Stocks were indicated to open sharply higher on Brexit hopes and U.S./China trade hopes, and earnings season will kick off next week. The bull market is now well over 10 years old, and volatility has been elevated despite strong double-digit percentage gains in 2019. Now is a time that investors need to be considering what changes they should be making for their portfolios and assets heading into late 2019 and as 2020 approaches.
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We have provided these calls in a quick-hit summary for easy reading, and additional comments and trading data have been added on some of the calls. The consensus analyst price targets and other valuation metrics are from the Refinitiv sell-side research service.
These are the top analyst upgrades, downgrades and initiations for Friday, October 11, 2019.
Alteryx Inc. (NYSE: AYX) was named as the Bull of the Day at Zacks, which said that this big-data analytics engine is growing sales at 80% from companies drowning in dark data. Its shares most recently closed at $109.78, with a consensus price target of $139.75.SPONSORED BY TOYOTA.COM
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Apple Inc. (NASDAQ: AAPL) was reiterated as Outperform at Wedbush Securities, but the firm raised its longstanding $245 price target up to $265 as the battle against Disney and Netflix begins and based on the sum of the parts in the businesses as a whole. Apple closed up 1.4% at $230.09. It has a 52-week range of $142.00 to $230.44 and a consensus target price of $229.28.
Canopy Growth Corp. (NYSE: CGC) was downgraded to Hold from Buy at Jefferies. The stock closed down 10.6% at $20.42, in a 52-week range of $20.42 to $59.25.
Clarus Corp. (NASDAQ: CLAR) was started with a Buy rating and an $18 target price at Jefferies. It closed up less than 1% at $11.26 and has a 52-week range of $8.56 to $15.10. The consensus analyst target is $15.90.
CrowdStrike Holdings Inc. (NASDAQ: CRWD) was downgraded to Sell from Neutral with a $66 target price at Goldman Sachs. It closed down 2.7% at $61.41, in a 52-week range of $51.61 to $101.88. The consensus target price is $89.76.
Deckers Outdoor Corp. (NYSE: DECK) was raised to Buy from Hold with a $170 target price at Stifel. Shares closed flat at $143.73, in a 52-week range of $102.97 to $180.76. The consensus target price is $176.08.
Delta Air Lines Inc. (NYSE: DAL) was downgraded to Hold from Buy at Argus. Delta closed down 1.5% at $53.10. It has a 52-week range of $45.08 to $63.44 and a consensus target price of $67.00.
Fifth Third Bancorp (NASDAQ: FITB) was raised to Buy from Neutral at Merrill Lynch. It closed up 2.1% at $26.18, in a 52-week range of $22.12 to $30.20 and with a consensus target price of $30.80.
InterContinental Hotels Group PLC (NYSE: IHG) was started with a Hold rating at Deutsche Bank. The shares closed up less than 1% at $59.37. The 52-week range is $53.57 to $71.02, and the consensus target price is $69.20.
China reported Friday that the country’s gross domestic product growth for the third quarter of the year was 6%. Not since the first quarter of 1992, the first quarter for which the data is available, has the country reported such slow GDP growth.
In the second quarter of this year, the country’s GDP grew by 6.1%. Economists were expecting third-quarter growth of 6.2%. China’s trade war with the United States gets most of the blame.
Economist Martin Lynge Rasmussen, China economist at Capital Economics, told CNBC that it will take time for China’s exports (which were down 3.2% in dollar terms year over year in September) to recover:
Looking ahead, exports look set to remain subdued in the coming quarters. Meanwhile, import growth has slowed sharply in recent quarters and now looks unusually weak relative to economic growth. A partial rebound in headline import growth is therefore likely in the near term.
How bad is the slowdown in Chinese imports? Nearly 2.5-times worse than the slowdown in exports? Third-quarter imports dropped by 8.5%, according to a Reuters report, and the country’s total September trade balance reached $39.65 billion, more than 10% higher than forecast.
