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JULY NEWSLETTER 4
$5 BILLION FINE
The European Union hit Alphabet Inc.’s Google with a record antitrust fine of €4.34 billion ($5.06 billion) and ordered changes to its business that could loosen the company’s grip on its biggest growth engine: mobile phones.
In the EU’s sharpest rebuke yet to the power of a handful of tech giants, the bloc’s antitrust regulator found Wednesday that Google had abused the dominance of its Android operating system, which runs more than 80% of the world’s smartphones, to promote and entrench its own mobile apps and services, particularly the company’s search engine.
Android phones come preloaded with Google apps and services, including Search. Competitors have long complained that Android’s dominance gives Google an unfair advantage in attracting users to those apps—and then using data from them to devise and target advertising. The preloaded apps stifle competing apps, the EU said.
In an interview Thursday, President Trump allowed that he was “not thrilled” about the Federal Reserve’s continuing interest rate hikes. He argued that raising rates strengthens the dollar and that makes U.S. exports more expensive. That is generally true.
Using his bully pulpit to chide the Fed had an unintended consequence, however. Even though Trump said he has no intention of telling the Fed how to do its job, investors took no chances. The U.S. dollar weakened almost as soon as the words were out of Trump’s mouth and equity prices dipped sharply.
Because crude oil trading is conducted in dollars, the currency’s relative strength exerts some influence on the price of oil. A stronger dollar generally weighs on the price of crude while a weaker greenback causes the price of crude to rise. You wouldn’t want to bet the ranch on the relationship between the dollar and crude prices, but it’s worth keeping in mind.
In a Friday morning tweet, Trump took another opportunity to weaken the dollar:
Donald J. Trump
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field...
Predictably, the dollar swooned against the euro, and the dollar index (DXY) dropped by 0.6%. It’s not unfair to say that the president’s tweet was a less direct, but an equally well-aimed, shot at the Fed’s interest rate hikes.
Back to crude oil prices. The president wants lower U.S. gasoline prices to arrive in time to boost Republican fortunes in the November elections. One way to push that process along is with a weaker dollar. But will that do the job?
Reuters oil industry analyst John Kemp noted this morning:
The last period of very high oil prices between 2011 and the first half of 2014 coincided with a period of dollar weakness, which cushioned the impact in many major oil-consuming countries.
But oil’s recent rise has been accompanied by a strengthening dollar, especially in recent months, which will intensify the impact on consumers. …
Consumers in many of the fastest-growing fuel markets are being exposed to the impact of pricier oil much more than before. …
If the U.S. dollar continues to strengthen, rising oil prices are likely to prompt a much larger demand-response from consumers than in 2011-2014.
In the current oil-price cycle, demand restraint is likely to be felt much faster and more aggressively than in 2006-2008 or 2011-2014, so long as the dollar remains strong.
The oil market in 2018 is much different from the market in the two major price run-ups Kemp mentions. That difference is nearly 2 million barrels a day of U.S. crude exports and 11 million barrels a day of U.S. crude oil production. If the dollar remains strong, as Kemp suggests is possible, demand for U.S. crude exports ought to decline.
Other things equal, a weaker dollar should make U.S. exports cheaper. But a weak dollar generally lifts crude oil prices. Can it do both at the same time and, if so, what will that mean for gasoline pump prices in the United States and for the U.S. economy in general? November’s election results may depend on Trump getting this right.24/7 Wall St.
GOAL IS SMOOTH
U.S. consumer spending increased by 6.6% year over year to $56.8 billion in June and up by 0.5% month over month from an upwardly revised May total of $504.3 billion. The U.S. Census Bureau released its estimated retail sales data for May on Monday morning. A poll of economists had forecast that retail sales would rise 0.6% compared with sales in May.
With the single exception of sales of sporting goods, hobby, musical instrument and book stores, sales increased month over month in every business category. The revised May month-over-month increase totaled 1.3% over April sales, sharply higher than the previous estimate of a gain of 0.8%.
Sales of motor vehicles rose 0.9% month over month from May and rose 4.6% compared with June 2017. Car sales totaled $96.34 billion last month on an adjusted basis, up from $95.4 billion in May and up from $91.9 billion in June 2017.
Total retail sales for the six-month period between January and June rose 5.5% compared with year-ago totals.
