The Most Profitable Business

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Kylie Jenner might be the youngest self-made billionaire in the history of the world. She is not even 21 but she has managed to leverage her social media following and Internet tools like Shopify to build a highly profitable business. She sells makeup. Her company Kylie Cosmetics has generated more than $600 million since its launch two years ago. Forbes has an interesting overview of her business.

What interests us more as investors is how we can participate in this high-margin, high-growth makeup business? There are several cosmetic plays available to public investors – ULTA, ELF, AVP, LVMUY (which owns Sephora).

The price action in ULTA is the only one that is catching my attention at this point. After going from $5 per share in 2009 to $300 in 2017, ULTA has pulled back about 20% and it might be setting up again.

ULTA is not just a pure momentum play. No long-term trend can survive on just rising market expectations. Long-term price appreciation requires serious earnings growth. And ULTA has the numbers. ULTA had earnings per share of 1.90 in 2012. This year, it is expected to make 8.40. In 2020, it is anticipated to gain close to $13 per share. It is currently trading at about 20X its 2020 expected earnings, which is a reasonable valuation for a company that grows 30% per year.

ULTA is working on a new base and it needs some time to set up properly. A breakout above $260 might trigger another momentum move higher. I don’t own any shares of it at the moment.

Momentum Monday – Another Sector Rotation

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Bull markets are defined by constant sector rotation. Large-cap tech stocks like NFLX, AMZN, and FB started their usual pre-earnings rise last week. So far this week, we are seeing a rotation into the so-called “old-economy” sectors like financials, transportation, energy, and industrials.

We take a dive into the stocks that define the Internet in the U.S. and most of the world – TWTR, FB, NFLX, SQ, SHOP, PYPL, V, GDOT, and share some new ideas.

Disclaimer: everything on this show is for informational and educational purposes only. The ideas presented are not recommendations to buy or sell stocks. The material presented here might not take into account your specific investment objectives. I may or I may not own some of the securities mentioned. Consult your investment advisor before acting on any of the information provided here.

What’s Wrong with SBUX?

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Starbucks has tripled its earnings since 2011 and yet its stock is trading near 3-year lows. It has underperformed 88% of all stocks and ETFs in the past year. What’s wrong with it?

Last week, Starbucks announced that it will close 150 of its underperforming stores in heavily penetrated areas. The next day, SBUX gapped down and it has been in a falling mode ever since.

150 is a drop in a bucket. Starbucks has more than 27,000 stores worldwide and it regularly closes about 50 a year. Then why the fierce market reaction?

There are two major ways a profitable company’s stock can appreciate:
a) Earnings growth
b) Multiple expansion – when the market is willing to pay a higher multiple for a company’s earnings. And by multiple, obviously, I mean P/E or a Price to Earnings ratio.

P/E reflects the market’s expectations about the near-term future of a company. SBUX is currently trading with a P/E of 21, which is its lowest multiple in the past 5 years.

The market is forward-looking and apparently, it has lost faith in the ability of Starbuck’s management to continue to grow at the same pace.

This is not an actionable post. I imagine a pullback near $40 will attract the attention of many value-oriented dip buyers because Starbucks is still a cash-printing machine and one of the most recognized brands around the world. They will probably figure out a way to jump on the current taste trend and offer better variety and organic options. They certainly have the money to acquire chains that are excelling in those attributes.

Buying on weakness is not my cup of coffee. I rather buy stocks that break out to new 52-week highs from solid bases. Risk management is a lot easier when I trade in the direction of the trend.

Momentum Monday – Summer Trading

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The market environment has certainly changed in the past couple of weeks. We went from a market, where almost all breakout led to a quick 10-30% move to a market with many failed breakouts.

Many Chinese Internet stocks are already down 10-20% from their recent highs and trading near levels of potential support. It will be interesting to see if dip buyers start to step in.

The small-cap biotech etf, XBI tried to break out a couple weeks ago, but the weakness in the general market pulled it back. Nevertheless, we are starting to see some decent long setups in the biotech space.

Some of the tickers we cover: SPY, TSLA, SBUX, XBI, SEDG, SFIX, PETQ, TRUP, etc.

Disclaimer: everything on this show is for informational and educational purposes only. The ideas presented are not recommendations to buy or sell stocks. The material presented here might not take into account your specific investment objectives. I may or I may not own some of the securities mentioned. Consult your investment advisor before acting on any of the information provided here.

Why Are Financial Stocks So Weak?

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I keep getting the questions “why are financials so weak” and “shouldn’t bank stocks be outperforming in a rising interest rate environment”?

Not all rising interest rate environments are good for financials. Banks tend to borrow on the short-end of the yield curve and lend on the long end. Their margins expand when long-term interest rates rise faster than short-term interest rates. The opposite has been happening in for most of 2018. In fact, the 10-2-year yield spread has been declining since 2014.

There are many other factors that impact financials’ margins. For example, if you look at JPM’s chart below, you will notice that the decline in the 10-2-year yield spread hasn’t really affected their profitability. JP Morgan’s earnings have increased by 50% since 2014. For the same period, its stock has appreciated 79%, not counting the dividends.

Overall, financials as a group have been showing relative weakness for most of 2018. With a relative strength of 52, the SPdr Financial ETF, XLF is right in the middle of the stack. $24-25 seems like a logical level of potential support. A move above 28.50 would be a bullish development.