Smuckers misses on revenues, where is support and what can we learn?

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J.M. Smucker reported a miss on revenues while maintaining it’s EPS outlook. The shares are down about 8% today. I’ve long been a fan, and a shareholder. Strong balance sheet, that’s been a steady and consistent out-performer, in a “safe” industry.

The stocks had quite a run up leading into today’s earnings. It was up 26% YTD and even after today’s drop it’s still outperforming the S&P 500, at 7.61% YTD, by a wide margin. The company has a long successful track record to allow one quarter to derail any of that. In my opinion this has more to do with the run up leading into this report. It’s great to see a stock you already own go “parabolic”. But oftentimes that just means investors are pulling future returns forward into the present and the result is usually either sub-par performance going forward (as the prior gains are “digested”) or worse, a major swing high before a significant pullback (as the stock/asset class becomes significantly overvalued).

A major daily move like this is almost never resolved in one day. Which leads me to believe there will be further downside in the days/weeks to come. Projected support comes in at $132 and $120 respectively. If your bullish on the stock, these might be good price points to enter.

Perhaps the better question is what can we learn from this? While there is no one perfect way to invest or trade, this is what has worked for me.

  1. Never chase momentum

Nothing goes up (or down) forever. Patience is critical to successful investing and it’s one of the hardest elements to master. A stock actually becomes more risky the higher it goes and less risky the lower it goes. This goes against our natural instincts but it’s the truth.

2. Never over-allocate to any one individual company

How many blue chip companies over the last 50 years are no longer relevant? My personal rule is to never allocate more than 5% to any one individual company. This way even a 50% drop in the company’s stock would only have a 2.5% effect on your total portfolio.There are some great companies that look like they may be around forever. But the truth is no one knows what the future holds with any certainty. Don’t allow your pride to make you think otherwise.

3. Equal weightings for all companies in your portfolio

While this is not a hard and fast rule for me, I do think the theme is relevant. This sort of piggy backs off of #2. I’m not interested in trying to figure out what company may or may not outperform the other each and every year. To me this is a classic “paralysis by over analysis” and I think it does more harm than good. When you overweight certain stocks over another it becomes more emotional. You become more emotionally connected in the outcome of the stock and this can make for some bad judgement calls. Locate some good companies and buy them at good prices and in equal size portions. Let the chips fall as they may. After all there is much outside of our control in the short term anyway.

4. Stay balanced

There is much debate between passive and active management. The problem I find is that most people take one side over the other and become entrenched in that viewpoint. Personally I think both sides have excellent points and I use a combination of passive index ETF’s and active stock picking in my approach.

There is a growing trend in this “buy and hold forever” philosophy. This is mainly the product of a seven year bull market. Investors can certainly do better than this approach but it takes time and effort (nothing good is easy).

(Disclaimer: Long SJM)

Walmart price chart update post earnings…

Last year I posted a technical update on Walmart stock after it offered a disappointing profit and sales outlook. At that point the stock was trading in the $60’s and my thoughts were that the stock was going to head lower. “So between $52-$54 (if it gets there) may be enough support to halt the decline” was my actual reply.

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Fast forward one year later and we can see that price did indeed drop into the upper end of the projected support range at $54.65 and has proceeded to rally to $74 as I type this (a gain of over 35%).

Today the company issued a better outlook along with an earnings and revenues beat. The company has made some meaningful investments in the e-commerce space to compete with Amazon.

While I thought the stock was intriguing as an intermediate term trade in the mid $50’s, I’m not nearly as excited now that the stock price is in the mid $70’s.  While the traditional valuation metrics aren’t terribly overvalued (outside of the PEG ratio), they are certainly no longer undervalued either.

It’s probably more well positioned than Target in the near term, while both companies offer attractive dividend yields, I still think there are better options.

Going forward I think this $74-$75 level will be key resistance. A clear break above could be a signal that this turnaround has legs.

Source: Wal-Mart lifts profit outlook as sales grow

Want to learn how to trade and analyze the markets? Whether you’re a day/swing trader or investor wanting to learn how to analyze trends in the financial markets, there is something in The Trading Playbook for everyone.

Target lowers outlook, where is support?

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Target reported earnings this morning that included lowering the outlook on the companies profit and same store sales. The stock is down 7% and seems to be bringing the entire market down a bit this morning. Competition from Amazon and Walmart, along with the companies own internal issues seems to be the main problems. The stock trades at 14x TTM and forward earnings already with a 3% dividend yield, so I wouldn’t expect this news to be a catalyst for the stock to crater. But I do think price is headed back down and possibly below the prior two lows at $65.

How far below? Who knows. But I do see support at $61, which would match the 25% drop experienced in 2013-2014 due to the credit/debit card breach issue. $58 would be another key technical area to watch if it gets there. If your bullish on the stock for whatever reason, those would be two areas I would be interested in.

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Personally I think there are better options in the retail space between Amazon, Ross Stores, Dollar Tree and even Dollar General. Target has never really shown much in terms of revenue growth and EPS growth has been non-existent for 3 years. And in terms of stock performance, Target has not been able to keep up with the S&P 500 on any time frame (which includes the dividend). So investors would have been better off owning the SPY or especially XLY.

