THE GENERAL MARKET
Stellar Corporate Earnings, Weak Investor Enthusiasm
The strong corporate results presented by some of the biggest and most influential companies did little to lift investor enthusiasm. The main U.S. benchmarks closed out Friday with not much change but booked modest losses.
About 80% of the S&P 500 companies that have reported beat forecasts and delivered better-than-expected results. But unlike before when this situation lifts individual share prices and precipitates a rally, it did not happen. The stocks of the three large-cap tech and internet companies that delivered stellar results advanced didn’t ignite a broader rally.
So far this season, about 80% S&P 500 companies that have reported beat forecasts, but the better-than-expected results have often failed to lift individual share prices. For the week, the Dow Jones Industrial Average slid 0.6% while the Nasdaq Composite Index fell 0.4%. The broader S&P 500 Index finished 0.01% lower compared to the previous Friday.
Gross Domestic Product (GDP)
The U.S. economy expanded at a 2.3% annual rate during the first-quarter of the year based on GDP data. The pace was slower compared to the three earlier quarters but it was above the forecasted 2% growth rate.
Historic Meeting of Two Korean Leaders
The historic meeting between Kim Jong Un of North Korea and Moon Jae-in of South Korea took place on Friday. The two heads of state signed a “complete denuclearization declaration.” Both men agreed to formally end the war in the Korean Peninsula with a peace treaty, The historic event did not affect the U.S. markets but the Asian markets were boosted.
Interest rate and Bond Yields
Investors are worried about rising inflation that could force the hand of the Federal Reserve to hike interest rates. If the rates eventually reach lead to restrictive borrowing costs for consumers and businesses, it will curb economic growth and usher in a potential recession. Aside from interest rates, the market is also focused on the 10-year yield’s return to the psychological 3% level.
Information Technology Sector Highlights
The Retail Giant Doubles Profit in the 1st Quarter
Amazon.com Inc. (AMZN) $1,572.62 as of 04/27/2018 (+34.47% YTD)
The world’s biggest e-commerce retailer reported on Thursday that it more than doubled its profit during the first quarter of 2018. Amazon.com Inc. also predicts strong spring results. Quarterly sales increased by 43% to $51.0 billion which was above Wall Street’s estimate of $49.8 billion.
The price of AMZN climbed 3.96% to $1,517.96 then increased by 3.60% to finish the week higher at $1,572.62. Actually, the share price zoomed up by 7% to a new record high in after-hours trade on Thursday. It added $8 billion to the net worth of its chief executive and largest shareholder Jeff Bezos.
The impressive results only showed the broad strength of Amazon. The company has drawn the ire of U.S. President Donald Trump particularly on the business of shipping packages.
Meanwhile, the company also announced on Thursday that effective May 11, the price for U.S. Prime subscribers will increase from $99 to $119 per year. Amazon said the increase will come with improved and additional features like U.S. football games and cloud services for business. Amazon’s service had only 20 million products four years ago. The number has grown to 100 million and available for two-day shipping.
Social Network Giant Rides Out The Storm
Facebook Inc. (FB) $173.59 as of 04/27/2018 (-1.63% YTD)
Shares of Facebook dropped 3.71% on Tuesday to $159.69 and remained flat until mid-week before the company’s earnings report was presented after trading. However, the stock price soared 9.06% to $174.16 as Facebook surprised Wall Street with a strong 63% rise in profit as well as an increase in users.
FB’s earnings report showed a 49% jump in quarterly revenue that outpaced the 39% rise in expenses from the previous year. Also, the world’s largest social network was able to reverse the 4th quarter’s decline in the number of daily active users in the U.S.
The number of users even increased to 185 million users during the 1st quarter of 2018. Their monthly active users in the first quarter went up by 13% to 2.2 billion compared to a year earlier. With the earnings report handily beating analysts’ estimates,
Despite the Cambridge Analytica scandal and the mishandling of personal data, it appears Facebook has weathered the storm. With an earnings report showing a hefty beat on the top and bottom lines, investors can now have a “sigh of relief” and forget about a doomsday scenario for Facebook. The stock remains a solid investment.
Communications Sector Highlights
The $26 Billion Merger is Almost a Done Deal
T-Mobile US Inc. (TMUS) $64.52 as of 04/27/2018 (+1.59% YTD)
It was a solid week for TMUS as it closed on Monday at $62.29 then climbed steadily in the next four trading sessions. The price settled at $64.52 on Friday. The company is scheduled to report its first-quarter earnings on Monday and analysts are saying it might be a buying opportunity.
What buoyed the stock is the reported deal between two U.S. wireless carriers might be completed as early as Sunday. The talks between T-Mobile US Inc. (TMUS) and Sprint Corp. (S) appear headed for a positive outcome in negotiating merger terms.
If completed, the combined company would have more than 127 million customers and could create more formidable challenger for the No.1 and No.2 wireless players, Verizon Communications Inc. (VZ) and AT&T Inc. (T). The race to expand offerings in 5G, the next generation of wireless technology, is heating up.
According to sources, T-Mobile majority-owner Deutsche Telekom and Japan’s SoftBank Group Corp., which controls Sprint, are working on an arrangement that would stipulate how they exercise voting control over the combined company.
