Stock Market Volatility

If you’ve been following the irrational run up of fuel cell stocks (PLUG, FCEL, BLDP, ARTX), then you’ve also been waiting for this day. In a very predictable move, an analyst at Citron Research (known primarily for their short selling research) today said Plug Power (PLUG) is worth 50 cents per share and that there are no fundamental changes to the company now or expected in their business model.

Irrationality of the market at its best.

Exactly one year ago PLUG was trading at $0.18 and today traded over $11.50 shortly after the market opened. That’s a gain of over 6,000% in one year! The YTD rise of nearly 400% (at its peak today) was mostly the result of the recent announcement for an order from Walmart for 1,700 of PLUG’s GenDrive units to help power forklifts in some of their distribution centers. While that is certainly great news for the company, it definitely doesn’t justify the hyperbolic move experienced in the company’s share price. Finally, rationality is returning to the stock — evidenced by the 40% drop today from its closing price on 3/10/14 of $10.31. Still, use this (and its peers) as a prime example of the differences between trading and investing, and the dangers of the irrationality of the stock market.

Chipotle Stock

If you needed another example of the mantra “invest in what you know” or “invest in what you like”, look no further than Chipotle Mexican Grill (CMG). The company just reported blow-out earnings after the bell today that showed YoY revenue and net income growth of 28.6% and 25.5%, respectively for the second quarter. Both revenue ($1.05B vs. $990M) and EPS ($3.50 vs. $3.09) beat consensus expectations as well by a sizable margin.

But the real star of the show was the company’s comparable restaurant sales (see: same store sales, or SSS) growth of 17.3% YoY — an increase from the previous quarter’s already-impressive 13.4% growth. This tremendous increase — helped mostly from an increase in foot traffic rather than the price increases implemented during the quarter — represents yet another quarter of SSS growth (as shown below from the company’s SEC filing posted on their website).

Improving Same Store Sales

Not only has SSS increased each quarter over the last year, but these increases have been what would be called “quality” increases given the rising average restaurant sales each quarter. This is yet further proof that more and more people are choosing to eat at CMG. Moreover, this impressive growth comes at a time when spending on fast casual restaurants was essentially flat for the quarter. Quite an accomplishment for any business in my opinion.

Furthermore, the company raised their SSS guidance for the remainder of the year as a result. For example, management said that it now expects comparable restaurant sales in 2014 to be in the mid-teens, which is up from the high single digits it had forecast in April following Q1 results.

However, the company did report that food costs did rise 1.5% YoY mostly as a result of increasing prices for beef, avocados and dairy. As such, CMG did see operating margins fall 0.3% YoY to 27.3% in Q2. In addition, CMG management also said that they did see a slight shift in people switching from steak to chicken as a result of the recent price increases.

It is important to note, however, that the company’s price increases that went into effect last quarter were not implemented for the full quarter and as a result did not represent the full benefit of these increases.

Chipotle Stock

Meanwhile, CMG management did report that they continued with their stock buyback program during the quarter as they repurchased about 37,000 shares of their own stock. This is notable as well due to the fact that management has been opportunistic with these purchases and announced that their average purchase price was around $517 — nearly 14% from today’s closing price around $590. These buys look even better now following CMG’s roughly 10% rise after-hours into the $645 range.

In the end, it looks as though CMG’s impressive results are poised to continue as their Q2 results are not just a fluke, but are part of a favorable (and continuing) trend. It would also appear that my buy recommendation from March was right on the money and I continue to recommend shares of CMG as no clear competitor seems to exist (even as El Pollo Loco prepares for its IPO later this week).

GDP Rebounds and Stocks Soar

Dow and S&P 500

Both have given back their gains from earlier this morning, but the Nasdaq still remains in the green. The volatile trading this morning, however, cannot change the fact that the advance reading of US GDP for the second quarter showed a stronger-than-expected gain of 4% compared to an upwardly revised -2.1% contraction in Q1 (vs. -2.9% originally reported). Full details of the report can be found here. The news also followed ADP’s employment report for July that showed a gain of 218,000 jobs — largely in line with expectations, but down from June’s 281,000 gain.

