February 10, 2018 Weekly Report

THE GENERAL MARKET

Wall Street Enters Correction Territory

U.S. stocks were down sharply for two weeks in a row, with the S&P 500 declining to levels not seen since early-December. The Dow Jones Industrial Average suffered a couple of setbacks. The blue-chip index nosedived by 1,175 points on Monday then another major plunge of 1,033 points on Thursday. The Dow’s freefall to start the week was the worst closing point decline on record. The dramatic sessions also dragged down the tech-heavy Nasdaq Composite index.

 With both the S&P 500 and Dow Jones falling more than 10%, market analysts are saying the U.S. stock market has entered correction territory. Last year saw low levels of volatility in 2017, with the largest decline being only 2.8%. Hence, the conclusion of many is that volatility has returned given the wild and daily market swings.

The Dow Jones in particular recorded intraday swings exceeding 500 points in each of the past six trading sessions. Four of the six trading days had swings greater than 1,000 points. Investors were worried seeing a bull market that lasted more than a year but is now experiencing two weeks of downtrend.

 

What prompted the panic selling are the expectations of rising inflation and the likelihood of Federal Reserve short-term interest rate hikes by the Federal Reserve. In terms of losses, a total of $2.49 trillion has been wiped out from the S&P 500.

The worries on Wall Street spilled over to the Asian markets on Friday. For the first time in the current crisis, the Shanghai Composite index in China and the Hang Seng in Hong Kong declined by 5.6% and 4.0% respectively. All other indices fell as well.  Data from the S&P Dow Jones Indices show that the total losses for global stock markets are bigger than the losses in the U.S. About $5.20 trillion have been wiped out already.

 

The week ended on a positive note as the U.S. market responded with sharp gains on Friday. However, the week was one of the most frenetic stretches of trading seen on Wall Street. It recorded the worst weekly losses in about two years.

The HEALTHCARE SECTOR

Invacare Corporation (IVC)

  • Invacare Corporation is a designer, manufacturer, distributor, and exporter of medical equipment for use in home health care, retail, and extended care markets worldwide. The company has four major segments that offer mobility and seating products.

  • The Invacare TDX brand is under the North America/Home Medical Equipment segment while the Invacare custom manual wheelchairs are under the auspices of the Institutional Products Group.  The Europe and Asia Pacific segments carry the Invacare Top End and Kuschall brand names respectively.
  • On Tuesday, Invacare Corp. presented its fourth quarter 2017 earnings report. Net sales increased by 1.5% to $250.4 million compared to the same quarter in 2016. However, gross margin as a percentage of net sales decreased 60 basis points to 27.3% compared to the fourth quarter 2016.
  • The drop was due to their inventory liquidation which followed the announced plant transfers and year-end promotional activities in 2017. The operating loss for the quarter was $7.9 million, or $1.0 million higher than the 2016 fourth quarter figure. The costs related to restructuring amounted to $2.2 million.
  • IVC closed at $18 flat on Monday then fell to $17.15 on Wednesday which was the lowest close for the week. The stock jumped up to $18.50 and finished the week unchanged.

  • Summing up full year 2017, the reported net sales of Invacare decreased by 7.7% to $966.5 million compared to 2016. Gross margin as a percentage of net sales increased 80 basis points to 27.9% compared to 2016. This is a result of the strategic mix shift toward mobility and seating products and reduced freight costs partially offset by increased manufacturing costs.

Syros Pharmaceuticals (SYRS)

  • Syros Pharmaceuticals is a biopharmaceutical firm that is pioneering the development of medicines to control the expression of genes. On Wednesday, the company announced the closing of its previously announced underwritten public offering of common stock. That includes the exercise in full by the underwriters of their option to purchase an additional 628,272 shares at the public offering price of $9.55 per share.

  • Syros was able to raise the amount of $42.9 million (net proceeds) in the offering. It also means that with the exercise of the option to purchase additional shares, the total number of shares of common stock sold by Syros is 4,816,753.

 

  • SYRS closed at $9.87 on Monday then climbed by 7.7% to end at $10.63 on Wednesday, which is the highest close for the week. The stock price slid the rest of the week, finishing lower at $9.63 with trading volume double the average volume of the preceding four trading sessions.

The INFORMATION TECHNOLOGY SECTOR
Twitter and Snap Turnaround

Twitter Inc. (TWTR)

  • After waiting for 12 years, investors finally saw Twitter reporting a profit. On Thursday, the shares of Twitter jumped to its highest levels in two years after reporting the company’s first-ever profit. The company posted a net income $91million in the fourth quarter of 2017. A year earlier, Twitter reported $167 million losses.

 

  • Rival social media stock Snap, the mother company of Snapchat, posted strong revenue growth on Wednesday. Both companies experienced unexpected increases in users and advertising revenues.

