Weekly Outlook: The market will likely get a jump start to this week after it was held in check by Cyprus' need for a bailout. That situation created some definite economic uncertainty in the marketplace as well as reintroduced fear into the European marketplace. Fear drove the dollar higher and brought down investor sentiment. With that fear gone, will the market continue to shoot even higher? Some confidence could be built off of the bailout deal, but its impact will likely be limited to the front of the week.
The more important news for the market will be a large slate of economic data, whether the market has any juice left to buy higher, and some interest earnings reports. Last week, the market moved unchanged, and we expect a similar result this coming week. Although the market is moving with great volatility on headlines, and that risk continues to exist. Look for the S&P 500 (SPY) and Dow Jones (DIA) to stay flat this week and even correct some on weak data.
Economic data will be important this week as there is a large slate of data points to watch. Tuesday, the market will get the all-important Consumer Confidence report, which will likely show a tick down due to sequestration. Additionally, the market will also be reacting to New Home Sales, which are also expected to drop to 400K. Investors/traders will get Pending Home Sales and Crude Inventories on Wednesday. On Thursday, the market gets hit with a lot of data: Jobless Claims, Q4 GDP estimate, and Chicago PMI. The GDP needs to show growth from the 0.1% reading for the market to have a shot at a good finish to the week. Finally, we finish with Personal Spending/Income and Michigan Consumer Sentiment. Most reports seem to show some weakness expected, so the market has a chance to pop on beats. At the same time, the market has been on fire for months. Signs of weakness could be quite detrimental to the market.
Outside of the USA, Europe and Asia will play crucial roles in the market this week. Cyprus will be the big story to start the week, but with the country prepared to accept a bailout, that story turns positive and likely falls out of importance quickly. Other news to watch this week include the Euro-Zone Economic Confidence and Great Britain's GDP on Wednesday. On Thursday, the market will get interesting German unemployment numbers. Another issue the market may start to play up as we move through the week is the Italian elections, which still have not been solved. Italy's issues could be the next bearish point for Europe in their continuing saga.
We have a pretty light week of earnings reports, but some of the reports we do have will be crucial. The market has seen a few weak reports as of late from FedEx (FDX), Caterpillar (CAT), Lululemon (LULU), and more. If companies are struggling much more than the market is showing, we could have a very rough earnings season. This week, we get a couple more reports to definitely watch to see how the numbers flesh out. The reports to watch are Walgreen (WAG), Mosaic (MOS), Paychex (PAYX), and Dollar General (DG). WAG, PAYX, and DG will be crucial for understanding spending trends, job strength, and consumers. MOS is an important stock to get a sense of agricultural trends. None of these reports can move the market alone, but the smart money will follow these companies.
The Federal Reserve had a positive impact on the market last week, as they showed no signs of pulling the foot off the gas of QE. The Fed's continuance of bond buying will help to liquidate the markets and limit downside. This week, we should see some more reaction to QE as well as a number of Federal Reserve economic indicators. We will get the Dallas Manufacturing Index on Monday as well as Richmond index on Wednesday. The market will also get the Kansas City Index on Thursday. Overall, though, the market will likely focus more on other news this week outside the Fed.
So, where are we headed this week?
For a while now, we have been waiting for the market to top out. Despite a Cyprus deal, the market could sell the news. With the Fed behind the market, it seems all the dips are buying opportunities and short-term. Therefore, we expect a volatile week that sees a lot of reaction to news and headlines as they develop from Europe and economic data. With a lot of data points, the market should be reactionary this week, but the general path still points up.
Stocks To Trade:
PG looks very solid right now, and we believe that it will be a great stock to own over the next couple months, as we believe the market could go through a short-term correction phase after such a long-term uptrend for the market. PG is up 15% YTD, but we believe the stock still has more upside potential. The company is pricing at a 17.7 future P/E as well as 2.5 p/s. Under 15 on future P/E shows value while under 3 on price/sales shows value. We see that shares show value on actual sales but not on earnings, meaning that margins are not strong enough for PG currently. The opportunity for PG lies in the fact that we believe that its growth in emerging markets will continue to be very strong, has strong cash flow levels that lead to a strong dividend, and has near-term catalysts that can push it higher.
The company has seen developing markets' sales grow over 10% for twelve years, and developing markets are now 40% of global sales. That number is very promising. The reason that we believe it's important to see that growth is that a lot of the future prospects for PG to continue to increase its share prices is that its multiples will stay fairly level between 15-20. The only way to increase its shares is to increase earnings. Analysts believe that earnings will grow 5-6% this year and next year, which are good levels. That growth is powered by Africa, South America, and Southeast Asia.