The Bureau of Economic Analysis (the government entity responsible for the GDP report)

claimed that the increase in Q2 GDP was largely the result of increased consumer spending, or personal consumption expenditures (PCE), as well as gains in private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment.

Consumer spending

This accounts for about two-thirds of US economic activity, increased 2.5% in Q2 vs. a 1.2% increase in Q1. This increase in Q2 was largely the result of long-lasting durable goods, which jumped 14% (vs. just a 3.2% increase in Q1).

Despite this increase in consumer spending, it was reported that the personal savings rate rose to 5.3% from 4.9% as incomes rose. Many economists claim that this increased savings rate should help future spending.

Gross private domestic investment (see: fixed investment in residential and nonresidential) also showed a dramatic gain in Q2 compared to Q1. For example, overall gross private domestic investment grew 17% in Q2 vs. a contraction of -6.9% in Q1. Nonresidential investments were up 5.5%, while residential investments were up 7.5% in Q2, compared to 1.6% and -5.3%, respectively.

Meanwhile, net exports were down again in Q2 as the US imported more goods than it exported. For example, real imports of goods and services increased 11.7% vs. a 2.2% increase in Q1, while real exports of goods and services increased 9.5% vs. a decrease of -9.2% in Q1.

Lastly, inflation pressures increased as it was reported that the price index rose 2.3% — the quickest in three years — after advancing at a pace of 1.4% in Q1. After stripping out food and energy costs, this “core” price index showed a gain of 2.0%  — the fastest since Q1 2012 — after rising 1.2% in Q1.

2018 Stock Market Forecast

If there is one day that you pay attention to this week, make it Wednesday. In terms of macroeconomic news, the upcoming week will be chock full of important events — the most important of which includes the first reading of Q2 GDP, followed by the July jobs report.

On Wednesday, look for a variety of newsworthy events, beginning with ADP’s July Employment numbers at 8:15am, followed by Q2 GDP (advance) at 8:30am and the Fed’s FOMC meeting and statement at 2pm.

Consensus estimates for Q2 GDP are between 3% to 3.2% following Q1’s dismal -2.9% contraction. Meanwhile, ADP forecasts between 215k and 225k jobs were added in July (down from June’s 281k). Although the Fed’s statement later in the day is not expected to move markets one way or the other, any details about the Fed’s direction going forward should be noted.

Finishing up the week is the all-important July Employment report at 8:30am, which is expected to show the addition of between 220k and 250k jobs (down from June’s 288k). Also look for data on personal spending and income, as well as the ISM manufacturing reading for July at 10am. Consensus calls for a reading of 56.0 (an increase from June’s 55.3 reading).

Lastly, the earnings barrage continues as more than 140 S&P 500 companies are scheduled to report earnings this week. Some of these include big names such as Exxon Mobil and BP, as well as P&G, Colgate-Palmolive, Kraft, Merck, Pfizer, LinkedIn and Tesla. Investors will also be focused on the continued geopolitical risks in Israel and the Ukraine, specifically.

Some view this week as the last major news week of the summer (economic-wise), so be prepared for major market movements one way or the other, with the potential for increased volatility.

GM Stock: Who is Buying It?

I have to admit that there are certain times when the market does not make any sense at all. The curious case of GM continues to baffle me.

Usually when a company faces millions of dollars in losses, a public relations nightmare, and mounting lawsuits investors will choose to avoid buying – or holding – shares in said company. But, for some reason, that does not seem to be the case with GM.

Following yesterday’s announcement of an additional 3.4 million recalls related to the ignition switch, the company’s total number of recalls issued in the US this year stands at 17.73 million and over 20 million worldwide. That is significantly more than their old annual US record of 10.75 million recalls that was set back in 2004.

