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Are Disney, Twitter, Boeing, and Micron Ready To Run Higher?
MICHAEL KRAMER AND THE CLIENT OF MOTT CAPITAL OWN SHARES OF SWKS, DIS, googl
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S&P 500 (SPY)
The S&P 500 finished the week up by about 85 bps, at 2,929. When we think about the broader set up for stocks going into the fourth quarter, the outlook still looks bright. Earnings estimates remain high for 2019, with operating earnings estimates at $176.86 per share. It gives the index a 2019 PE ratio of 16.6; still a lower earnings multiple than at the start of this year of 16.7. Again, the reason for that is because earnings estimates have climbed by over 10.5%, while the S&P 500 has risen by about 9.6%.
The 2018 operating PE ratio is about 18.6, and if we assume that operating PE ratio rises to about 18.5 throughout 2019, the S&P 500 still has room to rise 3,288 at some point over the next 6 to 12 months; 11% higher than the current index value.
Economic Watch
The economy continues to move along at a steady pace with GDPNow tracking third-quarter growth at 4.4%. It is a high growth rate especially given how late in the quarter we are.
At this point, the most significant risk to the market that I can see is interest rates on the longer-end of the yield curve continue to rise. But again, until I can see evidence to suggest something different, I think rates are still heading lower, not higher.
Disney (DIS)
Let’s move on to some stocks. Disney has a big weekend; as it finds out if they are the winning bidder for SKY in the UK. Again, this is a big part of their longer-term growth strategy, giving them further international distribution ahead of their direct to consumer streaming product. We also found out this week, that Disney has already added one million subscribers to their new ESPN+ app. If anything it just proves there is demand for the product, which does not come as a surprise to me. I have owned Disney for many years. Over that time I have believed that the future hinges on Disney’s direct to the consumer product. Based on my children’s viewing habits, and the amount of Disney content they consume, there is no doubt in my mind this product will be a success.
The chart for Disney suggests shares are slowly breaking out. The stock is in a multi-year period of consolidation; recently rising above downtrend resistance. The stock likely continues to slowly work higher, and the stock may soon be trading at multi-year highs.
Twitter (TWTR)
Twitter’s stock has been really melting lately, along with Facebook. What had looked like a revival at Twitter this year, has seemingly faded. There still seems to be too many questionable things happen there with the number of users on their platform; the chart reflects that uncertainty. The stock looks as if it is heading to $27.20, and potentially much lower.
Boeing (BA)
I was seriously considering buying Boeing and it adding to my Thematic Growth portfolio. I like their services business as it becomes a more significant part of its total revenue. I have a strict way of adding stocks to my portfolio, typically starting with first finding a theme, then a company, the charts to pick an entry point. I have literally been watching Boeing for months now.
BA EPS Estimates for Current Quarter data by YCharts
This week I grew concerned for three reasons: First, this stock is a proxy for the trade war with China, every lousy trade war headline causes shares to fall. Second, I see earnings and revenue estimates for the upcoming quarter are now falling, and that makes me believe full-year numbers will start coming down. Third, the stock can’t break out and rise above the $372 level. So I have moved on. Shares may break out and climb, and I may regret not pulling the triggers, but my instincts are telling me not to get involved. So I won’t.
McDonald’s (MCD)
I never understand what investors see in McDonald’s. It amazes me that investors fall for buying these EPS growth stories based on financial engineering. There is no doubting that McDonald’s revenue are declining. Listen to this, for 2018,’19, and ’20, McDonald’s revenue is forecast to have a compound annual growth rate (CAGR) of a negative 3%. Meanwhile, estimates show earnings climbing by CAGR of 10%. Hmm. How are they doing that? Well, cut cost and buy back shares.
The stock trades at 20 times 2019 estimates! Facebook trades at 19! Alphabet trades at 24!
MCD Revenue (TTM) data by YCharts
Why isn’t McDonald’s trading at 10, 12 or 15 times earnings? Right? An investor today is paying 2 times McDonald’s, 3 year CAGR! It seems like it is way too expensive for me. But shares are heading lower; the chart is showing that.
Micron (MU)
Micron actually had a better day than I expected on Friday. I still think it is heading lower towards $40 though. Earnings estimate for fiscal 2019 came way down after the results, and so did 2020.
One-liners
For now Hong Kong’s stock are back in rally mode, but still, need to rise above 28,230 on the HSI to extend the rally.
Shanghai has broken free of its downtrend. 2,920 is the level to watch there.
Skyworks (SWKS)
Skyworks looks like it is breaking out.
Broadcom (AVGO)
So does Broadcom, wow. What a turn around. $270 coming?
Lam (LRCX)
Lam Research is all putting in a bottom.
that’s it for today.
Mike
-mike
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Michael Kramer is the Founder of Mott Capital and the creator of Reading the Markets.
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