Welcome back to this month's club member fireside chat where we take a hard look at what's ahead, go over some of our key positions, including a new one and answer your questions, all part of what you get these days when you join ActionAlertsplus.com.
I want to start this month's call with some big club news - yesterday we launched the new, redesigned Action Alerts PLUS site. I'm very excited about it.
The team has been working so hard, this thing went at 2am, for months to improve the experience for our members and the results are great! I hope everyone has had a chance to check it out. The new platform makes it easy to find all the information that I know you've been asking for, and it's mobile optimized so it works equally well on your phone or tablet - including these calls which you can now watch on the go on any mobile device. There are lots of great new features I'm excited for you to discover like the dedicated video tab, whitepapers section, and price targets on the portfolio page.
To get familiar with the new site, for those who haven't, I highly recommend taking the tour we've created, which is located in the Help dropdown in the top right hand corner of the desktop site. Just click on the Help circle and choose "Take the Tour".
Some of our members are already raving about the new experience, and let me say that I am already cheered by the responses we have gotten so far! I'm just going to rip some of them off. Dane Kasich love the new Web site, very well done. Thanks to Jim for sharing all his knowledge. Great new format by John Crosby, loved the new site with a new site. Awesome Steve Smith. Thank you Steve, I know you were continual and long term fella. New site is awesome Wallace, look this stuff mean something to me means something to us because it says once again we have tried mightily to make this a better club better product and I think we're doing it
Before we move into the markets, I just want to say thank you again to so many people who send us email and tweet how much you are learning and enjoying your membership. We've gotten a huge number of tweets in the last month. Club members know we take your requests and your questions seriously, we've got a fabulous customer sales group, obviously our own group is as interactive as possible and we really thank those who have made their voices heard, you can see some of their suggestions at work in our new experience, and there is more to come! We're just going to get better and better and better.
Now, without further ado, let's get to it....
Club members know I take this thing darn personally. In this club room I feel free to speak my mind and tell you what we are doing right, and many times what we are doing wrong, which is more important and how we can get better at the art of investing. I saw we because it's not me.
Right now, I have to tell you, having just come from the Today Show this morning and interviewing several CEOs offline doing Squawk on the Street, writing a piece for Real Money, I am more than a little befuddled.
That's because, on the one hand, we in the media, spend a huge amount of time talking about Donald J. Trump and his impact on the markets and the economy but on the other hand, the impact, frankly, has been negligible.
Here's a classic example. I have been writing this presentation since Sunday, revising it and revising it, and I always left a big hole in it to be filled by what I talked about on the Today Show, the President's tax policy. I think the idea of making our corporate tax rate competitive, slashing it to 15% is long overdue. It makes a ton of sense. It should be done.
But I don't know if I can take the effort seriously given that the President has yet to find common ground, 80% common ground 20% not according to Paul Ryan this morning, with either party forget the Democrats, and seems to have no real sense of what it might take to get that tax rate down given that corporate taxes represent 11% of the federal government's tax take and there is no way that the president will get his own party to agree to a cut of that magnitude for this corporate tax just by saying that business will get better. They won't buy it.
Talk of a quick gain from repatriating the $2.3 trillion corporations have hoarded overseas might help. So might taxes on so-called pass throughs like hedge funds, law firms and real estate operations. That could net out to be a positive, althought it's hard to see how that could be.
Sure lower taxes can speed economic growth, create more jobs, bring more productive assets here, and increase profits that can be used to hire or buy back stock or give bigger dividends. All of those are good things. I know that Warren Buffett has a great part of his essay saying listen some people feel it's un-American to buy back stock instead of just hiring people it's wrong
But without more than one time offsets to the lost revenues from treasury, I just don't know if Trump can argue his way through this eminently reasonable corporate rate stance and get the jobs done. I don't think that Paul Ryan will let it happen.
So we debate it and debate it and debate it both in Congress and in the media. In the end I fear that neither will get anything done. We ought to enact a national wind bag tax, it's liable to be more successful.
So maybe we get some compromise. But nothing that is going to help a market that just charged to new all-time records on the Nasdaq and is breaking out in the S&P. We're having another good day today.
Or at least nothing within a time frame that matters to the three to six month purview I like to take for positions in the charitable trust. Maybe nothing until the end of the year, that's what my colleague David Faber said this morning on CNBC, and that might be too optimistic.
Meanwhile, what's happening? The market is passing by those who wait. We have a concerted group of stocks that is going higher and they all share one common trait: they are getting their growth from overseas. Whether it be Caterpillar or McDonalds or 3M or Dupont, those earnings we see, those great deltas, so to speak? They are from Europe or Latin America or Asia. They aren't from here. Only United Technologies and the major industrials really made their numbers here.
That's right, the rest of the world is snapping back and it's bringing our international companies' earnings with them as global GDP rises.
So as someone who both opines on stocks and invests charitable money I find I have to deal with the same dichotomy everyone else is struggling with: one, Thinking that Trump is the most important force in our markets and two realizing that other nations around the world are now growing faster than we are-admittedly off of a more depressed base-- and their stock markets are doing better than ours because of what looks to be the continued dysfunction in Washington except this time it's hosted by a different set of players, the Republicans in their own party.
