MorningWord 5/22/13: Another day, another record for the SPX. While the price action can be categorized as relatively sideways, it wasn’t a great day to be a big box electronics or video game retailer.
BBY was down 4.3% on what can only be categorized as a disappointing quarter highlighted by an earnings miss and greater than expected decline in gross margins due to the company’s commitment co continue their holiday season policy to price match online competitors.
GME was down 5% as MSFT introduced their new hotly anticipated Xbox One, and there appears to be some uncertainty whether or not the console will play used games without certain coding.
Yesterday’s declines in the aforementioned names stick out, aside from both being consumer-tech focused retailers there are a couple similarities about the stocks. Both stocks were essentially left for dead last year, with many calling for their demise as a result of AMZN’s continued market share-gains based on bricks and mortar retailers inability to compete on price. Despite the secular trend towards web sales, BBY and GME have had some spectacular performance ytd up 46% and 116% respectively as both companies continue to execute on restructurings. My sense is that the stock performance could have more to do with the fact that both stocks trade at about 10x next year’s earnings estimates, both have high short interest (BBY ~10% & GME ~34%), both pay a healthy dividend (BBY ~2.65% & GME ~3%), neither company is over levered, both have a heavy concentration of holders among largest holders (both have about 60% of the shares outstanding owned by the top 10 holders).
Whats even more fascinating in a year that has seen the resurgence of left for dead bricks and mortar electronics retailers is AMZN’s under-performance only up ~7% ytd.
I guess the lesson here is fairly simple, sometimes the moves that we expect least have little to do with fundamentals and a lot to do with technical factors. This has been a running theme in the market for some time. We have made this point on a few occasions of late, most recently about some of the solar names and the move in TSLA. So both BBY & GME came in hard, on heavy volume on fundamental news from 52 week highs, I would say this would not be the sort of price action to ignore if I were long, but who knows how long the current technical trends will last in what appears to be a market that defies all that doubt it?
MorningWord 5/21/13: Investing in equities on a stock by stock basis is not exactly one of the easiest endeavors, thus the proliferation of sector ETFs. Take, for example, the performance of the large cap Technology sector over the last 9 months. Early leaders (IBM, AAPL & AMZN) have become laggards and past laggards (GOOG, MSFT, INTC & CSCO) have become leaders. Stock picking is hard, there is no doubt about it, and trying to figure out a company’s financials, their products, their competitive positioning can be tough enough, but then throw in the animal spirits of a raging bull market and un-quantifiable characteristics like sentiment’s role in short term price action and sometimes it can feel damn near impossible.
On that note, last week a somewhat little-talked about tech stock, NTAP, was brought to the forefront by revelation that activist hedge fund Elliot management has taken a “large stake” in the storage provider and that they are urging the company to return cash to shareholders. The stock rallied nearly 8% on the news, and has since given back more than half of the initial gains.
SO, in this raging bull market that has seen meaningful rotation into cyclical tech with companies with strong balance sheets, OK growth and reasonable valuations… why is it that NTAP has yet to join the party, up only 11% ytd, trailing the Nasdaq that is up nearly 16%? Could it be because they don’t pay a dividend? I would be surprised if that was the only reason but I guess data storage vendors with heavy hardware leanings are just so 2010! In comparison, EMC, RAX & VMW are all down on the year, so on a relative basis NTAP has actually performed quite well, even before the Elliot news.
I wanted to put NTAP on readers radar as they report their fiscal Q4 earnings tonight after the bell, and I am sure their 33% net cash position, coupled with the stocks relative under-performance could be a major line of questioning on their conference call given the recent investor interest.
In sum, there are haves and have nots in any sector, and for some fairly important secular reasons hardware companies are not in vogue at moment, but all you have to do is look at MSFT or INTC and see how out of fashion companies levered to PCs have been of late. I guess my point is simple, in a raging bull market, every dog has its day, especially cash rich dogs.
Stay tuned for our Q4 preview later today.
MorningWord 5/20/13: The rally off of the November 2012, now equaling about 24% in SPX terms has been called many things, but the one most common seems to be the “most hated rally ever”. Hedge funds have underperformed throughout meanwhile, as large, predominately long only capital pools the world over have piled into stocks/sectors that would not normally be the hallmarks of a raging bull market.
In the last month, the SPX is up about 7.5%, while some of the best performing sectors since Nov have under-performed as investors have moved into more cyclical sectors. Since April 19th the XLP (consumer staples) is up less than 3%, the XLU (utilities) is basically flat and the XLV (healthcare) is up ~3.5%. This compares to sectors that had previously caused some bears to fear the rally was tapering back in Feb/March as it appeared that financials and homebuilders had topped out after strong performance out of the gate in 2013. But these 4 very economically sensitive sectors have caught a massive bids, with the XHB (homebuilders) up ~15% since April 19th and the XLF (financials) up ~11%, XLK (technology) up ~10% and XLI (industrials).
In my normal charting a couple names in this rotation theme, caught my eye over the weekend, names that bears had previously pointed to as fallen leadership.
Poster Children of the Cyclical Rotation:
MSFT up 21% since April 19th at 5 yr highs:
GS up 14% since April 19th
TOL up 20% since April 19th:
CMI up ~10% since April 19th:
While these names have done a bit of the heavy lifting during this rotation, after early year strength, it will be important to track their performance to see if they can keep pace as they all appear to be at huge long term resistance.
The breadth of the rally has definitely increased over the past month, an important feather in the bull’s hat. But since most of the cyclical sectors lagged to start the year, there are many names approaching important areas of overhead supply at current prices. I’m watching for breakouts or breakdowns at these pivotal levels to get a sense for the sustainability of the broader market move.