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My Top Six Valentine’s Day Stocks

February 14, 2018, 5:27 pm

There was a lot of love for stocks on Wall Street this week, and there are several companies that are poised to have a very happy Valentine’s Day today. This will be a record $19.6 billion holiday, with 25% of that going to jewelry, 10% to florists, 10% to candy and at least 20% to restaurants. There are a lot of companies that will feel the love, but there are six names that are sure to make investors swoon. Let’s take a quick look at each.

Match Group (MTCH) is the leader in online dating for young (Tinder) and older, more traditional singles. It’s still 85% owned by Barry Diller’s Interactive Corp. (IAC), so the company has friends as well as deep pockets to back up its aggressive merger & acquisition (M&A) strategy. MTCH is on top now and I expect it to stay that way this holiday.

L Brands (LB) is Victoria’s Secret, but it’s become much more than romance. If you compare it to Hanes (HBI), you’ll see that relative luxury has the upper hand right now. Consumers aren’t shifting down to comfy cotton, but instead shifting up the scale to something a little lacier that is able to support richer margins.

Signet Jewelers (SIG) is the sweet spot in diamond retail. It’s not as rarefied as Tiffany (TIF), but it basically runs the physical jewelry store at any mall you walk in. Diamonds have had a hard time over the last few years, but SIG was the big winner.

1-800-Flowers (FLWS) benefits from bouquet delivery – a quintessentially local business – but the real story here is food delivery. The company owns Harry & David, which is the best of the new breed of catalog food companies. This is the real holiday Amazon (AMZN) killer.

Carnival (CCL) is a top play in terms of an all-inclusive experience company, as it sells honeymoons and affordable luxury getaways to people of all ages. Dating isn’t just for kids any more, although singles cruises are finally attracting millennials.

Cheesecake Factory (CAKE) is still the number-one spot for special occasion dates. If 20% of all Valentine’s Day spending goes to restaurant, this one will be the winner.

Is the Market Bottom In?

February 13, 2018, 4:08 pm

Exactly two weeks ago from last Friday, Wall Street was riding the biggest January wave in my career. I know the subsequent selling was disconcerting, but as I had talked about in my last blog post I felt this was what was best for the market.

We’ve now seen an actual correction, a 10% dip off of the recent highs, which has become a rarity in this often unstoppable market. There have been some big bounces, too, which is often typical of a bottoming process. Between the fits and starts of selling and buying, traders are now considering whether the market will deflate any further before again turning higher. After all, corporate earnings are on track to expand 16.8% this year as the economy ramps up and tax rates recede, so the fundamentals provide plenty of support.

We saw signs at the end of last week that the selling had already reached levels as unsustainable as January’s buying was. The market swung all the way from overbought to oversold, starting the clock ticking on a bounce.

I always keep an eye on the market, even though my focus tends to be on individual stocks and charts, but with the unusually wild ride lately I think it’s worth reflecting a little on those broad conditions with an up-close look at the S&P 500

SP500 Chart

Technical traders often turn to the relative strength index (RSI, at the top of the chart) to signal when a chart is setting up for a reversal because it has moved too high or too low. A reading above 70 indicates that the bulls are running hot. As the recent rally demonstrated, stocks can run for weeks or even months with only brief pauses, so an overbought reading is not an automatic sell signal. We can enjoy the ride while it lasts. When the price action peaks, the RSI breaks down and we brace for at least a brief pullback.

These dynamics also apply to the other end of the trading cycle, with low RSI readings generally signaling a bounce. A reading below 30 indicates the stock or index is oversold, and they typically spend less time in this condition than being overbought. That’s a good summary of where we are right now.

The S&P 500 remains biased to the upside over the longer term and the fundamentals are intact. That makes me think that the index will eventually regain enough momentum to get back to and even beyond where the last bull run left off.

The Factors Behind Monday’s Selling

February 6, 2018, 5:10 pm

The Dow briefly dipped into full 10% correction territory yesterday as the volatility unleashed last week spread across Wall Street. While some of the selling came from the biggest shadows on the market – disappointing earnings from several hot mega-cap stocks and rising bond yields – also weighing on the indices was forced liquidation and worries about long-dormant inflation back on the economic landscape.

