MidWeek Commentary

HI Market View Commentary 02-11-2019

HI Market View Commentary 02-11-2019

What I want to talk about today?

Understanding the process:  Collar Trading

Purpose of Collar trading? – Make up SOME of the downward movement

Anything you make up on the way down is profit as stocks come back, and can be transferred into new stock ownership ( Dollar Cost averaging without asking for more money)

Collar trading protects you from a 2000, 2008 type crash in the market

I don’t have to worry about ever losing half my portfolio

Last year turned me into a life coach

Life is not easy and neither is the stock market

Risks – China Trade Deal, End of Week Government Shutdown, Brexit in the works

Where will our markets end this week?


DJIA – Bullish

SPX – Bullish

COMP – Bullish

Where Will the SPX end February 2019?

02-11-2019            -2.0%

02-04-2019            -2.0%


Mon:            L, CHGG

Tues:            TAP, ATVI, AKAM, DENN, TRIP, UAA


Thur:           CME, DUK, KO, CBS, NVDA

Fri:              DE, PEP, KHC

Econ Reports:


Tues:            JOLTS, NFIB Small Business Index

Wed:            MBA, CPI, Core CPI, Treasury Budget

Thur:           Initial, Continuing, PPI, Core PPI, Retail, Retail ex-trans, Business Inventories

Fri:               Import, Export, Capacity Utilization, Industrial Production, Empire Manu, Michigan Sentiment, OPTION EXPIRATION


Mon –

Tues –         

Wed –   CN: Merchandise Trade Balance  

Thursday –  CN: CPI, PPI


Sunday –       

How am I looking to trade?

 Earnings are coming up and protecting through earnings with protective puts and NO short Calls

AOBC – 2/28

BIDU – 2/21 AMC

MRO – 2/13 AMC

MRVL – 3/17

RHT – 3/26

UAA – 2/12 BMO


www.myhurleyinvestment.com = Blogsite

customerservice@hurleyinvestments.com = Email


Why am I invested in Ford?

Because it should trade in the $22 to $27, 7% dividend and cheap by valuation metrics IF you understand their credit division


Warren Buffett says this is one way to not get rich on Wall Street

  • “You really should not make decisions in securities based on what other people think,” Warren Buffett says.
  • Instead, do your own homework on companies you feel like you can evaluate better than others, the legendary investor says.
  • Try not to to listen to macroeconomic calls either when making individual stock decisions: “You cannot get rich with a weather vane.”

John Melloy@johnmelloy

Published 11:33 AM ET Wed, 6 Feb 2019  Updated 6:20 PM ET Wed, 6 Feb 2019CNBC.com

Legendary investor Warren Buffett has a tip for investors trying to get rich on Wall Street through a hot tip: it won’t work, so do your own work.

“I mean, on any given day, two million shares of Coca-Cola may trade,” the “Oracle of Omaha” explained to a captive audience at the 1994 Berkshire Hathaway annual meeting. “That’s a lot of people selling, a lot of people buying. If you talk to one person, you’d hear one thing … you really should not make decisions in securities based on what other people think.”

“A public opinion poll will just — it will not get you rich on Wall Street,” Buffett told his throng of followers.

While this advice was given more than two decades ago, it holds true now more than ever with the prevalence of social media. There are a lot of opinions out there now and more news than ever for investors to sort through.

Buffett’s advice is to counter this noise by sticking with companies you feel like you know and have an advantage over others in evaluating.

“So you really want to stick with businesses that you feel you can somehow evaluate yourself,” he said at the meeting.

Following his own advice has paid off for the chairman and CEO of Berkshire Hathaway. By poring through annual reports and other filings, Buffett’s stock allocation decisions and outright acquisitions through all kinds of difficult market environments have driven Berkshire’s stock price up by 12 percent annually the last 25 years, better than the stock market’s 9 percent annual total return over that same time frame, according to FactSet.

‘You cannot get rich with a weather vane’

With market volatility increasing after a nine-year bull market where stocks seemed to all just go up, investors may need to return to their stock-picking roots this year, while heeding Buffett’s advice.

Buffett and his longtime business partner Charlie Munger said they especially try to not make big predictions on the direction of the overall economy and stock market nor let the forecasts from others on those macroeconomic matters influence their individual stock decisions.