Yet, many observers I hear and read think the stock market's been roaring because Trump's going to get tax reform, repatriation and deregulation going in a way that would be immediately additive to earnings for most companies in 2017!
Let's face it though, here we are almost 100 days in to this administration and the only real progress has been on the deregulation front. Sure there's been a big push to create American jobs, unemployment is very low; frankly, though there seems to be more fratricide going on among the Republicans than there is comradery and that's taken the air out of the Trump rally. This is an earnings rally people, not a Trump rally.
Let's speak frankly with no party labels. I talk to almost all of the executives I interview, on air, off camera after the interviews and I can tell you that there has been a marked deceleration in the momentum of this economy ever since the House couldn't repeal and replace Obamacare.
From that time one, whether it be with autos, which are just ok, or with consumer spending or even with homes, even tho mortgage rates are at a 6 month low, we have seen our own country's economy take a step back while others have gotten stronger.
What are we to make of this? I think we have to recognize three critical points about this market and the white house and how they are informing our judgment for club members and for my charitable trust.
First, Trump's strongest suit is deregulation because it doesn't require the help of Congress which is either disorganized or perhaps just doesn't want to play ball with a man they nominally consider part of the Republican Party. They are at loggerheads on pretty much everything, from the wall to the border tax, I think that's going to come up again because Paul Ryan wants it, to health care where there really was no meeting of the minds or else it would've passed.
I don't see that ending any time soon. The disorganization is too palpable. The leadership too all over the place whether it be in the senate, the house or the white house itself. The fact is that I got up at 3 a.m. to study the different tax proposals floating around and every major news outlet had a different story about what the administration wants and will ultimately seek. It was an extraordinary feat just to try to figure out if the border tax is really dead or whether there really will be repatriation to help pay for taxes that may or may not apply to most companies including law firms and hedge funds, real estate companies. What will happen to mortgage deduction, how about your 401k suddenly out of nowhere, that may not be deductible, I mean that's how we invest in this country, what maks us want to invest is that deductibility, that's gone?
Frankly, for someone who tries to be rigorous about these matters, it's a little insane.
Second, because the rest of the world is now doing better than the U.S. we have to be mindful to now skew our picks to companies with a large part of their business in the rest of the world including Latin America, Europe and Asia or ones that can be impacted by a rising global GDP that we did count on just about 6 months ago.
Third because it now looks like not much can get done to help move the economy here-remember the $500 billion infrastructure bill, what happened to that?-- interest rates have stayed stubbornly low and commodity prices fairly subdued except for where there are tariffs being slapped on our trading partners, with partners in parentheses for those listening on the phone lines. Frankly many of these partners we could live without.
In that environment you need to get enough lift from our still robust employment and from the international business environment to make the fed feel at ease enough to raise rates two more times or we are going to lose our stock leadership. All these moves are really prefaced by a move in the bank stocks.
If we don't get those increases then I think the rally may not be as sustainable as we would like. Yes, growth of some sort is still integral to my thinking, growth in the U.S. Otherwise we would just be an all health care and utility fund and that's not how we are set up and you know we sold our utilities.
No, I am not advocating sell in May and go away-would anyone be even saying that ditty if the month didn't rhyme with go away??-I am just giving some recognition to the notion that you need the financials to keep going higher if we are going to be able to have a big move in the averages. They still have the power to take all stocks down with the exception of the FANGs that hang in when we hear disappointing growth stories, because the Facebooks, Amazons, Netflixs and Googles will give you good growth no matter what. They are a default mechanism.
Otherwise, though, we are going, after this big post- French election run, to have to depend more on the stocks and their respective earnings than on the stock market and I don't know how long this streak of fabulous earnings can go on given that we are now almost past the reporting of the big international companies that benefit from the type of worldwide growth I am describing, you've got to be concerned even today we didn't get the power we needed from the big cap stocks
We never mind that. Picking stocks is what we do best.
So we sit back, my team and I and say, how can we take advantage of what seems to be working both in the world and in Washington? How can we profit from what is actually getting done down there and still not worry about the new form of gridlock, the kind that would have been unthinkable just two months ago before repeal and replace failed us and Speaker Paul Ryan turned out to be the witting or unwitting obstacle to President Trump's ambitions to move the economy?
I am talking about trying to pick our next stock to take advantage not just of superior earnings but also to profit from Trump's strong suit; we need a company that should have the powers of deregulation behind it along with the backing of executive orders that can be made law WITHOUT Congress. Any new position should also have exposure to worldwide growth, not just domestic growth. And any new stock should be a bit under the radar without a lot of sponsorship that can be withheld and without a lot of hedge funds playing it from the long and short side.
Which brings me to the new choice for club members that I will take action on for the trust, as usual, after you have bought it, a company just added to the bullpen that I think represents all of these elements that I've talked about since the beginning of the call: Nucor (NUE), the amazing steel maker that runs rings around all others in its industry. How do you know that? Take a look at letter "X" U.S. Steel today, the stock is down more than it has ever been in the history of its entire existence and Nucor is not down
Now I don't need to repeat the note we sent out earlier this week about why we like Nucor. Let me just give you some bullets about this company, the nation's largest steel maker, with a 2.5% yield that is more than 10% off its high, something I love when I start a position.
