#delta stock dividend yield

[billehrman]

The Age of Digital Transformation

The Age of Digital Transformation

Corporations' operating profits, margins, cash flow, and ROIC are moving to new highs as the economy recovers from the pandemic, and managements have learned to do more with less spending heavily on technology while maintaining fiscal discipline in the boardroom.

While technology stocks are near-term beneficiaries of record spending as we move digital, the long-term winners will be technology buyers as the benefits accrue over time.  Even we are surprised about how quickly operating margins and returns are improving from the depths of the pandemic. The surge in tech spending will boost productivity, improve profitability, lead to higher returns on invested capital and keep a lid on inflationary pressures.

We now believe that operating margins can get close to 14% by the end of 2023, up from 10.3% in 2020 and 11.5% in 2019, which would translate into S&P 500 operating earnings over $245/share in 2023, up from forecasted earnings of $215/share this year. The real surprise will be the profitability and returns on invested capital of economically sensitive value companies over the next few years, which will lead to outperformance over time. It is not that we don't like tech stocks. We do. But expectations are high, and there is little room for disappointment, unlike other areas.

Economic growth is being held back by the surge in coronavirus cases/deaths, shortages, and supply line issues, but this will lessen as we move into 2022, boosting global growth. In addition, we expect to see continued monetary accommodation to go along with additional fiscal support,

The stock market remains the only game in town, with 10-year treasuries yielding 1.34% and the earnings yield on the market at 4.7% based on 2022 earnings and 5.4% on projected 2023 earnings. Even if rates go up, it will have to move a long way, which we do not expect, to make the stock market unattractive. We expect record buybacks next year, along with significant increases in dividends.

The key to the global economy remains to vaccinate the unvaccinated so that we can move forward. It was vital that the FDA formally approved Pfizer's vaccine last week as it removed a legal impediment to vaccinate all. More than 5.11 billion doses have been administered across 183 countries at a rate now of 38.4 million doses per day, a record. In the U.S., 366 million doses have been given so far at an average daily rate close to 880,000, a substantial increase from a few weeks ago. The Pfizer formal approval will lead to an acceleration in vaccinations, including booster shots for those vaccinated eight months ago. We continue to believe that we will get an annual covid booster shot like for the flu. We are pleased to see companies, schools, and government agencies make getting vaccinated a requirement. It appears that Dr. Gottlieb was correct, and the Delta outbreak is near its peak, which will lead to a re-acceleration in economic activity as we move into the fall.

The financial markets are transfixed on tapering as if that meant tightening. It is not! The U.S economy is in good shape and no longer needs extraordinary support from the Fed. Several members of the Fed, including Esther George, James Bullard, and Robert Kaplan, want to begin tapering this fall and end It by the summer of 2022. We cannot disagree, but the key will be forthcoming economic data points, especially employment, as tapering will not impact inflationary pressures, mainly caused by shortages and supply line issues. Powell at Jackson Hole emphasized that tapering is not tightening; he gave no hint when it will begin, and raising rates is a different decision. He sees continued progress to the goal of tapering, but future data points will tell when. It has become clear that if the virus peaks soon, tapering may begin before the end of the year and conclude by the third quarter of 2022. Rate hikes are still expected sometime in 2023. Again, tapering is not tightening, and the Fed will be maintaining an accommodative stance for at least two more years.

Biden's and the Dem's economic agenda moved forward last week as Nancy Pelosi made a deal with the moderate Democrats to get a hard vote on the traditional infrastructure bill by September 27th while moving forward on the reconciliation bill, which will include the blueprint for the $3.5 trillion social infrastructure bill. We continue to see the passage of the $1.2 traditional infrastructure bill this fall. Still, we expect the moderate Dems in the Senate and House to significantly alter the larger bill lowering its size significantly and the tax rates from what was initially discussed.  We were pleased to hear that Biden's advisors, including Treasury Secretary Yellen, support Powell's renomination to continue as Fed Chairman with Lael Brainard as Vice Chairman.

Economic data points continue to big a mixed bag but generally support an improving economy, especially as we get our arms around the Delta variant. Remember that most of this data was accumulated before the severe outbreak of the Delta variant so take it with a grain of salt: U.S. PMI Composite Flash was 55.4 vs. 59.9 prior; Manufacturing PMI was 61.2 vs. 63.4; Service PMI was 55.2 vs. 59.8; July existing home sales rose 2%; July durable goods orders fell 0.1%; July consumer spending increased 0.3% while income rose 1.1% resulting in a 9.6% savings rate up from 8.8% in June; the July PCE excluding food and energy rose 0.3% sequentially down from 0.5%; the July trade deficit fell to $86.4 billion as exports rose while imports fell; second quarter GNP growth stays at 6.6% as there were upward revisions to nonresidential fixed investment and exports offset by downward revisions to inventory investment and state and local government spending, and finally consumer confidence fell to 70.3 in August down from 81.2 in July. The domestic economy has slowed somewhat as Delta variant cases/deaths rose over the last month. Hopefully, vaccinations continue to pick up meaningfully, which we expect such that growth reaccelerates into 2022.

The spread of the Delta variant has impacted economic growth overseas too: Japan's PMI fell to 45.9 in August from 48.8; Germany's Flash Manufacturing PMI fell to 62.7 from 65.9; France's PMI fell 55.9 from 56.6, and growth in China has slowed too. President Xi commented that his government would strive to reach its economic and social targets this year, even if it includes more monetary and fiscal stimulus. Foolishly, China continues to reduce its stock of industrial commodities, just as global growth is about to accelerate in 2022. We continue to see an acceleration in global growth in 2022 as all the unvaccinated get vaccinated.

Investment Conclusions

While the spread of the delta variant has dented near-term growth, better days are ahead as we all get vaccinated. We are enthused by the long-term opportunity to significantly improve S&P operating margins, earnings, cash flow, and returns on invested capital as corporations’ benefit from the surge in their technology spending on all aspects of their business and finances. We know that it is hard to be a long-term investor due to the daily news sound bites and volatility, but that is just what you should do, a la Warren Buffett, the most significant investor of our time. While we continue to be overweighted in technology, the best long-term opportunities will be the value/economically sensitive companies that will benefit from all their tech spending over time.

[fxasker-blog]

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What is Stagflation? - Womack Weekly Commentary: September 7, 2021

WOMACK WEEKLY COMMENTARY

Renew. Regenerate. Refocus.

September 7, 2021

The Markets

Stagflation isn’t trending, but it was mentioned in quite a few headlines last week.

Stagflation is a portmanteau of ‘stagnation’ and ‘inflation.’ It occurs when a country experiences slow economic growth along with high inflation and high unemployment. In the United States:

Economic growth was strong during the second quarter; 6.5 percent year-over-year, according to the Bureau of Economic Analysis. However, some forecasts for third quarter’s economic growth have been revised downward. Economists at one large investment bank lowered their estimate from 9 percent to 5.5 percent, reported Lindsay Dunsmuir of Reuters.

Inflation is the rise in prices over time. The Federal Reserve prefers to measure the rise by looking at median Personal Consumption Expenditures (PCE) inflation. Median PCE was up 0.29 percent from June to July 2021, and up 2.2 percent over the past 12 months. The Federal Reserve’s target for inflation is 2 percent.

Employment showed a solid increase in August, although the gains were less robust than many expected. Unemployment ticked lower (5.2 percent), the labor force participation rate remained unchanged (61.7 percent), and average hourly earnings ticked higher ($30.73).

The culprit behind slowing growth, rising prices and recent unemployment levels is COVID-19. The spread of the Delta variant created a new wave of parts and labor shortages. Demand for goods is rising as many people appear to be less concerned about the virus. Shortages of goods coupled with high demand for those goods have pushed prices higher.

The Economist reported that the Delta variant, “…looks like a stagflationary force that is sapping growth less dramatically [than the original COVID-19 strain] but firing up inflation. Delta is weighing on consumer spending in the rich world but not causing a collapse. In countries with lots of vaccines, cases are no longer doing as much to stop consumers from moving around.”

Last week, the Dow Jones Industrial Average finished lower, while the Standard & Poor’s 500 Index and the Nasdaq Composite moved higher. The yield on 10-year Treasuries ticked higher during the week.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized;

and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, MarketWatch, djindexes.com, Federal Reserve Bank of St. Louis, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHAT DOES WAVE POWER LOOK LIKE? 

If your neighbor mentioned wind energy, you might picture a towering turbine planted in a field or rising offshore. If a friend talked about a solar farm they saw while on vacation in Colorado, you might picture acres of solar panels angled to catch the sun’s rays. Waterpower often brings hydroelectric dams to mind.

What do you picture when asked about wave power?

Almost three-fourths of the Earth is covered by water. Tides surge and retreat. Wind blows waves across the tops of oceans and lakes. Freshwater and marine life drift on currents.

Water generates a lot of kinetic energy. “When it comes to renewable energy, waves have other resources beat in two respects. First, unlike solar, waves offer a consistent energy source regardless of time of day. Second, waves provide much greater energy density than wind due to water’s heavier mass,” reported Mary Beth Gallagher in MIT News.

Despite its potential, wave energy lags far behind in the race to develop renewable energy sources.11 While diverse methods for capturing wave energy have been developed, none have become widely used. As a result, when wave power is mentioned, nothing in particular may come to mind.

That may change soon. This month, “…researchers will float a yellow platform out into the waters of the Pacific Ocean, north of the Hawai’ian isle of O’ahu. It’s not just there to roll upon the waves…if all goes well, it’ll turn those very waves into electricity…Wave energy could, for instance, charge up the buoys that landmark the sea. It could power the desalination plants that make seawater drinkable, potentially providing life-sustaining hydration to places like islands that need it most. It could help make aquaculture more sustainable. And it could power electric vehicles at sea,” reported Rahul Rao of Popular Science.

Will a yellow and black cylinder bobbing in the ocean become the symbol for wave energy? Only time will tell.

Weekly Focus – Think About It

“My grandparents lived with us. And I remember watching 'Doctor Who' with my granddad on his new telly. These were the days before remote controls but my granddad, being quite a resourceful sort of chap, had fashioned his own remote control - which was a length of bamboo pole with a bit of cork that he'd glued on the end.”

—Bill Bailey, comedian

Best regards,

Womack Investment Advisers, Inc.

WOMACK INVESTMENT ADVISERS, INC.

Oklahoma / Main Office: 1366 E. 15th Street - Edmond, OK  73013 California Office: 4660 La Jolla Village Dr., Ste. 100 - San Diego, CA 92122 Phone (405) 340-1717 - Toll Free (877) 340-1717

Website: www.womackadvisers.com

Womack Investment Advisers, Inc. (WIA) is a registered investment adviser whose principal office is located in Oklahoma. Womack Investment Advisers, Inc. is also registered in the State of California, the State of Illinois, the State of Indiana, and the State of Texas. WIA only transacts business in states where it is properly registered, or excluded, or exempted from registration requirements.