Sprint Corp. (S) $6.50 as of 04/27/2018 (+10.36% YTD)
Shares of Sprint Corp. displayed a trend similar to TMUS. The stock priced was at $5.88 on Monday and gradually climbed until it closed higher at $6.50 on Friday.
Although the Sprint and T-Mobile deal would provide better alternatives to the largest carriers, the current actions of U.S. regulators are unpredictable. The Justice Department’s antitrust division recently sued to block the AT&T and Time-Warner deal.
Both carriers offer unlimited data plans and were also the first carriers to allow people to unlock their phones. The moves are widely seen as pro-consumer. And even without the merger yet, the pricing and marketing strategies of T-Mobile have forced AT&T and Verizon to change their own pricing structure, data plans, and marketing for the benefit of consumers.
Healthcare Sector Highlights
The Mega-Merger that Fizzled Last Week Sizzled
Shire PLC (SHPG) as of 04/27/2018 (+4.22% YTD)
This mega-merger in the pharmaceutical industry loomed last week but fizzled out even before it got going. On Tuesday, Japan’s Takeda Pharmaceutical Co. fifth buyout offer was considered by biotech firm Shire PLC. According to Shire’s management, the Japanese drug maker’s adjusted offer of $64 billion or about $4 billion more than its first offer is now worth recommending to shareholders.
The deal would be the biggest M&A in the pharma industry if approved by both boards and passes due diligence. The U.K.’s takeover board, which has stringent rules for the timing and disclosure of bids, granted Takeda and Shire an extension until May 8 to finalize it. However, if Takeda succeeds with the purchase, it could face a multiple-step credit downgrade because of a “spike in leverage.”
Moody’s warned of a downgrade on Wednesday as the acquisition will increase Takeda’s reported debt to $55 billion (around 6 trillion yen). Moody’s maintains an A1 grade on Takeda which is the fifth highest level. The rating agency will adjust the rating once Takeda makes a firm offer for Shire.
Shire reported its first-quarter 2018 earnings this week that showed product sales of $3.6 billion or a 7.7% year over year increase. Royalties and other revenues went down by 20% to $129 million.
At the start of 2018, Shire divided its products into two business segments – Rare Disease and Neuroscience. The rare disease franchise contributed $2.7 billion of the total product sales. Also, as part of the portfolio restructuring, The company has also accepted a $2.4 billion offer for divesting its Oncology franchise to French company, Servier as part of their portfolio restructuring.
Shire has outperformed the biotechnology sector year-to-date. SHPG is up 4.22% compared with the -3.08% decline of the industry.
The First-Ever Cannabis-Based Med
GW Pharmaceuticals PLC (GWPRF) $11.85 as of 04/27/2018 (+6.18% YTD)
GW Pharmaceuticals just scored a big win that could build a bullish sentiment on marijuana stocks, both for recreational and medicinal uses. The advisory panel to the U.S. Food and Drug Administration gave a favorable recommendation to the first-ever cannabis-based medicine.
GW Pharmaceuticals’ drug Epidiolex is the drug. The medicine syrup is for the treatment of childhood epilepsy but it doesn’t have any psychoactive effects. The drug is derived from cannabidiol (CBD). CBD has many medicinal properties that help a variety of conditions. Epidolex contains less than 0.1% tetrahydrocannabinol (THC) which has mind-altering effects.
GW Pharmaceuticals can potentially generate over $1 billion in sales by 2022 with this epilepsy drug. The company also has a pipeline of cannabis-based drugs that are promising it is still uncertain that these drugs will become commercially successful like Epidolex.
At any rate, this latest development could be the start of a reversal of fortune for marijuana stocks. Investors in the industry could focus on GW Pharmaceuticals and watch out for the larger publicly traded companies while waiting for the buy signals. The stock prices of weed stocks on the recreational marijuana side are expensive at the moment.
The stocks are Aphria (APHQF), Aurora Cannabis (ACBFF), Canopy Growth (TWMJF), Cronos Group (CRON), and MedReleaf (MEDFF). For those interested in a selection of weed stocks, the ETFMG Alternative Harvest (MJ) is a good investment option.
The Week Ahead
Two investment officers made insightful observations about what’s happening in the U.S. stock market. For James Meyer, chief investment officer at Tower Bridge Advisors, “What we can say with fair conviction today is that earnings season so far, and we are now past the halfway point, has not served to brighten investor moods.”
Jack de Gan, the chief investment officer at Harbor Advisory Corp., said that while GDP growth remained solid, it had been slow. “I’m worried there may have been an inflection point when Trump started to talk about trade and tariffs. If we start to see more trade tensions, then the idea of 3% growth goes out the window.”
Mr. de Gan also cited the tech stocks with an emphasis on Amazon. “These stocks continue to post extremely fast growth, and I think the story of the market being led by tech names is still intact. The FAANG group will make a recovery and should continue leading the market in the remainder of the year.” FAANG refers to Facebook, Apple, Amazon, Netflix Inc., and Google-parent Alphabet Inc.
The earnings season continues next week. More than 25% of the companies in the S&P 500 are scheduled to present their first-quarter results. Important economic data is also lined up. The Purchasing Managers’ Index on Monday, Vehicle Sales on Tuesday, the Federal Reserve’s interest rate decision on Wednesday, and April’s Jobs Report on Friday.