My Earnings Game Plan: July 28-29

|
Includes: ABBV, AFL, AMZN, BCS, BMY, BUD, BX, CELG, CS, DLR, GOOGL, HSY, LYG, MA, RTN, SNY, VTR
by: Nicholas Ward

Summary

Here is part 2 of a series I've started, focusing on my weekly earnings game plan during this busy part of earnings season.

Major tech giants Alphabet and Amazon post earnings, and I discuss my bullish stances, regardless of income.

I'm watching Credit Suisse, Lloyd's, and Barclays for potential entry points for small, speculative positions in the aftermath of the Brexit vote.

I must admit, that I've been surprised and also very pleased with the reception that I've received after the first part of this series. I enjoyed writing the piece because it's helped me to plan and rationalize my week. Apparently, it's helped others as well, which is all I ever aim to do here. This enthusiasm for this sort of work has inspired me to continue these earnings game plan pieces. Here are my "index cards" for July 28th and 29th. Please continue to respond with your ideas, rebuttals, ideas, or questions. I always enjoy the commentary on my pieces. And, stay tuned for next week's earnings game plans, I hope to get those published this weekend.

For those of you who missed the first earnings game plan piece, please follow this link for the reasoning behind these short "index card" synopsis. Or, if you don't care about that, continue on and let me know what you think!

Thursday:

The earnings pace doesn't slow much, if at all, for Thursday. I'll be following Bristol-Myers Squibb (NYSE:BMY), Celgene (NASDAQ:CELG), Credit Suisse (NYSE:CS), Hershey (NYSE:HSY), MasterCard (NYSE:MA), and Raytheon (NYSE:RTN), who are all posting before the market opens, and Aflac (NYSE:AFL), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Digital Realty (NYSE:DLR), and Lloyds Banking Group (NYSE:LYG), all posting after the bell.

Bristol-Myers Squibb: This is a bio-tech that I've never owned, though it's been on my radar for awhile now. I think this is a very well run company with several exciting catalysts in the form of new cancer drugs and several offerings in the pipeline that seem to have big-time potential. The reason I've ignored the Cramer fueled hype for this blue chip company thus far is the valuation. BMY has made a habit of trading at near 30x EPS multiples over recent years without the growth metrics to support such a premium. BMY's revenues shrunk in 2012, 2013, and 2014. In 2015 the company finally posted a positive figure, though a 4.3% revenue growth against such terrible comps does not excite me as an investor. BMY has a 7 year annual dividend increase streak, which is laudable, though it also highlights the fact that the company failed to increase its payment for 4 consecutive years in the mid 2000's. Making matters worse as far as dividends go, BMY's 5 year DGR is a paltry 2.92%. But, with all of these negatives in mind, BMY is still a leading company in an industry that I like moving forward and I would be happy to have exposure if the price was right. Unfortunately for me, that "right price" is basically in-line with flash crash lows of last August around $51, or 20x 2016 expected EPS. I highly doubt I'll see this price anytime soon, though I'm happy, watching and waiting.

Celgene: I am long this company. My current cost average for CELG is $100.38/share. I hold a small CELG position in my ROTH where I've built a basket of high growth potential names. CELG has posted tremendous top-line growth for years now: 33.5% in 2011, 13.7% in 2012, 17.9% in 2013, 18.1% in 2014, and 20.7% in 2015. Admittedly, this pace seems to have slowed with ttm revenue growth currently sitting at 4.7%, though this figure could easily change as results from the second half come in. Celgene is a bit of risky bet right now with the majority of its sales coming from one drug: Revlimid; however, the pipeline remains strong. CELG has found very strong support several times in the mid 90's since breaking down through previous support levels at $110 early in January. My target price to add to my CELG is $95. I've missed out on opportunities to add at these prices too many times this year and won't do it again.

