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Comments on activity in client accounts

28 August 2020

During the week we traded Western Digital for a plus scratch in most accounts after being down 20%. We also traded HPE for a scratch loss; we eliminated Marathon Petroleum and Apache for small losses; traded Foot Locker and Abercrombie for 10% one day profits; bought the Airline ETF (JETS) ; and repurchased Abercrombie lower and American Eagle Outfitters and Walgreen Boots. Most larger accounts are 70% and more cash.

*****

We have written before that the extraordinary amount of call buying initiated in the five-month raucous redoubtable rambling rally has been a major reason the wonder stocks have continued to be wonderful as they move to the moon. The Robinhood traders (https://www.ccn.com/listen-up-robinhood-traders-mark-cuban-has-a-stock-market-warning/ )have discovered options and can play Tesla and Amazon et.al by buying $5 and $10 calls. At a cost of $500 for a call on 100 shares of a $2500 stock a small trader can play with the big boys and girls. The theory propounded by is that the option trader is only risking $500 versus having to pay $25000 for 100 shares so -as one an options guru on CNBC posited today- option trading is a much less risky way to play markets trends. The fact that the guru didn't mention is that if the underlying stock price does not continue to rise the option trader will lose all his investment. Since the heavily traded tech stocks have only risen for the past five months, a call buying strategy has worked and new investors are genii. Robinhood Brokerage and other zero commission (but not no cost) brokers have opened millions of accounts in the last five months and so many of the newbies have known nothing but success.

The reason the stocks that are the option call buyers' favorites have been rising is in large part due to the fact that market makers who sell the calls to traders hedge their selling of calls by purchasing the underlying shares or buying other calls which of course then must be hedged.

We are value investors and so our current theory (subject to change at any time) and hope- although hope is worthless as an investment strategy- is that, if markets are to continue to move higher, traders and investors will eventually have to move to value. But since we also think that a correction is needed in the wonder stocks, we have been hesitant to have more than 40% of our available cash in equities.

We have no reason to believe that a correction is imminent but when it does come for whatever reason we do think it could be as violent on the downside as the rally has been to the upside

One scenario we can envision that would initiate a correction is that Biden has a 50% (8 million share plurality -think California, Illinois and New York) with Trump getting 47%. But they tie or plus/minus a small number of electoral votes and the swing states of Wisconsin and Florida are subject to 3-week recounts. Given recent activity we can envision conflict in the streets and a pullback in market measures ensuing from the uncertainty and mayhem. And that is where the Robinhood option traders can exacerbate the correction. For as quickly as they have embraced call buying, they can and will switch to put buying which means the the market makers will have to sell shares to hedge their positions. And as in March when ETF traders easily sold their positions the same may occur to further affect matters.

Finally, this scenario does not even take into account any reaction if the flu season is more virulent than usual and/or if a second/third wave of the Covid virus reemerges.

And so, with those happy thoughts we wish you a peaceful end to August and calendar summer. Can Christmas advertising be far away?

****

Ain't capitalism great?

Shares of salesforce.com (NYSE: CRM) rocketed 26% to a record high of $272.32 on Wednesday, following the release of the cloud computing leader's outstanding fiscal 2021 second-quarter results. Despite the challenges presented by COVID-19, Salesforce's revenue climbed 29% year over year to $5.15 billion.

And then Salesforce Notified employees of 1000 Job Cuts. But - Salesforce Chief Executive Marc Benioff in March pledged on Twitter that the company would avoid any significant layoffs for 90 days. Time's up.

Coca Cola will lay off 4,000; MGM 18,000, American Airlines 19,000; Delta 1500 pilots; Boeing more; Schlumberger 24,000; and on and on.

*****

Corporate Insiders Pocket $1 Billion in Rush for Coronavirus Vaccine

https://www.nytimes.com/2020/07/25/business/coronavirus-vaccine-profits-vaxart.html?action=click&module=Top%20Stories&pgtype=Homepage

Analysts won't recommend a stock priced at 8 times expected earnings with a 4% yield but are happy to recommend stocks with no earnings and priced for perfection 10 years out.

Walgreens Boots Alliance Inc

has struggled in 2020, but its problems started well before the COVID-19 economic disruption.

The stock is now down 52.3% over the last five years, and Boa Securities analyst Michael Cherney said Wednesday there's little reason to expect things to get much better for Walgreens as it begins its fiscal 2021.

