11 May Capital 19 Catch-Up
Nasdaq Positive For 2020 As Job Losses Hit 33.5 million
All of the major indices made gains last week for the first time in three, flying in the face of the multiple economic reports which showed the economy stressed at levels not seen since the second world war. The benchmark S&P500 index was up 3.5% and is now only 13.6% from all-time highs, while the Dow gained 2.5%.
The Nasdaq rallied 6% and is now, if you can believe it, up 1.6% for 2020. The big tech stocks have been leading the charge with Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOGL), And Microsoft (MSFT) all up for the year to date. We’ve had stock recommendations on four of these in the last year – you can check them all out here: https://capital19.com/category/stock-report/, and you can always see our new stock reports as the come out at the bottom of the Catch-Up.
The only outlier amongst the above group is Netflix, which we have recommended as a sell on more than a few occasions. They’ve been very fortunate to be one of a few businesses who have benefitted from people being locked away at home with little to do other than being entertained on the couch. They’re currently basking in a little bit of luck, but the good times won’t last forever and they’ll be a great shorting opportunity when everything settles down.
Another stock that has been taking advantage of having a captive consumer base is exercise equipment manufacturer Peloton (PTON). You may recognise this company from last year’s little controversy when they produced an advertisement showing a husband giving his wife an exercise bike for Christmas. It was labelled sexist by many commentators, a media beat up by others, and it all provided some brilliant free advertising for the product.
Come forward a few months when the coronavirus hits and forces everyone to stay indoors. You then have a consumer base unable to use a gym and reliant on exercising within the comfort of their own home. Peloton sells stationary bikes and treadmills with screens that show online streaming classes. The beauty of it is they make money on the sale of the product but also receive a monthly subscription once the owners sign up to classes.
Their earnings came out this week which showed revenue have jumped by 66% to $524.6 million, with total members growing from 2 million to 2.6 million in the quarter. That’s a 30% increase when people were only locked away for the last couple of weeks of the quarter. You can imagine the next quarter will blow this one out of the water. Shares were up 16% after the result and are now up more than 40% year to date.
In other earnings, Disney saw mixed results which weren’t unexpected. Operating income from parks and cruises saw a fall of 58%, and the house of mouse expect its Parks, Experiences, and Products segment to lose around $1 billion because of closures. On the plus side, Disney saw a boost to its streaming service Disney+, which now has around 54.5 million subscribers as of May fourth (that’s Star Wars Day for the uninitiated). That boosted its Direct-to-Consumer segment to double revenue to $4.12 billion in the quarter. While revenue from its media networks was up 28%, and the Studio Entertainment segment also rose by 18%.
Another Catch Up favourite PayPal (PYPL) reported on Wednesday and just missed expectations due to strategic losses with its purchase of Latin American e-commerce platform MercadoLibre. These were expected and the numbers that really excite investors all blew away expectations. PayPal increased active users by 17% year on year by adding 20.2 million accounts during the quarter, and also expect to add another 15 to 20 million in the second quarter. The boost to online shopping during the pandemic has been an undoubted bonus. We did a stock report on PayPal back on March 13 and the stock is up more than 30% in that time. You can read our report here: https://capital19.com/investing-in-us-stocks/paypal-pypl/
Energy stocks fared a little better this week as the oil price staged a mini-rally on hopes of an economy being reopened. Airline stocks also managed to bounce back despite investment guru Warren Buffett commenting that his company Berkshire Hathaway had dumped all of its stocks in the sector due to the coronavirus outbreak. Most of the bigger airlines such as Delta (DAL), United (UA), and American (AAL) are still down more than 60% while Southwest (LUV) is down 50%.
Berkshire Hathaway now has $137 billion sitting in cash, with Buffett stating he hasn’t found anything attractive enough to deploy the money into. I suspect he’s waiting for another pullback.
The ISM non-manufacturing index showed a contraction to 41.8 in April. It’s the first contraction the index has seen since December 2009 and its largest since the index began in 1997. Private payrolls dropped by 20.2 million, which was its worst since inception in 2002. There were 3.169 million unemployment claims last week, taking the tally to 33.5 million in seven weeks, while the nonfarm payrolls showed that 20.5 million jobs had been lost in April, and unemployment was at 14.7%. Fun fact: it took almost two years for unemployment to hit 15% back in 1929. This time around it took just two months.
It wasn’t all bad news on the data front. Outside of the US, China showed a few green shoots with exports up 3.5% in April, when economists were expecting a 15.7% fall. As you can export medical exports surged as China sent healthcare supplies out to the rest of the globe. This included 27.8 billion face masks and 130 million protective suits. Imports, however, fell by 14.2% when analysts had expected a fall of 11.2%.
In the week ahead, earnings season will start to wind down but we’ll still have a few big names reporting. Under Armour (UAA), and Tilray (TLRY) come out tonight, Cisco (CSCO) and Sony (SNE) on Wednesday, while Applied Materials (AMAT), and JD.com (JD) will round out the week.
All eyes will again be on the success or failure of the gradual reopenings of different state economies. As some states start to relax restrictions, the number of active cases and the death toll will be closely watched. If the numbers continue to rise State governors will have the choice of either closing things down again or ignoring the numbers. As CNBC writer Tom Franck suggested, “fears of a dreaded second wave of outbreaks have perhaps been overcome by economic necessity”.
But it isn’t just about government decisions. The economic recovery also requires individual citizens to be confident enough to return to public life. Just because a governor opens up businesses doesn’t mean people will start returning to them. Certainly, some will and some won’t. Once again, it will come back to these toll numbers and how it will affect customer morale.
There’s also a slew of new economic reports out this week. I was going to list them, however, there seems to be little point in following them at the moment. They are all ultimately horrible and investors continue to ignore the results regardless. These are interesting times.
Have a great week.