Needless to say, Ford and GM have been hit by the chip shortage. Now we're seeing signs that this is easing.

General Motors and Ford shares rose on Tuesday as Commerce Secretary Gina Raimondo said U.S. automakers are beginning to get more semiconductors after a shortage had dented their production.

“You’re starting to see some improvements,” she told Bloomberg. In recent weeks, Ford Motor's Chief Executive Jim Farley and GM CEO Mary Barra have told Raimondo “they’re starting to get a little bit more of what they need,” and the situation is “a little bit better,” she said.

Raimondo organized meetings of semiconductor makers, their suppliers, and their customers, including automakers, Bloomberg reported. Senior administration officials said those confabs helped the situation.

This is a late, but we feel it is important to understand so we are posting this now (better late than sorry). It is a note from Mike Wilson - Chief Investment Officer and Chief US Equity Strategist at Morgan Stanley - wrote in May 2021 about what's called the mid-cycle transition. Initially when the economy reopens, there is a period of economic boom. Concurrently, cyclical stocks that are the most sensitive to the economic boom will follow. However, during the middle of this economic boom, as market perceives that economic growth will slow down shortly, there is a rotation away from these cyclically sensitive stocks into higher-quality stocks that are safer and more stable. This is indeed what we have seen happening; cyclical stocks such as Catepillar, banks, materials such as Nucor or Freeport McMoran have peaked actually in May. We just came across this piece, and we think it's important to share. We will now pay more attention to Mike Wilson, we think this guy is incredible.  

Please read it here.

Shares of Boeing are trading in the low 200s, down 50 points from where we initially bought it (20%). This is certainly a disappointment, but not totally unexpected. We have known for a while that Boeing's managements have problems with executions, and there are fears that the new CFO will have to do an equity offering. These 2 are chief fears why Boeing has been underperforming the market so much, and adding the broad market sell off yesterday, have decimated shares of Boeing.

Going forward, we still remain bullish for Boeing. The biggest 2021 catalyst for Boeing still remains, that is the China's recertification of the 737Max. 2022 will be a turning year for the company's financials, as the company is picking up more orders and cleaning out inventories. You can read in detail our thesis about Boeing here. 

In terms of trading, we are thinking about buying some Boeing shares here before the earnings. Shares have been down because people know Boeing is going to have a bad quarter, so when the bad quarter's news get out, it won't be a surprise. Even if shares trade down after the quarter's report, we can add some more. 

Shares of GM and F are under tremendous pressure today in what we believe to be a broad market sell-off, on concerns of slower economic growth due to the Covid-19 variants. The entire market is down today except those tied directly to fighting the Covid pandemic (Moderna being an example, and also stay-at-home stocks such as Docusign, Chewy, ...), which makes us think that this is a broad-based sell everything, shoot first ask later phenomenon. We will talk about this in a following post.

As we've said on this website multiple times, GM and F are trading together with the cyclical/value group as if they're cyclical stocks that can only perform when economic activities are high; however, they have a secular growth story that is the electric vehicle transition, and we believe stocks should be re-rated to become a growth story. Furthermore, shares of GM and F have been hit particularly hard because of the semiconductor shortage, so we believe stocks should get a relieve once the shortage subsides.

On the second point (about semiconductor shortage easing up), we recently heard from Taiwan Semiconductors (semiconductor manufacturer in Taiwan) on their earnings call last week. The company said it is working with customers to reallocate wafer capacity to support word-wide automotive industry. They expect that their actions will greatly reduce the automotive component shortage starting this quarter. Ford and GM should benefit from this.

On the first point (about secular growth story), we believe the demand for cars remain stronger than ever. The longer the pandemic carries on (which is what the market is being hit for in today's sell-off), the more likely it will be that habits learned during this period (such as remote/hybrid work) will be more deeply engrained. With that dynamic comes the desire for more space (think the move out of densely populated cities) and lead to sustained demand for cars because they are necessary for suburban living. Furthermore, the consumer balance sheet is the strongest that it has ever been (read the earnings call from JP Morgan here) so automakers should not see demands for their products decrease.

Altogether, you have demands being sustained at high levels, and the supply constraints easing up, which should help Ford and GM stocks.

