Best Calls of 2013

Guys,

It aint over till it’s over. I wanted to list out the stocks that made me some GREENS last year.

celg

Celgene, CELG – Until last week, this was a rockstar find.  7 straight up quarters with 25%+ earnings. Result, the stock went from below $100 to upto $170. Last week’s uneventful earnings coupled with the bad press has pushed down the stock. I got rid of 50% holdings once the 50 DMA was breached. I might drop all because my portfolio is biotech  heavy.

CMG

CMG, Chipotle Mexican Grill, a household name with outstanding profits. Now tell me how many retail/restaurants can boast that the quarter of Christmas/Holidays, its same store sales went up by 9.3% – !@#$%^&*( – I mean seriously!

I unloaded all of them at $503, when I realized that the twin peak’s floor would give away. But a day before earnings, at $480, which was the support, I decided to get my foot in again. Boy, was that a sexy call!!!!!

EWBC

East West BanCorp, EWBC – Hey, I aint Chinese and neither do I live in west cosast. So why EWBC? It’s no rocket science – when the world was crumbling, when all the banks were falling apart, there was a bank near the china town of San Francisco, EWBC. The bad loan on its books was miniscle compared to behemoths such as JPM, BAC, etc. The feds went to the extent to coerce it to buy its larger compititor to become the biggest bank in California apart from being a bridge to Beijing.

I first owned this bank at $8. It still continues to be the flag bearer bank. Recently, EWBC closed the purchase of the metropoliton bank in Houston, thus expanding its foot print.

FB

FB, FaceBook – Shall I say less!! My priniciples are the only reason I have had the hefty profit in this company even though I havent logged into FB since ages. Passion for work, stocks and helping NPOs takes it’s own toll.

I bought it at $33 and added & sold some multiple times. The breakthrough of making money via mobile adversting has been the recipe of succcess for FB. In its last quarter FB made 60% of its earnings through mobile adverstising.  FB needs to diversify else it will end up like GOOG, which also had 22% increase in adverstising revenue. But for now FB is good.

FLT

Fleetcor, FLT – Organic or inorganic, the numbers paint the true picture. This company has been growing at a brisk pace.

GILD

GILD , Gilead Sciences – Is this my poster stock? Maybe, I have owned it for two year and have sold and bought it multiple times. This might be the most profitable stock I ever owned. Look at its drug pipeline. I will quote an analyst – Gilead will annihilate the last quarter’s numbers and thus head to $100.

PCLN

PCLN, Priceline, another profitable trade, that I still own. I sold some recently.

In a nushell, these were some of my best calls of 2013!

Are the Homebuilders Overvalued?

After celebrating the turnaround in the housing, let’s look at some of the housing stocks. The inventories are at the rock bottom and there is pent up demand in the market. We will get deeper insight when 6 Home builders report their quarterly earnings in the coming week. So should we dip our toes in to profit or pull our money out?

ITB

Not really my dear friends. Overall, home-builders have dramatically outperformed the stock market in the last year. Pulte Group (PHM) shares have nearly tripled in price; And Ryland (RYL), Standard Pacific (SPF) and MDC Holdings (MDC) have doubled in value. As a matter of fact shares of Lennar (LEN) rose 97% and DR Horton (DHI) increased by 57%. But one thing to remember is – PulteGroup fell 69% in 2007, Lennar lost 66% in 2007 and then 52% in 2008, and DR Horton stock declined 50% in 2007 and 46% in 2008.

As Lombard Street Research analyst Melissa Kidd notes, home-builders’ profits have actually risen faster than their prices, and their net profit margins are higher than pre-crash peak levels. Let’s look at the gross margin.

GrossMargin_HB

As you can see that the gross margin of the giant Pulte and the whole sale builder DR Horton are at their pre-crash levels. But the operating margins are not there yet.

OperatingMargin_HB

All these recovery in the margins and the earnings are sans the fact that home prices are up by just 7% Year-Over-Year. Most of the analysts might concur that the recent stock price rise have all the earnings rise (see below) and the future profits baked in.

EPSchange_HB

Let’s analyze some companies whose stock prices have sky rocketed in last few months.

