Christmas Newsletter — Investment portfolio
In this newsletter as promised we’d like to present you our investment ideas for the first quarter of 2020. Keep in mind that those are our ideas and our investments, which we are sharing with you. This is not advice to trade or invest your money. Everything you do is at your own discretion and risk.
So lets’ dive in in to the investment plans we have and what stands behind them.
USD/CAD
The first investment and trading plan worth looking at in the beginning of this year is based on the currency pair USD/CAD, which is currently standing at the 1.2970 price level.
Our expectations are for the pair to reach the 1.2000 mark in a time period of 1 to 3 months.
Side: Sell
Fundamental analysis of the pair — Major points:
1. The US-China Trade War and the Middle East Tensions:
The Trump administration have been pushing the US economy as hard as possible in the passed 2019 , but was also creating tough obstacles for future growth. The ongoing trade war with China was one of the factors that was slowing down the economy and although some preliminary trade deal was reached I think that we’ll see the effects of that Trade War throughout 2020. Most economic events such as that have a strong lagging effect on the economic state, which might be seen even after the event has finished. I expect the trade war to cause turbulence on the stock market and have a stronger impact on all other markets. The hits will most likely be felt by the US dollar and investors and companies might squeeze their overseas spending and export in order to protect themselves from future exposure to such economic events. Not only that but to make things even harder for investors Trump administration ordered a drone strike and eliminated one of the most notorious Iranian generals — Qasem Soleimani. This drone strike was not authorized or at least consulted with the House of Representatives, which causes tensions not only in the Middle East, but also on home soil. Iran and Iraq are gearing up for counter measures against the US, which could escalate the situation further. Iranian government already announced that they will not aside with any of the restrictions imposed by the Nuclear Deal signed in 2015. At the same time Trump is warning the Middle East country that sanctions will be imposed and force will be used if any actions are taken by the Iranian government to compensate for the loss of their general. I expect the situation to continue escalating in January and probably in the next few months either, which could scare investors and push them aside from the stock market and the US Dollar, which would have a negative effect on the price of the dollar.
2. Impeachment, upcoming presidential elections and the Federal Reserve
The House of Representatives managed to impeach president Trump and now he is facing a possible removal from office. However this is highly unlikely due to the fact that the Senate is mainly composed of Republicans which will probably back up the president in this fight and the removal won’t pass. Still this creates tensions on home soil combined with all the other factors that Trump is being responsible for outlined above. Not only that, but we’ve entered the year of presidential elections, so the race for the White House spot will be one of the major topics this year with upcoming campaigns and debates. This could lead to uncertainty and turbulence in the US economy which inevitably will affect the US Dollar. Investors will be cautious and there are a lot of fronts to be wary about. At the same time the Federal Reserve did what they could in keeping the inflation rate flat and protecting the US economy by lowering interest rates. However by doing so, they’ve played some of their cards in their hand to battle arising issues, which would only make their job harder if the tensions in and out of the country continue rising.
3. Bank of Canada and the new Liberal Government
The BoC unlike the FED have kept their interest rates throughout 2019 and are planning to do so in 2020, which is a good indication of a progressing and stable economy. At the same time the newly elected liberal government are planning to cut taxes especially for the middle class, which would lead to more money in the pockets of people, which could stimulate consumer spending and could battle the unemployment rate. Those are factors that I expect to influence the price of the Canadian dollar and give it a significant boost throughout 2020. At the same time the trade war did not affect Canadian companies that much and the economy of Canada and the conflict in the Middle East could actually boost it further.
4. The Canadian dollar and the Gold
As most of you probably know the Canadian dollar is strongly connected with Gold, as Canada is one of the biggest producers of Gold. The rising prices of the precious metal could lead to a rising price of the CAD. With the current uncertainty in investors due to the tensions in the Middle East, the Trade War and of course the upcoming US Presidential Elections, will push investors to search for safe heaven investments, which will have a strong impact on the price of Crude Oil and Gold. I expect to see the Gold price rising throughout most of 2020, which as previously stated will affect the price of the Canadian dollar.
