20 Jul Capital 19 Catch-Up
Bank Earnings Produce a Mixed Bag As Sentiment Turns On Technology Stocks
It was all happening on Wall Street last week as reporting season kicked off in earnest. The big banks produced mixed results for the second quarter, while Netflix (NTFLX) was brought back to earth with disappointing guidance. Coronavirus cases continued to rise across the US and the death rate picked up, however, we saw more positive vaccine rumours suggesting that an effective treatment could be with us by years end. We also saw a shift in the types of stocks buyers were after as technology companies struggled, replaced by some of the bigger named cyclical stocks.
The shift away from technology was a fascinating one. It has been the one sector that has led the market’s recovery since the depths of March and taken the Nasdaq to all-time highs on an almost daily basis. However this week the Nasdaq was the only one to fall, losing 1.1% over the five sessions, while the Dow and the S&P500 gained 2.3% and 1.3% respectively.
The first signs that the big tech stocks were falling out of favour began on Monday when California announced it was reversing its reopening strategy. The headquarters of all of the major players are located there, except for Microsoft (MSFT) which can be found higher up the coast in Washington.
Considering technology companies are the best equipped to handle such interruptions didn’t seem to matter much to investors. But the tone was set and the sector struggled to get its momentum throughout the rest of the week. Facebook (FB), Alphabet (GOOGL), and Microsoft (MSFT) all lost ground over the five sessions, while Amazon (AMZN), perhaps the standout during the isolation period, dropped 7% for the week.
It didn’t help that the king of isolation stocks Netflix (NFLX) reported disappointing earnings guidance after the session close on Thursday. Profit was lower than expected, coming in at $1.59 per share, well below the $1.81 expected. However, revenue beat estimates of $6.08 billion, coming in at $6.15 billion, while the number of subscribers jumped by 10.09 million when the market was expecting 8.26 million. Guidance let shareholders down though, as revenue was down on estimates and Netflix said it expected 2.5 million new subscribers in the third quarter when the market was looking for 5.27 million. Netflix lost 6% in the Friday session and 10% for the week.
Earnings from the major financial institutions were also a mixed bunch as loans to customers struggled but equities trading took off thanks to market volatility and liquidity injections from the Federal Reserve. Early in the week, JPMorgan (JPM) had a small win while Wells Fargo (WFC) and Citibank (C) saw losses. Goldman Sachs (GS) outperformed in the Wednesday session, while Morgan Stanley (MS) did the same the following day. In contrast Bank of America (BAC) beat estimates but fell 2% when it announced it had put aside $4 billion to cover coronavirus related losses.
It was also a wild week for Tesla (TSLA) who hit all-time highs on Monday but then fell heavily with the rest of the technology stocks to be down 15% by the end of the week. At one point in the Monday session, it was up 14% and briefly the 10th most valuable stock in the US with a market cap of $321 billion. Unfortunately hitting this milestone seemed to draw attention to the fact that it didn’t really deserve to be regarded in such lofty heights and it fell away accordingly.
While it has gained along with all of the other tech stocks in the market it is still, in its essence, a car maker with a side business in battery storage. There’s a lot of pitfalls in the industry and its business model is ripe for competitors to steal away its customers. Even after the 15% fall over the last four days, the share price is still up a monstrous 541% since the start of July last year. We’ve been talking up the stock for years at Capital 19 but at these prices, it is just too outrageous. A price below $1000 would be much more realistic at this point. Tesla will report earnings on Wednesday of this week so I expect there will be fireworks in either direction.
The heat will continue to be on the tech stocks in the week ahead as some of the Nasdaq big guns report their earnings. IBM (IBM), Intel (INTC), Microsoft (MSFT), and Twitter (TWTR) will all report numbers. And we’ll also get to see the damage inflicted upon the airlines as United (UAL), Southwest (LUV), and American Airlines (AAL) all announce. Other big names to report include our stock report subject for last week Coca-Cola (KO), Halliburton (HAL), Verizon (VZ), Lockheed Martin (LMT), Chipotle (CMG), Travelers (TRV), and American Express (AXP).
The weekly jobless claims will continue to be the most-watched of the economic data as initial jobless claims continue to clear the 1 million mark each week. While the Senate Republicans will be meeting to discuss their forthcoming stimulus plans as the pandemic continues. And make sure you take a look at our feature on Gold this week in our latest Stocks in Focus section.
Have a great week.