Portfolio

Wednesday, August 24, 2016

The "Oil Indicator"

Not to long ago I discussed the Election Indicator, and it's surprising ability to accurately predict the election 86% of the time. Of course that indicator was the stock market which is a barometer of the business economy.


Here is another indicator we heard a lot about this past year.  It's the "Oil Indicator".  For awhile oil and equities were lock step with each other. In fact if neither line were labeled you'd have a hard time distinguishing between them.



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Then all of a sudden in mid-April things started to change. They started moving in near opposite directions at times since then.

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 It's not exactly clear why they were so closely correlated, and then parted ways.  However it just reinforces not every "indicator" can be accurate 100% of the time.

Tuesday, August 23, 2016

The Self-Driving Investment

OK so I guess I'll admit right off the bat the article headline is just slightly mis-leading.  Today I want to talk about Ford's announcement to produce fully autonomous vehicles. In case you aren't aware there are already fully autonomous vehicles on the road.  A prime example is Google's self driving car fender bender fiasco.

But technology is always a hard area to invest with individual companies. Premiums are quickly bid up, and you never know when the next change is around the corner. Unfortunately technology is essential to growth, but is best had in a passive index fund in my opinion for the majority of people. Or basically by a fund which tracks the Nasdaq.

A lot of people want to invest in this area since they see it as the next "Big Thing".  Tesla has been made famous by their super fast electric vehicles ability to change lanes and park itself.   A process it gets even better at over time.  Their technology was provided mostly by Mobileye(MBLY) until their recent decision to part ways.  Mobileye is one of the few publicly traded companies out there with this type of technology, Google is another, and it's speculated Apple is in on the game too. The problem is it's not so easy to invest in this area outside of traditional automakers.

Each represents their own challenges. For one MBLY is trading at a pretty high valuation, although the pullback that ended in February did provide a decent opportunity for those willing to take some risk. They aren't the only ones with this technology. In fact it appears Ford developed their technology with in house engineers and other companies. They never even mention Mobileye in their recent press release. Reminds me of cell phone companies in the 90's and early 2000's. Just ask investors in Blackberry, Motorola, or Nokia how they have fared. Unless the company can continuously outdo the in-house technology from automakers, and competitors, it will be tough for them to maintain this premium.

Google is predominantly a search and advertising company that's slowly morphing into a content/data/business services enterprise.  I don't doubt they'll figure out a way to get a piece of the action, but it's not going to be their focal point which doesn't make it a clear cut investment in this space right now. The stock has been an absolute beast in performance terms so maybe its best to own it for what it is.

Apple is the technology investors poster child. The company initially had a lot of success. Almost went bankrupt, and then came roaring back into the worlds most dominant company.  If it does turn out they have some type of technology they've been developing in the field it might be an intriguing play. But for now count them out of the self-driving vehicle scene. 

Tesla on the other hand is in my opinion not fit for most investors right now. I just like to look at this metric to make my point. They are valued at $33 billion right now. But they barely sell 100k cars each year. That means each car is worth $330k in market cap. Compare that to any other major automaker selling millions of vehicles with reasonable market caps. Whether or not Tesla can meet it's forecast to sell 500,000 vehicles by 2018 remains to be seen. Even if they do reach that milestone each vehicle sold in market cap terms is worth $66k right now. Hope they don't slip up.

That leaves the other automakers. They'll be the ones making the actual vehicles as always so no change here.  However I don't see margins getting miraculously huge because of this.  At first their major self-driving cars customers will be companies using these vehicles for profit. Or in other words the dreaded fleet- vehicle sale accompanied by thin margins. The buyers own profit motive will drive them to seek low prices, and will likely buy in bulk to negotiate discounts.  That doesn't sound like margin expansion to me.  But plenty of them have plans to introduce fully autonomous vehicles. I think in the automotive space let a few other companies release details of their self-driving plans and go from there.  Whoever gets the biggest lead with the best looking technology might keep a leg up on the competition for awhile.

It doesn't mean the performance of any of these companies will be bad, or that lots of money will be made in this sector.  I'm betting there will be at least a couple of names that benefit greatly from this trend. What I do know is that it's too difficult to pick a winner right now.  These cars aren't even for sale yet with the exception of Tesla's semi-autonomous models. So for now I'd stand pat and continue to invest in solid companies that sell great products, have wide moats, and a solid operating history. Just like the ones found in our portfolio.

