John’s Commentary – Oct 29 2018

It has been an interesting few days since I remarked late Wednesday afternoon in these NOTES that “today marks the day that one should be fully taking advantage of lower prices’’ and that continued decline “will present an excellent opportunity to restore equity exposure to normal levels in anticipation of recovery of markets.” I stand by that statement with the market basically unchanged from a few minutes after that was written [and down ½ of 1% from the point noted as I wrote]. While there is clear improvement in indicators that had led to my notes of caution in early October, I do not know if the S&P500 goes still lower over the near-term, but I can say that many well-positioned companies are selling at attractive entry points, including the companies mentioned positively in the Notes.

One of these highlighted issues – RedHat RHT – will see a large increase at Monday’s opening as a definitive agreement has been reached for IBM to buy the company for $190 or a 63% premium to Friday’s closing price. Congratulations to anyone who had the courage to act on this suggestion last week.

This purchase is a very good deal for IBM; it will catapult IBM to the number one spot globally in hybrid cloud, position IBM as a prime beneficiary of 5G technology, increase IBM’s growth rate and cash flow, and strengthen IBM’s competitive position in overall cloud offerings. While I am not sure how the market will react to this in terms of IBM’s stock price, last week I added IBM to my suggestions at prices below $130 and now find the fundamental case much stronger than a few days ago. Likely weakness on Monday, due to this announcement, would be a very attractive opportunity to buy or increase a position in IBM with a dividend yield over 5% and with
improving prospects that diverge significantly from current perception that has assigned a lowly 9 P/E ratio to the company’s stock.

Besides RHT, another of the technology suggestions – semiconductor company Mellanox MLNX – also had a very good couple days as its stock price moved from 66 to as high as 86 based on earnings up 87% and takeover hopes. The company is still very attractively priced [an actual low P/E multiple] and should be bought by anyone who can tolerate the volatility inherent in the semiconductor industry.

Perhaps encouraged by this success, I will offer up a few more suggestions in the semiconductor arena now that some specific stock prices have corrected very substantially: NXPI, MU, LITE, AMD.

In addition, price declines have made another group of very volatile companies attractive to begin accumulating for those with long-term perspective and the absolute willingness and ability to withstand volatility even greater than that of semiconductors! In my NOTES of 10-15-2018, Constellation STZ was highlighted as a notable exception to general avoidance of consumer staples companies. This was due to its adept and capable management whose latest strategic move was into the cannabis market. STZ is the safest way to invest in this emerging market, due both to valuation and uncertainty over who among the pure plays will emerge as long-term winners. With STZ as partner and financier, CGC will likely be one of them. Other but very small companies with already interesting businesses and strategies in place [and lacking outrageous valuations] are MedMen MMNFF and CannTust CNTTF. Please do not read the absence of a name as a condemnation of that company; these limited choices simply reflect a very uncertain competitive landscape that causes me to gravitate to relative safety in a risky new field.

John Stewart
Chief Investment Strategist

By | 2018-12-13T14:24:36+00:00 October 29th, 2018|John's Notes|0 Comments