Centene Gets S&P Rating Upgrade to BB+ from BB

May 18, 2017: S&P raises Centene’s rating one notch to BB+ from BB with an outlook rating of stable. “The rating upgrade on Centene reflects the company’s continued successful execution of its growth and profitability initiatives since we assigned a positive outlook two years ago (in May 2015)”, said Julie Herman, S&P Global credit rating analyst. Herman continued, “As a result, we believe Centene has increasingly differentiated itself favorably from its closest peers Wellcare and Molina, both of which we rate BB/Stable.”

The stable outlook on Centene reflects our expectation that the company will maintain its strong competitive position in the managed Medicaid market while continuing to diversify its profile, particularly in Medicare and specialty services. Consistent with our base-case economic forecast, we expect the company to show revenue growth of 5%-15% over the next two years, with an EBIT ROR of about 2.5%-3.5%. We expect financial leverage to remain elevated but to continue to drop year over year, reaching below 40% over the next two years. We expect consolidated GAAP capitalization to improve year over year through earnings growth, but remain modestly deficient at ‘BBB’ over the next two years. However, we expect consolidated risk-based capital levels to remain around 350%.

April 25, 2017: Centene reports Q1 EPS of $1.12 adj versus the $1.06 estimate. Revenue also beat coming in at $11.7 billion versus the $11.4 billion estimate. Quarter-end at-risk managed care membership came in at 12.1 million or +5% YoY.

February 7, 2017: Centene reports Q4 EPS of $1.19 versus the $1.12 estimate. Revenue also beat coming in at $11.9 billion versus the $10.9 billion estimate. Quarter-end at-risk managed care membership came in at 11.44 million versus 5.1 million last year representing an increase of 223% YoY, nice!

January 5, 2017: Centene Corporation announced today that its Pennsylvania subsidiary, Pennsylvania Health & Wellness, has been selected by the Pennsylvania Department of Human Services to serve Medicaid recipients enrolled in the HealthChoices program in three zones. Pending regulatory approval and successful completion of readiness review, the three-year agreement is expected to commence June 1, 2017. In April, Centene was originally selected to provide services in three zones for HealthChoices. Today’s award is in response to a re-issue of the HealthChoices award.

The Department completed an evaluation and scoring of the proposal and has selected Centene’s proposal for the Southeast Zone, the Southwest Zone, and the Lehigh Capital Zone of Pennsylvania. The HealthChoices program covers low-income children and families, individuals with disabilities, as well as those newly eligible under the Affordable Care Act expansion throughout the state of Pennsylvania.

In addition to the Health Choices Medicaid award, Centene was previously selected under a separate contract by the departments of Human Services and Aging to serve enrollees in the Community HealthChoices program statewide, pending regulatory approval and successful completion of readiness review. Under this agreement, Pennsylvania Health & Wellness will coordinate physical health and long-term services and supports (LTSS), if needed, to enhance the quality of medical care and access to all appropriate services to more than 420,000 individuals who are dually eligible for Medicare and Medicaid, older Pennsylvanians and individuals with disabilities.

January 3, 2017: Piper Jaffray/Simmons initiates coverage of Centene Corporation with an Overweight rating, and sets a price target of $67.

December 20, 2016: JPMorgan Chase and Co initiates coverage of Centene Corporation with an Overweight rating, and sets a price target of $75. JPMorgan also added Centene to its Analyst Focus List saying that while Republican “repeal/replace” efforts present some risk to both the Medicaid RPF pipeline and current Obamacare-population earnings, they believe the current valuation is more than discounting that risk.

Centene Corporation, a Fortune 500 company, is a diversified, multi-national healthcare enterprise that provides a portfolio of services to government-sponsored healthcare programs, focusing on under-insured and uninsured individuals.

Many receive benefits provided under Medicaid, including the State Children’s Health Insurance Program (CHIP), as well as Aged, Blind or Disabled (ABD), Foster Care and Long Term Care (LTC), in addition to other state-sponsored/hybrid programs and Medicare (Special Needs Plans). The Company operates local health plans and offers a range of health insurance solutions. It also contracts with other healthcare and commercial organizations to provide specialty services including behavioral health management, care management software, correctional healthcare services, dental benefits management, in-home health services, life and health management, managed vision, pharmacy benefits management, specialty pharmacy and telehealth services.

3D Printing Stocks For Playing Trump Trade War With China

A trade war between the US and China is likely going to start next year with a key promise of Trump to declare China a “currency manipulator” on day one of his Presidency and to enact a 45% tariff on certain Chinese produced products sold in US markets.