Are you prepared for market volatility?

Be prepared and have a plan. Watch our new video above on successful investing and receive a free report on how much risk you should be taking.

P.S.  These views are those of Carson Coaching, not the presenting Representative, the Representative’s Broker/Dealer, or Registered Investment Advisor, and should not be construed as investment advice.

* This newsletter was prepared by Carson Coaching. Carson Coaching is not affiliated with the named firm or broker/dealer.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.

* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the 3:00 p.m. (London time) gold price as reported by the London Bullion Market Association and is expressed in U.S. Dollars per fine troy ounce. The source for gold data is Federal Reserve Bank of St. Louis (FRED), https://fred.stlouisfed.org/series/GOLDPMGBD228NLBM.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.

* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.

* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you. The use of leverage can lead to large losses as well as gains.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.

* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

* Asset allocation does not ensure a profit or protect against a loss.

* Consult your financial professional before making any investment decision.

Sources:

https://www.investopedia.com/terms/s/stagflation.asp

https://www.bea.gov/news/2021/gross-domestic-product-second-quarter-2021-advance-estimate-and-annual-update

https://www.reuters.com/world/us/goldman-sachs-economists-cut-q3-growth-forecast-us-2021-08-19/

https://www.clevelandfed.org/our-research/indicators-and-data/median-pce-inflation.aspx

https://www.bls.gov/news.release/empsit.nr0.htm

https://www.economist.com/leaders/how-the-pandemic-became-stagflationary/21804167 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/09-07-21_Economist_How%20the%20Pandemic%20Became%20Stagflagnant_6.pdf)

https://www.barrons.com/articles/wall-street-stock-market-fall-forecast-51630709312?refsec=the-trader

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2021 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/09-07-21_Barrons_Nothing%20Can%20Take%20the%20Stock%20Market_7.pdf)

https://www.usbr.gov/mp/arwec/water-facts-ww-water-sup.html

https://news.mit.edu/2019/race-develop-renewable-energy-technologies-1218

https://www.popsci.com/environment/wave-power-searay/

https://www.brainyquote.com/quotes/bill_bailey_1064281

Best Regards,

Greg Womack, CFP

WOMACK INVESTMENT ADVISERS, INC. Oklahoma / Main Office: 1366 E. 15th Street - Edmond, OK  73013 California Office: 4660 La Jolla Village Dr., Ste. 100 - San Diego, CA 92122 Phone (405) 340-1717 - Toll Free (877) 340-1717

Website:  www.womackadvisers.com

Womack Investment Advisers, Inc. (WIA) is a registered investment adviser whose principal office is located in Oklahoma. WIA is also registered in the State of Illinois, the State of Indiana, the State of Texas, and the state of California. WIA only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. No client or prospective client should assume that any information presented or made available on or through this website, is a receipt of, or a substitute for, personalized financial planning consulting advice. Past performance is not indicative of future performance. No FDIC. Investing in the stock markets carries risk.

[billehrman]

Stay Long and Diversified

Stay Long and Diversified

The financial markets will remain in a holding pattern at elevated levels until they gain more clarity on the impact on global growth from the coronavirus delta variant and the future direction of monetary and fiscal policies.

The simple truth is that equities are the only game in town with interest rates so low and liquidity so high. Remember the axiom "Don't fight the Fed?" The Fed not only has our backs but also wants the economy to run hot. The stock market has rarely been so undervalued using Buffett's time-tested tool comparing 10-year bond yields, currently 1.31%, to the inverse of earnings yield, now 4.7%. We continue to emphasize investments in economically sensitive companies. We see above-average growth and returns for many years to come bolstered by a global recovery; the need to build additional capacity closer to home; the move to EV, going green and new technologies; and several government-sponsored infrastructure programs. In addition, we also own some of the great technology companies selling at reasonable valuations as we have indeed entered a new tech revolution in which all companies must spend to remain competitive. Earnings season has begun with a bang, with over 90% of the companies beating forecasts and raising future numbers. We are also paying close attention to balance sheets which have never been stronger. We expect to see significant increases in dividends and buybacks over the next year, which will support higher stock prices.

Getting vaccinated is the best protection against getting the coronavirus delta variant. More than 3.54 billion doses have been administered across 180 countries at a current run rate of approximately 31 million doses per day. In the U.S, 336 million doses have been given so far at a current rate of about 530,000 doses per day. Both the Moderna and Pfizer vaccines are effective against the variant, which is excellent news. Still, production must be ramped up even faster than current targets. The FDA must change the label from experimental to fully approved, which will alleviate some safety concerns. While the need for a booster shot has not been settled, we see billions of doses available next year to handle all needs such that we still see a global recovery beginning before next spring and lasting for several years.

Fed Chairman Powell was on the Hill last week giving his semiannual testimony to the Senate and House. He reiterated his view that the U.S economy has not improved enough to begin scaling back the central bank's monthly asset purchases while adding that inflation is likely to run high in the coming months before moderating.  He commented on production bottlenecks and other supply constraints as the principal cause of rapid price increases for some goods and services. He also downplayed any risks to the economy from higher asset prices. He continues to expect inflation to moderate over time and return to the Fed range around 2%. We agree as  most CPI increase was due to new and used autos, car rentals, hotels, and airfare. Used car prices have begun to cool. The CPI, excluding these areas, was up only around 2%.

The Fed Beige Book was released last week too and confirmed "moderate to robust growth," supply-side disruptions, increased bank lending, slight to moderate job gains, wage hikes at a moderate pace, labor shortages, and pricing pressures. We continue to expect the Fed to announce that they will begin tapering early in 2022, starting with reduced mortgage bond-buying, complete tapering by the end of 2022, and hike the federal funds rate by 0.25% in the first half of 2023. The bottom line is that the Fed will remain overly accommodative for several more years keeping real rates negative.

The Senate Democrats agreed to a $3.5 trillion top-line spending bill that includes most of Biden's social infrastructure agenda down from an initial level of $6 trillion pushed by the progressive Democrats. The agreement consists of Medicare expansion and excludes the bipartisan $579 trillion infrastructure bill. We need to see the spending and tax details before commenting but consider this bill overreaching from the progressives that will haunt them in next year's election, especially if inflation remains elevated. The market still has not embraced that a traditional infrastructure bill will be passed, which we consider a mistake. By the way, child tax credit checks have begun to go out this week. It will cost us about $100 billion and clearly will boost back-to-school sales this fall.

The domestic economy continues to roll along: industrial production increased 0.4% in June and capacity utilization rose to 75.4; jobless claims fell to a pandemic low of 360,000; import prices rose 1.0% while export prices increased 1.2%; July Empire State activity index rose to 43 while new orders hit 33.2 and shipments 43.8; inflation expectations hit a new high of 4.8%; consumer loans were substantial; the June CPI index increased 0.9% with the core up the same(read earlier comments about the CPI); the budget gap ballooned to $2.24 trillion for the first nine months down from 2020 pandemic levels; the PPI price index for final demand increased 1% in June; business inflation expectations fell 2.8% in July, and June retail sales jumped a surprisingly 0.6% with core retail sales up 1.3%. And all of this is before the child credit checks and additional fiscal stimulus.

China's second-quarter economic data was more robust than anticipated growing 7.9% from a year ago, led by strong retail sales and industrial production. The World Bank now thinks that China's economy will grow by over 8.5% In 2021. China's June imports and exports also came in well above expectations resulting in a trade surplus of $51.5 billion. And all of this has occurred before the Bank of China's easing policy last week  to  further stimulate growth.

We expect the ECB to change its policy guidance at its next meeting to accept inflation higher than its 2% goal, just like the Fed. Finally, Japan just lowered its growth forecast for the year due to high levels of coronavirus.

The U.S, Eurozone, and China will be engines of global growth in 2021, but we still expect the rest of the world to kick in next year as they get their arms around the coronavirus.

Investment Conclusions

We expect stock markets to move higher over the next year, driven by much higher earnings, dividends, and stock buybacks supported by accommodative fiscal and monetary policies. While we still favor the economically sensitive areas as we see many years of higher than historical growth rates supported by catch up capital spending, the need to shorten supply lines, and multi-year government-backed infrastructure spending bills, we have also added many technology companies as we have entered a multi-year technological revolution. Naturally, we have many special situations and own no bonds as we still expect the yield curve to steepen over time.

[billehrman]

The Other Side

The Other Side

The outbreak of the Delta variant has taken us by surprise. Still, it will not stop the global economy from expanding rapidly in 2022 thru 2023 as the number of vaccinations increase, and cases decline over the next year. Pfizer and Moderna will have over 5 billion doses of 90+% effective vaccines for the delta and other variants available in 2022 and more, if needed, in 2023. Other companies will have billions of doses of less effective vaccines available, but they still will be sufficient to reduce hospitalizations and deaths, which is good news. Remember that the annual flu vaccines we take usually are only 60% effective, giving you an idea of how successful our drug industry has been in getting a highly effective vaccine for the coronavirus.

We must applaud how governments and monetary authorities responded to the virus by providing financial assistance and flooding the system with trillions of liquidity to get us to the other side. There was much more liquidity provided than needed by the economy, such that investors were forced out on the risk curve, which led to much higher prices for stocks, commodities, and other assets. Today, we remain with a record level of individual savings, including $5.1 trillion in money market funds, and corporate balance sheets have never been stronger. Corporate buybacks have exceeded $683 billion to date this year, the second highest on record, while dividends have started to increase meaningfully too. Even though the S & P is up over 38% over the last year, the dividend yield on the market still exceeds the 10-year treasury rate. There is no reason the market multiple can’t sustain in the low 20s if rates stay below 2% and capital/liquidity ratios remain so high. In addition, we expect S & P earnings to increase from $140/share in 2020 to over $205/share in 2021 and further to $225+/share in 2022 as operating margins increase from 10% to nearly 13% over that time frame. While the market could correct at any time, we see higher prices ahead over the next eighteen months. It’s worth noting that Buffett’s key valuation metric, earnings yield versus treasury yield, continues to support the stock market valuation. It won’t hurt that we will have additional fiscal stimulus and continued easy monetary policies over this period.

The key to controlling the outbreak of the coronavirus, including all variants, is getting vaccinated. This has turned into a pandemic of the unvaccinated. The biggest vaccination campaign is underway, with more than 4.31 billion doses having been administered across 180 countries, with the latest rate at roughly 42.5 million doses per day. Three hundred forty-nine million doses have been administered so far in the U.S., and the daily rate has increased to near 700,000 doses per day. These global run rates mean that it will take less than six months to cover 75% of the world, enough for herd immunity. We expect the FDA to formally approve both vaccines by early September, which should go a long way to convince the unvaccinated to get vaccinated. We continue to believe that we will all get booster shots to enhance our immune systems, and this may become an annual affair, much like the flu vaccine. Fortunately, Moderna and Pfizer will have sufficient supply to handle all of this as we move forward to the other side, putting the coronavirus in the rearview mirror.

