Market. Mid-summer is silly season, with the signal being drowned out in a lot of noise. In Europe, people pay close attention to who is speaking because so often in the summer, the speaker is the assistant to the assistant and their statements are not credible. There are lots of things to worry about but the earnings revisions tell a different story. They started the year with a big rise, stayed flat for months and are rising again as good economic numbers have been published. Despite growth in the economy, inflation is still benign. So the fundamentals give a lot of reason to be optimistic. Over the short-term, the 25% growth in earnings estimates and 10% revenue growth this year give a lot of reason to relax. These numbers are, to a large degree, the result of the tax reduction and so this level of growth will not continue every year. However, the businesses will continue to operate at this new level and so they are worth more. Over the medium and longer term, however, there are some indications of a recession to come. Canada relies on cyclical industries. Signals from asset management, transports and semiconductors are turning or flattening out. The strength of the market has been shifting, with more contribution from utilities and health care--health care strength usually shows up late in the cycle. And the 2 year to 5 year Treasury yield curve spread is very low--only 19 basis points. So, it is a wonderful party, but it won’t last all night.
Comment on the UK. In response to a question on Brexit, he doesn’t think the way Brexit plays out will have much of an effect on US equities or trade policy. It is likely to not have a big impact on many of the companies that trade in the UK either, because they are international, but it might be wise to hedge out the Sterling-related (currency-related risk). At this time, he likes to invest in Ireland and France.
There are many deals in the works, nothing has closed and there is regulatory risk. These potential deals are risky reasons to invest in Disney. However, looking at Disney itself, this is the best monetization machine in the industry. For example, when they bought LucasFilm, they turned Star Wars into film, theme parks, TV shows, and consumer products. They’re also working on streaming, but there are risks with this. Aside from the sports franchise, they’re doing everything right. And the sports-related issues are well known by investors. The price consolidated for a while. It’s been rising again, but not too much. Disney is a discipline acquirer, so if the deals do come through, they will be good. However, he can’t buy the company at this time because media, as a group, is not showing market leadership. He will wait until the industry that includes Disney starts to perform better. Much of the recent rally in media is M&A premium, which is not a good basis for a long-term investment.
He likes the sector. This is a very broad-based materials name, with exposure to chemicals, agriculture, and so on. Some parts of their business are working well now, others not so much. For example, its coating business depends on the success of the auto industry, which might be pulling back. That’s normal for a business that is this broad. In general, materials is a late-stage performer and he has invested in a basket of stocks in this sector. DowDuPont recently reported a good quarter. However, the company’s future plans concern him. The company merged in order to reorganize and align its businesses and then split into three separate companies. He has never seen this intentional process of building to a 3-way split before. This is a multi-year strategy that is working very well so far. It has good global exposure. So he is comfortable with it, but he prefers to go to a broader basket of companies in this late stage rather than buying one and suffering the idiosyncratic risk. But if you were going to pick just one company, this one is broad and could make sense. (Analysts’ price target is $80.78)
The caller has a large profit in Apple and is considering selling half his position. Hurst commented that he loves the strategy of de-risking. Then he commented on the high quality of Apple’s performance. It is delivering in technological development, growth of revenue stream, stock buybacks, dividends, etc. He also thinks that the market has not yet appreciated the potential of Apple’s augmented reality technology, which is just in its infancy today. So, even though he would de-risk a position that had grown large because of a big profit, he would not exit Apple and sees strong reasons to continue to invest in it.
(A Top Pick August 9, 2017. Up 50%). He thinks this has largely played out. There is now a lot more competition, including head-to-head price competition with Fidelity. Fee compression is unrelenting, putting pressure on the whole industry. The rise in interest rates should help companies like E*Trade because they can earn money from the customer’s cash. However, last quarter, they disappointed, showing decelerating growth. Their growth is still significant, but not as much as it has been. The stock trades at a discount to Schwab and to TD Ameritrade and the main reason to own them at this point is the expectation that if they don’t do better, they’ll sell the company. He stepped away because that’s now what he would hold this company for. Someone who wants to speculate on a takeover could reasonably buy the company now, but he would not.
(A Top Pick August 9, 2017. Up 6%). He stepped away from emerging markets earlier this year but India still offers a good multi-year story. India adopted a biometric identity card system that puts everyone into the standard economy and away from the shadow economy. Deposits at banks are way up because of this. There are many other healthy signs in the economy. BUT, if emerging markets suffer, India will suffer. Because he doesn’t have to be in EM, he’s out of this for now.
He is negative on the space of drug distributors and pharmacy benefits managers. He thinks that policy pressures and pricing pressures make the PBM side of CVS a bad investment. The unrelenting pressure is driving more business to United Health, which is very efficient. Going top down: He doesn’t like consumer staples at this time and within that he doesn’t like distributors, and within that is all the difficulty in distribution of pharma. He thinks they’ve make good strides improving the retail, but the back end will be very tough for a long time. He would recommend cutting losses for someone who owns this and investing in medical devices or in a more general healthcare ETF. (Analysts’ price target is $85.47)
He doesn’t think that Alibaba has dropped very much compared to its volatility. He sees this stock as defensible: he likes the market, the industry and the name. He sees the technical action of the stock as a consolidation pattern. The company is growing rapidly. It’s PE ratio is high but its PEG ratio (price/earnings relative to growth) is not far from 1, which is a reasonable level. Compared to other momentum stocks, like Netflix, a stock with a PEG of 1 is priced much less aggressively. (Analysts’ price target is $241.14)
They make bespoke equipment. This can never be Amazon’d because the representative from Stryker works so closely with the doctor when they implant a new device into a patient. They are well-run, their robotics are leading edge. He likes the sector and this individual company but he would manage the idiosyncratic risk in this space by buying the IHI (US medical devices) ETF.
He is not a big fan of semiconductors at this time. In general, he wants to see good fundamentals that are confirmed by good technicals. At this point, the Broadcom technicals are not good. It has broken trend and for that reason he would not step into it. Regarding the semiconductor cycle, he thinks there is less downside this time than there has been traditionally because there are so many new categories that are creating accelerating demand for semiconductors, such as AI, machine learning, and autonomous driving. These will fuel demand even in a downturn. He would also not buy a semiconductor company based on its dividend growth--semiconductor companies should be showing strong revenue growth. He would wait until the chart looks better and if the fundamentals still look good, then he would buy. (Analysts’ price target is $287.16)
During the time of the show, Elon Musk tweeted a potential buyout of Tesla at $420 and the stock started rallying. Hurst’s comment was that the Tesla price fluctuations this summer are an illustration of the problem of signal and noise. There is all sorts of irrelevant noise about this stock, and investors are over-focused on the production numbers for Model 3. He thinks there is tremendous embedded value in the company and that SpaceX alone might be worth this much. Tesla’s cash burn is important, but the embedded value is being missed.
There are two ways to play real estate. He likes this one better than the IYR ETF because it is more narrowly focused, pays a little more yield, and is a little more defensive. If things slow down, this will do well. This is a significant component of his portfolio. (Analysts’ price target was not provided)