amateur traders that has suited me just fine in many cases.  I pick up stocks cheap.   

My downside for ANGI is $5 per share, but my upside is $8.25, a 2.87:1 reward-to-risk ratio, with an announced buyout as my best-case scenario for ANGI.

ABOUT ANGIE’S LIST (ANGI)

Angie’s List, Inc. operates a local services marketplace and consumer review site in the United States. It allows consumers to research, shop for, and purchase local services for home, health, and automotive service needs, as well as to rate and review service providers in 253 markets. The company also sells advertising to service providers through its monthly publication and call center; and on its Website, as well as through mobile applications. In addition, its e-commerce marketplace offers consumers to purchase services directly through its marketplace from service providers. The company was formerly known as Brownstone Publishing, LLC and changed its name to Angie’s List, Inc. in April 2010. Angie’s List, Inc. was founded in 1995 and is headquartered in Indianapolis, Indiana.

Source: Finviz.com   

Until next time…

Trade Wise and Green!

Jason Bond

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