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Retail-Related Funds Rise On Higher Earnings From Core Holdings

Summary Despite weak retail sales forecasts, the Direxion Daily Retail Bull 3x ETF has risen on Amazon’s higher earnings like a drone for home delivery. The Fidelity Select Retailing Portfolio has also soared, on the back of strong retailers, and offers an unleveraged exposure to this sector. However, other ETFs in the retail sector, such as the XRT Retail SPDR is mired in a consolidation. A handful of retail stocks are the key to this out-performance. As key retailers get stronger can the market be far behind? Introduction: Lowered Retail Sales Forecasts The National Retail Federation recently lowered their forecast for the 2015 calendar year from +4.1 percent to +3.5 percent (see reference 1). They also lowered their back-to-school spending by as much as -9 percent (see reference 2). These lowered forecasts are seen in the performance of say the SPDR S&P Retail ETF (NYSEARCA: XRT ) , which is stuck in a trading range between approximately 96 and 102 (see Figure 1). (click to enlarge) Figure 1: The SPDR Retail ETF is stuck in trading range, consistent with lack luster retail sales forecasts. (Chart courtesy StockCharts.com) AMZN, PCLN Report Strong Earnings In the current earnings season, Amazon (NASDAQ: AMZN ) reported a quarterly EPS of $0.19 per share, versus a consensus of a loss of -$0.15 per share (reference 3), pushing sharply higher (see Figure 2). Then Priceline (NASDAQ: PCLN ) pushed to all time highs on its earnings report (see reference 4), coming it at $11.57 versus an expectation of $11.10. Clearly, some retailers have something up their sleeve. (click to enlarge) Figure 2: Amazon has soared on higher earnings (Chart courtesy StockCharts.com) (click to enlarge) Figure 3: Priceline pushed to all time highs on earnings (Chart courtesy StockCharts.com) Select Retailers Now Trending Strongly The markets have rewarded the improved earnings by pushing these stocks higher. Their relative out-performance can be measured using the table below (see Figure 4). The absolute medium-term trend strength of the Fidelity Select Retailing Portfolio ( FSRPX) and the Direxion Daily Retail Bullish 3x ETF ( RETL) put them in the top tier of all funds. They are much stronger than the broader S&P-500 index which is only at 52, and are soaring compared to the Apple (NASDAQ: AAPL ), the other retailing giant. (click to enlarge) Figure 4: The absolute trend strength of FSRPX and RETL puts them in the top tier. Note how they are much stronger than retailing giant AAPL, and the S&P-500 index itself. (Data courtesy ETFmeter.com) Leveraged and Un-leveraged Opportunities It is rare to find two such similar funds offering both leveraged and unleveraged investing opportunities into a particular sector with such near perfect correlation. The Fidelity Select Retail portfolio is unleveraged, and has good liquidity. RETL is leveraged, but has less liquidity. The leverage can cut both ways, should the market correct, and hence many might prefer the FSRTX to the RETL for further analysis. XRT is another unleveraged way to track the fortunes of retailers going into the fourth quarter with good liquidity and without the volatility that leverage can bring. Portfolio Weights Secret to RETL and FSRPX success RETL has a very large exposure to AMZN stock (see Figure 5 or reference 5). Almost 41% of the fund is in just three stocks. Even Home Depot (NYSE: HD ) is helping by breaking out to new highs. The portfolio for FSRPX is similar, though they do not give the same breakdown. About 67% of the FSRPX is in Home Depot, Amazon, Priceline, TJX companies (NYSE: TJX ) , O’Rielly Automotive (NASDAQ: ORLY ), G III (NASDAQ: GIII ), Lowes (NYSE: LOW ) and Ross Stores (NASDAQ: ROST ). So, the key to the success of these two funds is their portfolios (see Figure 6). A detailed comparison to other ETFs in the sector and other technical data are available at reference 6. Figure 5: The most recent portfolio weights for RETL (see reference 5) show a large position in Amazon, which has helped its performance. (click to enlarge) Figure 6: The returns of RETL and FSRPX have near perfect 0.99 correlation over the long-term. Thus, you can use the less leveraged option with similar approaches to this sector. (Chart courtesy StockCharts.com) Looking Ahead All retailers are clearly not the same. Some have harnessed technology to their competitive advantage. Traditionally, the last quarter of the year is the best quarter for retail earnings. So better days are ahead for the strongest retailers, as the economy picks up in the second half. Plus, this sector offers both unleveraged and leveraged funds to suite your comfort level. As key retailers strengthen, can the rest of the market be far behind? References National Retail Federation revises down 2015 US retail sales forecast Retail sales forecasts: Something doesn’t add up NASDAQ AMZN Earnings NASDAQ PCLN Earnings Direxion Investments ETFmeter Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Wall Street Celebrates Amazon Q2: ETFs To Benefit