Boa Cuts Walgreens Estimates: Cherney lowered Boa's fiscal 2021 EPS estimate for Walgreens from $4.95 to $4.75 after a recent conversation with the retailer's investor relation team about the longer-term outlook for Walgreens.

Boa has slightly higher expectations for Walgreens' same-store sales growth in the next fiscal year, but also higher-than-expected technology and other SG&A investment spending, the analyst said.

"While WBA is clearly working diligently to continue to reform the overall growth dynamics for the business, we still see limited visibility into when that pathway of better growth becomes clearer."

No Earnings Growth Visibility? Boa is still anticipating positive revenue growth in the U.S. for Walgreens in fiscal 2021, driven by an increase in prescriptions and average basket size, Cherney said.

Yet the analyst remains skeptical of Walgreens' ability to translate that revenue growth into profit growth.

In particular, he said mix shifts such as slowing growth in the beauty category are weighing on Walgreens' margins. At the same time, Walmart and other retailers are facing rising costs associated with keeping their stores hygienic until the end of the pandemic.

As a result, Cherney said he is not anticipating positive total company EBIT or U.S. Retail EBIT growth from Walgreens in fiscal 2021.

Boa has an Underperform rating on Walgreens with a $40 price target.

https://finance.yahoo.com/news/bofa-cuts-walgreens-earnings-estimate-163005378.html

*****

Carpenter Technology Corporation CRS reported adjusted loss per share of 31 cents in fourth-quarter fiscal 2020 (ended Jun 30, 2020), narrower than the Zacks Consensus Estimate of a loss of 35 cents. The company had reported adjusted earnings per share of $1 in the year-ago quarter. This dismal performance resulted from elevated operational costs, reduced productivity and bleak customer demand due to the coronavirus pandemic.

Including one-time items, the company reported loss per share of $2.46 as against the year-ago quarter's earnings per share of $1.

Net sales of $437 million for the quarter were down 32% year over year. The top-line figure, however, surpassed the Zacks Consensus Estimate of $380 million. Volumes were down 32% on a year-over-year basis.

Cost of goods sold in the fiscal fourth quarter was down 20.4% year over year to $413 million. Gross profit tanked 80.4% year over year to $24 million. Adjusted operating loss in the reported quarter came in at $18.1 million, as against the operating income of $68 million recorded in the prior-year quarter.

The company witnessed year-over-year revenue decline of 29.6% in the Aerospace and Defense end-use market. Revenues in the Medical end-use market slid 17.6%. Revenues in the energy, distribution and transportation end-use markets plunged 29.3%, 41% and 46.8%, respectively. Revenues from the Industrial and consumer end market also decreased 25.3%.

The SAO segment reported sales of $369 million, reflecting a year-over-year decline of 30.6%. The segment sold 46,124 pounds, 31% lower than the prior-year quarter. Operating profit slumped 94% year over year to $5.3 million.

The Performance Engineered Products' net sales dipped 39% year over year to $77 million in the fiscal fourth quarter. The segment sold 2,384 pounds, 43% lower than the year-ago quarter figure. The segment reported operating loss of $8.4 million in the fiscal fourth quarter compared with the operating profit of $1.7 million recorded in the prior-year quarter.

Financials

The company exited fiscal 2020 with cash and cash equivalents of $193 million compared with the $27 million recorded at fiscal 2019 end. Long-term debt was $551.8 million at the end of fiscal 2020 compared with $550.6 million as of fiscal 2019 end. Cash provided by operating activities were $231.8 million in fiscal 2020 compared with the prior fiscal's $232.4 million.

Outlook

Carpenter Technology stated that the COVID-19 pandemic continues to impact global economic conditions and customer demand patterns. Therefore, it expects bleak demand during the first half of fiscal 2021.

The company expects strong long-term outlook for key end-use markets. It is focused on increasing market share across key Aerospace and Defense and Medical platforms and applications, while soft magnetics and additive manufacturing technologies continue to support long-term sustainable growth and creating value for shareholders.

Carpenter Technology has executed targeted cost reductions and portfolio restructurings, which is expected to deliver annual cost savings between $60 million and $70 million. It has further increased its liquidity with a $400-million bond offering. Moreover, the company is focused on aligning its production with customer demand.

Fiscal 2020 Performance

Carpenter Technology reported adjusted earnings per share of $2.21 in fiscal 2020, down from fiscal 2019's earnings per share of $3.46. In fiscal 2020, net sales came in at $2.18 billion, down 8.4% from the prior fiscal year.