Credit Suisse: I admit that my interest in this company (alongside several other European banks) is strictly speculative. When I see large cap companies losing 40% of their market caps in a couple of days it gets my attention. Since Brexit I've been trying to make peace with many of the issues that the EU faces. There are so many worries across the Atlantic, too many, in my opinion, for an investor to have any sort of confidence in the direction that those markets are heading. However, I'm potentially interested in taking a flier position in CS in one of our IRA accounts assuming that should things ever calm down in Europe and begin to turn around, a beaten down company like this is ripe for massive gains. This company current offers a large dividend yield, though I don't see the dividend as reliable by any means and my goal for an investment in CS would be as a contrarian capital gains play with any potential income serving as an added bonus. Should the stock sink below its 52 week low of $10.01 a share, I will seriously consider buying a small position. Remember, a year ago this was a $30 stock.

Hershey: I am long HSY with a cost basis of $85.62. As you can imagine, I was surprised and happy to see the massive uptick in share price sparked by the Mondelez bid (NASDAQ:MDLZ). This added premium to the stock price has pushed the stock into over valued territory. HSY shares are currently trading at 26x 2016 EPS expectations, entirely too high for a company expected to post low-mid single digit top line growth. However, I think this brand would make an excellent bolt on acquisition for any number of conglomerates out there (can anyone say, "Berkshire"?). If HSY's trust is viewed an amicable to a potential deal I think a bidding war would ensue for this company, pushing the stock price even higher, which is why the M&A premium still exists. However, this is all speculative and I'm rarely willing to invest that way (I know, I know, I just discussed potentially buying CS on contrarian speculation, though I'd much rather make a bet on weakness than on strength). If Hershey's stock price were to fall below $90, back towards my cost basis and a more appropriate valuation, I would be happy to add shares.

MasterCard: I am long this company as well. I admit that I worry about competition. I was actually hoping that PayPal (NASDAQ:PYPL) would fall further after its recent earnings report, I like this as a potential disruptive company in the electronic payments arena and I'd like to diversify my basket pertaining to the electronic payment space. MA had put together an impressive streak of double digit top-line growth before breaking it in 2015 with its disappointing 2% figure. MA needs to get back to this strong growth for it to justify its current 26x multiple of 2016 EPS expectations. I originally bought my MA position hoping for both double digit dividend growth and overall capital returns. Yielding less than 1%, MA can't really be viewed as an income play in the present, though with enough time, growth, and compounding, I expect that my MA income stream will be more than respectable. Right now, due to slowing growth concerns amidst aforementioned competition, my target for MA is an admittedly unlikely $65, which represents a multiple just above 18x 2016 EPS estimates. If it seems as though growth is picking back up, my target would change, though as I said before, right now I'm more focused on diversification in this very competitive space than bolstering my current positions in MA and Visa (NYSE:V).

Raytheon: In part one of this series I talked about how I view stocks in the defense sector as very defensive portfolio picks and how I regret the fact that I've never owned any of these companies and therefore, have been left out on their great run as of late. Raytheon is one of my favorite names in the space. The company is up 9% YTD and up over 40% from its 52 week lows set in the August flash crash last year. The stock currently trades at a 19x multiple of its 2016 EPS estimates. Although RTN has made great strides growing its EPS over the last 5 years or so, revenue growth has been hard to come by for this company, with negative results 4 out of the last 5 years. Because of this disappointing top-line growth I am using a 15x multiple for my buy target price, which would mean a $30 hair cut on the stock, down to $108. At this level the stock would yield 2.72%, which is much more attractive to me than the 2.16% that the stock currently yields.

