February 25, 2018 Weekly Report

THE GENERAL MARKET

Wall Street Book Weekly Gains 

U.S. stocks erased the weekly losses and pushed higher in the final hour of trading session on Friday despite persistent worries over rising inflation, interest rate and bond yields. The Dow Jones Industrial Average led the way and surged nearly 350 points to close at 25,309.99. 

The Nasdaq Composite Index made a strong rally as it capped the week higher and surged by 127 points to finish at 7,337.39. With the rally, the tech-heavy index is just 168 points shy or 2.2% away from its all-time high of 7,505.77 set last Jan. 26.

Main Benchmarks as of 02/23/2018*

*Index closing, points & percentage increase on Friday

Meanwhile, the S&P 500 index was aided by broad sector gains with both the energy and technology sectors advancing by more than 2%. The index added 43.34 points or 1.6%, to close at 2,747.30. The recent two straight weekly gains for the index are its most since February 13, 2015.  The three major benchmarks entered into correction territory on February 8.

The market is in correction territory when the benchmarks drop at least 10%. As a recap, while the Dow Jones and the S&P 500 were also recovering sharply, the Nasdaq has been outperforming both benchmarks even after marking a four-day losing stretch on Thursday–its longest skid since Nov. 4, 2016.

RETAIL TRADE – Battle in the Home Front

Walmart Inc. (WMT) > $92.89 as of 02/23/2018 (-5.93 YTD)

Rivals in the retail trade sector is about to wage a battle in the home front. Walmart Inc., the world’s largest retailer, will soon launch a new home-goods online site that would deliver a new home decorating experience for customers. The home goods shopping page is part of Walmart’s larger initiative to redesign its e-commerce business and refurbish digital sales.

However, the week left investors worried after Walmart released its most recent quarterly report. Tuesday morning. The numbers were dismal as Walmart posted its largest drop in years. Analysts see this as a sign that its online retail growth is decelerating due to heightened competitive pressure from rivals such as Amazon.com Inc. (AMZN) and Target Corp. (TGT).
 

Online sales grew by just 23% year-over-year during the quarter ending in January. It was a 50% in the prior quarter. Amazon’s online sales grew by 38% in its latest quarterly earnings report. As a result, WMT plunged from $104.78 to $94.11 on Tuesday then further dropped to $91.52 on Wednesday. WMT recovered slightly in the next two sessions to finish the week at $92.89.The upgraded and more stylish home decor shopping page will be up and about in the coming weeks. Walmart customers can browse over housewares and furniture based on their preferences. Thus, the move will spark a fierce competition with Target Corp. and its recently launched Opalhouse line.

Target Corp. (TGT) $75.41 as of 02/23/2018 (+15.57% YTD)

Target is also aiming to become a key player in the furniture and decor industry. Less than a year after the debut of its modern furniture line Project 62, Walmart’s rival unveiled on Tuesday their new in-house brand, Opalhouse. Their Project 62 line follows the specific—and in-demand—aesthetic style. The Opalhouse is the more eclectic, collected line that offers colorful and unique pieces inspired by travel.

 

TGT also dropped on Tuesday by 3.76% compared to the 10.18% slide of WMT. The stock likewise recovered to close the week at $75.41.

Target’s CEO Brian Cornell offers a different view. He acknowledges that e-commerce sales are growing but stores will always play an important role in a retailer’s overall strategy,

 

He said, “The winning retailers of the future are going to combine great physical assets with the ease that comes along with that digital interaction.” Cornell added, “For the foreseeable future, the majority of U.S. retail sales will still take place at stores.”

“We want to make Target the easiest place in America to shop” no matter whether a shopper wants to buy online or at the store, Cornell said. That’s why Target Corp. is expanding initiatives like curbside pickup, same-day delivery in metropolitan markets and two-day shipping for guests.