Wages edged up 2.5% last year, even before tax reform was passed. We haven’t seen real wage inflation since the Alan Greenspan years. It’s usually a sign of an economy that’s reached full employment and growing to the point where managers need to compete harder for talent. While no form of inflation is necessarily “good,” wage inflation is generally more benign than what we see when prices throughout the economy climb due to commodity-linked shortages.

Since even a hawkish Federal Reserve will be more lenient with wage inflation than other forms, it’s going to take a few months before policy makers shift focus to long-ignored and long-depressed price indicators that are now back in play. Until then, pressure on short-term interest rates will remain subdued – we actually saw one-month Treasury yields dip last week around the Fed meeting – and the long end of the yield curve still tells us more about market angst than the real economy. Yes, Treasury yields are on the rise, but it’s no surprise to see that demand for U.S. debt is lagging with all the bickering around the federal budget, a weakening dollar and a ballooning deficit.

Even so, rising bond yields have historically meant rough sledding for the financial sector. We saw a similar pattern emerge last summer and the banks recovered and thrived, and I expect we’ll see that again once the weight of the Fed’s sanctions on Wells Fargo (WFC) lifts. Likewise, while a weak dollar will ultimately be a boon for U.S. exporters and oil prices, it’s going to take a little time before that story filters into stocks like ExxonMobil (XOM), Chevron (CVX), Johnson & Johnson (JNJ) and Procter & Gamble (PG), which have been some of the biggest drags on the Dow in particular.

Then there’s Big Tech. Yesterday we saw the banks’ weakness turn into strength for the FANG group and similar NASDAQ giants. This is a good sign, as it shows that investors aren’t selling everything in sight.

I know the selling isn’t easy to watch when it happens, but I actually believe this is what’s best for the market right now. I don’t see the current action as the beginning of a bigger downtrend and I expect the market to resume its rally once the bond market stabilizes (which we saw a little of today), the sellers grow tired and buyers step in to take advantage of stocks at discounted levels that we haven’t seen in a while.

How to Pick a Sell Target

January 30, 2018, 10:41 am

Stocks have been on a near non-stop rally since August despite rising interest rates. While earnings season has always impacted market direction, it is almost as if these last results from 2017 don’t really matter. 2018 is what actually counts, and Wall Street is even becoming more focused on what 2019 will hold.

As valuations rise, so have the buy limits and targets I set for my stocks as I adjust the prices based on 2019 earnings expectations. This might be a little aggressive, but it is necessary to put my targets in line with the way investors are thinking, which will put me on equal footing as I look for stocks that will outperform.

There’s a lot behind the scenes that goes into coming up with these targets, and I wanted to give you a special look behind the curtain today. Let’s start by breaking down the math.

You might find this hard to believe, but the calculations are actually the easy part. I take a reasonable earnings estimate and apply an appropriate multiple to generate a target, with the time of the target usually being the start of the 12-month holding period (for my longer-term investments) that the earnings estimate is based on. For example, my targets following this year will be a year-end price based on 2019 earnings estimates, although this can vary based on market conditions.

Determining the multiples that give me the target is a bit trickier. It is common practice among companies to give forward guidance for earnings, but I don’t think it’s smart to follow management’s guidance blindly so I always double check to make sure the numbers are realistic and see if there are any competitive or macroeconomic factors they may be missing.

Finding the proper multiple is a bit of an art form (I could write a whole book on it!), but it boils down to the overall market multiple, how quickly the company is growing and how long that growth can last (the higher and longer, the more elevated the multiple), the risk level of growth being interrupted due to economic or competitive reasons, the amount of capital the company employs to sustain the growth (less unnecessary investments, more free cash flow is better and the higher the multiple) and the strength of its balance sheet.

All that said, targets can change quickly based on what is happening to the company and the market as a whole, which is why I use them as a guide and why I’ll sometimes sell before the stock hits my target or hold for even higher prices.

What’s Next for the Dow?

January 23, 2018, 10:32 am

If you had any doubt about Wall Street’s ability to sustain last year’s rally, the first few trading days of 2018 provided an extremely compelling argument. The market hit the ground running and then kept climbing through the next two weeks.

Then last week we saw Wall Street get a little spooked. This was due to a couple of reasons, including an overextended market and panic over the cryptocurrency sell-off. The problem with this environment is that a correction can beget another correction, just like higher highs beget higher highs, so downside can accelerate quickly.

