Press

Iron ore bust

BHP Billiton Limited (BHP) discovers, acquires, develops, and markets natural resources worldwide. It was founded in 1851 and is based in Melbourne, Australia. BHP operates through four segments: Petroleum, copper, iron ore and coal. Iron ore constitutes 38% of its revenue. BHP has enjoyed an overly positive growth rate due to the worldwide demand for iron ore for the production of steel. However, due to the sluggish price of iron ore, BHP’s recent positive run could be coming to an end and it looks to be ready to short.

BHP had reported significant and robust growth for the six months ending June 30, 2017, which was responsible for an increase of 13.4% in BHP shares. Contributing to this upbeat trend were productivity gains of $12 billion and a significant reduction of capital exploration expenses in its onshore plans. In its fiscal year 2017, BHP reduced capital exploration expenses by $5.2 billion resulting in a 32% plunge in total expenses.

Such momentum is simply unsustainable, due to its massive iron ore interests the price of which have fallen sharply. Mining companies continue to produce more supply, while inventory has significantly increased as a direct result of China’s demand for iron ore. Specifically, BHP anticipates iron-ore productivity to be within 239-243 million tons in fiscal year 2018, representing year-over-year upside of 3% to 5%. Improved productivity will come on the back of an increased yield of the Western Australia iron ore mine. Quite simply, iron ore prices are in a bear market, with volatility paving the way with prices reaching a high of $95 per ton in Feb 2017, then failing to $53 per ton in June 2017.

Additionally, metal commodities’ price fallout will adversely affect BHP’s dividend policy. BHP’s dividend policy differs from other companies where payouts are based on 50% of its cash flow rather than to a flat dividend payment in each quarter. Its recent dividend payment is 43¢ per share (including a 33¢ per share minimum payment plus an additional 10¢). This phenomenon cannot be repeated in upcoming quarters.

TECHNICAL PICTURE
BHP rebounded sharply from a death cross pattern in June thanks to its positive growth report, productivity gains, and China’s Belt and Road initiative resulting in up to 150 million tons of additional steel demand which drove up demand for raw materials. This all led to its sharp upward reversal from $33. However, increased production has led to a drop in iron ore prices and the formation of double top in BHP around $44. A correction should test support at $40 from the September low and a gap around $38.50. If that support is taken out, BHP could test its June lows. BHP is a shining candidate for a short position.

Advance Auto: Downshifting

Advance Auto Parts, Inc. (AAP) the provider of automotive parts, accessories, and maintenance items for domestic/imported vehicles, and industrial vehicles has been given a “ticket to short,” due to a 20% plunge in a singular trading day. The Roanoke, Virginia-based company founded in 1929 sells its products online through AdvanceAutoParts.com and Worldpac.com. It serves do-it-for-me and do-it-yourself customers, aswell as 5,062 independently owned stores, 127 WORLDPAC branches and approximately 1,250 independently owned Carquest- branded stores in the United States, Puerto Rico, and the U.S. VirginIslands. Internationally it serves Canada, Mexico, the Bahamas, Turks and Caicos, the British Virgin Islands and the Pacific Islands.

AAP’s 20% single-day plunge was primarily due to its reported lower than expected sales outlook for its Q2 2017. The company’s profit fell 30% to $8.7 million. It suggests that AAP is experiencing broad industry sector headwinds where sales for Q2 were flat instead of beating by an expected 0.2%. To make matters worse, this guidance was lowered by 1% to 3% in same-store sales for the year.  AAP’s adjusted earnings fell to $1.58 per share from $1.90, leaving flat revenue of $2.26 billion.

Yes: Amazon is different

Retail online giant Amazon Inc. has been the focus of intense investor speculation due to its pending acquisition of Whole Foods (WFM). However, those who have marked Amazon (AMZN) for a short position are being short-sighted and undoubtedly fail to see the opportunity to accumulate a position for solid long-term growth. Amazon’s downward momentum is not fundamentally sustainable, and its upward movements will be generated by high volatility within bid-ask prices resulting in a short squeeze.

AMZN, currently boasting a stock capitalization of nearly $500 billion, was founded in 1994 and is headquartered in Seattle. The company engages in the retail sale of consumer products and service subscriptions in North America and internationally.  From its humble inception focusing expressly on books, AMZN has expanded into unanticipated retail segments such as artificial intelligence, food, music, media content, publishing, manufacturing electronic devices and consumer products.

