Archives June 2020

Why stock-market strategists have never been more confused in June about the year-end outlook for equities

It has been the best of times and the worst of times for U.S. equity benchmarks over the past two quarters, and that is, perhaps, why Wall Street analysts are facing their most befuddling challenge yet.

The Dow Jones Industrial Average

and the S&P 500

just put in their best quarterly performances since 1938 in the aftermath of a bruising pandemic that took hold in March, according to Dow Jones Market Data. That performance would be stellar if it weren’t for a few simple facts: The Dow booked its worst first six months of a calendar year since the 2008 financial crisis, while the S&P 500 notched its worst first half of the year in a decade.

In other words, the returns enjoyed this quarter came after a troubling quarter that was ushered in by the emergence of the COVID-19 epidemic in the U.S. and its subsequent punishing effect on the economy, with businesses compelled into hibernations to curtail the spread of the deadly infection.

Since hitting a March 23 low at 2,237.40, the S&P 500 has surged 38% to nearly 3,100, while the Dow has climbed 38.5% and the Nasdaq Composite Index

has rallied about 46%.

The problem is that there’s no clear consensus on where the market goes from this point, and strategists have been more inclined to raise their year-end outlooks for the S&P 500 rather than lower them, even as the markets have run briskly higher past their targets and as coronavirus cases have staged a resurgence in parts of the U.S.

Jason Goepfert, head of SentimentTrader and founder of independent investment research firm Sundial Capital Research, wrote in a Tuesday note that based on standard deviations, strategists have never been so confused about the outlook into the end of a year (see attached chart):

Meanwhile, Bloomberg News, citing a recent research survey from DataTrek Research co-founder Nicholas Colas, noted that a fifth of poll respondents said the S&P 500 will finish out the year up 10% from its current levels, with roughly the same number predicting that it will end the year down by that degree.

Goepfert estimated that based on another way to consider strategists’ standard deviation, expressed as a share of the S&P 500 at the end of June, the current divergence by analysts is only the widest since 2009. To be sure, that is still a fairly wide breadth (see attached chart):

The Sundial analysts said that the average year-end target for analysts is 2,998 for the S&P 500, about 3% below where it is currently. That target matches the lowest-ever year-end target relative to where the S&P was trading at the end of June, according to Goepfert.

However, that may be a good thing. When the average target was that low, the market tended to fare well in the subsequent six- and 12-month periods, even if the near-term market returns weren’t stellar.

Goepfert said that the S&P 500 returned an average of more than 7% over the next six months, roughly July through December.

It is when the strategists are more uniformly bullish that problems arise, he said, pointing out that the market tends to return a negative-1.7% through the end of the year during those periods.

The Wall Street Journal wrote that Bank of America’s analysts put a 2,900 year-end price target on the S&P, abandoning previous calls of 2600 and 3100. Goldman lifted the low end of its three-month target to 2750 from 2400 in late May as the index hovered around its year-end projection of 3000, the paper reported.

Of course, it is impossible to know where the market will end up by the end of this dramatic year, considering all the variables that the market must digest, including a 2020 presidential election that could knock equities around and a economy that has seen tens of millions lose their jobs over the course of a few short months.

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KOL: Coal Could Be A Surprising Winner From The Pandemic (NYSEARCA:KOL)

One of the things that many environmentalists liked about the outbreak of the novel coronavirus pandemic is that it reduced carbon emissions. After all, after the stay-at-home orders were issued and the economy was shut down, people were using much less fuel for either travel or other commercial uses. In addition to this, many oil and gas companies cut back on the development of new fields, which could result in oil consumption being lower than previously for an extended period. However, a recent report from Rystad Energy shows that they may have been overly optimistic here. This is because the shutdowns may have the effect of increasing the demand for coal in some emerging markets. One way that investors can play this is by investing in the VanEck Vectors Coal ETF (KOL) over the medium term. We will discuss the reasons why in this article.

Making The Case For Coal

It is highly unlikely that anyone reading this is unaware of the impact that the outbreak of the novel coronavirus pandemic has had on energy prices. As we can see here, the price of Brent crude has fallen from $66.25 at the start of the year to $41.68 per barrel today, which is a 40.06% decline, and while prices have certainly come up quite a bit from their lows, they do still remain well below where they were at the start of the year:

Source: Business Insider

This has also had the unfortunate effect of reducing the production of both oil and natural gas. In the United States alone, production has declined by two million barrels of oil and four billion cubic feet of natural gas per day year to date. The reductions internationally have been even greater.