Given this, I think we are due for a near-term correction, but that doesn’t mean the market can’t end up significantly higher. In fact, I think the Dow will hit 30,000 within the next 12 months.

Check out my latest video clip from CNBC below to find out why, as well as who I think the leaders will be that fuel this market’s fire!

[ Click here to play message from Hilary Kramer ]

My 2018 Top 3 IPO Watch List

January 17, 2018, 11:09 am

Initial Public Offerings (IPOs) can be one of the most exciting terms on Wall Street. The excitement of getting into a buzz-worthy company at the ground floor is enticing, and sometimes that approach pays off big. However, it’s also risky since you can’t always believe the hype.

2018 is poised to be a big year for IPOs after a somewhat mixed 2017, with several well-known names hitting the exchanges. I’ve spent a lot of time researching them and wanted to share three companies that are worth watching this year.

Hot IPO #1: Survey Monkey

This Silicon Valley cloud-based software company is the global leader in online polling and surveys that have become a critical tool for businesses. Whether it’s to gauge the popularity of a new product or solicit feedback from customers, Survey Monkey has the power to improve the efficiency and effectiveness of marketing by reaching the most important target demographics through email, chat, social media and other mediums.

I had been concerned that the company might stumble after founder Dave Goldberg died in 2015, but that has not been the case. The site boasts three million visitors every day, and generated more than $200 million in revenue last year with lucrative profit margins in the 30%-40% range. Survey Monkey has also had recent success in Australia, which will serve as a launch pad for the untapped Asia-Pacific market.

Hot IPO #2: Airbnb

Founded over nine years ago, chances are good you’ve either personally used or at least have heard about Airbnb. The global home rental service exploded onto the scene as an alternative way to secure lodging while traveling. Rather than book through an overpriced hotel, users can check out local homes, apartments and even house boats for their next adventure. Airbnb currently has more than four million listing in over 190 countries, and is working on launching a premium service to tap into the lucrative luxury and business traveler market. While some places like New York State now have laws restricting who can rent their homes out on this type of site, Airbnb has been able to work with local governments to craft mutually-beneficial legislation.

The company was originally expected to go public in 2015, but chose to remain private and has grown rapidly in the following two years. Profitable since 2016, management estimates they will earn more than $3 billion in revenue this year and over $8 billion by 2020. Now that the company is back on the IPO bandwagon, it’s certainly an interesting candidate to consider.

Hot IPO #3: Lyft

This ride-sharing service and its fellow competitor Uber have upended the taxi industry with cheaper and more convenient services. Lyft recruits drivers who use their own car and solicits customers through a smartphone app. Both have a lot of promise, and until recently Uber was the darling of investors and the most likely IPO candidate. But a string of scandals over the past year, including sexual harassment charges, feuds with municipalities and criminal investigations that prompted the CEO and other top executives to step down, has provided an opportunity for Lyft. Its ability to more effectively navigate the regulatory issues and pressures of a fast-growing business is one reason I give it a nod over Uber.

Lyft’s ridership surged in 2017, with gross bookings rising to $3.2 billion and its share of the U.S. market climbing from 16% to 22%. While it currently operates only in the United States, that gives is an edge since it has more room to grow. Plus, Lyft plans to expand into Canada and is moving aggressively to develop a fleet of self-driving cars. These are the kind of catalysts I like to see in a growth stock.

The Next Group of Winners

January 9, 2018, 10:15 am

It was very encouraging to see how the market traded last week – the S&P 500 soared through the 2,700-point limit while the Dow cracked 25,000 and the NASDAQ leapt above 7,000. Once again, tech stocks led the charge and the FANG group – Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL) – hit record highs.

We’re in an environment that’s very good for growth stocks in particular, although it wasn’t always that way. Remember, back in the beginning of 2017 it was all about the Trump Trade – companies set to benefit from the policies of the incoming administration. Deregulation and higher infrastructure spending would lead to better economic growth, which would help financial, industrial, energy and materials stocks.

However, things took a turn when the economy stumbled in the first quarter, and much of President Trump’s legislative agenda stalled. This led to a steep decline in interest rates, with the 10-year Treasury falling from 2.6% in March to 2.05% in early September. However, the economy was still sound, and this flashed a green light for growth stocks. Meanwhile, many of the Trump stocks struggled through the first 10 months of the year.

