Weekly Outlook: The market continued to look solid this past week with Chinese GDP beating expectations of 7.8%, coming in at 7.9% and some solid housing data. Further, earnings continued to look fairly decent with a number of important blue chips and large cap companies reporting solid earnings for Q4. The outlook for 2013 has been very limited thus far for most of the reports as a lot of uncertainty surrounding spending cuts and government spending still remain.
The coming week will see a large number of earnings along with some key economic data. Some of the most important earnings to watch this week are Google (GOOG) and IBM on Tuesday, McDonald's (MCD) and Apple (AAPL) on Wednesday, 3M (MMM) and Starbucks (SBUX) on Thursday, and Halliburton (HAL) and Procter & Gamble (PG) on Friday. Earnings of these companies along with some interesting data will set the stage for a market that is starting to look a bit toppy.
It's a lighter week for economic data after a busy week. The main focus for data on this shortened week will be housing data. Tuesday, the market will get Existing Home Sales followed by the FHFA Housing Index on Wednesday. Thursday, we will get the release of initial jobless claims and Leading Indicators. Finally, we finish up the week with New Home Sales. Housing Starts were very strong to complete the year this past week, and we would expect the rest of the data to resemble similar strength this week. Data, though, should take a back seat to earnings and outlook for 2013 from a number of crucial earnings reports.
Outside of the USA, Europe and Asia have some interesting developments to watch. Tuesday, the Bank of Japan will be releasing its rate decision on Tuesday as well as monthly economic report on Wednesday. The BOJ has been attempting to strengthen the yen and their markets, and the bank may scrap the 0.1% rate paid on excess reserves. Wednesday, the Bank of England minutes and England's jobless claim change will be released. Finally, Friday will bring the markets the British Q4 GDP report. The big report to watch is that BOJ rate decision on Tuesday. It could give the market a bit of a push higher to start the week. A lack of movement, though, would likely have no effect as it does not appear to have priced into the market.
The week will be made or lost on earnings. There are 62 companies reporting earnings next week with a market of $10B or more. There are over fifteen companies with a market cap of over $50B market cap, so it is likely the most important week of earnings for this season. Here are those fifteen companies in order of market cap (largest to smallest): Apple, Google, Procter & Gamble, AT&T (T), Verizon (VZ), McDonald's, United Technologies (UTX), ConocoPhillips (COP), 3M, Altria (MO), Occidental Petroleum (OXY), Amgen (AMGN), Union Pacific (UNP), Bristol-Myers Squibb (BMY), Honeywell (HON), Ford Motor (F), and Abbott Labs (ABT). A lot of crucial bellwethers reporting are key to this market, and what will be the most important part of these reports will be 2013 outlook. How do companies see their earnings/revenue developing this year? Companies have been quiet about it so far, and it will be interesting to see what they say.
The Federal Reserve will release several Fed Manufacturing reports this week, but it will be a fairly quiet week for the Reserve. Tuesday, the Fed will release the Chicago and Richmond Fed Manufacturing reports as well as the Kansas City report on Thursday. Other than that, it's a quiet week for the board.
So where are we headed this week?
The market is quite extended it appears right now, so we will need some very strong earnings and outlook from
Stocks To Trade:
Qualcomm is looking very solid right now for a potential breakout from its current levels as it heads into earnings that we believe could show some solid 2013 outlook. The company has very solid value right now with a 13 future PE despite a 21 current PE. The discrepancy of current to future is due to strong 2013 growth expectations for earnings. The company is expected to see around 11% growth in earnings and revenue in 2013, and we like the stock to breakout into earnings if it can get over 65. We have seen very solid reports from other semiconductor companies with similar makeups to QCOM.
Taiwan Semi (TSMC) and ASML (ASML) both reported strong outlooks for 2013. TSMC made positive comments that demand was better than it expected in Q4, and that it did not believe Q1 would be as weak as expected. Great mobile demand is helping the company. ASML made similar comments saying that the company believed the second half of 2013 would be very strong for the company. Semis with strong mobile exposure seem to be making great strides, and QCOM is one of those companies. We believe that the company will be made or broken, however, by the Apple report. QCOM has a very strong relationship with AAPL, even if the company is only a part of the company's consumer. If AAPL shows good iPhone demand, we say buy QCOM. Look for a strong breakout over 65.
