PayPal (NSDQ: PYPL) Delivers, Why the Truckers Should Be Sold and Market Sentiment Suspicion
It’s been another busy week. As promised, the trading activity is picking up. The volatility makes holding bullish and bearish positions difficult. Bullish positions, for obvious reasons, as sentiment inspires more selling but bearish ones too, for fears of a big snap rally.
Market sentiment is very negative right now, and despite many indications that earnings growth is slowing, an abundance of bearish thinking can swing the market upwards.
According to the latest AAII Sentiment Survey, bearish sentiment is at 35%. This measure is a slight decline from the prior week but is above the 30% average. This is the third time bearish sentiment has risen above 33% for two weeks in a row.
The other two times were March 28–April 11 and June 27–July 4. Both of those periods represented interim lows in the market. Seeing how roughed up so many stocks have been during this downturn, a snap-back, if it is in the cards, will inspire some significant short covering.
I don’t have a crystal ball to know when that might happen but I am more vigilant in selling losers and taking options gains when they present themselves.
You likely saw that I recommended selling the trucking group this morning. As a whole, the group trades at extremely low valuations. Longer-term holders can take a bit of solace in this fact, but this particular stock market has no regard for low valuations. I have a list a mile long of “cheap” stocks that get cheaper every day.
I have been waiting for a bounce to sell these names on but it has not happened. To limit losses, I suggested selling Old Dominion (NSDQ: ODFL), SAIA (NSDQ: SAIA) and Werner (NSDQ: WERN) this morning.
In the same vein of growing capital, I suggested selling the Armstrong World (NYSE: AWI) puts this morning for a 35-40% gain. These puts moved up quickly with the market sell-off and despite a December expiration, would lose value quickly if the stock moves up.
I did recommend keeping the Griffon (NYSE: GFF) puts, however, due to its abysmal numbers. It has extremely high debt levels and very low-profit margins, a dangerous combination.
If a company has a lot of debt, the stock seems to have no hope of rising. I am searching for more highly levered stocks on which to make bearish bets. Leverage is the market’s term for measuring how much debt a company holds. It is typically measured by dividing net debt (debt less cash) by the company’s trailing 12-month EBITDA. EBITDA is the term for earnings before interest, taxes, depreciation, and amortization. It is considered a marker for the amount of cash a company can generate.
A company like Griffon has a leverage ratio of 7.5x. This ratio means it would take 7.5 years for it to pay off all its debt if it used ALL of its cash flow to do this. This level is one of the highest I’ve seen and puts the company in a precarious position as interest rates rise.
Rating agencies like Moody’s and Standard & Poor’s use leverage levels to assess the possibility of default. Typically a level above 4 or 5 is considered very risky and a level below two required to gain investment grades status.
Around the Portfolio:
AbbVie (NYSE: ABBV) is trading lower due to worries regarding European discounts to its Humira product. It should be no surprise that a generic product is being launched in Canada. Part of my recommendation is because I think the company’s success with its new hepatitis drug, Mavyret, will reduce its reliance on Humira.
The company announces earnings on November 2. Despite the loss in the stock, I’d like to wait it out for earnings to see if the good news on Mavyret will lift it.
Armstrong World and Griffon sold off with many other housing-related stocks as news of a home building slowdown continued to roll in.
For the week, mortgage applications declined 7.1%, and housing starts for September fell 5.3%. The soft data compounds the worry about the pace of growth for homebuilders and their suppliers.
BJ’s Wholesale (NYSE: BJ) was initiated with a Perform at Oppenheimer. I couldn’t get my hands on the full recommendation but found his commentary listed in various news sites to be mixed. He thinks the company will continue to post positive comp sales but believes growth will be below other warehouse peers.
I disagree and believe BJ’s decision to increase its toy selection by 20% and to offer free shipping to members on toy purchases will boost comps materially due to Toys R Us’s exit from the toy market.
NXP Semi (NSDQ: NXPI) was upgraded to Buy from Neutral at Goldman but had its price target cut from $106 to $85. Note that $85 is well above the stock’s current levels but below my $117 target. Analyst Toshiya Hari said the stock is now “sufficiently discounted” relative to history and peers to warrant a constructive view. The analyst believes NXP’s valuation discount to peers points to an attractive risk/reward profile and sees the potential for margin upside if management can execute.
PayPal (NSDQ: PYPL) delivered some good news last Thursday. Earnings of $.58 grew 26% and beat estimates. I believe most importantly; the company reported that the value of transactions done via its Venmo (person to person payments) app grew a remarkable 78%.
PayPal does not quantify the fees collected from Venmo, but it has just recently begun charging for some Venmo capabilities like same-day access to transferred funds. The company received fees from 24% of its Venmo user base, up from 17% in the prior quarter and 13% in May. I think the “monetization” of this Venmo base is the key to PayPal’s future success.
With hindsight it seems like I should have recommended some calls going into the earnings report, the volatility in the market made the risk too extreme. Darn, that crystal ball!
Tapestry (NYSE: TPR) took a hit when luxury competitor LVMH reported weak Asian sales on October 11. While Tapestry has some exposure to China, revenue from that geography made up 12.5% of total sales (its second smallest geography) which is the slowest growing region for the company. I expect strong domestic sales and its turnaround of Kate Spade to propel the stock.
Morgan Stanley subsequently upgraded the stock on Wednesday. Analyst Kimberly Greenberger upgraded Tapestry to Equal Weight from Underweight following a 20% pullback in the shares from their high hit on April 27. She sees a revenue opportunity at Kate Spade and thinks that its struggling Stuart Weitzman brand “may not move the needle” given its small size. Greenberger has a $44 price target on Tapestry shares.
An analyst at Needham, also upgraded the stock (with a more reasonable $50 target, although my target is much higher at $68). He noted the sell-off as being overdone on the LVMH news.
Werner first rose after fellow trucker JB Hunt (NSDQ: JBHT) reported strong earnings. Yet the bounce was short-lived and was not sustained despite Werner reporting quite respectable numbers itself.
As I noted above, I’ve lost patience with the trucking group. I sadly missed a great exit point in mid-September when the stocks had gains between 1% and 14%.