Tao Economics

Economics, Investing, Markets & Survival

Bottoms Up to This New Stock Pick

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His mother was upset he went into law, so he dropped the occupation and went to work at a counting house (bank), however he proved to have no business skills and that job was soon over.  His father lent him money to start a business to which all of the loaned money was lost.   He finally ended up working at at his fathers brewery but he was more interested in politics and the injustice of taxation at the time.

Samuel Adams would of course go onto be a revolutionary and one of America’s founding fathers.

Flash forward to 1985 and James Koch and Rhonda Kallman offered Samuel Adams Boston Lager as a tribute to the revolutionary hero.  The Boston native started brewing in his kitchen with a recipe that went back for generations in his family.

You know of the signature beer of the Boston Beer Company ($SAM), however you may not know they also own brands such as Twisted Tea, Angry Orchard, and Truly Spiked & Sparkling.

I haven’t given a stock recommendation on Tao Economics in a while, partially due to being very busy these days (who isn’t) and also I am a fan of saving some dollars at the moment due to an overall expensive market and cracks showing in the credit markets.

In short, I’m being patient and looking for companies that have a strong balance sheet, that are not going anywhere, and have broken out to the upside.

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We have found the perfect candidate with the Boston Beer Company. Lets start with the balance sheet.

SAM_Balance_sheet

I like to turn to the google finance for a quick visualization of a balance sheet.  As you can see above the debt to asset ratio is nothing.  They released earning for Q2 on 07/27 and the market was happy as margins increased along with a slight increase in revenue.

This company doesn’t need to worry about the credit markets rolling over and they have over $71 million in cash as they had $61 million in cash from operations this quarter.  In short they have no issues covering their liabilities.

The company does not pay a dividend, however they did retire $88 million worth of shares and they have a history of buying back and retiring shares, which effectively increase the shares value.

The full 2nd quarter report can be found here.

So is the stock cheap?  It’s current P/E (price to earnings) ratio is at 22 for the year.  That may sound expensive for value seekers, but consider the S&P is currently at 24 and over the last 10 years the companies PE ratio has been as high as 63 and as low as 16.7.  We are leaning on the cheap side for this stock.  Other ratio’s also indicate the stock being cheap compared to it’s history.

If you don’t own any sin stocks, now is a good time to add this one to your portfolio as people drink no matter how the economy is doing.  So what’s the downside?  There has been heavy competition in the beer and cider industry.  We could see revenue’s decline again, but this is why we use a trailing stop.  If things turn really bad for $SAM down the road we know it will likely take some time to play out and our trailing stop will get out of the position before too much damage has been inflicted.

The stock broke out of it’s 50 day moving average as it had a long decline from it’s 2015 high’s

Recommendation: Purchase $SAM with a buy up to price of $170. Due to the low beta we will be using a 18% trailing stop loss and will be tracking it in our Tao Stock Tracker.

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Sell First Majestic Silver Corp – Stopped Out

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We got stopped out of $AG – First Majestic Silver Corp.  I originally recommended a 25% trailing stop.  By the stop loss program we used opted for 18% based off of the stocks beta.

We are going to use the stop loss program I wrote in google sheets to and close out of the position today for a 17.8% loss.

The markets have turned against both precious metals and the miners.  The signals I use for both pm’s and miners flipped to red.

I strongly believe that we will see another massive bull market in miners and in the metals however that might not form until later this year or even possible later in 2018.

The purpose of the stop loss is to take the human emotion out of the sell so we do not occur massive losses, and on the flip side it will allow our winners to run.

If you are following our tracking please sell today.  We will likely re-visit First Majestic Silver Corp at another time.

You can see our booking here: http://taoeconomics.com/tao-stock-tracker/ 

We will no longer be tracking the stock in our open positions.

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Collect a Safe 4% While this Company Retools Itself

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U.S stocks are expensive. The Shiller P/E ratio of the S&P is in extremely high territory.

Many analysts are predicting the market is going to drop or crash this year, and it very well may happen.

The only thing that has kept me from believing of a imminent drop is that we have one the most ignored stock bull market in our history. I don’t have people giving me stock tips, the average retail investor has been largely out of this market (until this year that is).

S&P Volume

If you notice in the above chart, the S&P volume has finally shot up at the start of 2017. Otherwise known as the Trump trade. I think there is a chance that we may be at the start of a mania phase for stocks.  Stocks trade on expectations, and the current expectation is that we will see some massive tax cuts.