Given the current competitive dynamics between Intel (INTC) and Advanced Micro Devices (AMD) , we wanted to provide our current viewpoint on the report out of The Wall Street Journal that Intel is in talks to buy chipmaker GlobalFoundries for about $30 billion.

First off, while on paper this is probably a smart move for Intel as it would accelerate their integrated device manufacturing 2.0 strategy, decrease their reliance on Taiwan Semi (TSM) , potentially gain a competitive edge over AMD, and control the chip production of other peers, we cannot help but question the regulatory hurdles this transaction would need to go through. It is already tough enough to get a semiconductor deal approved by global regulators, and we question the willingness of this new antitrust department of President Biden to let a deal like this to happen given how anticompetitive it would be.

We also cannot help but wonder if this is Intel's way of saying we are not catching up to AMD any time soon. Think of this reported interest as a confirmation of AMD's multi-year technology advantage. And even if this deal happens and it receives the necessary approvals, Intel will be forced to spend a lot of time and energy making a $30 billion acquisition succeed. A deal this large is a huge investment and it puts a lot of pressure on their internal manufacturing capabilities. With any slip-up or delay, what we could see is AMD extending its lead out even further, especially once they close the Xilinx acquisition.

We'll continue to monitor this story because this potential deal would be a noteworthy one in the semiconductor industry, but let's not lose sight of the facts here. Not only would this type of transaction likely face an enormous amount of scrutiny from regulators, but this is also not a quick-fix solution to the multi-year lead Advanced Micro Devices currently has and will not be giving away any time soon.

For young investors, especially who joined in the 2020 market crash and have been participating, you may not understand a major driving force behind the stock market, and that is the bond market. Treasury bonds, a type of bond issued by the government, are essentially debt certificates by the government, that you're loaning out money to the government. There is a market for bonds, and bond prices move up and down. Bonds have yields, and when prices of bonds go up (because of buying), yields go down; and vice versa. We offer more explanation about the bond market here. 

Recently and as written in our post on 7 July, bond prices have been going up and treasury yields (commonly referred to as rates) have been going down. What's hard to understand is that stocks are going down as well. Here are some theories:

(1) Bonds are being bought, rates are going down because US Treasury Bonds offer a higher yield than anywhere around the world, and people are piling money to buy US bonds. If this is true, then the high yield dividend stocks deserve to go higher, because they offer higher yields than the US Treasury bonds (say KMI yields 6% per year, but US Treasury bond only yields 1.3%).

(2) Bonds may be going up in price and down in yield because people realize that inflation is transitory. If this theory is correct, it would be incredibly bullish for stocks, remember back earlier this year we got high inflation numbers that caused sell offs in the stock market. But also, if this is true, you would expect to see big tech stocks, the likes of Facebook, Amazon, Apple, Netflix, Google, Microsoft, ... to soar higher because they are relatively immune to inflation. However, these stocks have been obliterated in the past couple days, especially Amazon down 1.5% yesterday. So this theory may be wrong.

(3) Rates are going down because we are about to have a slowdown in the economy. Delta covid variant. Peak growth. This is a real possibility. 

Above are the 3 theories of why rates have been going down. I think (2) is true, that inflation is transitory. I've said it multiple times; and I'm not alone, I'm in the camp with Fed Chairman Jerome Powell. But again, if this is right, how do we explain the recent weakness in the broad stock market, including both inflation beneficiaries and stocks that can thrive even in an inflationary environment.

Here's what I think: I think it's none of the above 3 theories that has been causing the recent broad market weakness. I think we are seeing broad weakness because we have a lot of speculation in the system. Young people who got government stimulus last year and just got into the stock market, are participating in speculative trading, buying speculative stocks with no understanding of how these companies make money. These young, inexperienced investors seem to be driven to speculative technology, biotech, crypto and meme stocks. The pool of money for investment is limited (demand), so when there is an increase in the number of stocks (supply), prices simply go down. Even the high quality names get hit, because simply there is not enough money in the system to support all the junks that have been created of late.  

But at the end of the day, the speculative ones are always the first to go. As long as our portfolio owns companies that we understand how they work, they are reasonably valued compared to historical trading ranges and the overall stock market, we should feel confident to buy these companies into weakness.