Saturday, August 20, 2016

TLH Weekly Review


Boring. That's what this market continues to be.  Even with the FOMC minutes released this week we only saw a 0.6%(15 points) move for the day, and S&P finished flat for the week.  In different times we might have seen 1-2% moves.

Some will attribute it to the "Summer Market", and all the big boys are out on vacation.  That has a little truth to it, but it doesn't account for all the low volatility.  The S&P 500 has just not been that volatile of late, which is a great thing!


Look at how the daily changes in the S&P have continued to drop all year, with the exception of the Brexit vote.  Frankly there just isn't much to worry about now and I think that was evidenced by the barely large moves we've been seeing even on Fed and ECB meeting days.

Yet that is totally fine with me.  I like boring.  In fact most of our stocks are "boring".  Boring means things change little on a daily basis, but over time continue to rise as the money rolls in. It has been tough though to find really good deals in this market. The majority of high quality names even have low yields as judged by NOBL, the ETF loaded with dividend aristocrats barely yields above 2%. Although we have plenty of high quality on our list yielding above 3%(DEO, BUD, CMI, RAI, PG, PM, VGR, HCP, MO, BTI, EMR).

We had the FOMC minutes released this week, and there really wasn't much of a reaction overall Don't confuse no rate hikes as good, and rate hikes as bad.  While the initial market reaction can be in either direction, history has shown in general equities trend up with rising interest rates.

Then we started to see some disagreement behind the scenes from two Fed Presidents. William Dudley, and John Williams both came out recently stating they felt rates needed to be raised. Either way the market is finally starting to think rates might go up this year. In fact futures traders now foresee a 53% probability of rates getting hiked by December.  This meeting wasn't the most clear on direction, and I think that's a very calculated message.  Some took the notes as "dovish", but I think the Fed is really starting to wonder about which month they'll raise rates. 

Inflation data was flat this week showing a 0.08% increase excluding food and energy.  While on the whole this is running beneath the Fed's target rate, it continues to inch up for the most part. While the strong dollar and low energy prices have been able to keep a lid on prices, it doesn't mean everything is gloomy. 


We saw Industrial Production increased at a healthy pace.  The 0.7% increase was one of the largest since November 2014, and a lot of that weakness was attributed to the dollars rise during that time. With the dollar trending flat this year manufacturers have been able to handle currency pressures much better.  We've seen some pretty income numbers recently, and eventually higher wages and production will work it's way into the economy.

Not so boring week for a some portfolio members

Hain Celestial dropped a bombshell on us. I ended up selling part of the shares as a result.  The company noted they had accounting revenue recognition issues. You never like to see accounting issues when you own a stock.  The company did note it would not affect the amount of revenues, but the timing. No matter what, what worries investors is if they find out who actually knew of the problem and if it was not accidental. The company played it off that it wasn't, but I'm always skeptical.

The bigger issue is they announced they'll miss earnings. Considering just last quarter they issued no warning, things have changed quite a bit over the summer.  I think this earnings miss will be big.  If it wasn't they would have announced a new EPS range changed maybe 5 cents from prior guidance. That's what concerns investors.  Competition is getting stiff, and when the company started trading higher on buyout valuations(due to WWAV) you get the perfect storm for a multiple contractions.  I'm expecting the stock to start trading at a P/E under 20 for the foreseeable future.

Emerson Electric announced they'll be buying Pentair Plc valve and control unit.  The market didn't like the news and initially sent the stock down more than 5%.  The shares recovered a bit, and ended the day down around 3%.  I'm not sure what the margins are in this business, but I hope they are good.  Considering the company has been selling low margin divisions to re-invest into higher margin areas it better fit the bill.  I'll have to take some time to research.  The company has just shed about $5 billion in assets, and has now spent more than half of it with this $3 billion purchase.

In more cross border transaction news our recent pick Praxair(PX) announced they are in merger discussions with European counterpart Linde AG.  This combination would create the worlds largest industrial gas company worth nearly $60 billion.  Shares of PX popped higher on the news so it appears investors like the idea. I'm considering adding more shares if they fall back down a bit with this news as a nice tailwind.

That's all for now. Have a great weekend!

Wednesday, August 17, 2016

Sell Hain Celestial

I thought about it all day, night, and into this morning.  What was I going to do with the portfolio's Hain Celestial holdings.  The news wasn't good, and the subsequent 27%+ drop felt even worse. 

