IPO Stocks: ​A Bull Case for Trade Desk?

Gunning Ju  Follow | Tuesday, 16 May 2017 10:50 (EST)

Image via Trade Desk/Facebook

Major market indices showed divergence during the past month, with the NASDAQ composite index chugging to new highs, while the S&P 500 and DJIA indices letting up and shaping a potential launch pad. This emerging bifurcation may result from the shifting Trump rally to a normal recovery play. Will the leading NASDAQ index follow the two base-building indices, entering the so-called “sell in May and go away” weak market season?

As financial analyst Mark Hulbert wrote last month, the “sell in May and go away” indicator has existed only in the third years of presidential cycles, and that in the first, second and fourth years of past presidential terms, the pattern was non-existent.

Given that the 10-year treasury yield at 2.39% is 60% lower than the S&P 500 yield of 3.9%, the equity market still possesses more attractiveness than the riskless bond markets. However, emerging and European equity markets appear more reasonable or (undervalued) than U.S. markets. The possible asset allocation among global equity markets may cause some profit-taking in U.S. markets. But so far, U.S. markets have not shown any heavy selling pressure during the past month, which is a good omen for the rest of the year.

In bull markets, initial public offering (IPO) stocks often add new blood to the markets. Yet, it is more difficult and trickier to invest in IPO stocks than in established issues. Unlike old shares, most IPO stock prices may encounter tremendous insider selling after the three-to-six-month lockup period expires.

As a result, if you buy an IPO stock, you may incur losses because of this, regardless of the company’s fundamentals. On the other hand, you may also gain huge quickly even though IPO firm’s fundamentals are shaky. This creates the tricky part of IPO investing.

There are two main winning IPO chart patterns after the 2000 internet bubble: secular bullish and fleeting bullish chart patterns.

Fleeting Bullish Pattern:

This pattern occurs when IPO stock prices keep rising after the first trading day without digesting the IPO gains, but then subsequently flops. Acacia Communications Inc. (ACIA)shows a fleeting bullish pattern (See Chart 1). ACIA rose to $128.73 on September 6, 2016 from its IPO price of $23.00 on May 13, 2016, but has fallen to its currently, recently closing at $48.67. During that four-month upsurge, ACIA advanced more than 450% in a short period of time.

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Notorious stocks with fleeting bullish patterns are ExOne Co. (XONE), Twitter Inc. (TWTR), and Twilio Inc. (TWLO). The stocks with potential fleeting bullish patterns include: Azul S.A. (AZUL), Floor and Décor Holding Inc. (FND), and Ichor Holding, Ltd. (ICHR).

Investing in these types of stocks requires exceptional skills in entry and exit timing.

Secular Bullish Pattern:

A secular bullish pattern happens when IPO stock prices start falling after the initial hype, then subsequently forming a base. Facebook Inc. (FB)displayed a secular bullish pattern (see Chart 2). Due to the high demand for the shares from investors, underwriters steadily raised Facebook’s IPO price in May 2012 from $28 to $38. The first trading day sent FB’s stock price to a high of $45 but shares closed at $38.23. After that, Facebook then fell all the way to a low of $17.55, forming 14-month base. After upbeat earnings results on July 25, 2013, Facebook’s stock price broke out from the first consolidation, and continued to climb to around $150 where it trades at now.

Currently, lot of stocks show potential secular bullish patterns: Trade Desk Inc. (TTD), Chemours Co. (CC), Goose Holding (GOOS), Shopify, Inc. (SHOP), Trivago NV (TRVG), Veeva Systems Inc. (VEEV), Weibo Corp. (WB), among others.

Trade Desk, a technology company in Ventura, California, operates a self-service cloud-based platform that enables advertising buyers to create, manage, and optimize data-driven digital advertising campaigns using their own teams in the United States and internationally. Its earnings doubled last quarter with revenue expanding by 75%. Its ad business potential could be huge. Can it challenge ad giant Alphabet Inc. (GOOGL)? Time will tell.

TTD’s stock price could move much higher from its current price level. Using William O’Neil’s P/E expansion method, we can do a ballpark target price estimate by looking at the potential P/E expansion multiple and next year’s EPS expectations. In general, growth stocks could top at 2.3 times of their initial breakout P/E level. TTD had a P/E of 31.35 when it broke out from the first stage in February 2017. The company is also expected to post EPS of $1.20 next year. So, by calculating the potentially expanded P/E (31 X 2.3 = 72.1) and next year’s projected EPS of $1.20 would equal $86. This is consistent with the technical target price $90.