The president's deregulation style is basically a pro-worker agenda. If you look at a company like Nucor, which is the lowest-cost producer of steel in this country and arguably the world-much lower than US Steel which gave such a disappointing outlook last night, you know it has been hurt by high cost producing nations from all over the globe, but particularly the Chinese and Koreans, who dump their steel here in order to keep people employed in their own countries.
What kind of steel? Okay Nucor has recently moved big into the steel needed for oil and gas drilling and with an expanding rig count that makes for the hottest steel market in the country. It also has low-cost plate steel that could be used in infrastructure and the military.
Trump wants oil and gas companies to buy American. Box checked, Nucor. He wants us to spend more on our infrastructure. Box checked Nucor. He wants to rein in imports by declaring our defense industry vulnerable to a cut off in imported steel. Box check Nucor. While many of the dumpers won't like it, particularly China which is responsible for 26% of the steel we use, and the customers won't be crazy about it and won't like the notion that foreign steel is being blocked because of a defense imperative even as the military hasn't requested such a move, this plays entirely into Nucor's sweet spot. Plus, if Trump does do a public private infrastructure initiative, Nucor will win again, its got the right steel.
I like this idea because Congress isn't involved in spurring these orders or earnings so Nucor will not be held hostage by the House, which seems to have a particular antipathy to the president or is inept or both.
I have long followed Nucor, both in my time in the 1980s when the late Ken Iverson ran it, to the Dan Dimicco years where he was a regular guest on Mad Money to the John Feriola era that currently reigns. John's a straight shooter and while there are always kinks to a quarter-there were some problems with a newer factory that I visited in Louisiana not that long ago-I believe that in the dwindling universe of Trump stocks this one has the best tailwind behind it.
Now don't get me wrong. I am not saying that with this pick, Trump's had it with Congress. This is the beginning of his term for heaven's sake, not even 100 days. I am not saying that he is now bad for the stock market, although I would certainly regard the lack of leadership in the House of Representative as a negative for our country's ability to get any real stimulus that's needed to get our economy moving at the promised 4% level or the 3% and change that treasury secretary Steve Mnuchin said today.
I am saying that with the exception of a couple of key industries you don't want to pick stocks based on a Trump world.
You want to pick stocks for their ability to beat the estimates or because they are special situations that can transcend what will be a slower economy than we all expected when Trump was elected six months ago.
Nucor fits all of these. And, for those who saw the gigantic $7 special dividend that is propelling Costco today remember that Nucor is the only other company besides Costco with a long history of doling out those dividends.
It's the right stock for the time.
Now, with Nucor in hand, how about the rest of the portfolio.
When I sat down this weekend to put my preliminary thoughts for this session on paper, I decided rather than address every single position in the trust which I think we do really well in our weekly round-up, which I do hope you devour because it's pretty definitive, I would talk about the problem positions, the ones that may require action soon or have been troubling to me of late or even for some time.
The reason? When we got the feedback from the last call, and we go over every bit of your feedback, it was quite evident that the most value -added portion of our talk is when I am plainly open to you about the emotions and the challenges that face money managers behind the scenes that they don't want you to see.
When I started this experiment 15 years ago, the experiment of running money open-handed, warts and all with real lessons taught and misgivings revealed, I thought others might join me. I figured that teaching people could be a worthwhile goal.
But most managers are about dis-empowering you to some degree. They are about convincing you that it is too scary or that stocks carry all sorts of risks unless they are in the hands of the professionals or bolted together en masse to form an index.
And you know I like index funds. Who wouldn't? Think about what the S&P 500 really is? It's an actively managed index under the guise of a passive non-managed agglomeration. When stocks get too small, which happens when they underperform, they are pulled and replaced with better ones. When stocks get taken over, you get the gain and then they are replaced with new, good stocks.
That's hardly unmanaged.
But I have always felt that reasonable people who are interested in stocks have every right not to have their efforts denigrated or their fears verified endlessly by those who want your money and don't want you handling it.
I have never once said don't be in index funds or mutual funds. I do not scoff at their efforts.
However, the notion of the single stock risk abdicates your brain and forbids you from seeking the bountiful single stock rewards.
That's what I want to encourage you to do and it's why we always give you the why and how behind what we are doing so that you will have the tools to apply to your own investments in the future. I want you to learn from the product, not just blindly follow it. I want you to be better about how you handle your money and consider this product a do-it-yourself on-line suggestion manual so you can decide what's comfortable for you, not just for my trust. That's why we spend so much time talking about income and growth and suitability. We don't want you to own every position, we want you to own the positions you like and we will provide some of the support for your choices.
Of course, given our restrictions-every time I talk about a stock on TV, I am frozen so I can't make even the most obvious of moves, but I can tell you to do them-the trust itself will mirror only those restrictions on a day-to-day basis rather than the rigor we try to bring to the stock process, which is why I always stress, READ THE NO TRADE bulletins which are often far more important than the trade ones! It's why measuring performance has become almost an impossibility because we do not keep a record of what we could have done, just what we have been able to do, and the $2.1 million I've given away.
