Daniel Cullinane CPA
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LUXUARY HOME PRICES BOOMING
The CEO of Texas Instruments Inc. (NYSE: TXN) has resigned because of personal conduct issues. According to Reuters:
Texas Instruments Inc said on Tuesday that Brian Crutcher had resigned as the company’s chief executive officer just six weeks into the role, after finding following a report that he had violated the chipmaker’s code on personal behavior.
Boeing Co. (NYSE: BA) has set a major deal to build Air Force One. According to The Wall Street Journal:
Boeing Co. on Tuesday secured a $3.9 billion deal to build the new jets that will fly as Air Force One, with only one wrinkle yet to be resolved: their color.
The award follows 18 months of an at times tortuous to-and-fro between the aerospace giant and President Donald Trump, who had threatened to cancel the planned sale over concerns about the cost of replacing the aging 747 jumbo jets.
The cost of a car sold in the United States will soar if tariff proposals stick. According to The Wall Street Journal:
The Alliance of Automobile Manufacturers, the auto industry’s chief lobbying group in Washington, estimates a 25% tariff would increase the average price of an imported vehicle by $5,800.
Google faces a massive fine from the European Union. According to Bloomberg:
Google will be fined around 4.3 billion euros ($5 billion) by the European Union over Android apps on Wednesday, setting a new record for antitrust penalties, according to a person familiar with the EU decision.
The fine, to be announced about midday on Wednesday, ends an EU probe into Google’s contracts with smartphone manufacturers and telecoms operators. Google Chief Executive Officer Sundar Pichai had a call with EU Competition Commissioner Margrethe Vestager late Tuesday for a so-called state of play meeting, a usual step to alert companies of an impending penalty, according to one of the people, who asked not to be named because the discussion is private.
The Nasdaq has hit an all-time high. According to CNBC:
The Nasdaq Composite hit a record high on Tuesday as strong gains in Amazon and a rebound in Netflix shares led to a big comeback in tech stocks.
The tech-heavy Nasdaq rose 0.6 percent to 7,855.12, after falling as much as 0.7 percent, as Amazon reached an all-time high. Meanwhile, Netflix closed just 5.2 percent lower after falling as much as 14.1 percent earlier in the session.
Texas moved up the list of largest oil producers. According to CNNMoney:
The shale oil boom has brought a gold rush mentality to the Lone Star State, which is home to not one but two massive oilfields.
Plunging drilling costs have sparked an explosion of production out of the Permian Basin of West Texas. In fact, Texas is pumping so much oil that it will surpass OPEC members Iran and Iraq next year, HSBC predicted in a recent report.
If it were a country, Texas would be the world’s No. 3 oil producer, behind only Russia and Saudi Arabia, the investment bank said.
The National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI) for July came in unchanged from June’s index reading of 68. The HMI posted an 18-year high of 74 in December 2017. Economists polled by Bloomberg were expecting an index reading of 68 for July.
NAHB Chair Randy Noel said that while demand remains strong, builders continue to be burdened with rising materials costs. Random length framing lumber fell to below $550 per thousand board feet (nearly 7%) earlier this month after rising by about 85% over the past two years.
The index is based on an NAHB monthly survey of homebuilder perceptions of current single-family home sales and expectations for sale in the next six months. An index reading above 50 indicates that more builders view sales conditions as good than view them as poor.
The current sales conditions subindex for July was unchanged at 74, and the subindex that estimates prospective buyer traffic rose two points to 52. The subindex measuring sales expectations for the next six months dropped from 75 to 73.
NAHB chief economist, Robert Dietz, said:
Builders are encouraged by growing housing demand, but they continue to be burdened by rising construction material costs. Builders need to manage these cost increases as they strive to provide competitively priced homes, especially as more first-time home buyers enter the housing market
In the NAHB’s regions, three-month moving average indexes dipped in two of four regions. The South’s index score fell one point to 70 and the West’s score fell from 76 to 75. In the Midwest remained unchanged at 65, and the index rose one point to 57 in the Northeast.
