Capital 19 Catch-Up – May 21

The trade war continued to dominate the talk on Wall St last week, as markets consolidated after the previous week’s falls. Despite trade talks being all but shelved by the weekend, investors remained stoic for much of the week with the major indices only losing ground in the Thursday and Friday sessions.

Overall the Dow fared the best, only falling by 0.8%, to finish the week at 25,764. The benchmark S&P500 was right on its tail, losing 0.8% and closing at 2,859.53. While the Nasdaq suffered the most, dropping 1.3% and finishing at 7,816.28.

Trump’s Ban & Huawei

The technology stocks helped push the Nasdaq lower, following a tough week in which Trump moved to ban Chinese communication companies from doing business with American companies. Huawei and ZTE were the main targets, with US component suppliers unable to provide products to these companies without government approval, and hardware makers unable to take advantage of Huawei’s 5g product – now the world leader with over 283 global partners and 57 regional partners.

Overall Huawei spends $10-$12 billion each year on US components. However, they have had contingency plans for exactly this occurrence for a while now, developing their own chips and operating systems in-house. In all, it will be the Apple’s (AAPL), the Qualcomm’s (QCOM), and the Intel’s (INTC) that suffer. While Google (GOOGL) and Microsoft (MSFT) are also impacted, amongst a host of smaller names.

The Chinese weren’t impressed with the ban of course. Their media suggested that the US shouldn’t bother coming for trade talks – referring to Treasury Secretary Steven Mnuchin’s upcoming trip to Beijing.  The Chinese market was down 1.94% for the week. Baidu (BIDU), China’s version of Google, fell 16.5% on Friday, after concerns it will be heavily impacted by the trade war. It is down 22.81% for May so far.

In the US, chipmaker Nvidia (NVDA) also suffered. Despite beating analyst estimates on both profit and revenue after the market closed on Thursday and gaining as much as 7% after hours, concerns about its guidance and worries over China saw the chip maker fall 2.28% in the Friday session. As I’ve mentioned before, I like this company and I’m taking this moment as an opportunity to pick it up for a discount. It’s a market leader and will be so for a long time to come.

It was also a tough day for Pinterest (PIN) on Friday, losing 13.48% after releasing its first earnings since going public in April. The result takes some of the shine off one of the only successful IPO’s so far this year after the social media platform initially rose more than 50% above its recent IPO price. The company lost $41.4 million in the last quarter or $0.33 per share, better than the $52.7 million this time last year but not enough to impress the analysts who were expecting losses of $0.11c per share.

I find Pinterest a tough sell myself. Like all of the other social media apps, they are attempting to monetise their offering through advertising. But some have an easier time than others. So while applications like Twitter and Facebook are set up for well-placed advertising, Pinterest, which is an app that shows pictures of inventive ideas for the arts and crafts set, has more a DIY type of feel. You’re not really going to attempt to sell a Ford Ranger to a user base who want to know how to knit a nice cardigan – well, maybe a Volvo, but my point is you won’t have the range of prospective advertisers.

They now have 291 million users, an increase of 22% from this time last year. This isn’t anything to sneeze at, but it is still well behind the big players. An attempt to gain more market share in Europe will be key for them going forward. I’d expect continued volatility in the stock until their advertising revenue moves sharply higher. Until then I wouldn’t be buying the stock at these prices – even after the 14% fall.

An interesting note out from Factset last week advised that traders have been particularly harsh on companies missing earnings guidance this quarter compared to other years. And conversely, have been stingy in rewarding those that have done well. Companies that have missed their mark fell an average of 3.5%, well above the usual range of 2.5%. While companies that have beaten expectations have only gained 0.7%, slightly below the 1% norm.

There has also been an increase in S&P 500 companies offering lower guidance for this quarter. With 80% trying to ease expectations for the next round, compared to the usual 70%. Hopefully, this points to a whole raft of earnings beats when the second quarter results start coming out in July.

Microsoft (MSFT) is again flirting with the $1 trillion market cap level, that it first claimed in April. So far none of three companies that have cleared the trillion, Apple, Amazon (AMZN), and Microsoft, have managed to keep above it. With Microsoft now the closest at $988 billion.

MSFT now also has the distinction of being the only company that is worth more than 4% of the entire S&P500 index. Making it the biggest influencer on the largest index. Only four other companies have held this much influence over the benchmark index since the 1990s, those being Apple, Cisco Systems (CSCO), Exxon Mobil (XOM), and General Electric (GE). It is now up 28% for 2019 and is still only sitting on a P/E of 28. A nice one to have in the portfolio.

The retailers are set to dominate earnings talk this week with home improvement leader Home Depot (HD), department store struggler J.C. Penney (JCP), department store achiever Kohl’s (KSS), and bricks and mortar electronics retailer Best Buy (BBY).

More results from retailers will include Target (TGT), AutoZone (AZO), Urban Outfitters (URBN), Advance Auto Parts (AAP), Lowes (LOW), and Footlocker (FL). We’ll also see numbers from Hewlett Packard (HPE) and software maker Autodesk (ADSK).

Datawise we’ll see the Federal Reserve minutes from their May meeting, which will hopefully provide some insight into what they are thinking with the next interest rate movements. The US durable goods orders will also be in focus following a turbulent week with all of the trade kerfuffles.

EU Elections

The EU elections are also on this week. Every five years EU countries vote on who they want as part of the European Parliament with each country being allocated a set number of seats depending on the size of the country. There are 751 members, the largest country Germany holds 96 of the seats, while tiny Malta has just 6. It will have interesting ramifications for the EU going forward, and for the Brexit discussions that continue to shackle the UK.

Take a look below for a more detailed look at the earnings and data releases for this week.

Hope you all have a great week.

Cheers, Paul.

Earnings:

  • Tuesday: Autozone (AZO), Home Depot (HD), Kohl’s Corp (KSS), JC Penney (JCP), Expect Nordstrom (JWN), Urban Outfitters (URBN), Toll Brothers (TOL)
  • Wednesday: Advanced Auto Parts (AAP), L Brands (LB), Lowe’s Companies (LOW), Target Corp (TGT), L Brands (LB)
  • Thursday: Best Buy (BBY), Autodesk (ADSK), Gap Inc (GPS), Hewlett Packard (HPE), HP Inc (HPQ), Ross Stores (ROST)
  • Friday: Foot Locker (FL)

Economic Data:

  • Tuesday: Existing home sales
  • Wednesday: FOMC minutes
  • Thursday: Weekly jobless claims, Markit manufacturing PMI, Markit services PMI, New home sales
  • Friday: Durable goods orders, Core capital goods orders