The Day Ahead: Now I Get It!

 | Jul 02, 2013 | 8:00 AM EDT
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When I was a teenager, I never did really understand the wisdoms my dad shared while we were tossing the ball around at the park. A go-to saying of his was: "Someday you will get where I am coming from, son."

The strange thing is that I never got certain aspects of life until recently -- about 16 years later. Some examples where a light bulb has gone off: (1) why select people choose to suck the life out of you; (2) why "friends" are trying to milk your contact network for their personal gain; and (3) why people lie straight to your face.

One area that I definitely get is the emotions of clients. Holding calls with them, exchanging emails and constructing plans for them to win affords a financial services person an intriguing perspective on investing. I have always interacted with clients; doing so has been instrumental in separating me from analysts that hide like punks in their small offices, fiddling in Excel. But the increased daily client contact I now have has opened up an entire new world of insight for me. Look at a few of the great questions I fielded yesterday:

On the Fed: "How can I invest when a Fed governor has the power to dictate market action?" The answer to this was not easily forthcoming. There is serious confusion out there, thanks to the Fed's heightened transparency efforts. People are unsure of the sectors they should be exposed to, what constitutes an attractive stock, and if reaching for a plus 2% yielding stock is as cool as it once was (it was never cool, you should be seeking dividend appreciation names).

Near-term, I sense from studying ever single word shared by clients (because I give a damn) that most are underweight equities into Friday's jobs report. Not only are they underweight, but profit-taking is at the top of their minds instead of letting winners ride on the hope more gains are realized. Some might therefore believe there is a fresh round of money itching to get into the mix, but be careful, cowboy.

On a pharma stock valued for a future of robust growth: You have to be able to recognize the point that a stock that is valued for growth begins to justifiably lag its benchmark and peer group. This is the market's initial tell that the future fundamentals are changing. Since I can't share the advice given on this particular stock, look at the snapshot (think in this manner in reviewing a company!) of the analysis below:

  • The earnngs per share estimate on FY2014 will have to come down more, given the company will be cycling tougher sales comparisons and the increased generic competition on the scene. If you apply even a slight contraction in the price-to-earnings multiple to 15x (15.5x currently) on a reasonable downside estimate of $5.35 (consensus: $5.42) you are looking at a stock price 8% below current levels.
  • The company's next call with Wall Street is in late July. Although a recent FDA decision may be something to worry about two years out, the reality is the team will be forced to discuss the impact to some extent on this call. That may only serve to push the continued bulls (which there are a ton of them on the Street) to the sidelines with respect to their estimates/ratings. This would in turn pressure the stock further.

On a packaged food stock that has done nothing since its last earnings report: Same deal as on the pharma stock, except remember that packaged food companies are often valued richly. They therefore have to be consistently cutting costs and have a strong profit portfolio to fight in a competitive industry.

  • The company has a good product portfolio, and like many of these packaged food companies is benefiting from slowing inflation. But, this has all the makings of a name that could tread water until its next earnings report comes through. There may even be a downward bias. A recent acquisition, to me, isn't producing "better than expected" results thus far. This is a little thing I tend to listen for from companies that are integrating newly acquired businesses. At best, sales look poised to be flat in the company's new fiscal year for this division, with cost savings being the earnings driver. Also, the company has now lapped its prior year price increases. This means growth will probably be slower in coming quarters (this is detailed I think in the preliminary guidance).

Ends and Odds

  • My firm Belus Capital Advisors has launched coverage today of Dick's Sporting Goods (DKS) with a sell rating. After talking with the company a week ago, the long-term outlook continues to look promising; it's the near-term margin risk I am worried about.

MasterCard (MA) shares are lagging American Express (AXP) and Discover (DFS). I chatted with MasterCard as well, left thinking "meh." Valuation is too rich for me given the findings from the call. Much prefer an American Express at its relatively cheaper valuation and greater involvement with higher income households.

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