A contrarian trade for natural gas

Recently, the National Oceanic and Atmospheric Administration was predicting a mild winter this year due to El Nino. This has led to a decline of the natural gas (NG) price as a warm winter would mean less demand for natural gas. A few days ago, the U.S. Energy Information Administration (EIA) was forecasting that household natural gas heating bills will fall by 10% this winter. This has really crashed NG and its price dropped like stone, briefly below $2. It has reached a historical low at the moment. This may set up a great contrarian trade with a few things to consider:

• The sentiment is extremely low as virtually no one is interested in NG at the moment. As I said before, when everyone is standing on one side of the boat, it will soon tip over.
• The current historical price has likely factored in the low demand of NG during this winter. However, we all know that how accurate the weather forecast is, especially for something in a few months. I have seen a different forecast from the meteorologists at WeatherBELL , which is a premium service based on their models that a major cold and snowy winter over the South and into the East will occur in the coming months. If this turns out to be true, it may surprise everyone and the mood for NG can turn around overnight.
• We all know in the past decade, US has produced too much NG due to the revolutionary fracking technique. So we have a lot of supplies for NG, causing a downtrend of its price. But the thing is, when it is cheap, the demand for it will increase. Actually more and more power companies are switching to NG from the traditional energy source of coal. On top of that, due to the very depressing situation for oil and gas companies at the moment, increasing number of rigs are stalled and the production is going to be substantially reduced moving forward. 

Therefore, if we suffer a bit more severe cold weather in the coming months, I'm sure the NG price will shoot up greatly. One way to trade this idea is via the major NG producing company, Range Resources (RRC). As with NG, RRC is also in a bust mood with very depressed sentiment towards it. But if NG goes up due to any surprise, a jump of 15-20% of RRC is not out of reach. Of course, this is a risky contrarian trade and don't bet with the money you cannot lose. And better to place a tight stop loss, e.g. 5% from the current level. 

A new EFT for cancer immunotherapy

If you know a bit about the biopharma sector, you must know that right now the hottest area is nothing but cancer immunotherapy. BMS is the leading and first company to market the immunotherapy for melanoma, ipilimumab, which has been very successful and profitable. This is really a breakthrough, opening a totally new era for cancer treatment and has brought up the true hope that some day, cancers will not be a fatal disease but rather a chronic one and potentially curable.  Needless to say, a lot of money will be made in this area and this is just a beginning at the moment. I have been hoping for a ETF so that one can have a focused investment with good diversification to minimize the risk. Now we have got one. A brand new EFT, the Loncar Cancer Immunotherapy ETF (CNCR) has just been lunched for about a week. Here is some information for CNCR. It currently includes 35 companies involved in developing various immunotherapies at different stages. It covers both big biopharmas as well as mid-size biotechs. Below is some key portfolio information for CNCR. Given many of the underlying companies are greatly loved by the Street, valuation-wise, CNCR is not cheap. But since this is really one of the hottest areas at the moment, I'm not sure you can expect it to be cheap in the foreseeable future. Using dollar cost averaging may be the best approach to put some money into it. I personally have a high hope for it long-term.

Is Walmart a good buy now?

In the last earning report about 2 weeks ago, Walmart (WMT) posted rather grave earnings with a dire projection of decreasing profit growth in the next 3 years. We all know what happened to WMT: a one-day 10% plunge which has not happened in decades. Needless to say, investors were scared and all rushed to the exit by dumping the stock at the same time. I must say, I have been wrong for some time about WMT as I was expecting it would have done much better by now in transforming its business. So is WMT still a good buy now? Well, this is not an easy question. But fortunately I have seen a friend's (Chaoran) analysis about WMT, which is rather thoughtful about its valuation and possible prospects in the next few years. He has graciously agreed to allow me to quote his analysis here:

By Chaoran 

 