While the debate about Fed policy has gotten louder, we still believe that the Fed will hold the line providing an overly accommodative policy thru 2022 into 2023. The key to future Fed policy hinges on when employment returns to pre-pandemic levels and whether the increase in inflation, currently well above 2%, moderates in 2022 as shortages end and supply lines issues go away. While this level of inflation may be transitory, we still expect inflation to run well above 2% for all of 2022 before going down further in 2023. We continue to believe that the Fed and all global monetary bodies want their economy to run hot rather than taking the punchbowl away prematurely. The Fed is likely to openly debate tapering at Jackson Hole later in the month, comment further that tapering is on the way in the fall, begin tapering in $40 billion increments thru 2022, end tapering by early 2023 and begin hiking rates in small increments by the summer of 2023. All this hinges on the economy continuing to strengthen over the next 18 months, employment continuing to increase, and inflation moderating as we move through 2022.  We expect employment levels to disappoint and long-term inflation to stay contained as corporations have learned to do more with less accelerating technology spending that will increase productivity and hold down unit labor costs.

The Senate is likely to pass its $550 billion infrastructure bill this weekend. Still, its fate in the House is doubtful if Nancy Pelosi holds it hostage to the vast $3.5 trillion social infrastructure spending bill. We are totally for the traditional spending package as we need to upgrade our roads, bridges, electric grid, ports, rail system, water system, and broadband. While the CBO said that this package would add $256 billion to the deficit over ten years, we doubt that to be accurate as they did not use dynamic scoring nor full credit for some of the offsets. The proposed $3.5 trillion social infrastructure bill is another thing, and while some of it has its merits, including some tax increases, the sheer size and scope are far too large, and the pay for would damage our economy. We do not see the Senate passing a budget resolution and reconciliation bill before summer break so that it will carry over to the fall. Hopefully, Senator Manchin can hold his ground and force the Democrats to moderate their social spending plan. If not, and it passes by the end of the year, we believe that the Dems will lose control of the House in 2022.

Economic data has continued to be strong in July, although most of the data were collected before the severe outbreak of the Delta variant. An essential report was Friday’s employment report which showed that jobs increased by 943,000 after an upward revision to June to 938,000. The labor participation rate was 61.7, average hourly earnings rose 0.4%, and the workweek was unchanged at 34.8. It is important to note that the 10-year treasury rose from around 1.20% to near 1.30% by the end of the week. This is good news. Other data points reported were initial unemployment claims fell to 385,000; the trade deficit rose to $78.7 billion as imports increased by $6 billion due to the strength of the domestic economy; there are over 9.2 job opening while only 8.7 million are unemployed; the July PMI hit a high of 63.4; construction spending rose 1.2%; the Manufacturing PMI was 59.5 as backlogs rose significantly; new orders for manufactured goods increased 1.5% while unfilled orders increased over 1%; and the Services PMI  was a strong 64.1, the highest reading ever. Again, most of this data was collected before the acceleration in the pandemic outbreak, but it certainly shows an improving economy.

Economic data points have improved abroad too, but that is before the acceleration in coronavirus cases. Specifically, the July Eurozone Manufacturing PMI was at 62.8 while new orders and hiring accelerated too; Eurozone composite output index was 60.6 while services was 59.8; Japan’s July Manufacturing PMI rose to 53.0; India’s output, new orders, and exports all returned to expansion in July after contracting over the last several months; and China’s business activity index rebounded to 54.9 in July from June’s 50.3. All of this is excellent news as we are just starting to come out of the pandemic abroad, except China which began its recovery last year.

Investment Conclusion

The key to future growth hinges on vaccinating all the unvaccinated. We are confident that there will be enough doses available to vaccinate the world over the nine months. The global economy can then commence a synchronous expansion like we have not seen in a decade, as it will be supported by continued easy monetary policies with additional fiscal stimulus. Don’t forget that we are beginning this expansion with trillions of excess liquidity throughout the global financial system. We continue to favor the economically sensitive areas of the market and technology as both have entered long term cycles with above-average growth, earnings and cash flow potential.

[trustworthy-powerful-man]

https://www.macrotrends.net/stocks/charts/DAL/delta-air-lines/dividend-yield-history

Delta Air lines balance sheet.

Where did their money go ..

Some money went to shareholders' bank accounts. most money.. you have to ask their CEO.

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3 Stocks To Hold During The Economic Slowdown

New Post has been published on https://rwamztech.com/3-stocks-to-hold-during-the-economic-slowdown/

3 Stocks To Hold During The Economic Slowdown

Stocks are becoming more expensive. Yet earnings have not bolstered these prices. In fact, earnings surprises have been mostly negative, causing the Citigroup Economic Surprise Index to diverge with the price-to-earnings ratio of the market:

This index, almost by necessity, oscillates. As earnings continue to disappoint, analysts will inevitably lower their expectations, in turn creating an environment of more positive earnings surprises. This is bullish for the market, especially for companies reporting earnings in the coming months.

When earnings surprise, stocks rise. This is true even when stocks are perceived to be expensive. Those who are concerned with the inflated equity costs should be comforted to know that we are still in a bull market.

Don’t Worry Yet

Leading economic indicators tell us not to worry just yet. For example, ISM New Orders show continued growth in customer demand – 38 consecutive months of growth, in fact.

Note that new orders trend down before recessions:

We might be seeing slower growth, but we still see growth. Eventually, the top will be in, and leading economic indicators will start to decay before the next recession. For now, the economy is as strong as ever but with slowing growth.

Because the economy influences company earnings and because the economy is still strong, the Citigroup Economic Surprise Index being low is likely the result of analysts’ expectations being too high. With growth slowing, this makes sense. Analysts have been assuming the fast growth in corporate earnings will continue, neglecting the slowdown in economic growth.

Peak Growth

Currently, the slope of leading economic indicators (LEIs) is flattening. This could be a temporary stall, but we often see this toward the end of a bull market. The economy is likely leaving the expansion phase of the business cycle and entering a slowdown phase:

At this point, the risk/reward curve begins to become concave, meaning that the downside risk is beginning to outweigh further upside reward. From here, we will likely see lower volatility as the market makes its way up to a peak for this bull market. Before we hit the recession phase of the business cycle, we will likely see another rally, but one of much lower volatility and speed than the post-December rally.

The bull market is not over. With foreign economies clearly being deep in the slowdown phase, the US market is one of the last places for bulls. Yet the fact that the economy is slowing down means investors should be rebalancing their portfolios for the sake of maintaining alpha.

Outperforming Sectors

According to research on sector performance during the business cycle, at this point, investors should be ditching real estate and consumer discretionary stocks in favor of healthcare and consumer staples:

Drawing inspiration from this, here is my list of positions to hold during the coming economic slowdown:

Macquarie Infrastructure (NYSE:MIC)

This company falls in the “industrials” sector. This is a B2B service company – or set of companies, rather.

MIC has seen a stable, positive growth rate since around 2013. The slowdown earlier this decade did not make a significant impact on the company’s growth, implying that we should see growth continue during the next slowdown:

(Source: Damon Verial; data from ADVFN)

Cash flows too have been strong and growing:

(Source: Damon Verial; data from ADVFN)

Putting it all together, I calculate the company as undervalued as per its discounted cash flow valuation. Here is my discounted cash flow valuation plotted against the stock:

(Source: Damon Verial; data from ADVFN)

You can see that MIC was not underpriced until the last selloff. My chart only generated a buy signal in 2018. The valuation implies a 60% upside.

Four analyst downgrades after February’s earnings brought the stock to a discounted level. We know this was an overreaction because the stock is quickly filling the down area gap that appeared after earnings:

(Source: Stockcharts.com)

One key reason for my choice of MIC is its mispricing. Yet once the gap fills, the post-earnings drift will be officially over. Get in on this one early for some excess returns and to lock in on the company’s 10% dividend yield.

TreeHouse Foods (NYSE:THS)

This food and beverage company falls in the “consumer staples” category. It attracted my attention last month with an odd earnings reaction. The company reported a revenue decline of over 10%, causing the stock to fall.

Yet it was bought right back up, with dip-buying erasing all losses. The stock carried on as if nothing happened. This type of post-earnings reaction shows a strong investor base, which limits news-based drawdowns:

(Source: Stockcharts.com)

I dug into the earnings call transcript to see if I could find anything of interest. Lexical analysis is useful here. Proper financial lexical analysis can generate management sentiment, which is a predictor of a stock’s price over the coming month.

THS’s earnings calls were quite interesting. Rarely does a call contain more pessimism than optimism. However, THS was the rare exception for most of this and last year – except for the recent quarter.

Its most recent earnings call was roughly as optimistic as the average company. Because the previous quarter and year showed negative sentiment scores, I cannot make a comparison. Suffice to say, management is indirectly pointing to an inflection point in the company.

Here are a few flagged statements from the earnings call:

“Importantly, pricing execution has gone a lot more smoothly than last year with a minimal disconnect between inflation and pricing.”

– A tangible factor for the recent turnaround in sentiment.

“We worked hard as an organization to resolve the majority of our service issues and to restore customer trust and TreeHouse’s ability to deliver.”

– A similar statement; an admission of problems that are being corrected. Acknowledgement of issues and plans for resolution remains a strong indicator of excess returns, according to financial lexical analysis. (The downplaying of problems in contrast implies negative excess returns.)

“Quite frankly, solving the Snacks issue right now is our most important and where all the focus is.”

– A continued focus on problems. Should the company again succeed, we will likely see another quarter of strong sentiment, implying upward pressure on the stock price.

THS has outperformed the US food market to a great extent: 68% annual returns versus -4%. Yet my analysis hints that mean reversion is still underway, as the company still has a lower price-to-book than the average food stock. The company is expected to see a 60% earnings growth over the next year, making now a good entry point.

Because THS does not offer a dividend, you can use options instead for this play. I recommend the Aug 16 $60 calls. These have a delta of 100, allowing you to fully mimic holding 100 shares of THS per contract at a cost of around $650 and with minimum theta decay.

Madrigal Pharmaceuticals (NASDAQ:MDGL)

This company falls in the “healthcare” category. Investing in MDGL gives you exposure to a pipeline of cardiovascular, liver, and metabolic treatments. The stock is trading at under half its previous price because shares were diluted via a public offering for the sake of raising capital.

This capital will be used to finance the company’s pipeline. The timing was smart: just before a slowdown. The company will be able to focus on its pipeline with little regard to decaying economic conditions.

The options market is pricing the stock at $130, which is slightly above MDGL’s current price. I, too, see the stock as undervalued. Over the past year, MDGL has outperformed the biotech sector with 8% returns versus -1% returns.