News got out this afternoon that Moderna will be added to the S&P500 by the end of July. Stock is soaring to all time high of 280$/ share. Our cost basis in Moderna is 180$/ share. We of course are NOT buying anything here, but we will not sell it here either. When a stock is being added to the S&P 500, fund managers HAVE TO buy this stock to match the S&P 500 performance. This is buying pressure on the stock, and we will utilize that to sell into strength towards the end of the month.

General Motors shares gained 4.0% premarket at this time of writing after Wedbush initiated coverage of the stock with an outperform rating and $85 price target. That target implies an upside of more than 51% from Thursday’s close. “CEO Mary Barra along with other key executives has led the legacy auto company back to the top of the auto industry in the United States,” Wedbush’s Dan Ives said in a note. Below here we will summarize Dan Ives' call for you, but before we do, we just want to acknowledge that this "re-rating" sentiment is exactly what we have been looking for all along with not only GM but also F. We have said multiple times that F and GM are undervalued because they are currently being rated as traditional automakers, which is inconsistent with the efforts and commitments they have demonstrated over the past year to transition to electric and smart vehicles, and the bullishness in GM and F stock will be when they are re-rated as EV makers. We missed the chance to buy GM yesterday when it was down to the mid 50s, so we shouldn't buy it up here in the upper 50s. We're happy with our current GM position at this current price level.

Ives isn’t a traditional auto analyst. His coverage includes traditional tech stocks such as Apple (AAPL) and Microsoft (MSFT), and includes new transportation-technology stocks such as Tesla (TSLA) and Nikola (NKLA). Including GM on his list illustrates that some tech analysts are taking note of GM’s investments in electric vehicles and battery production as well as autonomous-driving solutions.

“The first part of [CEO Mary Barra ‘s] tenure had some clear lows and major speed bumps,” wrote Ives. Now “the laser focus on electric vehicles has given new energy and strategic focus to GM which the Street has clearly started to take notice,” he noted, adding that GM is now a “re-rating story.” Re-rating means that investors will start to pay a higher valuation multiple on earnings because of perceived increased business stability and growth. GM managed to make money during the Covid-19 recession. That’s a sign of stability. It is also pouring billions into EVs to try to catch up with EV leader Tesla.

GM stock trades at about eight times estimated 2022 earnings. Ives’ target price works out to about 11 times his 2022 earnings estimate of $7.56 a share. By comparison, the S&P 500 trades at about 20 times, while Tesla stock trades at about 100 times estimated 2022 earnings.

It isn’t unusual for tech analysts to cover Tesla. But Ives may be the first tech analyst to cover GM stock. Some GM analysts also cover industrial stocks, but most just oversee the automotive sector.

GM continues to be a very popular stock on Wall Street. More than 90% of analysts covering the company rate shares a Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. That’s been a good call for the Street in 2021. Shares are up about 35% year to date, better than comparable gains of the S&P 500 and Dow Jones Industrial Average.

Today the 10 year treasury yield dips down to 1.305%, down from the peak of 1.77% in March that slaughtered growth stocks. With this move in the 10 year treasury yield, growth stocks are breaking out to new highs, while cyclical stocks, especially the banks, are being hit. As a short explanation to those who has not been following the market, banks do well when long term treasury yields (10 year especially) are higher, which would be at the expense of growth stocks because higher interest rates eat away the valuation of future profits. 

We're happy with this move, as we lightened our banks exposure as soon as we saw the downtrend in treasury yield, and rotated into growth stocks (the likes of AMD, APPL, PYPL, and especially the big, great AMZN trade). 

However, we don't think this downward move in treasury yield and bank stocks will last forever. We will be looking to add to bank stocks on further weakness, but it will be a measured approach following 2 key levels on the 10 year treasury yield of 1.3% and 1.0% (which can be seen here).

It is important to understand that you need to be careful what you wish for. While growth stocks got hurt with high treasury yields earlier this year, a very low 10 year treasury yield may not be too good for the stock market. We're doing some research to predict what can happen and how to position our portfolio accordingly, and we will update when we can reach a decision. 

It's never a dull week with Boeing. Shares ended the week down 4.71%, while the SP500 hits record high. Shares of Boeing has gone nowhere for the past half a year. 