China has tried to offset this lack of import demand by injecting more money into the country’s banking system. That is not helping a lot because there’s not much demand for profitable infrastructure projects to spend the funds on. A Sichuan Development Guidance Fund official told the Financial Times, “There are not many economically viable projects for us to take on. We have plenty of bridges and roads already.”
Toll roads and bridges are profitable; sewage and water treatment plants less so, or even money-losing. That leaves Chinese lenders with a choice between slowing down investment, further constraining an already slowing economy, or start funding riskier projects, an option the central government itself has tried to stop for several years.
According to the October update to the International Monetary Fund’s World Economic Outlook, Chinese import growth lags about eight percentage points below the country’s real economic growth and well below import growth in the advanced economies (see chart 3 below).
Source: International Monetary Fund
What effect would a rebound in imports have on Chinese economic growth? Economist Brad Setser at the Council on Foreign Relations points out that lower investment means China will import less and that the problem is compounded by fewer exports also contributing to lower growth. Overall, the fall in Chinese exports due primarily to the U.S. tariffs was about 2% over the past year. Chinese imports have been shrinking by that amount annually for a decade.
In other words, China’s economic slowdown would benefit more from policies that encourage more imports, not tariffs that raise the prices of consumer goods and limit demand for imports. A secondary benefit, of course, would go to foreign exporters of goods Chinese consumers wish to buy.
Another takeaway is that an end to the U.S.-China trade war won’t fix China’s growth troubles, given the lack of profitable domestic investment opportunities. The International Monetary Fund forecast Chinese growth at 6.2% for this year and 6.0% for next year in its latest World Economic Outlook, but that assumes more investment, which implies more risk. That approach is not working now and has little chance of working any time soon as it is presently employed. China could be in for a tough slog.
Daniel Cullinane CPA
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Copyright © Daniel Cullinane CPA.
BANK OF AMERICA.
Bank of America Corp. (NYSE: BAC) reported third-quarter 2019 results before markets opened Wednesday. The big bank reported diluted earnings per share (EPS) of $0.56 on revenue of $22.8 billion. In the same period a year ago, it reported EPS of $0.66 on revenue of $22.93 billion. Third-quarter results also compare to the consensus estimates for EPS of $0.51 on revenue of $22.79 billion.
The bank’s EPS includes a $0.19 per share impairment charge of $2.1 billion related to a joint venture with Fiserv Inc. (NASDAQ: FISV) in its merchant services business.
Net income fell from $7.2 billion in the same period a year ago to $5.8 billion (including the impairment charge) while net interest income rose by 1% ($126 million) and non-interest income dipped by $43 million. Income tax expense dropped from $1.83 billion to $1.08 billion. Non-interest expense rose by $2.16 6illion to $15.17 billion (including impairment charge).
Credit loss provision totaled $779 million in the quarter, up by $63 million compared with the same period in 2018. In the global banking division alone, credit loss provision rose from a gain of $70 million a year ago to an expense of $120 million. Bank of America said the increase was “driven primarily by the absence of 3Q18 reserve releases, primarily from energy exposures.”
Net charge-offs decreased by $121 million to $811 million, and the net charge-off ratio dropped from 0.40% to 0.34% year over year.
CEO Brian Moynihan said:
In a moderately growing economy, we focused on driving those things that are controllable. We made continued strong investments in our capabilities to serve customers, more relationship management teammates, more and refurbished branches and offices, and more digital capabilities, all while core expenses are flat. Our client activity, the expansion of our client base, and our ability to gain market share across most of our businesses in the quarter, all reflect responsible growth.
The bank did not provide guidance in its earnings release. The consensus estimate for fourth-quarter EPS is $0.70 on revenues of $22.52 billion. For the full 2019 fiscal year, the consensus calls for EPS of $2.65 on revenues of $91.6 billion. Consensus estimates for both annual EPS and revenues have declined since the end of the second quarter.