Technical Analysis of the pair:
I’ve decided to focus mainly on the Weekly time frame of the pair as we are planning an investment approach here, not speculative trading. Below is the weekly graph of the USD/CAD currency pair and a breakdown of what I expect to happen in the next couple of months.
After a strong rise in the price of USD against the CAD in 2017 and 2018, we’ve witnessed a pretty much flat movement throughout 2019. However if we look closely we can see that this sort of a flat movement was actually creating lower highs, which is an indication of a deepening downtrend. Just last week the price broke through the bottom of a consolidation zone, which has been active since July 2019. I expect to see a further continuation of the newly started downtrend throughout the first quarter of 2020. We have to keep in mind that the price has just entered a Weekly Support Area, which bottom stands at 1.2700 mark. I believe that we’ll see some pressure from the bulls in keeping the area unbroken, but in the end the price will probably manage to push through it and continue further down to the next Weekly Support Area and finish the downtrend around the 1.2000 mark or a bit lower. We can exploit a downwards movement up to 1.2700 at which point we have to be cautious and see if the pair will manage to break through the bottom of the support area and continue further down. I’d advice you to split your investment in to a few smaller ones and have a pause at the end of the weekly support area until a verification that the price will continue going down. You can use the Daily time frame or even the H4 one in order to position yourself better and gradually lower your investments through the course of the overall downtrend.
Applied Materials Inc.
(AMAT)
The second investment, which I believe has a lot of value is Applied Materials Inc. (Ticker: AMAT). This is one of the biggest companies specialized in semiconductors and chip making, amongst other things. Lets’ get through the fundaments behind my decision to chose that company for an investment.
Side: Buy
Fundamental analysis of the stock:
1. Semiconductors, displays and IT
The first and for me most important factor in the decision to invest in AMAT is the semiconductor market. The market took strong hits throughout 2018 and 2019, with dropping margins for all semiconductor manufacturers, but the situation started to stabilize at the end of 2019 and is expect to reverse in a positive direction throughout 2020. Moreover than that I expect to see a huge expansion in display technologies and virtual reality technology and Applied Materials are strongly involved in those areas. With the deployment of 5G technology it is expected that the semiconductor market will make a tremendous turn and will wipe out the 12.8% loss for 2019 and also gaining a bit in 2020. We do have to mention here that another field which is gaining more and more popularity and is expanding is in the scope of Applied Materials. Yes I am talking about AI (Artificial Intelligence) technology. The company already opened for collaboration its META center in November last year, which will be focused on implementing AI technologies and reimbursing the chip making procedures. So as you can see there is a lot more road ahead of IT and Computing, and Applied Materials is doing its’ best to participate in the technological expansion.
2. Stock price, revenue and earnings
Looking at the revenue of the company and the expected earnings grow it seems that the expectations ahead for the company are to outpace the overall US market. With an expected 9.1% revenue growth and 15.7% earnings growth in 2020 the company is not only leading the US market, but also the industry. The company also has a huge return on assets and return on capital employed against the overall industry. The assets of the company are outpacing the liabilities which gives us great stability for the stock price. Their debt is well covered by the operating cash flow and their debt is not taking that much of their overall equity, which gives the company the opportunity to reinvest some of the cash flow in to future developments. Looking at their current stock price we can see that it is being traded below the fair value which is composed of the expected future revenue of the company, by whooping 20%. The fair value of the stock based on future revenue is around 82–83$ and the current price of the stock is around 61$. This is a good indication that there is still a lot of value in investing in this stock. Looking at last years’ earnings for the company we can see that they beat the expected earnings for all four quarters, which is another good indication that the company is a bit undervalued, which could lead to a rise in the price of their stock in order to rebalance this difference. Next earnings are expected on Feb 12, and analysts expect a 0.12 cents per share rise in the earnings against the previous earnings. According to 19 analysts the average price for the stock is around 67 to 68$ per stock, which is a bit over 10% rise from the current price level.