After two technology giants – Apple (NASDAQ: AAPL ) and Microsoft (NASDAQ: MSFT ) – disappointed investors early in the week, Amazon (NASDAQ: AMZN ) came up with blockbuster second-quarter results after the closing bell on Thursday. This injected fresh optimism into Wall Street. The online e-commerce behemoth reported a huge earnings beat of over 200% with a bullish outlook on the third quarter. The company earned 19 cents compared to the Zacks Consensus Estimate of loss of 15 cents per share. This represents the third consecutive quarterly earnings beat for Amazon. Moreover, the company swung back to earnings from the loss of 27 cents reported in the year-ago quarter. Revenues climbed 20% year over year to $23.2 billion and were well ahead of the Zacks Consensus Estimate of $22.3 billion. Incredible performances were primarily driven by accelerating growth in the North American market, continued strength in cloud computing business and new initiatives to lure customers to fend off competition. Notably, revenues in North America grew 26% year over year while cloud computing revenue jumped 81%. The company projects revenue growth of 13-16% for the ongoing third quarter to $23.3-$25.5 billion, the midpoint is much higher than our current estimate of $23.77 billion. The guidance includes record Prime Day sales last week. Amazon also expects operating loss of $480 million to income of $70 million compared with a loss of $544 million in the same period last year. Market Impact Based on solid results and an optimistic outlook, shares of AMZN spiked as much as 19% to a new all-time high in after marker hours. This has pushed Amazon’s market cap higher to $262.7 billion, more than the market cap of $233.5 billion of the world’s largest retailer Wal-Mart (NYSE: WMT ). Including the after-market gains, the stock is up about 82% from a year-to-date look. In addition, the stock surged 22% in the pre-market session today. Impressed by Amazon’s stellar Q2 result, many analysts revised their target prices upward on the stock. Amazon, which turned 20 on July 16, has a Zacks Rank #2 (Buy) and a solid Industry rank (in the top 40%) at the time of writing as per the Zacks Industry Rank, suggesting significant upside for the stock over the coming days. Further, the stock has a Momentum Style Score of ‘A’. The smooth trading in the stock will definitely spread into the ETF world, especially the funds with the highest allocation to this Internet giant. Below we have highlighted some of these that would be in focus in the coming days: Market Vectors Retail ETF (NYSEARCA: RTH ) This fund provides exposure to the 26 largest retail firms by tracking the Market Vectors U.S. Listed Retail 25 Index. Of these, AMZN takes the top position in the basket with 10.8% share. The ETF has a certain tilt toward specialty retail, which accounts for 30% share while hypermarkets (13%), drug stores (13%) and department stores (12%) round off to the next three spots. The product has amassed $221.6 million in its asset base and charges 35 bps in annual fees. Volume is moderate as it exchanges nearly 92,000 shares per day. RTH has gained 8.6% in the year-to-date time frame and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook. First Trust DJ Internet Index ETF (NYSEARCA: FDN ) This is one of the most popular and liquid ETFs in the broad technology space with AUM of $3.4 billion and average daily volume of more than 320,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 54 bps in fees per year. In total, the fund holds 43 stocks with Amazon taking the second spot at 9.7%. From a sector look, Internet mobile applications account for nearly three-fifths of the portfolio while Internet retail makes up for 26%. The ETF has surged 17.4% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook. P owerShares NASDAQ Internet Portfolio ETF (NASDAQ: PNQI ) This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The fund holds about 97 stocks in its basket with AUM of $224.4 million while charging 60 bps in fees per year. It trades in light volume of around 28,000 shares a day. Amazon occupies the third position with an 8.9% allocation. In terms of industrial exposure, Internet software and services makes up for 60% share in the basket, followed by Internet retail (36.1%). PNQI is up 16.1% in the year-to-date timeframe and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook. Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) This product offers exposure to the broad consumer discretionary space by tracking the S&P Consumer Discretionary Select Sector Index. It is the largest and the most popular product in this space with AUM of nearly $11.3 billion and average daily volume of roughly 5.7 million shares. Holding 87 securities in its basket, Amazon takes the top spot with 7.7% of assets. Media dominates more than one-fourth of the portfolio while specialty retail, hotels restaurants and leisure, and Internet retail rounding off the next three spots with a double-digit allocation each. The fund has gained about 10% so far in the year and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook. Link to the original post on Zacks.com

Invest In What You Know: Advice From Peter Lynch Is For Suckers

