Important: We categorize investments in two ways. Strategic or tactical; occasionally, they can be both. Most of the trades we cover fall into the tactical bucket.
- Strategic: Occasionally, we have insight into a specific company or theme and we are willing to make a 5-10 year bet to see if it plays out. In this category, we are looking for a business that has the potential to be a monopoly (legal of course), dominate their category, and build a durable moat.
- Tactical: For these trades, we have a specific price target to take profits at and a stop to protect our downside. For more information on how we evaluate these trades, read this article.
1. New feature
Our new section is called “The Chartbook.” This is where we will house our charts of stocks and ETFs. It’s a little bare now, but eventually, it will include all Russell 1000 stocks and all major ETFs.
It’s a great place to go hunting for trade ideas. All that’s up now is the major indexes, which are free, but by the end of the next week, I hope to have all major S&P 500 sectors entered.
You can access it here.
2. Stability leads to instability
The headline is part of a quote by the economist Hyman Minsky. He was referring to the economy in general but we can also apply it in the context of business.
When a business reaches a certain level of success, they can, if they aren’t careful, become complacent. They can lose focus on serving their customers and meeting their needs. And if they aren’t careful, competitors will come in and start encroach on their territory. This process could happen so slowly, that upper management might not notice.
Then one day… boooooom…They’re in a fight for their lives and their very existence is at stake. (think Netflix and Blockbuster or the demise of Sears)
Shares of Victoria’s Secret’s parent company, L Brands (LB), has fallen 45% this year and is one of the worst performing stocks in the S&P 500. In addition, they slashed their dividend and the leaders of both Victoria’s Secret and Pink resigned, reports Bloomberg.
How did it come to this?
Ed Yruma, a retail analyst at Keybanc Capital Markets, points out that making push-up bras, long a Victoria’s Secret staple, is something of an engineering challenge and a unique supply-chain capability. But newly popular styles like bralettes and sports bras can be made by many factories, he notes, and that has made it easier for new competitors to get in the game and tread on Victoria’s Secret’s turf.
In other words, they got complacent and didn’t innovate on the product that made them famous (push-up bra) and other companies introduced cheaper alternatives.
Dollar Shave Club
A good comparison is what happened between Gillette and Dollar Shave Club (DSC).
Gillette had firm control of the razor market, but many men just wanted a good enough razor at a fair price. DSC sourced cheaper blades from a South Korean Company, Dorco, made a viral YouTube video and sold directly to the consumer.
The result… They started taking share from Gillette. And eventually, Gillette started their own subscription razor business.
Today, any entrepreneur can build a Shopify store, source a product on Alipay, and set up shop in a few weeks. The advantage pre-internet companies had is slowly being eroded.
Down, but not out
All hope is not lost. They still have a dominant share of the underwear market and the most recognizable brand in the space. They have to get back to listening to their customers and serving them on their terms.
Victoria’s Secret was built when the world was supply constrained (pre-internet). Meaning, the only place you could buy a push-up bra was a Victoria’s Secret store in your local mall or from their catalog.
Today, supply is infinite. There are a million places you can buy a product that meets your needs. In today’s world, the companies who are closest to the customer will have a leg up on the rest of the competition.
3. Toll Brothers tops analyst expectations
How a stock reacts to information is often more important than the actual information.
Toll Brother (TOLL) beat both revenue and earnings estimates from analyst but offered weaker guidance for the 1st quarter of 2019. Initially, this was seen as bad news, but the losses have been recouped and the stock is trading higher on the week.
How to trade it
Since 2013, this stock has traded in a $30-$40 dollar range; with a few spikes above and below those levels.
If you are aggressive, you could be a buyer at the lower end of the range ($30). Stopping out with a weekly close under $30, and looking for a rotation back toward the top of the range ($40). Or hold and look for a breakout and move back toward the 2018 high print near $52.
• The reward/risk if you target $40 is 1.28 (not great)—Meaning you would make $1.28 for every $1 dollar risked.
• The reward/risk improves to 3.97 if you hold until the 2018 high print near $52. You just have to estimate how probable that is…
Other ways to trade
If you want exposure to a basket of homebuilders (recommended), there are two ETFs you should look at.
- iShares U.S. Home Construction | Ticker ITB
- SPDR S&P Homebuilders | Ticker XHB
Important: The top three holdings for XHM are Lowe’s, Home Depot, and Williams Sonoma; only five homebuilders round out the other seven. ITB is a better pure play on homebuilders as five of the top six holdings are homebuilders.
Let’s take a quick peek at their charts.
iShares U.S. Home Construction | Ticker ITB
Thirty dollars is a crucial level of support for this ETF. A break below could see a move toward $22.50.
SPDRs S&P Homebuilders ETF | Ticker XHB
This chart is similar to Toll Brothers. Price is trapped in a narrow range between $32 and $38 dollars. And remember, this ETF is not a pure play on homebuilders. Home Depot is this ETFs largest position.
4. Technical analysis
XLE | Energy Select SPDR ETF
Where are we at?
XLE has been trading between $64 and $78.50 since March 2016. Currently, the price has tested the bottom of the range—$60—and held. For now…
- Buying at the lower end of the range, $64, stopping out with a weekly close under $61.50, and holding for a rotation back toward $78.50 produces an attractive R/R of 5.8 (make $5.80 for every $1 dollar risked; in % terms it’s 22.60% on the upside and 3.90% on the downside) (see chart above).
- A break under $64, could lead to losses down to $50, a -22% move to the downside.
Quick facts on XLE
- Seeks to provide exposure to the energy sector of the S&P 500 index.
- Gross expense ratio: 0.13%—You pay 13 cents for every $100 dollar invested.
- Options available: Yes.
- Dividend yield: 2.90%.
Exxon Mobile (XOM) and Chevron (CVX) make up 42% of this ETF. Those two companies will have an outsized impact on its performance.
That’s all for today. Thanks for reading,