TO BUILD IT OWN SMART PHONE
JULY NEWSLETTER 6
When Goldman Sachs Group Inc. (NYSE: GS) released its most recent quarterly results before the markets opened on Tuesday, the investment bank said that it had $5.98 in earnings per share (EPS) and $9.40 billion in revenue. Consensus estimates had called for $4.66 in EPS and revenue of $8.74 billion. The same period of last year reportedly had EPS of $3.95 and $7.89 billion in revenue.
Perhaps the biggest announcement in the report is that David Solomon will be taking over the role as chief executive officer effective October 1, 2018. Investors had a chance to react to this news on Monday before earnings came out and promptly sent the stock up about 2%.
During the quarter, Goldman Sachs noted a book value per common share of $194.37 and tangible book value per common share of $183.78. Also, the firm’s Basel III Advanced common equity tier 1 ratio was 11.5% at the end of the quarter.
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In terms of its segments the company reported as follows:
Net revenues in Investment Banking were $2.05 billion for the second quarter of 2018, 18% higher than the second quarter of 2017 and 14% higher than the first quarter of 2018.
Net revenues in Institutional Client Services were $3.57 billion for the second quarter of 2018, 17% higher than the second quarter of 2017 and 19% lower than the first quarter of 2018.
Net revenues in Investing & Lending were $1.94 billion for the second quarter of 2018, 23% higher than the second quarter of 2017 and 7% lower than the first quarter of 2018.
Net revenues in Investment Management were $1.84 billion for the second quarter of 2018, 20% higher than the second quarter of 2017 and 4% higher than the first quarter of 2018.
The investment bank did not offer guidance for the third quarter, but the consensus estimates are $5.22 in EPS and $8.36 billion in revenue.
Lloyd Blankfein, board chair and current CEO, commented:
Solid performance across all of our major businesses drove the strongest first-half returns in nine years. With a healthy economic backdrop and deep client franchises, the firm is well-positioned to invest in attractive opportunities to meet the needs of our clients and continue to generate earnings growth.
Shares of Goldman Sachs traded down more than 1% to $228.44 early Tuesday. The consensus price target is $271.50 and a 52-week range of $214.64 to $275.31.
By most accounts, the U.S. economy is growing nicely, more Americans have jobs, and inflation remains under control. Looking at the market for luxury homes underlines that economic story.
Prices for luxury homes rose 4.6% year over year in the first half of 2018 according to a new report from Realtor.com. Of 91 U.S. counties included in the survey of luxury home markets, 17 posted price growth of 10% or more. The survey defines a luxury home as one priced in the top 5% of all residential home sales in a given market in April 2018.
Not only are prices rising in the luxury market, but the pace of sales is also quickening. The number of $1 million+ transactions in the 91 markets surveyed rose by 25% year over year, the biggest jump since January 2014 and two and a half times the pace recorded in the January 2018 survey.
Four of the fastest-growing markets are located in four northern California counties: Santa Cruz, San Mateo, Santa Clara, and Monterey. A San-Francisco real-estate market analyst told Realtor.com,” $1 million to $2 million is considered our affordable house segment.” He also noted that sales of houses priced above $2 million rose by 20% in the second quarter of this year.
Here’s Realtor.com’s list of the 20 fastest growing luxury markets along with the luxury price (top 5% of all homes sold) and the year-over-year change.
