Likefolio Field Notes

Holes have started to appear in Tesla’s sunny outlook. 

A new report from LikeFolio, which tracks social media mentions of brands and products, shows a drop in consumer happiness levels for the company, as well as some bright spots in the social data.

Consumer Reports said Tesla Model 3 was fun, but had flaws and some features were disappointing. Real trouble arose in late March when a Bloomberg Model 3 tracker indicated Tesla would not hit the pace goal for Q1: 2,500 Model 3 units/week. 

Musk attempted to control the narrative with an April Fools Bankruptcy joke. In the meantime, production increased to 2,000 units per week (but still fell short of 2,500 unit per week goal set to be reached by end of Q1). This was enough to bump the stock back up a little. But on April 3, TSLA missed Q1 production pace goals. 

Are Consumers Happy With Tesla Vehicles?

Yes, but….

Happiness has begun to drop, and recently hit new lows, as the company has pushed back delivery dates and delivered a product that is not quite living up to the expectations of the consumer.  This has competitors like GM, Ford and Mercedes licking their chops...and catching up on technology.

In fact, we’ve even seen BMW overtake Tesla in terms of consumer happiness… not a great signal…

Tesla’s outlook from here

Wyndham Worldwide (NYSE:WYN) is currently registering all-time highs in purchase intent (bookings) according to LikeFolio, which specializes in tracking consumer purchasing behavior.

Here’s a look at Wyndham brand purchase intent mentions (in green).  This data point tracks the number of times consumers talk about booking a room or staying at any of the company’s 20 brands comprising over 8,000 hotels:

As you can see, these mentions are showing extremely strong growth, pushing into all-time highs for the company.  This surge in consumer spending is occurring right as the stock makes new all-time highs and analysts are beginning to say that you should buy Wyndham stock right away.  

Are Wyndham brands consumers happy?

To find out, we look at the consumer happiness level of Wyndham Worldwide in comparison to some of the other top hospitality companies.  

While WYN doesn’t have the highest levels of consumer happiness, it never really has.  More luxurious brands, like Hyatt (NYSE:H) and Hilton (NYSE:HLT) have higher levels of consumer happiness likely because they provide a more upscale hotel stay. Wyndham brands offer a more affordable stay, with less luxuries, at the economy/midscale level.   

This potential upside in consumer happiness is important as Wyndham approaches a split of its company into two divisions in early 2018.  The hotels division will be able to better focus on the consumer experience, creating happier, more loyal customers.

Travel Industry Breakout? 

It’s not just Wyndham seeing an updraft in consumer spending.  In fact, when we look across the travel industry, we see several names following a similar pattern of purchase intent mentions at or near all-time highs.

Southwest Airlines Co. (NYSE:LUV) and Alaska Air Group, Inc. (NYSE:ALK) are two airlines that recently hit new highs in purchase intent data.  Carnival Cruise Lines (NYSE:CCL) is also powering forward as earnings over the next few years are expected to increase by 61.29%, indicating a highly optimistic future ahead.  Despite economic and political uncertainty in parts of the world, overall demand for travel and hospitality services continues to rise, a trend we are seeing consistently in the LikeFolio consumer data.

Playing Wyndham from here

Wyndham is set to announce their earnings on October 25, 2017.  Based on 4 analysts' forecasts, the consensus EPS forecast for the quarter is $2.01, which would be an increase of 12 cents/share over the same quarter a year ago.  

Historically, LikeFolio data has been a leading indicator of Wyndham (and other travel industry stocks) by 2-4 months, which means we could be in for a serious run to all-time highs as we turn the calendar page into 2018...

Shares of $BWLD have been under stress for the past week and are in danger of falling dramatically, as data gathered from social media indicates sharp declines in customers for the wing-based restaurant.

At LikeFolio, we track every twitter mention of Buffalo Wild Wings (including many of its slang references) and look for mentions that indicate the person is actually eating in the restaurant or ordering food from BWLD.

Less customers, and less customer happiness

Here’s what purchase intent mentions for Buffalo Wild Wings look like over the past 5 years:

On January 29, Starbucks reacted to President Trump’s travel ban by issuing a statement that it would hire 10,000 refugees. This announcement has backfired with consumers in a big way.

Consumers aren’t happy:

The backlash was immediate. Over the next few days, consumer buzz on Twitter spiked higher…and not in a good way. During that those few days, Starbucks saw its Consumer Happiness level go from its normally impressive 75% positive all the way down to 40% positive. That’s right—six out of every 10 opinionated tweets about the company were negative:

Throughout 2016, Consumer Happiness for Starbucks ranged 70-75%. Now it’s at 66%. This is the 7-day average, so that 66% does NOT include anything from the huge backlash immediately following the announcement.  

A loss of 7-9% in consumer happiness levels is a big problem, especially when it is sustained for a significant period of time like this.

