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I hope you enjoyed your weekend.
Let's dig into the Long Term trading game plan for this week. But first, a quick recap of this week’s market action and my observations.
Friday’s terrible jobs report really shocked traders into making some large wholesale moves into Treasuries and gold following the report. With the U.S. Labor Department report revealing that of only 38,000 jobs were created in May, the gold price immediately spiked $30 while the 2-year Treasury and 10-year Treasury yield plunged by a massive 10 basis points and 11 basis points, respectively, to close the week at a 93-point spread between the two---a nine-year low! The bond market is screaming at the Fed to NOT raise rates.
I say there is almost no chance of a rate hike by the Fed later this month, and most likely there will be no rate hike in July, either. The release of the terrible May jobs report comes at a good time to fuel a possible further unwinding of short positions during the coming summer months. Let me explain.
I really think the Fed is experiencing some serious ‘cold feet’ regarding its potential of making a serious policy mistake to end this bull market. Those traders who priced-in a rate hike this summer may be unwinding short positions, which may also explain the counterintuitive relative strength in stocks during the stampede into safety Friday. It may sound crazy to my readers at this time, but I think the the gal and guys at the Fed may actually be leaning toward an easing by the end of the year, maybe after the election, in December. And I think some savvy traders bought stocks Friday with this notion in mind.
Despite the bad jobs report, the DJIA, S&P 500 and NASDAQ finished mixed and collectively unchanged for the week. However, each of the major indexes closed above their respective 50-day moving averages. That’s remarkable, especially when considering the U.S. dollar’s serious weakness against the carry-trade currency to U.S. stocks, the yen, which soared as much as 4.46% higher against the dollar during the week. That, too, is highly unusual.
West Texas Intermediate Crude (WTIC) closed down 1.33%, failing for the second time to close above $50 per barrel. On balance, the oil market shows signs of a tired rally; but since the support of this market has become a critical means of central banks to elevate the banking industry and U.S. stocks, I would be surprised to see any violent moves to the downside in the crude price.
Although our bellwether indicator of the banking industry’s health, Deutsche Bank (DB), got knocked down pretty badly by nearly -6% this week,the VIX rose only modestly (to 13.47, still a very low reading), as the latter remains comfortably below its 52-week moving average.
What a strange market. But I still think the only plan the Fed has at this point is: slowly debase the U.S. dollar, thereby creating an environment for institutional investors of which favoring stocks may be a better bet than a guaranteed negative return by holding cash. For as long as the market remains faithful to the old cardinal rule of Wall Street: never fight the Fed, I will not fight the Fed, but instead ride the wave of liquidity it promises to provide.
Okay, let’s move on to two new stock ideas, provide you an update to my latest thoughts about last week’s bullpen of stocks I’ve been watching, and discuss open positions.
Here's this week's Swing & Long Term game plan.
Net 1 UEPS Technologies (UEPS)
As mentioned last week in an alert and in this report, I pulled the trigger on Net 1 UEPS Technologies (UEPS) and bought 2,000 shares at $10.76. The stock reached as high as $11.26 before selling-off a bit back below its 200-day moving average (MA). I’ll wait for the second assault on the 200-day MA to assess how the stock is acting, with an initial target of $12.25 in mind before I put my ‘thinking cap’ back on.
A stock that’s caused me to remember to always be cautious, yet be patient, as well. After buying 5,000 at $9.88, the stock went against me by $0.46 from a sudden reversal from my initial momentum play. From the subsequent market action, I realized the 5,000-share purchase should be cut back to 2,000 until the consolidation of the stock reaches a saturation point. As I mentioned in my email alert, I feel better with this amount of exposure at this time and feel as though I did the right thing, as the situation warranted a decisive and swift action.
FF is still on my watch list. The bio-based specialty chemical company held-up relatively well during Friday’s trade, though it traded lower 1.87% for the week. As I wrote last week, FF’s valuation is quite low when compared with its liquidation valuation estimate, leaving me wondering how low can this stock go before huge money comes in, like I saw happen in March of 2015.
If the price drops from overall negative market action next week, I’ll be looking at a cheaper stock while waiting for Wall Street to digest May’s job report and the Fed’s response to any negative market action. Of course, too, my expected pullback in the oil price may aid me in my decision that much more, with $10.50, or so, as a tempting entry point for FF.