China has threatened to retaliate by dumping Boeing and instead ordering from Airbus. China has said it will block sales of US automobiles and iPhones in China and that US soybeans and maize imports will be halted.

To better understand why I think 3D printing stocks are a good play on a trade war with China, we have to go back in history and use macroeconomic analysis to see how we got to where we are today.

China Joins the WTO

In 2001 China joined the World Trade Organization and began flooding America with illegally subsidized exports. Over the next ten years, the US would shut down over 60,000 factories, lose more than 5 million manufacturing jobs and see it’s historical annual rate of GDP growth cut by two-thirds.

Trade Deficits and Offshoring Subtract From GDP Growth

As a result of China joining the WTO, structural problems hit the US, Europe, and other major economies like Japan and South Korea.

If a country like the US runs a trade deficit, this directly subtract’s from its GDP growth. From that observation, you can see what the two most important structure drags on growth for many developed nations like the US have been.

The first has been the drag of the large trade deficits. The second has been the drag on lower domestic investment growth, as multinational corporations like Caterpillar, General Electric, and General Motors, have built more plants in other countries and fewer plants in the US.

Where have most of the offshoring of productions gone? The answer is China.

It’s no accident that the start of America’s era of slow growth in 2001 coincided with China joining the World Trade Organization or WTO, which gave China full access to American markets.

Contrary to the rules of the WTO, China began to flood the US with cheap, often illegally subsidized exports, and over the next decade and a half; the US would see the loss of over 60,000 factories and more than 5,000,000 manufacturing jobs.

The Emergence of Structural Trade Imbalances

During this time the economies of Europe, India, Brazil, among others, would likewise begin to have significant growth-sapping trade deficits with China and this would reduce global growth below what it would otherwise be.

The result would be the structural emergence of a growth-sapping global trade imbalance, as illustrated in the following set of figures.

Here, we see chronic annual trade deficits on the order of 200 to 400 billion dollars annually, with the heavily exported China.

By the year 2012, these deficits would help slow growth dramatically in both Europe and the US, and as a result, China’s two biggest customers would thereby be too weak to sustain China’s export-dependent growth.

In a ripple effect, slow growth in China, in turn, would lead to slower growth in so-called commodity countries like Australia, Brazil, and Canada, whose economies depend heavily on the sale of natural resources like coal, iron ore, and soybeans to China. More broadly, these structural trade relationships would lead to a new type of butterfly effect the world had not yet seen.

Here, we see that weak demand for Chinese exports from Europe and the US leads to weak import demand from China for commodities and other natural resources. In this way, chronic trade imbalances between China and other countries around the world would make it very difficult for a robust, global economic recovery.

Why Keynesian Stimulus Failed

From this butterfly effect, you can see why expansionary, Keynesian fiscal and monetary stimulus in the US and Europe, did not have the full effects anticipated. Indeed, this short-run Keynesian approach did nothing to address the underlying, chronic, long-term structural trade imbalances, acting as a drag on both the U.S. and European economies and by extension, much of the rest of the world.

3D Printing and China Manufacturing

China is rapidly losing ground to 3D printing technology. The business model of it being cheaper to manufacture goods in China could come to an end over the next ten years.

US companies will soon be able to make most things in small 3D printer factories right in your neighborhood or town. Factories, as we know them today, will get broken up and made smaller and local. Newsweek writes

In the distributed manufacturing scenario, the carbon footprint, so to speak, of each shoe drops precipitously. Asian manufacturing is toast, probably upsetting the global balance of power. And factory jobs—well, they’re likely never coming “back.” 3-D printing automates a lot of what factory workers would’ve done. The hope is that distributed manufacturing creates a whole new set of opportunities for middle-class workers and keeps money local instead of funneling it overseas.

Coming Trade War With China

A Trump Administration will be placing tariffs on Chinese-produced goods effectively penalizing US corporations that manufacture products in China. China will retaliate by blocking the sale of US goods inside of China.

This trade war with China will only speed up the adoption of cheaper and faster 3D printing facilities inside the US IMO.

Many US businesses could increase their purchases of 3D printing machines as a result of the worsening trade relationship with China as well as the public outcry over the loss of millions of US jobs to China.

The earnings recession which began in Q1 2015 prevented businesses from buying 3D printers as consumer demand was uncertain. This last quarter we saw an end to the earnings recession, and if corporate earnings continue to rise, we could see more companies buying 3D printers.

