2020 Market Outlook - Margin Of Safety Required

Euphoric 2019 and Bleak 2020 Forecast

All three major indices ended 2019 in rarified territory as the Santa Claus rally capped off a euphoric market. The S&P 500, Nasdaq, and Dow Jones ended 2019 at all-time highs. The S&P 500 posted its best return in nearly 20 years, coming in at a 28.9% return.

2019 was a unique year on multiple fronts where the markets roared higher despite impeachment proceedings, U.S.-China trade war, Federal Reserve actions, inverted yield curve, and slowing economies abroad. Furthermore, for the first time in history, the U.S. economy has started and ended a decade without a recession, with the economy expanding for a record 126 consecutive months (Figure 1).

2020
Figure 1 – All three major indices reached all-time highs at the end of 2019

Currently, the markets are faced with stretched valuations absent of any significant volatility over the past few months. 2020 predictions are shaping up to widely variable from the collective grouping of investment firms (Figure 2). The average forecast is looking bleak after a banner 2019. I feel these bleak forecasts are rooted in political uncertainty, geopolitical tensions, slowing company buybacks, stretched valuations, and inevitable market volatility. As 2020 unfolds, a margin of safety via raising cash as a core position may be wise. Continue reading "2020 Market Outlook - Margin Of Safety Required"

American Airlines Presents A Compelling Buy

American Airlines (AAL) is a cheap stock by many metrics and currently presents the best value in the airline sector based on valuation. Boeing’s (BA) 737 Max groundings have already been absorbed by the airline and moving forward, American is looking to settle with Boeing. Boeing took a $4.9 billion after-tax charge in Q2 to compensate airlines for the grounding. American is expected to see some cash from that amount once a settlement is reached between the two parties. The company is reducing its debt load, increasing free cash flow, returning value to shareholders, expanding its network while having the youngest fleet among the major airlines. American Airlines is near a 5-year low on the cusp of all the aspects mentioned above coming into the fold for 2020 and beyond. I feel that this stock presents a compelling buying opportunity in the backdrop of a frothy market for long-term investors.

Compelling Value

American presents a compelling value proposition across its enterprise with growth, decreased capital expenditures, youngest fleet of aircraft, debt reduction and increases in free cash flow. In an effort to drive growth, the company is expanding its network to add more gates in profitable hubs for 2019, 2020 and 2021 in Dallas-Fort Worth, Charlotte and Washington D.C., respectively (Figure 1). Early results indicate that hub growth is already creating value. Passenger revenue per available seat mile (PRASM) grew by 3.3% in 2019 from expansion in the Dallas-Forth Worth hub.

American Airlines
Figure 1 – 737 Max grounding and network growth plans already creating value

Starting in 2020, capital expenditures will begin to decrease, resulting in free cash flow increases drastically. At the end of 2019, over $30 billion was invested in the airline, and throughout 2020 and 2021, expenses will dramatically be reduced (Figure 2). These investments have resulted in American having the youngest fleet in the industry with over 50% of its aircraft being less than 10 years old (Figure 3). As expenses decrease, free cash flow will increase substantially to allow American to deleverage their debt. American will increase its free cash flow by $5.5 billion over 2020 and 2021 and over the long-term translating into an $8-$10 billion reduction of debt by 2024 (Figure 4). The company is in a position to increase earnings per share and income, even if the business doesn’t grow. Continue reading "American Airlines Presents A Compelling Buy"

Options-Based Portfolio: 50% Cash and Matching S&P 500 Returns

2019 shaped up to be a historic year for the stock market indices. The S&P 500 posted its fourth-best annual return in over 20 years, coming in at a ~29.5% return (my options-based portfolio has generated the same returns). Only two other years have outpaced these 2019 returns. These occurred in 1995 and 1997, posting returns of 34.1% and 31.0%, respectively. 2019 was a unique year on multiple fronts, most notably because the market returns outpaced even the most bullish forecast by any Wall Street analyst. The markets roared higher in the face of impeachment proceedings, U.S.-China trade war, Federal Reserve actions, inverted yield curve and slowing economies abroad. Furthermore, for the first time in history, the U.S. economy has started and ended a decade without a recession with the economy expanding for a record 126 consecutive months (Figure 1).