However, I find the biggest gating factor to help making you confident in the process of handling our own investments has to do with what happens when something goes wrong.
If money managers only go on air or reveal in their letters what goes right, then you naturally think -"I guess I can't do this because things go wrong for me and they don't go wrong for them."
Of course, things go wrong all of the time for them, but they just don't show you.
With that in mind let's go over the problematic positions I am talking about.
Let's start with Allergan. A club member recently inquired to me about whether it really is worth sticking with Allergan, especially given how poorly it acts. Now this stock is a holdover of several co-portfolio managers and I have attempted to work with it in the wake of the now disastrous failed bid by Pfizer. We had a big win which we turned into a big loss which is unforgivable in my book, but we didn't think the U.S. government would go back on its word to Pfizer and Allergan and pull the plug on the deal, especially after then Treasury Secretary Lew told me personally he didn't have the authority to do so. The inconceivable happened. It often does in the market.
Since then we rode it down and managed to buy some stock near the low before the ride back.
Right now I am of two minds about Allergan. The first is that it acts lousy. That's important because fund managers long stocks never ever admit to what I just admitted to. I hate the way it acts. It seems to want to go down.
Then again, though, it is the cheapest major big pharma stock and Brent Saunders has bought enough smaller drug companies with the money he got by selling out of his generic business --at the high, I might add-that I think he will strike gold in some of them. Not all of them. But some. Specifically, he has outlined his "6 stars" in the pipeline that we have told you so much about. These have the potential to reach $13 billion in peak sales and are in growing areas of need, such as NASH, a non-alcoholic fatty liver disease that impacts millions of peoples' lives that I think Saunders has the edge on.
So we hold it. We can't buy more because I don't like to have a lot of positions north of 5% and any additional buying will do that. But we do think the long-term potential is there, and the cheap valuation and capital optionality both provide support.
I also have other drug and health care companies I like, such as United Health and Eli Lilly, that I haven't bought because of our large position in Allergan. So there has been real opportunity cost there because I don't want to own too much pharma specifically or health care in general when the government hasn't solved the ACA issues yet. I puzzle and have angst over this choice endlessly. However, I sit tight. I wait. I don't like waiting. But we wait. Because there's no reason right now to believe that Brent Saunders is going to blow it now.
Next, Danaher. I never like it when stocks we own get hammered after they report. But Scott Berman, who is my right hand man, and I have scoured this quarter and we know that the divisions that are causing the problems, namely the dental consumables, will be addressed and fixed because that is the Danaher way. I like this industrial because it has less cyclicality and more life sciences, and dental is one of those businesses that isn't going to go away even if it isn't going to accelerate - although management did note that "we will see some improvement there, probably not in the second quarter but more likely in the second half." Expectations are low, and we like to take advantage of that. Not to mention, the company has taken costs out of the dental business and is investing in areas of growth for the future.
We deliberately kept the position small hoping to get a price break like we had last week. Now is not the time to run away given Danaher's amazing long term track record, now is the time to embrace it. I actually want the stock to go down below where we bought last so we can buy more.
Just so you know, the business that Becton Dickinson just paid $24 billion for, CR Bard, looks an awful lot like the one that Danaher owns. Except Danaher's is faster growing.
Next up, a really painful one, General Electric. I am sick of the excuses that General Electric is offering and I didn't like the fact that, while orders were good, the cash flow was negative, that unforgivable. While they , of course, had good explanations for that cash flow shortfall, the really great industrials like 3M and Honeywell, which have moved up too much for me to want to buy, just don't screw up like this. They just don't. And it is a HUGE screw-up. I foresee a challenge to the leadership of Jeff Immelt this time around as I do not believe the status quo will hold. That and the 3% yield are why I stay and why we have kept this name a One for those who are looking for income and willing to wait out the restructuring. At these levels, though, we like our current weighting. Once again, though, while I say no woulda, coulda, shoulda, I sure wish I had stayed in Honeywell and 3M longer but at the time we had too short term an orientation for the trust and we had bug gains. That's no longer the case. But, again, to show true human frailty to club members as I am want to do, I think the moment we sell this dog, we get a challenged to management and the stock goes up ten percent and I can't have that happen
Hewlett -Packard Enterprises does nothing, right? Why stay with a stock that does nothing? Frankly, I have to tell you that I am more inclined to double down on this position than cut it lose because Meg Whitman, the CEO, has made so many changes to this company that it is reasonable to expect that we haven't seen how it can really perform.
I have known Meg for a very long time and she knows that she has to make this company, smaller, nimbler and one with an edge. That's what the disposal of so many disparate divisions has been about, although the one she spun to CSC, DXC Technologies, intrigues us enough to want to build on any weakness, which is why we maintain the position we do. I wish it would come in.
I believe that with cash building at the company, with the execution risk now substantially behind her and with the final disposal of its software business to Micro Focus for $8 billion almost completed, the remaining company will have a gigantic amount of cash and growth, and we will look back and lament that we weren't bigger. Why, then do we stick by the discipline of waiting until it gets closer to $17 or at least below the $18 threshold? Simple. Because when we have a sell-off, a general sell-off in the market, we always like to put money to work in stocks that we have earmarked as to be bought at lower prices. There is no urgency to do it now. Why not let the market give us a chance at a better price?