Sarasota, Florida (county seat Sarasota): $1 million; up 19.7% year over year
Collier, Florida (Naples): $1.67 million; up 15.9%
Queens, New York (Queens): $1.26 million; up 15.9%
King, Washington (Seattle): $1.51 million; up 13.7%
Santa Clara, California (San Jose): $2.77 million; up 13.1%
Monterey, California (Salinas): $1.96 million; up 13.2%
Boulder, Colorado (Boulder): $1.33 million; up 12.8%
Santa Cruz, California (Santa Cruz): $1.62 million; up 12.7%
Snohomish, Washington (Everett): $801,000; up 12.7%
San Mateo, California (Redwood City): $3.48 million; 12.3%
Hudson, New Jersey (Jersey City): $1.32 million; 12.2%
Davidson, Tennessee (Lexington): $784,000; 11.9%
Douglas, Colorado (Castle Rock): $923,000; up 11.5%
Williamson, Tennessee (Franklin): $1.04 million; up 10.7%
Denver, Colorado (Denver): $1.02 million; 10.5%
Sacramento, California (Sacramento): $673,000; up 10.1%
Clark, Nevada (Las Vegas): $589,000; 9.9%
Riverside, California (Riverside): $754,000; up 9.8%
Jefferson, Colorado (Golden): $816,000; up 9.5%
Maui, Hawaii (Maui): $2.3 million; 9%
Shares of Starbucks Corporation SBUX have declined over the last few trading sessions due to the second high profile departure in a month. Recently, the company announced the retirement of its chief financial officer (CFO), Scott Maw, effective Nov 30, 2018. Notably, Maw has been associated with Starbucks for seven years before assuming the role of CFO in February 2014.
In the past three months, the stock has declined 17.2% compared with the industry’s 1.7% decrease. However, this Zacks Rank #3 (Hold) company seems to be well placed for long-term growth, courtesy of its robust fundamentals to counter intense competition from rivals. Let’s delve deeper.
Banks on Innovation
Starbucks is strengthening its product portfolio with significant innovation around beverages, refreshment, health and wellness, tea and core food offerings. In fact, beverage innovations have been a significant contributor to the company’s comps growth over the years. Seasonal offerings like pumpkin spice latte have been in the market for 10 years now and are quite popular now. Starbucks is also leaning toward fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers including almond, coconut, and soy milk alternatives.
Additionally, Starbucks is fast expanding its food offerings in the United States to complement its drinks. Notably, food has become a key growth driver and contributes more than 21% to the company’s U.S. revenues. The company plans to expand its lunch menu and offer locally popular snacks around the world. Starbucks’ much talked about evening program — food, wine and beer offerings — available at 100 stores is expected to be rolled out in 20–25% of its outlets in the United States by fiscal 2019. This evening program is expected to add $1 billion in revenues by the end of fiscal 2019.
Immense Growth Potential in China & Asia-Pacific
Management believes that China and the Asia-Pacific region will drive much more meaningful business growth over the next five years supported by rapid unit growth, growing brand awareness, and increased usage of the digital/mobile/loyalty platforms. Starbucks currently (as of Apr 1, 2018) operates 7,995 stores across China-Asia-Pacific (CAP). Starbucks' business in China is rapidly growing due to innovative store designs, local product innovations and the success of MSR program. It has plans to launch certain features in China loyalty program this year and full digital capabilities over time. Over the next five years, this Seattle-based coffee giant has plans to build 600 net new stores annually in Mainland China, which in turn will double the market's store count to 6,000 across 230 cities. Currently, the company operates approximately 3,300 stores in 141 cities in China. This rapid expansion is likely to triple its revenues and double its operating profit by the end of fiscal 2022 compared with fiscal 2017 number.
Loyalty Program & Digitalization
Starbucks holds a leading position in digital, card, loyalty and mobile capabilities. Evidently, the company’s loyalty cards are gaining popularity. In the United States, its membership increased 11% year over year under the My Starbucks Rewards (MSR) program in fiscal 2017. This positive trend continued in fiscal first quarter 2018 with the membership growing 11% year over year to 14.2 million active members. Customers in the country are using the chain’s mobile app to order and pay for drinks. They are joining the Starbucks’ rewards program as well. We note that MSR is one of the key catalysts of Starbucks.
6 IMPORTANT EVENTS
Ford Motor Co. (NYSE: F) shares dipped slightly on news that the automaker was issuing a recall in North America. The company is recalling roughly 550,000 sedans and sport utility vehicles in North America, saying a problem with the gear shifter could cause the vehicles to roll away.