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If we are at the beginning of a mania phase, then yes we are going to likely see an ugly crash/correction at some point. Here is how to proceed in the market:

  • Be aware.  Make sure you are paying attention.  Not just to lines on a chart, but to what with bills getting past, the EU elections, strangers giving “hot” stock tips, and so forth.
  • Hold/Save more cash.
  • Obey you stop losses.  If you don’t have a sell/exit strategy then do not buy.
  • Expect volatility.

So on to the stock pick.  This pick will likely make people’s stomach turn.  Retail in the U.S has been hit hard.  I’m sure you have come across many articles regarding store closures and declining revenue.

Target’s ($TGT) stock is down a lot.  The stock had a high of over $80 a share just last year and now trades for $55.75, a sell off of over 30%.

I’m going to tackle some of the risks I see first and get them out of the way.

  • Revenues were down in the 4th quarter of last year, and they may continue to go down.
  • If we see imports get taxed more heavily or a trade war breaks out, that could really effect Target and other retailers.
  • I’m not a fan of the shopping online to pick up in a store model which they are continuing to pursue.  Isn’t that just shopping twice?
  • The company is putting back $7 billion into it’s stores over the next 3 years.  I don’t view this as a bad thing, as it is likely necessary for future growth.  But I figure I would note it hear is it will likely cause their margins to drop during this time.

Now for the positive:

  • By most metrics the stock is cheap.  Forward P/E, Current P/E, Price to Sales ratio is only .45.  Price to free cashflow.
  • The dividend payout ratio is at 48%.  I believe the current dividend is safe at this level.
  • Target is still a great store where people love to shop.
  • Online segment is growing as well.

Action: Buy Target up to $59

Use a 18% trailing stop or if the stock closes below $52.

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3D Printer Stocks Taking Off – Not Too Late for this Trend

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3D printer companies are getting some attention again.  Earlier this month the Motley Fool had an article on 3D printing one how more and more companies are turning to the technology while we can likely forget about using them in our homes (at least for now). From the article:

There’s some significant progress on that front, with Stratasys signing deals with both Airbus and Ford. 3D Systems has been used by Mitsubishi and Daimler as well, so these companies are slowly being built into the design process. And these partnerships just scratch the surface of companies expanding 3D printing capabilities.

They go on to explain how 3D printing with metals will be the next phase for growth. And recently they covered again on the shoe industry and it’s use 3D printing.

On the 3D printing end, this partnership propels Carbon way ahead of current leader 3D Systems (NYSE:DDD) in the 3D-printed shoe space. Moreover, Carbon is on track to become the tech supplier behind a momentous 3D printing industry record: Once production hits full scale, the Futurecraft 4D will be the highest-quantity mass-produced 3D-printed product ever!

Today shares of Stratasys shot up over 10% on a upgrade noting a positive outlook for the rest of the year.  Stratasys has little debt, and arguably the most experience on commercial 3D printing.

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If we compare the disruptive technology cycle chart below with the price action of 3D printing companies we may now just be past the disillusionment trough.

Stratasys ($SSYS) Monthly

The stock is down about 80% from it’s 2014 level and now starting to trend up.  Insider buying has also been trending up since December.  If we consider Trump’s America first mantra and the push for manufacturing back home, it stands to reason that 3D printing could end up benefiting.  In the future the profits from commercial 3D printing may fuel 3D printing for home personal consumption.

Action to take: Buy Stratasys up to $26 a share.  Use a 25% trailing stop or sell if it closes below $16.00

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Time To Get Into this Stock Miner Play

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As Trump launched Tomahawk missiles into Syria to the neocon’s delight, gold and silver are continuing to creep up.

First Majestic Silver Corp. ($AG) is trending up past it’s 50 moving average after making a double bottom.

First Majestic Silver Corp.

As you can see $AG is down over 50% from it’s 2016 Aug high.

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The company also has been managing it’s business much better than it’s peers.  Noted from the 3rd quarter of 2016 they exceed at keeping their costs down:

All-in sustaining costs: down 27%

As if the dual fuels of rising production and prices were not enough, First Majestic also pushed its all-in sustaining costs down by 27% year over year to just $10.52 per silver ounce. Three factors contributed to this decline: the company’s recently renegotiated smelting and refining agreements, the continued weakness in the Mexican peso, and its record silver production. Those new arrangements alone resulted in a 34% decrease in smelting and refining costs, helping the company to more than offset a 10% increase in electric costs from the national power grid.

https://www.fool.com/investing/2016/11/22/2-remarkable-numbers-first-majestic-silver-corp-in.aspx

Recommendation: BUY (First Majestic Silver Corp. ($AG).  Sell if you reach a 25% trailing stop or if the stock closes below it’s March low of $7.23.