How about Schlumberger? Did they blow the quarter?
No. Just the opposite. They did what they told you they would do. But the analysts got ahead of the story and Schlumberger tells it like it is. The call told you that we are probably two quarters away from when the major oils and the big countries can no longer hold off spending. They will have to replenish and the only way to do that is to call in Schlumberger. I want to be bigger in this one than any individual oil company because it's the best call on the need for companies to grow reserves, which is their lifeblood and how they are rewarded in the market place. Call me a buyer.
I know Apache and Cimarex are sore points. When oil went to $53 we said to do some oil trimming because oil could be headed back down to the $40s. That's pretty much exactly what happened and we are buying our stock back as they go lower. And yes we took a loss on some of our Apache. We had to. If we believe oil is going to have that big a move down we have to take some action.
And look I wear the Apache on my back like a steamer trunk. I know it's been a big disappointment. I know it has hurt. It's painful as all get out.
But we are trying to manage it knowing that if we sell it now, when it is below where it was before it revealed its big Permian discovery, Alpine High, that everyone has now actually written off, we will be giving the stock away. I think if it doesn't get its stock up soon it will get a takeover offer not unlike the one it rebuffed from Anadarko 18 months ago when the stock was right at these levels. No I am not saying it is going to be Panera, which we battled successfully over and over again and ended up with a win, although not the big one. Still don't ever criticize the winners, I tell myself. Focus on the losses, like I didn't kick myself when I saw that JAB Holding bid. Apache, we're holding it, $47/48 we're buying more of what we sold higher
Cimarex is a fabulous growth oil company and it could be up twenty points in a straight line if oil breaks out to $60. I want to keep building it. You need growth oils and this is one that has the ability to grow faster than almost all of them.
Why bother at all if I think oil is not going to go back to the $80s or the $90s? That's because, with the exception of perhaps EOG or Pioneer, Apache and Cimarex two oils we own will make a great deal of money if oil is at $50 and I don't want to jettison them down here if that is the case. As we have told you in the bulletins, we are taking advantage of the oddity in the oil market that lumps all the players together into one ETF-based trend. We are willing for the good guys to show their true colors, better than those of the broader group.
How about Arconic? What happened to Klaus Kleinfeld? Why did he jeopardize it all with a personal letter to an activist that made no sense when he was going to win the fight to keep Elliott at bay and stay CEO?
We don't know. But we had been scale selling betting that management would stay in place. I no longer believe that to be the case. I now think that Elliott could win and Arconic could be put on the block or have parts sold quickly that will make the company a pure aerospace play.
The risk here? If current management wins, then the stock will go down. I am willing to take that risk, especially since the company reported a much better than expected quarter just last night. Wow, that was a shocker and I felt bad that Klaus wasn't there to celebrate better earnings at both Alcoa and Arconic. He didn't get to cross Jordan to the land of Milk and Honey did he? But we did. .
Okay, here's another: I worry about Newell Brands every day. I think that this one, believe it or not, is a casualty of Trump because I think there would have been much more aggressive lay-offs after the merger between Newell and Jarden if Trump had not been elected. There would have been a lot more offshoring, too.
Why hold on to it? Because I believe CEO Mike Polk will ultimately make this into one of the few pure play non-food and beverage consumer product companies with real growth out there. He has to figure out how to work the channel better, though. You can't just be hostage to the forces of bricks and mortar and you can't be as U.S. centric as Newell is. All in good time as I think Mike knows far better than I do. You just can't get away with doing that any more in this environment.
Here's another one due to report that keeps me up at night: Starbucks. I worry because the stock has been climbing as expectations grow for a better domestic same store sales number. When expectations were at 2-3% growth when the stock was at $55 that was fine with me. But now expectations are for a minimum of 5% and the stock is at $61. As we told you, we worry that the high expectations for the back half of the year have unintentionally creeped into the front half. I fear that the next two points could be down, hence why we elected to trim back the position just yesterday right on the eve of its reporting tomorrow.
Nevertheless, the company has assured me time and again that it will fix the throughput problem that comes from mobile payers merging with non-mobile payers-the one that has hurt those same store sales so badly in this country-- and when they do the stock will go to $70. So I will take that asymmetrical risk for certain but am ready if the disappointment takes the stock too low and action is required. I am cognizant that expectations have gotten a little heady for this, the first quarter that will be under the tutelage of Kevin Johnson as ceo, not Howard Schultz.
Finally, there's Wells Fargo. I look at this bank as if it is the Chipotle of finance, hmmm, nice comeback last night. We just need to put some distance between it and its transgressions and then the business will come back because, in the end, it is a great bank that made mistakes, not a crooked bank that will forever be tarnished. I think the economy is strong enough both here and around the globe, for the Fed to raise rates twice and for the first time this incredible franchise trades at a discount to almost all of the others in the group. When the cross-selling story is in the rearview mirror people will remember that this bank is a phenomenal cash generator that has no foreign risk. I wanted to buy it so badly if it had gone back to $50. But discipline says to wait. I sure hope it will be rewarded.