Since 2016, MDGL has had no long-term debt and can cover its short-term debt with its current cash and assets. With its moat of cash, MDGL can continue working on its pipeline without worrying about earnings. A strong clinical trial result or two should draw investors into this company, and the stock will rally in response.

This stock is more of a gamble than the other two, so do look into the pipeline to see if anything strikes your fancy. Biotech stocks are notoriously hard to predict, and so my philosophy is to bet on those that are (1) outperforming the sector, (2) have a decent pipeline or high-sales product, and (3) are financially healthy, whether that mean strong earnings or enough cash runway to support the pipeline.

This is a rather unpopular stock for the general public, but is popular with the “smart money”: venture capitalists, hedge funds, and institutions:

(Source: Simply Wall St)

If you want to play this without putting too much capital at risk, I suggest the June 21 $130 call options. If the option market’s prediction is correct, these contracts are currently underpriced. Aim for roughly 25% ROI over the next quarter and roll the options over quarterly.

Conclusion

The US economy is at peak growth. From here, it will soon (or already has by some measures) enter into the slowdown phase of the business cycle. During this phase, three sectors show excess returns: industrials, consumer staples, and healthcare.

While you could simply buy ETFs in these sectors, if we are to seek alpha, we should look for stocks that are to outperform in these sectors. Thus, we gain excess returns upon excess returns. I gave my three picks, one from each sector.

We have MIC, an industrial with strong growth; THS, a food company that is at an inflection point, having solved many of its major problems, and a management, which has recently traded pessimism for optimism; and MDGL, a biotech company that is cash-rich and focusing on its pipeline. All things being equal, holding these companies in your portfolio during the inevitable slowdown will produce alpha. Happy trading.

Exposing Earnings is an earnings trade newsletter (with live chat) that is based on statistics, probability, and backtests. My models are unavailable anywhere else online, as I designed them myself, keeping the code private for Exposing Earnings subscribers and myself. If you want a definitive answer on which way a stock will go on earnings, the probability of the prediction paying off, the risk/reward of the play, and my specific options strategy for the play, click here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

[awesomecolorfulcollectorwombat]

3 Stocks To Hold During The Economic Slowdown

New Post has been published on https://rwamztech.com/3-stocks-to-hold-during-the-economic-slowdown/

3 Stocks To Hold During The Economic Slowdown

Stocks are becoming more expensive. Yet earnings have not bolstered these prices. In fact, earnings surprises have been mostly negative, causing the Citigroup Economic Surprise Index to diverge with the price-to-earnings ratio of the market:

This index, almost by necessity, oscillates. As earnings continue to disappoint, analysts will inevitably lower their expectations, in turn creating an environment of more positive earnings surprises. This is bullish for the market, especially for companies reporting earnings in the coming months.

When earnings surprise, stocks rise. This is true even when stocks are perceived to be expensive. Those who are concerned with the inflated equity costs should be comforted to know that we are still in a bull market.

Don’t Worry Yet

Leading economic indicators tell us not to worry just yet. For example, ISM New Orders show continued growth in customer demand – 38 consecutive months of growth, in fact.

Note that new orders trend down before recessions:

We might be seeing slower growth, but we still see growth. Eventually, the top will be in, and leading economic indicators will start to decay before the next recession. For now, the economy is as strong as ever but with slowing growth.

Because the economy influences company earnings and because the economy is still strong, the Citigroup Economic Surprise Index being low is likely the result of analysts’ expectations being too high. With growth slowing, this makes sense. Analysts have been assuming the fast growth in corporate earnings will continue, neglecting the slowdown in economic growth.

Peak Growth

Currently, the slope of leading economic indicators (LEIs) is flattening. This could be a temporary stall, but we often see this toward the end of a bull market. The economy is likely leaving the expansion phase of the business cycle and entering a slowdown phase:

At this point, the risk/reward curve begins to become concave, meaning that the downside risk is beginning to outweigh further upside reward. From here, we will likely see lower volatility as the market makes its way up to a peak for this bull market. Before we hit the recession phase of the business cycle, we will likely see another rally, but one of much lower volatility and speed than the post-December rally.

The bull market is not over. With foreign economies clearly being deep in the slowdown phase, the US market is one of the last places for bulls. Yet the fact that the economy is slowing down means investors should be rebalancing their portfolios for the sake of maintaining alpha.

Outperforming Sectors

According to research on sector performance during the business cycle, at this point, investors should be ditching real estate and consumer discretionary stocks in favor of healthcare and consumer staples:

Drawing inspiration from this, here is my list of positions to hold during the coming economic slowdown:

Macquarie Infrastructure (NYSE:MIC)

This company falls in the “industrials” sector. This is a B2B service company – or set of companies, rather.

MIC has seen a stable, positive growth rate since around 2013. The slowdown earlier this decade did not make a significant impact on the company’s growth, implying that we should see growth continue during the next slowdown:

(Source: Damon Verial; data from ADVFN)

Cash flows too have been strong and growing:

(Source: Damon Verial; data from ADVFN)

Putting it all together, I calculate the company as undervalued as per its discounted cash flow valuation. Here is my discounted cash flow valuation plotted against the stock:

(Source: Damon Verial; data from ADVFN)

You can see that MIC was not underpriced until the last selloff. My chart only generated a buy signal in 2018. The valuation implies a 60% upside.

Four analyst downgrades after February’s earnings brought the stock to a discounted level. We know this was an overreaction because the stock is quickly filling the down area gap that appeared after earnings:

(Source: Stockcharts.com)

One key reason for my choice of MIC is its mispricing. Yet once the gap fills, the post-earnings drift will be officially over. Get in on this one early for some excess returns and to lock in on the company’s 10% dividend yield.

TreeHouse Foods (NYSE:THS)

This food and beverage company falls in the “consumer staples” category. It attracted my attention last month with an odd earnings reaction. The company reported a revenue decline of over 10%, causing the stock to fall.

Yet it was bought right back up, with dip-buying erasing all losses. The stock carried on as if nothing happened. This type of post-earnings reaction shows a strong investor base, which limits news-based drawdowns:

(Source: Stockcharts.com)

I dug into the earnings call transcript to see if I could find anything of interest. Lexical analysis is useful here. Proper financial lexical analysis can generate management sentiment, which is a predictor of a stock’s price over the coming month.

THS’s earnings calls were quite interesting. Rarely does a call contain more pessimism than optimism. However, THS was the rare exception for most of this and last year – except for the recent quarter.

Its most recent earnings call was roughly as optimistic as the average company. Because the previous quarter and year showed negative sentiment scores, I cannot make a comparison. Suffice to say, management is indirectly pointing to an inflection point in the company.

Here are a few flagged statements from the earnings call:

“Importantly, pricing execution has gone a lot more smoothly than last year with a minimal disconnect between inflation and pricing.”

– A tangible factor for the recent turnaround in sentiment.

“We worked hard as an organization to resolve the majority of our service issues and to restore customer trust and TreeHouse’s ability to deliver.”

– A similar statement; an admission of problems that are being corrected. Acknowledgement of issues and plans for resolution remains a strong indicator of excess returns, according to financial lexical analysis. (The downplaying of problems in contrast implies negative excess returns.)

“Quite frankly, solving the Snacks issue right now is our most important and where all the focus is.”

– A continued focus on problems. Should the company again succeed, we will likely see another quarter of strong sentiment, implying upward pressure on the stock price.

THS has outperformed the US food market to a great extent: 68% annual returns versus -4%. Yet my analysis hints that mean reversion is still underway, as the company still has a lower price-to-book than the average food stock. The company is expected to see a 60% earnings growth over the next year, making now a good entry point.

Because THS does not offer a dividend, you can use options instead for this play. I recommend the Aug 16 $60 calls. These have a delta of 100, allowing you to fully mimic holding 100 shares of THS per contract at a cost of around $650 and with minimum theta decay.

Madrigal Pharmaceuticals (NASDAQ:MDGL)

This company falls in the “healthcare” category. Investing in MDGL gives you exposure to a pipeline of cardiovascular, liver, and metabolic treatments. The stock is trading at under half its previous price because shares were diluted via a public offering for the sake of raising capital.

This capital will be used to finance the company’s pipeline. The timing was smart: just before a slowdown. The company will be able to focus on its pipeline with little regard to decaying economic conditions.

The options market is pricing the stock at $130, which is slightly above MDGL’s current price. I, too, see the stock as undervalued. Over the past year, MDGL has outperformed the biotech sector with 8% returns versus -1% returns.

Since 2016, MDGL has had no long-term debt and can cover its short-term debt with its current cash and assets. With its moat of cash, MDGL can continue working on its pipeline without worrying about earnings. A strong clinical trial result or two should draw investors into this company, and the stock will rally in response.

This stock is more of a gamble than the other two, so do look into the pipeline to see if anything strikes your fancy. Biotech stocks are notoriously hard to predict, and so my philosophy is to bet on those that are (1) outperforming the sector, (2) have a decent pipeline or high-sales product, and (3) are financially healthy, whether that mean strong earnings or enough cash runway to support the pipeline.

This is a rather unpopular stock for the general public, but is popular with the “smart money”: venture capitalists, hedge funds, and institutions:

(Source: Simply Wall St)

If you want to play this without putting too much capital at risk, I suggest the June 21 $130 call options. If the option market’s prediction is correct, these contracts are currently underpriced. Aim for roughly 25% ROI over the next quarter and roll the options over quarterly.

Conclusion

The US economy is at peak growth. From here, it will soon (or already has by some measures) enter into the slowdown phase of the business cycle. During this phase, three sectors show excess returns: industrials, consumer staples, and healthcare.

While you could simply buy ETFs in these sectors, if we are to seek alpha, we should look for stocks that are to outperform in these sectors. Thus, we gain excess returns upon excess returns. I gave my three picks, one from each sector.

We have MIC, an industrial with strong growth; THS, a food company that is at an inflection point, having solved many of its major problems, and a management, which has recently traded pessimism for optimism; and MDGL, a biotech company that is cash-rich and focusing on its pipeline. All things being equal, holding these companies in your portfolio during the inevitable slowdown will produce alpha. Happy trading.

Exposing Earnings is an earnings trade newsletter (with live chat) that is based on statistics, probability, and backtests. My models are unavailable anywhere else online, as I designed them myself, keeping the code private for Exposing Earnings subscribers and myself. If you want a definitive answer on which way a stock will go on earnings, the probability of the prediction paying off, the risk/reward of the play, and my specific options strategy for the play, click here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

[lazilysillyprince]

3 Stocks To Hold During The Economic Slowdown

New Post has been published on https://rwamztech.com/3-stocks-to-hold-during-the-economic-slowdown/

3 Stocks To Hold During The Economic Slowdown

Stocks are becoming more expensive. Yet earnings have not bolstered these prices. In fact, earnings surprises have been mostly negative, causing the Citigroup Economic Surprise Index to diverge with the price-to-earnings ratio of the market:

This index, almost by necessity, oscillates. As earnings continue to disappoint, analysts will inevitably lower their expectations, in turn creating an environment of more positive earnings surprises. This is bullish for the market, especially for companies reporting earnings in the coming months.