For comparison, McDonald’s customer happiness has averaged around 67-69% consistently. This means Starbucks went from 4-5 points better than McDonald’s to 3 points worse, which means poor comparisons for the company. Even worse, it’s the kind of data we see when consumers are in the process of making behavioral shifts that could have lasting impact on same store sales and revenue reports into the future.

Is Starbucks losing business?

To see whether the backlash is affecting actual spending, we need to drill down into LikeFolio’s Consumer Spend metrics for the company. These are measurements of people actually talking about being in the stores and buying the products… LikeFolio’s is the most unique and powerful data set.

The results are clear:

Starbucks has seen Consumer Spend mentions BELOW its one-year moving average for 80% of the days since the refugee hiring announcement.

Meanwhile, McDonald’s has seen Consumer Spend mentions above its one-year average for over 90% of days since the announcement.

In other words, since the announcement, Starbucks is shrinking while McDonald’s is growing.

Fallout

The data is clear – consumers are not happy with Starbucks’ decision to prioritize hiring refugees.  

As a direct result of Starbucks’ announcement to hire 10,000 refugees, the company’s brand value has taken a significant hit, they’re losing market share to competitors, and sales are dropping.

Two weeks ago, the TD Ameritrade Ad challenge took a unique approach to the Super Bowl, focusing on determining the public companies that got the most positive impact out of the commercials shown during the game. At $5 million per 30 second spot, investors want to know which companies are best utilizing their marketing dollars.

To to this, the firm used LikeFolio’s social data technology to track "definitely positive mentions" on Twitter of the brands and products advertised in the Super Bowl.  Scores for each brand and product were added together to determine an overall score for each publicly traded company, resulting in a clear list of companies that got the most out of their advertising dollar.

Winners

 $KO — Coca Cola went wire to wire with its America the Beautiful ad.  Incredibly positive response and to top it off the company did it on a budget by recycling the ad and airing it prior to kickoff.

 $VLKAY — Audi (owned by Volkswagen) put out the most controversial ad of the game by focusing on equality of pay for women.  The controversy worked, creating a firestorm of conversation that lasted for days.

 $PG — Mr Clean cleaned up and Tide did well for Proctor and Gamble, which turned boring household supplies into funny and very well received ads.

 $GM, $BUD, $TMUS, $HMC and $PEP rounded out the top 8 in the big reveal… beating out over 40 public companies that shelled out $5 million for 30 seconds of consumer attention.

These winning stocks can now be tracked through the LikeFolio Big Game Winners watch list in the Yahoo Finance app!

  Follow through

Winning the biggest game in advertising is one thing, but it’s not going to move the needle for these major brands unless the positivity continues in the weeks and months to follow as customers step up to the cash register.

To keep an eye on consumer behaviors around these brands, we can utilize the Social Signals technology inside of TD Ameritrade’s thinkorswim trading platform.  Here we are able to see updates to both mention volume and consumer happiness levels in near real-time, giving us incredible insight into consumer behaviors on Main Street, often before the numbers impact Wall Street reports or analyst opinions.

A great example of this is Pepsi, who was in the top eight of the TD Ameritrade Ad Challenge:

  This is a screenshot from thinkorswim software showing the stock price (top) and Social Signals data powered by LikeFolio (bottom). The yellow line is customer happiness, and the stack charts show overall mention volume. Red is negative, green is positive and blue is total.  

As you can see, when Pepsi’s CEO, Indra Nooyi, spoke out against the election of Donald Trump, the company saw massive amounts of negative mentions, slamming customer happiness levels and causing a “red flag” moment.  The stock then dropped drastically and quickly.  

Fortunately for Pepsi, the data points stabilized as the CEO clarified her comments, journalists corrected their misquotes, and Ms. Nooyi joined the Trump Administration’s business council.  Social improved dramatically from there over the next few months, and are near all-time highs, suggesting the Super Bowl pop might be part of a larger positive trend for the company.

Playing it from here

Using this kind of social data is powerful on a short term basis when things go crazy, but the bulk of its value comes from watching consumer trends over time and applying those insights to fundamental analysis with a 3-6 month outlook for the stock.

After all, the ultimate value of a company is not determined by analysts, traders or stock charts, but rather by the consumers that choose to buy the company’s products, or not.  Our job is to use powerful social data tools as described above to identify these consumer trends and behavior shifts before they become news on Wall Street. Consumers are speaking out loud and clear…all we have to do is listen to them.

Tonight we will all be watching a fierce battle among the world’s best competitors. No, I’m not talking about football – I’m talking about the commercials and the enormous spending that goes into them.  Companies are dropping millions upon millions for thirty 30 seconds of access to consumer eyeballs.

So, the real question here isn’t “what do ad experts think about the commercials” – it’s “what do real consumers think about the commercials”.  Because it’s consumers who are making purchasing decisions and potentially driving revenues for these companies…and that’s what matters to investors like us.

