|Company||Symbol||Date Sold||Sell Price||Price Now||Today's Change||Gain/Loss Since Sale|
|Capital One Financial||COF||08/18/2016||$68.21|
There’s really nothing wrong with the shares of Capital One Financial (COF) that a stronger U.S. economy, a more confident U.S.consumer, and an interest rate increase–or two–from the Federal Reserve... more
I like biotech’s like Incyte (INCY) with very solid and exciting growth stories. I like Big Pharma drug stocks with strong connections to biotech product pipeline, such as Bristol-Myers Squibb... more
|Update February 20, 2014: It’s always hard to judge the bottom of a cycle—and it’s certainly hard for gold right now. I suspect that the recent rally in gold to a close of $1320.90... more Read Jim's Original Sell|
|Update : Update: February 11, 2015. It was all about royalties going into ARM Holdings’ (ARMH) February 11 report on fourth quarter earnings. The worry holding the stock down for much of... more Read Jim's Original Sell|
|Update February 24, 2016: Update February 24 When markets are expecting you to declare bankruptcy, it's pretty easy to surprise to the upside. Chesapeake Energy (CHK), which had plunged when markets assumed that it had hired... more Read Jim's Original Sell|
There’s really nothing wrong with the shares of Capital One Financial (COF) that a stronger U.S. economy, a more confident U.S.consumer, and an interest rate increase–or two–from the Federal Reserve wouldn’t fix.
It’s just that I don’t see any of these in the cards in the near term–December at the earliest for a move by the Federal Reserve. And the Fed seems to be deep into holding the course until it can collect some evidence that inflation is a real danger (especially with an election looming.)
I bought shares of Capital One for my Jubak Picks portfolio back on December 10, 2015, when it looked like the Fed might actually deliver not just a December interest rate increase but two more increases in 2016. That would have given banks a big boost toward higher net interest margins on their capital and would have been a sign that the Fed was optimistic about the U.S. economy.
If those interest rate increases aren’t pending and if faith in the economy seems increasingly a matter of faith and not data, I think it’s time to call this buy “premature” and sell these shares. Shares of Capital One are up 18% from the June 27 low as of the close today, August 18. (But my position in these shares is still down 13.66% since that December purchase.) That recent gain brings them pushing up against the 200-day moving average at $69.57 and to a position near the top of their recent volatility range as sketched by the Bollinger Bands indicator. The stock has shown a recent pattern of lower highs with the shares failing to reach the April 26 high of $75.91 or the May 27 high of $73.83. The July 14 high was $68.85. By all these measures Capital One is starting to look, if not expensive, at least stretched.
The bank’s second quarter results fed into my decision to sell because they show a bank that is itself acting as if it sees dangers in the economy. For the second quarter, Capital One reported operating earnings of $1.76 a share, slightly below the Wall Street consensus at $1.86.
The miss was largely the result of a build in reserves as the bank added $465 million to the money it has put aside for troubled loans and credit card accounts. $298 million went toward reserves for the bank’s big U.S. credit card business, but the bank also set aside $58 million largely for its subprime auto loan portfolio.
The caution evidenced in the results as of the end of June looked well founded when the bank reported on July operations recently. Credit losses in its international credit card business rose 12 basis points to 3.64%. Credit losses were down 12 basis points from June but up 76 basis points year over year. Dollar delinquencies rose 18 basis points as percentage of loans from June. Credit card loss rates historically improve in the second quarter at Capital One and then increase again in the fourth quarter.
In its second quarter earnings call bank management said that it expects to see margin compression in the second half of the year driven by declining margins on auto loans and by the current and continuing low level of interest rates. (In July credit losses from auto loans increased by 25 basis points to 1.71% from June. That’s only a tick higher than the 1.70% rate of credit losses in June 2015.
Wall Street analysts have been lowering their earnings estimates for the third and fourth quarters of 2016. The consensus estimate of $2.08 for the third quarter 30 days ago is now down to 1.96 a share. For the fourth quarter the consensus estimate of 30 days ago at $1.70 has crept lower to $1.66 a share.
I still like the bank’s credit card business as a driver of future revenue growth but I just think the current interest rate environment makes it very hard for the bank to generate earnings growth from this business.
Time to review these shares when Fed policy clearly turns toward higher interest rates.
I like biotech’s like Incyte (INCY) with very solid and exciting growth stories. I like Big Pharma drug stocks with strong connections to biotech product pipeline, such as Bristol-Myers Squibb (BMY).