“You cannot get rich with a weather vane,” Buffett said at the meeting.


Cramer: This earnings period revealed ‘brutal truths’ about US-China trade

  • CNBC’s Jim Cramer guides investors on how to approach developments in U.S.-China trade talks.
  • The bears aren’t always right in assuming that stocks like Starbucks will suffer if talks go south, he says.
  • The “Mad Money” host opines on the prospects for shares of Starbucks, Nike, Boeing and more.

Elizabeth Gurdus@lizzygurdus

Published 1 Hour Ago  Updated 36 Mins AgoCNBC.com

If the latest round of earnings reports taught us anything, it’s that traders aren’t always right when it comes to U.S.-China trade talks, CNBC’s Jim Cramer said Monday as whispers of a potential trade summit kept stocks at bay.

Specifically, traders who bet against stocks like Nike and Starbuckswhen talks go south — usually assuming that they’ll be boycotted because they’re distinctly American brands — could have “the China trade” all wrong, he told investors.

“This earnings season has revealed some brutal truths about ‘the China trade’ that just don’t jive with the … conventional wisdom,” Cramer said on “Mad Money.” “We act like the winners and the losers from the trade war are obvious, but the reality’s a lot more nuanced than that. Many companies that should be hurting in the People’s Republic have been putting up some astonishing numbers, while others are being torn to pieces by increased competition or the slowing Chinese economy.”

White House officials have confused Wall Street with their statements on the trade talks in recent months, at times signaling progress and at times suggesting that the two sides were still far from reaching an agreement.

As a result, short-term stock-pickers have had to follow their instincts, Cramer explained. When tensions seem to be rising, they’ll usually choose to short-sell shares of top consumer brands, capital goods companies and technology giants, he said. Short-selling involves trying to profit on a bet that a company’s shares will decline in the near future.

Nike, Starbucks, Estee Lauder and Yum China all tend to fall in the first short-selling bucket, but if you ask the “Mad Money” host, that strategy “just hasn’t paid off.”

“Nike and Starbucks both reported an acceleration in sales” this quarter, he noted, adding that Nike saw its best-ever Singles Day, China’s Black-Friday-esque shopping holiday. “Nike’s biggest problem in the PRC? High-quality problem: making enough shoes to meet the demand.”

Starbucks performed strongly, with higher-than-expected same-store sales in China. Estee Lauder’s earnings report had nary a hairon it. And while Yum China didn’t blow away the estimates with its results, they weren’t nearly as bad as many had feared, with rising revenues to boot.

“The consumer stocks that are holding up in China … all share one trait: they have unassailable brands with little Chinese competiton,” Cramer said. “There’s really nothing like Starbucks in the PRC yet. Yum China? KFC slowed, [but] not enough to give the short-sellers a win. Estee Lauder’s practically peerless.”

Capital goods companies told a different story this earnings season: Emerson ElectricUnited Technologies3M and Caterpillar were all impacted by their exposure to the economic slowdown in China.

Aircraft manufacturer Boeing was the only exception, Cramer said, calling its much better-than-expected earnings results “a glorious secular win.” Even though it sells one in four planes to Chinese buyers, “the Chinese need Boeing more than Boeing needs China,” he explained.

In the technology space, “the elephant in the room is Apple,” the “Mad Money” host said. The iPhone maker pre-announced some first-quarter weakness tied to China in early January, and while it managed to top expectations later in the month, it sent a whole host of stocks — including that of its supplier, Skyworks Solutions — down with it.

“Tech’s the real triumph for the short-sellers, because the Chinese government has made it difficult for Apple to do well — [it’s considered] cheaper, more patriotic, if you go buy the Huawei phone,” Cramer said. “Nvidia’s been crushed by a government-mandated slowdown in Chinese gaming.”

So, if you’re trying to invest around developments in U.S.-China trade talks, going against the daily grain might be your best move, Cramer said.

“If this market gets hammered on China fears later this week — and I expect it will — use that pullback to buy … Nike, Starbucks, Estee Lauder, and Yum China, not to mention Boeing,” he advised. “Be wary of the industrials with Chinese exposure, and expect pain in the techs with Chinese business. Sure, there are some wildcards, but now you have your cheat sheet and a much better sense of who’s being hurt and who’s doing just fine.”

