September 20, 2016

Adding Chipotle to my Best Ideas List

Chipotle Mexican Grill's shares have declined all week after the announcement early this week that Bill Ackman's Pershing Square has taken a 10 percent position. The shares initially rose to over $444 and are now at $411.80.

I have steadily added to this (speculative) long on weakness. I do not shun in response to the last few days' underperformance; I look at this as an intermediate-term opportunity.

I am placing CMG on my Best Ideas List at $413 as the reward versus risk has now turned quite attractive.

Here is my projected 12-month updated upside/downside:

Upside $525 (+27%)

Downside: $385 (-7%)

Here is my investment thesis.

This is a speculative long, from my perch.

Position: Long CMG.

September 19, 2016

Avoid Wells Fargo stock

"Everything we do is built on trust. It doesn't happen with one transaction, in one day on the job or in one quarter. It's earned relationship by relationship." 
- Wells Fargo's Visions and Values

Let me distill my view on WFC stock down to one word: Avoid.

Wells Fargo's premium valuation is likely to be impaired over a period of time from the discovery of nearly two million fraudulent accounts.

I have never really understood the premium valuation of the bank. To be sure, Wells Fargo has a vast and dominant franchise and deposit base. It is involved in one out of every three mortgages in the U.S. But, given that over the last five years the company's pretax income (before loan loss provisions) has made no progress, others may now question that premium valuation. 

Importantly, given the broad involvement of more than 5,000 employees, I would not be surprised if more untoward transactions were uncovered in discovery in the next several months, which would provide a further case for a contraction in the bank's valuation.

Bottom line, I would stick with Bank of America (BAC) or Citigroup (C) if one is interested in exposure to the banking space.

Buffett Will Likely Soon Break His Silence on Wells Fargo

"Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless."

-- Warren Buffett

And here is a contrary thought.

Given the size of Berkshire Hathaway's (BRK.B) Wells Fargo holdings (10% of the shares outstanding) and Buffett's previous comments over more than two decades regarding his confidence in the bank and its management, most believe that The Oracle will publicly support Stumpf and the management team sometime over the next few days/weeks.

I don't agree.

While I don't think Buffett will provide any indication that he will sell his stock (it's not his "style"), I do expect an uncommon and strong reprimand. I suspect that privately he is furious and, in the time ahead. I don't think Buffett will buy more or sell his WFC holdings. He will likely stand pat. (The sins of Salomon still likely lie in Warren's mind and thoughts.)

One final thought.

As I have clearly detailed in the last three years, it remains my view that Warren Buffett has lost his way in his investment portfolio as many of Berkshire's largest investment portfolio positions are moatless, "old economy" companies -- such as IBM, American Express and Coca-Cola -- that have been consistent market underperformers.

From my perch, Wells Fargo is yet another one of the aforementioned old-economy company, as the now heavily regulated banking industry moves ever closer toward delivering a commoditized and non-differentiated product ... and lower returns on invested capital.

via thestreet

September 13, 2016

Apple's new iPhone7 is not interesting

The terms that I would use to Wednesday's iPhone 7 introduction from Apple are "boring," "uninteresting" and "humdrum." Or as The Wall Street Journal put it, the iPhone 7 is Practical, But Not Jaw-Dropping.

Yahoo Finance tech writer David Pogue noted that "by now, everyone recognizes that the annual cycle of adding an earth-shattering life-changing feature to each new smart-phone model is over."

Indeed, I'm reminded of an old saying: "Risk-taking is inherently failure-prone. Otherwise it would be called 'sure-thing taking.'" But as Peter Drucker also once famously said: "If you want something new, you have to stop doing old."

Frankly, it was little surprise to me yesterday when Apple revealed, for example, that it had eliminated the headphone jack with the iPhone 7. The company described that move as an act of "courage," but that's a phrase usually reserved for more meaningful and serious events. You know Apple has a potential problem when even sports bloggers are making fun of this.

From my perch, Apple is running a big risk that consumers who are already a part of the company's ecosystem will figure out at some point that they're getting ripped off by all of AAPL's expensive, proprietary peripherals. Many want the freedom to use any wireless headphones that they want--including expensive ones they might already own--and could easily switch away from Apple products.

And to reiterate a point that I've made previously, other companies have already long offered many of the "additions" that Apple unveiled for the iPhone 7. For example, Apple proudly stated yesterday that the phone is water and dust resistant "for the first time in the iPhone's history." But some rival phones are already water-resistant, and I'd note that the iPhone 7 isn't actually waterproof.

As for the iPhone7's "new" dual-lens camera, some competitors began offering this feature around a year ago. And as for the camera's other features--a wide-angle lens, image stabilization, an image signal processor, etc.--they don't seem like a big enough deal to me to justify upgrading to the new phone.

What about the iPhone 7's much-touted vibrating home button? Apple proudly noted that this new button is "force-sensitive"--meaning that rather than knowing you pressed the button because it clicked, it will vibrate instead. The company's marketing chief said this creates "new feelings and experiences that could not have been created before."

Nonsense! Competing products have had vibrating keys for years. Apple finally does it with one button and the company has the gall to try to spin that as some sort of innovation?

Apple also remains behind Alphabet (GOOG) , Amazon (AMZN) and others in terms of developing artificial intelligence.

Lastly, the upgrades that AAPL announced to the Apple Watch are a big yawner. The new watch is essentially the same as the prior version, except that it can be used in a swimming pool and features some fitness-related features. Zzz.

I'll have more to say about this a little later, and will give my 12-month risk-vs-reward forecast for Apple.

Position: Short AAPL

September 12, 2016

A nasty day when things fall apart

I have long thought that the disruptive impact of quant strategies had turned our markets upside down, to the extent that their models and algos chased priced and volatility.

This meant, at least to this observer, that buyers have lived higher and sellers have lived lower.

Today we see the sour fruits of their strategies that are agnostic to private market value and ignorant of balance sheets and income statements.

It can be debated what tipped over the markets and changed their momentum -- hawkish Fed Speak, the disassociation of a weakening real economy with higher stock prices, Wells Fargo's boatload of bogus accounts, recalls at General Motors and Ford, the avoidance of taxes by Apple and other multinationals, or something else.

But it is happening nonetheless, and with a vengeance not seen in months.

Several days ago I decided to move more aggressively to the dark side based on my perception that the downside was dramatically greater than the upside. I abandoned the notion of being reactionary in favor of being anticipatory for that simple reason.

I also would note that Friday was a vivid example of why I am so against the idea of selling naked puts, as we discussed earlier in the summer.

There will be no "Takeaways" as I plan to leave early for a few cocktails, and it won't be a rendezvous with some cheap tequila on the cold linoleum floor.

Long SDS
Short AAPL, SPY, GM, F. 

via thestreet