So how will we know which commercials do the best with consumers?

Enter the TD Ameritrade Ad Challenge.  Through a partnership with TD Ameritrade, Likefolio is leveraging its social data tracking technology to show investors how social media chatter around this year’s big game commercials may be able to help them validate potential trading opportunities in real time.  

Here’s how it works

LikeFolio’s proprietary technology scans the entire twitterverse constantly, capturing every tweet about the brands and products behind the world’s most popular stocks—and then analyzing those tweets for indications of sentiment (positive, neutral, or negative) and consumer purchase intent.

For the TD Ameritrade Ad Challenge, our industry-leading technology is being used to highlight which publicly-traded companies got the most positive Twitter mentions about their ads during the game.  Updates will be delivered in real-time throughout the game on Twitter, with the final results announced on video and through multiple media outlets on Monday morning.

Handicapping the field

What contest is complete without some pre-game projections?  With companies pre-announcing, or even pre-releasing their ads, it is already looking like a banner game for commercials.  Here’s how I think they stack up as we head into the weekend, but make sure you follow throughout the game as we are sure to see major shifts as the game gets underway:

First out the gate

Anheuser-Busch InBev ($BUD) has to be considered the morning line favorite to win the TD Ameritrade Ad Challenge due to its overwhelming size and strength. With 4 brands expected to be promoted in multiple spots, a history of popular ads, and an already controversial ad about its founder’s immigrant story…this year's Big Game is Bud's to lose.

Proctor & Gamble ($PG) might not be the first company that comes to mind when you think of great ads, but this year’s Mr. Clean ad is already getting good chatter, and they’ve had some wild, tweet-inducing spots for Old Spice in the past.

Disney ($DIS) is the boom or bust pick of this year’s ad challenge.  While the company hasn’t officially committed to buying ad time, there are rumors circulating that they might drop a preview of their upcoming Star Wars blockbuster “The Last Jedi”, which would be a total game-changer.

Contenders

Pepsi ($PEP) is introducing Lifewtr brand with John Legend’s version of “Love Me Now”, which could tip the scales in their favor, despite not running a Doritos ad this year.  Pepsi Zero Sugar is also getting in the game by sponsoring the halftime show.  You read that right.  The Pepsi Zero Sugar halftime show.

Coca-Cola ($KO) is going old-school, bringing back some of their classic, beloved commercials for Coke and Sprite brands.  At least that’s what they’re claiming right now.  We think a surprise could be in the works.

Volkswagen ($VLKAY) is taking a slightly political, serious approach to their commercial with a well-made spot focused on progress and women’s rights.  If they pull it off, “touching” could prevail over “funny”.

Kraft Heinz ($KHC) might just win the ad challenge down at the wire – without even buying an ad!  Their “Smunday” petition is getting steam on the internet.  By giving employees the day off on Monday, and pushing for it to be a national holiday, Kraft is sure to win over some loyal fans!

Long shots

Godaddy ($GDDY) can’t be counted out of the mix.  They always bring some cutting edge humor, and this year they’ve got some internet joke “easter eggs” hidden in the ad that could get some buzz.  With Victoria’s Secret (owned by $LB) out of the mix this year, Godaddy could be missing an opportunity to bring sexy back.

Honda Motor ($HMC) is featuring celebrity yearbook photos.

Wix.com ($WIX) is using a 30 second spot during the game to bring attention to a full campaign consisting of multiple short films.  It’s a big gamble that is already producing millions of YouTube views.

Nintendo ($NTDOY) is back to big game status after their impressive Pokémon Go revival and could be one to watch.

That’s a wrap!

We’re hoping the “Big Sunday Night Football Game that shall remain nameless in print” is a barn-burner, but we’re even more excited to see who wins the TD Ameritrade Ad Challenge this year.

Last month, we made the case that Chipotle may be in the midst of a major turnaround.  

Yesterday, the company announced that sales at Chipotle stores jumped by over 14% in December, a sharp turnaround after devastating losses throughout 2016.  

The stock exploded higher by over $21/share.  

This came after a rough year for Chipotle as it weathered a torrent of negative press from two E. Coli outbreaks. The outlook for the fast-casual chain got even worse after a Norovirus at one of its Boston restaurants sickened 80 college students.

The company's same-store sales sank 22% in the third quarter of 2016. As of last month, its stock had declined 25% in a 12-month period. While Chipotle tried to get customers back with free burritos, its efforts didn't seem to be making a huge difference -- until now.

So how did we call this?

LikeFolio uses Twitter data to discover insights into consumer behaviors.  For Chipotle, all of those insights lined up into a really great turnaround story:

1.  Consumer Happiness has recovered and is moving higher.  This is extremely important for Chipotle, because it meant consumers were starting to trust that the company’s burritos weren’t going to make them sick.