But that doesn’t mean I want to own a portfolio of nothing but drug stocks or that I want to own every drug stock on the market.
On Monday, April 11, I’ll be selling Novartis (NVS) out of my Jubak Picks portfolio. I added the stock to that portfolio on July 10, 2015 at $100.02. The stock closed at $75.22 on April 8 for a 24.8% loss.
That loss is done, gone, water under the bridge, spilt milk–and it’s not a reason not to the own the stock going forward.
But there are, in my estimation, at least two good reasons to sell.
The first reason for the sell is the company’s recent involvement in investigations of its marketing practices in Turkey, China and the United States. In the United States the U.S. Attorney for Manhattan has asked Novartis for information about doctor events over the last decade that the office claims were shams. The government is claiming that rather than educational programs events held at sports bars and high-end restaurants served as kickbacks to health-care providers. Last year Novartis agreed to pay $390 million to settle charges that it had paid kickbacks to pharmacies to boost sales of some of its drugs. Not exactly the marketing partner of choice for any biotech company with a hot drug candidate.
The second reason to sell is projections, from UBS, for example, that sales of the company’s potential blockbuster heart drug Entresto aren’t growing as fast as hoped. UBS says that prescriptions for Entresto in the U.S. may not show significant acceleration before mid-2017. The investment bank cut it 2020 sales estimates for Entresto to $4.6 billion from $8.3 billion.
I think drug and biotech companies in this portfolio such as Allergan (AGN), Bristol-Myers-Squibb, Ionis (formerly ISIS) Pharmaceuticals (IONS), and Incyte show better potential growth in revenue and earnings over the next year than Novartis.
And since I’m looking to raise cash in order to take advantage of any bargains in high-multiple, high growth stocks during what I project as a volatile earnings season, I’m selling Novartis.
February 20, 2014It’s always hard to judge the bottom of a cycle—and it’s certainly hard for gold right now. I suspect that the recent rally in gold to a close of $1320.90 an ounce on February 20 isn’t likely to hold and that we’ll get a retreat back below $1200 before the year is done. But that’s only my best projection and the market is deeply divided right now between analysts calling for gold to move higher from here (and to finish 2014 higher) and those projecting an end of the year price at $1050 an ounce or so. In this context I can’t say whether this is the time to start buying shares of Yamana Gold. If gold moves lower so will the shares of gold miners. Those shares have by and large outperformed gold itself in 2014. But I do think that Yamana’s fourth quarter earnings report, announced on February 19, does represent something very like a bottom for the company: big impairment charge, big cuts to capital budget and to the dividend, and what looks like a stabilization of the all-in cost of production at a very low level. Impairment for the quarter came to a whopping $682 million against operations in Brazil because of a delay in starting operations and against several exploration projects. That took the loss for the quarter to $536 million. Excluding these items the company earned 5 cents a share in the quarter, down from 26 cents a share in the fourth quarter of 2012. Gold reserves fell by 8%. That is a relatively small reduction in comparison to those being declared by other gold miners recently—Goldcorp (GG), for example, declared a 15% reduction in reserves. Yamana Gold has been relatively aggressive in cutting the price assumptions it uses in calculating reserves (at $950 an ounce versus $1300 an ounce at Goldcorp) so the low price of gold in 2013 has relatively less effect on Yamana’s reserve calculations. For the year Yamana reported that it had reduced exploration spending to $30 million, a 50% reduction from 2012, and that total capital spending of $1 billion in 2013 would fall to $480 million in 2014. The company also announced a big 42% cut to its dividend to an annual 15 cents a share. All-in sustaining costs fell to $947 an ounce in 2013 thanks to cost cutting and the company projected that all-in sustaining costs would dip further to $925 in 2014. Production in 2014 will climb, the company projects, by 200,000 ounces. To me this adds up to a lot of bad news and while I can imagine another batch of negatives if gold plunged below $1,000 an ounce, I think this is enough to mark a bottom for Yamana. Given the uncertainties of the price of gold, I don’t think I’d back up the truck right now, but I’m certainly going to continue to hold the shares in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ I’d buy more if the price fell to $9.50 or less. And I’m keeping my target price at $14.50 a share although I’m stretching out the schedule for that price to November 2014. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Goldcorp or Yamana Gold as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