The recall includes some 2013 to 2016 Ford Fusion cars and 2013 to 2014 Ford Escape SUVs. About 504,000 of the affected vehicles were sold in the United States.
According to the company, a bushing that connects the shifter cable to the transmission may detach in the affected vehicles. Ford warned that when the driver shifts the lever into the Park position, the vehicles may unexpectedly be in another gear. If the parking brake isn’t engaged, the vehicles could roll.
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Ford noted that drivers are still able to remove the ignition key if the affected vehicles are stuck in another gear. There’s also no warning message or audible chime to indicate that the vehicle is not in Park.
Shares of Ford were last seen down less than 1% on the day to $10.80, with a consensus analyst price target of $12.28 and a 52-week trading range of $10.14 to $13.48.
Depending on how you look at it, Microsoft is both the biggest loser of the mobile business and one of the biggest winners. The iPhone and Android duopoly pushed Windows Phones out the door, and Microsoft had to call it quits a few years after purchasing Nokia’s mobile division. But while Microsoft stopped making hardware, it didn’t stop creating or adapting software for mobile devices. Microsoft apps soon invaded Android and iOS, and it’s not just the Office suite, although that’s certainly one of the best Microsoft assets for both mobile and PC.
More recently, we’ve heard that Microsoft is working on a new kind of Windows 10 device, that mythical Surface Phone that Microsoft never made. Also known as Andromeda, the phone is still in development, with a rumor saying that it’s coming next year. But forget that for a second, as a crazier rumor just arrived: Microsoft is supposedly making its own Android handset.
Given that Microsoft already has many apps in place to take over the screen of Android devices, including the Office apps, a launcher, a browser, and the new News app, would it be so crazy to see Microsoft create its own Android-based smartphone? After all, Microsoft does sell Galaxy phones in its stores, which aren’t “Microsoft edition” handsets, but they may just as well be.
That said, with a Surface Phone in development, why would Microsoft even consider making an Android handset in the first place?
The rumor comes from Windows Latest, which provided screenshots that supposedly prove an interaction between a customer representative and a customer. The former said that Microsoft wouldn’t make any new Lumia phones — duh, of course, the Lumia family is dead.
But the person also said that Microsoft is working on its own Android handset, which will be powered by Android and sold under its own brand.
The week of July 13 was another wild one for the equity markets. Investors are getting to grapple with a nine-year-old bull market that is facing rising gross domestic product in the United States and a “peak earnings” scenario while global growth is slowing. Also front and center is that the Federal Reserve keeps wanting to raise interest rates as the economy reaches full employment, even as trade war and tariff fears keep arising each week.
Many investors are looking for new ideas and outside advice on where to look for opportunities for the second half of 2018. After all, buying the dips just hasn’t been as reliable as it had been in 2017 and the prior few years. It turns out that analysts on Wall Street are still identifying undervalued stock stories where big upside may be made if the expected scenarios come to fruition. Some analyst calls are looking for much larger than normal upside, and the market volatility and the endless flow of major non-equity news is causing some of these calls to be overlooked or missed entirely by the investment community.
24/7 Wall St. reviews hundreds of analyst upgrades and downgrades each week, and a review of the analyst calls from the week of July 13 presented seven analyst picks that were either missed, overlooked or even ignored by investors. This tends to happen frequently during volatile markets, but there was only one day this last week which butted heads with bullish investors.
We have included details about each analyst call that seemed to be overlooked this week, along with trading activity around each call. Also provided in this synopsis are the trading history around each company, the consensus analyst price target from Thomson Reuters, and additional color around each call if available. Sometimes it is these overlooked research calls issued when investors are distracted that can bring the most rewards.
Here are seven stocks with big analyst calls that seemed to be overlooked or ignored by investors during the week of July 13.
BlackRock: ETFs to the Future!