From www.equities.com: link below

https://www.equities.com/user/GunningJu

How Does the Market Perform in a Dual Target Monetary Policy Environment?

How Does the Market Perform in a Dual Target Monetary Policy Environment?

Gunning Ju  Follow | Tuesday, 11 April 2017 16:07 (EST)

Last Wednesday, FOMC Minutes for March revealed that the Fed expected to start shrinking its $4.4 trillion balance sheet late this year. The stock market has since altered its bullish stance to a bearish one, with major indexes up in the morning, then drifting down in the afternoon for four days in a row. Investors are feeling a little uneasy about the Fed unwinding its giant holdings in Treasuries and mortgage securities.

Will the Fed’s phasing out of reinvestments constitute a catalyst for the market to be topsy-turvy? Since the 2008 Financial Crisis, the Federal Reserve had been lowering interest rates and purchasing securities to revitalize the economy. In December of 2015, the Fed reversed its easy monetary policy by staging an interest rate-hiking cycle. Much research has evidenced that raising interest rates will not necessarily end the bull market.

When the Federal Reserve trims its balance sheet, it essentially reduces its monetary supply (M1, M2, M3, etc.). If the economy booms, consumer confidence will rise, and consumers will speed up their spending, thus increasing the velocity of money. Imagine Economy A has $100 money supply, but there is only one transaction at $100. Now, Economy B has $50 in money supply, but has two transactions each at $50. Two economies will have the same amount in transactions, i.e. same GDP. The case is extremely simplified, but it can be utilized to dispute the market's jitters due to the news of the Fed’s diminishing balance sheet.

Unlike the Greenspan Era of the 1990s, when the Federal Reserve mainly relied on inflation targeting monetary policy to achieve great prosperity with low inflation, the current Fed will undergo two unprecedented tasks at the same time: Raising rates, while seeing its balance sheet dwindle. As long as the Fed continuously adopts an explicit nominal anchor policy in transparent ways, communicating with the market with enough time so that it can discount its intention and action, the fear and panic from investors will have a good chance of dissipating, even without fiscal stimulus.

Nominal anchors here brace for a longterm 2% inflation target and mid-term annual unwinding amount of balance sheet. In these years, the Federal Reserve can trim its current $4.4 trillion balance sheet to $ 1-1.5 trillion, 30% above a pre-crisis $870 billion. With forward looking methods, the real shrinkage of balance sheets will be much lower. If the average annual GDP growth rate is 2% in the next 10 years, the corresponding Fed balance sheet could be $1.5 to $2 trillion. Therefore, the Federal Reserve would only need to shrink less than $2.5 trillion in 10 or longer years, which equals 10% of a total equity market cap of $24.5 trillion. This is an amount that the market can easily digest.

Markets frequently follow a very few leading stocks. FAT stocks ((FB), (AAPL), and (TSLA)) seem to shepherd the tone of markets now. If more buys than sells happen on these stocks, the overall market will have a low probability of falling apart. Earnings season is coming soon, and the market may wait for a reality check on President Trump’s first 100 Day performance before it moves away from its range-bound area: S&P 500, 2300—2400.

Weeks ago, I recommended selling Western Digital (WDC) and moving on. Since then WDC climbed almost 20%, slapping my face without any thought. In investing, sometimes you need to be nimble: when WDC moves back up to a 50 Day move average again, sending a buy signal, you should join the party right away.

I also commented on Applied Optoelectronic Inc. (AAOI) at the same time. It once rose 20% from $48 to $60 in one week, and now pulls back to $44, struggling around a 50 Day moving average, well below the prices I talked about. How do you deal with this tough situation when you have 20% profit while it disappears in a blink? First, you should never allow a 20% profit to become a loss. Second, when technical indicators show some weakness in prices around $55, you should take some profit. To my view, the AAOI story is still intact - its fundamentals are still in good shape. The technical chart shows only the second consolidation in price, and the first time its prices retreated to the 50 Day moving average line. However, overall market nervousness may yield a larger effect on AAOI price.

