What are the Bulls Eye Investor “Black Friday Deal” Stocks?

Taking our first look at teased "Bull's Eye" stocks from the latest Mauldin Economics newsletter

By Travis Johnson, Stock Gumshoe, December 4, 2014

I’m pretty sure I haven’t ever written about Jared Dillian and his Bull’s Eye Investor newsletter before, so when I was sifting through the pile of ads forwarded by readers last week this one caught my eye — it’s a pitch based on Black Friday, which has come and gone, but that was just a hook to get folks to read the email. So what are they really talking about?

Well, Dillian is a former Wall Streeter who got some acclaim for his daily trading letter for “professional investors”, The Daily Dirt Nap, and author of the book Street Freak: A Memoir of Money and Madness about his years trading at Lehman Brothers — and he’s now with Mauldin Economics to publish this stock-picking newsletter for individual investors. I don’t know much else about him, but the spiel says he’s a contrarian (as most of us wish ourselves to be) and that he relies on consumer and investor behavior and trends and his interpretation of behavioral economics.

Whatever that means. Basically, the pitch is like most others, “me pick good stocks.” So shall we see what those stocks are?

“Black Friday Deal #1: The Miser

“Take, for example, a company that is, without exaggeration, the epitome of the Black Friday bargain basement spirit. Not because it is a penny stock (far from it), but because its mission statement is to provide its customers with the most inexpensive product possible.

“To that end, they’ll cramp you into tiny spaces, neglect to feed you, and charge you even for carry-ons. And did I mention: they make a lot of money doing so, and their customers love it.

“I am, of course, talking about an airline – one that sells plane tickets cheaper than most other airlines in America….

“This company has no debt and is hugely profitable. The stock has been rising rapidly for over a month, gaining 46.4% between October 15 and November 10. But in the last few days, it’s been taking a breather in the $75 range, so I’d recommend getting in before it resumes its upward trajectory.”

This one is Spirit Airlines (SAVE), which was perhaps “taking a breather” a couple weeks ago in the mid-$70s, but has indeed resumed that upward trajectory (along with pretty much all the other airline stocks) as oil prices have been falling. This has been a growth stock darling for a while, and a pick of Louis Navellier a few times over the past year as well.

If you’re worried about oil falling further but think the economy is still OK otherwise, airlines are a popular pick for that idea and have been a worthwhile way to hedge against those collapsing oil stocks in your portfolio — they were particularly attractive when the Ebola panic drove the prices down for a little while, but even now they’re not all that expensive. You can almost picture all the airline executives rubbing their hands together and cackling like Scrooge McDuck about the fact that their planes are full, consolidation and a growing oligopoly means they haven’t yet gone back to the overcapacity/overbuilding that tormented them for much of the past decade, and now their biggest variable cost (fuel) is dropping like a stone.

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I don’t know Spirit that well, but it’s been the growth darling of the bunch — and it’s all about the consumer, this is not a business class airline but they slash prices and then nickel and dime their passengers for any additional service (the first airline to put a credit card reader on the bathroom door will probably be Spirit or Ireland’s Ryan Air, I’d bet). Personally, I’ve been riding this trend with some long-term LEAP options on JetBlue (JBLU), which also has some internal changes that are likely to boost earnings (including the likely unpopular decision to start charging for baggage next year and to cut their legroom like everyone else, as well as some potentially lucrative new cross-country “first class” style offerings), but the upward move is really an industry-wide phenomenon, they’ve pretty much all had a very good year and a spectacular last couple months since the “Ebola bottom.”

What else?

His second “Black Friday Deal” is a Japan ETF … here are the clues:

“Black Friday Deal #2: The Splurge Play….

“Just as the Federal Reserve in the US announced the final tapering of QE3, the Japanese government is going full throttle.

“Starting next year, the Bank of Japan (BOJ) will begin increasing its balance sheet by 15% of GDP annually. That includes $714 billion of bond purchases per year – that’s 60% more than the current stimulus. The BOJ is also committed to tripling its purchases of stocks and real estate….

“Because of this massive stimulus program – one of the largest ever attempted in the history of central banks – it is all but certain that Japanese stocks will continue to rise, even if the Japanese economy stubbornly stagnates…..

“This ETF, which is also in the Bull’s Eye Investor portfolio, is a direct play on Japanese equities. It has recently steeply risen from a temporary dip on October 16, but with the massive quantitative easing to come, we don’t see an end to that rise anytime soon. It’s still a good time to buy.”

Well, this trade has gotten so popular that there are now a whole slew of sector ETFs to play the idea, but it seems likely that he’s pitching one of the Japanese hedged equity ETFs, not just the Japan market index ETFs. The basic theory (and it’s been working out well for a couple years now) is that the aggressive effort to lower the value of the Yen on world markets by money printing and quantitative easing (what they call “Abenomics” these days) will be a boon for Japan’s export-led economy (the big brands you know and love, like Toyota and Sony and Mitsubishi and the slew of chipmakers still in Japan).

That will make the Nikkei index rise… but for foreign investors the impact would be muted, because the Nikkei is priced in the faling Yen and when you translate it back to US$ the results would look much worse. So WisdomTree started the parade of creating ETFs that give exposure to the Japanese stock market but also hedge out the currency impact — which now essentially means that they go short the yen and long the Japanese market.

The huge positive move for this strategy came in the first half of 2013, when the big ETF tracking this idea went up by more than 50% — and I presume that’s the stock Dilliard is pitching here. So we’re probably being told that WisdomTree Japan Hedged Equity (DXJ) is a “Black Friday” deal… and yes, it did dip on October 16, and it is up sharply since then. There are a whole slew of hedged equity ETFs from WisdomTree now, and many of them are sector funds for Japan — you can see the whole list here if you’re curious about a currency hedged position specifically in Japanese financials or tech stocks, for example. The other broad one that is big enough to consider is db X-trackers MSCI Japan Hedged Eq ETF (DBJP), but that pretty much moves identically to DXJ and is younger and smaller and has the same expense ratio so I wouldn’t scratch your head too long trying to decide which one you prefer.

