Capital 19 Catch-Up

Market Rally Pauses as Weed Industry Gets High and Disney and Under Armour Beat Estimates

Wall Street was quieter last week as the market took a breather from its recent upward run. All of the major indices still finished at record highs despite experiencing lulls mid-week. The Dow hardly moved during the middle of the week, while the S&P500 stayed within a 0.2% range for three straight sessions. It was refreshing to have a whole week go by without some sort of controversy impacting share prices, however, there were still plenty of interesting moments that will influence market direction going forward.

The Nasdaq was still the leader of the pack, gaining 1.7% to close at a record high of 14,095.47. The S&P500 made 1.2% for the week to close at its record high of 3934.83. While the Dow rose 1% and closed at a record high of 31,458.40. Despite the quiet week, the Dow is now up 5% so far in February, with the S&P500 and the Nasdaq up 5.9% and 7.8% in the same period. Ahead of all of these is the smaller cap Russell 2000 index, which is up over 15% for Feb. It’s also one of the main reasons why our top 30 strategy is up nearly 20% in just one and a half months so far in 2021.

With the market taking a pause it wouldn’t be a surprise to see a small pullback in the near future. But any fall will present a great buying opportunity. The market has run hard in the anticipation of the economic recovery that is about to happen. It’s now just a matter of waiting for that recovery to occur. For that, we need to see reopenings become more common and consumers back out on the ground spending money. On Friday President Biden announced the US had locked in another 200 million doses of the Covid vaccine, bringing the total to 600 million. This amount will be enough to cover the entire adult population. The comeback is only a matter of time.

The cannabis industry had an extremely interesting week which caused a kerfuffle in the Capital 19 offices. As you would probably know we have championed many of these stocks for quite a while now as the industry attempts to find its feet in Northern America. Well, during the week the Reddit drama that engulfed GameStop just a few weeks ago found itself on the weed bandwagon. This saw shares of Tilray (TLRY) rise by more than 50% and Aurora Cannabis (ACB) up 20%. Our favourite Canopy Growth (CGC, WEED) gained 6% and is already up 110% so far in 2021. The craziness was shortlived however and most of the prices were back to where they started by the next day.

Canopy Growth also reported earnings on the Tuesday which showed revenue rising by 23% year on year. Sales were driven by an increase in Canadian recreational buyers and an improved performance from vaporizers, and health and wellness products. CEO David Klein remarked “We delivered another quarter of record net revenue, with growth across all our businesses, led by improved commercial and supply chain execution. The company continues to accelerate its U.S. growth strategy… with the momentum building behind the promising cannabis reform in the U.S.” It is expected that more US states will come on board the legalisation train in 2021, along with a White House with a more favourable view on the industry. 2021 is looking like it could be a breakout year.

Walt Disney (DIS) was another to release earnings, as the House of Mouse announced a surprise profit for the final quarter of 2020. Its streaming service Disney + was the main instigator as a resurgence of the pandemic saw many new users flock back to their television sets. The number of subscribers hit 94.9 million by the end of the year, up from 26.5 million in the same period last year.

The streaming business has been a godsend as the company’s big theme parks and cruise lines stay closed for the time being. Despite the surprise to the upside, Disney shares fell 1.7% as analysts commented that they thought prices had run too high considering the poor performance of the parks and experiences business. Granted the valuation looks awful at the moment, but it is understandable considering park revenue has more than halved. However, I fully expect that there is a lot of pent up frustration with the curtail on travel that will see the holiday businesses go gangbusters when the shutdowns ease and people can move around freely again.

Under Armour also reported a surprise profit as online sales rose 25%. The boost to the athleisure wear industry has rubbed off on the sporting retailer with revenue hitting $1.4 billion, higher than the $1.27 billion expected. Profit was a positive $0.12c when analysts were expecting a loss of $0.07c per share. While store sales were down due to many not operating at full capacity, digital sales more than made up for the miss, with international sales also making up for a drop in US demand. Under Armour was up more than 8% after the result was released.

An increase in weekly jobless claims helped to hold the market back as investors feared another job slow down. Economists were expecting 760,000 unemployment claims, with the actual figure reaching 793,000. We also saw a little kick up in inflation with CPI rising 0.3%. It wasn’t enough to suggest that rates could be going higher soon, but it may be an inkling of what is to come as economies begin to reopen. Luckily we had Fed Reserve chairman Jerome Powell to allay any fears as he cautioned that US monetary policy needs to stay “patiently accommodative” as the labour market continues to face many challenges.

It will be a four day week this week as the markets close tonight for Washington’s Birthday. They’ll reopen tomorrow with earnings reports from CVS Health (CVS) and AutoNation (AN). Later in the week, we’ll also see reports from names such as Baidu (BIDU), Shopify (SHOP), Walmart (WMT), Applied Materials (AMAT), and Deere (DE). We’ll also see hedge funds and retail brokers gather in Washington DC for House hearings on the GameStop controversy which will no doubt be a total waste of time. Data wise we’ll have retail sales, the release of the FOMC minutes, and the manufacturing and services PMI numbers.

Have a great week.