Sponsored by AllstateWhere's the gas tank?
Retail trade sales rose 0.3% month over month and jumped 6.4% year over year. Nonstore retail sales rose 10.2% year over year. Month over month, nonstore retail sales rose 1.3%.
Gasoline station sales rose 1% month over month and are up 21.6% year over year. The increase is due largely to higher pump prices. Unadjusted gas sales totaled were about $8 billion in June than in the same month last year and accounted for nearly 17% of total year-over-year spending growth.
Electronics stores posted a sales decrease of 0.4% month over month and a year-over-year increase of 2.1% in sales.
Department stores posted a month-over-month sales decrease of 1.8% and were flat year over year.
Sales of building materials and garden supplies rose 0.8% month over month and were 6.2% higher year over year.
Food services and bar sales increased by 1.5% month over month and are up 10.2% year over year.
CONSUMER SPENDING UP
INEXPENSIVE STOCKS WITH BIG UPSIDE POTENTIAL
TRUMP LOWERING THE PRICE OF CRUDE
Most firms on Wall Street focus on large- and mega-cap stocks, as they provide a degree of safety and liquidity. Unfortunately, many investors are limited in the number of shares they can buy. Many of the biggest public companies, especially the technology giants, trade in the low to mid hundreds, all the way up to over $1,000 per share. At those steep prices, it’s pretty hard to get any decent share count leverage.
Many investors, especially more aggressive traders, look at lower-priced stocks as a way to not only make some good money but to get a higher share count. That can really help the decision-making process, especially when you are onto a winner, as you can always sell half and keep half.
We screened our 24/7 Wall St. research database and found five stocks trading under the $10 level that could provide investors with some solid upside potential. While more suited for aggressive accounts, they could prove to be exciting additions to portfolios looking for solid alpha potential.
This company may be way under the radar, but it has one of the best products imaginable in terms of name recognition. Arcos Dorados Holdings Inc. (NYSE: ARCO) is the world’s largest McDonald’s franchisee and Latin America’s leading quick-service restaurant operator. The company has exclusive rights to operate or subfranchise restaurants in over 20 countries in Latin America and the Caribbean. Brazil represents about half of revenues and nearly 60% of EBITDA.
Arcos Dorados was created in 2007 via the acquisition of McDonald’s assets in the region. The company completed a $1.4 billion initial public offering in April 2011. The company has posted solid results this year, with Mexico leading the way for momentum.
Merrill Lynch rates the shares at Buy and has a huge $12 price target. The Wall Street consensus target is $11.32, and the shares traded at $7.15 on Friday’s close
While not very well known, this is another company with huge upside potential. Avadel Pharmaceuticals PLC (NASDAQ: AVDL) offers various drug delivery platforms, including Micropump, LiquiTime, Trigger Lock and Medusa. The company offers its products in various categories, including hospital (including Bloxiverz, Vazculep and Akovaz) and pediatrics (including Karbinal ER, Cefaclor for Oral Suspension, AcipHex Sprinkle and Flexichamber).
Bloxiverz is a drug used intravenously in the operating room for the reversal of the effects of non-depolarizing neuromuscular blocking agents after surgery. Vazculep is used to treat clinically hypotension resulting primarily from vasodilation in the setting of anesthesia. Akovaz is indicated to treat clinically hypotension in the setting of anesthesia. Cefaclor is indicated for the treatment of otitis media, lower respiratory infections, pharyngitis and tonsillitis, urinary tract infections, and skin and skin structure infections, caused by susceptible organisms.
SunTrust has a Buy rating and a huge $13 price target. But that compares with a consensus target set even higher at $16.95. The shares closed on Friday at $6.82 apiece.
This stock was absolutely hammered back in the spring and could be offering investors an outstanding entry point. Ferroglobe PLC (NASDAQ: GSM) produces silicon metal and silicon- and manganese-based alloy, which serves customers in the chemical, aluminum, solar, steel and ductile iron foundry industries.
The company operates through two segments. Its Electrometallurgy segment includes its coal- and quartz-mining operations and its silicon metal and ferroalloy production. The Energy segment consists of its hydroelectric power operations, which currently operate approximately 20 production smelting facilities in the field of electrometallurgy.