This is a good time to play off of uncertainty, while the rest of the market appears expensive.

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Trump’s Challenge: Tariffs, Not Taxes

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As Trump’s cabinet fills out and markets price his administration’s economic impact for perfection, investors have to wonder if the new team can actually deliver.

Asia and economic expert Eamonn Fingleton, the only other analyst I know of predicting a Republican/Trump victory back in February, has some sage insight and advice for America’s tough road ahead.

In short, Fingleton identifies Trade and Immigration as the key issues for American voters and the economy. Pundits failed to give these issues proper consideration during the election (thus missing Trump’s appeal), and will likely continue toeing the corporate-establishment line of free trade orthodoxy. This would be a massive mistake.

A more recent Fingleton interview reveals that:

    ‘America was for its most successful decades very protectionist .. The entire federal government from the George Washington administration to the Abraham Lincoln administration was funded by tariffs a hundred percent. From the Lincoln administration to World War One two thirds of the government was funded by tariffs. World War One to World War Two, one third of the government was funded by tariffs. And now, our tariffs are pretty much non-existent.’

Though Trump may be able to storm his way through transnational trade agreements, demolishing any legal defenses against a more autarkic, protectionist US trade regime, the level of domestic investment and coordination necessary to re-industrialize presents a daunting challenge. Though the historical precedents of post-WWII Germany, Japan, and even China provide examples of success, some level of great power war, foreign invasion, and widespread destruction came first (a subject for another day).

For the time being we’ll let the qualified hypothesis stand, that a return to America’s days of industrial-trade greatness will not be a smooth transition. At best, we’ll see a euphoric blow-off in US equity markets, as masses of money flee negative/zero rates abroad, and rising rates in the US, to chase hopes of fiscal stimulus and “war bride” re-armament in the United States. As we’ve seen numerous times throughout history, however, the realities of trade and real war are no good for the average investor’s returns, much less the national economy.

TickerTruth Major Assets reflects many of these themes:

tickertruth-major-assets

Good Hunting!

Darshan Dorsey, Founder, Dorsey Intel
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Pockets of Strength After Brexit

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Watching the British Pound plummet to historic lows and stock markets sharply sell off can be shocking to say the least.  People are scared and markets hate uncertainty.

What I find interesting are the pockets of safety that occurred today during the sell off.  Other than the U.S. dollar, gold, silver, and U.S treasuries rallying there are a few stocks that are holding there own during the market sell off.

Noticeably the following:

Hormel Foods Corporation HRL 2.52% $35.46
Tootsie Roll TR -0.44% $36.62
Wallmart WMT 0.42% $72.40
Campbell Soup Company CPB 0.75% $63.11
Hershey Co HSY 1.12% $98.21
Reynolds American Inc. RAI 2.03% $51.87
P&G Foods BGS 1.05% $47.14
Verizon VZ 0.16% $54.76

The above is just a small sample of stocks that I came across today.  All of them are up except for Tootsie Roll which is down slightly.

What do the stocks above all have in common?  They are brands that people know, companies that have been around along time with a great track record.  They sell things or offer a service where people keep coming back and show up for more. They all pay a dividend and have done so for years.  These are incredible moves as the Down Jones has sold off over 500 points today!

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There is safety in stocks, and I while I don’t know what will happen next week or next month I believe we will start seeing a trend into safe stocks and a move away from government bonds.

As I mentioned before, we could still see a drop in stocks including the ones above, and one last push for government bonds. Looking out over the years to come I would rather own safe companies than “safe” long term government bonds.

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Why Retailers Should Use a eCommerce Platform for In-store Purchases

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Thinking a bit more after my article on why Walmart should buy B&N, I started thinking more about the advantages of Amazon to traditional retailers and how Walmart and other retailers could effectively compete.  How can a brick and mortar store compete with the ecommerce giant?

Amazon gets to know you very well.  You let Amazon know exactly who you are, they have your purchase history, when you buy, how much you buy and why you buy.

While I assume Walmart certainly tracks as much as it can, how many people come in the store, what items are selling what items are not, and probably basket analysis (aka Co-occurrence).  The store however does not know who you are and your specific history.  BTW, I am bullish on Walmart right now.

