25 Oct Capital 19 Catch-Up
The Major Indices Continue Their Fightback As Earnings Season Heats Up
It was another impressive week on Wall Street ending Friday as earnings reports continued to impress and coronavirus cases in the US subsided. Recent concerns over supply chain issues, inflation, and rising commodity prices have somewhat faded into the background with well over 80% of companies beating analyst estimates and most offering up positive forward guidance.
The S&P500 had a run of seven consecutive positive sessions, during which it added more than 5% before a small decline ended the streak on Friday. It was still the best performer of the major indices for the week, rising 1.6% over the five sessions. The Nasdaq, despite a heavy fall on Friday also made 1.3% for the week, while the Dow finished with a gain of 1.1%.
The week started poorly with Chinese GDP data slowing more than expected and US industrial production falling 1.28% in September. Chinese GDP was down from 7.9% in the previous quarter, stoking fears of stagflation which occurs when an economy sees slow growth with high inflation and unemployment. China has experienced power shortages in the last two months which has impacted output and caused businesses to hold off on future projects. There has also been a slowing in China’s real estate sector which accounts for a quarter of its total GDP. Tight credit conditions and the Evergrande troubles have combined to dampen investor enthusiasm.
Bitcoin was in the headlines during the week as the first ETF linked to the cryptocurrency hit the New York Stock Exchange. The ProShares Bitcoin Strategy ETF BITO started trading on Tuesday and closed 4.8% higher. The ETF tracks bitcoin futures rather than the spot price of the currency, so it’s not exactly what the punters were after but it certainly boosted bitcoin credibility to an extent. Bitcoin hit its highest point since April by the end of the week, breaching $64,000. I still wouldn’t go anywhere near it, but the increasing price shows the risk-on atmosphere that exists in markets at the moment, which can only have a positive effect on our stock portfolios.
Speaking of positive effects, this quarters earnings season just keeps on improving with 84% of S&P500 companies now beating analyst estimates. Profits are now expected to be up by 34.8% on last year, higher than the 30% originally forecast. Some of the successful earnings beats out of the Dow 30 components have come from Travelers (TRV), Johnson & Johnson (JNJ), and Verizon (VZ) who rose 1.6%, 2.3%, and 2.4% respectively. Procter and Gamble (PG) also beat estimates on the top and bottom line but fell 1.2% on concerns over rising freight costs and as it warned of inflation.
Later in the week Intel (INTC) and IBM (IBM) both dragged down the headline index, falling 11.6% and 9.5% respectively after reporting their results. Intel’s miss lay at the feet of the global chip shortage which has plagued all of the semiconductors. It also warned future margins would tighten and cash flow would decline as it targets R&D spending in the next few years including the building of its new chip factory in Arizona. IBM focussed on the tough labour market which it said: “put pressure on labour costs, and was not reflected yet in our current pricing. We expect to capture this value in future engagements, but it will take time to appear in our margin profile.”
Away from the Dow, Netflix (NFLZ) added 4.4 million subscribers for the quarter which was half a million more than expected, helped along by the South Korean megahit “Squid Game”. The streaming service also beat on earnings and matched revenue expectations however shares closed down 2.1% on future growth concerns. This is despite a large backlog of pandemic affected series coming to the platform in the last quarter of the year. The share price corrected itself to better match its results as it rose more than 5% in the last two trading sessions of the week.
The worst result for the week came on Friday as social media company Snap (SNAP) missed revenue expectations and fell 26.5%. The company blamed Apple’s iPhone privacy changes and supply chain shortages which have decreased demand for advertising. Apple’s new requirement for users to opt-in to let an app view their online history has resulted in only 16% of users taking up the option. This has made it harder for Snap and other social media apps to attract advertisers, who have, in the past, been able to target ads to the correct audience. CEO Evan Spiegel stated: “While we anticipated some degree of business disruption, the new Apple-provided measurement solution did not scale as we had expected, making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS.” The fall also caused trouble for Facebook and Twitter (TWTR) who fell 5% and 4.8% respectively.
Both the airlines for the week United (UAL) and American (AAL) both beat estimates but only American Airlines gained 1.9% while United fell 0.5%. Tesla (TSLA) also impressed as the electric car maker rose 3.2% on the back of improved margins. While old Catch Up favourite Nvidia also beat expectations and rose 2.6%. HP Inc (HPQ) was another winner, jumping 6.9% after beating on both the top and bottom line.
It was also a good week for Ford (F) who received a stock upgrade from Credit Suisse thanks to its concerted shift to electric vehicles. The analysts predict a further 30% rally in the stock – 4% of which came straight after the announcement. Wouldn’t it be nice to be able to move markets like that. Our stock report from May last year on Ford, when times were tough for the carmaker, and our update in December of last year, suggested there was a big future ahead with the EV switch. At the time Ford was trading at a huge discount of $4.87 and is now sitting at a much more realistic $16.28. That’s a nice 240% increase in just over a year for those that climbed aboard with us. Here are links to our old reports here to jog your memory: https://capital19.com/investing-in-us-stocks/ford-f/ and https://capital19.com/investing-in-us-stocks/ford-f-update/.
In the week ahead we’ve got 30% of the S&P500 reporting their quarterly numbers. Things are about to get real. Are there any of note? Maybe some of these names will ring a bell – Apple (AAPL), Amazon (AMZN), Facebook (FB), Alphabet (GOOGL), Microsoft (MSFT), Twitter (TWTR), Visa (V), McDonald’s (MCD), Coca-Cola (KO)? They’re all reporting along with Starbucks (SBUX), Boeing (BA), Ford (F), General Motors (GM), Caterpillar (CAT), and Exxon Mobil (XOM). Plus many more. Elsewhere, there may finally be a vote on the contested infrastructure bill, and the United Nations will meet in Glasgow to discuss climate change following the G20 summit in Rome. It’s going to be a big one.
Have a great week.