Further Signs of Weakness in a Stock Picker’s Market

Markets tumbled sharply in yesterday’s trading, turning a range-bound week into a distinctly negative one. The Dow Jones fell 2.22%, the S&P 500 tumbled 1.78% and the NASDAQ dropped 1.96%. The MCSI Emerging Markets Index slid 1.57%.
Big gainers in your Alpha Investor Letter portfolio included the iShares MSCI Philippines ETFC (EPHE), which spiked 5.65%, and last week’s recommendation, BYD Company, Ltd. (BYDDF), which added 1.49%.

The iShares MSCI Philippines (EPHE) shot back above its 50-day moving average, and moved to a BUY.
With the broader market pullback, a large number of your positions fell below their 50-day moving averages, and changed to Hold. These include Berkshire Hathaway (BRK-B), Vanguard Russell 2000 Index ETF (VTWO), First Trust US IPO ETF (FPX), Guggenheim S&P 500 Equal Weight ETF (RSP), The Walt Disney Company (DIS), PayPal Holdings (PYPL), Vanguard Global ex-US Real Estate ETF (VNQI), Market Vectors Biotech ETF (BBH), Global X Guru ETF (GURU), iShares Currency Hedged MSCI Germany (HEWG) and Home Depot (HD).

After its abrupt and impressive reversal from its Feb. 11 lows, the S&P 500 is now trading where it was on March 29. Going back even further, the S&P 500 closed yesterday at a level it first saw in November of 2014. That means the U.S. stock market has done nothing in the last 17 months.

Combine this technical weakness with an earnings recession in the S&P 500 and weak seasonality between now and November, and you see why this has become a stock picker’s market.

In one surprising trend, low-volatility stocks have been handily beating their high-volatility peers.

Over the past 12 months, returns in low-beta stocks have been good, while high-beta stocks have been terrible. Put another way, investors have not been rewarded for taking on additional risk, Sadly, when low-volatility stocks have so greatly outperformed high-beta ones, it did not bode well for stocks in general.

These are all themes I’ll be picking up on in our conference call this coming Monday, May 23, open to all Nicholas Vardy subscribers.

Participating in the call is easy. All you need to do is answer your phone when we call you between 11:55 and 12:05 p.m. EDT (8:55 and 9:05 a.m. PDT) on Monday, May 23. At your option, you’ll then be connected to the subscriber-only teleconference for an exclusive discussion with me.

Portfolio Update

Berkshire Hathaway (BRK-B) fell 3.07% over the last five trading days. Berkshire Hathaway took a $1 billion position in Apple (AAPL) recently. Berkshire Hathaway’s leader Warren Buffett likes a good deal, and this could be why he waited until Apple hit a low 10.5 price-to-earnings (P/E) ratio, paid a 2.4% dividend and is buying back $175 billion in stock before he bought. BRK-B dipped below the 50-day moving average (MA) and is now a HOLD.

Markel Corp. (MKL) leveled off last week, dipping just 0.51%. MKL still stands very close to its recent new 52-week high. Markel reported strong earnings on May 3 after markets closed. Earnings were $10.90 per share vs. the consensus estimate of $6.25. Quarterly revenue was $1.4 billion vs. the $1.3 billion estimate. Revenue was up 5.7% year-over-year. MKL is a BUY.

The Walt Disney Company (DIS) fell 6.25%. DIS reported earnings on May 10 after markets closed. EPS was $1.36 vs. the analysts’ consensus estimate of $1.40 per share. Revenue came in at $13 billion vs. the estimated $13.2 billion. This was a 4.1% increase in revenue year-over-year. A Wells Fargo analyst provided a simplistic yet insightful take on the report saying, “It wasn’t a horrible quarter — it just wasn’t that great.” DIS moved to a HOLD.

PayPal Holdings (PYPL) lost 2.61% last week. PayPal will host an “analyst day” today, and good vibrations abound in anticipation of the event. SunTrust and Jefferies reiterated “Buy” ratings recently, and Credit Suisse affirmed its “Outperform” rating. Firms BTIG and Cantor Fitzgerald also issued a “Buy” rating on the stock. Nevertheless, PayPal moved lower and pushed the position to a HOLD.

Guggenheim Spin-Off (CSD) moved 3.08% lower. Looking at CSD from a technical standpoint, this exchange-traded fund (ETF) has been trading directly along its 200-day MA for the past month, deciding which way to break. As of yesterday, its 50-day MA rose up from below to touch the 200-day MA, which may finally push CSD traders to definitively decide to trade CSD higher. CSD is a BUY.

iShares MSCI Philippines (EPHE) spiked 5.65% last week on strong buying volume. Politics can have a strong influence on a country-based ETF, and this was evident in the positive investor reaction to Philippines president-elect Rodrigo Duterte. A recent Bloomberg report said investors were “spellbound” with his transformation into a business-friendly leader, and this sentiment has reflected positively in the stock market. EPHE moved to a BUY.

Home Depot (HD) pulled back from a 52-week high last week, moving 4.01% lower. HD reported an earnings beat yesterday before markets opened. EPS was $1.44 vs. the consensus estimate of $1.34. Revenue was $22.8 billion vs. an estimated $22.4 billion, and gained 9.0% year-over-year. Earnings guidance was also reported for the upcoming fiscal year to come in around $6.27 per share on estimated revenue of $94.10 billion. HD moved to a HOLD.

BYD Company, Ltd. (BYDDF) added 1.49%. BYDDF joined the portfolio just last week and is off to a good start in this bad environment. Battery technology is hot right now, and recent tech news involving Tesla’s new Model 3 vehicle has really turned up the heat. With BYDDF sitting in a battery-production sweet spot, and substantial Chinese government support, this stock is likely to continue its bullish path. BYDDF is a BUY.

Sincerely,