Price Performance

Carpenter Technology's shares have gained 7.7% over the past three months, outperforming the industry's growth of 5.1%.

Carpenter Technology currently carries a Zacks Rank #3 (Hold).

https://finance.yahoo.com/news/carpenter-technologys-crs-loss-narrower-125212420.html

*****

Albertsons Cos. delivered an upbeat report last week, but its stock was falling because investors may have been hoping for more from the supermarket operator, given that so many food retailers have gotten a boost during the Covid-19 pandemic.

Albertsons (ticker: ACI) said it earned $586.2 million, or $1 per share, up from 8 cents per share a year earlier. On an adjusted basis, the company earned $1.35 a share on revenue of $22.75 billion. Analysts were looking for EPS of $1.32 on revenue of $22.71 billion.

Digital sales jumped 276% in the quarter, while same-store sales climbed 26.5%. Albertsons said product demand and overall basket size (the number of items people purchase each trip) have been rising since the beginning of fiscal 2020, both in stores and online. Other grocers have also seen big sales boosts because of the pandemic.

That said, the company booked $615 million in costs related to the pandemic, including an additional $275 million for front-line workers' pay, and it also saw some store closures and lower fuel sales.

Albertsons declined to provide guidance, citing uncertainty about the coronavirus crisis. "The ongoing Covid-19 pandemic has dramatically changed the landscape of food-at-home consumption, and the company continues to prioritize the health and safety of its associates, customers, and communities," it said.

The stock initially rose following the results, but later was down 4.9% to $15.32. The S&P 500 was up 0.5%. Rival Kroger (KR) also declined after its earnings report last month.

While the company delivered a better-than-expected bottom-line result, the 3-cent beat might not have been as strong as some investors had been hoping, given how supermarkets have benefited from consumers stocking their pantries and eating at home more. In addition, revenue was a bit light, another potential concern. Analysts expectations were also high going into the report.

Moreover, some investors may have been hoping for full-year guidance to provide reassurance that the strength can continue.

https://www.barrons.com/articles/albertsons-stock-earnings-digital-sales-pancemic-covid-supermarket-grocery-51595859311?siteid=yhoof2&yptr=yahoo

AND

In April the Albertsons reported that same-store sales surged 34% during the first two months of the retailer's first quarter.

Albertsons Cos. is once again preparing to go public, and is looking to sell more than 65 million shares of common stock at a price of $18 to $20.

The company announced in a filing late Thursday that it will list its shares on the New York Stock Exchange under the symbol ACI. The company says it will not receive any net proceeds from the sale of common stock by the selling stockholders, including from any exercise by the underwriters of their option to purchase additional shares of its common stock from the selling stockholders.

Albertsons is trying to ride a wave of momentum fueled by pandemic-related grocery demand. In April the grocery giant reported that same-store sales surged 34% during the first two months of the retailer's first quarter.

Since the end of Albertsons' fiscal year on Feb. 29, the company said it experienced significant increases in customer traffic, product demand and overall basket size in stores and online as customers adjusted to the circumstances around COVID-19. As a result, Albertsons same-store sales increased 47% during the four-week period ended March 28 and increased 21% during the four weeks ended April 25, giving the company a blended total for the two months of 34%. Albertsons is also seeing a lot of new customers engaged in e-commerce and existing customers who are using digital options with increased frequency.

This is the third time Albertsons has attempted an IPO.

In 2015, the company tried to go public, looking to raise as much as $1.6 billion in an IPO, but then pulled the offering amid undesirable market conditions.

In 2018, Albertsons attempted to go public by acquiring Rite Aid Corp. in a $24 billion merger, but the companies eventually abandoned the transaction.

Last month Apollo Global Management Inc. and a group of other investors announced they had acquired $1.75 billion of convertible preferred shares in Albertsons Cos., representing a 17.5% stake in the company. The transaction was expected to close by June 15.

"Albertsons Companies is pleased to work with Apollo and its co-investors. Apollo knows our industry and business model well, given its significant prior history of successful investments in the grocery sector. We believe the investment led by the Apollo Funds represents a vote of confidence in both our business and our long-term strategy," said Vivek Sankaran, president and CEO of Albertsons. "We are also proud to have the continued support of our owners, a consortium led by Cerberus Capital Management, L.P., which also includes Kimco Realty Corporation, Cliff Realty LP, Liberty-Adler Partners LP, and Schottenstein Stores Corporation. We appreciate their tremendous support over the years in operations, technology and financing as we have grown our business and our platform, and especially during the COVID-19 pandemic as we focus on the safety and well-being of our associates, customers and communities."