The orignial article is on www.equities.com, link:

https://www.equities.com/news/the-stock-market-under-dual-target-monetary-policy-environment

Will National Beverage Become Another Monster Beverage?

​Will National Beverage Become Another Monster Beverage?

Gunning Ju  Follow | Wednesday, 22 March 2017 12:16 (EST)

Tuesday saw a market sell off, as the Dow Jones index slumped 1.1%, the S&P 500 dropped 1.2%, and the NASDAQ fell 1.8%, with financial shares seeing relentless selling pressure from investors.

Will the market start to see a deep correction? It is hard to tell right now. However, the market is overdue for a pull back, and investors will likely come up with many excuses to sell. The index's normal retreat from a new high is healthy for a secular bull market. Some investors are worrying about the weaknesses in Dow Jones Transportation and small shares indexes. During past twenty-five year periods, both indexes were not consistent leading indexes, at best the secondary market indicators. The primary indicators are the markets themselves - the NADAQ and S&P 500 indexes, both of which have not signaled big trouble ahead yet.

Unlike a horse race, investing is a totally different performance game. In a horse race, after you pick a potential winning horse, you can only watch how the horse runs the course itself, while unable to control the horse race. Investing requires three key attributes: how to pick winning stocks, how to hold, and how to take profit.

It may not be so difficult for investors to find winning stocks in a bull market. Almost any stock you pick will move up, just like shooting a gun in a pond full of fish. However, knowing when to fold will determine who gets the last laugh. Five years ago, a retired engineer bought three-dimensional stock Stratasys, Inc. (SSYS) at bottom prices. His return on the stock was once over 2000%. But he did not take any profit, riding the roller-coaster all the up and down---a regretful lesson for any investor.

In February, I mentioned four stocks for post earnings drift play: TAL International Group (TAL), Mercury Systems Inc. (MRCY), Alibaba Group Holding Ltd. (BABA), and Western Digital Corp. (WDC).

TAL and MRCY each so far has climbed over 20% from the time I commended, and it is time to take partial profit, although I believe that TAL and MRCY could hit $120 and $50, respectively.

Both BABA and WDC have not moved well... it's time to sell them and move on. Two stocks came to my attention recently: Applied Optoelectronics Inc. (AAOI) and National Beverage Corporation (FIZZ). Both have solid fundamentals.

AAOI price has doubled in two months from the latest buy point of $27.38, forming a rare flag pattern. Investors can take advantage of recent weakness to add or buy in shares. AAOI prices may double again, reaching the $100 mark. FIZZ has risen over 20% in three weeks, above a previous peak price of $62.91. Normally, when a stock price soars so much during a short period of time, it should be held a little longer. In fact, compared with former super stock Monster Beverage Corp (MNST), FIZZ is undervalued.

MNST market cap is $26.5 billion, six times larger than the FIZZ market cap of $3.7 billion, while the MNST revenue of $3.37 billion is only 2.5 times higher than FIZZ revenue, at $956 million. MNST shares trade at 27.5 times of 12-month earnings forecasts, a little lower than National Beverage Corporation's P/E of 28.6. However, FIZZ earnings will next year grow at 15%, much higher than MNST’s 10.7%. Could National Beverage become another Monster Beverage, which has delivered 40000% return since 2004? No one knows, but FIZZ price action seems to be heading toward $120 or higher.

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This is just a personal opinion, and personal opinion is often wrong. Currently, the author has no position on any of the above mentioned stocks, and may or may not build any position on any stocks above in the future.

The Blog was originally published on www.equities.com with link 

https://www.equities.com/news/will-national-beverage-become-another-monster-beverage

Debunking the Fed Myth of Three Steps and a Stumble

Debunking the Fed Myth of Three Steps and a Stumble

Gunning Ju  Follow | Wednesday, 08 March 2017 13:04 (EST)

Last week, Federal Reserve Chair Janet Yellen hinted that a March rate hike is on the table. If the Fed indeed raises the federal funds rate by 25 basis points on March 15, the hoist will be the third time in a row. The market tranquilly reacted to the news last Friday, but drifted low on Monday and Tuesday, with each major index down less than 1%. However, behind the calmness of the market is the quirk of the Dow Jones Index back and forth countless times intraday on Friday around the “Maginot line”--- 21000, telegraphing the ambivalence among investors.