When earnings surprise, stocks rise. This is true even when stocks are perceived to be expensive. Those who are concerned with the inflated equity costs should be comforted to know that we are still in a bull market.

Don’t Worry Yet

Leading economic indicators tell us not to worry just yet. For example, ISM New Orders show continued growth in customer demand – 38 consecutive months of growth, in fact.

Note that new orders trend down before recessions:

We might be seeing slower growth, but we still see growth. Eventually, the top will be in, and leading economic indicators will start to decay before the next recession. For now, the economy is as strong as ever but with slowing growth.

Because the economy influences company earnings and because the economy is still strong, the Citigroup Economic Surprise Index being low is likely the result of analysts’ expectations being too high. With growth slowing, this makes sense. Analysts have been assuming the fast growth in corporate earnings will continue, neglecting the slowdown in economic growth.

Peak Growth

Currently, the slope of leading economic indicators (LEIs) is flattening. This could be a temporary stall, but we often see this toward the end of a bull market. The economy is likely leaving the expansion phase of the business cycle and entering a slowdown phase:

At this point, the risk/reward curve begins to become concave, meaning that the downside risk is beginning to outweigh further upside reward. From here, we will likely see lower volatility as the market makes its way up to a peak for this bull market. Before we hit the recession phase of the business cycle, we will likely see another rally, but one of much lower volatility and speed than the post-December rally.

The bull market is not over. With foreign economies clearly being deep in the slowdown phase, the US market is one of the last places for bulls. Yet the fact that the economy is slowing down means investors should be rebalancing their portfolios for the sake of maintaining alpha.

Outperforming Sectors

According to research on sector performance during the business cycle, at this point, investors should be ditching real estate and consumer discretionary stocks in favor of healthcare and consumer staples:

Drawing inspiration from this, here is my list of positions to hold during the coming economic slowdown:

Macquarie Infrastructure (NYSE:MIC)

This company falls in the “industrials” sector. This is a B2B service company – or set of companies, rather.

MIC has seen a stable, positive growth rate since around 2013. The slowdown earlier this decade did not make a significant impact on the company’s growth, implying that we should see growth continue during the next slowdown:

(Source: Damon Verial; data from ADVFN)

Cash flows too have been strong and growing:

(Source: Damon Verial; data from ADVFN)

Putting it all together, I calculate the company as undervalued as per its discounted cash flow valuation. Here is my discounted cash flow valuation plotted against the stock:

(Source: Damon Verial; data from ADVFN)

You can see that MIC was not underpriced until the last selloff. My chart only generated a buy signal in 2018. The valuation implies a 60% upside.

Four analyst downgrades after February’s earnings brought the stock to a discounted level. We know this was an overreaction because the stock is quickly filling the down area gap that appeared after earnings:

(Source: Stockcharts.com)

One key reason for my choice of MIC is its mispricing. Yet once the gap fills, the post-earnings drift will be officially over. Get in on this one early for some excess returns and to lock in on the company’s 10% dividend yield.

TreeHouse Foods (NYSE:THS)

This food and beverage company falls in the “consumer staples” category. It attracted my attention last month with an odd earnings reaction. The company reported a revenue decline of over 10%, causing the stock to fall.

Yet it was bought right back up, with dip-buying erasing all losses. The stock carried on as if nothing happened. This type of post-earnings reaction shows a strong investor base, which limits news-based drawdowns:

(Source: Stockcharts.com)

I dug into the earnings call transcript to see if I could find anything of interest. Lexical analysis is useful here. Proper financial lexical analysis can generate management sentiment, which is a predictor of a stock’s price over the coming month.

THS’s earnings calls were quite interesting. Rarely does a call contain more pessimism than optimism. However, THS was the rare exception for most of this and last year – except for the recent quarter.

Its most recent earnings call was roughly as optimistic as the average company. Because the previous quarter and year showed negative sentiment scores, I cannot make a comparison. Suffice to say, management is indirectly pointing to an inflection point in the company.

Here are a few flagged statements from the earnings call:

“Importantly, pricing execution has gone a lot more smoothly than last year with a minimal disconnect between inflation and pricing.”

– A tangible factor for the recent turnaround in sentiment.

“We worked hard as an organization to resolve the majority of our service issues and to restore customer trust and TreeHouse’s ability to deliver.”

– A similar statement; an admission of problems that are being corrected. Acknowledgement of issues and plans for resolution remains a strong indicator of excess returns, according to financial lexical analysis. (The downplaying of problems in contrast implies negative excess returns.)

“Quite frankly, solving the Snacks issue right now is our most important and where all the focus is.”

– A continued focus on problems. Should the company again succeed, we will likely see another quarter of strong sentiment, implying upward pressure on the stock price.

THS has outperformed the US food market to a great extent: 68% annual returns versus -4%. Yet my analysis hints that mean reversion is still underway, as the company still has a lower price-to-book than the average food stock. The company is expected to see a 60% earnings growth over the next year, making now a good entry point.

Because THS does not offer a dividend, you can use options instead for this play. I recommend the Aug 16 $60 calls. These have a delta of 100, allowing you to fully mimic holding 100 shares of THS per contract at a cost of around $650 and with minimum theta decay.

Madrigal Pharmaceuticals (NASDAQ:MDGL)

This company falls in the “healthcare” category. Investing in MDGL gives you exposure to a pipeline of cardiovascular, liver, and metabolic treatments. The stock is trading at under half its previous price because shares were diluted via a public offering for the sake of raising capital.

This capital will be used to finance the company’s pipeline. The timing was smart: just before a slowdown. The company will be able to focus on its pipeline with little regard to decaying economic conditions.

The options market is pricing the stock at $130, which is slightly above MDGL’s current price. I, too, see the stock as undervalued. Over the past year, MDGL has outperformed the biotech sector with 8% returns versus -1% returns.

Since 2016, MDGL has had no long-term debt and can cover its short-term debt with its current cash and assets. With its moat of cash, MDGL can continue working on its pipeline without worrying about earnings. A strong clinical trial result or two should draw investors into this company, and the stock will rally in response.

This stock is more of a gamble than the other two, so do look into the pipeline to see if anything strikes your fancy. Biotech stocks are notoriously hard to predict, and so my philosophy is to bet on those that are (1) outperforming the sector, (2) have a decent pipeline or high-sales product, and (3) are financially healthy, whether that mean strong earnings or enough cash runway to support the pipeline.

This is a rather unpopular stock for the general public, but is popular with the “smart money”: venture capitalists, hedge funds, and institutions:

(Source: Simply Wall St)

If you want to play this without putting too much capital at risk, I suggest the June 21 $130 call options. If the option market’s prediction is correct, these contracts are currently underpriced. Aim for roughly 25% ROI over the next quarter and roll the options over quarterly.

Conclusion

The US economy is at peak growth. From here, it will soon (or already has by some measures) enter into the slowdown phase of the business cycle. During this phase, three sectors show excess returns: industrials, consumer staples, and healthcare.

While you could simply buy ETFs in these sectors, if we are to seek alpha, we should look for stocks that are to outperform in these sectors. Thus, we gain excess returns upon excess returns. I gave my three picks, one from each sector.

We have MIC, an industrial with strong growth; THS, a food company that is at an inflection point, having solved many of its major problems, and a management, which has recently traded pessimism for optimism; and MDGL, a biotech company that is cash-rich and focusing on its pipeline. All things being equal, holding these companies in your portfolio during the inevitable slowdown will produce alpha. Happy trading.

Exposing Earnings is an earnings trade newsletter (with live chat) that is based on statistics, probability, and backtests. My models are unavailable anywhere else online, as I designed them myself, keeping the code private for Exposing Earnings subscribers and myself. If you want a definitive answer on which way a stock will go on earnings, the probability of the prediction paying off, the risk/reward of the play, and my specific options strategy for the play, click here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

[hostingnewsfeed]

3 Stocks To Hold During The Economic Slowdown

New Post has been published on https://rwamztech.com/3-stocks-to-hold-during-the-economic-slowdown/

3 Stocks To Hold During The Economic Slowdown

Stocks are becoming more expensive. Yet earnings have not bolstered these prices. In fact, earnings surprises have been mostly negative, causing the Citigroup Economic Surprise Index to diverge with the price-to-earnings ratio of the market:

This index, almost by necessity, oscillates. As earnings continue to disappoint, analysts will inevitably lower their expectations, in turn creating an environment of more positive earnings surprises. This is bullish for the market, especially for companies reporting earnings in the coming months.

When earnings surprise, stocks rise. This is true even when stocks are perceived to be expensive. Those who are concerned with the inflated equity costs should be comforted to know that we are still in a bull market.

Don’t Worry Yet

Leading economic indicators tell us not to worry just yet. For example, ISM New Orders show continued growth in customer demand – 38 consecutive months of growth, in fact.

Note that new orders trend down before recessions:

We might be seeing slower growth, but we still see growth. Eventually, the top will be in, and leading economic indicators will start to decay before the next recession. For now, the economy is as strong as ever but with slowing growth.

Because the economy influences company earnings and because the economy is still strong, the Citigroup Economic Surprise Index being low is likely the result of analysts’ expectations being too high. With growth slowing, this makes sense. Analysts have been assuming the fast growth in corporate earnings will continue, neglecting the slowdown in economic growth.

Peak Growth

Currently, the slope of leading economic indicators (LEIs) is flattening. This could be a temporary stall, but we often see this toward the end of a bull market. The economy is likely leaving the expansion phase of the business cycle and entering a slowdown phase:

At this point, the risk/reward curve begins to become concave, meaning that the downside risk is beginning to outweigh further upside reward. From here, we will likely see lower volatility as the market makes its way up to a peak for this bull market. Before we hit the recession phase of the business cycle, we will likely see another rally, but one of much lower volatility and speed than the post-December rally.

The bull market is not over. With foreign economies clearly being deep in the slowdown phase, the US market is one of the last places for bulls. Yet the fact that the economy is slowing down means investors should be rebalancing their portfolios for the sake of maintaining alpha.

Outperforming Sectors

According to research on sector performance during the business cycle, at this point, investors should be ditching real estate and consumer discretionary stocks in favor of healthcare and consumer staples:

Drawing inspiration from this, here is my list of positions to hold during the coming economic slowdown:

Macquarie Infrastructure (NYSE:MIC)

This company falls in the “industrials” sector. This is a B2B service company – or set of companies, rather.