I meant to write about WMT on its 10% drop earlier in the week, but threw it away since I really had no great insight on WMT. In the short term I could see it go either way: there could be a short term snap back with traders trying to make a quick 5-10%; or it could go down further due to disappointment and people throwing up hands with tepid projections from the company for the next 3-4 years. So I really have no idea if your intention is to have a short term play for the next 12 months or so. If instead you want to have a relatively long term assessment of WMT as an investment for the next 3-5 years or longer, I would offer a few of my personal views: 1. There is limited downside at the current valuation level: WMT is trading around 12-13 times of earnings. 2. The upside depends a lot on executions for the next 2-4 years. There are big uncertainties in management's ability to execute their plans to transform the company. They may or may not succeed. 3. Even if they succeed, you are looking at flattish earnings for the next 3-4 years, taking their projections at face value. It would require a lot of patience. Sure, you're getting paid a 3% dividend while waiting. But if their plan doesn't pan out as a decent success, would you be satisfied with something like 5% a year for the next 3-5 years? Now if it succeeds, what kind of return can you expect for the next 5 years? Let's assume its earnings stay flat for the next 3 years and its PE multiple also stays flat at 12.5. So you only collect 3% a year in dividends for the next 3 years. After 3 years, assuming WMT gets back to higher growth. But how high? WMT has averaged EPS growth about 7.5% a year for the last 10 years, but virtually no growth for the last 3-4 years. Realistically, I don't think WMT could be expected to grow more than 7-8% a year on a normalized basis, given its size and a host of other issues (e.g., higher compensation costs going forward, limited ability to expand domestically, less profitability internationally), even if they turn around successfully. Let's assume WMT does get back to 7.5% growth in EPS after 3 years. What kind of PE multiple does it deserve? Well, it should be higher, perhaps 15-17. Let's say it's 16. Right there you get a markup of about 28%. So that's about 28%/3=9% a year. Adding the 3% a year in dividends, you get 12% a year for the first 3 years. Not bad! But that's only if they succeed. A big if, though. Let's say that's the case. After the next 3 years, you will just get something like 7.5%+2.5%=10% a year. I'm assuming a more normalized dividend of 2.5%, since at higher PE multiple the dividend yield will be lower. All in all, it appears the best scenario is to earn you 10-12% a year if you hold it for the next 5+ years. If WMT fails to execute its transformation plans, your return will be quite unsatisfying. Could WMT get back to faster growth like 10+% a year? Not impossible, but not something I want to bet on.

 

I like this rather comprehensive analysis and also very much agree with the conclusion that WMT is not likely to get back to fast growth in the foreseeable future. Having said that, I'd like to offer some ideas about trading and investing in WMT from a different perspective.

 

With respect to trading for short-term, I do believe WMT is likely at or near its bottom at least for now. The sentiment for WMT is understandably extremely poor and almost no one wants to touch it anymore. This is the time when a bottom, not the top,  is near or reached. Technically WMT is quite oversold and offers a good opportunity for a quick rebound. Having said that, it is still a falling knife and the overall market is quite risky for a severe decline any day. To minimizing the risk of catching a falling knife, it is better to wait and see some evidence that WMT may have bottomed.  One good indicator is that, when the market falls off the cliff,  WMT  refuses to go down much or even goes up. That's the time to make a bet for its rebound.

So how about the long-term investment? Well it also depends how you would like to put money into it. While I do agree with the above analysis that it is likely that, even if the management has executed the transformation plan well, WMT may still likely stay at a slow growth rate. So if you are looking for an annual return 15% or more, you may not want to invest in WMT at all. However, there is another way to invest for long-term, good for this kind of slow growth companies with good dividends. If you are very patient and not looking for immediate return but for very long-term investment aiming for the ultimate values, then Dividend-Re-Investment (DRIP) is a good way to invest in WMT. I have written DRIP quite often in the past and here is the one which can mathematically prove that you don't need high growth stocks to become rich, as long as you have a very long investment horizon with patience. I think WMT is worth for long-term DRIP investment at this level. There are a few things to consider:

• As discussed in the analysis cited above, WMT is very cheap valuation-wise. After such a historical bloodshed, I don't think WMT will go down much further from here. The extreme dismal sentiment towards its long-term prospects has likely been priced in its price. Short-term it may still fluctuate a lot due to the overall market uncertainty; longer term however, I'd feel more comfortable to establish a position at this level, if you are willing to stay with it with DRIP in place.
• WMT is still generating a lot of cash from its retail business, given its size and presence world-wide. Per the company, it will generate $80 Billion free cash flow in the next 3 years.
• It has decades of track record to pay increasing dividends, a feature important for DRIP. Although it may very likely slow down or even stop increasing dividends in the next few years, given the current rather challenging financial situation, the chance of a dividend cut is highly unlikely since it continues to generate tons of money and its dividend payout ratio is quite low (< 50%). Therefore I think it is quite safe to invest in WMT with DRIP. The aim here is not for immediate return but rather to automatically accumulate its shares as much and fast as possible for long-term. Eventually this will allow you to hit a jackpot with exponential increase of the position value.  As such, a low share price is not a bad thing but even beneficial as long as the company is still generating enough cash to pay dividends.

The million dollar question is obviously whether the management can execute the transformation plan well in the next few years. Well, personally I still have good faith in it, given it has gone through numerous challenges since its birth decades ago and this one is certainly not the only one and the last one. I think it will find its way to revive and thrive again. This reminds me of MCD and MSFT few years back till recently when both had been considered dad money for years due to failure to timely responding to the changing environment and trends. But both have finally found their way out. I think we will see the same story for WMT eventually. However, this is only my personal opinion and no one knows for sure what will happen in the future. In case WMT turns out to continue to deteriorate substantially, the DRIP investment for it will not work well. We need a clear exit plan how to handle this unlikely scenario. Here is what I will suggest: don't go crazy to put a lot of money into it but have a reasonable position size. For DRIP the idea is not to bet for one stock with a lot of money but rather aim to create values via DRIP long-term with a relatively small position for each one. With that, use a trailing stop loss that you are comfortable with, e.g. 15-20% so that if WMT is indeed going down to the hell, you can get out without losing too much.

Thrive in a cashless world

This is a fast changing world with mind-boggling innovations brought up everyday. There are many new trends which are going to dominate our life in the future. One of them is a cashless world. For many years, cash has become less and less used in our daily life due to ever increasing usage of credit cards, debit cards and other traditional electronic banking. Now with lightening speed of expansion of the mobile world, the new ways of electronic payment like ApplePay, AliPay, Google Wallet just accelerate the death of cash. Maybe in the foreseeable future, cash will indeed become obsolete and disappear from people's wallet. There are certainly many company which will thrive in this cashless world. But one company is showing its particular strength. I'm talking about Global Payment Inc (GPN).

Global Payments provides payment solutions for credit cards, debit cards, electronic payments, and check-related services. It operates in two segments, North America Merchant Services and International Merchant Services. It processes billions of checks, payment cards, and e-commerce transactions annually for more than 1.5 million merchant locations around the world. Apparently GPN is not in competition with but rather work with various card-issuing and electronic payment companies by providing innovative software-supporting and processing solutions. Now with the mobile life dominating the world, GPN is not simply sitting and watching but is also actively participating in this mega trend. Below are just the 2 examples as described by GPN:  

Mobile Payment and Back-Office ManagementWith Global Payments' mobile solutions, you can turn your mobile device into a powerful payment system from point-of-sale to inventory management. Accept cash or credit. Scan barcodes. Manage inventory. Email receipts. And have real-time reporting – wherever you are.

Apple Pay
Apple Pay™ - A terrific milestone for the future of the payment industry. Apple Pay is transforming mobile payments with an easy, secure and private way to pay. Global Payments brings secure and innovative commerce to merchants, partners and consumers with the addition of Apple Pay.
By offering Apple Pay merchants can provide their customers an easier, convenient check out experience.

Its healthy and growing business has certainly been reflected in its financial data, mainly revenue growth higher than the industry average of 21.5% with strong earnings growth of 37.5%. Its recent reported net income growth came in significantly exceeded that of the S&P 500 and the IT Services industry (by 26.6% one year same quarter comparison). As such, its net operating cash flow has sharply increased by 165%. Its strong business can also be demonstrated in its long-term stock price trend. Below is its 5 year share price chart. As you may notice, it had been in sideways for years prior to 2013 and its share price has strongly moved up since 2013, roughly coincident with the start of the major change in our shopping behaviors by using more and more mobile payments. The long-term stock trend can hardly cheat people. If its business model were obsolete and could not be integrated into the most powerful trend of the cashless mobile world, you cannot expect its share prices could have consistently moved up over time. That's the main reason why I really think this is a stock that has a great future as long as it can continue with its momentum. The key question is whether it is a good buy now? I don't think so. Actually I think it is quite overbought at the moment at about $130 and there is a great chance it will correct by 5-10% near term. I'm targeting it to correct to around $120 to find its base for the next leg up. If you want to ride the cashless world, then GPN is one of the stocks you may bet on.

