A Crossroads for the Market, Why ATSG Should Soar and more…

The market averages finally took a hit last week but underneath the surface, it’s been looking pretty messy to me.

We’re at a tricky crossroads here. Rates are ticking up to levels that might just start to crimp corporate and consumer borrowing (or worse, hurt either party’s ability to spend due to variable rates) and tariffs and this year’s tax cut throw a wrench into a predictable trajectory for earnings growth.

In addition, certain secular issues, like increased vigilance on online privacy, are taking a bite out of the prospects for Facebook and Google, names the market relied on for strength and leadership.

The question is where the U.S. is in its economic cycle.

Are we still in the mid-phase when industrial and basic material stocks outperform? The lethargic behavior of my trucking recommendations tells me otherwise. Despite what appears to be an incredibly strong secular boost from continued online shopping and a diminished supply of truck capacity, the group gets hit with sell orders on each bounce.

I’ve been tempted more than once to sell these names as they’ve yet to deliver trading profits but each time I revisit the fundamentals, I decide to wait it out. More on Werner (NSDQ: WERN) below, the poster child for the bull/bear argument on truckers.

If we are indeed in the late-cycle phase of economic growth, stocks like healthcare and staples should be outperforming. Yet these two groups face their own sets of challenges. Healthcare investors must contend with the constant threat of pricing regulation. Consumer staples companies are grappling with less shelf-space at retailers and private label substitution.

While it’s frustrating, I will keep doing what I know best- look for special situation stocks- those with a catalyst to drive them higher or lower. My mantra of focusing on “reasonably” priced stocks isn’t working very well in this market. Cheap stocks keep getting cheaper and I’m spending more time stress testing earnings’ assumptions because many stocks that appear cheap are simply waiting for estimate cuts.

In fact, you may see some buy alerts for stocks that are more expensive on a P/E basis than usual, but I will make sure they still have solid operating metrics.

Lastly, I share your frustration in the lag between my online posting of options trade alerts and the time they arrive via text to you. I am working with the IT people on this end to shorten that lag but am considering sending the alerts before the open with a wider range of price limits.

This may result in some frustration if the options don’t reach the limits but at least subs will know a new direction is suggested and can monitor prices.

Around the Portfolio:

ANI Pharma (NSDQ: ANIP) announced the launch of Candesartan Hydrochlorothiazide Tablets, an authorized generic of Atacand HCT, indicated for the treatment of hypertension. The current annual U.S. market for this product is approximately $20 mln. This is not enough to really move the needle on ANI’s revenue growth but adds to its arsenal of profitable generics.

While the positive cash flow provided by generics is helpful for ANI, it is not the primary reason I like the stock. The company’s development of a generic of corticotropin gel, a $1.1 billion drug with no generic competition, is the trigger I am looking for to move the stock. The company is gearing up manufacturing of the drug and should give an update on the timeline of its launch on its next earnings release. Currently, analysts expect the drug to launch mid-2020.

Air Transport Services Group (NSDQ: ATSG) announced the purchase of Omni Air for $845M.  Omni Air operates a business similar to ATSG in that it flies charters and operates planes under aircraft, crew, maintenance, and insurance (ACMI) agreements. Omni’s fleet includes 13 passenger-configured widebodies – seven 767-300ERs, three 767-200ERs, and three 777-200ERs. These planes are extended range aircraft, capable of flying longer distances and carrying more weight than ATSG’s current fleet.

It adds $430 million in revenues with strong margins and a blue-chip customer base and is expected to close during the fourth quarter of 2018.

BJ’s Wholesale (NYSE: BJ) was resumed with a Buy at Citigroup with a target of $31. Citigroup is one of the underwriters on BJ’s secondary so this is standard procedure. BJ’s management recently noted it will have twice as many toys for sale on its website and boost its in-store toy selection “by as much as 20% this holiday season.” With the demise of Toys R Us, improved toy selection should drive more traffic to the stores.

General Motors (NYSE: GM) and Ford (NYSE: F) saw a lift, albeit not a huge one, due to the signing of the new NAFTA deal. Detroit’s Big Three automakers rely heavily on factories in Canada and Mexico to build cars and trucks for the U.S. market.

I recommended selling the GM calls on the lift.

I am working to find a better way to get text alerts to you on a timely basis. I know the easiest way to get subs lined up for options trades is to send an alert before the open. I can do that, but will not know the best trade price. I am considering issuing sales on fast moving options with a limit price before the market opens. Although this may be frustrating for some if the price is not hit, at least subs will know my thinking and can set up trades before the work day begins.

Steelcase (NYSE: SCS) hosted its  Analysts’ Day. The company reiterated its goal of medium-term organic revenue growth of 5%-7% and an EPS growth rate 2-times the rate of organic revenue growth.

Werner Enterprises first received a buy recommendation at Loop Capital and a $42 target. But later in the week, Wolfe Research downgraded it to underperform.

Wolfe noted a survey indicating lower pricing expectations for the group. The analyst, who also downgraded several other trucking stocks, expects slower volume and pricing growth over the next two years.

I actually agree with the analyst that pricing or rate growth will likely slow. For example, Werner’s revenue per mile rose between 8-14% in the past three quarters. It is unreasonable to expect that rate of growth to continue. I do think that pricing will be stable but disagree that volume growth will slow. Most importantly, I believe that growth in rates and volume will exceed the 7% expected for 2019 estimates.

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