Believe it or not, there is more to discuss this week than a thong-wearing protester ruining Mario Draghi's prepared remarks.
But darn, that was still fun. Anyway, investors continue to inundate me with all sorts of questions that are challenging my knowledge on the markets. In a way, I get the sense many are still not in the earnings season mindset, preferring to invest their time and physical efforts in studying multinational earnings, which pick up next week.
Nevertheless, here are answers to some of the hotter topics in the market right now -- absent anything related to who the next president will be.
Q: Should you buy the financials?
A: The call by Morgan Stanley (MS) this week to buy banks made sense -- higher interest rates on the horizon should be good news for bank stocks. And merger and acquisition activity has surged this year, which is boosting investment banking fees -- saw that in JPMorgan's (JPM) release, and likely Goldman Sachs (GS)/Morgan Stanley ¿ not really at Bank of America (BAC). But the bottom line is this: Why have your money tied up in what amounts to regulated utilities? Especially with the financials, as measured by the Finance Sector SPDR Fund (XLF), not reacting terribly well to the earnings beat from JPMorgan?
If so inclined to seek "safety" in bank stocks, made so by attractive price to book valuations (key industry metric), why not get outside the regulatory headwinds and buy stock in a company like General Mills (GIS)? The packaged-food giant is very likely to announce a beneficial restructuring within the next six to 12 months and is winning in key parts of the aisle (like yogurts).
Couple of things I don't like about banks here:
1. Ongoing legal costs that depress earnings. Investors continue to be kept in the dark on legal costs (see lack of comments on the topic from within JPMorgan's earnings call).
2. Weak economic data in the first quarter may push out the Fed's first rate increase to early 2016, meaning the thesis on buying the stocks today is unwarranted.
3. Concerned a bit by the outlook for commercial and industrial loan growth from the second quarter on due to the strong dollar's impact on multinationals -- will see this impact big time in the results of industrial names like Caterpillar (CAT), General Electric (GE), etc. JPMorgan's commercial and industry loan growth rose a solid 4% quarter over quarter in the first quarter -- not sure if that could be sustained.
Q: U.S. retail sales have stunk; buy the sector at lofty valuations?
A: No. Here are two names I continue to like from the sector. Stay measured here given the valuations.
Domino's Pizza (DPZ)
Consumers are just not spending their gas savings on apparel. What are they spending it on? Eating out, specifically from the red-hot Domino's. Here is what I like:
1. Getting ready to ramp up expansion in China (only has 60 or so locations there) as the Chinese start to embrace pizza.
2. Leading on the technology front -- I expect an Apple (AAPL) Watch app soon that will help people order.
3. Starting to redesign its restaurants globally to look more like cool fast-casual pizza chains (see Blaze Pizza); rivals like Papa John's (PZZA) and Pizza Hut (YUM) are not doing this stuff.
4. New delivery car is going to start rolling out this year, which should be a social media spectacle, and help to improve operations.
5. Cheese prices continue to be on the wane.
Foot Locker (FL)
Quarter has started well, and against a backdrop of sluggish retail sales, having that known information is much welcomed. Here is what I like:
1. It's winding down the underperforming Lady Foot Locker brand, and in its place opening up a store that is more Lululemon-like (LULU) with premium clothing and attentive customer service.
2. Aggressively remodeling its Foot Locker and Footaction stores while Finish Line (FINL) is doing so much more slowly.
3. Winning from the footwear design wars under way among Nike (NKE), Under Armour (UA), Adidas and Puma. Under Armour reports later this month, and I think it will say its footwear sales have been very strong with the new Stephen Curry One sneaker being sold at Foot Locker.
Q: Is Blackrock's (BLK) Larry Fink right to pour Hatorade on activist-driven stock buybacks?
A: Amen, Mr. Fink! The mere sound of corporate buyback announcements makes me cringe. They are disgusting, and designed to line the pockets of executives who have bonuses tied to full-year earnings targets as opposed to operating income targets. Buybacks are artificially inflating the stock market (reducing the float of stocks outstanding and tricking investors), and creating no sustainable societal value.
Here is why Fink is right on:
Companies continue to have a short-term mindset due to bonus targets and an infatuation by execs on watching stock trading screens. That causes them to lose focus of setting the company up to create value for future generations of shareholders, which includes heir-apparent execs. I applaud those companies seeking to do big deals right now, deals that make strategic sense for the long term. I even applaud those companies using cash to exit underperforming businesses, freeing up resources to buy smaller, high-growth companies or reinvest in new businesses. Because here is the deal: Once the market and economy correct, and they always do, those companies that plowed all their money into buybacks will be absent the solid operating structures of companies that had a vision when times were good.
Q: How do I play Jordan Spieth?
A: Sigh. Yes, this is what I am asked...
I would want to play post-Masters SpiethMania through Dick's Sporting Goods (DKS) for several reasons:
1. Golf sales at the company's Golf Galaxy business bottomed in the fourth quarter. Sales of golf equipment (pre-Masters) started to sell better in the first quarter in warmer-weather states.
2. The company spent 2014 rearranging its floor space to reduce underperforming areas like golf and exercise equipment, replacing them with hot-selling kids' apparel.
3. The company gives investors the ability to not only play renewed interest in golf due to Spieth's win and Tiger Woods' apparent revival, but also other trends such as strong demand for athletic wear, fitness trackers (not everyone will buy an Apple Watch) and footwear.
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