Options-Based Portfolio
Figure 1 – S&P 500, Nasdaq, and Dow Jones all set all-time highs as 2019 came to a close. The markets are in rarified territory with stretched valuations absent of any volatility. The Santa Claus rally capped off a euphoric market, generating the best returns in over 20 years

A data-driven, options-based portfolio is a method of selling options and collecting premium income in a high-probability manner to generate consistent income for steady portfolio appreciation. This strategy mitigates risk and circumvents drastic market moves and is done without predicting which way the markets will move. Options are a great way to generate superior returns with less volatility in both bear and bull market conditions over the long-term. Despite my 2019 performance lagging the S&P 500, when factoring in the Q4 2018 market sell-off, the options based strategy has generated the same returns. As 2019 comes to a close, my options-based portfolio returned ~19% relative to the S&P 500 return of 29.5%. Despite the epic 2019 market, when including the market sell-off of Q4 2018, my options based portfolio has returned 11.6% relative to the S&P 500 return of 11.2%. I was able to achieve the same market performance over the past 15 months with my current cash position at ~50% of my portfolio. Continue reading "Options-Based Portfolio: 50% Cash and Matching S&P 500 Returns"

Baby Yoda and Phase One Trade Deal Propels Hasbro

Baby Yoda and the phase one trade deal comes to Hasbro’s (HAS) recuse after a disastrous Q3 earnings call that resulted in the stock sinking 17%. Per Brian Goldner, “the threat and enactment of tariffs reduced revenues in the third quarter and increased expenses to deliver product to retail.” I feel that management was remiss when they forecasted their ability to circumvent the tariffs and then used the tariffs as a scapegoat to justify the company missing its numbers on both top-line revenue and bottom-line profit. Now the backdrop has changed in Hasbro’s favor with the phase one trade deal with China being reached and of course, the new internet sensation Baby Yoda.

The company is in a solid position moving into the holiday season, historically their biggest quarter, with blockbusters and the holidays coming into the fold. Hasbro has its Disney toy licensing deal (Marvel, Star Wars and Disney Princess lines) that should have a strong showing with Frozen 2 and the new Star Wars film with Baby Yoda debuting in Q4. Hasbro Studios (Transformers’ Bumblebee, My Little Pony, Power Rangers), E-Sports (Dungeons and Dragons and Magic: The Gathering), its legacy games (Monopoly and Nerf) and acquisition of Entertainment One earlier this year places the company in a position of strength. Hasbro has a compelling future across its portfolio with many catalysts in the near and long-term time horizons.

Baby Yoda
Figure 1 – Baby Yoda making his appearance last month in The Mandalorian on Disney+

Phase One Trade Deal

The U.S. and China came to terms on a phase one trade deal, benefiting any company that sources and manufactures its products in China. Hasbro has already migrated some of its supply chain away from China as a risk mitigation strategy due to the trade tensions between the two nations. The phase one trade deal provides Hasbro with supply chain flexibility and additional time to make any necessary adjustments to its business model. The previous quarter Hasbro lost momentum and attempted to attribute this to the tariffs. Now, this tariff headwind has been removed for the time being, allowing Hasbro stock to appreciate on the news. Continue reading "Baby Yoda and Phase One Trade Deal Propels Hasbro"

Protect Your Portfolio Gains In A Euphoric Market

Impeachment proceedings, U.S.-China trade war, Federal Reserve actions, etc., dominate the headlines and move markets in lock-step. The broader indices are at all-time highs and continue to set new high after new high despite the aforementioned variables. The markets have been on a steady rise for months without much resistance, and overall volatility remains low, indicating that market participants have become overly confident and complacent. The S&P 500 has had a banner year in 2019, posting a year-to-date return of over 25% through mid-December. A “blow-off” rally may be underway at this market juncture, and locking-in portfolio gains while mitigating risk is prudent. An options-based portfolio can offer a superior method to constantly locking-in gains while mitigating risk in these frothy market conditions. Over the previous 15 months through the bear market of Q4 2018 and the bull market of 2019, an options-based portfolio has returned 11.6% compared to the S&P 500 return of 8.7%. These returns have been accomplished with an 87% win rate while having the flexibility to hold ~50% of my portfolio in cash. An options portfolio enables optimal risk mitigation and realization of profits on a continual basis, especially important during market euphoria conditions.

Protecting Market Gains

An options-based approach is much like an insurance company where you sell insurance policies and collect premium income at a level that maximizes a statistical edge to your benefit. This strategy mitigates risk and circumvents drastic market moves. Selling options and collecting premium income in a high-probability manner generates consistent income for steady portfolio appreciation in both bear and bull market conditions. This is all done without predicting which way the market will move. Primarily sticking with dividend-paying large-cap stocks across a diversity of tickers that are liquid in the options market is a great way to generate superior returns with less volatility over the long-term.

Over the past ~15 months, 349 trades have been made with a win rate of 87% and a premium capture of 58% across 70 different tickers. When stacked up against the S&P 500, the options strategy generated a return of 11.6% compared to the S&P 500 index which returned 8.7% over the same period. Options are a bet on where stocks won’t go, not where they will go, where high probability options trading thrives in both bear and bull markets (Figures 1 and 2). Continue reading "Protect Your Portfolio Gains In A Euphoric Market"