Hi Folks - We’re just getting back from travel and recovering from a nasty cold. This week’s edition is a bit late and it will cover a number of topics as we’re catching up. Enjoy, and let us know what you think or what questions you want answered (just email us back or use Substack’s direct messaging).
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What the Market?
Mr. Market thinks he’s Mr. Bitcoin these days. He’s saddling up on his rocket ship and looking to fly to the moon. “Not only did the S&P 500 rise 5% last month, marking the fifth-strongest February gain since 1980, but also the world equity market hit an all-time high, as several key equity indexes around the globe reached record levels. This included the German DAX, the French CAC, and Japan's Nikkei, which, after 34 years, surpassed its prior high set in 19891”
The bond market has come under pressure as rates jumped and investors moved money into the stock market. A strong reporting from Q4 earnings, solid economic indicators and GDP growth, along with a general buzz of AI has created reasonable momentum in the market.
The oven is hot, and investors are looking for the winners,
What’s driving the market?
A growth spurt Carlton Banks could have only dreamt of: “This earnings season has been particularly strong, suggesting that a reacceleration is underway. With about 90% of the S&P 500 companies having already reported results, revenue is growing at 3.8% and earnings growth is tracking a solid 7.5%. Much of that is driven by a narrow group of mega-cap tech companies, but results have surprised positively across the board. And, looking ahead, the cyclical sectors might see an improvement in the second half of the year as the Fed pivots to rate cuts. Backed by healthy economic growth, the forward 12-month earnings estimate for the S&P 500 is now at a new high, about 4% above the prior peak in June of 20221“
When planned obsoletion comes to the rescue: In all forecasts, the US should have entered a recession in the past 12 months but the consumer has kept the US economy strong and growing. Consumer spending accounts for 70% of US GDP and despite inflation, and high borrowing costs, consumers continue to spend like it’s the eve of Y2K. The second estimate for fourth-quarter GDP showed that the U.S. economy grew 3.2%, slightly below the 3.3% initial estimate, and consumer-spending growth was revised higher at 3%1
When your parents ask you what the A to the I means? It’s hard to enter in any conversation without someone talking about AI. Will Long Blockchain (formerly known as the Long Island Ice Tea company now change its name to Long Artificial Intelligence? Yes, the AI revolution is here and the semiconductor companies are reaping the benefits (the guys who make the chips that power pretty much any complex computing device on the planet). Undoubtedly AI is and will continue to revolutionize how we work, create, and live - more on that another time. Right now, chip makers are the first to feel the financial boom of AI computing demand. NVIDIA is now worth more than the entire Chinese market, little known Supermicro Computer jumped nearly 300% in a matter of weeks (shoutout to my Boston Dentist for jumping on that bad boy). Peep the charts below to get an idea of the Semiconductor pump which has investors throwing their money like they’re at the Sapphire Gentlemen’s club.
What’s Next?
When you can point to actual data and figures related to a company’s performance for an increase in prices, the world makes a fraction of more sense. Meaning, the outperformance of Q4 earnings suggests that stocks may continue to rise - that doesn’t mean the ride won’t be bumpy. As investors are giddy like an 8th grader getting a note back from his crush with the box checked for “i like you too” right now and unaware that high school will wreck them (projecting much?). The point being, over excitement inflates prices, expect pullbacks. With the earnings season over, investors will return their attention to economic data and the Fed which has its next meeting on March 19. The focus will be on interest rates, and oh yes…the usual nonsensical volatility associated with government standoffs leveraging the threat of government shutdown. Lastly, inflation. The core PCE index has been below 3% over the past 2 months (the Fed’s target is 2% by YE 2024). If it keeps upping its limbo challenge the Fed will be more likely to cut rates mid-year.
What’s an investor to do?
Portfolio management
Since early 2023, the increasing concentration of the U.S. equity market has become synonymous with the Magnificent 7 stocks. But even this elite group of mega-cap tech companies became more concentrated in February. Microsoft, Apple and Alphabet lagged the S&P 500 gains last month, while Tesla is down about 18% year-to-date. That leaves NVIDIA, Meta, and to a lesser extent Amazon driving the bulk of the relative gains1.
This imbalance may create opportunities to broaden exposure throughout the year. As we are exiting the bear market and entering a bull market the window for bargain shopping is closing. Remember the old adage of the market…buy when others are fearful, sell when others are greedy. Well, folks are getting greedy right about now but there is still opportunity to be greedy too. The focus of your portfolio now is to diversify from US large caps (not avoid, diversify) and look for segments of the market that have lagged the bull run. Consider small and mid-cap stocks, value based investments, industrials, and cyclicals that may not fully benefit from the bull run until the Fed pivots to a more dovish stance and an improvement in growth based surveys (e.g., manufacturing PMI).
Remember, just because things are looking up does not mean it will be without volatility. The higher the expectations, the more room there is for disappointment. If the economy stays healthy, these pullbacks will provide good buying opportunities.
Investment Strategy
Small to Mid-caps (Russell 2000 - index)
Semiconductors (AI play): Many have already experienced large booms. Look for the ones that have yet to spike, monitor for increasing trade volumes across semiconductors (use a stock filter with your brokerage and set up alerts on trade volumes). For a list of semiconductor companies look here. (SOXX - index) Disclosure: Lamp Capital is long on SOXL
Upcoming Earnings
The Curious Investor:
Holy smokes NVIDIA earnings: Nvidia has been the primary beneficiary of the recent technology industry obsession with large artificial intelligence models, which are developed on the company’s pricey graphics processors for servers.
