Thursday, May 8, 2014

If you were a fly on the wall at Soos Global, here's some of what you'd see....

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Below are a few excerpts from emails and/or phone calls on a variety of investment topics that I’ve had w/investors over the course of the past week.  Thought you’d find them of interest…..

TOPIC:  What’s the strategy with “HIGH ALERT” names Himax (HIMX), American Eagle Outfitters (AEO).  Also, what’s the strategy with Cinemark (CNK)

I appreciate your questions and focus on the portfolio.  Two of the three names (HIMX and AEO) have been on my “High Alert” list on which I put stocks that, due to unusual price action, require an escalation of attention to ensure that the investment theme still stands and to respond accordingly with regard to portfolio positions.

Let’s go through each in turn.

Himax (HIMX):  The stock, after a meteoric rise in 2013 (from $2.40 to $14.71), hit strong headwinds this year, starting w/BofA’s downgrade to Underperform in March based on anticipated slowing sales of LCoS and IC (two of their key product lines: liquid crystal on silicon and integrated circuits), and coupled w/some industry blogs that turned negative on the near-term outlook for the growth of the wearables market.  As if that wasn’t enough to deflate the euphoria on HIMX, word started to spread recently that one of HIMX’s largest customers (unnamed, but most likely Samsung) was slowing its orders of HIMX product. This was addressed in great detail on this morning’s earnings call.  The issue revolves around this large customer’s inventory position, which due to generally weak economies around the globe during Q1, saw a slowdown in sales of all kinds of tech products from TVs to laptops to smartphones, etc.  So in order to adjust inventory to more appropriate levels, the end customer had to cut back on orders from HIMX.  This is not an unusual event especially in the high tech space.  What is unusual is the size of the inventory adjustment.  Recent rumors that HIMX has ‘lost’ the customer to competitors appear to be unfounded.
Today’s earnings were a beat on revenue estimates and a miss on EPS.  And the forward guidance for Q2 was very sober.
Bottom line?  I believe that HIMX is going to weather this storm.  They are a formidable player in the semiconductor space and are a leader in the technology that will likely be a key component of the wearables market.  As global economies continue to recover, the tech revolution will likely continue and therefore sales of all the end-products that embed HIMX technology should grow.  As for the stock price, HIMX is a very heavily trafficked stock in the tech space especially amongst a more speculative investor group.  As a result, the moves are often extreme in terms of absolute amount and timing.  Recently, we’ve seen a major ‘momentum-to-value’ move in the markets which has caused the overall Nasdaq to underperform.  HIMX was part of that.  When the momentum to the downside appears to abate, I will consider adding to our position.  I believe that as part of a longer term investment theme, HIMX should not only perform well on its own merits, but has often been cited as a possible takeover target, with possible suitors including the likes of Samsung and other large players in the space.

American Eagle Outfitters (AEO):  The same premise that led me to acquire AEO still stands.  It’s a retailer with quality locations around the US and with a growth strategy abroad that is less based on capital investment but more on partnerships with local companies.  AEO was already an underperformer when I bought it, largely based on the market’s view that the teen customer base was fickle and had moved its attention to AEO competitors such as H&M and Zara.  Coupled with that came the tundra-winter weather which threw most of the retail space into flux.  AEO also is one among many of  the retailers that is in search of a new CEO.  The Chairman of the Board, Jay Schottenstein,  has taken over as interim CEO.  He’s a very experienced retail executive and I’d expect him to guide the ship well until he selects a star player to take over AEO, which btw, has also been cited as a possible takeover target, especially given its recent stock price slide.  I am remaining with it and looking for the post tundra-winter to bring on a strong spring and summer season.  In retailing, I’d give a ‘pass’ on a one season fashion miss, maybe even two.  But longer term, the company has to re-prove to the market that it can ‘own’ the teen and twenty-something space.  Currently, I’m confident that they can do that.  I’ll be monitoring the coming season closely.

Cinemark (CNK):    CNK’s price action has not raised concern with me, and therefore I have not put it on my “High Alert” list.  I don’t regard CNK as a ‘high-flyer’ nor high momentum play.  In fact, I view CNK as one among the more countercyclical hedges embedded in the portfolio.  Movie theater attendance tends to rise during tough economic times as people spend less on expensive air travel and tend to vacation closer to home, if at all.  CNK’s benefits, of being a global player with state of the art digital technology and a strong, low debt balance sheet, makes me comfortable to maintain our current position, and add if it pulls back.  The dividend of close to 3.5% is also a plus.  Finally, away from its countercyclical value,  I’m expecting CNK’s growth to come from their continuing expansion of theaters overseas as well as growth in sales of snack items within theaters.

TOPIC:  Is the market in a ‘bubble’ that is about to pop?

Please don't tell me that you're becoming a 'glass is half empty' guy?!  That's my job!!  You're the sobering optimist.
The press is busy talking about bubbles.  It’s a good headline grabber, and makes people nervous.  But I say “Bubble, shmubble”.
I don't believe that the whole market is in a bubble.  But there are certain names that are very over-inflated.  Einhorn cited AthenaHealth, and you see what happened.  How about Twitter?  The lock-up on employee shares ended today, and the stock is down another 14%, after already falling hard in recent months.  (see chart below).
Bottom line is that, as I’ve held for a while, the market overall is high in terms of absolute levels, but in terms of PEs, it’s not crazy high.  It is, indeed, benefitting from a global liquidity deluge provided by central banks, but the fact remains that companies have been making money and should be justifiably priced for a global growth scenario that is modest. When individual names, or sectors, get overly optimistic and therefore, overpriced, then stand clear!  And I do believe that there’s a good chance that the whole market takes some wind out of its sails.  And that’s where ‘cash is king’ comes in.  Keeping some powder dry to scoop up value when it appears.