Big Players and Big Money Flowing Into 3D Printing Technology

In September of 2016, General Electric acquired Arcam for $1.4 billion as it makes a major move into 3D printing.

In May of 2016, the 2D printing giant HP revealed that it has been spending billions of dollars developing 3D printing technology and announced the release of its Jet Fusion 3D 3200 and 4200 printers. The more powerful 4200 was slated to begin shipping in the fall of 2016, while the 3200 will be available in 2017. HP claims these polymer 3D printers are up to 10 times as fast and twice as cost-efficient as current 3D printers powered by the leading technologies. HP sees the incredible future for 3D printing and aims to become the leading 3D printing company.

3D Printing Stock Chart

Chart Comments: Not a great looking chart. Twiggs Money Flow is rising but still below the 0% line. The 50-day moving average (blue line) at $15.21 is currently being tested, and a breakout above this level would be bullish.

Stratasys Stock Chart

Chart Comments: Stratasys’ chart looks even worse than DDD. The Twiggs Money Flow is rising nicely, but it is still below the 0% line.

HP Inc Stock Chart

Chart Comments: Twiggs Money Flow falls below 0% line after missing on revenue; however, overall, the strongest looking chart of the 3D printing stocks. Fantastic valuation at P/E 9.9 and forward P/E 9.2. Wait for candle over candle bounce before taking a long entry.

Disclosure: I do not hold any stocks mentioned in this article.

Don’t Double Down On Wrong Prediction, Just Move On

Whether we are talking about individual stocks, the stock market, or the economy, when you’re wrong just admit it and then move on. The goal is to make money, not to be right 100% of the time so you can stroke your ego.

AM TV and Peter Schiff predicted that the Federal Reserve could not stop their monthly QE injections into the economy. Even though the Fed kept cutting the monthly injection all the way down to zero, alternative media outlets AM TV and Peter Schiff kept saying the Fed wouldn’t stop the monthly infusions because they couldn’t as the patient (the economy) would die. Peter Schiff then went on to say that the Fed was not going to hike rates in December 2015 but instead actually cut rates. The Fed increased rates a quarter point right on schedule. For all of 2016, Peter Schiff has been saying that the Fed isn’t going to hike rates again but instead reverse course and lower rates. In December of 2016, the Fed will likely increase rates another quarter point.

Most alternative media outfits think they have to be crazed perma-bears to get viewers. Maybe they do. Rather than AM TV and Peter Schiff admitting they were wrong about the Federal Reserve, they double down on their wrong predictions and do another “interview” together, check it out.

There are some really good points in this interview, don’t get me wrong. However, to be a successful traders and investor, you can never be a perma-bear. You can never be a perma-bull. You have to adapt and respond to market conditions. That adaptation means you have to be willing to admit when you’re wrong and then to just move on.

Folks, watch out for fear mongering. Fear drives viewership and video view counts on YouTube but being forever fearful is a great way to lose all your money at trading. Some parts of the economy will no doubt suffer under a Trump Administration and higher interest rates; however, higher rates will be good for other parts of the economy like Banking. A Trump Administration will be bad for multinationals and the Dow and parts of the S&P 500; however, Trump will be great for domestic businesses and the Russell 2000.

Small Cap Stocks Will Outperform In a Trump Administration

Small cap stocks are the place to be in a Trump Administration. Trump’s economic policies will negatively impact large multinational corporations like Apple. Small cap stocks are all about domestic companies.

Small cap stocks generate most of their profits inside the US, exactly where Trump’s economic agenda is targeting.

Since Election Day, small cap stocks on the Russell 2000 Index have surged 12.3%, far better than the 3.05% gain for the large-company S&P 500 stock index, and the 3.6% gain for the Nasdaq.

A massive amount of money is moving into small caps. The Russell 2000 has closed up for 14 days straight since Trump won the election.

What The Trump Win Means For Multinational Corporations

I predict that a Trump win means down for the economy at first, then upward as the US consumer strengthens from domestic job growth.

The down first move in the economy will come from inefficiencies caused by forcing multinational corporations to bring domestic production facilities back to the US or face steep tariffs.

Several traders have emailed me asking what stocks are good to short or go long in a Trump Administration.

Here is how a Trump win is likely to impact industries negatively.

