The market has done a round-trip up and down since my last NOTE. The stand-out area among recommended issues was cloud/big-data. Outside that area, the stand-out issue was Tribune Media TRCO which got a takeover bid and was up a fast 17% – making TRCO our 3rd takeover in the last 2 months. At the other end of the spectrum, oils – even our high-production-growth oils – lagged.
There is no change in basic positioning to report. So I wish to take this opportunity to add some names to emphasize and to avoid, to highlight the safest, currently best-priced issues on the list, and to point out the issues that have solid long-term positioning regardless of the economic conditions to come.
The big-data/cloud plays and Apple offer the best illustration of what has happened to valuations in the market. The fundamental strength in the former will withstand whatever economic situation prevails. With increasing fears of a slowdown, market participants gravitated to this area where high-growth is assured for many years.
The opposite happened with Apple. Its future sales growth has come into question. My first commentary on stock issues in early October suggested avoiding Apple, Netflix, and Facebook due to “risks that are not fully appreciated”. While not enumerating those risks [I thought some were rather evident], they were legion at Apple. After a 29% drop, I might have been prepared to say Apple is a reasonable trading buy despite the fact that I do not like it long-term. Apple could have been a good trading buy because I had thought that the transition to 5G in 2019-20 would cause every iPhone user in the world to upgrade to new 5G phones over a relatively short period, causing a tidal wave of renewed Apple optimism before succumbing to the fate of every prior dominant consumer electronics company.
Changing this calculation with a risk I had not even imagined, last week Apple announced that the company would not introduce a 5G phone until at least sometime in 2020. Analysts portrayed this as not worrisome since Apple – without harm – had delayed 3G and 4G phones a year into those transitions, but I would argue those transitions were important to the carriers but not to consumers. 5G, on the other hand, is something that will change the lives of corporate and individual users and those users will want access to 5G as soon as it is available in their markets.
For a company that has been steadily losing market share everywhere in the world, this decision should dramatically aggravate loss of market share over the next 1½ to 2 years – irrevocably harming Apple’s ability to maintain its high profit margins. As a result of this corporate decision, I believe Apple is too risky in the medium to longer-term to trade it now on the long side despite the fact that a recovery of some sort seems near. Continue to avoid this stock, as there are simply too many other stocks one can choose that are not only due for a bounce, but also have bright long-term futures without the huge risks faced by AAPL.
Similarly, Facebook has begun a bounce but remains far too risky to trade as, in the case with Apple, there are many other better opportunities short, medium, and long-term. Aside from Facebook’s well-publicized problems [regulatory scrutiny, lower profit margins, and what seems like the beginnings of a decline in usage], it will also face increasingly severe competition for ad dollars from Amazon. I expect that Wall Street estimates of Facebook’s earnings for coming quarters and years are higher than the coming reality due both to under-appreciation of clean-up costs and the threat from Amazon’s ad platform and to overly-optimistic expectations for the monetization of Instagram and WhatsApp.
Though I like Alphabet GOOG long-term, there is some risk of earnings disappointment over coming quarters due to similar risk of erosion of ad market share to AMZN. It’s a difficult call. BID, DNKN, and TSLA should still be avoided. Adding to the ‘’Avoid List”, Oracle ORCL will continue to lose market share to the new generation of big-data and cloud companies, while its stock price does not fully reflect the stalling of its sales growth. Starbucks SBUX should be avoided now and long-term as its position in China faces risks that could jeopardize long-term growth plans that are baked into the stock price. The electric utility industry has reached such historically expensive stock valuation that it seems at-risk of lackluster performance regardless of what the general market does.
I remain constructive on the general outlook. If one is nervous about the environment but wants to buy something relatively safe, IBM and Abbvie ABBV are excellent candidates. MLNX – despite its huge rise since originally recommended – is also a buy that seems solid – with its high growth, low valuation, and multiple suitors.The time also seems very right for conservative investments in gold and silver, as outlined previously – WPM, GG, GDX, GDXJ.
All the big-data/cloud companies are well-positioned now and long-term and definitely should be bought on any pullback, though the market may not cooperate in that regard. New names to add in this fast-growing space are ZS and DOMO. In 5G and with its high yield, CTL seems very compelling at this price. As with DISH, for those willing to be patient, IRDM is well-positioned to benefit from the changing telecom environment. At the very least, the recommended semiconductor companies look like they have a positive stretch ahead of them – and I like them long-term.
In the industrial area, previously mentioned HRS and PKI seem timely. In the inherently more risky biotech area, SGEN appears well-positioned to advance.
In the speculative arena, I will add two companies for participation in the U.S. cannabis market – adding Acreage Holdings ACRZF and Origin House ORHOF to CuraLeaf CURLF, Charlotte’s Web CWBHF, and MedMen MMNFF. Currently, ORHOF would be my 5th choice or smallest position among these volatile and speculative issues in this “Wild West” of an emerging industry.
Chief Investment Strategist