For Friday, the market all boils down to Non-farm Payrolls and the Unemployment Rate. After a weak ADP Employment Change number on Wednesday followed by stronger than expected Initial Jobless Claims on Thursday, Friday's NFP report will be very important to market direction for the day and likely next week. At the same time, the weak move on Wednesday for the markets likely priced in some expectations of a miss for Friday's report.
Additionally, the positive news from the Bank of Japan to introduce a new monetary policy similar to the Fed's QE helped markets rally Thursday. That news should help balance weakness in employment as well. Therefore, we would look for a hushed move lower on any weakness in NFP and a very positive reaction if NFP surprises and comes close to expectations or beats them. Look for a 20-40 point drop on the Dow Jones (DIA) if NFP comes in lower than 160K. Anything above 180K could lead to a small rise.
Stocks To Trade:
When Facebook IPOed, the company got a lot of flack for the fact that they did not have a strong enough mobile presence. While they were on mobile devices, the company did not have a strong presence here and lacked revenue from mobile advertising. Over the past six months, the company has completely transformed their mobile presence, and we believe that is the single best reason to look again at FB. The launch on Thursday of "Home" is definitely a step in the right direction. Home is a new software application development from Facebook that will allow users to change their Android home screens to a Facebook version home screen.
The user will see pictures and a news feed as their homepage when they turn their phone on or unlock the screen. The software is a great step in the right direction. Not only does it make users use FB more, but also the company wants to integrate advertisements into the software. Additionally, the use of Home will continue to increase the company's presence on mobile, allowing them to also get users into applications that are sold through Facebook. While the software will start small in the USA on one Android phone and in the UK through Orange, the potential is very strong. Instead of building an entire phone, the company can latch onto other phones and further their mobile reputation.
Mobile advertising, further, is the future of much of FB's business. At the beginning of 2012, the company had very little in revenue from mobile advertising. In the latest quarter, the company had jumped to over $300M in advertising revenue, making up nearly 1/4 of the company's total ad revenue. That number and percent will continue to grow as more users move to tablets and phones over laptops and desktops. In fact, EMarketer claimed that the ad revenue can grow to nearly $1B this year. The development of Home is the company's realization that mobile is the future for now, and they are adjusting correctly. We believe the applications through Facebook business is also a big winner for the company, and with developments like Home and mobile applications syncing with Facebook, the company can continue to create another large revenue stream.
Take for example Zynga (ZNGA). Just a couple days ago, the company announced they would be opening a gambling game in the UK for "real money." The application will work through Facebook eventually, and FB will get a cut of sales as always. As FB continues to develop their dominance in the social media world, applications will continue to flock to the company to get a cut of Facebook revenue sharing plan. Developments like Home only further this.
With a 35+ future P/E, though, shares do seem somewhat expensive - even if the growth story is very exciting. We recommend for those not already long to write a bull put spread. That way, you can take advantage of potential upside and make money, while at the same time take stock at a cheaper price if FB shares decline strongly. We like the June2013 23/21 bull put spread, offering about 15%.
Trade: FB, June2013, 23/21 Bull Put Spread
Max Gain: 15%
Another stock we like right now is Pfizer. It is definitely time to think about looking towards getting defensive in your trading and short-term investment accounts. The market looks to be topping, and May is historically a weak month for the market. Stocks that have good yields, low beta, decent growth potential, and solid value are attractive right now. That is why we recommended General Electric (GE) and Procter & Gamble (PG) already this week. Healthcare tends to do well during weak economic/market environments due to the fact that people tend to still pay for medications and get sick during tough times.
PFE is a great example of a company that fits all the qualities we have listed above. First off, the company has very solid yield, nearing 4%. That yield is backed by very solid fundamentals. In the latest quarter, PFE had over $10B in cash/cash equivalents on their balance sheet along with over $15B in free cash flow. That type of cash is very healthy for any company, especially a research-based firm. Additionally, investors can feel very safe with their dividend with that type of health. The company was even able to raise their dividend 9% in December of 2012.
On top of yield, defensive stocks have low beta to consistent earnings. PFE has a 0.7 beta, which shows that the company will decline less than the market during any pullbacks. For example, in the whole of 2008, PFE dropped 30% while the market corrected 50%. While a 30% drop is obviously not a positive, if the market declined 5% over the next couple months, you could lose less with PFE. It's a defensive play. On top of that, though, the company has solid growth prospects. Earnings are expected to rise 4% in 2013 and 2014, which does outpace GDP. PFE has consistent, predictable earnings. In 2008, the company actually gained in revenue over 2007. They were one of a handful of companies able to do that. That type of consistency to expansion through new drugs, international markets, and healthcare advancements makes PFE very attractive.
For building a defensive portfolio, we like adding PFE here.
Trade: PFE, Long
Buy Point: Now
Finally, we are bearish on CRM in the near term and mixed in the long term. We recently published a long-term outlook on CRM with a Hold rating. We do see the company as quite overvalued in the sense of future P/E, which stands at 66. Further, we believe that the company will see rising competition from the likes of Oracle (ORCL) and IBM (IBM) who want a larger piece of the cloud network pie. In the near term, we believe CRM could see some pretty strong correcting with such large valuations, but in the long term, we do see CRM as being a much better potential play than some other cloud networking companies. CRM will likely see a hit if the market corrects as investors abandon high growth names during market corrections. Further, CRM cannot make any mistakes moving forward to continue to maintain that P/E ratio.
Thursday's after-hours report from F5 Networks (FFIV) will likely damage CRM, and it also shows the problem facing high-growth names. FFIV said that spending in North America slowed in their latest quarter. While it could be company specific, we believe that the combination of the sequestration, tax increases, and continued lack of employment momentum signals a still moderately recovering economy. With the valuations CRM has, these near-term issues can affect CRM very negatively.
Although, in the long term we believe that CRM is more fair valued. The reason is that we do believe CRM has a lot more catalysts for business growth than many of their competitors. Here is a section from our latest report:
CRM has announced different actions planned for the forward fiscal year that will grow the company and will balance out the value of CRM so it is fair valued. On March 21, 2013 CRM announced a 4-to-1 stock split to take place between April 3 and April 17 of the current quarter. This stock split will bring the number of common stock from 400 million to 1.6 billion shares. The split will significantly lower the price of shares as it stands presently. CRM also recently announced their new generation of Salesforce Chatter, its software that enables customer companies to sell, service, and market to its customers on any Android or iOS device. CRM explains that, "With new Salesforce Chatter, for the first time ever, companies will be able to access, create and act on customer information-all in the Chatter feed, from any mobile device". Salesforce Chatter is available now for Android and iOS devices and is included in Salesforce editions. The Salesforce Chatter creates and edits record capabilities are currently scheduled to be available during the second half of 2013.
These two initiatives are very attractive to us. The stock split will help attract new investors at the lower price, while the all-platform Chatter is a very positive development for CRM as the world becomes more focused on mobile. Still, even with strong initiatives like these and others we outline, there are many better opportunities for upside than CRM. The company is definitely overvalued, and we at best like it as a Hold if you already own it for the 6-12 month period.
In the near term, we like shorting CRM if it fails 160.
Trade: CRM, Short
Sell Point: Break of $160
Charts courtesy of finviz.com.