Technical analysis of the stock
Looking at the chart of the stock we can see that currently the price is standing at the all time high and is struggling to break through. We can also notice that the stock has been moving inside an uptrend channel and I expect it to continue doing so. At this point it would be risky to jump in right away in to this investment, as we might see a short correction down to the bottom line of the uptrend channel or according to my calculations around the 57$ price level. In this case I’d wait for one of two scenarios before investing in the stock:
- A correction down to the 57$ price level and entry there, as I expect a bounce from the bottom line of the uptrend channel and the formation of a new all time high
- A confirmation break of the previous all time high area where we are at now. If this happens I’ll pull the trigger on a position around the 63$ mark.
Based on the technical analysis we can not predict where the uptrend might stop, but the average target of 67$ would be a good start. Of course there is a possibility that the price will hit the 70$ level or even further, but after the 67$ mark I’ll be more cautious on how the price behaves and will start dumping parts of my investment with the expectation of a possible retracement. Of course you can close partially your overall exposure and gradually if the price continue moving up or you can wait until you have a signal that the uptrend is slowing down and a downtrend might occur. Overall I expect a strong upswing in the price of this stock and would keep my investment for the next 2 to 3 months, after which I’ll reevaluate.
Natural Gas
There is a lot of attention dragged into the energy sector since the beginning of 2020. The tension between Iran and US will certainly has its effect so that’s why I decided to focus on a security which will move with less unexpected stress movements.
That’s why I decided to post a long-term investment trading plan based on the Natural Gas. I am expecting the price to reach the first target by the end of February and the main target which is very long term in my opinion could be reached in few more additional months.
Side: Long (Buy)
Fundamental analysis on Natural gas:
1. Natural Gas innovations and technologies.
Since more gas use is essential to mitigating climate change and local pollution, this “lower costs locking-in more infrastructure and future demand” reality predictably gets ignored by too many. Reminder, the Yellow Vest riots in Paris show how not even rich Westerners will accept the higher energy costs that some of our politicians want to saddle us with to reduce emissions.
2. Global gas demand is rising.
The demand is with 35% higher over the past decade alone, the conveyor belt of investment in infrastructure continues to grow. However, the positive growth trends for gas supply and demand are clear, but not without issues. One problem is that new production continues to be driven by the U.S. and Russia, with new consumption led by the U.S. and China. Other nations are helping to expand the market, but more focus is needed.
3. The globalization of the Natural Gas trading.
Globalizing the gas market to be more like petroleum, the LNG trade is the essential diversifying force for buyers. LNG is rapidly adding a security of supply that is encouraging more importers, now around 45 nations.
Technical analysis on Natural Gas:
As you can see from the chart below, I made the trade plan on daily time frame, but I put two eventual targets. First target is more short term and the main target is long term.
The first thing that you probably notice is that the natural gas price is on a very low level for the past year and it was trading in a range. Now the price is again on the bottom of this range and I will start explaining my trading plan by showing you another chart which is zoomed at the price formation and development for the first target.
Here the idea is to open the long trade in the action zone because in the whole blue area the price was finding support before and it is very possible to bounce up again and to start the upward movement. For the more defensive traders I marked buy zone with the green rectangle. The idea of the defensive play is to wait for the price to enter in the buy zone then to fell back down to test the support around 2.200 and then to buy and open position when the price to bounce up from that support.
After that the plan is very straight forward. When the upward movement starts, I will hold the trade and be careful with the first resistance level around 2.450. On the way up it is possible for the price to have some corrections, but I am expecting slow but steady uptrend. If the price breaks successfully the resistance level around 2.450 I am expecting second impulse on the long side and the price to reach the first target around 2.650.