One thing that many nations around the world have been attempting to do is reduce their carbon emissions due to concerns of climate change. One of the ways that they are attempting to do this is by converting their old electricity-generation plants from coal to natural gas due to the fact that natural gas produces much lower carbon emissions than coal does. Several emerging nations in Southeast Asia such as Vietnam and China have been among them.

In order to accomplish this though, these nations need to actually obtain the natural gas for their power plants. The coronavirus-induced plummet in oil prices may have made this job more difficult to accomplish. Vietnam may actually be a perfect case study of why this might be difficult.

As is the case with many emerging markets, Vietnam is growing its gross domestic product at a much faster rate than developed markets. In Vietnam’s case, that rate is about 7% per year. Naturally, this kind of growth requires the growth of energy infrastructure in order to feed the energy demands of the new industrial and commercial users, as well as from the members of the emerging middle class that wants to upgrade their lifestyles. According to Rystad Energy, this growth will require Vietnam to increase its power generation capacity from 54 gigawatts today to 130 gigawatts by 2030. This is a 140.74% increase over the next decade. As might be expected, this new infrastructure will increase the country’s demand for natural gas.

There may be some readers at this point that mention that the country can meet this expected demand growth using renewable sources. This is unlikely because renewable energy generation technologies do not yet have the reliability to sole power an industrialized economy. Vietnam does plan to increase its renewable energy generation ability, but the demand for natural gas from the electric generation sector alone is still expected to grow from 7.2 gigawatts today to 19 gigawatts by 2030.

Vietnam has some of the largest natural gas reserves in the world. According to the most recent estimates, the country has approximately 24.7 trillion cubic feet of proven reserves, which puts it at 29th largest in the world. This would be another reason for the country to base its power generation around natural gas, as it makes no sense for the country to import resources as it attempts to industrialize itself. Indeed, that was the nation’s plan. Rystad Energy expected that output would reach ten billion cubic meters by 2025, 60% of which would come from new projects. Unfortunately, the cuts from energy companies due to the COVID-19 pandemic have delayed the development of many of these projects. Rystad Energy says that 200 billion cubic meters of the country’s undeveloped resources will no longer be developed in the near term.

This ten billion cubic meters of output would not have been enough to meet the country’s expected sixteen billion cubic meters of demand. It was expected that the country would make up the difference by imported liquefied natural gas from the United States and Australia:

Source: Rystad Energy UCube, GasMarketCube

As a result of the postponements due to the COVID-19 pandemic, Rystad Energy only expects the country to produce seven billion cubic meters by 2025. This means that it has to import an even greater quantity of liquefied natural gas to meet its demand. This could prove difficult.

One of the reasons for this is the impact that the COVID-19 pandemic has had on liquefied natural gas projects around the world. The sector was already suffering from an oversupply of the compound before the pandemic, and the global economic shutdowns have made the problem worse. This has resulted in the developers of liquefied natural gas projects having difficulty obtaining long-term contracts for the output from their projects, and the presence of these contracts is necessary for these projects to make economic sense. This is why we have already seen the LNG Canada and Pacific Oil & Gas’s Woodfibre LNG project get delayed by at least one year. We have also seen Royal Dutch Shell (RDS.A) withdraw from the Lake Charles II project and Woodside Petroleum (OTCPK:WOPEF) delay the deployment of the second train at the Pluto LNG project. This all means that the medium-term supply of liquefied natural gas will likely be lower than what many were expecting prior to the outbreak of the pandemic.

The medium- to long-term story for liquefied natural gas continues to look quite strong though as countries all around the world seek to reduce their carbon emissions. The developing nations of Southeast Asia such as Vietnam are expected to have the highest growth in demand, although China and India will both likely boost their demands at reasonable rates. As we can see here, the global demand for liquefied natural gas is expected to increase at a 4% compound annual growth rate over the next five years:

Source: Wood Mackenzie, GasLog Limited (GLOG)

Rystad Energy’s concern is that the delay or deferment of projects will make it difficult to produce enough liquefied natural gas to meet this demand. Thus, these countries may need to import greater quantities of coal in order to meet their growing energy needs because they already have the coal-fired power plants in place and there are no other viable alternative sources of electricity that can be ramped out quickly enough to meet their needs.

About The Fund

The obvious way for an investor to play this is by investing in the VanEck Vectors Coal ETF (KOL), which is one of the only exchange-traded funds that is focused on the coal industry. At first, it might be expected that the fund only invests in coal miners, but this is not correct. According to the fund’s website, the fund is designed to track the MVIS Global Coal Index, which tracks the performance of coal operators (production, mining, and cokeries), coal transporters, producers of coal mining equipment, as well as companies involved in coal storage and trade.