You will never be insolvent by being cautious

Following my bearish view posted yesterday expecting a sharp market turndown, I got a comment "As much as I like your crystal ball, I am also mindful of the wisdom that says "Market can be insane longer than you can remain solvent".  This market is insane, and it may last a little too long." This is a very good point and I'd like to post some further thoughts on my opinion.

I definitely have no crystal ball and as much as I'd like to be correct to see a sharp market plunge starting next week, I really don't know whether this will happen or not exactly per my timing. However, the key message of mine is not about the timing but rather "BE CAUTIOUS"! Why is it so important about this cautionary message?  Because this is the time when herd investors will start to chase the market by being aggressive to buy. You see, we start to see all the talking heads on TVs beginning to be quite bullish and talk about year end rally. We are also seeing Wall Street analysts giving advices that it's the great time to buy as the correction is over and we have seen the bottom now. When this kind of euphoric sentiment floating around while the technical indicators all pointing towards a rather overbought market, it is the most dangerous time to put your money to work. However, this is exactly the time most herd investors cannot hold up and they are very anxious to get in because they generally fear they will miss the boat if they don't buy now. That's why I'd like to be contrarian and caution anyone who care my view about the market status. Of course, I could be wrong but I can say you will never be insolvent by being cautious. We may miss some opportunity if I'm wrong but it's much better than to be caught up in a sharp market crash. If the market indeed turns out to start a powerful bull run, it will never be too late for us to join even if we miss the initial few points of increases.  With respect to the idea of shorting some stocks, let me be very clear: I'm not blindly advocating everyone to short anything. It is not suitable for the majority of investors/traders. It should only be considered for those who are experienced in shorting and know how to control their risk. Otherwise, there is indeed a risk of be insolvent when you are aggressively shorting but the market keeps going against you!! DON'T DO IT UNLESS YOU KNOW WHAT YOU ARE DOING AND ONLY PLAY WITH THE MONEY YOU CAN LOSE.

A final word about value stocks for long-term investment. I personally have quite a lot of such stocks that I have no intention to sell for long time. I do not suggest anyone to sell them as well simply because I'm expecting another market correction. As long as they are still good in valuation, simply keeping them will not go wrong. Personally I have virtually placed a short hedge for each of them because I'd like to be compensated for some paper loss if the crash indeed occurs. I also hold a sizable cash load and will only aggressively buy when I feel the final bottom is indeed in place.

This oil company could be a good hedge for declining market

Tetra Technology (TTI) is an oil service company. As we all know, oil companies in general are facing significant headwinds in the past year and many of them are on the verge of crash or bankruptcy. TTI may be one of them, if it continues to bleed with fast burning of the capital. Let's first look at its key financial data why TTI is in a dangerous situation (you may find all these data in Yahoo Financial): TTI has a negative EPS at -1.9 with negative free cash flow in the past year at -$34.30 million. This means TTI income is substantially below its expenses. As such, its return on equity is: -22.02%; profit margins: -12.59%. It has $936.11 million in debt with only $41.94 million in cash. So its Debt/Equity is 123.98%. Of course, if the oil market can quickly recover to allow TTI to swiftly make more money, TTI may avoid this dire financial abyss. But unfortunately it is not likely to happen in the near future. Yes, the oil market has been on fire in the past week or so but I don't think it can last for too long, at least not for now. Similar to the overall market, the oil sector is a bit too hot for now and I believe it will take a breath as well. If both the oil sector and the overall market come down as I expect, it won't be good for TTI. But what makes me more interested is its technical setup. As you can see below, for the most part of the year, TTI is roughly fluctuating in the range between $4.5 to $8. Now it's approaching the top end of the range. A more bearish sign lies in its H&S formation when it is approaching the overbought condition. I think TTI is a tradable short candidate as part of hedge in your portfolio in a declining market. Of course, shorting always has inherent risks. Don't try if you don't know how to do it and always have a clear exit strategy in case the trend is against you. To me, if TTI breaks out it recent high above $7.7 at closing, I think the idea is wrong and a stop loss should be triggered.