And yes, if Japanese stocks go down this will stink. A currency hedge can only take you so far.

Next one?

“Black Friday Deal #3: The Final Frontier…

“While the golden era of the emerging markets is on the decline right now, another sector is on the up and up: frontier markets, in particular on the African continent….

“Jared suggests investing via an ETF here, because while individual frontier markets can be extremely risky, “when you’re talking about frontier as an asset class, it actually shows better risk characteristics … than emerging markets!”

“The ETF he recommended in the October issue of Bull’s Eye Investor is highly liquid, a very important factor. It’s had a great run up since the beginning of February, gaining as much as 19.7%, but is currently much more affordable, in the $35 range.”

Africa has been famously underserved by ETFs, partly because the wildly disparate South African, Nigerian and Egyptian stock markets have accounted for almost all the market capitalization and those aren’t the most appealing economies on the continent… though there are several other ETFs in the registration stages that might make it to the markets eventually that look like they could be appealing. But in this case he must be hinting at the broad frontier markets ETF, the iShares Frontier 100 (FM). That ETF did indeed top out at a 19.7% gain in the Summer if your start point is the beginning of February, and right now it’s up about 4% on the year.

It’s not much of an Africa play — though about 25% of the ETF is in African stocks, mostly banks, telecom and breweries in Kenya and Nigeria. The ETF has a much higher weighting in the middle east, with substantial exposure to Oman and Kuwait… but you can also throw in Argentina, Pakistan and Vietnam and there’s a little taste of most every Frontier market that might tickle your fancy. The basic strategy is to buy the biggest and most powerful companies in the frontier economies, which isn’t a bad idea, but all of these economies do experience wild sentiment swings and they tend to be very cyclical. I don’t know whether the fact that the ETF is down 10-12% over the last 3-6 months means it’s a “black friday deal” or not, but it seems that is what Dillian is pitching.

So… whaddya think? Any of these “deals” appeal to you for your end-of-year shopping? Let us know with a comment below.


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AllanTrends
Irregular
December 4, 2014 1:31 pm

I recommended HA to my subscribers yesterday and suggest HA as well as, DAL and/or JBLU (in addition to SAVE) as beneficiaries of the crash in oil prices. Why HA? It’s sexier. Why DAL? Most of their fleet have TV’s in the headrests. Why SAVE? Appeals to the no frills, pay as little as possible, (although in return get as little as possible, just the flight, a seat and limited use of the restrooms). Why all of the above? They are all in uptrends and that is all that really matters.

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eugene11803
Member
eugene11803
December 6, 2014 6:31 pm
Reply to  AllanTrends

With that, add LUV – Southwest Airlines. Individuals just want to get from one place to another as cheaply as possible. Greyhound with wings. Beautiful chart. As oil stays low, probably for the next few months, profits will be high. You can make a quick buck on these.

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vivian lewis
December 4, 2014 1:31 pm

I hate to beat the drum for our picks but we own a double negative play on yen depreciation, now half sold after we doubled our money. This is an ETF and covers a portfolio of Japanese shares picked by our reporter in Osaka, Chris Loew. Much better than a fund. And while we had to go to London to find a real play on Africa north of the Zambezi (excluding South Africa) it is denominated in US$s and trades at the usual closed-end fund discount. And last but not least we found an airline which treats is passengers right but which will gain from the lower price of aviation fuel (which is made from crude oil now half priced at $77 per barrel).

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skipper1952
Member
skipper1952
December 4, 2014 5:42 pm
Reply to  vivian lewis

Thanks for the post, Vivian. Can you name the specific names of the investments you referred to in your above post?

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Solyom
Member
Solyom
December 4, 2014 5:41 pm

Spirit Airlines supports a wonderful museum near Portland OR. Almost worth a trip by itself.

billtench
Member
December 5, 2014 2:55 pm
Reply to  Solyom

The museum of which you speak sounds like the Evergreen aviation museum in Mickeyville (McMinnville, OR, 30 or miles south of Portland). Houses Hughes’ Spruce Goose and sports a real B747 mounted on its roof. Evergreen aviation just declared bankruptcy and insolvency last November. Don’t know if the museum is still open.

Solyom — is this the museum Spirit supports?

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Tim Carp
Member
Tim Carp
December 5, 2014 8:42 am

Any of y’all ever flown Spirit? I have gotten tricked into flying them from Orlando to Ft. Lauderdale as my booking said it was a UAL flight. Ha, it was a Spirit prop vehicle. I was not impressed and will not intentionally give that fly by night airline my company’s hard earned money in the future. I fly a lot of miles on Delta since I am located in Atlanta, but I can’t give them an investment endorsement. This is the same company that filed chapter 11 in 2005 and while they may benefit short term because of low fuel prices, they show no real ability to generate earnings on their own. Also, besides Southwest Airlines, do any of these companies actually understand customer service? If these companies operated in any other sector, they would go out of business with the way they treat their customers.

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Carbon Bigfoot
Guest
Carbon Bigfoot
December 7, 2014 2:50 pm

African Play is NAMPAK Packaging ADR NPKLY trading @ $3.72/share own 500 shares for over a year modest gain and pays a dividend. Originally recommended by Sovereign Society as a way of investing into entrepreneurial crafts market , shipping to Europe and the US, without investing in the group.

SoGiAm
Irregular
December 9, 2014 6:40 pm
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