Growth stocks have led the market for a long time, but last week we saw many interest rate-sensitive value stocks (like insurance companies and utilities) firm up. This temporary rotation into value stocks is a bit odd, since the 10-year Treasury bond yield rose decisively above the 3% level, despite low inflation.
For example, on Thursday, a flagship semi-conductor stock, Micron Technology (NASDAQ:MU), announced that its latest quarterly sales rose 37.5% to $8.44 billion, versus expectations of $8.25 billion and $6.14 billion in the same quarter a year ago. During the same period, the company's earnings per share rose 79% to $3.56 ($4.33 billion), versus $1.99 per share last year. Excluding extraordinary items, Micron Technology's operating earnings were $3.53 per share versus analyst expectations of $3.33 per share, so the company posted a 6% earnings surprise. Since Micron Technology trades at barely four times earnings and has "fat" monopolistic operating margins, I would not be surprised if the company announces another big stock buyback program, like its recent $10 billion buyback program announced just three months ago.
Micron stock rose on the good news Thursday, but then it declined on Friday. If you are wondering why technology stocks with stunning sales, earnings, and better-than-expected results no longer lead the overall stock market, the answer is simple: There was a big "reversion to the mean" among some laggards. I think investors should be patient and wait for the fundamentals to work. I prefer superior stocks with great valuations, like Micron Technology, while avoiding frothy "fad" stocks, like Canadian marijuana stocks!
(Please note: Louie Navellier does currently hold a position in MU in Mutual Funds and Navellier & Associates does currently own a position in MU for client portfolios).
The "Long Game" of Trump's Trade and Tariff Talks
I believe the catalyst driving the 10-year Treasury bond yield back above 3% was the fact that China threatened to continue to sell Treasury securities as their trade spat with the U.S. escalates. Last week, the U.S. announced a new round of 10% tariffs that will be imposed this week on $200 billion in Chinese imports, and if China does not negotiate in good faith, the rate will reportedly be raised to a whopping 25% later this year. Clearly, the Trump administration is striving to get China to negotiate in good faith.
Interestingly, popular consumer electronic items, like smartwatches and Bluetooth devices, were exempted from these tariffs, so Apple (NASDAQ:AAPL) and Fitbit's (NYSE:FIT) operating margins are not expected to be adversely impacted. Since both Apple and Fitbit are open to moving some of their manufacturing to the U.S., it appears that the Trump administration is not intending to punish U.S. companies that manufacture in China, provided that they plan to divert some of their manufacturing facilities back to the U.S.
President Trump also made it crystal clear that he does not want to impose the 25% tariffs on China later this year, but he will keep ratcheting up the tariffs until China negotiates in good faith. Wall Street liked President Trump's comments and now seems to fully comprehend that his ultimate objective is free trade with no tariffs. We are well on the way down that road with Europe and some other trading partners, but China is the only one that has purposely devalued its currency to maintain a competitive trade advantage.
The trading math is in America's favor. For every $1 of products the U.S. exports to China, the U.S. imports $4 of products from China, so the U.S. leverage over China is essentially 4-to-1. China can't raise tariffs "tit for tat" beyond a certain point, since there are comparatively much smaller total U.S. exports to China.
In my opinion, Trump's economic advisor, Larry Kudlow, is still the best spokesman for the President's domestic objective of sustainable 4% GDP growth. Since there is no way of boosting 4% long-term growth rates without boosting U.S. exports, Trump's push to narrow the trade deficit will soon shift to more domestic manufacturing like the recent NAFTA agreement with Mexico to raise U.S. content in vehicles.
Speaking of GDP growth, the Conference Board on Thursday said that its Leading Economic Indicators (LEI) rose 0.4% in August, following a 0.7% increase in July and a 0.5% increase in June. As an example of just how strong some of the leading economic components are now, the Labor Department announced on Thursday that new claims for unemployment benefits declined to a 49-year low for the third consecutive week, despite a major disruption from Hurricane Florence. Overall, an acute labor shortage persists, and after the mid-term elections, the U.S. may boost its visa program to attract more qualified foreign workers, which many companies currently need to fill the many job openings going begging.
Stay Away from Speculative Canadian "Pot" Stocks
The big financial gossip last week was the wild ride of Tilray Inc. (NASDAQ:TLRY), a Canadian cannabis stock that went public in July. Initially, Tilray was up more than 400% in a month, before falling over 50% in the last half of last week. Tilray briefly hit an intraday market capitalization in excess of $20 billion (with a "b"), even though its annual estimated sales are expected at less than $40 million (with an "m")!
I must add that I haven't seen any stock trade at 500 times annual sales since the old "dot-bomb" days.
There are a couple of major details that you need to know about cannabis stocks, namely that Canada is really the primary investment option, since U.S. tax rules prohibit expensing normal business costs (like wages, electricity, rent, etc.), which is why many of the U.S. cannabis businesses are non-profit enterprises. The other thing you need to know is that pot ETFs, like ETFMG Alternative Harvest (NYSEARCA:MJ), are pouring money into thinly-traded Canadian cannabis-related stocks in an essentially "pump and dump" manner.
Furthermore, after it leaked out that MJ was trading at approximately a 30% premium to its Intraday Indicative Value (essentially, its net asset value), Morningstar stopped publishing an Intraday Indicative Value for the fund, which showed that investors were getting fleeced 30% per trade, which may also be related to the fact that it is very difficult to price thinly-traded Canadian cannabis-related companies. (I highly recommend you read this article I wrote about getting fleeced in Pot ETFs like MJ.)
Every weekend when we run our weekly quantitative research, I typically find about 15 Canadian cannabis-related stocks, but I have yet to find any Canadian cannabis-related stock that regularly files quarterly reports, so I can't analyze sales, earnings, operating margins, etc. For example, just go to Yahoo Finance and look up a stock like Canopy Growth (NYSE:CGC), and then click on "Analysis" to access all its financial and analyst data. You'll probably find, as I did: "Analysts data is not available." Oops!
I have to tell you that I have never come across an industry where virtually all companies within a sector largely refuse to file quarterly financial statements! In conclusion, I expect the current bubble in pot stocks to end badly, since some unscrupulous ETFs are fleecing naïve investors by 30% per trade and are in the midst of a massive "pump and dump" campaign of thinly-traded Canadian cannabis-related stocks.
(Please note: Louie Navellier does not currently hold a position in APPL, FIT, CGC or TLRY in Mutual Funds and Navellier & Associates does not currently own a position in APPL, FIT, CGC or TLRY for client portfolios.)
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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