According to Reuters, the deal with Apollo values Albertsons at around $10 billion, excluding its $8.7 billion debt burden as of the end of February. It gives Albertsons more time and a valuation floor in its pursuit of an IPO, for which it has registered with the U.S. Securities and Exchange Commission. Last year Apollo bought Smart & Final for $1.1 billion. Apollo bought The Fresh Market in 2016 for $1.36 billion.

"We are excited to work with the strong management team at Albertsons Companies, and believe the business has compelling growth opportunities ahead via e-commerce penetration, expansion of the company's innovative Own Brands portfolio, and merchandising and marketing initiatives," said Justin Orval, partner in Apollo's Hybrid Value Business. "This investment, led by our Hybrid Value team in partnership with our Credit platform, marks the third sizable transaction in the last month and exemplifies the breadth of Apollo's capabilities and the creative capital solutions we can deliver to great companies."

Albertsons operates 2,252 retail stores with 1,726 pharmacies, 402 associated fuel centers, 23 dedicated distribution centers and 20 manufacturing facilities. The company's stores predominantly operate under the banners Albertsons, Safeway, Vons, Pavilions, Randall's, Tom Thumb, Cars, Jewel-Osco, Acme, Shaw's, Star Market, United Supermarkets, Market Street and Haggen. Albertsons is No. 8 on The PG 100, Progressive Grocer's 2020 list of the top food retailers in North America.

https://progressivegrocer.com/third-time-may-be-charm-albertsons

*****

American Eagle Outfitters

Shares of American Eagle Outfitters Inc have declined by 45% over the last 18 months versus a 33% gain in the S&P 500 index, of which the stock is a member, according to JPMorgan.

The American Eagle Outfitters Analyst: Matthew Boss upgraded American Eagle Outfitters from Neutral to Overweight and raised the price target from $12 to $17.

The American Eagle Outfitters Thesis: The company is likely to report a second-quarter loss of 14 cents per share, better than the Street's expectation of a loss of 17 cents per share, Boss said in a Wednesday upgrade note. (See his track record here.)

American Eagle has upside to revenue estimates for the second quarter and the second half of the year, even assuming moderating brick-and-mortar productivity and e-commerce comps in June and July, the analyst said.

JPMorgan's conservative merchandise margin estimate shows contraction of 225 basis points, with "rational promotional activity to date" being partially offset by inventory provisions of $60 million taken by American Eagle Outfitters in the first quarter, he said.

For the Aerie brand, Boss estimated 16.1% comps in the second quarter, driven by the brand's digital penetration and the uptrend in digital demand.

The American Eagle brand has a revenue base of more than $3 billion, with a high-single-digit margin profile, the analyst said.

Although he said he expects "moderating productivity tied to back-to-school/holiday COVID-19 related disruption," Boss believes the brand will exceed peer performance "driven by newness and product assortment."

https://finance.yahoo.com/news/american-eagle-outfitters-revenue-upside-152148459.html

*****

General Electric is a far from perfect company, but it's good enough to warrant a serious look by value-orientated investors looking for a stock that's been left behind by the market. GE's recent earnings report showed just how badly the company has been hit by the COVID-19 pandemic, but it looks likely that the second quarter of 2020 will mark a multi-year low point, and all of its segments should improve from here. Let's take a closer look at why GE is an interesting stock to buy.

The investment thesis

The case for GE being a good value is based on the following points:

CEO Larry Culp appears to have returned to giving very conservative guidance in order to make it easier to under promise and overdeliver -- usually a favorable outcome for investors.

GE is taking action to reduce costs by $2 billion and cash actions of $3 billion in order to improve profits and free cash flow (FCF) with expected annual structural cost reduction of $1.5 billion to $2 billion.

The company has been badly hit in 2020, but all of its segments should improve from the second quarter.

A combination of underlying cash flow generation potential and turnarounds in progress in power and renewable energy should lead to substantially more cash flow in the under promise and overdeliver

Back at the end of May, Culp told investors that the cash outflow would be some $3.5 billion to $4.5 billion in the second quarter, but the figure came in a lot better, with an industrial free-cash outflow of just $2.1 billion. For reference, industrial FCF is simply that generated by its industrial businesses, and therefore strips out GE Capital -- finance companies are not best valued using FCF.

