IT’S A DIFFERENT BATTLE TODAY

Seventy-four years ago today, Japan attacked Pearl Harbor in a surprise event that thrust the U.S. into WWII. It is amazing to think that the youngest survivor of that event is 92 years old.  Our hats are off to those that gave their lives and those that survived and were a part of what is considered “the greatest generation.”

Unlike the battles of those times and wars years later, we are now engaged in the other side of the war on terror.  Much as many wish to ignore the unmistakable signs, such as President Obama, it cannot be denied an longer. After all, when Obama has only his third evening press conference from the Oval Office to state that we have entered a new phase here, it is for real.

When the events of last week in California and in England over the weekend referred to as terror events, we must concede that something has to give or change.

No longer are attacks prepared by major armed forces, or even smallish cells/groups alone. They can be small groups or lone wolves that attack at will in an uncoordinated fashion here in the U.S. and with much planning abroad.

These events have prompted more discussion regarding greater gun control and the lessening of current guidelines.  The government and our citizenry are locked in a conflict over what steps to take. There is a reason gun sales are surging and the more gun control advocates make noise or these horrific events occur, the more gun sales will climb. Thus, it is a no-brainer town these stocks, regardless of their YTD performance, will move higher.

The Stock Market Today

Although it tried to break through the 1200 mark earlier this month, until Friday, the Russell 2000 Index had not broken above the 1200 level since August 19th, the day before all hell broke loose. All of the preaching that small stocks are coming back has come to fruition and the time is right to feel comfortable enough to have meaningful exposure in this category. After all, not only is the index a hair from its 2014 close, but just shy of its 200 DMA, an important technical measure.   Our Thanksgiving report of last week is a good source of ideas.

Investors will be hearing a lot about how poor physical store Black Friday sales were (on a relative basis) and online was pretty good. Of course, that could be largely determined by Cyber Monday where a lot of the big box and retail stores are ready to sell us their wares at huge discounts. I would recommend paying close attention to the fact that consumers were buying fewer items or were targeted in their purchases in the real world and more broad in their buying habits online.  Data on this front could tell the true tale of the start of holiday shopping.

We believe that crowds were generally smaller and apparel inventory high causing the Macys (NYSE—M) of the world to offer big-ass discounts.  Therefore, be wary of the stocks you buy in this space until more clarity occurs mid-week.

Opportunity Knocking?

If you are older than 40, the brand name Avon may make you wax nostalgic as you remember your mother or grandmother buy Avon Products (NYSE—AVP—$4.22), or even picture the Avon lady that sold them door-to-door years ago.  For the uninitiated, Avon bills itself as is the company that for more than 125 years has stood for beauty, innovation, and optimism for women.  With a projected $7 billion in annual revenue in 2015, Avon has products that are sold through 6 million active, independent Avon Sales Representatives worldwide. Avon products include color cosmetics, skincare, fragrance, and fashion and home, featuring well-recognized brand names.  

The stock is down a whopping 53% year-to-date as revenue and EPS have been crushed this year. Sales are forecasted to drop by 19% with EPS generation of a paltry $0.14 as compared with $0.75 in 2014.  The good news is that management appears to have stemmed the bleeding as of 3Q15 and Wall Street has revised its EPS expectations to $0.33 for 2016, more than double the forecast for 2015. Management is hosting an investor day on January 21, 2016 which is likely to spark renewed confidence and interest in the stock and likely coincide with a reduction in its annual dividend, which has long been expected and would be lauded by Wall Street. 

Plus, just last week, AVP announced it is selling its North American business to a private equity firm. While some believe it can unlock value, other, vocal, activist investors are slamming it, citing the price as too low. Since then, the stock has risen on strong volume and could result in a higher price not just for the unit but for the company as a whole. I think the stock could trade well above the $5 level by early next year, which represents 15x—18x the 2016 EPS estimate, and a 40%+ return.

Say What?

Great info, insights, and hard-hitting stories make up this week’s Say What? feature...

International Business Times

http://www.ibtimes.com/global-recession-coming-bond-market-decline-has-investors-spooked-2213352

Might be a bit alarmist but very useful perspective.

Bloomberg

http://www.bloomberg.com/news/articles/2015-12-04/opec-unity-shattered-as-saudi-led-policy-leads-to-no-limits-ihs9xu51

Looks more pain for oil producing countries and companies.

The New York Post

http://nypost.com/2015/12/06/white-house-chef-dishes-big-secrets-and-a-crazy-surprise/

Funny stuff even if it isn’t true.

USA Today

http://www.usatoday.com/story/news/politics/2015/12/06/obama-seeks-reassure-americans-amid-renewed-terror-fears/76897864/

The “T” word.

Marketwatch

http://www.marketwatch.com/story/holy-grail-of-shipwrecks-has-been-found-off-colombias-coast-2015-12-05

Beware the run on shipwreck stocks.

Just the Stats!

AAII Sentiment Survey (figures rounded)

  Current Last Week Long Term Avg
Bulluis 30% 32% 39%
Neutral 49% 42% 31%
Bearish 21% 26% 30%

Huh? In the AAII survey half of the respondents are Neutral while nearly half of the Ticker Sense bloggers are bullish. What gives? Considering we are entering an historically strong period, we agree with the latter rather than the former. Moreover, time will likely bear this out as well.