MIC has seen a stable, positive growth rate since around 2013. The slowdown earlier this decade did not make a significant impact on the company’s growth, implying that we should see growth continue during the next slowdown:

(Source: Damon Verial; data from ADVFN)

Cash flows too have been strong and growing:

(Source: Damon Verial; data from ADVFN)

Putting it all together, I calculate the company as undervalued as per its discounted cash flow valuation. Here is my discounted cash flow valuation plotted against the stock:

(Source: Damon Verial; data from ADVFN)

You can see that MIC was not underpriced until the last selloff. My chart only generated a buy signal in 2018. The valuation implies a 60% upside.

Four analyst downgrades after February’s earnings brought the stock to a discounted level. We know this was an overreaction because the stock is quickly filling the down area gap that appeared after earnings:

(Source: Stockcharts.com)

One key reason for my choice of MIC is its mispricing. Yet once the gap fills, the post-earnings drift will be officially over. Get in on this one early for some excess returns and to lock in on the company’s 10% dividend yield.

TreeHouse Foods (NYSE:THS)

This food and beverage company falls in the “consumer staples” category. It attracted my attention last month with an odd earnings reaction. The company reported a revenue decline of over 10%, causing the stock to fall.

Yet it was bought right back up, with dip-buying erasing all losses. The stock carried on as if nothing happened. This type of post-earnings reaction shows a strong investor base, which limits news-based drawdowns:

(Source: Stockcharts.com)

I dug into the earnings call transcript to see if I could find anything of interest. Lexical analysis is useful here. Proper financial lexical analysis can generate management sentiment, which is a predictor of a stock’s price over the coming month.

THS’s earnings calls were quite interesting. Rarely does a call contain more pessimism than optimism. However, THS was the rare exception for most of this and last year – except for the recent quarter.

Its most recent earnings call was roughly as optimistic as the average company. Because the previous quarter and year showed negative sentiment scores, I cannot make a comparison. Suffice to say, management is indirectly pointing to an inflection point in the company.

Here are a few flagged statements from the earnings call:

“Importantly, pricing execution has gone a lot more smoothly than last year with a minimal disconnect between inflation and pricing.”

– A tangible factor for the recent turnaround in sentiment.

“We worked hard as an organization to resolve the majority of our service issues and to restore customer trust and TreeHouse’s ability to deliver.”

– A similar statement; an admission of problems that are being corrected. Acknowledgement of issues and plans for resolution remains a strong indicator of excess returns, according to financial lexical analysis. (The downplaying of problems in contrast implies negative excess returns.)

“Quite frankly, solving the Snacks issue right now is our most important and where all the focus is.”

– A continued focus on problems. Should the company again succeed, we will likely see another quarter of strong sentiment, implying upward pressure on the stock price.

THS has outperformed the US food market to a great extent: 68% annual returns versus -4%. Yet my analysis hints that mean reversion is still underway, as the company still has a lower price-to-book than the average food stock. The company is expected to see a 60% earnings growth over the next year, making now a good entry point.

Because THS does not offer a dividend, you can use options instead for this play. I recommend the Aug 16 $60 calls. These have a delta of 100, allowing you to fully mimic holding 100 shares of THS per contract at a cost of around $650 and with minimum theta decay.

Madrigal Pharmaceuticals (NASDAQ:MDGL)

This company falls in the “healthcare” category. Investing in MDGL gives you exposure to a pipeline of cardiovascular, liver, and metabolic treatments. The stock is trading at under half its previous price because shares were diluted via a public offering for the sake of raising capital.

This capital will be used to finance the company’s pipeline. The timing was smart: just before a slowdown. The company will be able to focus on its pipeline with little regard to decaying economic conditions.

The options market is pricing the stock at $130, which is slightly above MDGL’s current price. I, too, see the stock as undervalued. Over the past year, MDGL has outperformed the biotech sector with 8% returns versus -1% returns.

Since 2016, MDGL has had no long-term debt and can cover its short-term debt with its current cash and assets. With its moat of cash, MDGL can continue working on its pipeline without worrying about earnings. A strong clinical trial result or two should draw investors into this company, and the stock will rally in response.

This stock is more of a gamble than the other two, so do look into the pipeline to see if anything strikes your fancy. Biotech stocks are notoriously hard to predict, and so my philosophy is to bet on those that are (1) outperforming the sector, (2) have a decent pipeline or high-sales product, and (3) are financially healthy, whether that mean strong earnings or enough cash runway to support the pipeline.

This is a rather unpopular stock for the general public, but is popular with the “smart money”: venture capitalists, hedge funds, and institutions:

(Source: Simply Wall St)

If you want to play this without putting too much capital at risk, I suggest the June 21 $130 call options. If the option market’s prediction is correct, these contracts are currently underpriced. Aim for roughly 25% ROI over the next quarter and roll the options over quarterly.

Conclusion

The US economy is at peak growth. From here, it will soon (or already has by some measures) enter into the slowdown phase of the business cycle. During this phase, three sectors show excess returns: industrials, consumer staples, and healthcare.

While you could simply buy ETFs in these sectors, if we are to seek alpha, we should look for stocks that are to outperform in these sectors. Thus, we gain excess returns upon excess returns. I gave my three picks, one from each sector.

We have MIC, an industrial with strong growth; THS, a food company that is at an inflection point, having solved many of its major problems, and a management, which has recently traded pessimism for optimism; and MDGL, a biotech company that is cash-rich and focusing on its pipeline. All things being equal, holding these companies in your portfolio during the inevitable slowdown will produce alpha. Happy trading.

Exposing Earnings is an earnings trade newsletter (with live chat) that is based on statistics, probability, and backtests. My models are unavailable anywhere else online, as I designed them myself, keeping the code private for Exposing Earnings subscribers and myself. If you want a definitive answer on which way a stock will go on earnings, the probability of the prediction paying off, the risk/reward of the play, and my specific options strategy for the play, click here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

[estimize]

Will Delta Continue Flying High?

Delta Airlines (DAL) is set to release Q2 results on Thursday, July 13. Estimize and The Street have been very much in line with each other when it comes to their estimates for Delta’s EPS. According to Estimize, EPS is set to increase roughly 114%, from $0.77 in FQ1’17, up to $1.65 in FQ2’17. Likewise, Wall Street is looking for an identical spike. Furthermore, it looks as though the consensus among Estimize and Wall Street remains fairly similar regarding revenue. In FQ1’17, Estimize estimated  revenue of $9.175M and Wall Street came in at $9.140M; the actual number lying at $9.140M. This quarter, both Estimize and the Street are looking for revenue to increase nearly 18%. It seems like we have been holding pretty consistent with The Street on this one and Delta is on the uptrend.

Despite airline stocks not having much popularity among investors, Delta appears to still be showing strength in an unattractive market. With a high dividend yield of about 1.5%, Delta is proving to be something to keep your eyes on. With a number of new developments, such as its recent deal with Korean Air and its current testing of using biometrics rather than boarding passes, there is going to be lots of eyes of Delta in the coming future. Despite the fact that using fingerprints and eye measurements rather than boarding passes could potentially pose privacy issues and controversy, we definitely recommend taking a closer look at this company prior to earnings announcements.

Place your estimates here!

Photo Credit: Bernal Saborio

[smartwebhostingblog]

3 Stocks To Hold During The Economic Slowdown

New Post has been published on http://croopdiseno.com/3-stocks-to-hold-during-the-economic-slowdown/

3 Stocks To Hold During The Economic Slowdown

Stocks are becoming more expensive. Yet earnings have not bolstered these prices. In fact, earnings surprises have been mostly negative, causing the Citigroup Economic Surprise Index to diverge with the price-to-earnings ratio of the market:

This index, almost by necessity, oscillates. As earnings continue to disappoint, analysts will inevitably lower their expectations, in turn creating an environment of more positive earnings surprises. This is bullish for the market, especially for companies reporting earnings in the coming months.

When earnings surprise, stocks rise. This is true even when stocks are perceived to be expensive. Those who are concerned with the inflated equity costs should be comforted to know that we are still in a bull market.

Don’t Worry Yet

Leading economic indicators tell us not to worry just yet. For example, ISM New Orders show continued growth in customer demand – 38 consecutive months of growth, in fact.

Note that new orders trend down before recessions:

We might be seeing slower growth, but we still see growth. Eventually, the top will be in, and leading economic indicators will start to decay before the next recession. For now, the economy is as strong as ever but with slowing growth.

Because the economy influences company earnings and because the economy is still strong, the Citigroup Economic Surprise Index being low is likely the result of analysts’ expectations being too high. With growth slowing, this makes sense. Analysts have been assuming the fast growth in corporate earnings will continue, neglecting the slowdown in economic growth.

Peak Growth

Currently, the slope of leading economic indicators (LEIs) is flattening. This could be a temporary stall, but we often see this toward the end of a bull market. The economy is likely leaving the expansion phase of the business cycle and entering a slowdown phase:

At this point, the risk/reward curve begins to become concave, meaning that the downside risk is beginning to outweigh further upside reward. From here, we will likely see lower volatility as the market makes its way up to a peak for this bull market. Before we hit the recession phase of the business cycle, we will likely see another rally, but one of much lower volatility and speed than the post-December rally.

The bull market is not over. With foreign economies clearly being deep in the slowdown phase, the US market is one of the last places for bulls. Yet the fact that the economy is slowing down means investors should be rebalancing their portfolios for the sake of maintaining alpha.

Outperforming Sectors

According to research on sector performance during the business cycle, at this point, investors should be ditching real estate and consumer discretionary stocks in favor of healthcare and consumer staples:

Drawing inspiration from this, here is my list of positions to hold during the coming economic slowdown:

Macquarie Infrastructure (NYSE:MIC)

This company falls in the “industrials” sector. This is a B2B service company – or set of companies, rather.

MIC has seen a stable, positive growth rate since around 2013. The slowdown earlier this decade did not make a significant impact on the company’s growth, implying that we should see growth continue during the next slowdown:

(Source: Damon Verial; data from ADVFN)

Cash flows too have been strong and growing:

(Source: Damon Verial; data from ADVFN)

Putting it all together, I calculate the company as undervalued as per its discounted cash flow valuation. Here is my discounted cash flow valuation plotted against the stock:

(Source: Damon Verial; data from ADVFN)

You can see that MIC was not underpriced until the last selloff. My chart only generated a buy signal in 2018. The valuation implies a 60% upside.

Four analyst downgrades after February’s earnings brought the stock to a discounted level. We know this was an overreaction because the stock is quickly filling the down area gap that appeared after earnings:

(Source: Stockcharts.com)

One key reason for my choice of MIC is its mispricing. Yet once the gap fills, the post-earnings drift will be officially over. Get in on this one early for some excess returns and to lock in on the company’s 10% dividend yield.

TreeHouse Foods (NYSE:THS)

This food and beverage company falls in the “consumer staples” category. It attracted my attention last month with an odd earnings reaction. The company reported a revenue decline of over 10%, causing the stock to fall.