Disclosure: Cramer’s charitable trust owns shares of Apple.


Did Netflix Just Set The Stage For Disney?

Feb. 11, 2019 12:09 PM ET


The key rule for social media is: content is king. If you have the reach, then it is quality over quantity. I argue Disney has a big advantage over Netflix.

Further, Netflix might have actually helped Disney by creating a DTC market.

Disney is a great business, not really cheap from a value perspective, but cheap from a growth perspective.

Disney (DIS) is definitely a great business. It has a strong brand, improving margins, growing cash flows and a growing dividend. However, the current free cash flow and earnings yields of around 6.5%, don’t make it cheap from a value perspective.

From a growth perspective DIS might be really cheap and investors could expect double digit yearly returns over the next decade, if the company manages to copy what Netflix (NFLX) did. Actually, it might do much better as Netflix broke the ice and created the direct to consumer (DTC). Given the frictionless switching among current and future DTC providers, it is likely that the one with the best content will make the most money. Unlike NFLX, Disney will not have huge additional content costs. Actually, Disney will manage to deliver better content, with better margins, that will enhance its profitability.

I have created 3 scenarios, that merely assume that what NFLX has done over the past 5 years, DIS will do over the next 5 years. Given that nobody knows what will happen in the future, the estimations bring to various returns. However, I estimate a return for investors between 6% and 14% per year.


Baidu: Get iQIYI And Ctrip For Free

Jan. 31, 2019 4:11 PM ET


The value of the highly profitable Baidu search engine alone significantly exceeds the current market value of $59 billion.

The 58% stake in Iqiyi is worth $9 billion and the value of the 19% Ctrip.com stake is $3.4 billion.

Baidu has more than $13 billion of excess capital on the Balance Sheet.

Baidu is becoming an artificial intelligence company with many new initiatives, including self driving cars, which can become new earnings generators in the future.

Baidu has a 70% market share of the Chinese Internet search market and Google’s “Dragonfly” project to reenter the Chinese market is postponed.


Baidu (BIDU) has the 2nd largest search engine in the world and the largest search engine in China. In December 2018 Baidu had a market share of 70% of the Chinese Internet Search according to Statcounter. Shenma has a market share of 15%, Sogou of 5% and Haosou of 4%. Google and Bing have both market shares of only 2%. The stock price of Baidu has dropped from $270 in June 2018 to $169 on January 31, 2019. Is this drop justified based on fundamentals?

An Internet search engine business has a strong moat due to network effects, economies of scale, a strong brand and intangible assets of search technology. Google (GOOG) is the largest search engine in the world and is highly profitable. Yandex (YNDX) is the biggest search engine in the Russian Federation and has been able to defend its market leading position against Google.

Internet Search is a winner takes all business. Switching costs are low on the Internet. Internet users will choose the best search engine available. As a result the best search engine will have the most visitors and highest revenues. The company with the highest revenues can invest the most in improving their search engine. Therefore, the quality will continue to improve compared to competitors, who don’t have the same scale and network effects. The competitive advantages of the Baidu Search engine are described here in more detail. I expect that Baidu can defend its dominant position in the Chinese Internet Search market even if Google will reenter the Chinese market as part of the “Dragonfly” project.

The picture below describes the business model of the Baidu Search engine.

Baidu Search business model

However Baidu has transformed from a search only business to an Artificial Intelligence company with a number of diversified business, including:

  • Iqiyi (IQ) – The “Netflix (NFLX) of China” with more than 80 million subscribers. Iqiyi obtained a listing on the Nasdaq stock exchange after a partial spin-off in March 2018. Baidu still owns 58% of the shares of Iqiyi.
  • DuerOS – Artificial Intelligence Speech and image recognition
  • Apollo – Autonomous driving
  • ABC Cloud and AI Solutions
  • Ctrip.com (CTRP) – Baidu has a 19% stake in the online travel website Ctrip.com

Since 2015 Bidu generated about $5 billion in income by selling several business, including:

  • Equity stake in Uber
  • Mobile game business
  • Qunar Cayman Islands Limited

Valuation of Baidu

Baidu reports the financial figures of Baidu Core and Iqiyi separately. Iqiyi is losing money. Baidu Core is highly profitable. It generates almost $1 billion per quarter in net earnings and earnings have been growing more than 20% a year. Baidu Core also includes the various artificial intelligence projects including autonomous driving. I assume that these projects are losing money and that the Baidu search engine alone is even more profitable. I estimate that the Baidu search engine will generate annual net profits of more than $5 billion and will continue to grow 20% a year. As a result the value of the Baidu search engine alone is significantly higher than the current market capitalization of $58 billion on January 31st, 2019. A price earnings valuation of 20 seems reasonable for this high quality business, which would imply a valuation of $100 billion for the baidu search engine business.