It feels bad for a number of reasons. One I had such high hopes for the company especially following the WhiteWave acquisition.  It made me feel good to see other big CEO's were seeing opportunity in the healthy food sector.  Second is I use and love some of their products because I believe that higher quality, healthier food, is better for our bodies. Yet it's not always good for the investment pocketbook :(

It feels the worse to know you were just dead wrong on something. It's never easy admitting you were wrong on a company.  Either way I decided to meet halfway on my decision to sell.  I decided to sell half the shares in the portfolio.  For bookkeeping purposes I'm selling the first "add" from when I started this endeavor.  Remember the first add when I started this site in October does not represent my actual buy prices. They represent the price of the stock that day.  The reasoning was I felt it was improper to include my original buys since some holdings had already been held for years, and I only decided in October 2015 to take my tracking online. It just didn't seem fair to bring that past success into my performance. Instead I was willing to show that over time as I made more picks I could still beat the market. 

That will bring the total HAIN portion of the portfolio to less than 1% of the holdings, which I feel comfortable with. I still think the company has products that are very valuable. I also think that in 5 years there are a few scenarios that could be played out.  One is the company could still receive a buyout offer after this clears up.  Second is I think this will force management to refocus on it's strategy.  I'm hoping they cut a few more brands, and reinvest in their best performers. That I think they can do.  So I don't want to completely miss out on any future upside, but I am not willing to have as much capital on the line.  That would have been a good thought last week!

I do think this will all take quite some time to clear up. And judging from the technical damage on the chart possibly over a year is my best guess.  Plus it remains a real possibility the multiple investors are willing to pay for earnings will decline. That will keep a lid on the stock as it was already fetching a higher premium.  In the mean time I could be missing out on plenty of other investing opportunities.  A few examples in my opinion right now are DEO & EMR.  It keeps getting harder to find value in this market, but with our current holdings these two stand out.

*Shares were sold at $38.00

Tuesday, August 16, 2016

CPI & Inustrial Production

Today we received CPI and Industrial Production numbers.

CPI overall came in flat with 0.0% change. However excluding Food and Energy prices rose 0.8% in the last year.  Basically food and energy are dragging down consumer prices. Or in other words we are seeing some deflation in this sector still.

We actually have been getting good results on the Industrial side of our economy.  After taking another dip at the beginning of the year production has continued to increase in the spring and summer. In fact the 0.7% increase was the largest since November 2014. Since that time industrial production was hitting a rough patch as it faced off with a stronger dollar, and some slow downs overseas. It appears that pressure has abated somewhat for now.

I'm HAINGRY!!!

Late last night Hain Celestial announced they were delaying their fiscal year end 10-K filing, Q4 results, and the big whopper an investigation into accounting issues. More specifically their accounting issues revolve around revenue recognition to distributors. It was not named which distributors they had issues with.  Oh and then they included this little nugget.

"Separately, the Company does not expect to achieve it's previously announced guidance for fiscal year 2016."

This all pisses me off for a few reasons. One is I don't see why they wouldn't have caught the revenue issue before. If not then shame on them and it highlights carelessness.  I don't care if there will be zero net revenue changes, just shuffling to different periods. Also in one news release this morning it stated both the CFO and CAO have announced resignations in recent months. While I normally don't follow that type of news I feel some dots are now being connected.  When I see that I start to think it's likely they both new of the issue and decided to leave while the going was good. Also it then seems plausible they were condoning of the issue and  decided to go along with CEO/Board pressure to skew results. Then when it seemed they could no longer keep it up they leave and the company is forced to announce they'll miss earnings like they did today.

The announcement they'll miss earnings is really angering.  Just in May the company stated Q4 non-GAAP EPS should come in at $2.00-$2.04 .  How big of a miss this will be is going to be fun to watch.  Of course not fun for the portfolio!

So now I have 3 options.
  1. I sit tight and wait to see how this all pans out. 
  2. I sell.
  3. Or maybe the craziest option I buy more right now because they company is over $1 billion cheaper than it was yesterday.  
What's funny is I noticed some strange volume and price action the last two days. I feel even worse for the person who likely bought Friday on the tip of "big news coming out soon", only to find it was really bad news. Actually never mind I don't feel bad for that person trying to use inside information.
I'll have to think about what course of action I'll take, and I'll update this post when I do decide. Might take me an hour or a week. Tough decision as I really liked the potential here, especially after the WWAV buyout.

The Election Indicator

Right now as a side effect of the elections you'll hear about the Election Year Indicator.  It's part of a group of indicators people have come up with over the years to correlate with the market. While this is one is likely the most famous let's not forget about the Super Bowl Indicator, Lipstick Indicator, Women's