fbpx

Capital 19 Catch-Up

Weekly Index Movement

S&P500+4.3%
Nasdaq+4.5%
Aussie All Ords+2.3%

Well, that certainly put the bears back in their cage.

We knew last week was going to be a big event and there is a high probability it will turn out to be the biggest week of the year. It could well be the week that turned around the bear market.

We have a lot to cover this week, but the summary is – there is a very good chance we have seen the bottom in US stocks and the bear market is over.

Before we get to the important points, let’s address GDP and recessions.

Second quarter GDP was announced on Thursday and it was negative at -0.9%. That follows on the back of the Q1 -1.6%.

One accepted measure of a recession is two consecutive quarters of negative growth. The US has met that definition but no one cares because it is only one way of measuring a recession.

The US has a group called the NBER who get to decide if the economy is in a recession or not. They sit around drinking tea and eating Twinkies and at some point declare a recession. This is usually well after the rest of the world knows it to be the case.

The reason stocks did not react to this recession confirmation is twofold

  • Everyone knew what the number would be because of the Atlanta Fed GDPNow model
  • Companies are making record profits so who cares what the tea and Twinkie crowd say.

Our take is the economy is clearly contracting but companies are managing this slowdown well and it’s all about the profits when it comes to stock market gains.

56 percent of S&P500 companies have reported so far. 73 percent of those have beaten expectations. Earnings are on track to come in at $56.45/share in Q2 which would be an all-time high.

Unless you have a very good reason to believe earnings are going to come crashing down then stocks are very much a buy right here.

As we are all fed up with hearing, the problem this year has been inflation. But it now looks like we have seen peak inflation.

Commodity prices and inflation tend to run hand-in-hand and commodity prices appear to have peaked.

Commodity prices have all rolled over. Oil is down from $120 to $95. Corn is down from $800 to $600 a bushell, wheat is down from $1250 to $800 a bushell. These numbers suggest Inflation should be running around the 4% mark, not the recent 9% figure we received.

A big part of that 9% is rent. But the rent figure they use is calculated in ways we don’t like. Take a look at the CPI rent versus advertised rental prices for apartments. We suspect the rent part of CPI will follow suit shortly.

Bottom Line: Inflation is likely to have peaked and if that peaking process leads to a reasonably fast past of deceleration then the Fed can stop raising rates.

The other inflationary problem has been supply chains. But even here we see evidence of normalisation.

Everywhere we look we see evidence of business normalisation and slowing inflation.

The Fed would see the same thing and that’s why Powell (after giving us another 75Bps hike) said they could slow their pace of rises in coming months.

We have 8 weeks until the next meeting at the end of September, but the market now expects the cadence of Fed interest rate increases over the rest of 2022 is 50, 25, 25 and done, and then some cuts in 1H of 2023.

So, as a stock investor, how do you interpret all this data?

Stock investors spent the first half of 2022 worried about a never-ending series of interest rate rises, out-of-control inflation and slowing company profits. So they sold down stock positions.

But we have now learned company profits are even stronger than before, inflation is peaking and the Fed will slow interest rates.

That is quite a different story to before.

The market is always looking forward by about 6 months. What it sees for the next 6 months is much more positive than at any time this year. Barring any geopolitical or economic shock, the worst is behind us and you can begin buying stocks once more.

This brings us to our new feature.

We have been getting a lot of emails saying “thanks for the macro picture, but exactly what stocks are good to buy?”

So we are going to start to build a portfolio of stocks we think are worth investing in. We will review the list each week and add or remove things as they come up. Plus we will run a stop loss on each position just in case we have read things completely wrong.

Here are our first two to kick things off.

  1. Buy Microsoft (MSFT approx $280) with a stop at $240

Microsoft (MSFT) is the second largest company in the world and is diversified within the technology space. The company produces electronic hardware, cloud infrastructure, software, workplace collaboration tools, and web services. Investors are particularly focused on the performance of Azure, MSFT’s cloud computing service for application management, which continues to post strong growth figures.

Fiscal year 2022 adjusted EPS rose by 15.6% y/ y and GAAP EPS rose by 19.9%. The stock is currently trading 27.4 times LTM adjusted EPS. FY 2022 revenues rose by 18% to $198.3 billion (up 19% in constant currency).

We especially like the consistency of earnings by Microsoft. Look at this list of year-on-year EPS changes. Talk about consistency. Microsoft is the poster child of a growth stock.

Q2 2022 +2.8%
Q1 2022 +13.9%
Q4 2021 +24.7%
Q3 2021 +48.6%
Q2 2021 +39.3%
Q1 2021 +34.4%
Q4 2020 +31.9%
Q3 2020 +6.6%
Q2 2020 +22.8%
Q1 2020 +37.3%
Q4 2019 +21.1%
Q3 2019 +21.2%
Q2 2019 +20.0%
Q1 2019 +14.6%
Q4 2018 +35.7%

From a technical perspective, we like the pullback against a major trend that gives a nice entry point and the fact the short-term trend has recently been broken.

MSFT CEO Satya Nadella commented: “as a percentage of GDP, IT spend is going to increase because every business is trying to fortify itself with digital tech to, in some sense, navigate this macro environment.”

2. Buy Texas Instruments (TXN) with a stop at $145

The Senate voted Wednesday to pass the CHIPS and Science (CHIPS+) Act to provide $52 billion in subsidies and incentives to domestic semiconductor manufacturers, as well as more than $200 billion for scientific research and development to strengthen U.S. competitiveness in key areas like artificial intelligence (AI), robotics, quantum computing and a variety of other technologies. The House of Representatives followed up with a vote on Thursday and passed the massive chips and science bill.

The $280 billion measure includes federal grants and tax breaks for companies that construct their chip facilities in the U.S. The plan is centered around investing federal money into cutting-edge technologies and innovations to boost the nation’s industrial, technological and military strength.

Semiconductor chips are used in many products, including vehicles and cell phones, medical equipment and military applications. A shortage of chips during the coronavirus pandemic has caused price hikes and supply chain issues in several of these businesses.

Just five companies—including Micron Technology Inc (MU) and Texas Instruments (TXN) —are expected to receive the lion’s share of the $52 billion in subsidies.

Texas Instruments is a quality company that is part of our Dividend Growth Model Portfolio.

In a similar way to Microsoft (MSFT), TXN is just starting to break-out of the 2022 bear market and is now ready to resume its march higher, this time with the backing of the new scientific research bill.

From a record-keeping perspective, we are going to take the open price tonight for our theoretical purchase price monitor gains/losses from there.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.