Doesn’t mean the stock can’t outperform in the future. But trying to time that type of fundamental and technical turnaround is impossible for 99% of investors.

(Disclosure: Long AMZN, ROST)

Source: Target Cuts Outlook in ‘Difficult’ Environment

Gilead Sciences Inc. (GILD): Best buy in the market?

As the bull market pushes past its seventh year and the stock market averages triple in value off their great recession lows, it can become increasingly difficult to find good companies trading at reasonable values. As Buffett famously said “You can buy a good company, but at a bad price it can still turn into a bad investment.” The S&P 500 currently trades at 17x forward earnings and 19x TTM earnings. While this isn’t bubble territory when factoring in generational lows in the risk free rates, it’s far from cheap.

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Which brings me to Gilead Sciences Inc. (GILD), it currently trades 7x forward and TTM earnings (5 year average is 21x) and 3.9x sales (5 year average is 7x) for a company that grows revenues at an average annual pace of 32% for the last 5 and 10 year period and grows earnings at a pace of 40-50% annually for the past 5 and 10 year average (chart above). The company also displays operating and gross margins well above the industry average.

Now there are always two sides to every trade and the bears are looking at the overhead potential of drug pricing reform and more specifically what other generic drugs may cut into Gilead’s future revenue and earnings growth potential. There aren’t ever any certainties in the markets but what we can say is that it’s usually a good idea to buy good companies with a margin of safety. In this case we have a solid company with good competitive advantages, exemplary management, and revenue growth that exceeds even Amazon’s, trading at a fraction of it’s historical average.

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Taking a look at the weekly chart, GILD looks to have a confluence of support between the $82.50-$84 with the 200 week ma just below.

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Next we take a look at the entire biotech sector chart. Here we see that the entire sector has been under pressure since the 2015 highs, down 40%. The sector appears to be stabilizing and a break above $289 would bode well for all those beaten down biotech names such as Gilead, Regeneron and Allerghan.

Gilead Sciences reports earnings after the market closes on Monday. The street is looking for earnings of $3.02/share on $7.85 billion in revenue. The bar appears to have been set quite low for the quarter, and the future for that matter.

(Disclosure: Long GILD, REGN, AGN)

Aftermath to Brexit

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It came as a shock to most but the United Kingdom has voted to leave the European Union. Everyone wants to know what happens from here but the harsh truth is no one knows for sure. No country has ever left the European Union before so there isn’t a playbook for such an event. Markets hate uncertainty and right now there is a mass of uncertainty about the future which isn’t likely to be resolved anytime soon.

For long term investors this really shouldn’t change anything about your approach if you’ve properly assessed your tolerance for risk and time horizon. It’s in times like these when investors find out if they have the correct plan in place. If you panicked on Friday and made any substantial changes to your portfolio, your doing it wrong. While there is no way to take all of the emotions out of it, after all no one enjoys seeing the value of their investment accounts go down, an investor with a properly created investment plan tailored to ones risk tolerance and time horizon should result in an investor who isn’t swayed into making any significant changes to their portfolio during these types of events. However this isn’t easy, so if your having trouble then find an independent fee only investment adviser to help you navigate the waters.

In light of Fridays price action let’s take a step back and examine the facts.

Although Fridays drop of 600 points sounds scary, the market had been going up all week prior to the referendum, including up 250 points on Thursday. So the net decline in the Dow for the week was actually only 274 points or 1.5%.

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For the S&P 500 the total decline for the week was 33 points or 1.63%. Not great of course but not horrible either.

The results of the vote means that the UK will now enter into a period of negotiations with the European Union in regards to the future trade policies and relations. At this point the UK will continue to remain a full member of the EU during the negotiations which could take 2 years or more to complete. What this means is that this result is probably not quite as disruptive as the financial media will lead you to believe, at least in terms of the political process.

Also the UK accounts for 3% of global GDP and about 2.9% of revenues for S&P 500 companies. So the effects of the UK disruptions on the domestic market are negligible. I know there are many additional moving parts such as the currency and bond market ramifications, but the purpose of this post is simplicity and focusing on the facts instead of predictions.

The last point is the case for diversification. Friday was the perfect example why investors should still have allocations to bond funds. I know bonds are boring and interest rates are at all time lows. But it’s in times like these, when investors need them the most, when bonds have generally provided a form of insurance against market big declines. An investor with a bond allocation softened the blow of Friday’s price action and likely kept them from making an emotional decision.

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The long term US treasury bond index fund (TLT) closed up 2.68% on Friday after being up as much as 3.5% at the open. This is the perfect example why investors should not give up on high quality bonds of all duration’s, especially as this current bull market eclipses the seven year mark.

In conclusion investors will no doubt be bombarded with a plethora of opinions and predictions. We really don’t know how this will all play out and that will likely effect asset prices, especially if earnings growth for the second half of the year fails to materialize. Add in the fact that the US has it’s own election this year and you have a recipe for heightened volatility. We may not know the outcome with any certainty, but eventually the smoke will clear and the markets will resume their uptrend. In the meantime stay diversified.