I know you could say well how about your retail. Aren't you worried about TJX or Walgreen's? I think TJX is about to come into a colossal amount of merchandise from all of these closed stores and its margins are going to expand. By the way, it is the only major retailer in the country still putting up a large number of new stores because each store addition is profitable. Only a handful of retailers can say that and they are all much smaller than TJX.
Walgreen's? Sure, it's a soul searcher. The drug stores aren't doing well in general and it can be Amazon'd up front. However, there will eventually be a resolution with the Rite Aid deal and either path is better than the one we are in now. If the deal is derailed by the FTC than I think we will get a truly monster buyback. If the deal is accepted, analysts can raise numbers substantially. Those are good outcomes, and it would be a mistake to abandon the position without waiting to see which positive outcome we get. So there's the problems and concerns.
Let me just add one other thought to the mix.
Last week at this time the biggest problem this portfolio had? Snap On. We had done so much work on it. Was it going down because of peak auto? Was it going down because Advance Auto Parts and Autozone had weak numbers? Was it going down because of a spike in delinquencies, which had been the short selling rumor de jour? Was it going down because the previous quarter, the one that caused the price break, contained some weakness in tools, a weakness that they told us they had addressed? Should we not trust Nick Pinchuk, the CEO?
We went the other way and bought it all the way down because we had conviction and we knew the story. Sure enough the division that had slowed reaccelerated. Delinquencies, never a big deal even during the Great Recession, went down. The auto readthrough meaningless. Right now Snap On has the only diagnostic tools on the market good enough to examine today's complex engines and find out what's wrong without having to take them apart. They are time saving and they are a huge advantage over what the other companies sell.
We could have panicked. We could have looked the other way. But no, with every point down, we redoubled our efforts and a problem position became an opportunity. If this stock goes below $170 again, it's crazy! We'll probably do some buying.
That's how we do it around here. That's how I want you to do it, too.
Now, before we move to Q&A, I just want to encourage you all once more to get to know the new AAP site on your desktop or mobile device and let us know what you think. If you have any questions or feedback, you can email NYCustomer.Service@thestreet.com.
I'd also like to personally thank all of our members who were part of our beta test, please know that we listened to you and incorporated your feedback. I am just thrilled to give our members this new, professional interface - it's a top-notch site that is easy to use from wherever you are - designed to make you a smarter, more confident investor.
We will continue to work on new features for the experience along the way and we look forward to the future of the club!
Now on to our questions now as a new member what should my first steps be. Do we have to wait for the rally to slow? Nick P.
All right Nick. The reason why we have stocks that are rated ones is because those can be bought right now. You know I don't believe that you have to buy all at once. So let's say you're looking at this you say OK Citi Jim's got that as a one. It's at 60 but it's got to 45 basis should I get in there. I would say you could buy a little. Yes, It's a one off. But then you got away when you look at it. If you looked at a Danner which we're buying right now. I would buy right along with us. I would buy Nucor right now along with us. That's how you get started. But remember if let's say you have $3000 I would put a third in because we've just gone up 560 points in the Dow the Nasdaq set a record. And I don't want you to look back and say I bought all that at the top. OK. So that's why you only put a third in because it's inconceivable you're buying all the time you're only putting a third in. OK.
Next what do you view is the downside potential in this market given the underlying risks? William H.
William H. It's that the economy slows down we get some weak employment numbers and the Federal Reserve changes its mind about two rate hikes. Then we lose J.P. Morgan then we lose Bank of America. We lose Wells Fargo we lose Citi we lose PNC we lose KEY. Wow KEYs good.
And those are the stocks that people look to, they look to that and they look to the transports. And we can't lose because this rally is predicated upon a decent backdrop which is that the feds going to raise twice. And so therefore the banks are going to make more money and they're going to be able to provide more money to the economy which is going to make it act better. And they're also going to give you better dividends and I really think that what we have, here I see Snap-On drops after Capital Forum article published. I don't know who Capital Forum is I will have to work on that after this call. I just met with the company five days ago. I don't know what they know we'll be all over it and we will come back to you.
On next one. Can you quickly explain the difference between the Dow Jones NASDAQ and S&P 500. How do they work in representing the market differently?
OK that Dow Jones is it atavistic index. It literally is just all it is a list of 30 stocks. It's meant as a barometer. OK. It's a shorthand. I still use it it's just a kind of like to mention at the top of show as a performance manager I never really cared about it's it's atavistic but people still think about it. S&P 500 is what people benchmark by. And it's really really important. It's kind of an active passive index. Nasdaq is it companies that are fast growing. Typically they list there although we have some companies that aren't that just decided they'd like to be on the Nasdaq. I like to look at Nasdaq and those of you who read real money know that I did a big analysis yesterday about how the Nasdaq in 2000 versus now and how it's so different it is and how much cheaper the stocks are now.
Matt Horween, one of our one of our viewers and readers suggested I also mentioned the fact that they've got good dividends they've got great cash flow. Very different from what we had in 2000.
What areas do you view as having the best growth opportunities in next three months?