Shares took a hit Monday on news that the FAA told Boeing that it likely would not certify the planned 777x until mid to late 2023. On Tuesday, Boeing got a nice win after United Airlines finalized an order of 200 more Boeing 737 Max Jets. The company announced Thursday it has appointed Brian West as Chief Financial Officer. West will replace Greg Smith, who previously announced his retirement from the company. A question market has for the incoming CFO is does he believe Boeing needs to sell stock in order to clean up the balance sheet. On Friday, shares dipped after news broke that a Boeing 737 cargo plane ditched off the coast of Honolulu due to engine problems. We expect some type of weakness any time an issue with any Boeing jet comes up because the immediate thought that comes to mind is will this implicate the MAX. But based on early reports, it sounds like the issue with this older 737 cargo aircraft is unrelated to what plagued the MAX. 

You can view our thesis for Boeing investment here.

Shares of Advanced Micro Devices (AMD) are trading higher today (up 3% at the moment) on news from UK that the antitrust authority there has approved AMD's acquisition of Xylinx. We discussed the potential for this news last week, and indeed the shares are responding positively. AMD is up 4.7% this week already.

But we're not over yet in terms of regulatory approvals. The deal is still waiting approval from Chinese authority. Once we get news from there it will be yet another positive catalyst for shares of AMD.

To reiterate, we believe once the acquisition is complete and over, AMD will be re-rated upward, as this acquisition transforms AMD into a bigger, better and more competitive semiconductor technology company in the space. You can view our investment thesis in AMD here.

Shares of CRISPR are trading higher today (~10%) following news from Intellia Therapeutics (NTLA), a fellow company in the sector which uses the CRISPR-Cas9 gene editing technology to treat diseases. NTLA reported the world's first positive data from gene editing clinical trial in a liver disorder. This is proof of concept for the CRISPR-Cas9 technology, and of course companies in the same sector would get a general lift. 

As you know, our holding in AMD, apart from the very sound fundamental and growth story that the company offers, is predicated on two other reasons: i) the stock has been an underperforming dog this year, and with the rotation into growth stock happening right now, we think market would give AMD a chance and ii) the imminent Xylinx deal which will close by the end of this year. About point ii), we think uncertainty surrounding the Xilinx acquisition is the reason why AMD has been underperforming this year compared to its peers. This stock merger creates a trading opportunity called a merger-arbitrage, in which arbitrage traders buy the target company (XLNX) and short the acquirer (AMD). That is why AMD is being shorted nearly 8% right now. 

However, from what we hear, approval of the deal could come as soon as next week - removing uncertainty and causing an unwind of some of the short trades caused by the arbitrage opportunity. Technically, the short sellers in AMD would buy the stock to cover their shorts, creating a buying force. Meanwhile, fundamental investors will come into AMD, because once the deal is finalized, the entire fundamental story changes for AMD. With the humongous buying force coming up, we have reasons to believe AMD will head to 100$/share by year's end.

Earlier this morning, Ford its adjusted pretax earnings for the second quarter will “surpass its expectations” and be significantly better than a year ago. The company also said net income for the second quarter is expected to be substantially lower than a year earlier, as calculations last year included gains from an investment in self-driving firm Argo AI. In April 2021, Ford forecasted its full-year adjusted pretax profit to be between $5.5 billion and $6.5 billion, including an adverse effect of about $2.5 billion from the semiconductor shortage.

Shares traded down nearly 2% today in the broad industrial stock sell-off following the FOMC meeting yesterday. We consider this a great buying opportunity: usually stocks rally on good news, especially news that the company will be able to deliver higher earnings. However, as we are in a broad market sell off, shares of Ford are coming down on good news from the company, which again is a great buying opportunity.

The fact that Ford traded down today with the industrial complex, which technology-related stocks are trading higher (NIO trading up by about 5%) also indicates to us that Ford is still not being regarded as an electric vehicle company. The same can be said for GM (down about 3% today). We know that in the future, F and GM will be EV-industry leaders, so this current dynamic offers even more reason for us to own F and GM.

Following this morning's expected earnings announcement from General Motors, we want to take time to analyze the valuation of this company and reiterate our price target for GM.

GM now expects pre-tax profits "at the higher end" of a $10 billion to $11 billion range. This expectation has already factored in impacts from chip shortage and higher production prices (of $3 billion). If we take the conservative estimate of $10 billion as GM's earnings this year, and with 1.45 billion shares outstanding, GM's earnings per share this year is 6.90$/share. Given the current P/E ratio that GM trades at (10 times), this means the stock price of GM has to be at least 69$/share by year's end. 