As you can see, consumer happiness for Chipotle has finally fully recovered from the health scare a year ago.

2.  Purchase Intent at Chipotle firming up.  We can also use social data to determine shifts or trends in the number of people who are actually talking about eating at Chipotle stores.  We saw this in a free fall through most of 2016, until right near the end of the year, when it finally started to reverse.

Through social data, we are actually able to see that Chipotle customers were finally happy, and starting to come back to eat in the stores....in real time. 

That kind of insight -- before the news hits Wall Street -- is an extremely powerful tool for investors. After all, it is consumers…not Wall Street analysts… who ultimately determine a company’s fate. 

A data-driven, real-time understanding of the consumer is a winning – and very profitable – formula.

Jeff Macke literally grew up in Target stores. Retail flows through his veins like bourbon over ice. Discounting and buybacks are his kryptonite. When he speaks, we listen.  

That’s exactly what happened when we discussed the bullish case for lululemon heading into yesterday’s earnings call.  Macke was adorned in the finest lulu lemon men’s apparel, which he sees as an untapped market. 

Here’s what happened-- Macke sees enormous opportunity for the specialty retailer and multiple signs that they are executing very well.  LikeFolio’s social data shows strong purchase intent and consumer sentiment.  Everyone agrees BULLISH, and the next day the stock opens up 20% higher than the price at time of publication.  

Summary:  You should be a listener.

Digging in-- what gave away LULU’s huge quarter?

MACKE:  “When I see specialty retailers commanding 50% margins and NOT being promotional on black Friday that tells me the company has a lot of confidence in the goods they’re carrying and that their margins are going to be solid.”

Result?  Revenues up 13.5%, gross margins at a blistering 51.1%

SWAN: “LuLu mentions are at levels where they were when the stock was at $70 rather than the under $60 we’re at today....with the stock trading at that big of a discount to what we’re seeing, this could be a good time to get some value.”

LikeFolio data showed consumer mentions of lululemon near all time highs

Result?  Stock moves from $58 to $70 in a few trading hours on a phenomenal earnings report and call.

MACKE:  “We’re finally at the point where this omni-channel thing cannot be ignored. The winners online have a chance to gain market share in the US for the first time in a generation.  It’s a lot easier for retailers like Target and Wal-Mart to add backend software and automation than it is for Amazon to add those kind of distribution centers.”

Result?  LULU posts in-store gains of 4% and direct/online gains of a massive 16%. 

I know what you’re thinking... “wow, those guys nailed it... but what good does that do me now?”

And you’re right....so...

Two NEW retail ideas

TJ Maxx ($TJX) -- Bullish

TJ Maxx, whose primary brands are T.J. Maxx and Marshalls, has seen a steady uptrend all year in consumers talking about shopping at their stores. They reported positive earnings in November, and we remain bullish on TJX.

Ralph Lauren ($RL) -- Bearish

Ralph Lauren is showing a steady decline in purchase intent mentions, while at the same time an increase in the % of customers who are happy. 

Diving deeper, we see that the number of happy customers remains steady while the unhappy ones are leaving. This consolidation combined with decreased mentions of spending money on their brands leads us to lean bearish on the company.

We asked Macke for comment on the two companies, and here is what he replied with:

“I like the low expectations on Ralph. TJX is a monster. If KSS is healthy it usually means TJ Maxx is ready for an ultra marathon. RL might be a flier but you need to see management earn it. TJX already deserves the benefit of the doubt.” -- Jeff Macke

Bottom line-- retail is a fickle game. Great companies make great products, and consumers...not Wall Street analysts... determine their fate. A data-driven understanding of the consumer combined with expertise in the sector is a winning -- and very profitable -- formula.

In today’s episode of the LikeFolio Broadcast, we discuss 5 big trends we are observing across our social data. Further detail is available in the December LikeFolio Letter:

1.  Chipotle may be in the midst of a major turnaround headed into 2017.  We are seeing consumer sentiment improve markedly from the “will this make me sick” disaster of 2017.

Data from LikeFolio 2.  Amazon’s dominance is only accelerating.  We are seeing the company capture a larger share of online shopping, as the online shopping space continues to grow dramatically.

3. Target had the best in-store experience and performance during the black Friday shopping weekend, and online sales weren’t shabby either.

4. Apple could be in trouble. Apple store traffic looks down and consumers are obviously not enthusiastic about the current product lineup. Where is the next big thing???

5. Updates on prior calls on Netflix, Urban Outfitters, Nike and lululemon have been posted in the December issue of the LikeFolio Letter.

Each of these trends has been forming for quite some time, and has been supported by pretty consistent measurements in consumer sentiment and purchase intent data.  

In October, we issued a strong warning to our premium clients about Nike.  The social data was deteriorating quickly and consistently:

Consumer sentiment numbers were down significantly.