Another stock we like long is Accenture. ACN works in business services with outsourcing and consulting help for businesses. The company has made a great comeback after December earnings showed some weakness in shares. The reason we like the company is that we believe the drop on earnings was extremely overdone. The company showed flat growth in consulting despite a 9% increase in profits. Further, the company increased its earnings outlook for 2013 from 4.22 - 4.30 to 4.24 - 4.32. ACN reconfirmed revenue and bookings for 2013, and we believe the weakness on the earnings report showed strong support at the $65-$66 level.
Moving forward, can ACN stay strong? We believe so. The company is expected to see another 10% growth in earnings in 2013 and has only a 15 future PE, which is a key level showing value to us. We actually believe that the government spending issue makes ACN an attractive contrarian play. The company recently signed two contracts with the US Navy to help them manage finances. We believe smarter spending by the government in the future could lead to more consultants being used as well as potential outsourcing of some government work. Right now, we can use the 62.50/60 May2013 bull put spread as a great way to start a position. The spread will gain 16% if the stock closes above 62.50 on expiration. If not, we can use it as a way to convert to stocks on the cheap.
Trade #1: QCOM, Long
Trade #2: ACN, May2013, 62.50/65 Bull Put Spread
Max Gain: 16%
The bearish positions we like are Solarwinds and Amgen. SWI is a stock to watch as we believe that the stock has gotten ahead of itself on valuation and lacks an economic moat. SWI operates in the very crowded cloud network, focusing on data storage, security, and network management/monitoring. The problem that we see for SWI is that while the company is emerging with good growth, where is the moat? The barriers to entry into the cloud network are minimal, and with a future PE nearing 36…a lot of future growth is priced in at this point. When looking at growth stocks, the only way it continues to increase in value is if the market believes that growth levels will continue to increase or sustain for at least 2-3 more years.
When we look at SWI and many of the cloud companies, we are not sure about the future for the company. The company is only expected to see around 15% growth in earnings year/year. Not a level that screams buy me with a 50+ PE. With the continued growth of the number of companies in the industry and with market leaders like Oracle (ORCL) and IBM continuing to push into the market, we worry about smaller names like SWI. Recent weakness has most likely been due to profit taking as we head into earnings, and we like starting a short on a break of the 50-day MA.
Finally, we like the looks of a bearish position on Amgen. The story in AMGN is not an attractive one. The company's Aranesp treatment has come under recent fire, and news last week may leave the stock wounded for some time. Aranesp is a treatment for anemia, but some issues about how useful the drug is has started to break. In 2009, the treatment was said to have no positive impact on patients with kidney disease. In 2012, Amgen pleaded guilty to marketing Aranesp for uses not approved by the FDA as well. The news this week got worse for the company. The company started a trial in 2006 for a phase 3 heart failure drug, but the drug did not meet its endpoint to lengthen lives of patients using the drug. That failure has hurt shares significantly. Here is one analysts take from Forbes:
The null results of RED-HF together with the negative results of Aranesp for CKD reignite the debate around the continued use (and abuse) of Aranesp. An agent that has not been shown to have any positive impact on patient-related outcomes continues to be a blockbuster with over $1B in annual sales in the US. Who is at fault here? The regulatory agencies that continue to rely on a nonvalidated surrogate measure for approval, or the payers that continue to reimburse for improvement in a lab measurement without regard to patient outcomes.
Not good. We like the company for a bear call spread as we believe that the success of the drug may start to falter, causing the company to see growth stalled. We like the 87.50/90 bear call spread as $90 has been very strong resistance for the past year. We can make 9% on that spread right now.
Trade #3: Short, SWI
Breakout: Failure of 50-day MA
Trade #4: AMGN, Feb16, 87.50/90 Bear Call Spread
Max Gain: 9%
Chart courtesy of finviz.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.