Furthermore, the 10x price to earnings multiple is something that we have been struggling, because of how cheap it is. Let's compare GM's valuation to other electric vehicle companies in America and in China:

1. General Motors:

• Market Cap: 89.38 billion

• Price/Earnings: 9.99

• Price/Sales: 0.73

2. Ford:

• Market Cap: 58.24 billion

• P/E: 15.22

• P/S: 0.45

3. Tesla:

• Market Cap: 582.69 billion

• P/E: 609.75

• P/S: 16.21

4. Toyota (TM):

• Market Cap: 297.54 billion

• P/E: 12.73

• P/S: 1.20

5. Lucid Motors (CCIV):

• Market Cap: 6.28 billion

• P/E: not profitable yet

• P/S: no sales yet

6. NIO:

• Market Cap: 52.67 billion

• P/E: not profitable yet

• P/S: 14.72

7. Xpeng Motors (XPEV):

• Market Cap: 30.63 billion

• P/E: not profitable yet

• P/S: 23.36

General Motors and Ford have the strongest credibility as a vehicle manufacturers; they have been dominating the car market for a while and will into the near future. Given their commitment to transition those currently best-selling vehicles to all-electric, there are no reasons to doubt that into the future, their all-electric vehicles will continue to be best-selling.  

This morning GM announced it is increasing its total investments in electric vehicle to a total of 35$ billion by 2025, an increase of 30% compared to previously committed. The additional money will be used to expand its rollout of EVs and accelerate production of its battery and fuel cell technologies, including 2 new US battery plants in addition to the 2 that are already under constructions.

GM also said it now expects adjusted pre-tax earnings for the first half of the year to be between 8.5$ billion and 9.5$ billion. This is a 50-70% increase compared to their previous estimate of only 5.5$ billion. 

Shares are up 1.8% pre-market. 

Boeing received another B737Max order from United Airlines. Shares of BA were up early market, but lost most of that gain. Boeing is trading in a 248 - 255 range, we were hoping this news would break it out of the range. If we lose 248 then we would test 240. No action is taken by us right now. 

UPS hosted its investor and analyst conference Wednesday, and ahead of the event, the team provided a press release laying out strategic priorities, three-year financial targets and new environmental, social, and governance goals for the company. "We are creating a new UPS, rooted in the values of the company. Our strategic priorities are evolving to reflect the changing needs of our customers and our business, and what matters most to our stakeholders," said CEO Carol Tomé on the press release.

The strategic priorities can be broken down into three areas: Customer first, People led and Innovation driven.

"Customer first," according to the release, means providing the best digital experience possible and the removal of as much friction as possible when doing business with UPS. To quantify the improvements here, UPS is targeting a 2023 NPS score of 50 or higher and plans to achieve this target by focusing on the "wildly important" of small/medium business (SMB), health care and international end markets, as well as overall brand relevance. Notably, management is targeting $10 billion in health care sales across three segments (indicating a 12.3% compound annual growth rate from 2020 to 2023). Internationally, the team sees UPS' addressable market growing from $86 billion in 2020 to $103 billion in 2023 -- representing a 6% CAGR.

"People led" means improving the employee experience to the point that more employees would recommend UPS as a place to work. To quantify progress on this front the team is establishing a 2023 "likelihood to recommend" target of 80% or greater.

"Innovation driven" means a focus on technology and productivity to deliver "consistently higher returns on invested capital, as well as returns to shareowners through dividends and share repurchases." On the innovation front, the team is working to simplify the fulfillment process and provide enhanced visibility and control to shippers via their CoyoteGo platform -- which will also help make parking easier for commercial drivers. The Orion (On Road Integrated Optimization and Navigation) platform is also being leveraged to optimize routes and save miles and fuel as a result.

Speaking of fuel savings, we expect to see further reductions as the company transitions to electric vehicles, as it previously committed to purchasing 10,000 Arrival (which UPS has an investment in) electric vehicles, with an option to buy another 10,000. Additionally, as a reminder, the team is also looking at the potential for eVTOL (electric Calvert Takeoff and Landing) aircraft to further enhance its logistics network.

Bringing the entire digital supply chain together is Symphony, which allows customers to access their "UPS-managed warehouse and transportation data from one portal, one single source of truth."