The dissolution of the bank’s joint venture was announced in late July, and even though the charge came in at the high end of the range, investors had plenty of time to adjust. Add to that Warren Buffett’s apparent interest in boosting his ownership of the shares beyond the 10% limit for passive investors. Bank of America shares added 2% on Tuesday after that report broke.
Shares traded up by more than 2% in the premarket Wednesday to $30.40. The current 52-week range is $22.66 to $31.17. Analysts had a 12-month consensus price target of $32.78 before results were announced.
WeWork is in the midst of negotiations to get new financing. Based on some reports, it will run low on money toward the end of the first quarter of next year. JPMorgan reportedly is leading the discussion. Softbank, which is already a large shareholder in WeWork, may invest again. Observers have said that WeWork will need to slow its growth and cut staff to move toward profitability. Management may want to close offices if it can.
WeWork says it has 845 offices either open or “coming soon.” The locations span 123 cities. Like companies in the retail industry, some locations perform much worse than the average. Firms like Gap and J.C. Penney have abandoned many stores to save money. The issue with shrinking WeWork is hidden in the leases it has for each location. They likely vary substantially from office to office and may vary most from country to country. WeWork had more leverage in lease negotiations in some places, as is the case with any multiple location tenant.
WeWork probably has two sets of locations likely to be pruned. Some cities have a large number of WeWork offices, perhaps too many. This will become a larger problem when a recession begins. For example, WeWork has 62 locations in the New York area. If there is a sharp economic downturn, it is almost certain that not all those locations will be fully occupied. Some of them are only a few blocks from others, which could be critical to consolidation.
The other hurdle WeWork probably has is the support of cities that only have one or two offices. These cannot share management who run several locations. This likely drives up cost per office. For example, WeWork only has two offices in Western Australia and only two in South Africa.
WeWork management has to be combing through locations for profit potential. Yet, can management break leases in underperforming areas or those with poor forecasts? That will be part of whether WeWork can improve overall margins.
If any technological advancement has become 100% ubiquitous for most Americans it is the internet. We use it daily for a multitude of tasks, including everything from payments to ordering food, to travel, to checking the weather, to a million other things. Because of the huge adoption of the internet, digital advertising has emerged as the single most innovative breakthrough in the advertising arena since the dawn of TV.
A new Jefferies research report remains very positive overall on the internet and the prospects going forward but also remains selective on the top companies in the sector they like going into the third-quarter earnings prints. The analysts, led by Brent Thill, are very bullish on these four top picks before earnings, and all are rated Buy at Jefferies.
The search giant continues to expand and, while search is king, the cloud presence is growing fast. Alphabet Inc. (NASDAQ: GOOGL) is a global technology company focused on key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. It generates revenue primarily by delivering online advertising and by selling apps and contents on Google Play, as well as hardware products. The company provides its products and services in more than 100 languages and in 190 countries, regions and territories.
Alphabet offers performance and brand advertising services. It operates through Google and Other Bets segments. The Google segment includes principal internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome and Google Play, as well as technical infrastructure and newer efforts, such as virtual reality.
Back in the fall, Google outlined expanding capabilities to facilitate commerce, capitalizing on the “treasure trove” of data provided by seven different properties, each with at least a billion active users (Android, Search, Chrome, Maps, Play, YouTube and Gmail). Smart shopping campaigns leverage machine learning to make sense of touch points along the consumer purchase path, including better offline attribution capabilities (locally oriented searches up 200% over past two years) and improved purchase conversion rates (20% on average).
Advertising remains a huge growth area, and the analysts noted this:
Industry ad spending remains healthy as we noted at the Advertising Week conference in September. The company keeps pushing the envelope with advertising surface on YouTube, Google Maps (including travel planning), and local initiatives. We remain positive on Alphabet thanks to attractive valuation, healthy digital advertising market, and call options such as YouTube, Cloud, hardware (expanded product line heading into the holidays), and Waymo (Long-term value ~$250 billion).