Update: February 11, 2015. It was all about royalties going into ARM Holdings’ (ARMH) February 11 report on fourth quarter earnings. The worry holding the stock down for much of 2014 had been an apparent decline in royalty growth from companies that licensed ARM’s chips to 7% in the fourth quarter of 2013, then to 4% in the first quarter of 2014, and 2% in the second quarter. Royalty growth had picked up in the third quarter of 2014—to 11% year over year—and the company had guided to mid-teens growth in the fourth quarter. That looked like a recovery but would the company be able to deliver? For at least the fourth quarter, the answer is Yes. Royalty growth from the company’s licensing of its chip technology climbed to 16% year over year. (In U.S. dollar terms licensing revenue grew 30% year over year.) Net profit, consequently rose to $111 million from a loss in the forth quarter of 2013. For the rest of 2015 the company said it expects continued momentum in licensing revenue on the strength of growth in smartphone (especially iPhone 6) sales and on the introduction of new smartphones this year incorporating ARM’s 8-A architecture. Shares of ARM Holdings fell for much of 2014 on the fear that growth in royalty revenue had slowed permanently, but it now looks like stock bottomed at $39.28 on October 22. As of the close today, February 11, at $50.31 shares have gained 28%. On the technical charts, ARM finally showed the 50-day moving average crossing back above the 200-day moving average in late January. That pattern is usually an indication of a continued upward trend. The company’s product pipeline also points to continued strength. It’s new Cortex A-72 Maya processor has been licensed to a dozen companies including MediaTek. The design, ARM says, is 3.5 times faster than the ARM processors used in most smartphones sold last year and uses 75% less energy. The company’s new Mali-T880 graphics processor for mobile devices also looks to play into the heated competition among smartphone makers to add bigger displays with more graphics while increasing the speed to the user. ARM Holdings has been a member of my Jubak’s Picks portfolio http://jubakam.com/portfolios/ since October 25, 2013. My gain during that period has been an un-awe-inspiring 5.31%. But I think ARM is moving into a product and royalty cycle sweet spot. As of February 11 I’m raising my target price for June to $60 a share from the prior target of $56.
February 24, 2016Update February 24 When markets are expecting you to declare bankruptcy, it's pretty easy to surprise to the upside. Chesapeake Energy (CHK), which had plunged when markets assumed that it had hired financial advisors to prepare for a bankruptcy filing--which the company denied--surged 23% today on news that it had agreed to sell $700 million in natural gas and other assets instead of the $200 million to $300 million the company had projected in December. The extra cash will be used to pay off $500 million in debt coming due in three weeks. The company also announced that it plans to sell another $500 million to $1 billion in assets in 2016. The extra cash goes especially far in paying down debt because Chesapeake has been able to buy back bonds on the market at deeply distressed prices. The company bought about $240 million of notes due next month at a 95.7 cents on the dollar and also bought bonds maturing in 2017 for 45% of face value. The company also announced further cuts to its capital spending with plans to shut down at least half the drilling rigs it has under contract. Chesapeake will put about 70% of its capital spending to use in finishing already-drilled wells rather than starting new ones. The company's capital spending budget will be $1.3 billion to $1.8 billion in 2016, 57% less than in 2015. The news about asset sales and debt reductions came as part of Chesapeake's fourth quarter earnings report today. The company reported a fourth-quarter loss of $2.2 billion or $3.36 a share, steeply (an understatement) down from a profit of $639 million in the fourth quarter of 2014. That loss, however, was in line with Wall Street expectations. In the fourth quarter lower prices for natural gas led the company to write down the value of its reserves by $2.83 billion. For all of 2015 write downs came to $18.2 billion. (These write downs are a paper rather than a cash loss--although still important since they can affect the company's leases on its reserves. If natural gas prices ever rise, sustainably, Chesapeake will write up the value of these assets again.) The company still has a long way to go to to return to profitability and that will require a big swing in natural gas prices. (Chesapeake produces more natural gas in the United States than anybody but ExxonMobil (XOM). Chesapeake has hedged some of its gas production at $2.84 per thousand cubic feet and some of its oil production at $47.79 a barrel for 2016.) But the debt reductions announced today increase the odds that Chesapeake can survive until prices turn--which is why I own it in my Jubak Picks and Jubak Picks 50 portfolios as a long-term option on natural gas prices. Earlier in February Standard & Poor's had called Chesapeake's debt burden unsustainable. Well, it's significantly more sustainable after today's news.