   

  • TWTR climbed by 12.15% from $26.91 to $30.18 with the trading volume simultaneously increasing by 232.72%. The stock traded at a high of $35 but was trimmed down by profit-takers and the broad-based Wall Street sell-off that occurred in the afternoon.

 

  • The turnaround of Twitter and Snap this week is an indication that advertisers are not limiting their online spending on Facebook and Google although the two giants combined account for more than three-quarters of global spending on digital advertising. Wall Street remains wary about smaller internet companies the likes of Twitter and Snap and their abilities to challenge the dominance of Facebook and Google.

Snap Inc. (SNAP)

  • On Tuesday, Snap Inc. reported its fourth-quarter earnings that beat analysts’ expectations on revenue and overall losses. Because of the better-than-expected results, SNAP jumped on Wednesday by 47.58% from $14.06 to $20.75. Trading volume increased by 439.55%. The stock finished the week lower at $18.80.
  • It has been 170 days since SNAP closed above $20 and 148 days since it closed above its $17.00 IPO price. SNAP has been trading for only 237 business days, which means that means about 63% of the time, the market valued the stock at less than the amount its first investors thought it was worth when it went public.
  • A few positive indicators for SNAP moving forward is the redesign of Snapchat which the company announced last November. Some analysts are relating the increase in daily active users on the platform. SNAP is also preparing to release a program that would allow broadcasters to beam live snippets of shows into the app. The Wall Street Journal reported that a deal has been struck with NBC to stream part of the upcoming Winter Olympics.

Momo Inc. (MOMO) – Worries over long-term growth

  • Momo Inc. is a seven-year old company in China that operates as a mobile-based social networking platform and is one of the most exciting Chinese stocks in the Nasdaq Composite Index.

 

  • The company’s platform consists of the Momo mobile application and various related features, functionalities, tools, and services that are provided to users, customers, and platform partners. Its Momo mobile application enables users to establish and expand their social relationships based on locations and interests.
  • MOMO was on a decline mode for most of the week. It closed at $28.51 on Monday then slid until Thursday to close the session at $26.38. MOMO continued the trend to begin Friday, trading at its lowest for the week at $26.21. The stock recovered and finished the week higher at $27.65.

 

  • Momo Inc. experienced massive growth for a few years but fell out of favor when the growth in paying users started to flatten. However, MOMO still trades at a very reasonable valuation vis-à-vis its growth performance and even comparing the same to the market’s growth expectations.
  • Its core MOMO application contributed largely to its growth. Revenue grew from a paltry $3 million in 2013 to $553 million in 2016. Wall Street analysts forecasted 2017 revenue to be $1,313 million, which is about 137% year-on-year growth rate.

 

  • The top-line is predicted to continue its growth in the next few years but the growth rate is expected to decline consistently to a more modest 7.9% in 2020. Analysts are not betting on a protracted growth because they see a fast saturation of the market.

The Automotive Sector

Tesla Inc. (TSLA) – Worst week for Tesla stocks

  • The euphoria over billionaire Elon Musk’s  two pioneering projects: the virtual power plant in Australia and the maiden launching of the Falcon Heavy super rocket, on Monday and Tuesday respectively, was short-lived after Tesla Inc. reported its worst-ever quarterly loss on Wednesday. Tesla dropped by 8.62% on Thursday then continued its slide to finish the week at $310.42.
  • It was also the stock’s worst week since the week of July 2017. However, analysts believe TSLA’s drop was also due the steep weekly losses in the broader stock markets.
  • Interestingly, while Tesla has habitually missed key production deadlines in the recent past, its stock price generally on an upswing. Again they delivered only half of the promised vehicle production last month. In truth, Tesla is hard pressed to accelerate and mass produce the more affordable Model 3 sedan. The launching of the Model 3 sedan has been pushed back several times due to bottlenecks in the assembly line.
  • CEO Elon Musk remains upbeat. “2018 will be a transformative year for Tesla, with a high level of operational scaling,” he said in a press release. Musk continued, “As we ramp production of both Model 3 and our energy products while keeping tight control of operating expenses, our quarterly operating income should turn sustainably positive at some point in 2018.

The Week Ahead

Wall Street might have entered correction territory this week but investors need not push the panic button for good reasons:

  • The economy is getting stronger.
  • Corporate earnings are getting stronger profit exerts the most influence on stock prices.
  • Rates might be moving up but the level is not actually that high to threaten the equity market values.
  • Pullbacks occur but in recent history, the market always rebounded after pullbacks.
  • Price-to-earnings (P/E) ratios have gone down that U.S. stocks are now trading at their most attractive levels.

The earnings season is coming to a close with only 59 companies from the S&P 500 reporting earnings next week. The important economic reports are the following: inflation and retails sales to be capped by consumer sentiment on Friday.

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