If this kind of under promising and overdelivering sounds familiar, it comes from the fact that Culp started 2019 predicting an industrial free-cash outflow of up to $2 billion only to end the year with $2.3 billion in FCF.

While Culp didn't give guidance for 2020 during the last earnings call, he did say that FCF would turn positive in 2021. Given recent history, it's reasonable to expect good FCF next year.

https://www.fool.com/investing/2020/08/24/why-ge-stock-is-a-good-value-right-now/

and

The case for GE relies on the idea that air travel will return to 2019 levels sometime in 2023 or 2024 and take GE Aviation's FCF back up with it. In addition, management is in the process of engineering a turnaround in its power and renewable-energy businesses, while GE Healthcare can be relied on for an annual $1 billion to $1.5 billion in FCF over the next five years.

GE Segment 2019 2022+
Power ($1.5 billion) GE Power will get back to a high-single-digit earnings/FCF margin with a $1 billion in FCF and low-single-digit growth in the future.
Aviation $4.4 billion GE Aviation will recover in line with commercial aviation recovery, and long-term FCF will be generated from aftermarket parts and services.
Renewable energy ($1 billion) Margin will get back on track for high single digits in line with its peers and the bet that offshore energy will start to pay off.
Healthcare* $1.2 billion Steady low- to mid-single-digit growth in earnings/FCF.
corporate and eliminations ($2.1 billion) Cost cuts will lower outflows.
Total GE industrial* $1 billion Wall Street has its analyst projections set for $4 billion.

Data source: General Electric presentations. *Excludes the now divested biopharma business.

GE's market cap of just $55.2 billion means that if the company hits Wall Street's expectations for FCF in 2022, it would trade at 13.8 times 2022 FCF, a very attractive valuation.

https://www.fool.com/investing/2020/08/25/better-buy-ge-vs-raytheon-technologies/

*****

An interesting article on value investing:

https://d2gr5kl7dt2z3t.cloudfront.net/blog/wp-content/uploads/securepdfs/2020/08/14115159/Dont-Forget-Value-Miller-Value-Partners.pdf

*****

21 August 2020

For the umpteenth time this year we surrender. We have been trying to trade the markets with middling results- up last week giving back the gains this week. We keep expecting Institutional Investors to return to value investing as the high-flying wonder stocks move to ridiculous sales and earnings ratios while value stocks muddle at 10 to 12 times normalized earnings (excluding the last 4 months). We tried some trades this week and surrendered with small losses.

We are now back to 50% or more cash and tired. Covid continues to expand but at a lower rate and the markets continue to ignore its effects on the economy. For sure, Apple and Google and Amazon are great companies but trade at 40 times earnings on the first two and 100 times on the last. And then there are Teledoc and Zoom and Shoplift et al that are trading 100 to 1000 times sales/earnings -if they have any earnings- reminiscent of domestic markets in March 2000 and Japan's Nikkei in 1989.

Of course, our favorite ridiculously priced issue remain Tesla. Tesla makes a great car and by 2023 it may sell 1 million vehicles. But by 2023 GM, Ford, Toyota, and VW will all be selling electric vehicles. Currently Tesla is valued at $380 billion and will sell 400,000 cars this year. Gm, Ford, Toyota, VW and Honda will sell 13 million cars this year and are valued at a combined $390 billion.

Our recent -and so far, wrong- investment thesis has been that if markets are to go higher there will need to be- or there should be- a rotation to value. That is not occurring. Markets look ahead 6 months or more and are expecting a vaccine for Covid by the spring of next year. Markets can stay at these levels with that hope but higher would seem to require a significant drop in weekly unemployment claims and greater reopening than is occurring. With our retrenchment in accounts this week they remain much higher than they were 3 months ago but still lower on the year. our desire for gains is dependent to a rotation to value, and that is not occurring.

Stay well.

*****

14 August 2020

Markets meandered this week as summer vacations, Covid cases plateauing, and political stuff kept a lid on volatility.

We added a new stock we haven't traded before -XRAY, a dental supply company suffering from the pandemic closing of dental office for 3 months. We also repurchased Cisco when it dropped 10% on less than results. We are trading Boyd and AMC Networks- not the movie theatres- which is a cable and streaming entertainment content company down from $60 to $25 and priced at 5 times earnings. We are also back in Carpenter Tech, BP, and Exelon.