The Jefferies price target for the shares is $1,500, and the Wall Street consensus target is $1,343.80 The shares closed Tuesday at $1,242.24.
This online travel leader could be poised for a potential big third-quarter report. Expedia Inc. (NASDAQ: EXPE) is the leading internet travel pure-play with exposure to online travel in the United States, Europe and Asia. The company’s portfolio of brands includes Expedia, Orbitz, HomeAway, Travelocity, Hotels.com, Trivago, Egencia, Hotwire, Wotif, Venere and Classic Vacations.
Top analysts see it as a story of improving execution, and they also think that the company finally is starting to match Priceline’s growth metrics. The company has raised the dividend and is buying back stock, and both are shareholder-friendly actions.
Jefferies noted this when discussing the outlook for the third-quarter results:
We expect investors to focus on Vrbo and trivago, looking for improving trends, along with potential commentary on expectations beyond fourth quarter 2019 against softening global macro trends. We believe that continued strength in Core OTA, return to growth for trivago and favorable exposure should help top-line growth in the second half while operational streamlining and remaining marketing spend efficiencies should still help margins.
Investors receive a 1% dividend. The $170 Jefferies target price is well above the $149.10 consensus price target. Expedia closed Tuesday at $137.25.
Johnson & Johnson (NYSE: JNJ) was raised to Outperform from Market Perform with a $155 price target at Bernstein. The stock closed flat at $129.06. It has a 52-week range of $121.00 to $148.99 and a consensus target price of $149.35.
nVent Electric PLC (NYSE: NVT) was started as Buy with a $27 price target at Gabelli. It closed flat at $19.20 and has a 52-week range of $19.04 to $28.49. The consensus target price is $23.67.
Perrigo Co. PLC (NYSE: PRGO) was raised to Buy from Hold at Argus. Shares closed flat at $52.00, in a 52-week range of $36.28 to $75.42 and with a consensus target price of $52.89.
Rio Tinto PLC (NYSE: RIO) was raised to Buy from Hold at Jefferies. Shares closed up 2.7% at $50.90, in a 52-week range of $44.62 to $64.02. The consensus target price is $54.61.
Roku Inc. (NASDAQ: ROKU) was raised to Buy from Hold with a $155 price target at Jefferies. Roku closed down 1.4% at $116.13, in a 52-week range of $26.30 to $176.55. It has a consensus target price of $134.94.
Square Inc. (NYSE: SQ) was started as Reduce with and assigned a $49 target price at Nomura/Instinet. Susquehanna gave Square the opposite treatment, raising its Neutral rating to Positive. The stock closed flat at $62.03. It has a 52-week range of $49.82 to $83.20 and a consensus analyst target of $78.88.24/7 Wall St.
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Terex Corp. (NYSE: TEX) was downgraded to Underweight from Equal Weight at Barclays. Shares closed up about 2% at $23.81. The 52-week range is $22.84 to $38.57, and the consensus target price is $30.71.
Tilray Inc. (NASDAQ: TLRY) saw its price target slashed to $25 from $57 at Jefferies. Tilray closed down 13.5% at $20.65. It has a 52-week range of $20.59 to $178.85 and a consensus target price of $48.58.
Twilio Inc. (NYSE: TWLO) was started as Outperform with a $135 target price at RBC Capital Markets. It closed down less than 1% at $110.29, in a 52-week range of $62.43 to $151.00. The consensus target price is $150.80.
Whiting Petroleum Corp. (NYSE: WLL) was named as the Zacks Bear of the Day stock yet again. The firm said that the exploration and production companies are hitting new lows and this may finally be the bottom. Shares last closed at $6.86, with a consensus price target of $17.68.
Thursday’s top analyst upgrades and downgrades included American Airlines, Apple, Bed Bath & Beyond, Box, Cisco, HP, Kroger, Netflix, PG&E, UnitedHealth and many more.
