Sunday, June 5, 2016

TLH Weekly Review

I'll keep this one short and sweet as we all try to enjoy the early days of summer. Which causes the weekly review to be a little late(which I apologize for), but you have to enjoy life when you can!  It was still a busy economic week despite only 4 days due to Memorial Day.

We started off with Personal Income and Spending. Income rose by 0.4% while spending rose 1.0%.  I'd personally like to see it the other way around.  ISM Index came in at 51.3 which still shows growth, and was up just a bit from the prior month. ISM Services also came in at 52.9.  Both readings are key to stay above the 50 level to show some growth.  Construction spending decreased -1.8% so it remains to be seen if this is a temporary decline as the previous reading showed 1.5% growth.

Then we got a big bummer on Friday. NFP came in at 38K, which means the economy only added that many jobs. That sent markets all over the place and people were questioning if a Fed rate hike is now off the table.  Interestingly the unemployment rate came down to 4.7%.  A big contributor to the decline was a reduction in the labor force participation rate which which decreased to 62.6% from 62.8%. Not exactly encouraging.  I still don't think this means a Fed rate hike is off the table. In fact I'm somewhat more inclined to think the Fed will raise rates another 25bps in June or July.  With both ISM's above 50, and the unemployment rate at 4.7%, I think that gives them enough room to really consider a hike.  The market heavily disagrees with me a June hike is in the cards as expectations fell from 30% to 6% on Friday.

The markets sold off initially on the NFP news, but were able to climb back most the day. Either way the S&P 500 ended the week barely changed, the Dow had a slight loss, the Nasdaq a slight gain, and the Russell came in with a nice 1.1% climb. Small caps had a real rough start to the year, but have seemed to gain a lot of traction lately.

Started Week
Ended Week
% Change
S&P 500
Russell 2000

Now for some stock housekeeping that I took some time away from last week.

Costco reported earnings at the end of May which helped propel the stock higher.  On the surface it appeared sales had flat lined. However when we look at the numbers under the hood the company saw sales increase 3% when adjusted for currency and gas deflation.  Even with revenue numbers under pressure from currency and gas deflation the company still reported a 6% increase in EPS to $1.24 according to the conference call.  Additionally they saw a small increase in gross margin from 11.09% to 11.43%. Also the renewal rates have been very strong for the company.  Even the online site saw a 14% increase from the year ago quarter.

All told it sounded like this traditional retailer continues to run a tight ship.  Plus it's working really well in the areas that are important with membership renewals, and strong online sales. That's something not a lot of retailers are putting together right now.  I think the stock has been under some pressure as investors wait to see how the tide turns with what appears to be an ever increasingly strong threat from Amazon.  But the company is operating better than many of its traditional retailers. Wal-Mart for example just noted in it's recent quarter that their online sales are not where they'd like to be with somewhere around 7% growth.  I think the company has the most unique traditional retailer platform, and while overall growth is slower than it was years ago, it's still strong.

Universal Corp also reported a strong quarter at the end of May.  The stock popped on the news and has since come back a bit. I'm not going to dig into specifics, but I did have one key takeaway from the conference call. 

They were asked if the new FDA regulations were going to have any impact on their liquid nicotine business.  Management responded that they didn't see any changes to their operations or outlook.  In essence the FDA granted a monopoly to all existing players.  That's a big win for the company as a major supplier of liquid nicotine to many companies. They will remain one of the few big players with products already approved by the FDA.  Startups will find a much harder time entering the field now.  I think this area is going to represent a nice growth opportunity as tobacco company's start what seems to be a bigger push into vaping.  I think that's the key for this slow and steady pick.  Regulated monopolies are great for business. It provides protection from competition, which ensures margins can stay at a higher level.

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