Why Urban and Target Remain Strong Buys, Recycling Plans for Bearish Trades and More…
Well, I certainly didn’t think I’d be recommending the sale of the Deere (NYSE: DE), and Lindsay (NYSE: LNN) puts so quickly. While I am thrilled that some of you were able to capitalize on the trade recommendation and make a high profit in a short time, this is not my intention with these trade ideas.
I spend considerable time researching and preparing the timing for the trades. To have those ideas here and gone in less than 24 hours is likely frustrating for those of you who were not able to execute the trade in time. Fear not, the market is a beautiful thing in that we can recycle the research (or at least build onto the deep knowledge base I’ve built) so that we can revisit these stocks. Building up the original models and doing the initial research on the industry and company is the most labor intensive part of the process. Hopefully, we can leverage this research with some new trade ideas soon.
I was very underwhelmed by Deere’s earnings, which the company reported Wednesday and am pretty shocked the stock rose so am trying to discern if it’s due to short covering or a shift to the industrials sector.
As I noted last week, the cross-currents in the market are rough. One week ago retail was the sector darling and then a mixed bag of reports (bullish reports from Walmart (NYSE: WMT) and bearish ones from Lowes (NYSE: LOW) and Kohls (NYSE: KSS) sent investors fleeing. Although portfolio name Target (NYSE: TGT) missed earnings slightly, I do believe the company is well positioned for the holiday shopping season. Urban Outfitters (NSDQ: URBN) fell despite reporting an excellent all-around quarter.
It is incredibly frustrating to see our names fall, especially if they report robust earnings. However, this is bear market behavior. An old colleague who is an expert at the tone of the market believes we’ve hit an intermediate low. I expect we will bump around a bit but hopefully see some more bullish action into year end.
In the meantime, I’m working on new trade ideas and will post them as soon as they are ready.
Around the Portfolio:
AbbVie (NSDQ: ABBV) and Roche (NSDQ: RHHBY) secured accelerated approval from the FDA for VENCLEXTA for the treatment of newly-diagnosed acute myeloid leukemia.
SunTrust analyst John Boris said that AbbVie gets ‘another leg of growth’ on FDA approval of Venclexta. The FDA approval for its Venclexta is for the treatment of newly diagnosed acute myeloid leukemia in adults aged 75 years or more. The analyst sees the results from a phase-3 Bellini study evaluating the combination of Venclexta, Velcade, and dexamethasone in relapsed and refractory Multiple Myeloma expected in the first half of 2019 as the next potential catalyst for the program.
BJs (NYSE: BJ) enjoyed a 10% bounce to $22 before giving a little back on Friday. It reported Q3 earnings featuring a $0.06 beat on EPS and upside revenues, which rose +4.4% to $3.22 billion vs. $3.16 billion consensus. Management stated that it is “still in the very early stages of its transformation and [has] significant opportunities ahead.”
Carbonite (NSDQ: CARB) acted better than the market partly due to a tech bounce and partly due to the news that the company approved a $50 million share repurchase program.
To illustrate how unforgiving this market is, Target got walloped 16% on a slight earnings miss (revenue met expectations). Investors freaked out over weaker product margins and slightly elevated inventory levels. As a reminder, Thanksgiving fell earlier this year than last, requiring retailers to bulk up with extra merchandise earlier than the prior year.
I see the sell-off as a significant overreaction. While management did a poor job of communicating just how much investment is necessary for smooth digital and curbside order fulfillment, the company is making the right investments and is reaping the rewards of investments in merchandise designers with its fresh and unique holiday product lines. I also believe the retailer will be a big beneficiary of toy purchases, which do not begin in earnest until post-Thanksgiving.
Target is currently is trading at a 2019 P/E multiple of ~12x, well below its peer group despite the solid results and forecast. Other retailer P/Es are as follows: Costco (NSDQ: COST) at ~28x, Dollar General (NYSE: DG) at ~16x, Walmart at ~20x, and Amazon (NSDQ: AMZN) at ~61x.
Barron’s magazine noted that bargain hunters should capitalize on this dramatic price drop. Even Walmart’s ex-CEO praised Target’s toy positioning when on CNBC’s Squawk Box.
The retail sell-off even hurt Urban Outfitters who reported a fabulous quarter all around. Earnings came in at 70c, 10% higher than consensus 63c and revenue was $973.5M, consensus $968.4M. Inventory on a per store level was flat and all divisions of the company (Urban Outfitters, Anthropologie and Free People), showed positive same-store sales.
Some analysts lowered their targets on Urban due to difficult compares. This thinking strikes me as ridiculous. The comparisons are nothing new, it is no surprise that last year’s numbers were strong in the fourth quarter. Each analyst commended the company on terrific execution but worried the holiday season might not live up to expectations. I still like the stock but do realize the calls are down significantly from my recommendation price. They do not expire until January, so I am giving them a bit of room this week but will be watching them carefully with the chance of selling them and rolling into a further out expiration date.