Our cash position is lower but still substantial in larger accounts. Our smallest accounts are fully in. Our thesis is that the markets won't top out until a substantial move to value occurs. The markets do need a stimulus package – as do more importantly the unemployed- and we think the political realities will result in some action.

Stay Well.

*****

Intelligence on Intel:

Intel's chief architect Raja Koduri said in a blog post Thursday that the transistor-technology improvements will deliver performance equivalent to moving to a smaller transistor size without actually making the switch. Intel has previously said it can achieve transistor density with its 10-nanometer process that is roughly what its rivals have accomplished with seven-nanometer fabrication techniques. During its presentation Thursday, Intel said the manufacturing process performance gain from SuperFin is roughly 15% to 20%.

Intel's troubles have left an opening for rivals such as AMD (AMD), which doesn't make its own chips, and Taiwan Semiconductor Manufacturing (TSM), whose clients include AMD and rival graphics-chip maker Nvidia (NVDA).

https://www.barrons.com/

Boyd Gaming

Boyd Gaming operates 29 gaming properties. The company is divided into three segments: Las Vegas Locals, Downtown Las Vegas, and Midwest and South.

Operating performance in the second quarter declined considerably, with all 29 of Boyd's properties closed for most of the quarter because of the COVID-19 pandemic. Revenue dropped 75.2% to $209.9 million, while adjusted earnings plummeted 147% to a net loss of $110.5 million, versus the second quarter of 2019. Nevertheless, despite the poor showing, the company handily beat the consensus estimates for revenue and earnings by 25.7% and 47%, respectively.

5-star analyst Joseph Greff, of J.P. Morgan, commented, "Second quarter 2020 results were much better than we expected, with June generating levels of strong (and positive) EBITDAR following recent staggered property re-openings that followed widespread casino closures. Boyd, …reported meaningfully lower operating expenses allowing it to generate impressive year-over-year margin gains (1,000 bps+, wow) …"

The company's stock is down 16% year-to-date. However, Greff predicts a rebound for Boyd based on its "localized/regional footprint predominantly focused on a drive-to, leisure gaming customer." The company has an advantage over other gaming companies because it is less dependent on the travel and tourism industry.

According to the J.P. Morgan analyst, there is another catalyst that could propel the stock forward. "Furthermore, we see Boyd as a non-conventional way to play growth in U.S. sports betting, and note that its 5% stake in FanDuel is largely unappreciated/overlooked by investors," he explained.

Based on all of the above, Greff rates Boyd an Overweight (i.e. Buy), along with a $30 price target, which adds up to upside potential of 21% from the current share price. Similarly, most of the Street is getting onboard. 8 Buys and 2 Hold assigned in the last three months add up to a Strong Buy analyst consensus. In addition, the $27.50 average price target puts the potential upside at 10.5%

*****

7 August 2020

Monthly unemployment report today. 10.2% isn't good, but the apocalypse was delayed by the various measures which just expired. So delayed, but not averted.

US jobless claims for the week that ended Saturday totaled 1.2 million, the Labor Department said Thursday. That came in below the consensus economist estimate of 1.4 million.

It marked a decline from the previous week, putting an end to a two-week streak of increases. This week's report brought total filings over a 20-week period to more than 55 million.

Continuing claims, the aggregate total of people receiving unemployment benefits, totaled 16 million for the week that ended July 25.

Wonder whether these numbers include all the folks who have applied but are in limbo?

A staggering 40% of people who filed for unemployment in the state of Florida since March 15 have been deemed ineligible for benefits and left wondering what they should do next.

Who said this about what?

20 January: ‘We have it under control'

26 February: ‘It's going to disappear'

10 March: ‘It will go away'

29 April: ‘It's gonna be gone'

11 May: ‘We have prevailed'

17 June: ‘It's fading away'

19 July: ‘I'll be right eventually'

Mr. Market (we have removed the feminine appellation Ms. because Mr. Market is certainly acting with male testosterone rather than feminine intuition) is choosing to take an Emperor with no clothes approach as The Chosen 50 stocks' valuations continue to expand while even the earnings of the best performers are growing at half or less of their P/Es. Earning don't matter until they do.

If there had been no Covid we wonder if market would be this high since instead if five stocks comprising 30% and most of gain in S&P 500 there would be 500 stocks to consider and earnings would be more important and interest rates would be substantially higher giving stocks competition since the Fed would not have injected as much surplus liquidity into the economy or rescued the high yield bond market.