As for 2023 financial targets, management is targeting revenue in the range of ~$98 billion to ~$102 billion. Adjusted operating margin is expected to come in at approximately 12.7% to 13.7%. Capital spending from 2021 to 2023 is expected to be roughly $13.5 billion to $14.5 billion and adjusted return on invested capital of about 26% to 29%.

During her keynote speech, Tome spoke to some of the assumptions that went into this guidance. At a high level, the team believes that 2020 was an inflection point for small package growth due to the online shopping dynamic resulting from the COVID-19 pandemic and sees an accelerated growth rate in this market segment for at least the next few years. Globally, the team sees the small package market accelerating to a 10% CAGR through 2023 whereas management believes the U.S. Domestic small package market will grow at an even faster 12% CAGR through 2023.

Chief Marketing Officer Kevin Warren also spoke to the importance of winning small and medium-sized business (SMB) customers, calling out that this cohort is a huge opportunity for the company as the team sees U.S. domestic SMB market growth accelerating from a 3% CAGR in the 2016 to 2019 timeframe, to an 8% CAGR from 2019 through 2023. To win this business, the team will invest in core capabilities by expanding weekend operations and working to increase speed and ease of use for the SMB cohort. The team will also invest in "adjacencies" by implementing a new global pricing platform and improving the digital supply chain. The new global pricing platform could shave up to three days off of the shipping process of SMBs while the digital supply chain investments will result in over 150 enhancements to the tracking experience. Notably, these investments have "already reduced claims time from 20 days to 5 days."

Speaking on "Operational Excellence," the president of U.S. operations, Nando Cesarone, spoke about the "productivity flywheel," highlighting that the team managed to reduced key performance indicators from 462 to less than 10, eliminated unnecessary costs in the first quarter of 2021, increase weekend deliveries by over 46%, and improved driver efficiency by reducing package-selection time by up to 25%, eliminate ~11,000 container movements per week. The company also leveraged automation to reduce handles by 7.6% on volume flowing through 17 of the company's largest hubs in February and increased safety initiatives -- which resulted in a 6% reduction of most severe accident frequency in the first quarter of 2021.

CFO Brian Newman also provided details on these financial targets. The bulk of the revenue increase will be achieved by U.S. domestic revenue growth and international market share gains, while U.S. domestic margin expansion represents the largest contributor to overall margin expansion. Of course, achieving these two goals is what will allow management to reach their adjusted operating margin target while a combination of operating profit expansion and a focus on disciplined capital allocation is how the team will realize their return on invested capital objective.

Regarding capital allocation, UPS has four priorities: reinvest in the business, maintain a stable and growing dividend, maintain a strong balance sheet and credit rating and share repurchases. 

Looking at capital expenditure, as a percentage of revenue this line item is expected to decline from ~6% in 2020 to around 4.5% to 5.5% cumulatively in the 2021 to 2023 time period. Of the $13.5 billion to $14.5 billion spent during that period, 65% will be targeted toward growth initiatives with the remaining 35% focused on maintenance.

We should also note that UPS plans to achieve total free cash flow of $24 billion to $27 billion in the 2021 to 2023 time frame, a key goal that will provide for the various investments noted above and allow the team to achieve another goal of repaying $6.9 billion of maturing debt.

Finally, on the environmental, social and governance (ESG) front, in the long-term, the team is pledging "to be carbon neutral across scope 1, 2 and 3 emissions in its global operations by 2050." In the near-term, by 2025, UPS plans to have 25% renewable electricity for facilities and 40% alternative fuel of ground vehicles. In the mid-term, by 2035, UPS plans to reduce CO2 per package delivered for its global small package operations by 50% (compared to 2020 levels). Additionally, the team is planning to have 100% of their facilities powered by renewable energy and for 30% of fuel used by the global UPS air fleet to be sustainable aviation fuel.

All in, the event was a solid update for the company, however, as noted in our trade alert earlier today, this was not quite enough to meet elevated expectations and as a result shares have been met with a "sell the news" reaction. That said, we believe the team is making all the right moves for longer-term growth and is on the path to realizing management's "better not bigger" objective. This echoes commentary from analysts at Deutsche Bank who commented in a reaction note, following the event, saying "we continue to view UPS shares as very compelling in the context of structural earnings power. Shares, however, are underperforming a bit today on the back of what we consider to be very conservative guidance." The analysts ultimately concluded, "Net/net we have been here before with UPS shares. UPS mgmt. appears to be doing the prudent thing - putting out targets that are achievable under many different and unforeseen circumstances ... but the true potential is higher." 