The Home-Furnishing Retailer Tumbles

Wayfair Inc. (W) > $75.25 as of 02/23/2018 (-6.25% YTD)

The shares of Wayfair Inc. tumbled on Thursday after the Boston-based furniture and housewares retailer posted a wider-than-expected fourth-quarter loss. W’s price plummeted by 22.71% from $95.69 to $73.95. The stock even traded at a high of $100.14 at one point on Tuesday prior to the release of the earnings report. It climbed 1.75% on Friday to finish the week at $75.25.

It was the biggest one-day decline since Wayfair Inc. went public in 2014. Investors were disappointed because of the widening losses despite very strong sales growth but lack any signs toward profitability

The sales growth of the e-commerce home-goods specialist is impressive as revenue increased 46% to $1.44 billion, beating estimates of $1.36 billion. Active customers climbed 33% to 11 million, and average order size jumped from $203 to $229. Their gross margin declined from 24.2% in the quarter a year ago to 23.1%. It’s an indication that competition may be intensifying and price reductions are inevitable. 

Some analysts see a sell-off as part of a familiar pattern: With each successive quarter’s earnings report, investors see bloated spending on advertising and operations but without an obvious path to profitability.

 

The net loss of the company in the fourth quarter was $72.8 million, up from a loss of $44 million during the same period in 2016. Excluding some items, the per-share loss was $0.58, compared with the average analyst estimate of $0.53.

However, its Chief Executive Niraj Shah would rather focus on the positives. He cited the company’s “incredible growth” in 2017 where net revenue rose 40%  to $4.7 billion. Shah defended the company’s advertising expense of nearly $550 million last year. He said the advertising campaign resulted in “significant market share and that an emphasis on technology has allowed them to redefine “what is possible in the home category.”

Some of Wayfair’s major investments were in infrastructure and operations. They also expanded to the Canada, Germany, and the United Kingdom. That is partly the reason for the 33% growth in active customers.

 

Wayfair projects revenue in the current quarter to be between $1.315 and $1.345 billion, up 40%-43% from 2016. The company also said that they might see a negative EBITDA for the first time in a year. On the market threat, Walmart Inc. (WMT) announced that it would be launching a new home-goods site and that would deliver a new home decorating experience for customers.

INFORMATION TECHNOLOGY

Price Increase in YouTube TV Online Service

Alphabet Inc. (GOOGL) $1,128.09 as of 02/23/2018 (+7.09% YTD) 

On Wednesday, Alphabet Inc.’s Google announced that they are raising the price of its YouTube TV online service for new customers who will be signing up after March 13 this year.

It has been less than a year when Google launched YouTube TV and the company is increasing its pricing from $35 to $40 per month. However, more channels will be added such as Time Warner Inc.’s Turner, which would include CNN, TBS, and TNT. Google will soon add the Major League Baseball network and NBA TV.

Google sees the need to expand its offering now that the number of competitors is increasing. YouTube TV is pitted against AT&T’s DirecTV Now, Dish Network Corp’s Sling TV, and Hulu. All of them are vying to win over the growing number of customers who are abandoning their cable subscriptions to watch their favorite shows online.

GOOGL dropped to its lowest at $1,007.71 on February 8 when the stock market went into a downturn. The stock showed resiliency and gradually climbed to surpass the $1,100 mark on Tuesday. GOOGL finished the week higher at $1,1128.09.

According to AT&T, DirectTV Now has over 2 million subscribers already but Sling TV, Hulu and YouTube TV are secretive about their user base. Research firm BTIG estimates they respectively had 2.1 million, 500,000 and 350,000 as of the end of 2017. With the customer shift to online TV services, the four largest cable and satellite companies lost about 1.5 million pay TV customers in 2017.

The costs for these offerings are competitive. Prices range from $20 for Sling TV’s most basic offering (30 channels) compared to Hulu’s $39.99 that includes more than 50 channels. Hulu also has its library of shows and movies which can be availed of separately at $7.99.