Summary Peter Lynch is the father of the very popular “invest in what you know” strategy that was very lucrative for him and has always enjoyed mass appeal. Today many names that are popular selections according to this strategy make terrible investments due to extremely overpriced stocks. Most people are not implementing the “invest in what you know” strategies the way Lynch intended. These days it may be more suitable to “invest in what you know” based on a personal edge gained from professional expertise. Peter Lynch is considered one of the greatest investors of all time because he managed the Fidelity Investments’ Magellan Fund in the 1980s, which was the best performing Mutual Fund in the world during that time. With average annual gains of over 29% it regularly more than doubled the yearly gains of the S&P 500. “Invest in what you know” is one of Lynch’s investment strategies that was not only very successful, but was easy to understand for the masses. He outlined his strategy in two highly popular and widely read books, One Up on Wall Street and Beating the Street , and many investors since have adopted the strategy. I also find this strategy very appealing simply for the fact that I can use the products and services that I already consume on a regular basis, but get the added satisfaction of contributing to the success of a company I partly own. However, today I find that Lynch’s philosophy is difficult, if not impossible, for many to profit from due to growth chasers and other investors who believe so strongly in a company that they are willing to pay any price for its stock. Buying a company simply because you like it is enticing and easy, but can lead to sideways performance, high volatility, or huge losses and as I will discuss in this article, is not the only way to “invest in what you know”. How Not to Invest In What You Know Many naive investors don’t know any better and will blindly make purchases of stock at insane multiples of potential future earnings simply because it is a company that they like. What’s worse is these purchases are made at times when reasonable growth is either already priced in or the company has reached its potential and future growth is limited. Three recent examples include: Amazon.com (NASDAQ: AMZN ) which has fallen 24% from a 52-week high of $408.06 to its current share price of $308.52. The stock still sports a very high stock price given the valuation of $145.85B, and the company is not profitable, with a loss of -0.47 per share in the last 12 months due to major expenses on infrastructure, customer subscription acquisition, and low margin contracts designed to gain market share. Netflix (NASDAQ: NFLX ) which has fallen 28% from a 52-week high of $489.29 to its current share price of $348.94. With a very lofty P/E multiple of 92.6, any potential future growth the company can receive is already priced into this stock, and then some. Tesla Motors (NASDAQ: TSLA ) which has fallen 24% from a 52-week high of 291.42 to its current share price of $219.31 These companies all have changed how industry operates and are forcing others to follow its lead by capturing the hearts, minds, and wallets of the public. I would jump at the chance to own NFLX or AMZN at a reasonable price because I love the services they provide and believe they have forced other companies to adopt a more consumer friendly business model to remain competitive. TSLA makes the only luxury electric car that is attractive and it has made huge strides in battery power storage, which makes it highly appealing to investors and consumers (I must confess I personally would not purchase stock in any company that relies on sales of vehicles over $70,000, a price I find ridiculous for any vehicle). The problem with investing in stocks like AMZN, NFLX, and TSLA is two-fold: Despite these companies being positioned for future growth and huge earnings, an investor’s risk of losing capital remains very high. Lofty investor expectations are priced into the current stock price and the risk of a huge drop in a short amount of time is dramatically increased if the company fails to meet the unrealistic expectations. Valuations continue to remain extremely lofty following the fall in share price that results from the company failing to meet unreasonable growth expectations. Even after the fall in stock price, there is no room for the investor to make money, and the investment becomes a speculation that the company will either beat lofty expectations repeatedly or you purchase based on technical analysis and the belief that other people (suckers) will be willing to pay a higher price in the future. I personally prefer to purchase stocks of good companies I believe will provide me a low risk of loss in the future due to a stock price below intrinsic value, and I don’t purchase stocks based on my belief that others will soon find it more desirable than it currently is. AMZN, NFLX, and TSLA are not the only examples of excellent companies with either a dominating market position, huge growth potential, or both, and sporting an extremely overvalued and unattractive stock price. Here are a variety of my favorite companies with