Just two weeks ago, the federal funds futures indicated less than a 30% chance of March hike. Should the investors worry about the Fed’s March move? Not necessarily!

In fact, given that the equity indexes have more than doubled during the past eight years, the huge wealth effect from index advancement will improve the economy in the months ahead. But the Federal Reserveseems to be anchored on the last great recession, while slowly raising interest rates.

Over the past 100 years, the Federal Reserve has battled far more recessions than inflations: the 1930’s Great Depression, internet bubbles, great recession; high inflation struggle in the 1970s, which was far less severe than 1920’s Germany’s hyperinflation when one truck of Marks could buy only one loaf of bread. The Federal Reserve’s anchoring on recessions appears to be what Ludwig Erhard, West Germany’s minister of economics in 1958 explained to President Eisenhower: “Whereas Germany, because of their history, always worried about inflation, the Americans, because of their history, always worried about depression. The resulting danger was that America would overreact to threats of recession and cause serious inflation in the long run.” The reality of 1970s inflation can be shown to be very far from Ludwig’s rhetoric.

The change in the Fed’s tone over the last week is partially reflected in the recently humming market, forcing the Fed’s prompt talk before action. Without the hawkish comments from Fed officials, the interest rate hike in March may send the market into a tailspin. In terms of Rigobon and Sack’s research*, an unanticipated 25-basis point increase in interest rate may result in a 1.7% decline in the S&P index, 1.2% drop in Dow Jones Index, and 2.3% plunge in NASDAQ Index. This may trigger another 13% market correction after the first federal funds rate hike in December 2015 when the Fed had not communicated well with the market. The Fed under Yellen knows this, and of course will not want to create similar market turmoil.

So, at a speech before the Executive Club of Chicago on March 3, Chair Yellen discussed the US economy and the Fed’s monetary policy. She explained that the Fed’s ultimate goal of interest rate lift is the longer-run value of the neutral real federal funds rate (NRFFR) to be in the neighborhood of 1%. The neutral “real” federal funds rates, defined as the federal funds rate adjusted for inflation, is neither expansionary nor contractionary when the economy is running near its potential. She expected NRFFR to rise until 2018 and 2019. Although the NRFFR is essentially a moving target dependent on inflation, Yellen forecasted inflation will be around 2% over the medium term. This implies a 3% target for the federal funds rate ahead.

If inflation rises to 3%, the target for the federal funds rate would be 4%. When the economy overheats, inflation may rise fast. The Fed would theoretically raise the federal funds rate even faster, according to the Taylor Principle which says that an increase in inflation by one percentage point should prompt the central bank to raise the nominal interest rate by more than one percentage point.

Now, investors may ask: Will the rise in rates kill the bull market? And if not, when will the bull run end, or when will a big correction happen?

There are no “sure” answers to these questions. However, an old market myth created by Edison Gould says “three steps and a stumble”. The “ Three Steps and A Stumble” rule states that when the Fed increases one of three monetary variables (discount rate, reserve requirement, and margin requirement—changed to open market operations due to its efficiency), the stock market will stumble. Here, we focus on discount rate variable to find out how the third jump in interest rate had impacted previous four bull markets—the Soaring Twenties ( 1921-1929); Construction Years(1950-1959); New Paradigm (1990-1999), New Millennium (2003-2007).

Market analyst Norman Fosback found the Fed raised interest rates a third time on July 13, 1928. Fourteen months later, the S&P 500 peaked on September 7, 1929, then dropped 82%. On September 9, 1955, the Fed lifted interest rate third time. Eleven months later, on August 2, 1956, the S&P 500 topped, starting a 21% market correction.

During the New Paradigm 1990-199 period, the Fed engaged in two rounds of interest rate hiking cycles in the latter first half and second half. After the interest rate bottomed out at 3% on September 4, 1992, from the high of 8.2% in early 1990, the Fed became hawkish, cautiously lifting rates by 25 points on February 4,1994. On that day, the S&P 500 plunged 2.27%. Two months later, on April 18,1994, even though the S&P 500 had declined 10% since the first rate raise, the Fed hauled up rate again by another 25 basis points, with the S&P 500 falling 0.83% that day. However, the market sank further, with another four 25 basis point raises by the Fed. Nonetheless, this round of hike cycles soothed the market froth by causing a one-year market correction. The correction led the third interest rate raise by over two months.