YouTube TV’s director of content partnerships, Heather Moosnick, said Google is banking on its strong sports offering to bring in more subscribers. “Sports is really one of the key offerings that a millennial would be willing to pay for a live TV service,” she said.

Based on its TV ads this year, Google is focusing on sports fans. According to iSpot.tv, a TV ads tracker firm, About 96% of YouTube TV’s ads so far this year came out during sports programming, including the Super Bowl.

Cisco collaborating with network operators to push 5G

Cisco Systems Inc. (CSCO) $44.00 as of 02/23/2018 (+14.88% YTD)

Cisco Systems together with tech firms Apple (AAPL), Intel (INTC), and Microsoft (MSFT) helped the key stock market indexes extend their gains on Friday. The last time when CSCO was below $40 ($39.53) was on February 9 $39.53. Since then the price has never gone down below that level. CSCO even traded at a high of $45.09 at one point last February 16 during the Wall Street’s comeback week. CSCO closed the week at $44.00.

The Mobile World Congress will be held in Barcelona, Spain in the coming week where Cisco Systems along with hundreds of telecom operators are converging. Most of them are looking for new ways to handle the exploding customer data demands and intense pricing pressures.

Cisco Systems made a bold announcement on Sunday prior to global event. The company aims to shake up the wireless radio access market led by Ericsson, Huawei, and Nokia by supporting challengers who make more flexible software versions of traditional mobile gear.

Cisco is well known for making networking gear that moves big volumes of data around the internet. They want a bigger share of the mobile market but not by manufacturing the radio access equipment itself. Instead they will be backing the alternative equipment providers.

Cisco’s push of the radio access network part of the company’s efforts to prove to mobile network operators that investing in modern infrastructure and automation tools can help them to cope with the increasing demand for data while simultaneously lowering costs.

Cisco disclosed that they are working with more than 20 network operators to offer next-generation 5G services. The service promises to deliver not just faster phones and video, but also connected cars and internet-connected industrial sensors over the next decade.

Yvette Kanouff, general manager of Cisco’s business unit for telecom service providers, said in a Reuters that “Many of the things we enable you to do, you can do before 5G.” Cisco’s bid to open up the market puts them in direct competition with the big mobile equipment vendors, including No. 2 ranked Ericsson which they have an existing two-year-old joint sales pact on 160 current deals.

Waiting for the infrastructure business to grow

MaxLinear Inc. (MXL)> MXL $23.42 as of 02/23/2018 (-11.36% YTD)

Investors are lowering expectations on MaxLinear because the weak end-markets have delayed the supposed emerging growth story of the company and stretched out the transition process.

The end-markets are the wireless backhaul, access, and optical interconnects where their real growth opportunity lies. The key concern for MaxLinear is when their infrastructure business (optical interconnects, laser and line drivers, TIAs, wireless backhaul and wireless access products) will take over as the organic growth driver.

MXL started the week strong, climbing on Tuesday to $23.12. The stock price stood at $23.00 for the next two sessions before closing the week higher at $23.42.

The company’s transition has been extended but the current revenue mix is expected to grow much faster than the Connected Home business in the coming years. However, the extended process could lead to above-average volatility in its financial performance.

Apart from the erosion in its legacy businesses, there is also greater-than-expected weakness in its communications (Infrastructure) market. Several revisions as to expectations (around 10% on the top line) have taken place over the past six months or so.

When their performance starts to improve by the second half of 2018, a period of double-digit revenue growth and improving margins should follow. The company is confident their datacenter optical products could be a $100 million to $150 million opportunity over the next 3 to 5 years. Significant revenue could be realized after the deployments of their 100G optical and 5G equipment.

However, their integrated device could face serious challenge from Broadcom (AVGO), Silicon Labs (SLAB)Texas Instruments (TXN) and many others that are all targeting the same markets. MaxLinear can compete but not expected to dominate.