Stifel’s Buy rating comes with a massive $13 price objective. The posted consensus price target is $15.40, and the shares were last trading at $7.98.
This stock has been on a roll this year and looks poised to go higher. Sirius XM Holdings Inc. (NASDAQ: SIRI) is the world’s largest radio company, measured by revenue, and has approximately 33.1 million subscribers.
Sirius creates and offers commercial-free music; premier sports talk and live events; comedy; news; exclusive talk and entertainment; and a wide range of Latin music, sports and talk programming. Sirius is available in vehicles from every major car company and on smartphones and other connected devices as well as online.
Sirius is also a leading provider of connected vehicles services, giving customers access to a suite of safety, security, and convenience services, including automatic crash notification, stolen vehicle recovery assistance, enhanced roadside assistance and turn-by-turn navigation.
Merrill Lynch has a Buy rating, and its $8 price target soon may be going higher. The consensus price target is just $6.89, but the shares ended the week at $7.11.
This asset manager remains an up-and-comer in the exchange traded fund business, with many specialized ETF offerings. Wisdom Tree Investment Inc. (NASDAQ: WETF) currently has over $30 billion in assets under management and continues to benefit from the movement toward ETFs. This is especially true with the specialized currency hedged products, with the potential for significant uptake in interest rate hedged products.
The company has developed proprietary indexes rather than tracking third-party indexes. Its product offering of specialized ETFs, many of which are active or rules-based, generates higher fees than most ETFs. More than two-thirds of the company’s assets under management have international investing objectives.
Shareholders are paid a 1.31% dividend. Jefferies has a $13 price target on the Buy-rated stock, and the consensus target was last seen at $10.36. The stock ended Friday at $9.09 per share.
It’s hard to believe the first half of 2018 already has ended. It’s also hard to imagine that the Dow Jones industrials and S&P 500 have done very little in 2018 after all the volatility has shaken the U.S. equity markets higher and lower this year. Investors have had to rethink their “buy the dip” mentality in 2018 as the trend of the past five years has just been less reliable. Now many investors are wondering how they want to be positioned for the third and fourth quarters in 2018 and beyond.
Merrill Lynch released its high-conviction ideas for the third quarter ahead of the 4th of July holiday. These high-conviction ideas are based on the firm’s views of potential significant market and business-related catalysts that are likely to affect these stocks during the third quarter of 2018. Of the top 10, there were eight buys, spread across six sectors.
24/7 Wall St. has outlined the basics of each case for upside laid out by Merrill Lynch. The calls have been compared to the consensus analyst price targets (mean) from Thomson Reuters for a relative comparison against other research reports and valuations out there.
Allergan PLC (NYSE: AGN) led the list, and the pre-research level of $166.72 compared to the Merrill Lynch price objective of $213. Allergan’s consensus target price is just $208.43.
Merrill Lynch sees Allergan as the best positioned to benefit from key catalysts events among its pharmaceutical peers and sees it as meaningfully undervalued as investor faith in its business model has dissipated. All this adds up to investors debating the merits of a company split ahead of liver, migraine and wet age-related macular degeneration data.
DXC Technology Co. (NYSE: DXC) is an information technology (IT) services company on which Merrill Lynch has a $103 price objective, indicating implied upside of more than 27% from the recent $81 share price.
Merrill Lynch’s target is actually less than the consensus target price of $105.06. The firm believes that less than 10 times expected 2019 earnings is too cheap of a valuation against peers as the stock has witnessed some dislocation after the recent spin-off of its government services business. Merrill Lynch believes DXC can drive an improving trend in revenues and margins and sees its September analyst day as the primary catalyst for guidance out to 2020 and beyond.
Fluor Corp. (NYSE: FLR) has a $58 price objective at Merrill Lynch, indicating an implied upside of about 19%, without considering close to a 2% dividend yield. That target is almost $3.50 higher than the consensus target price of $54.57, and Fluor shares have a 52-week high above $62.
The firm sees Fluor having an attractive risk/reward to the improving energy and mining capex cycle in the coming years, and Merrill Lynch expects that 2018 should mark a trough in its backlog with improvement from mining and energy projects in the second half of 2018.
Honeywell International (NYSE: HON) has a $185 price objective at Merrill Lynch, indicating more than 28% in implied upside from the recent $144 share price. That is without considering the 2% dividend yield.