Long-Term Investments

Nearly all of my writings are centered on trading and speculating. I often refer to long-term investment in passing when a name I am talking about also happens to be a good stock for the long term. Only rarely do I highlight stocks that are first and foremost a long-term investment. There are two types of stocks that come into that paradigm. The first and primary would be high-quality stocks that have bullet-proof dividend payouts, that the companies have a reputation for raising those dividends every year and even more importantly have faithfully paid those dividends for decades. The other long-term type of investment is tiny market-caps, largely unknown names that have a dicey future but if they survive over time have a chance of generating very large returns in the future. One that I recently mentioned was TransEnterix (NYSEMKT:TRXC), another is Iridium (IRDM); over time I must have mentioned several others, many of which are not faring that well right now. This form of long-term investing is more like being a VC, have 10 to 15 tiny bets and wait for one or two to pay off in a logarithmic fashion. I don’t believe this should be considered a viable investment strategy for a retirement account, and this is not the category I want to address today.

Why are Long-term Investments focused on dividends

I believe that dividends go into the heart of what long-term investing is all about. A long-term investor should approach their holding in a company as an owner. If you own a business, you should expect to get a return on your ownership. You want to be paid for owning it, you want to see real revenue growth, and real earnings growth, otherwise those dividends may have to be cut or eliminated. As an owner, you should never look to sell your business, unless you really must. How often do owners of actual businesses sell their business? I would say almost never. In fact, many owners look to the day that their daughter takes over the business when they retire. That said, being an owner in stocks doesn’t mean “buy and forget.” As an investor, you are buying that company every day. What that means is, you should look to hold a stock forever, unless the company can no longer pay dividends or the sector is untenable. There was a time when coal mining companies threw off a great dividend and had great prospects. Someone who is still invested in such a stock today because they are a long-term investor will be in error. One could make the same argument with a cigarette company, and so on.

A long-term investor should use the perspective of time as an advantage

By that I mean a long-term investor allows you to have patience, in a time scale that traders could never manage. What do I mean by that? Let me use two names that I’ve recommended over the last few months for the long-term – Johnson & Johnson (JNJ) and 3M (MMM). These are two names that have some bad headlines to deal with but are great companies with great futures. For JNJ it’s accusations of asbestos in Johnson’s Baby powder and charges of being active in the Opioid crises. Both of these situations are temporary, and while they may cost billions (I doubt that it will be that much, but even so) JNJ has chosen largely to litigate these charges, for now, but it WILL be fixed. As long as these cases are publicized the news flow will hammer the name and keep it down. MMM has issues with groundwater chemical contamination, also a big part of their business in China and industrial companies are not doing great in general. A trader would be afraid to touch both these names, but the long-term investor should love stocks like these because the patient owner will win. A trader has no expectation that either of these names is going to move substantially higher for years, let along days or even weeks. I believe the MMM issues are more troublesome than JNJ. That said, MMM is a fantastic company that was the original “high-tech” company before there was such a sector. They have a huge RnD budget, which made MMM famous for innovation and break-through products. What I see is that MMM will either navigate their way through and go back to their historic high valuation. Or they most likely will find an activist investment group that will push for spin-offs and business sales. In the meantime, the dividend will keep paying. What I am getting at is a long-term investor should look for medium-term surmountable issues and consider them investment opportunities, even when the news is not great at all. AT&T (T) is another stock that I mentioned as a long-term opportunity. Right now DirecTV is doing poorly, actually very poorly, heavily hemorrhaging subscribers, and there is a question about how the Time-Warner acquisition will work out. In the meantime, that dividend looks mighty tasty, a long-term investor can prosper by accumulating T, JNJ, and MMM over time, also set up the DRiP, to have the dividends be turned automatically into shares. Any time the market sells off, nibble some more. The key here is that you treat the long-term investment account as your savings program, slowly allocate a few hundred or thousand (whatever you can afford) every month, to dollar cost average. Ten years from now, you’ll see the power of a steady investment program.

Work with your investment advisor

A long-term investor can scope out the market for “fallen angels,” they are names with great businesses in a rough patch. Don’t get me wrong, a long-term investment account should have well-diversified portfolios and ETFs are great for that. I would still favor ETFs that are strong dividend payers. Many of you have money managers, let them set up the ETFs for you, you can pick 5 to 10 big-cap dividend kings that over the long term are going to be great but are stumbling right now. At some point in the future I will expand on the “VC”-type long-term investment schema.

I plan on having a long-term investing section on every weekend piece going forward.