BIOTECHNOLOGY

Most compelling Chinese biotech stock

BeiGene Ltd. (BGNE)

BeiGene Ltd. is regarded as China’s most compelling biotech stock to-date. That distinction was earned last summer when this Chinese biotech cut a deal with Celgene (CELG) regarding the company’s PD-1 drug known as Tislelizumab. Since then, the price of BGNE has been soaring.

The two companies generated combined sales of $10.8 billion last year from the partnered drug. The drug was launched only a few years ago. It strengthens the immune system in order to fight cancer in the same way as the known drugs such as Opdivo and Keytruda.

The success with tislelizumab would be more than enough to keep BGNE climbing but the partnered drug is not their only path to growth.

BGNE $155.96 as of 02/23/2018 (+59.60 YTD)

Versus the Biotech Sector & S&P 500 YTD Chart

Celgene bought rights to develop tislelizumab for solid tumors outside of Asia. They also gave permission for BeiGene to sell its most popular cancer therapies throughout China. Celgene’s Revlimid on a stand-alone basis is an $8-billion-a-year drug, Hence, BeiGene could generate enough revenue to support one of the industry’s most ambitious oncology pipelines.

BGNE started lower on Tuesday at $135.66 before hitting its stride, jumping by 10.51% on the next trading session. The stock price closed higher at $155.96 on Friday.

Boosted by two FDA approvals

AMAG Pharmaceuticals (AMAG)$19.65 as of 02.23/2018 (+48.30% YTD)

AMAG is another biotech stock that has been glowing and getting hotter in 2018. The share price of AMAG Pharmaceuticals is about 34% higher over the past month. For the last two Fridays, AMAG has been showing a steady climb. The price was $12.95 on February 9, $18.50 on February 16, and closed at $19.65 this week.

The boost came from not one but two Food and Drug Administration approvals. In early February, FDA gave the green-light to AMAG’s Feraheme for the treatment of iron deficiency anemia (IDA). By adding the IDA indication to their prescription label, it instantly doubled the iron supplement’s addressable patient population.

AMAG’s Feraheme will be in direct competition with Daiichi-Sankyo’s Injectafer. The latter earned FDA’s approval to treat IDA patients in 2013. However, AMAG’s clinical trial data could help their sales team. In a head-to-head study, Feraheme proved itself non-inferior to Injectafer plus a safety bonus. Around 39% of patients treated with Injectafer exhibited severely low blood phosphorus levels versus just 0.4% in the group treated with Feraheme. 

The second FDA approval is for AMAG’s auto-injector and lead product called Makena. This is a decades-old drug and the only one approved to lower the risk of preterm births. It was also the source of around 63% of AMAG’s total revenue during the first nine months of 2017.

Unfortunately, Makena’s seven-year period of orphan drug exclusivity recently expired. Thus, the pressure now is to increase the volume of sales on the generic versions of the intramuscular injection. The newly approved subcutaneous auto-injector could offset those losses be the key to sustain sales growth.

THE WEEK AHEAD

Wall Street moved in one direction only last year – higher. However, more recently, it has been navigating a zig-zag path. The market declined on Tuesday and Wednesday followed by upswings on Thursday and Friday.

The market has been swinging between the optimism of strong economic and corporate fundamentals while grappling with the anxiety of rising inflation, interest rates, and bond yields. The result has been larger swings in stock prices. The blue-chip Dow Jones is moving by triple digits in 12 of the last 15 trading sessions.

The average daily change in the U.S. stock market thus far in February has been 1.3%, compared to the 0.3% for all of 2017. The swings between optimism and skepticism are likely to continue in the near term. The markets are adjusting to the developing economic and interest rate cycle. The broader direction is higher but the ride is going to be bouncier this time. 

The economic data to be released next week are as follows: consumer confidence on Tuesday, pending home sales on Wednesday, and the Manufacturing PMI and vehicle sales on Thursday.

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