Even worse, it is only June 17th!! That leaves more than 5 full months for GM to recall even more of their cars.

Moreover, an even more shocking fact related to GM’s recalls this year is the fact that the company has now recalled more cars across the world so far in 2014 than the total number of cars it sold globally in 2012 and 2013 combined!

Let that sink in for a moment…

The company sold 9.3 million cars in 2012 and 9.7 million in 2013 (globally) for a total of 19 million. Yesterday’s recall has now brought GM’s total recalls to over 20 million. Again, simply shocking.

Not only is GM expected to take a $700 million loss in the second quarter stemming from these recalls, but the damage to their reputation is likely worth much more than that. What is even more shocking to me is that despite all of these troubles, GM shares are only down approximately 12% YTD in 2014. Hardly a sufficient drop if you ask me.

This leads me to my main question – who exactly is buying shares of GM???

While it has been documented thoroughly that GM was, and remains, a top pick among hedge funds at the end of 2013 and still in 2014, all of the buying cannot be coming from them.

Consider this. Shares of Ford (F) fell over 8% in December 2013 on news that they would only earn $8 billion in profits this year instead of the $8.5 billion they earned in 2013 because they chose to invest in their future by introducing more new car models worldwide than they usually do. Justified? In my opinion, definitely not.

Today shares of F are roughly where they were before their announcement in December. All this despite several pieces of favorable news that have been announced by F over the past 6 months, especially with regard to their exponential growth in China.

Meanwhile, I feel as though shares of GM have not been punished enough for their impending losses and reputation risk.

So again I ask, who is buying shares of GM? And why is no one buying shares in F? What are the hedge funds and other investors waiting for before they sell their shares of GM???

I know the downside risks that GM are exposed to are certainly not worth the 3.4% dividend yield. Hopefully investors will come to their senses soon, but I wouldn’t hold my breath.

Short Trading Week Ahead

Next week is sure to be a busy week for the stock market as investors digest several big economic reports and the end of the second quarter ahead of the Fourth of July holiday on Friday. With average trading volume and the VIX index (i.e. volatility) both near their recent lows, investors should be prepared for a volatile week resulting in possibly a dramatic move for stocks — either up or down.

Beginning with the closing of the second quarter on Monday, volume is likely to be heavy as fund managers typically engage in window dressing — a strategy used to improve the appearance of a manager’s performance by selling stocks with large losses and purchasing those that performed well over the quarter in an effort to disguise any underperformance.

In addition, many studies have found that the stock market has a tendency to perform poorly on Mondays as bad news is often released over the weekend. Further, investors are usually more optimistic going into a weekend (especially a holiday weekend — as is the case this week), and thus bid up prices on Fridays only to sell them off on Mondays.

With the markets closed on Friday for Independence Day, Thursday will see a flurry of economic reports including the all-important employment report for June. Consensus is for 215,000 non-farm payrolls with the unemployment rate holding steady at 6.3%. Also on Thursday, we will see the usual weekly jobless claims numbers, as well as the May trade deficit and ISM Services readings for June.

Prior to these reports, investors will have plenty to digest Monday through Wednesday with Chicago PMI on Monday; Construction Spending, Auto Sales (focusing on GM’s report which will include the latest effects of their growing recalls), and ISM Manufacturing on Tuesday; and the ADP Jobs Report and Factory Orders due on Wednesday. Meanwhile, Fed Chairman Janet Yellen is scheduled to speak at the IMF conference in Washington about financial stability on Wednesday, while ECB President Mario Draghi will start his latest press conference on Thursday.

Considering the dismal economic reports that were announced in the first quarter of this year — capped by the -2.9% growth in GDP last quarter that was finalized this past week — all eyes will be on the upcoming economic reports this week and going forward for evidence of a rebound in economic activity. With the preliminary release of Q2 GDP data not expected until the end of July, the market will likely continue to tread water in the coming weeks, buoyed by next week’s reports.