The value-oriented and Trump names had a much better fourth quarter as tax reform legislation, which seemed like a long shot at times, became a reality. Growth stocks continued to do well and realized a nice gain in the quarter, although their performance lagged the past two weeks when the 10-year U.S. Treasury yield shot up above 2.4% and reports of faltering iPhone X demand hurt the semiconductor companies that supply Apple (AAPL).

I don’t expect the iPhone issue to impact the broader growth market overall in 2018. However, higher interest rates are definitely worth keeping an eye on, especially with many valuations at lofty levels. The Federal Reserve is expected to raise the Fed Funds rate at least three times this year, and should also speed up the sale of the holdings in its portfolio. These moves will pressure both the short and long end of the yield curve. In addition, the European Central Bank (ECB) will begin to slow the pace of its quantitative easing (QE) program and potentially end it in October, taking away another pillar of support for bonds.

There’s little doubt that interest rates will move higher this year. While this could cause bouts of volatility, I still believe growth stocks will do just fine. I don’t expect the 10-year Treasury to get above 3%, so yields will remain supportive of stretched valuations. In addition, if there are any signs of a slowing economy or the markets looking shaky, the Fed will pull back on tightening to support the bond market and stocks.

Therefore, I look for many of our winners to emerge from the same groups as 2017: technology, healthcare and retail, but not so much the futuristic industries like the Internet of Things (IoT), robotics and artificial intelligence (AI). These have been talked up quite a bit in the financial media lately, but I don’t see any established “pure plays” here yet.

This could always change or one of these segments could become a large part of an established company. For example, tech giants AMZN, Microsoft (MSFT) and GOOGL all have AI software, but the size of these operations for now is swamped by other operations so they aren’t able to move the needle too much on sales and earnings. It is too soon to identify who will be the winners and losers in these exciting industries, so investing in them right now is too risky.

Are We Experiencing the January Effect?

January 3, 2018, 5:29 pm

It’s hard to believe that we’re three days into 2018 (I hope you had a happy New Year!). It’s nice to see the market back at work after the slow holiday trading these past few weeks.

2017 was a busy year, but I’ve loved every minute of it and I hope you did, too. Now that Wall Street has turned its attention to what will happen this year, I expect the recent upward trend from the end of 2017 to continue. Right now, the bulls maintain the upper hand, which is especially interesting since some analysts had speculated we’d see a sell-off at the beginning of the year triggered by investors selling for tax purposes that would put the bears back in control.

The broader market’s moves may get smaller and slower as interest rates rise, but the odds are also rising that we’ll see a decisive January Effect – a rally during the month of January – roil the waters one way or the other. I think we already saw a bit of that yesterday, as the three major indices – the S&P 500, Dow and NASDAQ – held firmly in the green to start the year. Remember, the bulls have corporate tax cuts and the promise of a big infrastructure bill ahead in their corner.

That’s not to say that there won’t be a little turbulence along the way, but that’s not a bad thing. The S&P hasn’t declined more than 4% since well before the election, forcing everyone in the market to chase highly-valued stocks far beyond their historical comfort zone. There’s a lot of easy money to be made on dips.

In the meantime, tax cuts accelerate what’s already healthy earnings growth and help support the high stock valuations. Corporate America achieved 9.6% growth in 2017 and is on track to deliver 11.8% richer cash flow this year. These numbers were enough to support the broader market’s move this past year. And the reality of a lighter tax regime in the mix and a rally isn’t out of the cards, which is good news for all investors.

Focusing on the very near term, people who believe in the January Effect are looking for a win this week as a hint to where Wall Street will go for the rest of the year. I think that win could be coming as I expect to see strength in the economic data due out this week – auto sales, global PMIs and the employment report – which, along with positive seasonal factors, should put traders in a buying mood for at least the first part of 2018.

2017 took Wall Street on a wild ride, and now I’m very excited for what 2018 holds. I expect it’ll be a good one, so here’s to another profitable year!

What About Bitcoin?

December 19, 2017, 2:31 pm

With bitcoin all over the news, it’s no surprise that I’ve received a couple of questions asking for my take, so I wanted to share it with you today.