However, in addition the balance sheet of Baidu contains the following assets with a total valuation of $25 billion.

  1. 58% stake in Iqiyi – $8 billion
  2. 19% stake in Ctrip.com – $3.4 billion
  3. Excess cash and short term investments – $13.8 billion

As a result, the fair value of Baidu shares is approximately $300 dollars. The Iqiyi spin-off unlocked value. Spinning-off new business like Apollo or ABC Cloud could unlock more value in the future. Joel Greenblatt described in his book You Can Be a Stock Market Genius how demerging businesses with different characteristics can unlock hidden value.

Insider Ownership

CEO and founder Robin Yanhong Li owns 16.1% of the company shares and has more than 50% voting power. As a result interests of management and shareholders are aligned and Robin Yanhong Li has a proven track record of value creation for shareholders.

On June 27th, 2018 Bidu announced a share repurchase program of $1 billion. This is an indication that management believes that the stock is undervalued and that buying back shares can create shareholder value.

Why is Baidu undervalued and what are the risks?

In my opinion there are two reasons for the undervaluation of Baidu. Valuation of Baidu is complicated because of the combination of a highly profitable search engine, several fast growing but money losing business and equity stakes in other business. The second reason is the trade war between China and the USA and fears of a slowdown of the Chinese economy. Baidu is not exporting products to the United States. As a result the direct impact of the trade war should be limited. However a slow down of the Chinese economy will have a negative impact on Baidu as most of the business is conducted in China. Baidu is a highly profitable business and therefore it should be able to weather a severe recession and even benefit from it in the long term if competitors are forced to leave the market.

There are also risks. Baidu Inc is incorporated on the Cayman Islands. Legal protection of shareholder rights is less strong compared to companies incorporated in the United States.

CEO Robin Yanhong Li has full control of Baidu. It is possible that decisions made by him are not in the interest of small minority shareholders. I have not found any indication that this has been the case.

Iqiyi is losing money. It is possible that Iqiyi needs capital from Baidu to continue operations, if it cannot achieve profitability.


The value of the highly profitable Baidu search engine alone significantly exceeds the current market capitalization of $59 billion. However, there are additional assets with a market value of at least $25 billion on the balance sheet of Baidu, including equity stakes in Iqiyi and Ctrip.com and excess cash, which an investor in Baidu gets for free. The autonomous driving, cloud services and other artificial intelligence projects can also become income generators in the future.

Disclosure: I am/we are long BIDU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


Under Armour Earnings Preview: Forward EPS Estimates Stable But Revenue Estimates Seeing Lower Revisions

Feb. 11, 2019 5:23 AM ET


The mid-December ’18 investor meeting gave the first look at 2019 guidance, which was $0.31-0.33 in EPS vs. the $0.35 estimate.

Under Armour rose 22.5% in calendar ’18.

Forward revenue estimates for 2019 and 2020 continue to be revised lower.

Under Armour (UAA), the apparel manufacturer that has been plagued with ERP implementation issues as well as renewed competition from Adidas in the US sports apparel market the last two years, reports their calendar 4th quarter, 2018, financial results before the opening bell on Tuesday, February 12, 2019.

Street consensus is expecting $0.03 in earnings per share on $1.21 billion in revenue (per IBES by Refinitiv) for an expected year-over-year 4th quarter decline in revenue of 11% on a $0.00 EPS compared to Q4 ’17.

Briefing.com is showing a $0.04 EPS estimate and $1.3 bl in expected revenue for UAA for Q4 ’18, so we’ll see if the numbers are adjusted before Tuesday morning.