As of the time of writing, the fund contains 26 positions. Here are the largest:

Source: VanEck

The first thing that we notice is that this is a global fund that contains companies from all over the world. This is nice because it provides a certain amount of protection against regime risk. Regime risk is the risk that a national government or some other authority takes some action that proves to be negative for a company. In this case, governmental restrictions on the use of coal due to climate change concerns is the obvious example, but it could also include something like the nationalization of a mine or the imposition of an unfriendly tax regime. The fact that the fund invests in companies all over the world helps to reduce the damage that the actions of any individual government can have on the fund as a whole.


As might be expected, the recent performance of KOL has been rather disappointing. The financial media, politicians, and many others have been predicting the demise of the coal industry for many years. As we can see here, the fund is down 45.96% over the past year and 38.44% over the past five years:

This could, however, present an opportunity if Rystad Energy’s analysis is correct. The coronavirus-induced project delays could force emerging markets to turn to coal to meet their growing needs for energy due to an insufficient supply of anything else. This would prove beneficial for the fund and lead to profits for investors.


In conclusion, the coronavirus has had a devastating effect on the energy industry, including on the development of various liquefied natural gas projects. This could unfortunately lead to a shortage of that compound as emerging markets continue to grow their economies and their energy needs at a remarkable rate. This could ultimately prove to be beneficial for the coal industry, as they will need to switch to other sources for power and they already have the coal-based infrastructure in place. The VanEck Vectors Coal ETF is one of the simplest ways for investors to take advantage of this, but it also boasts a significant amount of diversification that could make it a good option.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Exclusive: Boeing kept FAA in the dark on key 737 MAX design changes

© Reuters. FILE PHOTO: A Boeing 737 MAX airplane lands after a test flight at Boeing Field in Seattle

By David Shepardson, Eric M. Johnson and Tracy Rucinski

WASHINGTON/SEATTLE/CHICAGO (Reuters) – Boeing Co (N:) failed to submit certification documents to the U.S. Federal Aviation Administration (FAA) detailing changes to a key flight control system faulted in two fatal crashes, a long-awaited government report seen by Reuters has found.

The flight control system, known as MCAS, was “not an area of emphasis” because Boeing presented it to the FAA as a modification of the jet’s existing speed trim system, with limited range and use, according to the report.

The 52-page report by the U.S. Department of Transportation’s Office of Inspector General (IG), dated June 29 and set to be made public Wednesday, laid bare mistakes made by both the planemaker and FAA in the development and certification of Boeing’s top-selling aircraft.

The FAA declined to comment beyond the department’s response attached to the report. The IG did not immediately respond to a request for comment. A Boeing spokesman said the company had taken steps to enhance safety and was committed to transparency. “When the MAX returns to service, it will be one of the most thoroughly scrutinized aircraft in history, and we have full confidence in its safety,” he said.

The IG’s report is the latest of reports faulting the plane’s approval, while the Justice Department has an ongoing criminal investigation.

The 737 MAX has been grounded from commercial flight worldwide since March 2019 after two crashes killed 346 people in Ethiopia and Indonesia over a five-month span.

Boeing’s so-called MCAS stall-prevention system has been faulted in both crashes, when the system repeatedly and forcefully pushed down the jet’s nose as pilots struggled to intervene. Crash investigators have pinpointed a cocktail of other factors.

The inspector general report details activities from the early phase of the certification process in January 2012 through the second crash and details allegations of “undue pressure” from Boeing management on workers handling safety certification. The IG’s office will issue recommendations to the FAA later this year, the Transportation Department said in comments about the draft report submitted on June 8.


Boeing kept the FAA in the dark on significant changes to MCAS, the report said. Then, the FAA first conducted its first-ever detailed review of the system in January 2019, three months after the first crash in Indonesia. The review resulted in documentation that was never finalized, the report said.

The report noted that after the Indonesia crash the FAA completed a risk analysis that found that the uncorrected risk to the 737 MAX was 2.68 fatalities per 1 million flight hours, which exceeded the FAA’s risk guidelines of 1 fatality per 10 million flight hours.

A December 2018 FAA analysis determined a risk of about 15 accidents occurring over the life of the entire 737 MAX fleet if the software fix was not implemented.

After the crashes, Boeing proposed and FAA accepted a redesign of MCAS software that would include additional safeguards against unintended MCAS activation.

Boeing agreed to develop the software update by April 12 and operators would have until June 18, 2019, to install the software. As Boeing worked on proposed software upgrade for MCAS, a second plane crashed in March 2019 in Ethiopia.