As you may already have heard, on Tuesday, Energous announced it signed an agreement with an undisclosed partner to join-venture the production of a “full-size WattUp transmitter. The range of the wireless charging device is estimated to reach as high as 15 feet. That’s more than the length of an average-size bedroom. So, my initial deductive reasoning about this stock was spot on. Those expecting a worthless stock in the end may be in for big surprise and may have much “crow to eat”. For the benefit of my foreign subscribers, “to eat crow” is an Americanism, meaning “to feel humiliation by admitting wrongness.”
But the only disappointment, so far (I’m still assessing), is the possibility that WATT will reach my $12 target without me, as the stock spiked $0.96, or 9.23%, to close the week at $11.36. Ugh. I hate being so right about the stock’s direction, but I may have missed the timing of the trade. I think! Let’s see what next week brings. The jobs report is weighing on me to wait for the possibility of a somewhat sour week this upcoming week, which may be what I need for WATT to reach my $10.50 target entry.
Boy, what a boring week for GRPN. Wasn’t it? On tiny volume, the stock traded within a equally tiny range---all week. I had to go back to 2012 to find volume statistics as low as last week’s. But don’t despair; when the stock makes headlines, you’ll see why the stock’s mean monthly volatility clocks-in at more than 5% per month.
GRPN is a bona fide turnaround stock, in my opinion; and I’ll will be looking for a good entry at $3.25, what I see as a reasonably solid level of support. In addition, I also want to put some distance between me and the 200-day moving average ($3.57) before going long the stock. With my profit target of $4.00 (a 23% potential score), I must seek to get in GRPN at closer to $3.25.
New Stock Idea: ZAGG is a stock which I think has been unjustifiably knocked down too much from its Dec. 11, 2015 of $12.74. When news of weaker-than-expected sales of the Apple’s (AAPL) iPhone 6 began to hit the wires earlier in the year, ZAGG dropped in sympathy with the decline of AAPL. But in ZAGG’s case, the stock’s eventual 63% slide from the December high was too much of a bad thing, especially when compared with the much more modest decline of 17.4% in the share price of AAPL.
Sure, ZAGG is no AAPL, but when a stock whose outlook is brighter than ever, especially following its purchase of mophie, a low Price-to-Book of 1.14, PEG of 1.01, and Price-to-Sales of a measly 0.53 are metrics that I would expect from a company in a turnaround phase. ZAGG is not that company. In my estimation, the company may be printing some nice revenue and EBITDA numbers in the third and fourth quarters.
Here’s what I’m getting at.
First, ZAGG’s acquisition of mophie gives the company diversification to the combined company’s product line and customer base. With the acquisition, ZAGG will become dominant in wireless charging battery systems, in addition to its present leadership in screen protection. mophie’s line of juice packs and power stations compliment the screen protection business well, as these two categories (power and protection) within the ‘add-on’ market of the connectivity industry represent the lion’s share of the industry’s revenue.
From my research, ZAGG is the premier leader in four industry categories: battery cases, external batteries, screen protection, and tablet keyboards. No OEM competitor can touch ZAGG’s revenue potential in these four categories in 2016, and beyond. And the roll-out of the company’s non-accessories products, such as ZAGG’s suite of keyboard products, Cam social media camera and Flex personal audio device diversifies the company still further.
According to ZAGG CFO, Brad Holiday, the company should achieve a gross margin of 40% in the coming quarters of 2016. EBITDA is projected to reach between $60 million and $65 million for fiscal 2016, from sales of between $460 million and $500 million. So if I take ZAGG’s present valuation of $154 million and EBITDA of $33.5 million, I get a valuation of $10.31 per share by the second-half of the year.
I’m looking for $5 for ZAGG as an entry point, with $12 as a long-term objective.
New Stock Idea: Sientra is a medical aesthetics maker of breast implants. The company’s mission is to provide a greater choice to board-certified plastic surgeons and patients in need of medical aesthetics products.
Sientra is a play with a double, triple or quadruple potential. And that’s not just my opinion; it’s the opinion of Wall Street analysts who cover the stock. SIEN’s consensus rating among analysts is a “Buy”, with a consensus target price of $28.33. Frankly, that consensus target price eclipses my target of $21.88 per share. But, at $6.04, I’m not going to argue with any of these analyst. In short, the stock is poised to make everyone happy.
So, why the depressed stock price?
Brazil’s regulatory agency (ANVISA) ordered Brazil-based manufacture of Sientra implants, Silimed Indústria de Implantes (Silimed), to halt shipments of all Silimed products, including Sientra’s. On Sept. 24, 2015, the UK Medicines and Healthcare Products Regulatory Agency (MHRA) suspended Silimed’s CE certificate to market its implants in the UK (and by legal extension, the EU). Following the news of the MHRA decision, SIEN crashed 53%, to $9.70 per share.
