We're far enough along in the earnings season to start picking winners and losers, sectors to avoid and sectors to buy, and to render some conclusions about where to place your next incremental dollar now that the market has worked off its overbought condition.
Remember a few weeks ago when I signaled that the S&P 500 oscillator I follow that indicates inordinate buy or sell pressure hit an extreme -- in this case, a reading of plus 10, ultimate excessive buying? Remember how I said that this market would have to work off that overbought condition either through a huge, quick selloff or just a grind-it-down decline over time?
The market has chosen the latter path and it has gotten to the point where it's no longer unsafe at any speed. No, when we have worked off the overbought condition it is not a green light to buy. But when we were plus 10 that's a red light not to buy, and it was worth it given that the Dow after a shallow advance then proceeded to go down for seven straight days. The bulls were lucky it wasn't something more damaging and permanent, in that every time we take a sharp leg down we lose still more asset class holders. Or, as we say on the trading floor, the buyers have left the building.
Now that it's less perilous, what looks promising?
Four themes worth embracing? The humanization of pets, semiconductors of all shapes and sizes, biotech and the steel stocks.
Sectors to avoid? Restaurants, retailers, airlines and apparel.
So without further ado, let's roll our sleeves up and go over them. First, let's tackle pets. We continue to believe that the best secular growing market in the world right now isn't the Internet of Things or cloud adoption or social and mobile, although they do have some standout players with above-average performance.
No, we think that the real rising tide out there is the growth of spending on companion animals. This is the so-called humanization of pets -- not to be confused with "The Secret Life of Pets," a hit movie with a similar theme but more of a read-through for Comcast (CMCSA) , the maker of this summer's blockbuster hit and part of the Action Alerts PLUS portfolio.
The thesis, as first propounded by Jonathan Ayers, the CEO of Idexx Laboratories (IDXX) on "Mad Money" not that long ago, goes like this: As pets become more involved with their masters, as demonstrated by them being allowed to sleep in your bed, health spending on them has surged. Sure enough, when Idexx reported yesterday it gave you the biggest beat and raise so far of this quarter, and it sent the stock soaring from $93 to $107. Usually it takes a takeover to add that kind of capitalization.
What's behind the move? "Accelerated companion animal gains," according to the Idexx conference call. Their lines of business devoted to animal health showed 10% to 11% organic growth, including some vet-connected businesses with 13% organic growth such as recurring diagnostics, which is what happens when millions of pet owners -- a number that keeps growing -- take many trips to the vet. Zoetis (ZTS) , which reported a beautiful upside surprise, noted that its companion animal business also had 11% organic growth, so it is no fluke. It is a bona fide trend.
What can I say about semiconductors? They have been on fire and a lot of it has to do with acquisitions, including the purchase of Arm Holdings (ARMH) by Softbank and Linear Technology (LLTC) by Analog Devices (ADI) . Those were huge bids that ignited the group. But it could have been powered by earnings alone as we saw amazing numbers from the likes of Texas Instruments (TXN) and Qualcomm (QCOM) and the once very down-and-out but no longer Advanced Micro Devices (AMD) .
Cirrus Logic (CRUS) , a huge supplier to Apple (AAPL) , reported a monster good number that has ignited a second leg in the Apple story, given that it appears that Apple -- which also is part of the Action Alerts PLUS portfolio -- has put in more orders for the iPhone 7 than expected. I say "appears" because you aren't allowed to mention Apple's orders. Even when one or two of their number reports a punk number, such as Integrated Device (IDTI) or Qorvo (QRVO) , each is excused for the indiscretion. And when Intel (INTC) gave you a subpar report it dropped less than two points even as it had run quite a bit from the bottom.
The real standouts are graphics chip maker Nvidia (NVDA) and semi equipment makers Applied Materials (AMAT) and the acquisitive Lam Research LRCX. They are all buys. I still like NXP Semiconductors (NXPI) , too, which ran big into takeover talk and since has pulled back to the very buyable $82 level (it, too, is part of the Action Alerts PLUS portfolio).
It looks like the long national nightmare that was biotech is at last over. How can you tell? I like to judge it by what makes it run.
For example, last week Celgene (CELG) reported a better-than-expected quarter and it is now up nine straight points. But even when the quarters aren't so hot, like Biogen (BIIB) had, the stock runs anyway, this time on takeover talk, bogus or not. And it doesn't give up the whole gain when the talk has been shot down or viewed more skeptically. Stocks are also running on drug approvals; witness the gigantic leap that Ionis (IONS) had when Biogen announced a big partnership with it after it had an approval for a drug that could cure floppy baby syndrome, the No. 1 killer of infants worldwide.
Amazingly, after being dormant forever, the four horsemen of the big pharma apocalypse seems to be back in good graces, with the exception of Gilead (GILD) , which really has to do something with all the cash it's been able to get out of its new hepatitis C cure. In addition to the aforementioned Biogen and Celgene, Regeneron (REGN) is now up almost 100 points from its June lows. The company reports earnings tomorrow and we will see if the recovery is more permanent than many think.
Finally, there's the steel stocks, many of which people keep asking me about. Everyone loves a low dollar stock. AK Steel (AKS) is this group's AMD and it's had an amazingly positive reaction to the tariffs put on Chinese and South Korean steel -- tariffs that have basically shut down imports from both countries. U.S. Steel (X) just reported a huge loss, but not as big as expected. Both these commodity-style steels can still run.
However, if you want a growth steel that happens to be addicted to profitability, may I suggest you buy Nucor (NUE) , which came on "Mad Money" not that long ago after reporting excellent numbers. Nothing wrong with that almost 3% yield, either.
Now the losers.
Many restaurants can't seem to get it right as a combination of higher wages and lower traffic has conspired to really lay low many of these. Today's trial? DineEquity (DIN) , which saw its Applebee's division have an astounding minus 4.2% same-store sales -- double as bad as I thought. It joins disappointments such as Sonic (SONC) and Texas Roadhouse (TXRH) and Darden (DRI) , parent of Olive Garden.
Supermarkets have taken it on the chin, with both Whole Foods (WFM) and Kroger (KR) having a tough time. We're about to get some reports from a slew of retailers but, suffice it to day if you are not in the dollar store quadrant you are getting whacked.
Airlines? You would think that with oil down 20% from its highs you would get some relief from this beleaguered group. But overcapacity, fare wars, the strong dollar and now the Zika virus are stinging them.
Finally, there is apparel, which has seen weakness in Nike (NKE) -- I have Nike founder Phil Knight on Mad tonight -- and Under Armour (UA) due in part to the demise of Sports Authority. But today we got a hideous number from Kate Spade (KATE) , and VF Corp (VFC) failed to deliver its usual robust number.
So, here's how it is: If you can get comfortable with an animal health company or chip business or a biotech or a steel, you could be rewarded here. But if you are in retailers or restaurants or apparel or airlines, let's just say you could be in for some real turbulence for the rest of the earnings season.