This Week, The Big Milestone is the Trade Meeting October 11

I can’t stress enough how much this meeting will affect trading this week. At this point, there is more optimism that Trump is ready to parley rather than palaver. I have no sense of where the Chinese are at this point. I think there is a good chance that they will make the political calculation that Biden is out and Warren is in. If that is the case then they are ready to give Trump enough of a win to keep him in the game. Warren will likely be a lot harder to deal with and much less interested in the economic downside of confronting China on Hong Kong, and Uighurs. But this is still a very binary event, if the stock market is too optimistic I would be inclined to get more aggressive on hedging. If there is more pessimism, I would look for long opportunities. At the same time earnings season is upon us, and we are already in positions that we took last week. Let’s talk about some of the names from last week.

There are other economic numbers this week, one that interests me but may not swing the market will be the NFIB survey. My thesis is that economists are missing the strength of small and medium-sized businesses. If the survey stays at historic highs, then my bull thesis is still intact that the underlying economic basis will keep our GDP above 2% and back to higher growth in 2020.

Some trades from last week, and what to do this week

Micron (MU)

On September 27, I suggested going long on Monday. On the following Sunday, September 29 I suggested a 3 legged options configuration called a “Risk Reversal” sell the MU put with a 41 strike price, and then long call spread with the long call at 43 and the short call at 46. At this point, I would close out the short put at 44.55 (where it closed on Friday), and then in hindsight, I would roll up the short call at 46, perhaps moving it up to 50. If we do get some static and Micron falls back it would likely hold the 41 price-level, that would give those that regretted not getting on the MU trade a chance to get in again. I bet the CEO of MU is already buying back MU stock furiously.

Ulta Beauty (ULTA)

I mentioned on Friday that ULTA retreated, and from the collective news of last week I am more confident in spite of the drop. So let’s chart it and see where we’re at…

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Ulta closed at about $250, it looks like support won’t come in until 240. A gradual round bottom is a very stable rally, but at the end of the arc, you saw a more parabolic move. This is the sign of an overbought condition and that this check back is logical, and gives latecomers the opportunity to buy-in. Keep in mind that , an insider-director, bought $17.4 million at $248ish per share and 27.2 million at $236ish. If ULTA does fall to $240 you are getting pretty close to the median price point for ULTA. The CEO also bought more than 300K, we covered this last week.

Costco (COST) charting the downside

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This is the 3-month chart of Costco, and it doesn’t look great. Let me preface anything I say about COST, by stating that it’s a fantastic company. One of the best major retailers out there. It’s just that sometimes even great names get ahead of themselves, as COST is now. The chart above is showing a “head and shoulders” top, this formation is almost classic with the rightward shoulder lower it is really bearish, it just is. The other diagonal line is the 200-day moving average, when the stock price falls below the 200 DMA it’s dramatically called the “Death Cross.” I don’t know that moniker should be associated with COST but it’s not great. It is very instructive to note that COST stopped at its upward trajectory right at that moving average. I think that the name continues its downward movement this week. I think there are about 20 points of downside, because the chart says so.

Facebook (FB) trading below the 200 DMA

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The above chart is not exhibiting a perfect “inverse head and shoulders,” so there might be some further sloppiness. Also, a trendline didn’t seem instructive to my eye, so once again I am using the 200-day moving average. (Please note I always use the closing price for the moving average). That is the descending green line above the graph of the prices (blue line), an overhead 200 DMA means that there is resistance to the upward movement. A purely technical trader will not invest in FB until it closes decisively above that 200 DMA of about 182.5. Just bear in mind that FB is reporting at the end of the month, and I think it runs to 200 into earnings. There was a spike in Call buying last week.

If the trade talks go the other way then it makes sense to look at hedging more closely

Tomorrow I will price out hedging to prepare for a negative result in the trade negotiations. My hope is that China gives enough for Trump to claim victory while at the same time Trump turns down the aggressive rhetoric against China. Hope for the best, prepare for the worst.

Political Advertising is going to break records, invest in the “idiot box”

President Donald Trump and the Republican National Committee (RNC) raised $125 million in the third quarter, a record-breaking fundraising sum. According to Trump’s campaign manager Brad Parscale, the president now has $156 million in cash on hand with nearly $310 million raised so far this year. In contrast, former President Barack Obama and the Democratic National Committee (DNC) had only pulled in $70 million in the third quarter of 2011.

Sen. Bernie Sanders (D-VT) was yet again the most successful Democratic candidate in terms of fundraising, bringing in $25.3 million; in comparison, Sanders raked in $24 million in Q2. According to the Federal Election Commission, Sanders has raised more than $46 million, a number that will leap substantially when the third-quarter numbers are added to that total. In all, Sanders has raised more than $60 million for his 2020 election campaign.