Here we go. Let's go back to the ones I would say that when we look at what we've got Comcast which reports tomorrow Danaher. I think that Google even though I have said that it could go down instantly when it reports that you want to buy those all make sense Southwest reports tomorrow I think that go back to 55 and you would do it. Those all fit the bill. You know I guess they just mentioned the Snap-On article I got to work on that but that's they just reported that that could be an opportunity because I think I'm going to have to work to refute that. I'll be in touch with the company. All right. Those will work for me.
What can retirees do with this market that continues to go higher? Are there safer areas?
Well we've got stocks. People should know we have investment indices break. We have a value index that you can look at. We have a growth index and we have a blend and then we have income and What is our income?
We've got Magellan, Schlumberger, Dow Chemical, Wells Fargo, General Electric and PepsiCo. The income index is the answer to what you're looking for.
What are your thoughts on investing internationally especially in India? India is there more room to run? I'm sorry left of the other names I should have done this from Diane. B
I think India is terrific situation. One of the reasons why we hold Apple because I think Apple is really doing very well in India. It's tough to invest in India itself we were thinking about adding an index. The European ETF if France didn't go well France went well and the index got away from us.
You want to speculate Santander believe it or not but I say that. It's had a great quarter but international we're playing with a lot of our companies that do international work.
OK a new member here. Can you help a new investor where to start one's homework and with critical things to look at?
Well it's earnings season this is a great time to talk about homework. The way I do my work is as I sit down I try to get all the research I can. All right. And then I wait for the quarter. I read the I read the release I listen the conference call. I go over the notes before and after and try to figure out what was really disappointing what wasn't a got a piece on real money right now talking about how Proctor and Gamble beat two cents, but did they really beat two cents? Well I've got to tell you when you look at it they were up 1% the only reason you want to be in is that Trian's working to get it better. And because it's got a good dividend. But that's an example if you've done the homework you wouldn't have been fooled. You wouldn't have said Oh my God that's a great quarter. I've got to go buy some. You would've said there's questions in that quarter. Maybe I should wait.
Debbie S says are there any general rules of when to sell a company. How low can we watch this stock go.
Well OK. Let's talk about Apache there I mentioned that as it's an oil company as oil went down and we were caught we were hung. I felt we had to sell some to be able to buy back. But typically it's in the non-commodity stocks we just keep checking the quarter checking the quarter checking the quarter and checking the fundamentals. And if the business is faltering like people felt that Snap-Ons faltering until I spoke with Nick Pinchuk last week, if the business is faltering we have to take action.
You say Newell Rubbermaid was that faltering. No Newell was not faltering it's just the stock went down because the company was not able to produce more gains than I thought initially it would. Adobe went down eight bucks on a really good quarter and we stood there and to buy it. It's now up 30 points. So I think it's the checking of the fundies checking the fundies checking the fundies.
Arthur A. writes, can you discuss your outlook for oil and how to play the sector?Oil is obviously on a lot of people's minds. I've been saying that oil is going to go 53, 47, 53, 47. We have a nice little boost in oil today. I do not think it will hold which is why we are waiting for the oil stocks to come down, with the exception of Schlumberger which has come down so much. I'm not enamored of the oils. OK. I just wanted to play them. I know that that's probably how I got in trouble with Apache. I wanted to play them to some degree. And Bob M. asked his questions short and long term for Apache. We are beating Apache's death here in this call. Well the answer is like I said if they don't get the stock up someone else will. So Bob M. that's my view on Apache I can keep beating myself. I used to do that endlessly at the hedge fund. It doesn't really produce all that many results. Next question please.
This one's from Lawrence H. Can you provide your thoughts on the DOW Dupont spin offs post-merger? Could they turn out like the R D spin-offs?
You know frankly Mr. Clinton Well let's talk about something it didn't work. That's three companies that were spun out of our Donley without any details without a sense of what they were going to do. Ed Breen is going to do what he did with Tyco. Ed Breen's runs DuPont in August this deal with DuPont and Dallas going to close. He's going to split into three well-defined companies. He's going to give you all the parameters and all the management teams. If you take a look at the wealth thats been created by Tyco you will know that this could be a very big move even from here. Dow Chemical $64.41 reports tomorrow. I like it.
Number 10 it is from Syad. He's asking I would like to initiate positions in FANG stocks like Google and Facebook. What is the right time and how much of a pullback do I wait for?
These companies pull back after they've run into the quarter and they have I mean Google we told you to buy it so aggressive when people are worried about that ad issue which I told you would not amount to much. Remember where they were like people were afraid the advertisers were saying complaining and I'm going to be next to porn next to hate. Well they had a solution Google they had put it in the works a couple of weeks it was just these guys just trying to jawbone Google's ad rates down. Well Google's doing pretty well. I would say that it still could sell off because there's always some detail that make people say well I've got to get out of that one witness PepsiCo's. Oh I've got to get out on that one. Nothing wrong with Pepsico. Facebook's the same, there's always some insiders selling into their report that's just the way it is. So they open the window if they report the stock looks heavy and then bingo.
