Should We Sell These Stocks?

“Hakuna Matata... it means no worries!”

- The Lion King

The Portfolio

Our blog portfolio continues to perform well and volatility in the portfolio remains low vs the overall market. Year-To-Date the portfolio is up +21.70%. Our benchmark index, the S&P 500 is up 19.70% YTD. Not only are we still beating the broad market, we're starting to diverge from the S&P at a faster pace.

Saudi Oil Field Attack

What happened and how does it impact our portfolio?

Over the weekend, coordinated drone attacks on two key Saudi Arabian oil facilities caused a disruption to oil production equal to 50% of Saudi Arabia's output. The equivalent of 5.7 million barrels per day, or 5% of the global supply per day. To put this in perspective, the largest oil production facility in the U.S has an output of 607,000 barrels per day. Yemen's Houthi rebels, who have been locked in a war with a Saudi-UAE-led coalition since 2015, claimed responsibility for the attacks, warning Saudi Arabia that their targets "will keep expanding". The attack illustrated how fragile the worlds oil supply is, and the prospect of more attacks has markets shifting positions.

Industries that rely on oil are seeing their stocks decline today, airlines, cruise lines and other transportation stocks. Mean while defense and oil stocks are rising. Whiting Petroleum is up over 36%, and Lockheed Martin is up over 1%, a big move for this $110 billion dollar company. and Raytheon is up +3%.

What About Hedge Funds?

This is a story that may materialize in the next few days as hedge funds have a lot of exposure to oil and they provide a tremendous amount of liquidity to our financial system. One of the biggest trades in the hedge fund industry has been making long and short bets on the spread between WTI Crude and Brent Crude. As recently as April 2019 hedge funds were heavily shorting oil, but today that trade is roughly neutral. Basically hedge funds have been reducing their exposure to the short and long side of the trade in a market that has been hard to figure out. Hedge funds have been trying to figure out if oil prices will move one way or the other because of the trade war, geo-politics, over supply from the US, OPEC cutting output, reduced demand and more.

However, hedge funds with short positions will get hurt by this attack on Saudi Arabia. Oil stocks and oil prices catapulted up this morning, I can only think that a lot of hedge funds had to use capital to cover their short positions at these higher prices. Most hedge funds have been building cash positions in hopes of being buyers in a market down turn; this will greatly diminish the cash positions of hedge funds that short oil.

Sell These Stocks?

With all this uncertainty and geo-political confusion shouldn't we be selling stocks or building our cash position? No. Nobody ever made a dime panicking, and we have no reason to even be flustered by today's events. The biggest question mark in the portfolio is Royal Caribbean Cruise Lines (RCL), primarily due to its exposure to oil and cancellations that typically show up during times of geo-political unrest.

RCL revenues rose 20% and revenues have found their way to the bottom line, improving earnings per share. RCL has shown a pattern of positive earnings per share growth over the past two years. RCL increased its bottom line by earning $8.57 versus $7.53 in the prior year. This year consensus expects an improvement in earnings to $9.65 versus $8.57. RCL has a better than 45% gross profit margin, which is up from the same quarter last year. I am reiterating my 12 month price target of $140 and holding our shares.

The Stay Invested portfolio already has too much cash, cash that needs to be invested. But let's look at what we might consider selling. We have three stocks (ASML +67.11%, CCMP +58.85% and AMTD +10.98%) that have risen above my original target prices. Doesn't our discipline say that we should sell these and capture the gains?

ASML has a gross profit margin of 47.25% which is strong. Gross profit margin increased from the same quarter the previous year. However the Net profit margin has declined. ASML's share price has soared over 40% over the past year exceeding the broader market during that same time frame. With a P/E Ratio roughly double that of its peer Lam Research, the stock is looking expensive. Since the same quarter last year, revenues declined by 3.0%. Earnings declined by over 14% in the last quarter compared to the same quarter a year ago. The company has had volatile earnings and currently the consensus is that ASML will report a contraction in earnings at the next earnings call. However I see a conflict in the consensus. According to management, earnings should increase substantially, as the forward P/E is 31% below the trailing P/E, an indication that management sees more growth in earnings ahead. The biggest mistake I made was not buying a larger position at lower prices, but I stuck to the discipline of buying in small increments. There’s an old saying, bulls make money, bears make money, but pigs get slaughtered. We bought at $147.68 and the stock is trading today at $246, which actually I see as being fair value. Any lessening of the trade tensions will be a plus for ASML. I'm going to hold our shares and keep an eye on ASML. While I can make a case for the stock to rise further to $285, I'm going to just dip a toe in the water until I see more data and raise to $250.

CCMP's revenue grew over 80%. CCMP's share price has jumped by 32%. Net operating cash flow has increased by over 72%. CCMP has reported somewhat volatile earnings, however I feel it is setting up for EPS growth. Bottom line earnings were $4.20 versus $3.39 in the prior year. The market expects an improvement in earnings $6.60 versus $4.20. CCMP's debt-to-equity ratio of 0.92 is low, but I will continue to monitor debt levels and management of debt. My favorite debt metric, the company's quick ratio, is 1.96, indicates strong liquidity. I'm still bullish on CCMP and have raised my 12 month price target to $160.

AMTD has improved earnings per share by over 26%. AMTD has shown a pattern of positive earnings per share growth over the past two years, which I feel should continue this year. AMTD increased earnings $2.59 versus $1.64 in the prior year. Consensus is that AMTD will increase earnings to $4.02 versus $2.59. Net income increased over 23%. Gross profit margin is exceptional at over 54%. Net profit margin also increased over 37%. TD Ameritrade is outperforming its peers. My feeling is that AMTD will continue to perform well and is benefiting from volatility in the market as AMTD has a lot of clients who are traders who generate a lot of commissions and fees for the company. Just because I don’t trade doesn’t mean I can’t earn a profit off of traders. I’ve increased my 12 month price target to $57.

Just 2 weeks to go

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"Markets don't go to zero, Portfolio's do.

Buy quality, be patient...and look twice for motorcyclists"

- Clay Baker

Stay Invested,

Clay

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Keep Me Honest

  1. S&P 500 declines to 2,350 or more (1-3-2019)

  2. Healthcare and Biotech sectors outperform (1-3-2019)

  3. S&P reaches 3,000 by year end (1-11-2019)

  4. CSCO reaches $60/share (1-18-2019)

  5. VEEV reaches $145/share (2-14-2019) (achieved $145.23 on 5-10-2019)

  6. CVS reaches $91.50 (2-27-2019)

  7. Bull market takes another leg up (4-7-2019)

  8. The Fed will lower rates 1-2 times (5-13-2019)

Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't, Stay Invested

Rule #4: When a good stock you own drops 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Rule #7: When an investment bank sells below book value, buy it

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD, HD, AWR, XLNX, MRVL, NBRV

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved