Bullseye Brief presents three thematic, actionable investment ideas every other week. My goal is to help identify only those opportunities most worthy of your time… by analyzing data, distilling complexity and sharing insights from a deep network of experts. I love what I do and invite you to join me.
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Adam Johnson

Adam Johnson anchored several business programs at Bloomberg Television over five years, interviewing CEOs, heads of state, and Nobel laureates. His daily video investment blog, Insight and Action was sponsored by a major U.S. lender. Previously he managed global risk assets for ING Furman Selz and Louis Dreyfus, trading oil futures, listed equities and equity options. Adam began his career at Merrill Lynch with a degree in economics at Princeton.


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As Good As It Gets?

Growth, Upside and Income

  • Caterpillar’s singular suggestion of peak profitability in 1Q has dominated the earnings narrative
  • Meanwhile U.S. related M&A volume is on track to set a new annual record of $3.6T
  • And the Fed, IMF and OCED have all raised their respective global growth forecasts for 2018

Caterpillar CEO James Umpleby upended Wall Street’s apple cart last month when he boldly asserted the first quarter earnings beat would likely prove the company’s high water mark for the year. The stock went from up 5% pre-open to down 8% by the close. CNBC and Bloomberg had a field day trotting out the loudest bears they could find, all parroting Mr. Umpleby’s assertion and proclaiming the bull market had officially ended… sell everything! Sorry bears, 1Q was not as good as it gets. As I have affirmed for many months and restate now, the Two Es of Earnings and Employment provide an incredibly powerful tonic for stocks. We have the most number of people making the highest income ever, and additional stimulus from tax cuts will propel GDP towards 4% by year end… earnings and stocks have a long way to go. I initiated a long on the regional bank ETF (KRE) two weeks ago, since they provide the most leveraged exposure to economic expansion via loan growth and capital acceleration. Today I propose a follow-up, another bet on the financial sector. This one offers Growth, Upside and Income. It’s also cheap.


May 19, 2018

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Which of These…

Is Not Like the Other

  • Oil hits a 4-yr high as OPEC inventories decline 20% YoY and geopolitical angst adds a $15 risk premium
  • Energy stocks are the best performing group in the S&P 500 and one of only three sectors up this year
  • Dispersion of stock performance within the sector widens to a multi-year extreme of 5,400 basis points

Pairs trading was all the range when I was cutting my teeth as a young options trader in the 90s. I recall 30-something hedge fund managers who were certain they’d found the Holy Grail… pairing a best-in-breed long against a weaker short to capture “pure alpha” while still being market neutral. Sadly there is no Holy Grail on Wall Street, and pairs trading has come and gone, but the concept of relative value is still central to successful stock picking. As an example, energy stocks lead the S&P 500 Index this year (they’re up 12%) and yet dispersion within the group is a staggering minus 20% to plus 34%. I can understand why a shale driller with exceptional acreage would outperform a boring pipeline operator, but topping this year’s leaderboard is a former major… one of the big guys. Stodgy oil companies with operations across the globe are better known for paying dividends than rocketing higher like software stocks, and that’s why I’m raising the flag on a relative value opportunity. I’m not suggesting a pairs trade here, but I am suggesting a short. Even with oil at $72, this company is WAY overvalued… and I think I’ve figured out why.


May 19, 2018

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Low Tide

One Gets Beached

  • Europe’s stringent new online privacy and data security regulations take effect starting May 25
  • Only 65% of large companies and just 25% of small companies say they’ll be compliant according to IDC
  • Mega-cap tech leaders have capitalized on unpreparedness to take cybersecurity share from smaller rivals.

Warren Buffet famously observed you see who’s swimming naked when the tide goes out, and Europe’s new privacy regulations have exposed flaws at one former cybersecurity leader in particular. The General Data Protection Regulations (GDPR) go into effect starting May 25, and they apply to any organization that holds or uses personal data on individuals within the European Union. Not only will companies have to ask users whether they can share data obtained from searches on Google and likes on Facebook for example, they will also have to ensure people’s data is encrypted and completely secure… even credit card info, social security numbers and passwords. That’s a tall order, and stiff fines mandate companies comply. Deep pocketed leaders like Microsoft and IBM have spent billions to ensure their customers are compliant, but mid-tier cybersecurity specialists are losing share. To borrow Mr. Buffett’s metaphor, some of these companies are wearing less than I thought… and one might even be bare.


May 19, 2018

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12

As in the Russell 2000 Index of Small Cap Stocks has risen to 12 new all-time highs this year, well ahead of the larger S&P 500 Index.
#RiskOn

34.4

As in business optimism rises to 34.4, the highest since 2011 and the second highest in 35 years according to the Philadelphia Federal Reserve Bank.
#BearsThinkItsToppy

52

As in 52% of businesses surveyed by real estate services firm CBRE plan to introduce unassigned seating in their offices, joining the other 25% who’ve already done so.
#Bullpen

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“They’re showing us some substance, and that’s a sign of respect. It’s a constructive approach.”
–WH Economic Advisor Larry Kudlow on recent willingness by the Chinese to narrow the trade deficit.

#Negotiations

“The consequences of investing in this aren’t very high. The consequences of NOT investing are extremely high.”
–FedEx Chief Information Officer Rob Carter, on blockchain technology.
#StreamliningLogistics

“I tried to play more with my forehand, and when I do my backhand becomes better. It’s always important to be able to change the tactics of the match.”  
–Rafael Nadal after winning his quarterfinal match at the Italian Open 

#ShakeItUp