OK next. Can you provide an update on Newell? Seems to have been stuck recently? Again,. dead horse. But I would tell you that Newell is a function of the reason why it went down is because Target. That's where they sell a lot of their stuff. Wal-Mart and there's a sense that the retailers are in trouble so therefore Newell has to be in trouble. I would tell you that Newell's got a lot of new products. I would tell you that Newell's expanding into China aggressively. I'd tell you that Newell's run by Mike pokies a proven winner. So let's let it go. Let it run.
Robert N. and writes, can you discuss the GE investment thesis and how compares to other industrials?
It compared poorly, as I mentioned at the beginning I think that GE is poorly run. I think that something has to happen there. We're getting paid 3 percent to wait till something happens. Allergan appears to be stalled says Michael P. Should we be adding here. I've been over the fact that our basis is much higher. I would love to add here but I don't want to add because we have 4.7 percent weighting. We don't like to go over 5 percent. If we bought some here it would do that. I do think that you're going to get a chance to buy it maybe a couple of points lower. Let's see Allergan, when it reports I think will reset expectations. We could be OK here when they do report, it reports may 9th. We're going to stay close to it. Not a lot of volume today on the stock.
All right. The next one is from David H. How do you determine the support level for a stock?
Well you know some of it is technical we've got some fabulous technicians for instance. Bruce came in this morning when we decided to buy some Schlumberger. We called Bruce the in-house Chartists and sais give us a chart of Schlumberger. I like to look at charts because it's what other people look at. I know that that seems a little bit lame. But remember money managers are herd animals if it looks bad they actually might say I don't want to buy it yet. So I look at the support levels technically and I also take a look and just say Okay listen where do we buy last. Where can it make a difference to buy.
All right. Next from Jan H. What do we do with solid dividend yielders that are either stuck in the mud or in the negative. But we still value income.
Jan that's an easy one as long as the story keeps checking out. We just keep buying or stay the course until lower levels.
Next one, Vinod. How should younger investors view dividends versus growt? Younger investors should be all growth. You've got your whole life to make back what you lose me unfortunately. I love the income stocks. Why. Because well I've got a whole life to make it back too but you know unless I'm going to go to 120. I don't have as much time as people who are much younger. Particularly if you're investing for young people or you're a young person you really should be going for it. Ok should be going for it you should be gone for the ones that have the highest growth.
Next what is the strategy to cut down our portfolio if we own too many stocks. Something that my late dad always talked about especially if we already hold relatively large portion of cash.
We rank them which ones we feel most comfortable with. If there's ones that you can't live with the volatility. Get rid of them because what will happen is when they go down you'll sell them. If there's ones that you think don't offer you income and you want to make them get rid of them if there's ones that you see that are twos on our list versus ones that are ones sell OK. We'll get back in lower. If we have to. I've always felt that you could in the old days before we had the web. That having more than 10 stocks was too hard. I now think with the Web you can own more. What do I think is the only one your stay at home person who is just watching the market. I think you can be there with us if you're a person that is involved in the business, I think you can own 15-20 stocks. If you're a person who is just trying to be a good home gamer. I think that 15 is probably pretty hard. And more than that you're kind of a mutual fund.
All right. Dan K. asks How do you reconcile conventional wisdom of holding a portion of bonds for middle aged investor in this rising interest rate environment?
The way to reconcile it is to own an MMP is to own something yields 4.5 and say OK listen I'm do with our stocks that are bond equivalents. The other ones that we like by the way that are not in here that we were trying to buy that have gotten away a Cedar Fair, symbol FUN. EPR, that's a good one too.
Finally what index funds especially Vanguard do you like the most?
Warren Buffett discussed this on his conference call. I don't like to choose these because I always know that what happens is where's your money. Because to switch your money from one fund to another is difficult. My father was in Vanguard. So I'm in Vanguard. My father used to go to Vanguard because we lived very close to it. The Vanguard funds are the lowest fees. John Bogle invented the index fund and they have the S&P 500 and that's where my kids are. So, there you go, you could say well wait a second Jim how about this firm, that firm, this firm. I what my father said, and then when Buffett said it was a good one, well I felt pretty darn good about it.
Well anyway I've take a lot of your time. I've gone over a lot of different things. I want to reiterate that we absolutely love your input. I know I say that and people say well wait a second. What kind of input. Well the answer is we got a page to go to. We have fabulous customer service. NYcustomer.firstname.lastname@example.org will get you to us. I want to hear about the call. I want to hear about the Web site. I want to hear about what other information you want. I feel strong by the way once again that Nucor is a good situation.
Like I said I'm going to dig into Snap-On, I don't think anything's changed from when I spent 40 minutes with Nick Pinchuk last week but someone keeps trying to get the stock down. Well we've seen how that games played. Remember Nucor up 70 cents now it is still a buy. It is still down 7 from its high which is meaningful given the fact that letter "X" steel is down a lot. I liked the Schlumberger again only because it's down a lot.
I want to try to recreate it and you've got all my marching orders we've got to still get a couple more companies that report this week.
I urge you to look at our bulletin, I thought we had a very thorough bulletin today on PepsiCo that I felt made a very compelling case when it was down a lot, good situation. We're going to continue issue Bullen's. We had a great bulletin on Arconic. And just keep watching your e-mail and now it's a lot easier because you've got our great Web site. Thank you so much for coming back to our club meeting and I'll see you next month.