The FAA is currently evaluating the MCAS upgrades during a series of certification test flights this week that could pave the way for the jet’s return domestically by year end.

“While we have not found any evidence of an inappropriately close relationship between FAA and Boeing to date, some FAA personnel expressed concern that FAA executives are too deferential to Boeing,” the report said.

In response to the report, the Transportation Department said the FAA’s certification of the 737 MAX was “hampered by a lack of effective communication” between the agency and U.S. planemaker.

Crucially, that included the “incomplete understanding of the scope and potential safety impacts” of the changes Boeing made to the jet’s flight control system to give it more power and authority, the agency said.

“Key FAA certification engineers and personnel responsible for approving the level of airline pilot training were unaware of the revision to (MCAS),” the report said.

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Here are the major brands that have pulled ads from Facebook

Since an advertising boycott of Facebook Inc. was organized in mid-June, a veritable Who’s Who of major brands have either added their names to the #StopHateForProfit campaign or otherwise pulled their ads.

Facebook makes almost all of its revenue via advertising. Still, analysts are expecting the company to take a less-than-5% revenue hit due the boycott. The social-media giant has more than 8 million paying advertisers, Rohit Kulkarni, executive director at MKM Partners, noted this week in a note to clients.

Civil rights groups have called on large advertisers to pause their Facebook advertising for the month of July, to protest what they say is the company’s inability to properly rein in racist and violent content and misinformation.

Facebook shares

are down 2.4% over the past month, but are up nearly 11% year to date, compared to the S&P 500’s

4% decline this year.

Of the nearly 300 companies worldwide that have joined the ad boycott, some of the most prominent include:

Adidas AG



Ben & Jerry’s Homemade Holdings Inc.

Beam Suntory Inc.


Blue Bottle Coffee Inc.

Blue Shield of California



Coca-Cola Co.


Denny’s Corp.

Diageo plc

Eddie Bauer LLC

Eileen Fisher

Ford Motor Co.

Hershey Co.

Honda Motor Co.

HP Inc.


Levi Strauss & Co.

Magnolia Pictures

Massachusetts Mutual Life Insurance Co.

Microsoft Corp.

Patagonia Inc.


Pfizer Inc.

Puma SE

The North Face

Recreational Equipment Inc.


Starbucks Corp.

Upwork Inc.



Verizon Communications Inc.

Vertex Pharmaceuticals Inc.

* Pulled ads, but have not formally joined the campaign.

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Sherwin-Williams: Resilient Business With Tailwinds Paint The Road Ahead (NYSE:SHW)

As the world continues to grapple with the coronavirus pandemic, the subsequent economic fallout, and the risk of a second wave, I wanted to look at a series of stocks that are more “recession-resistant”. I thought of Sherwin-Williams (NYSE:SHW) while speaking to some friends who recently repainted their apartments during the pandemic. I wanted to do some due diligence on the company and see if it is worth an investment.

Just a brief background on the company, Sherwin-Williams is a retail and commercial paint and industrial coatings (i.e. coatings for wood products, cars, etc.) manufacturer and distributor. The company sells its paints and other supplies via company-owned retail outlets. The company has 4,758 company-owned stores that carry the company’s products under the “Sherwin-Williams” brand. These stores service the needs of home building contractors and “do-it-yourself” remodelers.

On the other hand, industrial coatings are sold directly to global manufacturing companies. Despite dealing with large OEMs, Sherwin-Williams has disclosed that it has no concentrated customer risk (i.e. no loss of a single customer would greatly hurt profitability). In 2019, the retail segment of the company consisted of about 71% of revenues, while the Industrial Coatings segment made up the remaining 29%.

Revenue breakdown from 10-K

Company presentation

Company presentation

Despite the pandemic, Q1 2020 net sales for Sherwin-Williams increased by 2.6% compared to the same period last year. The initial impact of the coronavirus pandemic was offset by higher architectural paint sales in the Americas, which increased by 7%. However, these results do not take into account the full impact of the pandemic especially during the early stages of the lockdowns. The company guided for a decrease in revenue of 10-15% compared to Q2 2019. By most accounts, the construction industry was hard hit despite being determined to be an essential service due to the slowdown in new home sales and home remodeling activities.

While typically paints are seen as a “recession-resistant” business, the coronavirus pandemic is a special situation. Despite the improvement, the unemployment rate in the US is still at an unprecedented level at 13.3%. The number of people filing for unemployment slowed down in June but is still a staggering 1.5 million. Given the economic uncertainty, consumer confidence is at an all-time low. This would imply a lot of belt-tightening, and I would imagine that any sort of home repainting is put on hold for the time being.

