Wow, it has been a long time since my last post, but I have
nothing to regret about what has happened in the past month. School has been
busy, finally getting into my core classes along with getting the real-world
experience I need for my future career. I took up an analyst position in the
WTI sector of our energy hedge fund at the beginning of the school year, where
I am constantly tracking oil markets , as well as coming up with potential
trade ideas for being long.
Lets catch up from a month ago:
-S&P 500 and Dow have both had good gains up 1.6% and
2.3% respectively. The QE3 hopium has seemed to have fizzled out within the
past couple weeks and consolidation is now taking place before we begin the
wave of Q3 '12 earnings.
-Nasdaq is unchanged since I last posted, Apple has lagged
the market in the past month and is down 7.5% off its all time high from two
weeks ago. A couple of reasons:
-Via
Bloomberg on Thursday night, Samsung Galaxy 3 sales beat expectations. This is
the major competitor for
the iPhone5
-The
iPhone5 has gotten some negative reviews on its maps app due to lack of Google
maps. There are also very minimal
changes from the iPhone 4s; in my opinion, people were expecting more.
-Global PMI data released last Monday show that we are still
in contraction, and US growth is still sluggish.
-Jobs numbers from Friday were fairly strong, but debatable
as seen from Jack Welch's standpoint on how the BLS obtains their data.
Nonetheless, politics aside, we are better off than '08 but still nowhere close
to where we want to be.
Above, Dow, S&P, Nasdaq and Apple
Most of the major macro data releases took place in the last
two weeks, so we will look to cruise right into Q3 on minimal news unless
something breaks midday.
Earnings on tap for this week:
Tuesday: Alcoa, YUM,
Wednesday: Costco
Friday: JP Morgan, Wells Fargo
Alcoa, one of the biggest laggers of the Dow for the past 4 years
now, reports Tuesday. From back in July, I mentioned how they would continue to
underperform the overall market, unless we see turn around in global
manufacturing data. Alcoa is up only 4% in the past 3 months compared to the
S&P up 7.5%. Demand is not there for
aluminum and I still continue to see a bleak future going into 2013 for this
company. We will have to hear more from CEO Klaus Kleinfeld on the conference
call Tuesday afternoon, but I am not expecting any surprising upward revisions.
Analysts expect Alcoa's third-quarter results to show it broke even, down from
a profit of 15 cents from last year, according to Thomson Reuters. With all of
the negativity in China the past quarter, I would not be surprised if they
reported a loss.
Fundamental analysis of Alcoa show that the company is weak
internally. They continue to fluctuate between net profit and net loss from
quarter to quarter, mainly due to the costs. Revenue is stagnant and has been
for the past 3 quarters (between 5.9B and 6B dollars) so revenue growth is an
issue as well. They have also lost over 1.3B in retained earnings over the past
year.
Technical Analysis shows a buy on a recent golden cross and
MACD, but I wouldn't put much into this.
YUM Brands also reports Tuesday; looking at them YTD, they
have outperformed main competitor and global franchise McDonald's by over 20%.
In my opinion, one reason is more choice of food. McDonand's has just their
burger line, but YUM has Pizza, tacos, and chicken which gives the consumer
more of a choice. With 37,000 restaurants in 120 countries, they have a better
chance to catch the consumer when they are not in the mood for a burger or
other items on the McDonald's menu. Analysts are expecting a profit of 97
cents, up from 83 cents a year ago. Fiscal year earnings are projected $3.26
per share, while revenue is expected to be $3.64 billion for the quarter. This
is about 11% higher than the previous year of $3.27 billion. Total revenue for
the year is expected to come in at $13.9 billion. They have seen double digit
revenue growth on a year over year basis as well.
Above, comparing YUM to McDonalds, we see that YUM is
clearly the outperformer
Looking at YUM's fundamentals, their profit margin has had
some wild swings in the past year, going from 7.5% to 17.5%. This may have a
slight affect on the stock price, but until I see a drastic decline or negative
growth in their monthly comps, then this is still a good place to put some
money. It is also good to stay defensive in an uncertain economic environment,
and a 2% dividend yield is a great way to make some cash while you wait.
On Wednesday, we get a look at Costco's earnings. This has
been one monster of a stock to own this year, as well as Wal-Mart which are
both up 21.5% and 26% respectively, outperforming the s&p 500, consumer
staples sector and consumer discretionary sector. They have been doing well
because of their ability to sell gas to consumers at cheaper prices than gas
stations, from membership fees. Also, Americans like everything big, and with
the ideology that bigger is better; it is also cheaper, especially when buying
bulk.
Analysts are expecting a higher profit for Costco when they
report Q4 results. The consensus
estimate is for profit of $1.30 a share,
which is up from $1.08 per share a year ago. Analysts are projecting
earnings of $3.86 per share for the fiscal year. Revenue is expected to
beat the previous year's total of $28.18
billion by about 12%, ending at $31.59 billion for the quarter. For the year,
revenue is projected to come in at $98.52 billion.
Net income has risen three straight quarters. The 19.1% yoy
growth in net income in the most recent quarter came after the 13.2% growth in
the second quarter and the 2.6% rise in the first quarter.
As seen from the chart below, Wal-Mart is the clear
outperformer, but in my opinion Costco has stronger fundamentals and better
growth prospects. Wal-Mart's has been bouncing all over the place in the past
year. This in my opinion is due to Costco's strong presence in North America,
whereas Wal-Mart's North American revenue is 60% of its total revenue (they
have stores in 27 other countries).
I believe they will beat on both top and bottom line, but
the shares may get hit as they have not had a decent correction down in quite
some time.
On Friday, both of the big banks JP Morgan and Wells Fargo
report earnings, JP Morgan at 7:00AM EST and Wells Fargo at 8:00AM EST. For
Wells Fargo Q3, analysts are looking for earnings of $0.87 per share, with a
high-low range of $0.80 to $0.94. Earnings have only missed once in the past
three years. Revenues are projected to rise 9.10% yoy to $21.42 billion.
Credit Suisse expects the big banks to deliver solid third
quarter earnings, including Wells Fargo. The firm cited loan growth and asset
quality as drivers for the group.
For JP Morgan, they are expected to earn $1.22 per share range
on revenue of $24.55 billion, a slight increase (0.70%) from the previous year.
JP Morgan is now trading at 9.64x earnings well below the 5-yr average of
16.9x. The shares are also trading at a discount to book value of $48.70(as of
the last report) Shares are up about 20% since disclosing a 2 billion dollar
trading loss in its CIO unit on May 10th.
In recent news, they were sued over Bear Sterns role in
the 2008 financial crisis of misleading investors through the sale of MBS that
had the high potential for default.
I have no positions in large banks, and do not plan on
buying either here, the rough macro conditions and central banks keeping rates
low till 2015 should tell you to stay away as well.
I will be watching oil markets this week and throughout the
rest of the year as well. I tweeted out a screenshot of light sweet crude
futures last week of a potential breakdown that we could see in the near term
You can follow me on twitter @peter_eller10 and our energy
hedge fund, updated daily @SIMMenergyfund
have a good week all.
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