If any subsector in technology is cyclical, it is the semiconductors. Toss in a massive trade dispute that has really muddied the waters for the chip stocks over the past year, and many investors have decided that the risks are just too great. The reality is that despite the numerous daunting issues the semiconductors have encountered, the Philadelphia Semiconductor Index (SOX) has traded in a bounded range for over six months and looks to be breaking out of a quadruple top pattern.
While the technical data may give some investors more comfort, the bottom line is that while earnings could be solid for the third quarter, fourth-quarter guidance could be sluggish, and that could take its toll on the sector.
In a set of new research reports, the Merrill Lynch analysts make the case that semiconductor stocks could move higher on solid earnings, seasonal strength and hopes for a 2020 recovery. They also point out that from 2010 to 2018, the fourth-quarter and first-quarter returns for the SOX index returned 19% versus 2% for the S&P 500.
The analysts have four large cap companies selected as top picks, and all make sense for aggressive growth accounts looking to add alpha over the next six months and beyond.
This stock could very well continue to benefit from an increase in information technology and upcoming 5G spending. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal-processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide. It offers signal-processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.
The company has among the best end-market exposure, with high communications and aerospace/defense market exposure, in addition to offering investors a powerful 5G content growth story. Plus, acquisitions over the past few years like Linear Technology and Hittite Microwave should provide revenue and additional cost synergies that are still coming.
Investors receive a 1.95% dividend. The Merrill Lynch price target for the stock is $130, and the Wall Street consensus target is $117.77. The stock closed Wednesday trading at $110.59 per share.
This sector leader made a huge purchase in the spring. Nvidia Corp. (NASDAQ: NVDA), a company that rarely has grown through acquisitions, bought Mellanox and paid a whopping $6.9 billion in cash. The deal has come under some scrutiny lately as some feel that the trade war and other issues could sidetrack the transaction, but for now it is still on.
Mellanox’s BlueField intelligent network adapters are another version of data center co-processing acceleration. Top Wall Street analysts see the combination of Nvidia and Mellanox as a definite threat to Intel’s data center CPU dominance of workloads. This indirect competition could ultimately be a problem for Intel shareholders.
Merrill Lynch feels that the third quarter could provide a solid print but note that fourth-quarter guidance, weak global growth and trade issues are still an overhang for the company.
Investors receive a 0.33% dividend. The $250 Merrill Lynch price target compares with the $193.10 consensus target. Shares closed Wednesday at $194.21.
This is still considered a top play for investors looking for a chip stock with Internet of Things (IoT) exposure, and it is a member of the Merrill Lynch US 1 list. NXP Semiconductors N.V. (NASDAQ: NXPI) became the fourth largest semiconductor company in the industry after it merged with Freescale in late 2015. It is also important to note that the combined company is the number one supplier in auto semiconductors with a 14% share, as well as the number one supplier in global microcontrollers and a dominant supplier in mobile payments.
NXP continues getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile phone charging, increased cellular data consumption and even LED lighting. With shares trading at a solid discount to peers, some Wall Street analysts are very positive on the faster earnings growth potential relative to its competition.
Merrill Lynch has a $125 price target, while the consensus target is $117.77. Shares closed Wednesday at $108.61.
This classic old-school chip tech company offers solid value at current levels and is a great pick for more conservative investors. Texas Instruments Inc. (NASDAQ: TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors to high-performance analog components, to digital light-processing technology and calculators.
Some 65% of the company’s sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets. While the stock was hit hard recently as it is a big Apple supplier, the long-term outlook for this venerable leader makes it a safer bet for accounts with less risk tolerance.
In addition, the shift toward a parallel processing and IoT computing paradigm translates to secular demand growth for the company’s integrated circuits sold into IoT devices, which will ship in the tens of billions of units. Continued consolidation of analog industry translates to better pricing and higher gross margins, and the firm’s superior cost structure should translate to higher gross margins and share gains.
Investors receive a 2.78% dividend. Merrill Lynch has set a $150 price target. The consensus target is $129.37, and shares closed at $129.50.