Overall brand mentions were dropping.  Most importantly...

Purchase intent mentions dropped steadily for two consecutive quarters, not even showing an uptick during the normally bullish Olympic Summer games.

That was with the stock at $60.  Since that warning, it’s fallen 16% and is starting to stabilize.  

Social data starting to improve

Today, we’re seeing a much more positive story for Nike: 

On this screenshot from the thinkorswim platform, in the bottom pane, you can see sentiment (yellow line) trending higher along with mention volume (blue area) pushing higher as well.  Both are bullish.

Consumer Sentiment is rising at a good clip, which is often a forward-looking indicator for purchase intent.  Likewise, overall brand mention volume is rising, which indicates the company’s brands and products are nearing “top of mind” status for consumers once again.  Very important heading into the holiday shopping season.

This improvement has led us to remove our BEARISH tag on Nike.  We even discussed possible ways to initiate a slightly bullish position on the stock on the LikeFolio Broadcast.

Bottom line:  It’s likely that Nike’s worst days are behind it, and we like the way the social data is setting up for the company heading into holiday shopping.

Pokemon Go is getting all the buzz in the media, among users and on Wall Street.  In just the past 6 days, Nintendo has moved from it’s usual spot around 24th in the LikeFolio Top50 all the way up to 6th-- getting more Twitter mentions of its brands and products than powerhouse companies like Microsoft, Amazon, Netflix and Facebook!

Just how big a move is it?

When we look at social mentions of Nintendo brands/products on Twitter, we can see an enormous move as the popular game has truly gone viral since the launch of Pokemon Go on July 6.

Since that launch last Wednesday, we have seen a staggering 2,080% increase in the number of purchase intent mentions associated with Nintendo brands and products.

What’s even more interesting is seeing how, the explosion of users was visible through social data before Wall St took notice and before the stock surged higher:

Obviously, investors with a keen eye on social data had a huge advantage -- over one full trading day-- when it came time to catch the breakout move.

What’s next for Nintendo stock?

The key for shareholders will be seeing if Nintendo can sustain (and build upon) the initial frenzy that Pokemon go has accomplished.  The risk here is that Pokemon Go frustrates fickle users, or that the company has trouble monetizing the game.  The upside is enormous, as many believe Pokemon Go is just the “lead off hitter” in a new wave of Nintendo victories.

Fortunately, through LikeFolio’s unique social data, investors will be able to see that information in real-time, as users continue to post (or not) about their experiences in Pokemon Go and subsequent Nintendo games.

Very few people start out with a huge trading account, but with a steady, thoughtful process it is achievable. Trading in an account of $25,000 or less requires a different approach than trading with a larger account. Here are the 10 Commandments of Trading in a Small Account that are sure to make your trading more profitable, less risky, and far less stressful:

I. Risk more per trade

When you have less money to trade with, each trade will need to do more for you. Traders with smaller accounts should be comfortable with 5-10% of net capital in each position.

For example, in our latest earnings prediction, many of our clients put 10% of account positions on Apple, Sirius, Ford, Dunkin Donuts and Netflix going into their earnings calls.... and it worked!

II. Keep more capital at work

A majority (80-100%) of your capital should be at work at all times when trading in a smaller account. This doesn’t mean you have to be overly aggressive, it just means that you should be focused on growing all of your account, rather than worrying with account protection techniques best suited for larger accounts.

III. Swing BIG when appropriate

Up to 20% of capital should be deployed when you come across the “perfect setup.” That means your trade thesis is showing traction, the unique data advantage you have is pointing strongly in a specific direction, and the market is giving you a fantastic entry price. This is also a situation when you might be more aggressive with respect to moving your targets or strike prices further out of the money in order to seek a larger potential return for the risk you’re taking.

IV. Trade using defined-risk approaches

Using options spreads to strictly define the maximum risk of any one trade in your account is a really smart and capital-efficient way to play the markets with a smaller account. We like to focus on vertical spreads and Iron Condors that give us a high probability of profit while limiting max loss to a comfortable number.

If you don’t have an account with thinkorswim yet, you should.  We highly recommend them for using defined risk options trading.

V. Don’t use stops

Stops get hit. They take people out of good trades. Instead of using stops, we use option spreads that necessarily define the risk to a comfortable amount as mentioned above. If you simply must own a stock, instead of using a stop, we suggest setting price alerts to re-evaluate the opportunity with a bias towards exiting, or utilizing put options to protect your positions.

For example, in a recent IPO like Twilio, you are going to see very large swings in share price that happen very quickly. It’s essential that you not be taken out of a good trade by a blip on the radar.

VI. Take profits

Nothing…and I mean nothing… is worse for a small account than watching a profitable position go negative. The financial damage is one thing, but the psychological impact is even worse.