Though the Food and Drug Administration (FDA), which oversees U.S. sales of Sientra’s implants, had not followed the MHRA, Sientra voluntarily halted sales of its implants as a precaution, not due to Sientra’s product specifications or manufacturing protocols---protocols that were approved by the FDA.
In essence, Sientra was a victim of circumstances surrounding its competitors’ issues at a plant outside the jurisdiction of the U.S. To assure the market, the company enlisted the help of a third-party examiner to confirm the safety of Sientra’s implants. The examiner did certify the implants were safe for the U.S. market, and most likely the European market, as well.
On Feb. 8, Sientra issued a news release, stating the company’s products will return to the U.S. market in March.
And so far, the demand for Sientra implants hasn’t missed much of a beat, according to the company Chairman and CEO, Jeffrey Nugent, who stated in the Q1 2016 earnings call:
Demand has exceeded our expectations in the first months of commercial activity. Since the market re-entry, we have contacted 84% of our total previous customers who were active prior to our voluntary hold. Nearly 80% of the customers we contacted are committed to using Sientra products and only 2% have decided to pass, for now. In addition, more than 90% of those in the committed category have already made at least one purchase during the precision launch, and that's through the first quarter of 2016.
Nugent also stated that the $20 million of inventory calculates to approximately $60 million of revenue, which he expects 70% (conservatively) to clear within 18 months. So, that calculates to $42 million, or approximately $10.5 million per quarter, though the ramp up to $42 million won’t obviously be linear.
This calculation helps me grasp the picture of what traders may be thinking when earnings reports come along, and guide me to calculate at what price traders will most likely pay for SIEN at this level of revenue. Using my estimates----and if Nugent turns out out be correct with his assumptions---the latter of which I’m assessing a 80% chance of success, I expect a $21.88 stock by Q3 2017, a quarterly compounding rate of 24%. And, by the way, this doesn’t include revenue derived from the company’s new acquisition, bioCorneum. See Mar. 9 news release.
I’m looking at the $5.50 and $5.75 range to initiate a long position, with a target price to exit of $20 within 18 months.
And finally, Santander (SC), a stock I may want to short due to what I believe is a lofty valuation when taking into consideration the auto loan industry’s record volume, sluggish economic outlook of the U.S., and elevated default rates that come with economic slowdowns.
Though the share price of the auto lender’s stock has declined to $12.20, from $26.83 of late-June 2015 (54.5% decline within 11 months), I don’t see how the Santander’s “core” business of non-prime loans and leases will maintain a low default rate as the U.S. economy enters a soft patch in GDP in the coming quarters. I’m just not buying the notion that the Labor Department Employment Report for May was a fluke; and I’m not buying the Fed’s optimism about GDP growth, either.
And a look at the renewed movement into fixed income securities among institutional investors, since June of 2015, tells me credit quality will be king in the coming quarters. The bond market has been warning of a slowdown in the U.S. for nearly one year. That’s the normal lead time before a change in economic conditions catch up to stocks like SC.
The president of Santander, Jason Kulas, said in the conference call on April 27 that he believes the U.S. economy is “robust.” But he then proceeds to state that core non-prime auto originations declined 15%, year-over-year, and adds that the company “continue[s] to maintain discipline underwriting standards.” In other words, as the industry reaches a record high of $1 trillion of auto loans, it appears that the market is tapped out and the inevitable credit cycle crunch approaches. Isn’t that what the flattening Treasury yield curve has been telling us since June 2015, which by the way coincides with the beginning of SC’s price decline.
As investors of credit reach for AAA ratings, the spread between AAA and non-prime auto loans will most likely soar, trashing SC along the way. At more than a record $30,000 underwritten for an auto loan, and at more than a $500 monthly payment (a record), SC is a train wreck waiting to happen.
And I’ll end my discussion about SC with a quote by JP Morgan CEO, Jamie Dimon, who told attendees at the Alliance Bernstein Strategic Decisions Conference in New York, “Auto is clearly a little stretched, in my opinion. Someone is going to get hurt. ... We don't do much of that [auto lending].”
I want to short this stock at $13.50, or maybe a little lower. I’ll update everyone with my thoughts on SC as we move into the post-May jobs report trading action this week. I want to see how the follow-up trading to Friday’s surprisingly strong finish to the terrible Labor Department report feels like.
Here's the Long Term portfolio