Aflac: This is a company that I had owned for several years before recently selling at $69.73. AFL is a high quality dividend paying company, though its 2.23% yield is low for me and I decided that I wanted more reward for the risk that I was facing holding a financial company like this. I put those funds towards a purchase of Blackstone (NYSE:BX) for $23.43/share. Although AFL is up ~5% since I sold, I'm happy with the trade being that BX is up 18% since my purchase. Looking back, I could have simply used some of my cash to buy BX and hold onto AFL, a dividend aristocrat, though like I said, the yield is low with some of the big banks yielding roughly 1% more, I decided to simply take my profits and move forward looking for deals in the space over the coming months. I wouldn't be opposed to buying back these shares that I sold however. $55 has served as very strong support for AFL several times over the past 12 months. I would start to get interested in buying shares at $63, or a 10% drop from my recent sale price. Below $60, I won't hesitate to buy shares; at this level the stock will yield a much more attractive 2.73%.

Alphabet: After years of watching GOOGL shares rise without any exposure in my accounts, I recently broke ranks with the DGI crowd and decide to build a position in this internet/data giant in my portfolio as a reasonably priced growth vehicle. The relative value that GOOGL shares offer in comparison to many of the traditional DGI type names played a large role in this decision; GOOGL currently trades with a 22.5x multiple of its 2016 EPS estimates, which is much lower than many of the dividend aristocrats, who are now trading with P/E's in the mid 20's. What's more, although Alphabet doesn't contribute to my portfolio's income stream, this company offers strong double digit growth prospects on both the top and bottom lines, which is something that can't often be said by the overpriced consumer staple or utility names. I've built my position at more attractive multiples than what is offered by GOOGL in the present day. My cost basis for GOOGL is $718.27. Due to the lack of income that GOOGL offers, I've been willing to trade around this position as well, meaning that my cost basis would be a bit lower if I hadn't sold two lots of shares bought in the $706 area for quick profits on a couple of short term bumps. All in all, GOOGL has treated me well thus far in 2016. My most recent purchase was on June 27th for $679.98/share. I think this is a well positioned company moving forward in our digital world. I will look to potentially add to my stake if prices were to fall below $700 again. At this level the stock will be trading at 21x 2016 EPS estimates and just 17.5x 2017 EPS expectations. Though, I admit that competition is heating up here (the Verizon (NYSE:VZ)/Yahoo (YHOO) deal comes to mind) and I will be looking for clarity on the margin and ad spend pictures in the upcoming report, as well as any news on guidance.

Amazon: Honestly, I don't even know what to say here with regard to a target. All I know is this: I think AMZN is a wonderful company, disrupting more industries than we probably realize, and although I simply can't wrap my head around the valuation, I wouldn't mind having exposure in my ROTH. This would be a purely speculative bet on continued massive growth at AMZN in its current markets, as well as new, unforeseen spaces where revolutionary Jeff Bezos eventually enters and dominates. I will be monitoring the report and if there is significant weakness, I may buy a few shares. Despite my bullish stance, because of the valuation issues I won't let AMZN become a significant position. Though, like I said, my intuition tells me that this is a company worth owning for the long-term and although I hate the idea of paying this sort of premium, I'd like to have an opportunity on a dip to add a bit of exposure as a speculative growth play.

Digital Realty: I am long this company and currently sitting on triple digit gains. The growth of data centers has been wonderful for DLR investors and I don't see this slowing anytime soon as cloud growth continues to accelerate and the dominant players seem to be more than willing to allow others manage the real estate aspect of these businesses. A $93 price would represent a 17x multiple of the company's 2016 FFO guidance. This price would equate to a 3.78% yield. An $88 price would represent a 4% yield. These are two levels that I will be looking for and if earnings disappoint and the stock slumps, I will consider adding to my already outsized position as an income play with above average growth prospects.

Lloyds Banking Group: Everything that I said about CS applies here as well. In my opinion, this is a beaten down stock that has potential as a contrarian play. I am disregarding the yield because I don't know if its sustainable, though at 52 week lows in the $2.50 range, I may consider making a small bet in one of our retirement accounts hoping for outsized long-term gains hoping that the U.K. and the E.U. stabilize.