AMZN’s June 2017 quarterly report indicated a 25% increase in its revenue to $38 billion while its operating income slid 51% to $628 million (adjusting for periods of earning expansion with increased investing). AMZN’s recorded capital investment comprised of its yearly capital expenditure of $2.5 billion (up 46%) and its capital leases such as property and equipment — up 50% to $2.7 billion — has astonished the street. These numbers are indicative of AMZN’s demonstrative efforts to reinvest and refine its shipping capacity, digital video segment, Echo device and affordable cloud services solutions.

Those who hold onto traditional methodologies and try applying them to AMZN fail to understand that AMZN has never followed a traditional business model. They are expecting corrections and retractions similar to other stocks, rather than embracing AMZN’s 20-year proven model as sufficient evidence that AMZN is different and has a unique growth metric. AMZN’s surprising acquisition of Whole Foods only serves to provide further support that the company has not topped off, and will continue with its forward momentum.

This all has implications that will boost AMZN’s bottom line. Even in the face of a potential failure to acquire Whole Foods and expand its physical offerings, Amazon has proven itself capable of handling defeat, as it has with other failed expansion attempts (i.e., AMZN’s Fire phone). AMZN’s window for investors to purchase will eventually shut as AMZN continues to evolve and reshape the future for both its shareholders and the world. Hence, keeping AMZN in your portfolio as a long-term growth solution is a smart and lucrative future investment.

AMZN has broken the traditional valuation model since 1995 from its sporadic profitable quarters versus the belief of sacrificing profitability for growth. Its technical outlook indicates a status of reinforcement rather than divestment due to its P/E ratio dropping to low triple digits from a commanding high triple digits and has been on a clear pattern of ascension since 2016.

Continually trading above its 50- and 200-day moving average, AMZN has been a picture of consistency leading to its rise through early June when its price temporarily breached $1,000. A sell-off has held above its July low near $950.

Sporadic correction and retraction operating above 50-day MA may challenge support below this level, perhaps testing $910. Shorts , in general, re difficult to master because of the scarcity of float/liquidity, requiring a contrarian sense of objectivity and Amazon’s business model is equally contrarian by its nature. In the context of the market, AMZN is most solidly a long position and provides a unique opportunity for any portfolio accumulation. AMZN may not have reached the low of this correction, but there is more room on the upside.

We recommend buying AMZN between $970 and $988 with a near-term objective of $1,108. Longer-term, we think that AMZN can reach $1,250. A drop below $903 would indicate further weakness, but AMZN will be back above the $1,000 mark relatively shortly.

Chipotle: New health outbreak, new short

Chipotle Mexican Grill Inc. (CMG), the trendy Mexican-style restaurant chain founded in 1993, develops and operates more than 198 Chipotle Mexican Grill restaurants in the United States, 29 international restaurants and 23 non-Chipotle style restaurants. Denver-based CMG has become famous for its unique food services, while also becoming infamous for its candidacy as a long-term short position.

Since 2015, CMG has signaled its short-selling potential and has been continuously recommended as a short. CMG relished its notoriety and its growth rate in 2015, sending the equity to an all-time high of $758.61 with a market cap of $15.19 billion, an earnings per share of 16.76 and a P/E ratio of 29.07.

In the fall of 2015 the E. Coli outbreak at various stores in multiple locations across the United States, and the subsequent media coverage generated by the Center for Disease Control’s 2016 formal declaration of its direct association, led CMG to slash its sales and earnings forecast. This sent the stock’s price plunging from its then 52-week high of $521.52, a market cap of $12.82 billion, EPS of 0.77 and P/E ratio of 525.84, as of March 8 2017. During the same period, CMG was faced with a secondary offering of $2.9 million shares by a prominent shareholder activist, which further reducing the market’s trust in CMG.

In July 2017 it was reported and confirmed that 130 customers in Sterling, Va., were contaminated by food from a Chipotle restaurant and infected by the norovirus. CMG has been unable to distance itself from its food poisoning reputation, and solidified its June 2017 guidance warning that CMG’s operating costs would be higher, and that its promotional mitigation costs would rise significantly. Despite CMG’s multifaceted attempts to recover from its damaging and hurtful press coverage as well as hindered goodwill, CMG’s stock has continued to decline. Its continuous disappointing earnings have reinforced it as a volatile short position, with more declines in the offing.

