The Day Ahead: Can a Stock Melt?

 | May 22, 2013 | 8:00 AM EDT
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Keep this secret between us but I did a jig as soon as seeing the first shout out for S&P 500 2000-plus by the end of 2014. Kudos to the Goldman strategist for wielding his brass balls (Alec Baldwin's term not mine!) and fueling the nonchalance captivating the minds of the Street (but not yet retail investors).

Chew on this: imagine the advice on individual stocks Goldman clients are receiving if they are being pitched that S&P 500 2000-plus is a strong possibility 18 months forward. Heck, imagine the text messages of Goldman clients to their friends, aka potential referrals; the conversation must be why they continue to be allocated in fixed income and ignoring hot stock opportunities.

LOL. This market has certainly captivated yours truly. Every single day I am watching a wall of euphoria being built, a classic wall that is often reserved for historical accounts (think tulip craze comparisons) in textbooks. Bricks in that wall include:

  1. Zany S&P 500 targets predicated more on price-to-earnings multiple expansion than robust margin expansion;
  2. Silly price target hikes on individual stocks that already don outsized valuations compared to the market and peers; and
  3. Reiterated buy ratings simply due to fear of underperforming rivals in similar pope gigs by 0.5% (oh this is happening, trust me).

Rating downgrades? Nowhere to be found right now. In fact, this Bernanke induced stock orgy is finally starting to hug corporate America, depending on the company. Home Depot (HD) served up one of the most optimistic FY13 guidance raises and earnings calls of the first quarter reporting season; this was nicely captured by the comment of an I-bank analyst on the call, who stated "pretty bullish, guys."

There are many pockets of the market beginning to materialize that are of worry, a specific focus being on the absolute and relative weakness of a few EU periphery countries' exchanges. Nevertheless, I was asked on Tuesday whether we are in a "melt-up" backdrop for stocks.

Since I am anti-jargon as it only confuses the human brain, the basic question an investor should be wondering is: "is the market a runaway train?" 

Here are a couple signs that we are still riding on an unstoppable force that will only be halted amid track vaporization via an alien spaceship...

  1. Negative macro stories are ignored, wherever they are found.
  2. Bad individual stories (i.e., J.C. Penney (JCP)) advance, false positives in the fundamentals seen due to the market's elevation.
  3. Strategists are tripping over themselves to adjust their S&P 500 year end targets (a development that has taken shape this week).
  4. Cash is trash, according to brokers.
  5. The mood is full on performance chase, contrary to the tried and true practice of seeking undervalued opprtunities.
  6. Financial market exuberance not translating into the real economy. Financial markets relentless, however.

You Heard None of This: Best Buy

In case you just read the normal earnings pieces...

Somewhat tricky quarter from Best Buy (BBY) in that the bullish case wasn't necessarily seen at first blush. There were wonky accounting charges. There were declines in sales. There was a lack of leverage over operating expenses on a GAAP basis. There was a mention by an executive of a challenging second quarter. However, if you peered deep into the soul of Best Buy's performance, it should have reaffirmed the very reason the stock has zoomed in 2013. That reason: an operational overhaul that is both removing oodles of wasteful processes and repositioning the company for relevance in a competitive industry.

Here are the points of interest:

  • Domestic comp  up 1.3% versus down 5.2% year ago versus down 1.6% Street consensus. 

What it showed: price investments are gaining traction in re-establishing trust in Best Buy's pricing AND this initiative is not causing negative surprises relative to Street models.

  • Rent reduction underway at a "number of stores." 

What is showed: Best Buy is preparing to drive better profits per store in 2014 on the new reality of big box retailing ... low single-digit positive same-store sales.

  • Company left the line that SG&A investments will be "substantially" offset by cost reductions. I was hoping for this line in the same way I continue to look for changes in Fed policy in its statement. 

What this showed: fixing the business is being done through savings reinvestment, but a good portion of it is left for the bottom line (and for shareholders to benefit today). FYI, $325 million of Best Buy's $725 million cost out plan shared on November 2012 analyst day has been realized; if pushed, at the next analyst day Best Buy could be set to announce a new cost out plan (this one seems to be running ahead of plan).

  • Inventories down 9.95% year over year.

What it showed: Best Buy is starting to run a tighter ship in which demand is properly aligned with inventory.

Side note: the company noted "increased promotions" in its China business. To me, this could be a signal that China operations will finally be exited (inventory being priced to move), perhaps with an announcement on tap on the holiday 2013 earnings release.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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