VII. Automate your profit taking

As soon as you enter a trade, you should immediately enter the order to exit at your profit target. Take the emotion out of the decision to take profits. You’ll be shocked at how often you’re getting alerts that profits have just been dropped into your account.

VIII. Be picky

There are hundreds of opportunities coming your way every single day in the stock market. With a small account, you are risking more (as a percentage) per trade. You need to respect that and keep looking for top opportunities to put your capital at risk. Again—get your thesis and unique data advantage in line before placing the order!

IX. Don’t time the market

Once you spot an opportunity, get in. Don’t try to get a better price by timing the way the market will move over the next 1-2 hours or days. Being penny-wise and pound-foolish is a sure way to miss out on the best opportunities and get yourself into some already broken trades.

X. Focus on discipline and patience

The smaller your account, the more each individual action you take is going to matter. Having a plan and sticking to it is critical. Allowing your opportunities to become profitable by being patient is critical. Keeping a level head and avoiding emotion is critical. You’re in this to win – take a disciplined approach and give yourself the opportunity to succeed!

We have seen time and time again that smaller accounts that follow these commandments can be just as successful and profitable as larger accounts, if not more so. Trading in a smaller account will help you develop skills and habits that will be useful when you are trading in larger accounts. 

Emotional decision-making is the enemy of traders. Here are a few of the ways I’ve learned to eliminate emotion from my processes and become a more profitable (and productive!) investor.

1. Have a data-backed thesis  

When you enter a trade based on a “feeling,” you’ll likely exit it based on a “feeling” as well.  And that can be disastrous. Instead, require every trade you make to be based on a theory you have that is validated by some external data.   For example, you might think XYZ stock is headed higher because 47% of the float is sold short, the social data indicates that consumers are buying products faster than Wall Street predicts, and if the stock breaks through that level you think there will be a short squeeze. That will force those short-sellers to exit their positions by buying the stock back, creating higher and higher prices.

Maybe you’re right, and maybe you’re wrong. However, now you have a thesis based on real data that you can benchmark against as the trade progresses. That’s far better than “it feels ready to pop.”

Example:  In our Home Depot/Lowe’s pair trade, our thesis is that social data from LikeFolio is showing that Lowe’s is gaining traction among consumers.

2. Determine in advance what will prove your thesis wrong

Before you enter the trade, you need to understand what data in the future will prove your thesis wrong (or right). Exiting a position should be just as data- and thesis-driven as entering one. Remember, the goal is to keep emotion out of your trading decisions.

Commit to checking the data behind your thesis at a specific interval or point in time. Is your thesis still sound?

In the example above, we used XYZ’s short interest as a data point, along with positive social data as the stock is approaching all-time highs. You might determine that your thesis would be proven wrong if, 1) XYZ fails to move into new all-time highs in the next two weeks, or 2) XYZ’s short interest dropped off dramatically prior to new all-time highs, or 3) social data came back down to normal levels.

Again, the key here is that you determine BEFORE entering the trade what the scenarios are that prove your theory wrong and what data points you will be using to make that determination.  

Example:  Our warning and “position bearish” on Apple would no longer be valid if purchase intent volume on iPhone products began to improve, the Apple Watch started gaining consumer enthusiasm, or the company announced a new product that would be a catalyst for consumers.  In any of those cases, our original idea for the trade would no longer be valid.

3. Position small enough to fly blind

The most common behavior I’ve seen among new traders is the propensity to take positions that are too large. This invariably leads to emotional reactions to price movements. In fact, it’s not uncommon to see new traders develop real fear within minutes of entering a position that is too large. To avoid emotional decisions, position small. You can always add more later as your thesis is proven true.

How small is small enough? When you enter a position, imagine yourself locked out of your brokerage account and without access to quotes for 3-5 days. If you can handle that kind of blind volatility, you’re fine. If you find yourself watching every tick and “cheering” for the next move—it’s time to reduce size dramatically. I’ve never heard a trader tell a story that ended with, “I didn’t take a large enough position.”

Example:  With Disney, we suggested building a long term position over time at under $100, starting very small and moving up as the thesis was proven correct.

4. Define your maximum risk in advance

This adage goes along with positioning small. By defining your maximum risk on any trade to something you’re comfortable with, you can dramatically reduce emotion-based behaviors.

I’m a huge fan of using option-spreads to strictly define risk. Others are comfortable with Good-Til-Cancelled stop orders, which add a layer of discipline but cannot guarantee a maximum loss like option spreads. Another option is to find optimal put options, as David Pinsen of Portfolio Armor suggests in this piece on Tesla.

It’s really up to you. The key is to have a mechanical system in place that defines your maximum loss at a comfortable number.

5. Automate your profit taking

In stock trading, it is critical to eliminate decisions solely based on psychology as much as possible. This comes into play in a big way when it’s time to take profits. How many times have you met your initial profit goal, but decided to let the position ride? How many times has that resulted in the position moving against you and your winner turning into a loser?