Given the tough economic environment, it is imperative that the company has enough cash liquidity to survive. Apart from examining the business, as investors, we need to look at the company’s balance sheet as well. The company has a cash position of $238.5 million with a $2.5 billion credit facility. The company disclosed a total debt to adjusted EBITDA ratio of 3.1x in Q1 2020. In terms of the debt schedule, the majority of the company’s medium-term debt is coming due 2024 -2027. Looking at the numbers, I believe the company has sufficient liquidity.

Company Q1 2020 presentation

Two Major Potential Long-term Tailwinds for the Company

The first major trend is the surge of demand from millennial homebuyers. Prior to the pandemic, millennials were the largest share of the home-buying market in the last few years. Millennials have been purchasing their first home at a later age than their parents. High housing prices, debt, and lack of finances are cited as the most common reason, not a lack of desire to purchase a house. However, as this particular cohort continues to age and starts to have better control of their finances, they will eventually settle down and start purchasing homes.

This year alone, a large portion of millennials, roughly 4.8 million, will be turning 30, which is considered “peak home-buying age,” according to the report. As millennials mature and start to have families, with the oldest members of the generation reaching 39 years old in 2020, their priorities are shifting toward affordability.

Millennials to drive housing market in 2020

Remodeling is also part of the home selling process for older houses, and millennials have their own preferred style. As millennials purchase their first homes, remodeling and repainting to make the house “more their own” will be among the first things they do. The healthiness of the housing market is reflected in the data as well. Prior to the pandemic, new home sales have been rising, and existing home sales have been healthy. Housing market activity has been a good proxy for determining the overall demand for paint from the retail sector.

ChartData by YCharts

The second tailwind is the effect of historically low crude oil prices. As disclosed in the company’s 10-K, Sherwin-Williams’ paint is made using Titanium Dioxide and other petrochemicals such as propylene and ethylene. These chemicals are obtained from the refinement of crude oil and petroleum. Crude oil derivatives and crude-linked products account for around 60% of raw materials for paint. Crude oil prices have been at an all-time low and have been trending downward for the past few years due to industry dynamics; in particular, the abundance of supply from fracking. As crude oil prices decrease, so will the cost of petroleum and petrochemicals. This will then in turn lower the raw material costs of paint, improving the margins for the company.

ChartData by YCharts

I believe that Sherwin-Williams is the best way to invest in this dual trend. The Global Coatings industry is concentrated with the top 10 suppliers making up around 55% of the market, giving incumbents economies of scale. The other dominant players in this space are PPG (PPG), Akzo Nobel (OTCQX:AKZOF), Nippon (OTCPK:NPCPF), Axalta (AXTA), and Kansai (OTCPK:KSANF). PPG and Axalta are mostly focused on the industrial and OEM paint market and thus would not be able to benefit as much from growth in the paint retail market. Akzo Nobel has been suffering from declining revenues. Nippon and Kansai are primarily focused on the Asia Pacific markets which have different market dynamics. Sherwin-Williams generates a substantial portion of its revenues from the retail market and the US.

Looking forward to the next 5 years, I see the possibility of pent-up demand resulting in remodeling and housing activity due to millennials entering late into the housing market and delays due to the coronavirus lockdowns. This will coincide with the expansion of margins due to lower raw materials cost which will benefit Sherwin-Williams.

Company presentation


In terms of valuation, Sherwin-Williams has been steadily growing its revenues and earnings. The company has a 5-year CAGR of 9.6% for revenue, a 5-year CAGR of 8.1% for earnings, and a 9.9% 5-year CAGR for operating cash flows, which is impressive for a company in a growth industry. These growth rates are much higher than the overall industry CAGR of 4.9%, indicating the company’s superior offering as they are able to steal some market share.

Author Calculations using values from Seeking Alpha

The company has decent margins and return on assets and enough liquidity to make it through a possible second lockdown. These factors make me confident in the stock as a long-term hold.

In terms of valuation, the company is trading at a 2019 P/E of 33.8x and a forward P/E of 27.7x. Most analysts are estimating an EPS of between $18.8 and $21.2. The fact that analysts are still forecasting growth in earnings speaks to the resiliency of the industry (paint tends to be recession-resistant) and the long-term trends discussed above. Although I am not quite as bullish due to the macroeconomic conditions, I believe the slight premium to 2019 earnings is justified. Sherwin-Williams is a long-term buy, in my opinion.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SHW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don’t know you or your specific circumstances, therefore, your tolerance and suitability to take risks may differ. This article should be considered general information, and not relied on as a formal investment recommendation.

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