BlackRock Inc. (NYSE: BLK) had a quiet week after rallying Monday and Tuesday with the markets. What stood out was a Friday, July 13, call in which the money management giant and manager of the iShares ETF family shares was raised to Outperform with a $590 price target at Keefe Bruyette & Woods. This represented an implied total return of more than 18% to the target (dividend included), but BlackRock’s stock also was ignored after Credit Suisse’s refreshed Top Picks list included it with a $743 price target that implied just over 50% in total return expectations.
BlackRock has a consensus price target of $608.58 and a 52-week trading range of $408.62 to $594.52. Year to date, the stock was down about 2%.
Tesla shares fell 10% following news that the company hit its goal of producing 5,000 Model 3s per week. The stock will be a bumpy ride over the next few years, but we remain optimistic that Tesla represents considerable upside in large-cap tech over the next 2-5 years. Here are some investor concerns that may have driven the stock down.
Concern: Average weekly Model 3 production did not improve from the end of the March quarter. Our perspective: Tesla is getting better at producing Model 3s. While average weekly production was consistent from the end of the March quarter at 2,400 per week, it was an increase from the 633 average weekly production in the March quarter.
Concern: Model 3 has quality issues. Our perspective: While the company stopped a standard brake and alignment test, it did so because the test was redundant. There were no brake problems reported beyond the Consumer Report test which Tesla fixed with a software update.
Concern: The company will be profitable in Sep-18, but it won’t be sustainable. Our perspective: We agree in the short term. Tesla is still 3-4 quarters away from sustained profitability given that a favorable ASP mix on Model 3 will inch the company into profits in the Sep-18 and Dec-18 quarters. The key is that demand remains high for Model 3 and production is improving. As that scales in 2019, the company should have more sustained profits. One note: the company will dip back into a temporary loss when it ramps production of Model Y (SUV) in 2020.
The Elon Musk factor. While we feel better about the progress Tesla is making, we are more concerned about Elon Musk’s investor and media relations. The latest episode involved Musk taking to Twitter to criticize a reporter for a story related to Model 3 brake certification. Perhaps there is a new leadership approach that is more combative (e.g., Donald Trump, and to a lesser extent, Elon Musk), but we prefer a more stoic approach. More to come.
Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.
Athletic gear maker Nike Inc. (NYSE: NKE) not only held on to its place at the top of the Dow heap for the year to date, the company’s stock also gained 6.7% in the short week. That’s on top of an 8.5% gain in the prior week. For the year to date, Nike stock is up 22.3%.
The second-best performer among the Dow Jones industrials so far this year is Microsoft Corp. (NASDAQ: MSFT), which is up 15.28%. That is followed by Visa Inc. (NYSE: V), up 18.3%, UnitedHealthGroup Inc. (NYSE: UNH), up 13.7%, and Boeing Co. (NYSE: BA), up 13.5%. Of the 30 Dow stocks, only 11 have managed to post a gain to date in 2018.
The Dow experienced modestly successful week, adding about 185 points over the course of the past week to close at 24,456.48, up about 0.8% from the previous Friday’s close. The Dow closed up less than 1% for the second quarter but down 1.8% for the first six months of 2018.
Nike has been trading solidly higher after beating earnings and announcing a large stock buyback plan. Analysts have also weighed in with some price target increases that have helped push the share price up. Wedbush Securities maintained an Outperform rating and raised its target price from $82 to $85. Credit Suisse reiterated its Outperform rating and raised its target from $78 to $90, while Deutsche Bank reiterated its Buy rating and lifted its target price to $87 from $84.
The company is also expected to benefit from its sponsorships of the Brazilian, French, Croatian and English World Cup soccer teams. France beat Brazil on Friday, but England plays Belgium and Croatia plays Russia Saturday for the remaining two spots in the semifinals. While most fan gear is sold ahead of the tournament, the winner or an unexpected high finisher (we’re looking at you, England) can result in a late sales boost.
Nike’s shares jumped to an all-time high of $81.00 in the prior week and closed Friday at $77.08. The 52-week low is $50.35. The consensus 12-month price target on the stock is $81.02, and the forward price-to-earnings ratio is 24.51.