We purchased a few stocks on Friday thinking that a funding package of about $1.75 trillion will be approved. The Dems can hope for a sweep in November, which will allow them to help the states with $1 trillion in January rather than now (that's $1 trillion less). Also, they could settle on the $400 number for unemployment help and maybe only give the $1200 to folks earning less than $75,000.

We know we are optimists.

We currently own familiar names: Intel; Wisdom Tree Mid Cap ETF (DON); Western Digital (purchased on a 20% sell off this week at $38- sold last week at $42); Lyft after it dropped 10% on Uber earnings news -reports earnings next week expect better than; Snap on the Tik Tok ban news; AMC Networks for its content and really low P/E; Terex -trying for a third time to catch a reopening move; and Alberton's; and lots of cash in most accounts except the aggressive small accounts.

*****

Intel

More than you ever wanted to know about Intel's recent market action:

https://www.investopedia.com/intel-beats-estimates-but-stock-crashes-on-weak-outlook-5073663?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral&yptr=yahoo

Western Digital Stock Tumbles as Earnings Outlook Disappoints, we've seen this move before.

Western Digital stock fell late Wednesday after the disk-drive and memory chip company provided a disappointing outlook for the company's September quarter.

For the June quarter, Western Digital (ticker: WDC) reported revenue of $4.3 billion, up 18% from a year ago, and in line with Street estimates. Non-GAAP earnings were $1.23 a share, two pennies higher than consensus. Revenue from the company's client devices segment was $1.9 billion, up 19%, while data center devices and solutions revenue was $1.7 billion, up 32%. But the client solutions segment, which includes products sold at retail, reported a 9% decrease in revenue to $687 million, amid the closing of many bricks-and-mortar stores.

The big story, though, was disappointing guidance. For the September quarter, Western sees revenue of $3.7 billion to $3.9 billion, with a non-GAAP profit of 45 to 65 cents a share, below the previous Street consensus of $4.35 billion and $1.33 a share.

Read more at https://www.barrons.com/articles/western-digital-stock-tumbles-as-earnings-outlook-disappoints-51596663253?siteid=yhoof2&yptr=yahoo

And https://finance.yahoo.com/news/western-digital-wdc-stock-down-130001180.html

Albertsons Companies (ACI)

America's second largest grocery chain, Albertsons, went public this past June. The chain's management saw opportunity in the pandemic chaos – with more people cooking at home, a grocery chain basing its brand on fresh meat and seafood would have a chance to build on changing consumer habits. The grocery chain is profitable, with revenues of $62 billion in fiscal year 2019 and net income of $466 million.

Goldman's Kate McShane, a 5-star expert on retail stocks, is bullish on groceries. In a recent note, she writes, "[We] note eating at home trends continue to hold up well, with food growth above where it was pre-pandemic and grocery app downloads still above average. We believe that demand will remain higher than average for the longer term driven by a more value conscious consumer and possibly due to behavioral changes of eating out."

Regarding ACI, McShane notes "Our framework focuses on operating income dollar growth, market share gains, defensiveness, execution, SSS sales growth, and EPS growth in the context of valuation. ACI scores the highest on all these measures versus SFM and KR. Further, ACI scores only slightly lower than high quality names such as WMT, COST and ORLY, further underscoring our Buy rating."

Along with her Buy rating, McShane sets a $22 price target on ACI that implies an upside of 45%. (To watch McShane's track record, click here)

Overall, Wall Street agrees with the Goldman Sachs stance on Albertsons. The stock has 16 reviews, including 13 Buys and just 3 Holds. Shares are trading for $15.20, while the $19.64 average price target suggests a one-year upside of 29%.

https://finance.yahoo.com/news/goldman-sachs-projects-over-30-173745790.html

The 'death of valuation' and what it could mean for investors going forward

In 1967, Warren Buffett told investors that he was "out of step with present conditions," an admission that he couldn't wrap his head around the market climate at the time.

"I will not abandon a previous approach whose logic I understand (although I find it difficult to apply)," Buffett explained, "even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital."