overvalued stocks: Chipotle Mexican Grill (NYSE: CMG ) with a P/E of 52.9 The Habit Restaurants (NASDAQ: HABT ) with a P/E of 45.2 Starbucks (NASDAQ: SBUX ) with a P/E of 30.1 Visa (NYSE: V ) with a P/E of 30.8 Google (NASDAQ: GOOGL )(NASDAQ: GOOG ) with a P/E of 27.5 Don’t get me wrong, many investors have amassed huge returns from stocks in the above-mentioned companies and many will see huge returns in the future. However, I am trying to remain a disciplined investor, and the extreme valuations are more speculative to me considering the downside risk despite my natural attraction to stocks of companies I really like and I believe have excellent management and future growth potential. I was highly anticipating the recent IPO of HABT prior to its market debut on November 20th, because I love to eat at its restaurants, its casual dining atmosphere is appealing to customers, and management’s goal of growing from 99 to 2000 total restaurants. the growth potential is amazing, but I can only wait for the price to fall dramatically before I can even consider an investment. How did Peter Lynch do it? How to Properly Invest In What You Know First off, I don’t believe that Lynch’s investing advice is for “suckers” as my title suggests; in fact Lynch was living proof that when the strategy was used properly it was incredibly successful. It was so successful that he coined the term “ten bagger” to refer to investments that achieved a price 10-times greater than his purchase price. I doubt that Lynch would purchase the stocks discussed above at the current price, none of which have ten bagger potential at current prices. Lynch would purchase a stock when the company was small and had huge potential for growth before others in the investing community noticed. Getting in before others is really the key to making huge profits. As we have noticed recently with HBT and the amazing success of CMGs fast casual business model, most companies are good at touting future potential and attracting investors. This leaves little selection for value investors seeking to “invest in what we know” at a discount. Average holding time for one a Lynch investment was 6-7 years, which is how long it typically took for a company to reach its full growth potential, attract the full attention of the investing community, and reach overpriced status. Holding a stock for a long time is a place of common ground for value investors and growth investors, but takes extreme patience. Most investors have a difficult time holding losing stocks, and the volatility that can lead to boom and bust moments for high growth stocks can easily lead to huge losses for investors prone to emotional stock buying and selling, and let’s face facts, that is most of us. Buying companies whose products and services you like is not the only way to “invest in what you know”. Investing in companies or industries where you are a profession expert or you have indirect professional knowledge of can give you an edge. For example, I am a wildlife biologist and environmental impact analyst, and I consult for government agencies and large utilities and infrastructure developers regarding environmental impact avoidance and compliance with environmental laws. My understanding of environmental regulation gives me an edge regarding investments in industries such as solar energy, where solar panel developers may post huge profits in 2015 after prices fell considerably in recent months. The end of tax incentives for solar panel makers in 2016 will lead to increased profit in 2015 because many developers will rush to finish large project ahead of the deadline. My knowledge of environmental regulation and incentives I received from my job gives me an edge in this instance. Anyone can apply this same principle to their own profession and find many great companies that have excellent growth potential and attractive valuations. Closing Remarks I have great admiration for Peter Lynch as an investor, and I believe his philosophy has mass appeal, because it makes investing more personal and can be very lucrative if done well. However, many investors let emotions or naivety get the best of them and invest in what they know with purchases of stocks at the peak of popularity or at excessive earnings multiples and then hastily sell after the stock price drops when the company fails to meet unrealistic earnings goals. Successful purchases of stocks of companies that you like is done when the company is small and growth is ahead of the company, but most importantly before the masses are convinced that the company is the next CMG. Another way to “invest in what you know” is to invest in companies in industries you work in professionally. Knowledge of regulation, new product, successful internal business practices, and other hard to research information impacting companies’ future outlook can give you have an advantage over others. Don’t just look for the easy names of the new hot restaurant or the already established industry leader that commands a rich valuation, and be creative to find names that other investors may overlook or where you may have expert knowledge and information before it is widely known.