In the analyst's view, we could be looking at "true EPS power just above $14 per share in 2023 (and on track to our $15+ in 2024E)." With the sell-off today, UPS trades at 18.5x 2022. Applying this 18.5x forward multiple to FY2023, we expect next year shares of UPS to trade around $260/share, which represents a 30% increase in share price. 

As a result, we are very confident with our decision to start a position in UPS today amid a ~4% sell-off. This represents an opportunity for longer-term investors, thanks to the improving underlying business fundamentals we have seen thus far and expect to see in the years ahead. 

We absolutely do not like the activities going on in meme stocks, or stocks pushed by the Reddit Wall Street Bets crowd, the likes of AMC, CLOV or WEN. These events are not normal and are noises that take away the focus of the market from serious investment theses such as the reopening trades, reflation trades or growth stocks with sound fundamentals. This is especially concerning when market has been stalling at all time high, and in order to move higher and break through the deadlock we need absolute focus on the "serious" trades that have been driving the market higher this year. We fear that market will participate too much in these Reddit trades, some will get burned (even including big money managers on Wall Street) and causing them to sell their positions in the "serious" stocks, thus causing an overall market correction. 

We're actively managing this situation and we fear that a stock market correction of about 5% may be coming earlier than we initially thought (we thought about end of August - September). These Reddit trades eventually will come to an end (like it did in January 2021) and people will get hurt. 

This morning, UPS published 2023 financial targets, forecasting full year revenues of around 100$ billion, as the world's largest delivery group aims to be carbon neutral by 2050.

This statement was published ahead of its annual investor day event which will take place from 9 - 11 am this morning. UPS held back from providing full-year guidance this year, following record first quarter earnings announced in April 2021. 2023 revenues expected to be between 98 and 102 billion, an 18.2% increase from 2020 levels, with consolidated operating margins of between 12.7 and 13.7%. 

According to CNBC, Southwest Airlines said Tuesday it is increasing its order for Boeing’s smallest 737 Max model by nearly three dozen planes, citing an improvement in travel demand. United Airlines and Alaska Airlines have also increased their Boeing Max orders in recent months, helping boost demand that dried up after the planes were grounded in 2019 after two fatal crashes. U.S. regulators lifted the grounding last November. 

General Motors (GM)'s stock had its "overweight" rating reaffirmed by Barclays in a research note issued on Monday. Analyst raised the price target to $70.00, up from their prior price target of $66.00 (representing a 10.46% from the stock's current price). This is on the background of better execution by the company, especially with the lead of CEO Mary Barra in the C-suite, that the company will not be hit as much as expected due to the chip shortage earlier this year.

Shares of GM are not responding well, however. On this news, shares traded up to 64.30 (up 1% on the day), an all-time high, but immediately got sold and down to 63.12 (down 0.4% on the day) at the time of this post. This indicates there is selling pressure at all-time-high prices.   

Shares of Abbott (ABT) plunged roughly 9% Tuesday after the company lowered its full-year 2021 earnings per share guidance to reflect weakening demand for COVID-19 tests. Quoting Abbott President and CEO Robert Ford:

"We've recently seen a rapid decline in COVID-19 testing demand and anticipate this trend will continue, which led us to adjust our full-year guidance. At the same time, excluding COVID-19 tests, our organic base business growth is accelerating, we continue to see improving end-markets and our new product pipeline continues to be highly productive."

As a result of the sharp decline in demand, management now forecasts total COVID-19 testing sales of $4 billion to $4.5 billion, down from their previous view of $6.5 billion to $7 billion. Not all of this drop in revenue will flow to earnings, as management said they will partially mitigate the earnings impact through less than planned reinvestment. However, the hit to earnings per share is material, with the company now expecting full-year 2021 adjusted EPS to be in the range of $4.30 to $4.50. This updated outlook still reflects strong, double-digit growth compared to the prior year but still, the $4.40 midpoint falls well below the "at least $5" target management previously guided to and the consensus estimate of $5.04. As a result, shares are being hit hard in Tuesday's session, and the roughly 8% drop has erased all of Abbott's year-to-date gains.