IoT Industry

Tesla is the big driver of autonomous vehicles. Tesla is shipping all new Model 3 cars with the hardware for full autonomy. These autonomous cars are also electric cars. Tesla’s new Model 3, after tax credits, was priced for under $30,000. The Trump Administration is likely to be unfriendly towards companies like Tesla that benefited under the Democrats crony capitalism. The Trump Administration will likely offer few proposals for combating climate change. Trump will likely not pursue “green policies,” which means the discontinuation of “green” tax credits like the kind Tesla benefits from. Without these generous tax credits, Tesla automobiles will be more expensive which will slow purchases and slow the spread of the self-driving car.

Industrial IoT trends have been towards automation and replacing human workers with machines and robots. Trump has promised to renegotiate trade deals to bring manufacturing jobs back to the US. If IoT trends are taking away US jobs, it’s a pretty good bet that a Trump administration will advocate against industrial machines and robots that replace human labor.

Payments Industry

Trump has threatened to cut off remittance send from the US to Mexico until Mexico pays for a border wall. Trump is considering forcing Mexico to pay for the wall by invoking the US Patriot Act to cut off portions of the flow of money between the US and Mexico until Mexico makes a one-time $5 billion to $10 billion payment for the wall. Mexico is the largest receive destination for US remittances, cashing an estimated $25 billion in 2015. Western Union recently doubled the size of its retail network in the country, and MoneyGram unveiled a product in partnership with Walmart to make it easier and less expensive to send money from the US to Mexico. Cutting off the flow of money from the US to Mexico, even temporarily, would negatively impact Western Union and MoneyGram.

A Trump Administration will focus on bringing manufacturing back to America, specifically targeting firms like Ford and Apple to build products in the US rather than in Mexico or China. To implement a plan of bringing manufacturing back to the US, a Trump Administration will need to use tariffs and issue tougher manufacturing restrictions. This will likely cause a major decrease in international business spending as more businesses are either unable to make transactions due to restrictions or unwilling to pay the extra fees.

Technology Industry

Net neutrality is the concept that all data transmitted over the internet should be treated equally. Trump has not released official statements about the topic of net neutrality, but he has expressed distaste for President Obama’s approach. A Trump Administration could push to change the FCC’s net neutrality rules which would result in different price points for various data types and enable service providers to throttle data delivery.

In a Trump Administration, technology companies will likely be forced to change encryption policies to provide backdoor access to the US government. Trump supported the court order calling for Apple to facilitate access to an encrypted iPhone used by the San Bernardino shooter and asked consumers to boycott the company until it complied. Civil liberties groups are likely to take the Trump Administration to court. Requiring companies to provide backdoor access to the US government would violate consumers’ trust and likely lead to a decline in users of these companies’ products at first. Over time, though, consumers will likely not care.

Policy changes by a Trump Administration would harm tech companies that manufacture overseas, like IBM and Apple. Apple’s iPhone is likely going to become much more expensive for US consumers.

Apple and Google make more of their revenues overseas than within the US. Higher tariffs and protectionist policies could make it more expensive for tech companies to move and sell their products around the world. The broader use of trade tariffs would likely spur more countries to invest in domestic technology sectors within their own countries and to reduce their reliance on US technology providers, which would further hurt US tech multinational corporations.

Large mergers between service providers and digital content companies could face greater scrutiny. Trump said that the $85 billion AT&T and Time Warner merger would not be approved by a Trump administration because “it’s too much concentration of power in the hands of too few.” A Trump Administration could lead to a decrease in M&A activity.

The technology sector has been granting more H-1B immigration visas to highly skilled workers with STEM backgrounds.

A Trump Administration will likely include fees that will make it more expensive for companies to hire foreign workers through the H-1B visa program. If such fees are enacted, it would likely drive up wages for highly skilled IT talent even further across the technology sector.

E-Commerce

Protectionist policies and tariffs will increase the cost of goods. Trump wants to tax US companies that choose to manufacture goods overseas. Such a policy would harm retail companies that manufacture their goods overseas. Most retail companies will raise their prices to offset these tax penalties and the added cost of building manufacturing plants in the US.

E-commerce companies are pushing to deliver products to consumers as fast as possible. Think Amazon, and it’s Amazon Prime membership with free two-day delivery as well as its drones for remote area deliveries. This fast delivery involves automation within distribution centers. A Trump Administration will likely move to protect American workers from being displaced by machines thus forcing e-commerce companies to invest in traditional forms of labor over cheaper and faster new ones.

While a Trump Administration will be great for the US economy long term IMO, short term, I think we get a pullback in the economy while corporations adjust to higher costs and lower sales.