This market's like watching the movie Scarface. It's filled with violent moves that have big consequences for your portfolio and we have to understand why they happen to figure out whether they are one-off and buyable or are the real deal.
The most violent down move today? I think it's Chipotle (CMG), which is down 50 points on what is widely regarded as a less profitable quarter than we thought coupled with very disappointing guidance. What's the seller thinking? He wants out before the string of double-digit comparable store sales runs out. He believes it's just too difficult to own given that the company doesn't want to raise prices and can't keep the string of amazing performance going.
I think that judgment's wrong. First, the quarter was marred by the decision not to take pork from a supplier who treated pigs inhumanely. Go read the conference call and, believe me, you will agree with that costly decision. Second, though, I think the market's judgment about guidance will prove to be shortsighted. Or as Monty Moran, the brilliant co-CEO said on the call, "So while it may look like we are staring down the pike at sort of flattening sales and no increased comps, it looked that way 10 years ago and nine years ago and eight years ago and seven, six, five, four, three, two, one years ago." Moran acknowledged the possibility of the flattening, however, adding, "we hope that our continued focus on trying to do everything we do better will work out just super."
I think it will. Stocks that are down this big in one day tend to go down big again the next. You buy on day three. It's been right every time for these purveyors of much-loved food with integrity. I think it will be so again.
Next act of Scarface? Say hello to my little friend of price competition in the biotech space. There's wholesale selling in the group because Gilead (GILD), which is making fortunes with its Hep-C drug, decided to cut its price drastically, an astounding 46%. That's hideous, but necessary in order to take business from rival AbbVie (ABBV). Both are getting crushed. What are the sellers thinking here? They want to be out of those companies that compete with each other and into those that are causing the competition so they can make money -- namely the pharmacy benefit managers like CVS Health (CVS) or the health maintenance companies such as UnitedHealth (UNH) and Humana (HUM).
What do you do? I think you keep buying the health containment cost companies. They have the upper hand. But you should begin purchasing those biotechs that actually have no competition to speak of, namely Celgene (CELG) and Regeneron (REGN), which are down badly. Again, like Chipotle, when you see a stock down badly, like Gilead or AbbVie, that means there's a second day coming as the sellers who are willing to dump these stocks when they are down this much will gladly sell them again tomorrow to be sure they are done with it. That's just how it works with angry, disillusioned portfolio managers who can't take it anymore. They will sell Gilead for Humana until the cows come home.
The final slaughter? The oils. We know oil went up too much in one week. A 19% gain is unsustainable with pretty much any commodity. However, we also know from Rich Kinder, the excellent CEO of Kinder Morgan (KMI), that oil may be too cheap if it gets back to the low $40s. Put yourself in the brain of the potential purchasers. They know there is voracious buy interest at the $43-$44 level. So they will try to buy at $45.
That means you can let the oil stocks come down a little more but they, too, are now buys. I like Royal Dutch (RDS-A), which just went to $66 from $61, and EOG Resources (EOG), which is actually up for the year, even as it is well off its highs, and Halliburton (HAL) or Schlumberger (SLB) if you want oil service.
You buy quality in violent situations like these because the rest are just too dicey if oil stays low for a long time. Sure, Kinder said oil should be around $65-$70 because of demand, something I agree with as I see Japan and Europe and China stimulate to the point where it is actually starting to work. Just recognize that supply is still coming on at a startling rate, which makes this V-shaped move faulty, as a "U" is the more likely letter.
Then there's Ralph Lauren (RL), down $27 after reporting negative comparable-store sales and giving a pretty dismal forecast. What are the sellers thinking here? I would bet that they are saying sure, gasoline's come down in price, but the people who benefit from it aren't the people who shop for Ralph Lauren. It's people who buy basics or shop at less toney places like Kohl's (KSS) or Costco (COST), which reported terrific numbers, or the dollar stores, of which I think Dollar General (DG) now represents great value. The big box retailers do better here and that's not where you buy Ralph Lauren or Tiffany (TIF), for that matter, which also disappointed.
Finally, there's Wynn Resorts (WYNN), which is falling on a sharp decline in Macau gambling revenues. I get this. The Communist Party is cracking down on corruption and smoking. It has crushed the junket business and is talking about an all-out ban on smoking, something that deters a lot of inveterate gamblers. Wynn will recover over time, but to me the whole group's just gotten too risky and I want to stay away.
Now, how about some upside violence? Disney's (DIS) on fire because it gaffed shorts who expected theme parks to be weaker because we heard last week from Visa (V) that tourism is slowing down because of the strong dollar. Plus there was a suspicion that ESPN would be soft and ABC outright bad. Not true on any count, which caused the shorts to have to cover and the longs to embrace it as the quintessential growth stock for the era.
There's Edwards Lifesciences (EW), up again, simply because it has a better mousetrap vs. open heart surgery and, therefore, boosted numbers.
Or how about Whirlpool (WHR), which is up $12 after still one more blowout quarter? That's the consumer once again using the extra dollars to spend on a new washing machine, coupled with the new, far more oligopolistic pricing that's coming now that Electrolux (ELUXY) is buying General Electric's (GE) appliance business. The stock's not done going higher. It's too bad, by the way, that General Electric moved out of appliances just when they took off and moved into oil and oil-related companies, like energy infrastructure play Alstom (ALSMY), at precisely the wrong time for both. Just saying.
Or how about Kohl's, up 6%? What do you expect when you get a guide-up at a place that is 180 degrees different from Ralph Lauren; Kohl's is a direct transference from the pump to the fabulous place where I buy all my socks but was denied a credit card for insufficient funds.
Or how about Smucker (SJM), which just made a major acquisition in the hottest area of food, pet foods, buying Big Heart Pet brands, the old Meow Mix and Kibbles brands that were owned by Del Monte (FDP). With a name like Smuckers it's got to be a good acquisition. My take? Go buy Freshpet (FRPT), a recent IPO that offers fresh food for pets sold in nifty proprietary refrigerators at a chain store near you. Why? How about the fact that Richard Thompson, the CEO, used to be CEO of Meow Mix? If the stock of Smucker can up $7 on the $5 billion purchase of Thompson's old company with its far from natural and organic offerings, how much will another food company pay for his far more in fashion Freshpet? I would say a heck of a lot more than the $500 million the company's currently worth.
So there's today's crime and punishment blotter with some positives thrown in. Remember, this is the Scarface market: too many dead bodies to count. Just remember that stocks are like vampires. They can roar back to life, especially if they help themselves as the winners have in so many cases since this market's bottom almost five years ago in 2009.
