What’s Driving Weakness in the Chemours (NYSE: CC) and NXP (NSDQ: NXPI), PayPal (NYSE: PYPL) Hit the Buy Button and more…
I’m sure it’s not news to any of you that the market hit the skids last week. I’ve been warning that I felt some cracks in the market, but it is so darn tricky to pinpoint the timing. As far as catalysts go, this break seemed to rest solely on the 10-year note breaking 3.2%.
Higher rates hurt stocks in many ways;
- They offer a reasonable alternative to equity holders. If you can earn a guaranteed 3.2% on a bond (a government t-bill is likely to mature at face value), then you might sell some stocks and buy bonds instead.
- They increase the cost of capital for companies that need to borrow money to fund their businesses. This higher interest takes an immediate bite out of earnings.
- Interest rates influence the rate that investors use to arrive at a present value for a stock. This influence is a bit academic but is incorporated into stock valuations. Analysts estimate the future earnings or cash flow of companies for several years out. They must then “discount” those future earnings back into today’s dollars. Higher interest rates lower the present value of those earnings. A lower value on earnings leads to lower valuations on stock prices.
Of course, most of us are not going through these mathematical exercises while our portfolios are in free-fall. We are worried about preserving capital and limiting losses. I find trading most stocks during these tumultuous periods dangerous.
I do, however, believe in booking options gains, which have a limited shelf life, in times of volatility. As an example, I suggested selling of the Allergan (NYSE: AGN) puts last week into the volatility. I still think Allergan has some serious competition coming after its Botox migraine treatment so will be looking for new entry points on a bearish trade.
Unfortunately, I expect our call options in the Chemours Company (NYSE: CC) and NXP Semiconductors (NSDQ: NXPI) to expire worthless this week. There is no action required by holders of these options. They currently hold very little value as they expire at the close Thursday and both strike prices are well above current stock prices.
Professional money managers do not often have the luxury of long-term thinking with their portfolios. Usually, you can find tremendous bargains during market washouts. I have a list of names I’ve been curating and am excited to issue some new trade recommendations this week.
You likely saw my recommendation of PayPal (NSDQ: PYPL) this morning. Although this stock does trade in sympathy with many tech stocks, it’s business is, in fact, finance related. Its Venmo service is on the cutting edge of person to person payments, particularly small sums, which gives the company a viable platform for global micropayments.
PayPal reports this Thursday after the close. Options prices are super inflated due to Increased volatility in the market and the near-term earnings event. Most of the calls are very expensive and are above my risk comfort level. However, many of you are better options traders than me and might choose some near-term calls.
Of course, it is impractical to think the market selling is totally exhausted. I found the “rally” on Friday pretty limp. At several points during the day, I believed the market would close lower. I am mostly concerned with the late day selling which often represents withdrawals of mutual funds.
If investors pull significant dollars out of funds, there will be very few spots to hide with bullish holdings. However, I am on the hunt for stocks that have company-specific catalysts that I expect will propel them higher.
As many of you know, these trade ideas do not always work out exactly as planned but I do my best to keep on top of events and to alert subscribers of news that might change my thinking. Overall, I believe my years of experience as an analyst and portfolio manager will help us find terrific and profitable trade ideas.
I will also be more aggressive in selling stocks where we have had a nice run. It is incredibly frustrating to watch gains like the 30% one in Steelcase (NYSE: SCS) or the 37% one in Steven Madden (NSDQ: SHOO) disappear in two weeks.
As we enter earnings season for the third quarter, the volatility in the market might remain elevated. I am looking for more bearish option positions to help deliver some profits for down periods (and even during up periods if my analysis is correct).
As always, please post questions or comments on the Stock Talk boards. I try to get back to you as quickly as possible.
Around the Portfolio:
Carbonite (NSDQ: CARB) was initiated with a Buy, and a $45 target at Jefferies Analyst John DiFucci noted that the company’s total addressable market, identified as data protection-as-a-service, was at least $4.8B in 2017 and is likely to grow 16% annually to $10.2B in 2022. He believes Carbonite is “positioned for the evolution of the data protection industry” and is best suited to target the segments of the market with the highest growth, like cloud.
The Chemours Company got hit (again), this time on an earnings pre-announcement by PPG Industries (NYSE: PPG), who sells paint and coatings to auto and architectural customers. They blamed the weakness on two things: softer demand from automotive customers and higher cost inflation.
While Chemours does not have any customers more significant than 10% of its revenue, it’s quite likely PPG buys some of its TI02 raw materials from Chemours.
PPG’s stock dropped 9.5% and now sells for a P/E of 15x 2019 earnings.
Chemours, which has less exposure to the auto industry, fell 10% and now sells for a P/E of 6x 2019 earnings.
This reaction doesn’t make sense to me, but right now the market is telling me I’m wrong on the stock. Unfortunately, I expect the calls to expire without any value on October 19, unless something dramatic occurs in the market. I am a bit appeased at the stock’s relative strength on Friday, which gives me some hope the broadscale selling is dissipating in this name.
NXP Semiconductor (NYSE: NXPI) is getting hit on two fronts. As a semiconductor company supplying some auto products, the stock continues to see huge sellers.
The company presented at Deutsche Bank conference on September 13th. An analyst asked CEO Richard Clemmer about the near-term weakness in auto sales. Below is his response:
Richard L. Clemmer, NXP Semiconductors N.V. – CEO & Executive Director 
So I think the right way to think about it is, is sure there’s some impact near term. We think that it’s reflected. It doesn’t have a material impact on our guidance associated with it. And over the intermediate term, when we talk about the 8% to 10% growth rate, we don’t see it having any significant impact.
Steelcase was upgraded to Buy from Neutral at Seaport Global. Analyst Matt McCall gave the stock a $20 price target citing cyclical, secular, and company-specific opportunities. McCall said a “perfect storm” is setting-up from continued top-line momentum in commercial, minimal impact from tariffs and a positive impact from the USMCA trade agreement, EMEA demand, several more quarters of easy comps, and reasonable valuation.
J.C. Penney (NYSE: JCP) extends the term of its consumer credit card program with Synchrony (NYSE: SYF) until January 2027. I am trying to compare the terms of the new agreement with the old, but the details are elusive.
Overall, I see this as a positive. Some of you remember the drop Synchrony suffered when it could not come to terms with Walmart (NYSE: WMT) over its credit card terms, and Synchrony lost the contract to Capital One (NYSE: COF).