TOPIC:  on a question as to the ”right” level of cash in the portfolios and Earnings season:

As you know, at our most ‘defensive’ back a few months ago, I had cash holdings at historic highs of over 25%-30%!  I’ve been selectively buying on pullbacks and now we have ~11% in the CORE and ~17% in the IRA. 
I feel comfortable with these %ages, and still think that on pullbacks, we could deploy more.
Earnings season too has been a mixed bag.  Earnings growth so far, for those who have reported, appears slightly positive, but the top-line (sales) growth is not yet too inspiring, and I think we need to see serious growth in top-line numbers, which would indicate strong business going on, in order to get P/E multiple expansion.  Companies can’t keep cutting costs as the primary generator of bottom-line results. 
I still think that the risk of a big across the board pullback is possible, (though it’s not the base-case) so I’m not comfortable getting cash down into low single digits.  But at just under 10% for the CORE and perhaps a bit above that for IRAs, for now, seems risk appropriate.
At times it feels a bit low on oxygen up here: 

TOPIC:  On the issue of the NFP data and on being challenged as to why I think you can’t judge the book by its cover!  The underlying data detail tell a more sobering story.

Fyi….strong employment number, but some sobering elements beneath the headline:

On the other hand, the unemployment rate plunged from 6.7% to 6.3% (consensus 6.6%), but the entire decline resulted from an 806,000 drop in the civilian labor force. The number of workers actually employed declined by 73,000. The labor force participation rate dropped to 62.8% from 63.2%. If the labor force did not decline, the unemployment rate would have increased to 6.8%. (quote from

The Dow was DOWN!!!!  I’m not the only one looking at the NFP report as a mixed bag.

TOPIC:  On the issue of Davita (DVA) and whether I’d add to current position:

Separately, been reading the transcript of the DVA earnings call.  very mixed picture.  Their kidney biz is strong in terms of number of patients, but as always, the Medicare patients are really not profitable given the government’s tight purse string on costs.  The private patients are the ones footing the bill for earnings.  The real negative for DVA is how they’ve been handling the HCP acquisition.  It’s been a series of misses (those are the words of the CEO!).  Can they get things in order and back on track?  I tend to think so, so I’m eyeing it, currently down 3.5%, as an ‘add’ to our current 1.8% holding.

TOPIC:  On the issue Sector weightings, specifically related to Energy, Materials and Consumer Discretionary holdings

In the CORE portfolio, the weightings are pretty close among Industrials, Energy and Materials (roughly 8-9%).  Our bigger weightings are in Consumer Discretionary and Tech a la the ‘global emerging middle class’ theme.
In the IRA portfolios, we have the same themes at play, and the main difference vs CORE is the Energy sector where we are lighter in the IRAs b/c we don’t own the XLE there.
In sum, I view those three sectors (Industrials, Energy and Materials) broadly as the more ‘cyclical’ sectors, more tied to the economic cycle, and to some extent, a bit more tied to some of the geopolitical noise that erupts from time to time.   Commodities, both metals and energy related, are used by markets as proxies to reflect a ‘fear factor’ related to disruptors to economic growth (like Putin-ization or like oil-supply disruptions in the Middle East).
As for rails, totally agree….I like NSC and am looking for an opportunity to add.
Bottom line, I think that regardless of the economic cycle, the middle class emergence is going to take place resulting in an larger number of human beings who for the first time can buy all kinds of goods…from sneakers to phones to computers to laptops, etc.  When bad economic data hits, the cyclical sectors ought to suffer more than the sectors/companies more directly related to this middle-class growth.  Currently, the global economy, while growing, is still quite uninspiring.  When we anticipate things changing, and we believe we’ll start to see real strong growth in the US, Europe and Asia, then I’d shift to heavier weightings in these cyclical sectors.

TOPIC:  On the issue of ‘Global Macro Thematic Value Opportunities’: an example of one in formation:  El Nino!

…great speaking w/you yesterday. 
Fyi… the article in the link above in the WSJ is what we talked about re one of the examples of a ‘global macro thematic value opportunity’.  The El Nino impact is something I’m tracking closely as it could impact  the supply chains of some current holdings (eg: Kellogg (K)), or some EM countries, such as Brazil, if the rain further hurts the coffee crop. (Starbucks?  May have less price elasticity than other less chique brands).   Check out the chart below.  Shows what’s already happened to coffee prices in recent months…back to mid/late 2012 highs…but certainly potential to revisit highs of spring ’11.

TOPIC:  Deere…recent lightening up in portfolio
Given the run up in the stock in the past couple of months, I trimmed the position to just 1% (from 1.5% in some accounts, 1.8% in others).  This is part of an ongoing plan to move the ‘infrastructure’ theme more towards the “consumer discretionary and related sector” themes (related to emerging middle class spending around the world).

I hope you found this of interest.  Please share any thoughts that you have an any of the topics above…..always eager to receive valuable input.

 Please continue to visit Soos Global Market Musings for updates.

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs incl. DE, K, XLE, NSC, DVA, CNK, HIMX, AEO.  Positions may change at any time without notice.