After over four years of the Fed’s indecisive monetary policies due to Asian currency crises, LTCM Failure and Russia debt chaos, the Fed again initiated hiking interest rates by 25 basis points on June 30, 1999. The stock market cheered with Fed action, with the S&P 500 advancing 1.6% that day. Because the market kept heating up, the Fed was forced to raise the rate a third time, by another 25 basis points on November 16, 1999. Unfortunately, the market defied the Fed and the S&P 500 moved up 1.8%. The S&P 500 peaked at 1553 on April 18, 2000 after four months of the third rate raise Table 1.

From the third rate lift on March 22, 1994 to the market peak on March 24, 2000, the market zig-zag advanced nearly 72 months Table 1.

After the internet bubble burst, the Fed dropped interest rates to the lowest 1% on June 25, 2003. One year later, the Fed saw a bright sign of economic recovery, raising interest rates the first time on June 30, 2004 after a previous thirteen instances of interest rate easing. The S&P 500 moved up 0.4% that day. On September 21,2004, the Fed hitched up the rate a third time, but the market continued its ascendant journey. The S&P 500 peaked on October 11, 2007 after 35 months from the third interest rate hikes for total snail pace of seventeen 25 basis point lifts, and then cracked over 57% Table 1.

From the above analysis, we can roughly guess how the market will move after a third interest rate hike next week, March 15.

1. If the market starts stumbling around the third move, the downside could be limited, paralleling to 1990s’ tightening cycle; 2. It could take 30 months after March 15 for the market to arrive at its final summit; 3. Each hike may be 25 basis points for the foreseeable future; 4. The peak federal funds rate could be around 4%.

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This article was originally published on www.equities.com.With link:

https://www.equities.com/news/debunking-the-myth-of-three-steps-and-a-stumble

Federal Fund Rates Change Dates  1990-2008

Change Date	Rate (%)		Change Date	Rate (%)
January 1, 1990	8.25	Easing Cycle	May 16, 2000	6.5	Easing Cycle
July 13, 1990	8		January 3, 2001	6
October 29, 1990	7.75		January 31, 2001	5.5
November 14, 1990	7.5		March 20, 2001	5
December 7, 1990	7.25		April 18, 2001	4.5
December 19, 1990	7		May 15, 2001	4
January 8, 1991	6.75		June 27, 2001	3.75
February 1, 1991	6.25		August 21, 2001	3.5
March 8, 1991	6		September 17, 2001	3
April 30, 1991	5.75		October 2, 2001	2.5
August 6, 1991	5.5		November 6, 2001	2
September 13, 1991	5.25		December 11, 2001	1.75
October 10, 1991	5		November 6, 2002	1.25
November 6, 1991	4.75		June 25, 2003	1	Tightening
December 11, 1991	4.5		June 30, 2004	1.25	Cycle
December 20, 1991	4		August 10, 2004	1.5
April 9, 1992	3.75		September 21, 2004	1.75	3rd raise
July 2, 1992	3.25		November 10, 2004	2
September 4, 1992	3	Tightening	December 14, 2004	2.25
February 4, 1994	3.25	Cycle	February 2, 2005	2.5
March 22, 1994	3.5		March 22, 2005	2.75
April 18,1994	3.75	3rd raise	May 3, 2005	3
May 17, 1994	4.25		June 30, 2005	3.25
August 16, 1994	4.75		August 9, 2005	3.5
November 15, 1994	5.5		September 20, 2005	3.75
February 1, 1995	6	Easing Cycle	November 1, 2005	4
July 6, 1995	5.75		December 13, 2005	4.25
December 19, 1995	5.5		January 31, 2006	4.5
January 31, 1996	5.25		March 28, 2006	4.75
March 25, 1997	5.5		May 10, 2006	5
September 29, 1998	5.25		June 29, 2006	5.25	Easing Cycle
October 15, 1998	5		September 18, 2007	4.75
November 17, 1998	4.75	Tightening	October 31, 2007	4.5
June 30, 1999	5	Cycle	December 11, 2007	4.25
August 24, 1999	5.25		January 22, 2008	3.5
November 16, 1999	5.5	3rd raise	January 30, 2008	3
February 2, 2000	5.75		March 18, 2008	2.25
March 21, 2000	6		April 30, 2008	2
May 16, 2000	6.5		October 8, 2008	1.5