Rumors of a More Deals for PayPal (NSDQ: PYPL), Urban (NSDQ: URBN) Trounced Despite Strong Sales and more…

One of my favorite Wall Street Journal writers had some good advice for the stock market last week; close at 10:30 AM EST each day. As I noted last week, each gap up in the market is met with increasingly aggressive selling as the day wears on.

A large gap up on Tuesday and Wednesday morning resulted in flat to down days, and mid-day rallies were sold into as well.

The damage for the week was a 1.3% loss in the S&P 500. Smaller stocks fared worse with the Russell down 2.6%. The Russell is down 19% since its year-to-date high which it hit in early September. The S&P, which peaked about one month later is now down 11% since that level.

The late day selling is indicative of mutual fund redemptions. Most funds get those orders throughout the day and settle them after the close. If the funds do not have enough cash on hand to meet redemption requests, they must sell some positions to fulfill those sell orders.

According to Lipper, investors pulled $46 billion out of stock funds last week. The American Association of Individual Investors, which tracks investor sentiment, reported its latest reading which shows the lowest bullish numbers since May 2016. A mere 21% of individual investors are bullish right now, a 17 point drop from the prior reading and versus a historical average of 38.5%.

I tell you this not to cast a pall over your holiday festivities but to acknowledge how ugly it is in the market right now and to offer some hope for future market performance.

While the ransacking our portfolio is suffering right now is painful, I take some solace in the fact that it appears to me that most of the stock-related issues I have been worrying about (tougher earnings growth comparisons due to the tax cut, tariff shocks to the system and higher rates) are pretty widely known. Many individual stock valuations reflect these fears and more.

I’ll continue to offer bearish trades where I think we have a reasonable catalyst and dip my toes into more long positions.

It is particularly painful to see stocks wilt when their fundamentals meet or beat expectations. Urban Outfitters (NSDQ: URBN) is the most obvious example recently. I offer more commentary on its recent numbers below but am quite pleased with the guidance the company provided last week.

There are several market-moving events this week.

On Wednesday the Fed will likely announce a widely-expected bump to interest rates. More important and less certain is its outlook for future increases. Recent economic data may nudge the Fed to less hawkish (i.e., less likely to raise rates) stance. I believe this would be welcome news to the market.

Steelcase (NYSE: SCS) reports earnings Tuesday, December 18, after the close.

FedEx (NYSE: FDX), a stock not in our portfolio but considered a bellwether for transportation stocks, also reports earnings on Tuesday afternoon. Oddly, while portfolio holding Air Transport Services Group (NSDQ: ATSG) benefits partly due to shortcomings at FedEx, the stocks tend to trade together.

Around the Portfolio:

AbbVie (NYSE: ABBV) approved a $5 billion repurchase plan. At current prices, this equals 58 million shares which, if all repurchased, would boost earnings per share by 3%.

An analyst at influential firm MoffettNathanson predicted last week that PayPal (NSDQ: PYPL) might expand a relationship with Facebook (NYSE: FB) that could potentially add $1.5 billion in annual sales.

“We believe it is quite likely that Facebook and PayPal announce a significant expansion of their partnership sometime in the coming months—an expansion that, in our view, could be a game-changer for PayPal,” she wrote.

I continue to love the fundamentals of PayPal and think the stock could enjoy a significant bounce once the market gets its footing.

Robust sales at DSW Inc. (NYSE: DSW) bodes well for sales at Steven Madden (NSDQ: SHOO). DSW is a big customer of SHOO’s and reported robust sales in all product lines. Margins held up as increased markdowns were not needed to move inventory.

Urban Outfitters (NSDQ: URBN) reported in its 10-Q filing that so far during Q4 comparable Retail segment net sales are mid-single-digit positive. This number falls squarely in line with the company’s guidance that fourth-quarter comps would be mid-single digits. While management did not explicitly quantify this guide, its comment that sales growth would follow the pattern seen in the first three quarters of the year implies this growth.

The stock is well below the $43 strike price associated with our January calls. I had hoped to sell our January calls at a small loss and roll or purchase further out calls. Unfortunately the sell-off this week leaves the calls trading at pennies. I’ll be watching closely and looking for a chance to issue this trade alert. At this juncture, I don’t think it’s worth selling for such a low price.

Stock Talk

George McMillion

George McMillion

Thanks Linda, it is a nervous time for sure. Going to add PYPL to portfolio.

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