 

Be prepared for a retest of the Aug low now

It's really amazing how people in the market can change their mood so fast. When I said I was very bullish just a little bit over a week ago, hardly anyone was happy and joyful about the stock market. Honestly, I did not expect this kind swift change almost like overnight from depression to euphoria. That's why this mood change appears more like a schizophrenic behavior. It is purely beyond my expectation. I thought it would probably take at least 2 weeks or so with a few times of back and forth to move the S&P above 2000. But it has just happened like a snap of fingers and S&P shot up non-stop for 5-6 days, going directly above 2000 and reaching almost 2020. I initially targeted 2030 as its turning point but I'm not sure this will need to happen anymore.

You see, now the situation is just a mirror image of what it was a week ago: now all the people in the market are happy and fearless, all stepping on the euphoric side of the boat (as opposed to the depressing side a week ago). As I said, when this happens, the boat tends to tip over. The market is clearly rather overbought. S&P is at its upper end of the Bollinger Bands and the Stochastic Oscillator (SO) index (at the bottom) is approaching the highest level at 97.2. Mathematically SO cannot go over beyond 100! You may check the SO over the past year when it was at that level and what happened next. It almost always preceded a sharp decline of S&P. VIX, the fear index, is below its BB lower end, indicating it will soon move up (which usually means a declining stock market). The call option prices for VIX are also much more expensive than the put options, suggest higher VIX in the next few weeks. The junk bond prices are starting to turn down as well, which often the leading indicator for the stock markets. There are simply too many technical indicators that suggest this dead cat bounce is close to its end, if not yet ended. I bet starting from next week, S&P may resume its next leg down, and likely will go down to test its Aug low or even lower.

Remember what I said 9 days ago: I think its final plummet may only start when it is over 2000 and when most of the people start to think this correction is over and starts to be quite bullish for longer term into the year end rally. This is likely the time when the market will start to punish as many investors/traders as possible. I believe the time is ripe and the market will show its mighty power to punish as many as possible. BE CAUTIOUS!!

Enjoy a sweetie year end

Believe or not, the commercially busiest season of the year is quickly approaching and Santa Claus has already started to greet you in many malls. So what is a good gift loved by most of people? Many but chocolate is definitely one of them. Just go to Costco or Walmart or any grocery store, chocolate is certainly one of the those gifts placed at the busy traffic lines. Given the brutal stock plunging in the past couple of months, I think you may consider to buy some chocolate stocks as your own year end gift.

The stock I love most is Hershey (HSY). This company has over a century history, which means it has gone through all kinds of tough economic or political turmoil, such as great depression in 1929, oil crisis in 1973, black Monday stock market crash in 1987, dot.com tech stock crash in 2000 and latest financial crisis in 2008. Regardless how challenging the world economy is, people will still buy and eat chocolate and Hershey, the most famous US chocolate brand has only become stronger and stronger fundamentally. The thing many people don't realize is its efficiency of business investment.  Do you think HSY requires a lot of capital investment for new technology for its products? Hardly anything meaningful relatively speaking, since for centuries, the processing and manufacturing of chocolate remains largely similar but of course some good improvement has certainly been made. However, proportionally against its revenue, such new capital investment required for improving manufacturing could virtually be ignored. Largely due to this reason, HSY is generating a lot of free cash, which has been used to reward investors for decades via increasing dividends and stock share buy-back. Hershey is a stock you can own and probably forget about it for life as long as you buy it at good prices and reinvest its dividends. Right now, it is probably a good time to pick up few shares of HSY. It is not super cheap but it has "crashed" almost 20% lately thanks to the market turmoil. Not only that, if you look at its price curve for the last 5 years, you may notice that HSY typically starts to move up quite handsomely during the last quarter and into the new year period. This is consistently with its best business seasons for Halloween and Christmas.  So even from the trading perspective, buying HSY now is likely a good idea.