Even after PulteGroup’s run-up, its price-to-forward-earnings ratio is 17.7, according to FactSet; revenue for 2012 is estimated at $4.7 billion, while this year it’s expected to climb to $6.1 billion.Meanwhile, Lennar’s stock is trading at 23.3 times forward earnings, with its financial year 2012 revenue of $4.1 billion estimated to grow to $5.4 billion. It’s a similar story for DR Horton, which has a price-to-forward-earnings ratio of 21, and is expected to see its $4.4 billion FY2012 revenue grow more than 25% to about $5.6 billion. Let’s look at the historical PE comparison.

PE_HomeBuilders

Juxtaposing all the premium home-builders in US, it is easy to conclude that the mean P/E multiple was around 10 before the boom and the bust. But now the scenario is different. Even though we are far off from the peak of new home sales of 1.3 million in 2005, the new home sales are growing at brisk pace in last 5 quarters. Expectations for housing starts and new home sales are both in the 20 percent range for 2013. So a forward P/E of 23 for a growth in excess of 25% is acceptable.

Recently Lennar announced its earnings.  The Florida-based builder crushed estimates as fourth-quarter earnings more than tripled on 42% higher sales. Lennar’s new orders rose 20% and its order backlog was up 35% as of November.  Lennar CEO Stuart Miller said in the company’s earnings announcement that the housing market is stabilizing, “driven by a combination of low home prices and low interest rates, making the decision to purchase a new home more attractive.”

Similar expectations are for DR Horton and Ryland homes. The 24 analysts polled by Thomson Reuters expect Horton to report fiscal first-quarter earnings per share of 14 cents, a 56% rise from last year’s 9 cents. Sales are seen advancing 21% to $1.1 billion. Ryland is forecast to report a huge jump in Q4 EPS to 49 cents, up from 2 cents a year ago. Revenue is projected to grow 55% to $404.4 million.

“Just because the stocks are overvalued doesn’t mean they are not going to go up more,” says David Goldberg, a housing analyst at UBS. “It’s a momentum play.” Goldberg warns, however, that there is a lot of growth baked into these stock valuations for 2013, expectations that may be tough to meet. This uptick might not be at 45 Degree angle and might have pauses but the time is not to cash out of them.

Let’s hold onto them and add some more during pullbacks. So which are the companies that are worth adding to the portfolio. Based on the operating margins, earnings growth and PE ratios (historical, TTM and Forward) I believe Lennar and DR Horton are the best of the pack. I would also like to mention TOL. But please don’t buy anything now. Be patient and wait for pull back to 50 DMA. Why DHI and LEN? We will talk about it in the next post.

Lastly, if you don’t feel comfortable buying these home builders, you can own the Home Builders ETF (ITB). Another way to play housing recovery is by buying companies such as Home Depot (HD) (re-modeling,  new home set up etc.), Sherwin-Williams (SHW) (Paints), Tronox Inc (TROX) (Pigment for paints) and Corelogix (CLGX) (Mortgage related information provider).

Portfolio As of 4/12/2012

Cash 40%.

Portfolio –

AAPL – 3%

PCLN- 4%

STX – 6%

WDC – 6%

HLF – 3%

SCSS – 4%

SXCI – 4%

QCOM – 6%

BLV – 3%

TLT – 3%

RWM – 3%

FFIV – 3%

F – 6%

APA – 6%

Sold last week –

CLR, WLL, ALLT, GNC, LNKD (I know!)

Reasons for the sale –

  1. Market broke 2 critical supports last week – 4 month old trendline and 50 DMA. Let’s wait till the market moves above 50 MA and makes new high, convincingly  (no double tops please:().
  2. The earnings season is underway. It’s better to reduce the high fliers by 50% to avoid losing profits.
  3. Quite a few breakouts in last couple of weeks have stalled, failed and occurred at below average volume – such as SWI, WDC, LVS, etc.
  4. Old adage – Sell in summer and go somewhere ( dont ask me where!.)

Lastly I added small positions of defensive stocks as mentioned earlier – BLV, TLT and RWM.

Week ahead –

  1. Stay defensive, preserve capital below the prior trading range. Above the range, expect a move back to and above the prior highs.
  2. Do not trade intraday, but rather focus on setups and keep an eye on earnings
  3. U.S. week ahead (Reuters)
  4. Next week’s trading radar (Minyanville)

Good Reads –

Market and Porfolio

Stocks fell on Wednesday to finish with sizeable losses, but they managed to close off their session lows.