At that level I will close 50% from the initial trade exposure and I will move the stop loss at break-even. In this way I am protected from eventual drop down and realizing loss which can eat my already closed profit.
After that the further development of the plan will be as follows:
Below I will reshare the graph with the whole plan on which I will comment the further development of the trade with the rest 50% floating exposure.
As you can see on the graph the main target is very big, so I am expecting developing for more than three months. However, if we are in a broker with small fees, we can afford to hold it because the potential is very good, and the profit will be more than satisfying. Probably the price will struggle to break the first target area which will act as a resistance, but I am expecting another impulse which will push the price further up. On the way up depending from the chart formations and the upcoming news I might implement different risk management but for now the idea is to hold the rest 50% floating exposure with stop loss at break-even and to wait for the price to reach the main target around 4.60. I am expecting several corrections on the way up, but my main expectations are for continues uptrend. If the price reach around 4.60 or started to consolidate just below this level I will close the whole position and enjoy the profit.
Walt Disney Company
(DIS)
The second investment plan which I will share with you is going to be based on the famous stock Walt Disney (DIS). With the last changes and the implementation of Disney + there is a huge potential and if we take the price of their rival Netflix there is still a lot room for the Disney stock price to catch up.
The Walt Disney Studio and Walt Disney Productions before officially changing its name to The Walt Disney Company in 1986. The company established itself as a leader in the American animation industry before diversifying into live-action film production, television, and theme parks.
Side: Long (Buy)
Fundamental analysis:
The stock has spiked about 11% since the official unveiling of Disney+ in April 2019. But the stock still looks like a buy, trading at a forward price-to-earnings ratio of 22 times next year’s earnings estimates.
Disney has significant growth opportunities in digital streaming, where it could juice margins by raising prices. A subscription to Disney+ is relatively low at $6.99, but as more exclusive content is added to the service, look for Disney to flex its pricing power over time. If Netflix can get away with it, Disney certainly can.
Pricing power combined with Disney’s franchises is a potent combination. With that said, Disney could be the right stock for those looking for growth without paying high valuations for other tech stocks.
Disney’s margins will be pressured in the short term as management invests heavily in content for Disney+, but Morgan Stanley expects the growth in digital streaming to nearly double Disney’s earnings over the next five years. The appeal of the Star Wars and Marvel content, not to mention the entire Disney film catalog available exclusively on the service, should attract millions of subscribers.
Technical analysis and plan
Walt Disney chart daily time frame:
The initial trading plan is to buy the stock in the action zone. My expectations are if the price begins to rise the next stop will be the level around $152.00 which I marked as first resistance. After that I am expecting the price to test this level from both sides once when it is breaking it as a resistance and then to retrace back and to test is as a support. After that I am very bullish on the stock my target will be floating and very dependable from the next quarterly results.The ultimate idea will be for the DIS stock price to chase NETFLIX, but this is too long term because NFLX is on $330.00. Even though if someone wants can take long term position in order to wait for these expectations to confirm and then the trade to develop.
Of course, there is more defensive alternative of the initial trading plan. If there is a slight market drop in the upcoming weeks, we might observe drop of the Walt Disney stock price so the levels around $130.00. Here we have two opportunities. If we are already in a position from $146.00 you can add to your position here. By adding I mean to double the size of your initial exposure or of course if someone wants, they can add even more. The idea hare is to catch the next uptrend movement no matter if it is going to start from the action zone or the price will first drop to the defensive play area and then it will bounce up. In both cases as soon as the price is above the first resistance area and the new uptrend is confirmed I will move the stop of my position on break-even and wait for further development without any additional risk. If I see formation on the chart which suggest that the uptrend is exhausted, I will collect my profit there otherwise I will try to hold it as much as I can for maximizing my profit.
This is all from us boys and girls! For final words we’d like to wish you a great year ahead filled with love, happy moments and of course great trades! 😊