Bulls on cryptocurrencies talk about the limited supply of the coins and the innovating blockchain technology used to mine them. They are also seen as a convenient store of value. However, I believe these positives are actually outweighed by the negatives. The value of bitcoin is highly dependent on what a relatively few number of traders say it is. You cannot easily exchange it for actual goods and services, like at your local supermarket or on Amazon (AMZN). The fact that it is so volatile, moving from $13,000 to $19,000 and back down in a matter of days, is unheard of in real currencies and shows that it is a trading instrument, not a currency. It’s also important to keep in mind that bitcoin is not backed by any government, and in fact, governments could easily ban its use or trading should they decide to do so.

I believe that former Federal Reserve Chair Alan Greenspan said it best: “Bitcoin is really a fascinating example of how human beings create value, and it is not always rational … it is not a rational currency in that case.”

If you’re still interested in trading bitcoin or other cryptocurrencies, your options are essentially limited to Coinbase. You can open an account and start trading, just as you would with a typical brokerage account. Of course, fees vary, but in the United States it will cost you a minimum of 1.49% of your funds to convert your dollars into bitcoins to trade. However, please know that Coinbase did crash once due to high usage that was straining its IT systems and management warned on Twitter (TWTR) that this could happen again, so it’s important to be careful.

For me, I think the true game changer and where the real opportunity lies is in the technology behind bitcoin: blockchain. Blockchain boils down to a way to authenticate transactions within a cloud of networked computers. There’s so much processing power built into each link in the data chain that it’s practically impossible to break the code. Only the computers with legitimate access can authorize any activity whatsoever; everyone else is locked out. And if anyone tries to tamper with the chain, the deception is obvious to all. It’s the foundation of an all-new Internet that’s safer, more efficient and scalable to accommodate billions of devices.

Investors looking to stay relevant and rich in the brave new world ahead can’t afford to ignore blockchain’s impact, so it’s a story I will continue to follow closely.

From Buzz to Business: Don’t Envy Private Equity

December 12, 2017, 10:59 am

We’ve talked before about investing around the unicorns because you can’t invest in them. I know investors can get frustrated at being locked out of some of the most dynamic names in the U.S. economy during their peak years of growth and shareholder value creation, but I don’t think you need to be.

Sure, it’s great to nurture a speculative story from day one and watch your holdings appreciate. But it’s also miserable when you have to let that money incubate for years before seeing one penny of profit, especially while the public side of Wall Street is making a lot of money. Why wait when you can make good returns in a matter of months?

To give you a better understanding of how difficult investing in the unicorns really is, let’s take a look at Sharespost 100 (PRIVX), an investment fund that tracks what its specialists rank as the fastest-growing and highest-quality private companies. Because it fills the portfolio with shares insiders sell in private transactions, operating costs are high. You don’t need to be a millionaire-accredited investor to buy PRIVX, but the fees are still a significant drag on people hoping to build a future. And even if these are nominally the top names in Silicon Valley, performance hasn’t lived up to the hype around Lyft, Pinterest, SoFi, Spotify and other core holdings. PRIVX is up 5% since January 2016, which only feels good until you compare that return to the S&P 500’s 36% gain over the same period, and the fund is down year-to-date.

That’s not exactly a stratospheric billionaire-making trajectory. If PRIVX accurately reflects the best of the private equity universe, it’s a pretty safe bet that a lot of the venture-backed start-ups that don’t make the list are having an even harder time keeping up with the index funds. Part of the problem is that the companies in the portfolio that do go public are struggling on the open market. Four PRIVX holdings have made it to the IPO stage so far. Apptio (APTI) has been the only breakout, up 36% from its late 2016 offering, while Cloudera (CLDR) is up just 6% since April. Tintri (TNTR) and Sunrun (RUN), on the other hand, have fallen 22% and a harrowing 60%, respectively, leaving this “successful” slice of the private universe down an average 10% per position.

Of course, none of these companies are household names, but the closer these unicorns get to everyday American economic reality, the more pain their shareholders have had to accept in the meantime. As the biggest and highest-profile IPO this year, Snap (SNAP) tells a similar story: while kids know the messaging platform, the adults on Wall Street aren’t impressed with the numbers, taking the shares down 14% from their debut and erasing a whopping $3 billion in shareholder value in the process.

Don’t envy the Silicon Valley fat cats. When the truly breathtaking opportunities hit the market, you’ll be there to catch them – maybe even at lower levels than what the investment bankers say these companies are worth.