The Nasdaq lost 1.5%, while the S&P 500 shed 1% and ended under the 1400 level. The Dow Jones industrial average dropped 0.9%.  This will end NASDAQ’s 7 week winning streak.

The day’s news largely was on the negative side. The Institute for Supply Management’s service sector index fell 1.3 points in March to 56, indicating the sector continues to expand, but it was below forecasts. Payroll services provider ADP said private companies added 209,000 jobs last month, below expectations. And there were lingering worries over the latest Fed minutes, which came out Tuesday and indicated policymakers are not planning for additional economic stimulus measures.  Finally Spanish bond sale reminded that the PIIGS are still lurking around.

Now the question is – Whether SPX will break the 3 month trend line? This breach of support will be indicative of changing sentiment. And finally our good old 50 DMA will come into prominence. But these things do happen after such a run up. In fact we might see some more profit taking tomorrow based on the long weekend ahead, specially to ward off surprises by Euro and Friday’s  job data.

Now if you look around most of the leaders hung in today with minor correction on low volume to average volume. The leaders of this bull market seem healthy and in control. Some such as PCLN bucked the trend today. On equity side SNDK lost 7% after company cut its revenue forecast and trimmed it’s margin.

Portfolio Time –

The only company to be beaten up today was ALLT. It has been up more than 55% YTD, but 8 out of 11 analyst, who follow this name, maintain buy recommendation on it with average price target of $25. SXCI and  URI almost gave back their yesterday’s gains.

Declining crude is taking its toll on WLL, CLR and APA, though continental is clinging to the 50 DMA.

The earning’s change in latest quarter mentioned above is not correct. It seems that Telechart lags the fundamental data update by a month or so. I recently trimmed FFIV, sold all ALXN. I might close CLR and URI of the 50 DMA is broken comprehensively. I plan on taking some profit off ALLT and LNKD. The idea behind taking profit is to have enough cash in hand to a scoop new buys or make additional buys when stocks bounce of the 50 DMA, such as CRUS below.

Lastly during such times, when market is going sideways, keep an eye on Leaders. They will break before market craters. Thus acting as precursor to the impending correction. The leaders of this market are ULTA, SCSS, AAPL, PCLN, CMG, ISRG, TPX, STX, FFIV, EMC, VMW, RAX, etc.

Some good reads –

  • Employment up 209K (ADP)
  • ECB holds steady (MW)
  • Fed signals no need for more easing (BL)
  • Gold continues post-FOMC minutes fall (BL)
  • Copper falls as dollar rises (REU)
  • Brent slips toward $124 on Saudi supply (REU)
  • Sagging orders suggest eurozone in recession (FP)
  • Eurozone retail sales disappoint (REU)
  • German factory orders disappoint (BL)
  • Spanish yields reach 12-week high (BL)

FaceOff – China data vs US data

And the winner is China PMI. The Dow ended lower for a third consecutive session dropping 78 points as concerns mount over China’s manufacturing index being down for the 5th month in a row.  The S&P 500 lost 10 points today and the NASDAQ lost 12 points. This was despite the fact that new jobless claims fell more than expected last week, while an index of leading economic indicators for February rose more than forecast.

China’s manufacturing activity shrank in March for the fifth straight month, while manufacturing in the 17-member euro zone contracted more than expected, led by declines in France and Germany. This took toll on sectors such as energy, materials and industrial.

But despite all this we are still in bull as long as we hang onto 1370 in S&P 500. This current mild weakness in the averages is not unexpected given the magnitude of the market move from October of last year.  It would not surprise me to see continued short term sideways action over the near term or even a drop of 2% points.

So if you look at charts above 1370 will act as pivot point. The reasons are – you have previous high support, 50 DMA and the trend line support. Moreover the breakouts did not disappoint today – look at LNKD, WDC, ALLT and GNC. Surprisingly LULU reversed even after not so weak guidance. LULU might have lost it’s momo status.

Good Reads. Tons of them today –

China & Eurozone factories shrink (REU)

Another day of Copper beating (BL)

Keystone XL – Again! (BL)

US Economy and Sentiment (BL)

Hunger Games (MW)

Oil lower amid talk of tapping reserves (FIN)

Gold in tandem with China as well! (REU)