Kailish Concepts, a quant analysis firm, used those very words from the Berkshire Hathaway BRK.B, 1.97% boss in a note taking a deep dive into the "death of valuation" in today's market, which can be seen by this telling chart showing the dominance of growth stocks:

See chart here: https://www.marketwatch.com/story/like-warren-buffett-half-a-century-ago-quant-firm-admits-to-being-out-of-step-with-todays-bubbly-conditions-2020-08-03?siteid=yhoof2&yptr=yahoo

"Kailash believes the idea that things are different this time to be a very old and very flawed story," the analysts wrote, adding that they believe that "much of Nasdaq's manic run is simply a wall of money chasing what was already racing higher."

Joining the likes of high-profile Wall Street names like Jeremy Grantham, David Tepper, Stanley Druckenmiller, Cliff Asness and Howard Marks, to name a few, Kailish explained that, as the chart suggests, the stock market is clearly in bubble territory.

And we've seen this play out before.

"The most expensive firms in the market today, like in August of 2000, generate no FCF, are loss-making and carry the associated negative ROEs and ROAs, and are diluting shareholders to fund operations," Kailish wrote. "With spreads between value and growth at record levels and an explosion of speculative listings through IPOs and SPACs underway, today's market environment shares numerous features with prior peaks in 2000 and 2007."

*****

Mania news:

Novavax has moved from a $100 million valuation to a $10 billion valuation in the last 6 months after being given $1.6 billion – yes, billion-on hopes that they can come up with the best Covid vaccine even though the company's attempts to develop a flu vaccine over the last 4 years have been unsuccessful. By the by, the CEO hauls down $1.5 million in compensation annually. In comparison, Johnson & Johnson that fly by night drug company was given $1 billion.

*****

Whatever happened to the Republican anti-Obama Care mantra of folks need to be able to go to their family doc?

Teledoc https://finance.yahoo.com/quote/TDOC/profile?p=TDOC with a $20 billion market cap, $700 million in revenue and an annual loss of $50 million is acquiring

Livongo https://finance.yahoo.com/quote/LVGO/profile?p=LVGO for $18 billion. LVGO has annual revenue of $300 million with an annual loss of $50 million.

****

Disney jumped 10% on the news of streaming service gains while the parks are operating at 25% capacity and is cruise ships and movie theaters remain closed and it lost $5 billion in quarter.

Walt Disney Co. DIS +9.82% posted its first quarterly loss since 2001, nearly $5 billion, as the majority of its business segments reeled from government efforts to corral the coronavirus by shutting down public spaces around the world.

The Covid-19 pandemic has closed Disney's DIS 10.01% theme parks, virtually eliminated movie distribution and curtailed live sports, a key programming source for Disney DIS 10.01% TV networks. However, the world's shut-in nature has helped the company's Disney DIS 10.01% + streaming service secure more than 60 million users in nearly nine months, a mark that Netflix took about eight years to achieve.

Disney DIS 10.01% said Tuesday it lost $4.72 billion in the three months ended June 27, compared with a profit of $1.43 billion in the year-earlier period. Total revenue fell 42% to $11.8 billion.

https://www.wsj.com/articles/disney-loses-nearly-5-billion-as-pandemic-slams-theme-parks-11596573570?mod=hp_lista_pos3

*****

Square – so as log as Bitcoin gambling and individual stock trading continue the valuation is justified?

$59 billion market cap, $300 million in earnings-Square, whose core business is helping merchants accept credit cards, made almost half its gross profit in the quarter from services on its Cash app, which lets people send money to each other and to invest in stocks and Bitcoin. It appears to have benefited from a trend that has also helped brokers during the pandemic—a rise in day trading…. Square's revenue from Bitcoin was $875 million, up 600% year over year. It accounted for an enormous portion of the company's $1.92 billion in revenue.

But that revenue is somewhat deceiving -- the company counts the total amount of Bitcoin that it sells to customers as revenue. So, if people buy $100 of Bitcoin for their accounts, that $100 plus a small cut to Square goes into Square's revenue line. Square buys Bitcoin and takes a "small margin" on each sale to customers, which it records as gross profit. The company recorded $17 million gross profit from Bitcoin trading in the quarter, less than 3% of its total gross profit (but up 717% year over year). The Covid-19 lockdowns have inspired a surge in retail trading, with privately held Robinhood Markets announcing in May that it had added 3 million customers this year. Square said in the fourth quarter that its equity investing product had the fastest growth of any Cash app product launch, though the company wouldn't release figures on the number of customers using it.

*****

Guess the new woman friend needs a wardrobe remake.

This week Jeff Bezos cashed out $3.1 billion in Amazon stock — more than his total share sales in all of 2019.

*****

 


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