Technical picture
CMG warrants lower P/E multiples to reflect today’s slower growth rate versus its competitors. It has plunged with a down gap since mid-October 2015 with multiple plunge milestones.

CMG soared above its 50- and 200-day moving averages in late March 2017 after straddling those averages for most of Q1, establishing a clear reverse head-and -shoulder pattern before finally topping at $499 on May 16. CMG then began a stark decline, breaking below its 50- and 200-day MA in June as well as its 50-week MA.

The sell-off accelerated in July following the norovirus outbreak. CMG took out its three-and-a-half year October 2016 low, making the next clear technical support level the 2012 low around $240 (see “Big level,” below). This accelerated weakness pushed CMG into a Death Cross on Aug. 2, with the 50-day SMA crossing below the 200-day SMA, while the market traded below both. CMG last entered a Death Cross in late November 2016 and subsequently dropped from $576 to just below $400 in six weeks. It entered a Golden Cross (the bullish opposite of a Death Cross) this past March before rebounding 25%.

CMG’s troubles are clearly not over, and the recent fundamental weakness following the norovirus outbreak has created extreme technical damage.

Disclosure: The author has a short position in CMG.

GS: Anticipating the swap bump

The Goldman Sachs Group Inc., founded in 1869, continues to offer long-term growth and upside potential, despite recent political interference and intermittent plunges. Goldman’s recent volatility should be construed as a golden fleece, without a tragic ending, providing strategic timing for investors/traders seeking long-term growth on equities within the banking sector.

New York-based Goldman offers its worldwide investment banking, securities and investment management company through four segments: investment banking, institutional client services, investing and lending and investment management. Goldman’s primary year-to-date income — more than 70% — stems from trading and investments, specifically lending to institutional clients such as hedge funds and high-frequency traders.

Unlike its competitors, it has limited its exposure to investment financing within energy-based entities and sectors. This intrinsic insulation, which has been ahallmark of Goldman’s growth power and previously recommended as a long holding, has continued to keep it in a position worthy of accumulation.

Goldman had been in a strong ascending pattern since President Donald Trump’s election. Passing through resistance levels at $219 and $232 before settling on a continued base-building area between $237 and $242 during March 2017.

Following a correction and retraction with a plunge to $235 and then $227, Goldman stock reversed higher through its 50-day moving average around $232 and rallied to a new high of $255.15. Shares have since plunged 20% from that high set in early March, as promised tax cuts and regulatory relief have stalled. The stock began crossing its neckline set in early May at $226, which was reflective of a bearish “head-and-shoulders” signal, subsequently followed by a plunge to an intraday low of $214.08.

Goldman’s recent weakness stemmed from international bond purchases positioning Goldman in the middle of a political storm when it was revealed that its asset-management division acquired $2.8 billion of 2022 October bonds issued by Venezuela’s oil Co. PDVSA on the secondary market, rather than directly from the Venezuelan government. Goldman’s activity, which has been similarly enacted with other discounted sovereign bonds including those from Greece, was met with opposition from anti-Venezuelan U.S. Congress members accusing Goldman of aiding and abetting the country’s dictatorial regime.

This was a primary culprit for Goldman’s stock sinking to $212. Keeping in mind that Goldman is not alone in this practice, operating with sound business judgment abiding by “ex fida bona,” as other discounted deals have been derived by similar global asset management firms, most notably Nomura Securities purchasing $100 million of Venezuelan government bonds.

With exposure to Venezuela no longer a serious threat, investors have an opportunity to take advantage of these momentary dips in Goldman stock as its price-to-earnings ratio has fallen way below its peers. Goldman’s May low of $211.26 could serve as a long-term bottom (see “GS technicals looking up”). The stock faces primary resistance at $224 and secondary resistance at $232. Base-building and short covering could challenge its upper-head resistance at $239. Though technicals still appear weak, it is not a good idea to bet against Goldman as it has friends in high places.

Core Labs is out of gas

Barron’s Short on Chipotle

Joseph Parnes, In Barron’s  recent article ” Chipotle Losing Its Spice”. The ground breaking restaurant chain faces new challenges trying to grow. The stock could lose another 15% to 20%.