Here is why the rewriting of War & Peace isn’t required for Tuesday’s release: in mid-December ’18, Under Armour management held their investor meeting and guided 2019 to estimated EPS of $0.31-0.33 vs. the then-consensus of $0.35 in EPS, and revenue growth of 3-4% versus the then expected +4.9% consensus on gross margin expansion in 2019 that is expected to be higher by a little less than 1%.

Have expectations for the sports apparel and footwear giant changed materially in the last 7 weeks? Probably not.

UAA was trading at $21 on the day of the pre-announcement and closed Friday, February 8th at $20.75 per share so the stock has appeared to all but ignore the contained 2019 guidance at this point.

What has changed about Under Armour since the stock was crushed from a high of $52 in late 2015 to a low of $12 in late 2017?

1.) Last quarter UA/UAA generated $200 million in 4-quarter trailing free-cash-flow and also generated its 6th quarter (of the last 7 quarters) in positive free-cash-flow, after generating negative free-cash-flow for the previous year and a half.

2.) Slower growth is helping: the Under Armour “bug” was phenomenal from 2009 to 2015 thanks to remarkable growth where revenue and EPS grew 20-30% annually for several years. The demand for the brand seemed to be on fire, particularly at the college level.

3.) Apparel is now 68% of revenue, down from the mid-70% range during the halcyon days and looks to be averaging mid-single-digit growth the last 4 quarters, while footwear is roughly 20% of revenue and is much lumpier in its growth.

Here is the consensus EPS and revenue trends for 2019 and 2020:

2019 EPS est 2020 EPS est 2019 rev est 2020 rev est
2/10/18 $0.33 $0.49 $5,380 $5,700
1/13/19 $0.33 $0.49 $5,394 $5,746
12/31/18 $033 $0.49 $5,394 $5,735
11/30/18 $0.34 $0.50 $5,450 $5,766
10/31/18 $0.34 $0.49 $5,452 $5,764
9/30/18 $0.33 $0.50 $5,484 $5,857
8/30/18 $0.33 $0.49 $5,486 $5,963
7/31/18 $033 $0.50 $5,487 $5,864
6/30/18 $0.31 $0.52 $5,486 $5,949

Source: I/B/E/S by Refinitiv

Readers can see how EPS has remained fairly stable since the July ’18 financial release while 2019 revenue was sliced between November and December ’18 (no doubt as a result of the investor meeting update) and 2020 revenue has continued to trend lower as well.

It is good that Under Armour is showing margin control and discipline by keeping EPS stable as revenue estimates get revised lower, but all else being equal, going forward, I’d prefer to see revenue estimates start to stabilize for 2019 and 2020.

Under Armour Valuation:

2020 P.E 41x
2019 P.E 61x
2020 exp EPS gro rt 50%
2019 exp EPS gro rt 48%
2020 exp rev gro rt 6%
2019 exp rev gro rt 4%
Price-to-sales (using est for q4) 1.8x
Price-to-book 5x
Price-to-cash-flow 26x
Price-to-free-cash 50x
FCF yield 2%
Div yield no div
Mstar long-term GM est 49%
Mstar long-term Op mgn est 9.2%
Mstar moat none

Source: valuation spreadsheet and Morningstar analysis


Maybe the best way to summarize Under Armour for the next few years is that it should return to growth, just a slower and more manageable growth rate accompanied by a somewhat more reasonable valuation.

Under Armour was the one stock that came up in meetings with client prospects in the middle part of this decade, and I told both current and prospective clients that 90x cash-flow is not the place to initiate a position in a stock.

We took a position near $30 per share, sold the shares, then bought near $20, sold the shares in the high teens, and then re-established the current position between $17 and $20 in the last year. At one point, given the state of the cash-flow statement, you had to wonder if Under Armour was going to survive.

At present, clients have a 1.6% position in the stock.

For those looking to manage risk, a trade below $17.10 or the early 2019 low for UAA would not be well received.

The upside is likely contained in the high $20’s by a breakdown gap from the January ’17 earnings release.

The real question remains did a chastised and somewhat humbled Under Armour management team “underpromise” but plan on over-delivering with fiscal 2019 guidance or at some point can we expect stable to positive revisions in the Under Armour revenue estimates after seeing the steady drumbeat in downward revisions?

Going forward, for the next few quarters, the 2019 and 2020 revenue estimates have my attention.

Disclosure: I am/we are long UAA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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