July 21, 2017
Weekly Market Comment
The S&P 500 rose 0.5% on the week, while the TSX Composite was flat.
Amazon has a rich history of disrupting industries. First, Amazon ran Border’s book stores out of business. Then they set their eyes on just about everyone else. This week, Sears announced they will be selling Alexa enabled Kenmore appliances on their site, further threatening the traditional retail brick and mortar business model. This follows news last month of the company’s acquisition of Whole Foods, propelling them into the retail grocery space.
Investor trepidation seems to follow wherever Amazon decides to go next and the Sears announcement sent shares of Home Depot, Lowes and Best Buy tumbling. Investors are concerned this deal will eat into these companies’ appliance market share, but let’s take a step back and look at the facts.
First, appliance sales at Lowes, Home Depot and Best Buy represent 11%, 8% and 6% of the firm’s sales, respectively – not immaterial, but not overly significant either. It’s been a fast growing segment for the group, however, as they’ve been stealing market share from the likes of Kenmore. Which leads to the second point; the Kenmore brand at Sears has serious problems. The market share for this brand has gone from almost one third of industry sales to 10% currently. Allowing sales through Amazon changes the method of purchase, but does not change brand quality or customer perception. Having the ability to sell a brand on Amazon does not make it a good one. Lastly, appliances in the kitchen are some of the most high profile purchases in one’s home and tend to be heavily scrutinized, as people like to see and feel these products first. That’s not to say one can’t use Home Depot as a show room, but 87% – 90% of appliance sales are still done in person.
What’s the market’s opinion? Almost $8 billion USD of market capitalization has been erased from the Home Depot stock over the past couple of days. That’s more than the total sales of appliances at Home Depot, which suggests the pullback in and of itself is a bit overdone. But Home Depot is a pricey stock as well, trading close to the high end of its valuation historically. Another explanation for the price action is that the Sears news was the spark while the valuation was the kindling. We sold out of Home Depot on valuation concerns, but do like the name and are looking to re-enter. We’re much closer now to an attractive valuation and entry point, but not there yet.
Corporate earnings season is well underway and the numbers have been encouraging so far. The blended earnings growth based on reported and expected numbers for the second quarter is 7.2%, higher than the 6.8% reported last week. Surprises to the upside from the financial sector was the primary reason for the revision higher. 72% of firms have beaten analyst estimate, which is higher than the 5 year average of 68%. This market needs corporate fundamentals to be strong and we’re definitely seeing it.
2017 is shaping up to be a great year for corporate America.
Musings Beyond The Markets
Scientists are making breakthroughs involving the human genome that is nothing short of mind-blowing.
An FDA panel unanimously recommended approval of the world’s first gene therapy treatment where a leukemia patient’s own cells are enlisted to fight the cancer, effectively turning those cells into what scientists call “a living drug”. Novartis is behind the leukemia treatment but many other treatments are being worked on by them and other companies, including aggressive brain tumor cancers where all hope of recovery is lost. Each patient has cells removed, frozen, shipped to Novartis for processing, re-frozen and then shipped back. The results have been so powerful with just one dose, resulting in long remissions and possibly cures (not enough time has yet passed to know for sure).
Emily Whitehead was six years old when she was treated but has since remained cancer-free at the age of 12. The data shown to the FDA was from a 63 patient study who received treatment over a 16 month period with a remarkable 82.5% of recipients went into remission. This just does not happen for such a killer disease. Long-term side-effects are possible but unknowable today, which may derail some of the enthusiasm. But these are patients whose only other alternative is to die with the disease at hand. It’s a worthy trade-off.
More futuristically, scientists have translated Shakespeare’s sonnets into the DNA of a living cell. A Harvard geneticist encoded his own books into bacterial DNA which they then copied 90 billion times. “A record for publication,” he joked.
Scientists have more recently stored video as DNA, reproducing Edward Muybridge’s famous motion picture of a galloping horse filmed in 1878. Scientists stored and later retrieved the data . A still of the videos is below while the videos can be seen here. Complete copies of the video grew as the bacteria multiplied.
Word of the Week
genome (n.) – a complete set of DNA; the collective genes or genetic material present in a cell or organism. Each genome contains all of the information needed to build and maintain that organism. In humans, a copy of the entire genome – over 3 billion DNA base pairs – is contained in all cells that have a nucleus. “Where do people believe that there are dangerous implications of the idea that the mind is a product of the brain, that the brain is organized in part by the genome, and that the genome was shaped by natural selection?” – Steven Pinker.