All traders have experienced this, and it is the result of a little thing called “greed.” It’s in all of us -- the key is to find a way to manage it.

I asked Nick Fenton of TickerTank how he approaches profit taking and his theory was very clear:

“Automate, automate, automate! You should know your exact profit goal before entering any position. Determine that goal, enter the position, then set an automated profit taking order.”

For example, let’s say you sell the 100 puts in XYZ for a credit of 2.00. You determine you want to take profits once the puts have decreased in value by 50%. You would then set a Good-Til-Cancelled (GTC) order to cover your XYZ 100 puts at 1.00. This order will be “working” from market open to market close everyday going forward until XYZ 100 puts hit 1.00. If the puts do in fact hit 1.00, the order will automatically trigger and your profits will be booked.

Let’s do a quick stock example. You buy 50 shares of XYZ at 100.00 per share. Your profit goal is a 5% increase in the stock price. You buy the shares, then immediately create a GTC order to sell 50 shares of XYZ at 105.00. It’s that simple and it takes greed out of the equation!

Fenton added that you should ”NEVER modify your automated profits taking order if you see the position working in your favor. That defeats the purpose. Always keep it based off your initial profit goal.”

With our preferred broker, this kind of order entry is very fast, very easy, and effective.

6. Do something else for a while

OK – you’re ready. You’ve entered the trade.

You have your thesis.

You know what data points you’re looking for to determine if your trade is on the right track or not.  

You’re positioned small enough to fly blind.

You’ve limited your max risk to something you are comfortable with.

Now what?

Hit the gym. Write something interesting. Play with your kids. Return at a time when you expect there to be new data that you can check against your thesis. Until then, nothing matters and the only possible influence you’ll have on the trade is an emotional reaction or action out of boredom—both of which are very negative and to be avoided.

By following these six steps, you will reduce emotional decision-making in your trading, regain the time and energy you would have spent worrying, and take more profitable, productive actions.

Quick hitter here as we are swamped in the perfect earnings season with client requests for data and research.  Remember, LikeFolio data is based on millions and millions of real consumer mentions on social media--- not of the stock, but of the brands and products made by these companies.... a window into the cash register!

BUYS

Ford ($F)-- DIVERGENCE OPPORTUNITY!  The stock is struggling as consumer sentiment and purchase intent mentions are increasing impressively! 

Dunkin Donuts ($DNKN) -- Very strong consumer sentiment at 98% positive along with increasing purchase intent mentions....

SELLS

Netflix ($NFLX) -- We’ve been warning on this for a while and the company is joining our chorus.  Sentiment to new lows as purchase intent drops... not a good combo for a former high flying stock.

Apple ($AAPL) -- Everything just eroding slowly.  Low consumer enthusiasm and confusion around product lines.  

SiriusXM ($SIRI) -- Terrible metrics in our social data.  Sentiment dropping fast, purchase intent (subscribers) falling... too many options with Pandora, Spotify and Amazon on-demand streaming services just a bluetooth connection away.

Because social data is quickly becoming one of the most sought-after, powerful metrics that investors and traders can use, it’s important to understand exactly what it means and how the data can be used in your research.

Brand mentions -- Real-time analytics on real consumers

What separates LikeFolio from other providers of social data is our emphasis on measuring what real consumers are saying as they are interacting with the brands and products made by publicly traded companies.  As the NFL is fully aware, social media allows you to run a massive, blind consumer survey 24 hours a day, 7 days a week.  Here’s how these data points are broken down:

Mention Volume -- the total number of qualified mentions of the brands/products that a company makes in a given timeframe.  Mention volume is a good gauge of how much people are talking about a brand or product.

For example, mention volume of the Apple Watch is much lower than would be expected if the watch were selling at the pace analysts expect. Sentiment -- the ratio of positive mentions to negative mentions.  Note, for social sentiment, we exclude mentions that do not express sentiment.  

Sentiment = (Positive Mentions) / (Positive Mentions) + (Negative Mentions)

Sentiment shifts can be leading indicators of purchasing behavior! For example, if sentiment for Netflix dropped under 90% positive, that would be an indicator that the company might be seeing increased churn in the future! Purchase Intent -- The number of mentions that contain an indication that the user is planning to buy or has recently bought the brand/product.

This is the most powerful data in all of social-data mining.  It’s a real-time indication of the amount of buying that consumers are doing of the brands and products made by the company!

Cashtag mentions -- measuring “stock talk”

Many companies offer analysis on cashtags, which are conversations about the ticker symbol (stock) of a company.

Cashtag volume -- Total number of mentions containing that cashtag/ticker symbol-- this can be a leading indicator of a stock’s volume and volatility. For example, when $CMG saw ever-increasing chatter about its ticker symbol, it was followed by historic levels of volatility in the stock.