Now imagine the following:

  1. You walk into a Walmart
  2. Your phone buzzes
  3. You look at your phone and are prompted to sign into Walmart’s free Wifi which will automatically also signs you into the companies website Walmart.com.
  4. Settings and agreements on your phone can be managed so that this sign in process automatically happens when you walk into the store.
  5. Walmart.com knows that you are ‘in-store’.
  6. You pick out a shopping cart which has a unique identifier and links the shopping cart to your in-store shopping session.
  7. The shopping cart also has a build in wireless charger for your phone.
  8. You pick up an item place in your cart, the item shows up in your online walmart.com shopping cart as well.  Possibly tracked by RFID and your phone.
  9. You walk down the aisle and notice your favorite beef jerky is out of stock.  You hold your phone and scan the QR code, the product enters your cart anyway notifying you it will be shipped within a few days to your home.
  10. You are all done shopping.  You hit ‘Proceed to Check-Out’ on your phone.  You are offered an additional discount off the total price for using this system.  Your beef jerky was also qualified for free shipping.  You hit the final button and pay.
  11. Being a good environmental shopper you brought your own bags and a employee shows up to offer you help out with a big smile as you avoid the check-out line.

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Now Walmart knows who you are, they can build a history and send you precision type ads and notifications.  You equally become use to shopping online with their site.  While the above is extremely complex and needs to integrate data centers, single-sign on, location, RFID and shopping cart tracking it is possible.  Obviously this would need to be tested with a small number of stores first.  But the above shopping experience would provide a huge competitive advantage with Amazon.com.

Maybe the above is already being developed?  Amazon.com could also end up partnering with retailers to offer the in-store website shopping service as well.

The above shopping scenario could very well be the future.   Well it happen?  I have no idea. This is really just me thinking out loud as a fun exercise.  But this is what I would be thinking about if I was an executive at a major retailer.

Now, I realize this sounds like one step away from facial recognition personalized shopping like in the movie Minority Report.  The cell phone step would make the transition less terrifying for most people.

Minority Report Shopping

Folks will no doubt also be concerned about privacy.  I believe there will be a market for those not willing to give up their privacy.  When we tend to move far in one direction in society, something else seems to arise to counter.  I am an advocate for anonymous based browsing and shopping and I hope the two worlds can co-exist.

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Why Walmart Should Buyout Barnes & Noble

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Walmart has been in the news a lot lately.  The stock has been moving steadily down since it’s 2015 high of almost $90 a share.  It recently closed over a 100 U.S. stores and announced it will be placing more money into it’s online operations to compete with Amazon.com.  Walmart is now a big hiring company in Silicon Valley.

At first glance it may seem unrealistic that buying Barnes & Noble would help Walmart compete, but the company needs something to desperately draw people to it’s ecommerce website.   That something could and should be ebooks.  Business Insider points out that B&N has extremely loyal Nook users, however the companies ebook reader the Nook is bleeding the company of cash.

BKS

If Walmart owned the Nook it could push other Walmart.com ads to inexpensive Nook readers just as Amazon.com does with it’s Kindle.

Walmart wants developers for it’s website, imagine that it could fold barnesandnoble.com into Walmart.com and expand it’s media library along with all of barnesandnoble.com content and reviews and retain those developers as well.  Think about when you go to Amazon.com.  What keeps you on the site is content and being able to explore new items that you did not know existed.   B&N has the content, they have customer reviews along with “Customers Who Bought This Item Also Bought…”

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What about all the book stores?  B&N is currently in the process of closing it’s non-profitable stores as sales are down.  Can Walmart turn them around?   I’m not suggesting that Walmart can change the trend of brick and mortar books stores, but I believe the companies experience and leverage may be able to help manage it’s current operations and reduce costs.   The overall strategy of the buyout would not be for the stores, but for the website catalog and the Nook device, the stores would be a bonus as I believe they could be continued to be operated profitably.

Isn’t this all just playing catchup?  

Yes.  It is.  That is the reality.  Walmart needs to catchup in one major aspect.  Digital content.  Right now Walmart is trying to also attract affiliate members just like Amazon’s affiliate program, but Walmart will continue to have issues unless they get that content so that visitors want to hang out longer on their site.

B&N has a market cap of just over $600 million.  Walmart pulled in $15 billion of cashflow just in 2015.   Even if they paid a premium for B&N it would barely put a dent in their annual cash flow.

The next step after the Nook?  Streaming movies programs to draw in more customers. I bet Walmart could pick up the Blockbuster brand name for a song.  🙂 It may be possible that Walmart using it’s stores can come up with a program more desirable than Amazon prime.  Time will tell.

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