Waiting for the all clear as we navigating volatile waters
Key Points from this Alert:
- We reiterate our Sell rating on Target (TGT) share as we are Shorting them on the Tematica Options+ Select List. Our price target is $60, and given the greater risk associated with shorting stocks, we will set a protective buy stop order at $80.
- We continue to rate the Cummins (CMI) March 2018 170 calls (CMI180316C00170000)that closed last night at 2.62 a Buy. Our protective stop loss remains at 1.25.
- We continue to rate MoneyOnMobile (MOMT) shares a Buy
- We continue to rate GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000)that closed last night at 0.29 a Buy at current levels.
We all witnessed the market’s sharp move lower over the last two days following Fed Chair Jerome Powell’s testimony before Congress, which stoked market concerns over the potential for more than three rate hikes this year. The reality, however, is that over the last five trading days the S&P 500, as well as the Dow Jones Industrial Average, are each down less than 1%.
Quite a different perspective, but one that shows that as expected volatility, after being absent for all of 2017, is still with us. As I shared on this week’s Cocktail Investing podcast, I expect volatility will be with us for the next three weeks as investors look to dissect each and every data point attempting to zero in on what the Fed will do with monetary policy and say in their next economic forecast on March 21.
What’s making this data assessment challenging is that recent data, like the January New Home Sales and Durable Orders reports both missed expectations. Taking a wider view, the Citibank Economic Surprise Index that we refer to on the podcast has not only rolled over, but it’s slipped below zero. What this tells us is more data is missing expectations than surprising on the upside. Several weeks ago, I voiced my concern that investors could overestimate both the timing and the benefit to be had with tax reform, and that certainly appears to be the case.
All of this is poised to make navigating the market more challenging than we’ve seen in 2017. Add in the wide swings of the last few days – the Dow Jones Industrial Average rose more than 900 points between Feb. 21-26, but fell 680 points during the last two days of February, while the S&P 500 rose 78 points and fell nearly 66 points over the same time frame – and the risk is even wider swings in options, both calls, and puts.
This has me putting the use of option on the sidelines in the near term.
Even though we are not adding new options positions this week, we’ll continue to stick with our GSV Capital (GSVC) and Cummins (CMI) call positions. Over the last week, we’ve seen a meaningful rebound in our GSVC June 2018 10.00 calls (GSVC180615C00010000) as Spotify formalized its IPO plans, and Dropbox filed its going public documents with the SEC. These are the catalysts that we’ve been waiting for as GSV monetizes its portfolio investments.
With our Cummins (CMI) March 2018 170 calls (CMI180316C00170000), the next few days will bring the February flash heavy truck order data, which should continue to benefit from the current shortage, as well as a rash of data for the domestic economy, including truck tonnage and freight.
As such, I continue to rate both the GSV Capital (GSVC) June 2018 10.00 calls (GSVC180615C00010000) and the Cummins (CMI) March 2018 170 calls (CMI180316C00170000) as Buys at current levels.
We will continue to hold our Utilities Select Sector SPDR ETF (XLU) March 16, 2018, 54.00 calls (XLU180316C000540000), which have been hit hard as amid the climb in 10-year Treasury yields. At the current levels, the prudent thing to do is to wait and see if we get a rebound at which it would make sense to close out the position. At the current price, it would likely cost more to trade out of the position than to let these XLU calls expire in a few weeks.
Over the last few weeks, we’ve added several stock positions including a long one in MoneyOnMobile (MOMT) shares and a short one in retailer Target (TGT).
Let’s talk about our negative view on Target first.
A new report from research firm NPD Group revealed that US apparel sales fell 2% in 2017 compared to 2016. E-commerce apparel sales for that same period, however, grew 4%, to account for some 21% of total apparel sales. As I sit here wearing shoes that I purchased online from AllBirds and wearing a Nike (NKE) top that I purchased from Amazon (AMZN), I can personally vouch for that as part of increasing consumer comfort with buying apparel and footwear digitally. I chalk the growing ease of returns for this and odds are it’s only going to get easier.
But enough about my apparel buying habits… adding to that report from NPD, data published in January from Coresight Research showed that not only is Amazon the second most-shopped retailer for clothing or footwear in the US last year, but Target is being hurt the most by shoppers switching to Amazon. Of the survey respondents who said they were spending more of their apparel budget at Amazon compared with three years ago, 30.3% of them reported that their budget had shifted away from Target.
As you can picture, I see this as rather confirming data for the short position we added in Target shares last week. The next known data point for this position will be had next week the company issues its next quarterly earnings next week.
Turning to MoneyOnMobile (MOMT)
Last week MoneyOnMobile (MOMT) reported its December quarter results, and as Visa (V) said on its quarterly conference call, MoneyOnMobile continues to benefit from the shift away from cash to digital forms of payments, which “remains a powerful secular trend.” We are more than aware of that given our Cashless Consumption investing theme, but it’s always nice to hear one of the leading players confirm our thinking. In its quarter, MoneyOnMobile saw a 193% rise in revenue but continued to generate a bottom line loss as it expands its footprint across India.
As a reminder, India has about 155,000 bank branches and 200,000 full sized ATMs across the entire country of over 1.3 billion people. Those numbers are about 10% of what is required to match the same availability we have here in the U.S. – that pain point is the opportunity for MoneyOnMobile. To date, the company has relationships with over 350,000 retailers covering more than 700 cities throughout India. As I mentioned when I added MOMT shares, I own them personally and am inclined to be a patient investor, full well knowing these shares are bound to volatile in the short-term. Over the medium to longer-term, the company’s business and our shares stand to benefit from the Indian government’s Cashless India initiative, while in the longer-term I suspect MoneyOnMobile’s continued success makes it a likely takeout candidate.