Adjusted earnings per share of $5.16 vs $4.64 expectation
$22.10 billion in revenue vs $20.62 billion anticipated.
Revenue guidance beat at $24 billion vs. $22.17 billion consensus forecast.
Total revenue up 265% YoY
Data center revenues were up 409% YoY to $18.40 billion, with more than half of that from large cloud providers.
Gaming business rebounded, rising 56% YoY to $2.87 billion as the post-pandemic glut continues to clear in the market.
What we’re wondering: How will NVIDIA be impacted by increased US investment in American made chips and increased restrictions on Chinese chips? Biden Admin to invest $5B in Semiconductor Research Consortium
Is the magic back at Disney? Back when Lamp Capital was able to purchase shares of Disney for less than $100, we were feeling like we just found the Pikachu Illustrator card at a yard sale. Then Disney struggled to find a way to grow revenues amid the pandemic and as investors lost excitement for Disney+’ growing user base without profits. The onus on companies in a hawkish environment is to focus on improving their operating margins rather than solely focusing on outward growth. That’s exactly what Disney has been up to and their latest earnings are testament and the reason why DIS shares popped nearly 20% after their earnings a few weeks back. Disney said it is on pace to meet or exceed its goal of cutting costs by at least $7.5 billion by the end of fiscal 2024. The company said it expects fiscal 2024 earnings per share of about $4.60, which would be at least 20% higher than 2023. Disclosure: Lamp Capital is long DIS.
Disney also announced it will take a $1.5 billion stake in Fortnite studio Epic Games and launch its flagship ESPN streaming service in fall 2025. The string of announcements, and progress in its cost-cutting initiatives, comes as the company faces pressure to improve its results from activist investor Nelson Peltz.
Here is what Disney reported compared with what Wall Street expected, according to LSEG, formerly known as Refinitiv:
Earnings per share: $1.22 adjusted vs. 99 cents expected
Revenue: $23.55 billion vs. $23.64 billion expected
Revenue was about flat at $23.55 billion, compared with $23.51 billion in the year-ago quarter.
Disney’s direct-to-consumer unit reported a $138 million operating loss in the quarter. Including the performance at ESPN+, losses for all its streaming businesses narrowed to $216 million, from $1.05 billion in the prior-year period.
Disney+ core subscribers shrank by 1.3 million from the prior quarter due to price increases, but the company saw a rise in average revenue per user because of those subscription cost hikes.
In the entertainment sector, revenues fell 7% to $9.98 billion, as linear networks and content sales and licensing fees continued to slump. The direct-to-consumer business, however, saw a 15% jump to $5.55 billion.
At ESPN, revenues rose 4% to $4.84 billion, as the company saw a decrease in programming and production costs and growth in ESPN+ subscription revenue and subscribers.Disney’s experiences division saw a 7% bump in revenue to $9.13 billion even as the company reported lower attendance at its domestic theme parks in Florida. Its two California-based parks saw comparable growth to the prior quarter as guests spent more while in the parks. Additionally, higher ticket prices and more passenger cruise days buoyed growth at Disney’s Cruise Line.
Walmart buys Vizio for 2.3B. Tell us what people watch because we know what they buy. Curious how data incentivizes acquisitions.
Macy’s shuttering 30% of it’s stores - defending against activist investors and promising a modern Macy’s? A hawkish environment means tighten your operations to improve margins.
SEC to rule on climate transparency: The rule, proposed by SEC Chair Gary Gensler, would require public companies to disclose their greenhouse gas emissions and climate-related risks.
If your taxes are simple, use Free File, there is a surge in folks filing for free this year
Regional Bank issues: NYCB
The recent downgrade of New York Community Bancorp's (NYCB) long-term deposit ratings by Moody's credit rating agency, raises concerns about the bank's financial stability and creditworthiness. Although the downgrade is not expected to immediately impact NYCB's ability to repay deposits, it highlights the bank's challenges, particularly its high exposure to multifamily real estate loans. Analysts are worried about NYCB's loan portfolio, and the bank's deposit levels, as it relies heavily on brokered deposits, which are seen as less stable than traditional deposits.
Inflation Reduction Act: The law has supercharged investment in American manufacturing facilities of some low-emission technologies, led by solar panels, advanced batteries and the full supply chain for electric vehicles. An investment tracker by the Rhodium Group, a consultancy that follows energy and climate spending, and the Massachusetts Institute of Technology shows companies spent $44 billion on clean-energy manufacturing in America over the past year, with significantly more planned in the years ahead. Those companies will benefit from the tax breaks in the climate law, either directly or indirectly. However, renewables are struggling - Rivian layoffs, Lucid motors revises production to 1/10th, SolarEdge had weak guidance, Sun Run missed on revenue,
Keep an eye on the economy
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Disclaimer
This writing is for informational purposes only and the author/s undertake/s no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author/s expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. The postings on this site are our own and do not necessarily represent the postings, strategies or opinions of our employers.
Kourkafas, Angelo. “Weekly Market Wrap.” Edward Jones, Edward Jones, 1 Mar. 2024, www.edwardjones.com/us-en/market-news-insights/stock-market-news/stock-market-weekly-update.