Another reason to like PG is their dividend yield, which sits at just under 3%. The dividend is safe, though, as it has been increased for 56 straight years, and the company has a 90% FCF/income ratio. The company uses cash very effectively, and its dividend is very safe. If we do go through a correction period, we believe that attention will turn to emerging markets, bonds, dividend stocks, and safe haven stocks. Consumer staples like PG work in those environments along with the company's emerging market and dividend appeal. Right now, we believe it's a great time to get long on PG along with a bull put spread to hedge the long as well as give oneself the ability to add shares at lower prices.
Trade: PG, Long
Buy Point: Now
Another stock that we like long is Ford. The company continues to combine outstanding value with strong growth potential in emerging markets and domestic markets. The auto industry continues to be in a very healthy cycle that may slowdown somewhat over the next couple months but still has potential. February sales should have dropped by all accounts. Tax refund delays, sequestration on the horizon, a recent tax increase, and strong comparable sales were all reasons why one would expect February sales to drop for Ford. Yet, they did not. The company saw another 9% rise year/year for February. The company has now seen sales rise 46% this year in China as well. Demand is very good for the company's cars, and we believe that it's hard to ignore the strong value in shares right now. Future P/E is still under 8 despite the fact that the company is expected to see sales rise over 5% the next two years. The company, further, should see an over 10% jump in earnings in 2014. 2013 earnings will still be held in check by Europe.
Still, the situation in Europe is more than priced into shares now. Therefore, if you still do not believe in Ford, you have to believe that the company's strength in nearly every market outside of Europe will not be enough to make up for the debacle in Europe. We do not see this issue as a long-term derailment to car sales in the long run as the situation is now priced in at its worst-case scenario. We believe that the company has a solid chance to continue up with such strong sales to date this year. Further, the company has a lot of potential moving into next year as Europe starts to pick back up.
Buy Ford now as prices will not exist this low for much longer this year.
Trade: F, Long
Buy Point: Now
Finally, we believe that LULU is a sell. We posted, recently, our report on LULU and why it is a sell. The company's earnings to end the week proved further that the company is still a growth stock, but they have issues with their latest earnings and competition. Both of those reasons make us very weary of their 38+ P/E and nearly 25 future P/E. The company noted in their earnings at the end of the week that they see Q1 EPS at 0.28-0.30 versus 0.40 expectations from analysts. The miss there is the first red flag. With growth stocks, one has to believe that the long-term growth is strong enough to still warrant high valuations. If that theory comes under question, LULU will see issues with its stock even if growth is still happening. Perception is key to growth stocks.
Another red flag is their sheerness issue with Luon. The company is having a problem with pants becoming too sheer. While that issue alone is not enough to ruin the stock, we believe it questions the quality of the pants as well as helps rising competition. Many other sporting good/apparel companies want to be in the yoga and women's wear arena. If LULU does not meet quality standards, consumers may turn to competition. The company also reported that margins would drop in the coming quarter, which is another sign of growth stalling or being questioned.
From our article about LULU, we discuss the company's near-term catalysts further:
As we've stated before, LULU is currently overvalued. The current PE at 42.9 is much higher than the industry average at 22.7. Its value is indicated to drop according to its future PE of 30.9. Even though LULU saw large percentage increases in revenues, its operating margin and gross margin did not reflect this change. Instead of increasing as well, operating margin decreased YoY from 27.2% to 25.3%. Gross margin decreased during this same period from 57.3% to 55.2%. These slight decreases in profitability margins show us the vulnerability LULU finds itself in while it is overvalued. An overvalued PE and declining problems forecast larger problems to come during the 2013 fiscal year. A second aspect of our catalyst lies in continually rising competition. UA recently announced its new line of sportswear called Armour39 and the Spine running shoe. Without sustained innovation on LULU's part, it will be left behind. Even so, UA is not LULU's only competitor. Nike (NKE) as well as other less traditional sportswear brands like Gap and Nordstrom are also contending for LULU's revenue. LULU has the potential to increase its global presence but without any concrete plans for expansion in the future we cannot count on it to continue to hold its presence in the market against the competition. In short, other sportswear companies have concrete plans for new and exciting products that will grab consumers' attention but we do not see LULU meeting this rising competition, and it is not compensating with any expansion plans.
With the market looking toppy and LULU facing some near-term issues, we believe the stock should slip some over the next several weeks. Look to short on the break of 61.50.
Trade: LULU, Short
Entry Point: 61.50