Friday was a seesaw session. We witnessed panic-buying again that resulted in the major indices closing at the highs of the session.  This is even more impressive heading into a weekend where the government might shutdown or not.

• Dow Jones Industrial Average: +54 points
• S&P 500: +12 points
• NASDAQ: +40 points

On another note, it was a remarkable week for the stock market. Several themes have continued from 2017; while others are evolving that belie assumptions about the economy just one year ago. These changing narratives provide investment lessons as well. Here are ways investors should look to find ideas and to manage their portfolio.

Sifting Through The Ashes

On Friday morning, Kohl’s (KSS) caught an upgrade at Jefferies Group (JEF) with a new share price target (of $100 from $66), which is a massive change of heart on a company that was written off and abandoned in December 2016. Shares were changing hands at $57.00 and subsequently drifted to $36 by May 2017. The stock has gone up more than 80% since August 2017.

The investment lesson is to have patience if you think a stock is oversold. I had subscribers buy after the December dip but closed out in February.

Reassessing Value

Just because a stock has rallied, it doesn’t make it overvalued. In fact, Wall Street is always late with upside assumptions, which is why so many companies post financial results that beat the Street. In addition, Caterpillar (CAT) was upgraded by two Wall Street firms and got higher targets from two other firms on Friday: 

• Berenberg: initiated with a ‘Buy’
• JPMorgan Chase & Company: upgraded to ‘Overweight’
• Citibank:  new target ($185 from $160)
• Credit Suisse: new target ($192 from $155)

In the past twelve months, this stock has gone up 82%. It seems as though these firms are really late because the stock is overbought. 

For the fiscal year 2018 (FY18), the earnings consensus is now $8.14, up from $6.69 just three months ago. This changes the dynamic of the stock and its valuation. I pounded the table on this stock in the past two years. However, if someone asked me about this stock, I wouldn’t talk them out of buying it here.

Pricing Power

As most of you know, I’m much more concerned about the top of the income statement versus the bottom line and earnings per share. For me, the most powerful thing any company can have is pricing power that doesn’t disrupt sales or market share. 

When Apple (AAPL) sells older-model smartphones at their record average selling price, you buy the stock and ignore rumors of demand or production dips.

 Amazon (AMZN) announced that it would raise its monthly Prime membership rate by $2.00 ($10.99 to $12.99), and it’s doubtful any customer will cancel. Whenever the hot tech companies hike prices, we often hear analysts call for their demise but that hasn’t been the case.

Non-Fundamental Trends - Short Squeeze

NVidia (NVDA) hit an all-time high on the market on Friday. It had been a very volatile year that began with the stock under tremendous pressure as famed short-seller Citron (CTNI) was able to publicly rake the company and its stock over the coals. 

In addition, there were numerous Wall Street firms calling for the stock to crash, one being BMO Capital Markets that finally cried ‘UNCLE’ and jumped on the bandwagon.

As market bias remains to the upside, look for more big short squeezes.

Takeovers

Look for a lot of mergers this year in every sector. Many companies are flushed with cash and a strong currency in the form of their share price; they will be looking to bulk up in order to meet the growing economy’s demands.    

The Economy: Rev Up That Diesel

In fact, I think this market juggernaut is only going to get stronger due to the surging enthusiasm about the tax bill and the economy.

A new poll by the WSJ shows that 69% of Americans are satisfied with the economy, the highest level since 2001.

Moreover, the Michigan Consumer Sentiment report states that ‘tax reform’ was spontaneously mentioned by 34% of all respondents; 70% of those who mentioned ‘tax reform’ thought the impact would be positive, and 18% said it would be negative.

Today’s Session

All eyes are on D.C. to see how long the shutdown lingers.  It’s hard to say, but this is an odd situation when both sides of the aisle agree something should be done to extend DACA.   The problem is what to get in return to make a permeant solution for something born of executive order without anything in return like mitigating illegal immigration and slowing the import of drugs.

As it stands now, DACA expires on March 5^th, which makes the notion of cutting pay for our military even more absurd.

Be that as it may, I don’t think there will be a hit to the market outside of some rubbernecking and stalling as investors are going to shift focus to earnings, especially Netflix after the close.

This morning, we received a key earnings report from Haliburton, which beat and gave optimistic outlook for 2018:

“Outstanding execution resulted in an excellent fourth quarter and we are well positioned to take advantage of opportunities presented by a growing North America market and improving international outlook. I continue to believe we are on the path to normalized margins in North America in 2018.”

“I am optimistic about what I see in 2018. Commodity prices support increasing activity in North America and I am encouraged by the increase in tender activity and the positive discussions we are having with our international customers.”

Jeff Miller, President and CEO.

I’m not going to force the issue at the open.  There is a good chance we’ll add a new idea on the afternoon note (if you are not already a subscriber to the Hotline, contact your account representative or email info@wstreet.com to get started today).  Standby for the noon Senate vote, which will give us an idea on how long this latest D.C. saga will play out.

 

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