What is interesting about this revised COVID-19 testing forecast is what it means for the back half of the year. Abbott generated about $2.2 billion of COVID-19 testing sales in the first quarter, and the company said Tuesday that it expects to do about $1.1 billion in the second quarter. Using the low end of management's $4 billion full-year guidance as the new target, what can be implied is that Abbott now anticipates only $700 million in COVID-19 testing sales over the last two quarters of the calendar year. And looking beyond to 2022, Ford said during the conference call that to assume any meaningful amount of COVID-19 related testing sales in 2022 "wouldn't necessarily be prudent." This means estimates for 2022 earnings will have to be lowered, as well.

We believe Abbott is a premier health care company that has plenty going for it beyond COVID-19. Abbott has an incredible diabetes franchise, headlined by the FreeStyle Libre continuous glucose monitor, a market leader in a fast-growing category. The pipeline is strong, with several new launches and market expansion opportunities expected later this year. Plus, the balance sheet here is clean with a low amount of debt and plenty of cash on hand thanks to the billions of dollars the company has made from testing sales. We would not put it past management to take advantage of its advantageous balance sheet position by either buying back stock or pursuing M&A to reinvigorate growth.

It may sound counter-intuitive, but we now have greater confidence in Abbott's ability to meet its earnings per share goals. Its numbers have been completely de-risked from a revenue stream that had low visibility and was hard to predict, giving way to the core of the business that has and should continue to perform well. Now that expectations for the rest of 2021 have been fully reset, we think this pullback in Abbott Labs back to about $106 represents a buying opportunity.

The stock market is resilient yet very cautious

I believe the stock market has already priced in inflation fears, and to be more precise, it is now believing in Chairman Powell that this current surging inflation is going to be transitory and the Federal Reserve will be able to control it. Obviously, the Federal Reserve may be wrong, which is a risk for the market, and if that comes out to be the case there will be further pain.

Now what the market is talking about is tapering of bond purchase. Every time we get good economic data, market gets stuck in a stalemate as bulls strenghten their investment thesis but bears fear tapering of easy monetary policy. At WIC, like discussed, we think there may be a >5% correction towards the end of summer (August - October) surrounding this tapering controversy coinciding with when Federal Reserve will participate in an economic summit in Jackson Hole, WY. We don’t know if and when the Fed will taper, and we don’t think the market is pricing in the tapering yet. We think the best way forward for one’s portfolio is to try to price this tapering in, by selling heavy and profitable positions on rallies and reserve a big cash position.

But what happened this morning and why are the indices rallying today? 8:30 AM today we received May jobs data. Remember, very low jobs number hurts the reopening thesis, that the economy is not reopening as robustly as people thought. On the flip side, very high jobs number would suggest that the Federal Reserve may be nearing their tapering of asset purchase, which is definitely a negative for the stock market, especially the speculative frenzy. Nonfarm payroll jobs for May 2021 in the 500 thousands. Analysts were estimating 700,000. So 500,000 is not too bad, but not surprisingly good, which is good for stock market. Rally on!

Put this on your calendar

August 26-28 this year, the Federal Reserve will attend an economic symposium at Jackson Hole, Wyoming. This is where Chairman Jay Powell will lay out the FED policy for the years ahead, and economists/traders are anticipating that this will be when he discusses tapering of bond purchase.

If indeed the tapering begins (FED stops buying bonds), we can see the SPY correcting 10%, something that a lot of investors have been calling for. However, as we have said multiple times, this will be a good buying opportunity. Two predictions on WHEN the correction will occur:

a) We may see the correction prior to the meeting (our most likely scenario), as a way investors anticipate for the tapering to happen. Regardless if the FED tapers or not, we think market will likely be choppy for September - October before rallying at years' end.

b) We don't think this will be the case, but it can be that investors will be too optimistic (SPY not correcting before the meeting) and will be caught by surprise as the FED announce tapering of bond purchase during the meeting (SPY correcting after the meeting).

The best way as we get through the summer is to lighten up your investments on big rallies, so that you can work up a big cash position (10-15%) before the event. Then, when we have big corrections, buy small positions. Again, we recommend selling when at all time high, buying when there are >3% sell offs.