Yet it was bought right back up, with dip-buying erasing all losses. The stock carried on as if nothing happened. This type of post-earnings reaction shows a strong investor base, which limits news-based drawdowns:

(Source: Stockcharts.com)

I dug into the earnings call transcript to see if I could find anything of interest. Lexical analysis is useful here. Proper financial lexical analysis can generate management sentiment, which is a predictor of a stock’s price over the coming month.

THS’s earnings calls were quite interesting. Rarely does a call contain more pessimism than optimism. However, THS was the rare exception for most of this and last year – except for the recent quarter.

Its most recent earnings call was roughly as optimistic as the average company. Because the previous quarter and year showed negative sentiment scores, I cannot make a comparison. Suffice to say, management is indirectly pointing to an inflection point in the company.

Here are a few flagged statements from the earnings call:

“Importantly, pricing execution has gone a lot more smoothly than last year with a minimal disconnect between inflation and pricing.”

– A tangible factor for the recent turnaround in sentiment.

“We worked hard as an organization to resolve the majority of our service issues and to restore customer trust and TreeHouse’s ability to deliver.”

– A similar statement; an admission of problems that are being corrected. Acknowledgement of issues and plans for resolution remains a strong indicator of excess returns, according to financial lexical analysis. (The downplaying of problems in contrast implies negative excess returns.)

“Quite frankly, solving the Snacks issue right now is our most important and where all the focus is.”

– A continued focus on problems. Should the company again succeed, we will likely see another quarter of strong sentiment, implying upward pressure on the stock price.

THS has outperformed the US food market to a great extent: 68% annual returns versus -4%. Yet my analysis hints that mean reversion is still underway, as the company still has a lower price-to-book than the average food stock. The company is expected to see a 60% earnings growth over the next year, making now a good entry point.

Because THS does not offer a dividend, you can use options instead for this play. I recommend the Aug 16 $60 calls. These have a delta of 100, allowing you to fully mimic holding 100 shares of THS per contract at a cost of around $650 and with minimum theta decay.

Madrigal Pharmaceuticals (NASDAQ:MDGL)

This company falls in the “healthcare” category. Investing in MDGL gives you exposure to a pipeline of cardiovascular, liver, and metabolic treatments. The stock is trading at under half its previous price because shares were diluted via a public offering for the sake of raising capital.

This capital will be used to finance the company’s pipeline. The timing was smart: just before a slowdown. The company will be able to focus on its pipeline with little regard to decaying economic conditions.

The options market is pricing the stock at $130, which is slightly above MDGL’s current price. I, too, see the stock as undervalued. Over the past year, MDGL has outperformed the biotech sector with 8% returns versus -1% returns.

Since 2016, MDGL has had no long-term debt and can cover its short-term debt with its current cash and assets. With its moat of cash, MDGL can continue working on its pipeline without worrying about earnings. A strong clinical trial result or two should draw investors into this company, and the stock will rally in response.

This stock is more of a gamble than the other two, so do look into the pipeline to see if anything strikes your fancy. Biotech stocks are notoriously hard to predict, and so my philosophy is to bet on those that are (1) outperforming the sector, (2) have a decent pipeline or high-sales product, and (3) are financially healthy, whether that mean strong earnings or enough cash runway to support the pipeline.

This is a rather unpopular stock for the general public, but is popular with the “smart money”: venture capitalists, hedge funds, and institutions:

(Source: Simply Wall St)

If you want to play this without putting too much capital at risk, I suggest the June 21 $130 call options. If the option market’s prediction is correct, these contracts are currently underpriced. Aim for roughly 25% ROI over the next quarter and roll the options over quarterly.

Conclusion

The US economy is at peak growth. From here, it will soon (or already has by some measures) enter into the slowdown phase of the business cycle. During this phase, three sectors show excess returns: industrials, consumer staples, and healthcare.

While you could simply buy ETFs in these sectors, if we are to seek alpha, we should look for stocks that are to outperform in these sectors. Thus, we gain excess returns upon excess returns. I gave my three picks, one from each sector.

We have MIC, an industrial with strong growth; THS, a food company that is at an inflection point, having solved many of its major problems, and a management, which has recently traded pessimism for optimism; and MDGL, a biotech company that is cash-rich and focusing on its pipeline. All things being equal, holding these companies in your portfolio during the inevitable slowdown will produce alpha. Happy trading.

Exposing Earnings is an earnings trade newsletter (with live chat) that is based on statistics, probability, and backtests. My models are unavailable anywhere else online, as I designed them myself, keeping the code private for Exposing Earnings subscribers and myself. If you want a definitive answer on which way a stock will go on earnings, the probability of the prediction paying off, the risk/reward of the play, and my specific options strategy for the play, click here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

[awesomecolorfulcollectorwombat]

3 Stocks To Hold During The Economic Slowdown

New Post has been published on http://croopdiseno.com/3-stocks-to-hold-during-the-economic-slowdown/

3 Stocks To Hold During The Economic Slowdown

Stocks are becoming more expensive. Yet earnings have not bolstered these prices. In fact, earnings surprises have been mostly negative, causing the Citigroup Economic Surprise Index to diverge with the price-to-earnings ratio of the market:

This index, almost by necessity, oscillates. As earnings continue to disappoint, analysts will inevitably lower their expectations, in turn creating an environment of more positive earnings surprises. This is bullish for the market, especially for companies reporting earnings in the coming months.

When earnings surprise, stocks rise. This is true even when stocks are perceived to be expensive. Those who are concerned with the inflated equity costs should be comforted to know that we are still in a bull market.

Don’t Worry Yet

Leading economic indicators tell us not to worry just yet. For example, ISM New Orders show continued growth in customer demand – 38 consecutive months of growth, in fact.

Note that new orders trend down before recessions:

We might be seeing slower growth, but we still see growth. Eventually, the top will be in, and leading economic indicators will start to decay before the next recession. For now, the economy is as strong as ever but with slowing growth.

Because the economy influences company earnings and because the economy is still strong, the Citigroup Economic Surprise Index being low is likely the result of analysts’ expectations being too high. With growth slowing, this makes sense. Analysts have been assuming the fast growth in corporate earnings will continue, neglecting the slowdown in economic growth.

Peak Growth

Currently, the slope of leading economic indicators (LEIs) is flattening. This could be a temporary stall, but we often see this toward the end of a bull market. The economy is likely leaving the expansion phase of the business cycle and entering a slowdown phase:

At this point, the risk/reward curve begins to become concave, meaning that the downside risk is beginning to outweigh further upside reward. From here, we will likely see lower volatility as the market makes its way up to a peak for this bull market. Before we hit the recession phase of the business cycle, we will likely see another rally, but one of much lower volatility and speed than the post-December rally.

The bull market is not over. With foreign economies clearly being deep in the slowdown phase, the US market is one of the last places for bulls. Yet the fact that the economy is slowing down means investors should be rebalancing their portfolios for the sake of maintaining alpha.

Outperforming Sectors

According to research on sector performance during the business cycle, at this point, investors should be ditching real estate and consumer discretionary stocks in favor of healthcare and consumer staples:

Drawing inspiration from this, here is my list of positions to hold during the coming economic slowdown:

Macquarie Infrastructure (NYSE:MIC)

This company falls in the “industrials” sector. This is a B2B service company – or set of companies, rather.

MIC has seen a stable, positive growth rate since around 2013. The slowdown earlier this decade did not make a significant impact on the company’s growth, implying that we should see growth continue during the next slowdown:

(Source: Damon Verial; data from ADVFN)

Cash flows too have been strong and growing:

(Source: Damon Verial; data from ADVFN)

Putting it all together, I calculate the company as undervalued as per its discounted cash flow valuation. Here is my discounted cash flow valuation plotted against the stock:

(Source: Damon Verial; data from ADVFN)

You can see that MIC was not underpriced until the last selloff. My chart only generated a buy signal in 2018. The valuation implies a 60% upside.

Four analyst downgrades after February’s earnings brought the stock to a discounted level. We know this was an overreaction because the stock is quickly filling the down area gap that appeared after earnings:

(Source: Stockcharts.com)

One key reason for my choice of MIC is its mispricing. Yet once the gap fills, the post-earnings drift will be officially over. Get in on this one early for some excess returns and to lock in on the company’s 10% dividend yield.

TreeHouse Foods (NYSE:THS)

This food and beverage company falls in the “consumer staples” category. It attracted my attention last month with an odd earnings reaction. The company reported a revenue decline of over 10%, causing the stock to fall.

Yet it was bought right back up, with dip-buying erasing all losses. The stock carried on as if nothing happened. This type of post-earnings reaction shows a strong investor base, which limits news-based drawdowns:

(Source: Stockcharts.com)

I dug into the earnings call transcript to see if I could find anything of interest. Lexical analysis is useful here. Proper financial lexical analysis can generate management sentiment, which is a predictor of a stock’s price over the coming month.

THS’s earnings calls were quite interesting. Rarely does a call contain more pessimism than optimism. However, THS was the rare exception for most of this and last year – except for the recent quarter.

Its most recent earnings call was roughly as optimistic as the average company. Because the previous quarter and year showed negative sentiment scores, I cannot make a comparison. Suffice to say, management is indirectly pointing to an inflection point in the company.

Here are a few flagged statements from the earnings call:

“Importantly, pricing execution has gone a lot more smoothly than last year with a minimal disconnect between inflation and pricing.”

– A tangible factor for the recent turnaround in sentiment.

“We worked hard as an organization to resolve the majority of our service issues and to restore customer trust and TreeHouse’s ability to deliver.”

– A similar statement; an admission of problems that are being corrected. Acknowledgement of issues and plans for resolution remains a strong indicator of excess returns, according to financial lexical analysis. (The downplaying of problems in contrast implies negative excess returns.)

“Quite frankly, solving the Snacks issue right now is our most important and where all the focus is.”

– A continued focus on problems. Should the company again succeed, we will likely see another quarter of strong sentiment, implying upward pressure on the stock price.

THS has outperformed the US food market to a great extent: 68% annual returns versus -4%. Yet my analysis hints that mean reversion is still underway, as the company still has a lower price-to-book than the average food stock. The company is expected to see a 60% earnings growth over the next year, making now a good entry point.

Because THS does not offer a dividend, you can use options instead for this play. I recommend the Aug 16 $60 calls. These have a delta of 100, allowing you to fully mimic holding 100 shares of THS per contract at a cost of around $650 and with minimum theta decay.

Madrigal Pharmaceuticals (NASDAQ:MDGL)

This company falls in the “healthcare” category. Investing in MDGL gives you exposure to a pipeline of cardiovascular, liver, and metabolic treatments. The stock is trading at under half its previous price because shares were diluted via a public offering for the sake of raising capital.