The U.S. Energy Information Administration (EIA) released its weekly petroleum status report Wednesday morning showing that U.S. commercial crude inventories increased by 5.8 million barrels last week, maintaining a total U.S. commercial crude inventory of 411.1 million barrels. The commercial crude inventory is about 2% below the five-year average for this time of year.
Tuesday evening the American Petroleum Institute (API) reported that crude inventories rose by 629,000 barrels in the week ending July 13. Gasoline inventories increased by 425,000 barrels and distillate stockpiles rose by about 1.7 million barrels. For the same period, analysts expected crude inventories to decrease by about 3.6 million barrels. Gasoline inventories were seen down by 44,000 barrels, and distillate inventories were expected to rise by 873,000 barrels.
The unexpected jump in crude oil inventories looks to weigh further on prices that have dropped by nearly 10% since last week. Last week’s unexpectedly large decline in crude inventories started the tumble, which got a further push from talk of releasing crude from the Strategic Petroleum Reserve. This week’s increase is likely the result of a decline of more than half a million barrels a day in exports, a small increase in production and a jump in imports.
Total gasoline inventories decreased by 3.2 million barrels last week, according to the EIA, and remained about 5% above the five-year average range. U.S. refineries produced about 10.3 million barrels of gasoline a day last week, down by about 400,000 barrels a day compared to the prior week. Total motor gasoline supplied (the agency’s proxy for demand) averaged 9.6 million barrels a day for the past four weeks, flat compared with the prior week.
Before the EIA report, benchmark West Texas Intermediate (WTI) crude for August delivery traded down about 0.9% at around $67.45 a barrel, and it slipped to around $67.15 (down about 1.4%) shortly after the report’s release. WTI settled at $68.08 on Tuesday and opened at $67.64 Wednesday morning. The 52-week range on August futures is $47.39 to $75.27.
Week over week, U.S. crude oil exports fell by 566,000 barrels a day and U.S. production rose by 100,000 barrels a day to 11 million barrels. Exports averaged 1.46 million barrels a day last week and have a cumulative daily average for the year of 1.82 million barrels a day, a 140% increase over the year-ago export total.
Distillate inventories fell by 400,000 barrels last week and are about 13% below the five-year average range for this time of year. Distillate product supplied averaged 5.2 million barrels a day for the past four weeks, up by about 1.1 million compared with the prior week. Distillate production averaged 3.9 million barrels a day last week, down by about 1.3 million compared to the prior week’s production.
For the past week, crude imports averaged 9.1 million barrels a day, up by 1.6 million compared with the previous week. Refineries were running at 94.3% of capacity, with daily input averaging 17.2 million barrels a day, about 413,000 less than the previous week’s average. Exports of refined products fell by 885,000 barrels a day last week to 4.74 million.
According to AAA, the current national average pump price per gallon of regular gasoline is $2.865, down less than a penny from $2.872 a week ago and down three cents per gallon compared with the month-ago price. Last year at this time, a gallon of regular gasoline cost $2.256 on average in the United States.
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Here is a look at how share prices for two blue-chip stocks and two exchange traded funds reacted to this latest report.
Exxon Mobil Corp. (NYSE: XOM) traded down about 0.7%, at $81.74 in a 52-week range of $72.16 to $89.30. Over the past 12 months, Exxon stock has traded up about 1.4%.
Chevron Corp. (NYSE: CVX) traded down about 1.4%, at $120.23 in a 52-week range of $102.55 to $133.88. As of last night’s close, Chevron shares are trading up about 15.9% over the past year.
The United States Oil ETF (NYSEARCA: USO) traded down about 0.5%, at $13.88 in a 52-week range of $9.00 to $15.08.
The VanEck Vectors Oil Services ETF (NYSEAMERICAN: OIH) traded down about 0.9%, at $25.652 in a 52-week range of $21.70 to $29.87.