South Bend Mayor Pete Buttigieg was next, pulling in $19.1 million, his campaign announced on Twitter. So far, his campaign says, Buttigieg has raised over $51 million for the year. Mayor Pete’s fundraising totals are a decline from his second-quarter haul, when he pulled in just under $25 million. Still, he is miles away from his Q1 fundraising totals, which were under $10 million.

This is not about whether political ads should be controlled or any other political editorializing, this is about the Benjamins

I am not here about politics, but this is proof positive regarding an idea that I have come back to time and again. The advertising for the general election will generate hundreds of millions of dollars in a very short while. The companies that will benefit are the TV stations. CBS is the only independent big-cap TV network. The other interesting independent TV company is the Sinclair Broadcast Group (SBGI). SBGI is a conservative TV company, so I suspect a lot of GOP ad buying would happen there to energize the base. I also think Dems that want to change minds want to advertise with them too. I have no idea what their indebtedness is, they acquired a bunch of TV stations, and I am not an expert on this industry. I am only pointing this out to you to spark some thinking that could leverage the upcoming election, which whether we dread it or not will clot our airwaves for the next year and a half or so. Also, SBGI is selling at 12 times earnings. Do some research on your own, this is a relatively tiny company; actually, CBS is not all that big either. I think they get a nice chunk of ads because old folks vote, and old folks watch the TV. I think these two might just be a way to get alpha.

Analyst Corner

Snap (SNAP) was upgraded by analysts at Morgan Stanley (NYSE:MS) from an “underweight” rating to an “equal weight” rating. They now have a $17.00 price target on the stock, up previously from $14.00. 18.9% upside from the current price of $14.30.

Tandem Diabetes Care (TNDM) was upgraded by analysts at UBS Group AG (NYSE:UBS) from a “neutral” rating to a “buy” rating. They now have a $75.00 price target on the stock. 33.3% upside from the current price of $56.28.

My take: I can’t believe TNDM is back to this level. It’s a buy.

Etsy (ETSY) is now covered by analysts at Nomura. They set a “buy” rating and a $70.00 price target on the stock. 25.4% upside.

Costco Wholesale had its price target raised by analysts at Telsey Advisory Group from $305.00 to $315.00. They now have an “outperform” rating on the stock. 9.0% upside. Costco Wholesale had its price target raised by analysts at Bank of America Corp from $310.00 to $320.00. They now have a “buy” rating on the stock. 10.7% upside.

My Take: COST is a great company, it just is. Frankly, everyone knows that it’s a great company. You aren’t going to buy more on 9% to 10% upside.

Home Depot (HD) had its price target raised by analysts at Oppenheimer Holdings Inc. from $215.00 to $255.00. They now have an “outperform” rating on the stock. 12.4% upside.

Short interest – Top 6 names

Tesla (TSLA) – 2.2%

Bristol Meyers (BMY) +1.2%

Netflix (NFLX) +1.2%

BB&T Bank (BBT) +4.5%

Square (SQ) +4.5%

My Take: TSLA is reporting in two weeks and I suspect that the shorts are taking some profits. As I regularly warn you, earnings are binary and there is a good chance TSLA has positive cash flow as equipment purchases for the buildout of both the Gigafactories in Nevada and Fremont have largely been completed. Meanwhile, the Shanghai factory is just starting. The goal is to start at 1000 cars a week there so they aren’t piling in equipment all at once.

NFLX being the second-highest short was a surprise, and I am wondering whether all of it is the “smart money.” The news that they disappointed in subscriptions is very old news. The assumption that they will disappoint again is a binary event, shorts are much smarter than that. NFLX had a sharp reversal at above around $250 and bounced as high as the $270s. NFLX is reporting 10 days from now, you should wait for the news and then act accordingly. Or even wait for the week to evolve going into the trade meeting on the 11th. There might be a better moment to make that decision.

SQ is fairly easy to figure out. It has been acting great lately, but it is very clear that it is running into huge overhead resistance. Take a look at the chart below, we see the classic inverse head and shoulders but it runs right into long-standing resistance at this $63ish level. Also look at how high the stranded buyers are, all the way up to $82! So maybe SQ does chop around at this level. It WILL break out and it will reach $82 and above. SQ has a great business model and mission – being a champion of small business. A short squeeze would be just the thing that gets SQ there. In fact, any of the above-bolded names could create conditions for one.

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Enjoy the rest of your weekend everyone!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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2019-10-06