This capital will be used to finance the company’s pipeline. The timing was smart: just before a slowdown. The company will be able to focus on its pipeline with little regard to decaying economic conditions.

The options market is pricing the stock at $130, which is slightly above MDGL’s current price. I, too, see the stock as undervalued. Over the past year, MDGL has outperformed the biotech sector with 8% returns versus -1% returns.

Since 2016, MDGL has had no long-term debt and can cover its short-term debt with its current cash and assets. With its moat of cash, MDGL can continue working on its pipeline without worrying about earnings. A strong clinical trial result or two should draw investors into this company, and the stock will rally in response.

This stock is more of a gamble than the other two, so do look into the pipeline to see if anything strikes your fancy. Biotech stocks are notoriously hard to predict, and so my philosophy is to bet on those that are (1) outperforming the sector, (2) have a decent pipeline or high-sales product, and (3) are financially healthy, whether that mean strong earnings or enough cash runway to support the pipeline.

This is a rather unpopular stock for the general public, but is popular with the “smart money”: venture capitalists, hedge funds, and institutions:

(Source: Simply Wall St)

If you want to play this without putting too much capital at risk, I suggest the June 21 $130 call options. If the option market’s prediction is correct, these contracts are currently underpriced. Aim for roughly 25% ROI over the next quarter and roll the options over quarterly.

Conclusion

The US economy is at peak growth. From here, it will soon (or already has by some measures) enter into the slowdown phase of the business cycle. During this phase, three sectors show excess returns: industrials, consumer staples, and healthcare.

While you could simply buy ETFs in these sectors, if we are to seek alpha, we should look for stocks that are to outperform in these sectors. Thus, we gain excess returns upon excess returns. I gave my three picks, one from each sector.

We have MIC, an industrial with strong growth; THS, a food company that is at an inflection point, having solved many of its major problems, and a management, which has recently traded pessimism for optimism; and MDGL, a biotech company that is cash-rich and focusing on its pipeline. All things being equal, holding these companies in your portfolio during the inevitable slowdown will produce alpha. Happy trading.

Exposing Earnings is an earnings trade newsletter (with live chat) that is based on statistics, probability, and backtests. My models are unavailable anywhere else online, as I designed them myself, keeping the code private for Exposing Earnings subscribers and myself. If you want a definitive answer on which way a stock will go on earnings, the probability of the prediction paying off, the risk/reward of the play, and my specific options strategy for the play, click here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

[lazilysillyprince]

3 Stocks To Hold During The Economic Slowdown

New Post has been published on http://croopdiseno.com/3-stocks-to-hold-during-the-economic-slowdown/

3 Stocks To Hold During The Economic Slowdown

Stocks are becoming more expensive. Yet earnings have not bolstered these prices. In fact, earnings surprises have been mostly negative, causing the Citigroup Economic Surprise Index to diverge with the price-to-earnings ratio of the market:

This index, almost by necessity, oscillates. As earnings continue to disappoint, analysts will inevitably lower their expectations, in turn creating an environment of more positive earnings surprises. This is bullish for the market, especially for companies reporting earnings in the coming months.

When earnings surprise, stocks rise. This is true even when stocks are perceived to be expensive. Those who are concerned with the inflated equity costs should be comforted to know that we are still in a bull market.

Don’t Worry Yet

Leading economic indicators tell us not to worry just yet. For example, ISM New Orders show continued growth in customer demand – 38 consecutive months of growth, in fact.

Note that new orders trend down before recessions:

We might be seeing slower growth, but we still see growth. Eventually, the top will be in, and leading economic indicators will start to decay before the next recession. For now, the economy is as strong as ever but with slowing growth.

Because the economy influences company earnings and because the economy is still strong, the Citigroup Economic Surprise Index being low is likely the result of analysts’ expectations being too high. With growth slowing, this makes sense. Analysts have been assuming the fast growth in corporate earnings will continue, neglecting the slowdown in economic growth.

Peak Growth

Currently, the slope of leading economic indicators (LEIs) is flattening. This could be a temporary stall, but we often see this toward the end of a bull market. The economy is likely leaving the expansion phase of the business cycle and entering a slowdown phase:

At this point, the risk/reward curve begins to become concave, meaning that the downside risk is beginning to outweigh further upside reward. From here, we will likely see lower volatility as the market makes its way up to a peak for this bull market. Before we hit the recession phase of the business cycle, we will likely see another rally, but one of much lower volatility and speed than the post-December rally.

The bull market is not over. With foreign economies clearly being deep in the slowdown phase, the US market is one of the last places for bulls. Yet the fact that the economy is slowing down means investors should be rebalancing their portfolios for the sake of maintaining alpha.

Outperforming Sectors

According to research on sector performance during the business cycle, at this point, investors should be ditching real estate and consumer discretionary stocks in favor of healthcare and consumer staples:

Drawing inspiration from this, here is my list of positions to hold during the coming economic slowdown:

Macquarie Infrastructure (NYSE:MIC)

This company falls in the “industrials” sector. This is a B2B service company – or set of companies, rather.

MIC has seen a stable, positive growth rate since around 2013. The slowdown earlier this decade did not make a significant impact on the company’s growth, implying that we should see growth continue during the next slowdown:

(Source: Damon Verial; data from ADVFN)

Cash flows too have been strong and growing:

(Source: Damon Verial; data from ADVFN)

Putting it all together, I calculate the company as undervalued as per its discounted cash flow valuation. Here is my discounted cash flow valuation plotted against the stock:

(Source: Damon Verial; data from ADVFN)

You can see that MIC was not underpriced until the last selloff. My chart only generated a buy signal in 2018. The valuation implies a 60% upside.

Four analyst downgrades after February’s earnings brought the stock to a discounted level. We know this was an overreaction because the stock is quickly filling the down area gap that appeared after earnings:

(Source: Stockcharts.com)

One key reason for my choice of MIC is its mispricing. Yet once the gap fills, the post-earnings drift will be officially over. Get in on this one early for some excess returns and to lock in on the company’s 10% dividend yield.

TreeHouse Foods (NYSE:THS)

This food and beverage company falls in the “consumer staples” category. It attracted my attention last month with an odd earnings reaction. The company reported a revenue decline of over 10%, causing the stock to fall.

Yet it was bought right back up, with dip-buying erasing all losses. The stock carried on as if nothing happened. This type of post-earnings reaction shows a strong investor base, which limits news-based drawdowns:

(Source: Stockcharts.com)

I dug into the earnings call transcript to see if I could find anything of interest. Lexical analysis is useful here. Proper financial lexical analysis can generate management sentiment, which is a predictor of a stock’s price over the coming month.

THS’s earnings calls were quite interesting. Rarely does a call contain more pessimism than optimism. However, THS was the rare exception for most of this and last year – except for the recent quarter.

Its most recent earnings call was roughly as optimistic as the average company. Because the previous quarter and year showed negative sentiment scores, I cannot make a comparison. Suffice to say, management is indirectly pointing to an inflection point in the company.

Here are a few flagged statements from the earnings call:

“Importantly, pricing execution has gone a lot more smoothly than last year with a minimal disconnect between inflation and pricing.”

– A tangible factor for the recent turnaround in sentiment.

“We worked hard as an organization to resolve the majority of our service issues and to restore customer trust and TreeHouse’s ability to deliver.”

– A similar statement; an admission of problems that are being corrected. Acknowledgement of issues and plans for resolution remains a strong indicator of excess returns, according to financial lexical analysis. (The downplaying of problems in contrast implies negative excess returns.)

“Quite frankly, solving the Snacks issue right now is our most important and where all the focus is.”

– A continued focus on problems. Should the company again succeed, we will likely see another quarter of strong sentiment, implying upward pressure on the stock price.

THS has outperformed the US food market to a great extent: 68% annual returns versus -4%. Yet my analysis hints that mean reversion is still underway, as the company still has a lower price-to-book than the average food stock. The company is expected to see a 60% earnings growth over the next year, making now a good entry point.

Because THS does not offer a dividend, you can use options instead for this play. I recommend the Aug 16 $60 calls. These have a delta of 100, allowing you to fully mimic holding 100 shares of THS per contract at a cost of around $650 and with minimum theta decay.

Madrigal Pharmaceuticals (NASDAQ:MDGL)

This company falls in the “healthcare” category. Investing in MDGL gives you exposure to a pipeline of cardiovascular, liver, and metabolic treatments. The stock is trading at under half its previous price because shares were diluted via a public offering for the sake of raising capital.

This capital will be used to finance the company’s pipeline. The timing was smart: just before a slowdown. The company will be able to focus on its pipeline with little regard to decaying economic conditions.

The options market is pricing the stock at $130, which is slightly above MDGL’s current price. I, too, see the stock as undervalued. Over the past year, MDGL has outperformed the biotech sector with 8% returns versus -1% returns.

Since 2016, MDGL has had no long-term debt and can cover its short-term debt with its current cash and assets. With its moat of cash, MDGL can continue working on its pipeline without worrying about earnings. A strong clinical trial result or two should draw investors into this company, and the stock will rally in response.

This stock is more of a gamble than the other two, so do look into the pipeline to see if anything strikes your fancy. Biotech stocks are notoriously hard to predict, and so my philosophy is to bet on those that are (1) outperforming the sector, (2) have a decent pipeline or high-sales product, and (3) are financially healthy, whether that mean strong earnings or enough cash runway to support the pipeline.

This is a rather unpopular stock for the general public, but is popular with the “smart money”: venture capitalists, hedge funds, and institutions:

(Source: Simply Wall St)

If you want to play this without putting too much capital at risk, I suggest the June 21 $130 call options. If the option market’s prediction is correct, these contracts are currently underpriced. Aim for roughly 25% ROI over the next quarter and roll the options over quarterly.

Conclusion

The US economy is at peak growth. From here, it will soon (or already has by some measures) enter into the slowdown phase of the business cycle. During this phase, three sectors show excess returns: industrials, consumer staples, and healthcare.

While you could simply buy ETFs in these sectors, if we are to seek alpha, we should look for stocks that are to outperform in these sectors. Thus, we gain excess returns upon excess returns. I gave my three picks, one from each sector.

We have MIC, an industrial with strong growth; THS, a food company that is at an inflection point, having solved many of its major problems, and a management, which has recently traded pessimism for optimism; and MDGL, a biotech company that is cash-rich and focusing on its pipeline. All things being equal, holding these companies in your portfolio during the inevitable slowdown will produce alpha. Happy trading.

Exposing Earnings is an earnings trade newsletter (with live chat) that is based on statistics, probability, and backtests. My models are unavailable anywhere else online, as I designed them myself, keeping the code private for Exposing Earnings subscribers and myself. If you want a definitive answer on which way a stock will go on earnings, the probability of the prediction paying off, the risk/reward of the play, and my specific options strategy for the play, click here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.