Cashtag sentiment -- ratio of bullish to bearish mentions about that cashtag/ticker symbol.  Again, neutral mentions are not counted here. Cashtag sentiment is often a contrarian indicator!

For example, when cashtag sentiment on $TWTR reached new lows, the stock was bottoming out around $13.

Finding signal in social data

Now that we know how these data points are derived, there are three primary methods for using them to find a forward-looking signal:

1) Comparing the data point to itself over time:  With sentiment, you can look for trends that tell you how consumers are reacting to the brands and products that companies make.  With Purchase Intent, it’s important to compare this period vs the prior period, as well as that same period a year ago.

2) Comparing the data point to competitors or others in industry:  Especially helpful for understanding which companies are doing best in the eyes of consumers.  NOTE:  You shouldn’t compare an airline stock vs a tech stock -- completely different consumer dynamic. 

3) Comparing the data point's movement to the movement of the stock:  Our favorite setups are called “Divergence opportunities”, when the stock price of the company is moving in an opposite direction of the key social data metrics.  These setups are rare, but have led to some of our biggest gains-- like Deckers, LinkedIn as it came into its huge miss, and even McDonald’s all-day breakfast rally!

Putting it all together

In this episode of the LikeFolio Broadcast, we discuss how we use the power of social data to get an EDGE for profitability in our trading.

This data is too powerful not to take advantage of!

According to all analysts, earnings are expected to be down pretty big this quarter, as the comps get “heavy” and companies have a difficult time keeping up with prior performances.

But that bad news may already be priced into stocks.  As JJ Kinahan of TD Ameritrade points out in his tech earnings preview, FANG stocks “dropped by about 23% through early February as earnings estimates were being reduced.”

In other words, expectations have already been adjusted lower by analysts… it’s old news..and as always, the only thing that matters is the future.  It’s a good thingLikeFolio’s social-data is forward looking….

What is social data saying as we head into earnings?

It’s a mixed bag, and this will truly be a stock-picker’s earnings season.  The fact that analysts are getting so negative going into the quarter could make for some amazing opportunities.

For example, LikeFolio data supports being cautious on Apple as we head into their quarterly report later this month as purchase intent volume remains depressed and the company desperately seeks a new catalyst product to drive increased results.

In aggregate, we are seeing depressed consumer purchasing behavior, especially when it comes to larger ticket items. But there are still diamonds in the rough.

Amazon is still primed to dominate even as consumers are growing wary.  Why? Because even though the retail pie might not be growing much (or even shrinking), the rotation of consumer behaviors into online purchasing is accelerating quickly.  Very quickly!

What’s the best way to play earnings?

This earnings season will be all about discipline. We see lots of opportunities for bigger-than-expected moves in many of the most popular names. This means it will be essential to keep risk limited and stay nimble throughout the season.

On today’s LikeFolio broadcast, we discuss how we are going to play this earnings season in detail, including specific trading setups in the names above and others like Coca Cola.

Social Data from LikeFolio shows that Lowe’s is gaining traction over Home Depot among consumers as we head into home improvement season.

Supplement: Podcast with actionable trade ideas.

Background

Home Depot and Lowe’s are extremely similar.  Their product lines, customer profiles, and sensitivity to economic conditions are almost identical.  It’s no wonder the two stocks tend to move in tandem: 

As you can see, over the past year, Home Depot stock has outperformed Lowe’s by over 15%.  But if you look closely, a majority of the gap between the two developed in the spring and summer of last year, as home improvement season took hold.   We are once again entering a critical period of competition between the two stores.

Who’s winning this home improvement season?

Social sentiment for both brands is high compared to industry peers. Home Depot is registering a respectable 92% positive while Lowe’s sits near the top of LikeFolio-tracked retailers at an exceptional 97% positive.

It’s purchase-intent volume where the real divergence is starting to appear...

Home Depot is showing fairly steady purchase intent numbers after dropping from last Spring’s seasonal highs...

On the other hand, Lowe’s is seeing an early, very impressive spike in purchase intent mentions over the past two months, which indicates a very successful start to the very important home improvement season:

Screenshots taken from LikeFolio app

Clearly, Lowe’s is outperforming Home Depot among consumers over the past couple of months.  Lowe’s has doubled its purchase-intent volume in the last two months while Home Depot is making a much more subdued increase.  

Also worth noting that the purchase intent mentions of Home Depot are usually 2x that of Lowe’s, which matches nicely with the fact the market cap of Home Depot is twice the size of Lowes.  This is another reason that Lowe’s purchase intent volume spiking up almost to the levels of Home Depot should be very concerning for HD shareholders.

We think it is extremely likely that Lowe’s stock will outperform Home Depot stock in the future.  

We discuss trading opportunities in detail on today’s broadcast.