Friday:

Things slow down a bit on Friday with regard to the earnings pace. I will be following AbbVie (NYSE:ABBV), Anheuser-Busch Inbev (NYSE:BUD), Barclays (NYSE:BCS), Sanofi (NYSE:SNY), and Ventas (NYSE:VTR) who are all scheduled to release earnings before the bell.

AbbVie: I am long this company and although shares have been on a nice run as of late into the mid 60's, I think ABBV offers one of the few compelling valuations in the high yielding space. The company's shares currently trade at 13.5x 2016 EPS estimates. This, combined with a 3.5% yield leads me to believe that shares are attractive at current levels. However, I already have a sizeable position here with a cost basis of $57.09, so I'm not in any rush to add shares. ABBV's reliance on Humira and that drug's upcoming patent cliff is concerning for me, though the company boasts a strong pipeline which it believes will more than replace lost revenues moving forward. Because of the fact that my ABBV position is already full, I will only add shares should they sell off significantly, using yield thresholds as my buy targets. A 4% yield would likely entice me to add exposure. This would mean a share price right around my cost average at $57.

Anheuser-Busch Inbev: This is a company that I've never owned, though I respect its history and expect a bright future for this beer behemoth. I regret not initiating a position when the shares sunk down to the $100 area in February of this year. BUD was one of a handful of companies that I was watching closely bank then, though didn't add because of greed and the quickness of the rebound from the so-called "Dimon bottom." The company's 2016 earnings picture is a bit distorted due to M&A that BUD is taking part in. However, 2017 estimates seem to be back in line with past results and using these forward figures we see that shares are currently trading at 24.5x forward EPS estimates. I would love to buy shares at an 18x forward multiple which would mean a $93 share price (prices in the mid 90's in what I was waiting for back in February); though I don't see things going that low for bud and if shares fall to the $105 range, or a 20x forward multiple, I will likely add a small position trading at fair value hoping to hold for the long-term.

Barclays: Once again, see CS and LYG's write ups. BCS hit a 52 week low of $6.76 on the morning after Brexit. Should shares return to these sub-$7 levels, I will consider adding a small, contrarian position. I know there is a ton of risk involved here but it's hard to ignore the fact that last July this was an $18 stock.

Sanofi: This European based mega-cap pharma company is already beaten up, down 23.5% from its 52 week high. On any further weakness, I will consider buying shares. SNY shares have made a habit of slow and steady growth, both on the top and bottom lines over the past 5 years or so (with the exception of 2013, which was a negative year). Sanofi's dividend hasn't risen in a perfectly straight line like many DGI investors like to see, though it is undoubtedly trending in the right direction and I expect for payments to continue to increase moving forward. The stock is currently trading with a 2.68% yield and a 13.3x multiple on 2016 EPS estimates. These figures seem fair at current levels, though I'd really like to see shares yielding 3%, which would mean a $34.45 share price. Unfortunately, I don't expect to see the stock trade down that far. Because of the already depressed P/E ratio, I will be hoping for prices below $40/share where I would strongly consider initiating a long-term position.

And finally, we come to the end of this week's earnings game plan: Ventas. I am already long this company, currently sitting solid gains. I own VTR as an income play. The stock is currently yielding 4%. I originally bought shares yielding ~5%, though I know in this low rate environment I am unlikely to see a yield like that here until rates rise. VTR is up more than 30% YTD and is trading less than 1% off of its recent 52 week high. I'm not a fan of buying stocks near tops, so for me to add to this high quality position I would need to see significant weakness. I don't expect it, but if VTR were to sell down 15-20%, I'd be a buyer. A share price in the low $60's would represent a 15x FFO multiple on the midpoint of 2016 company guidance. The company's long-term FFO "normal" multiple according to F.A.S.T. Graphs is 13.8x. In a low rate environment I understand a stock like VTR will trade for a higher than average premium, though I think this premium should be in the 10% range vs historical average, not 30%.

Disclosure: I am/we are long ABBV, V, CELG, HSY, VTR, BX, GOOGL, V, MA, DLR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.