15 - 19 November 2021: Weekly Roundup

Sunday, 21 Nov 2021 8:00 AM EST

Summary Of The Week

U.S. equities faced some pressure on Friday of this week largely to the downside trading in Europe this morning. Shares of the old "reopening" names (travel, leisure, hospitality, and even banks) underperformed, while technology names surged higher, with names like Apple and Amazon making all-time highs. Weighing on the "reopening" equities is the resurgence in COVID-19 in Europe. Austria became the first country in Europe to reimpose a full coronavirus lockdown, stepping up its restrictive actions for only unvaccinated citizens. This follows surging cases in German and other parts of Europe that are leading to renewed restrictions. Germany saw a new all-time high of over 65,000 new coronavirus cases yesterday. Same thing in the Netherlands, where a third consecutive day of record high of new cases was reported, and France is seeing levels that were last seen around the end of August. Belgium has re-instituted work-from-home and indoor mask mandates. In Asia, the Korea Disease Control and Prevention Agency reported South Korea also saw a surge in COVID-19 cases even as the country moves into its first phase of "living with COVID-19" with loosened restrictions. 

We don't believe the worry this time is the same as before: we're not worried about high deaths, forced lockdowns, slowing of economy, ... as much as we did before, given the availability and effectiveness of the vaccines. This time, we think the market is worried about supply chains issues associated with Covid-related slowdowns in production/ transport. For example, chip factories in Malaysia just returned to full capacity not so long ago, and it would not be good to hear that they have to shut down again. It makes sense to see Covid fear hurting travel/ leisure stocks. It is also hurting financial stocks, as treasury yields are declining as a result of this worried economic slowdown. 

Despite the rotation away from the reopening trade and into growth stocks, we would not turn our backs on the reopening trade. Between the approval of vaccine boosters, the development of highly effective antivirals, and the wide availability of rapid tests, we have more tools at our disposal to combat this pandemic than ever before. At the end of the day, our approach to the market right now is maintain a diversified “barbell” approach of reopening plays (financials, travel/leisure, industrial, materials) and secular growth winners (tech, healthcare). 

In Washington, the House approved $1.75 trillion Build Back Better economic package today. The Senate then plans to take up the legislation after it returns from a Thanksgiving recess. Also coming back to the forefront in Washington is the U.S. debt ceiling given that the Treasury Department projects that the U.S. government can stave off a debt default until Dec. 15 - that's just over three weeks away and yes, Congress does have that Thanksgiving break which means the House and Senate won't be back in session until Nov. 30.

Lastly, ahead of the Thanksgiving holiday, President Biden assured us he will share his pick for the next Federal Reserve chair. While current Fed Chair Powell is the front-runner, over the last few weeks, Fed Governor Lael Brainard's name has been brought up following the news that Biden interviewed both Powell and Brainard, and spent more time with Brainard. Either Powell or Brainard should be good for the market, so any volatility associated could be bought.  

We will not be writing and posting over the Thanksgiving week. However, as always, you can update our stock positions here.

Portfolio Actions Taken Over The Week

On Friday's weakness, we didn't buy any travel/ leisure stock (Disney) because we had bought it earlier in the week. However, we bought more JPMorgan (JPM), Wells Fargo (WFC) as financials were weak following the drop in treasury yields. We would have added to Morgan Stanley (MS) if we hadn't bought higher a couple days ago. However, for MS, we're willing to buy in the low 90s if that has to be the case. It makes sense for JPM and WFC to drop following yields, but MS is not a rate-sensitive story, so such move should be treated as a buying opportunity.

We sold half of our position in Pfizer (PFE) based on a technical and portfolio management's move. Shares have ran up too much too fast, now at 2021 high and saw some ugly selling action on Friday even after news of booster endorsement. 

Lastly, we purchased more shares of Ford (F) over the week, in the $19s. On Thursday, Ford's CEO announced that they will double their EV production capacity by the end of 2023, to 600000 EVs a year. However, the stock didn't react to this news, and to us that's a buying opportunity. Being able to raise production capacity shows that management is confident about the semiconductor situation. We are willing to bet that demand is not going to be an issue, given the strength of the Ford brand, the fact that we are just starting to come out of the vehicle shortage situation, and the electric vehicle incentives in President Biden's Build Back Better agenda that eventually Congress will pass. As a result, we believe analysts will soon have to raise 2022 and 2023 earnings estimates for Ford. Currently the consensus for 2022 EPS is $1.94/share, and shares have been trading well at 19$/share, suggesting investors are comfortable with a 10x forward multiple (significant improvement compared to the 7-8x of earlier this year). We'd like to see average 2022 EPS estimates go up to $2.2/share, which is the highest estimate out there. Given a 10x multiple would bring shares to $22, making our purchase here at $19 very reasonable (15% upside possible this year). 2022 is going to be a different story as investors will start pricing in 2023's EPS estimates. Currently the consensus is $2.6/share, therefore, we expect shares of Ford to be in the high $20s in 2022. 

Portfolio Overview:

Amazon (AMZN): While the October Retail Sales report showed domestic digital shopping remains robust, renewed COVID-19 restrictions in Europe bode well for a re-acceleration in that market. During the week, reports suggested Amazon may be looking to move its co-branded credit card to Mastercard from Visa (V). While a switch to Mastercard would be a positive for that company and the portfolio's position in the shares, we would caution subscribers that this could prove to be a negotiating tactic on the part of Amazon to get lower transaction fees out of Visa, part of its stated objective to reduce variable costs and leverage its fixed costs. We'll wait for a formal announcement before revising our margin assumptions for Amazon. . 

Apple (AAPL): At its Investor Day, Qualcomm (QCOM) shared it multi-year forecast for 5G smartphones, which confirmed the multi-year ramp, a positive for Apple's iPhone upgrade cycle. Qualcomm also shared it sees itself as only supply ~20% of Apple iPhones in 2024, which translates into an accelerated ramp in Apple's Apple Silicon plans. There was also renewed chatter over Apple's autonomous car efforts with speculation calling for the company to debut a vehicle by 2025. We have said before that Apple's vehicle plans, dubbed Project Titan, are one of the worst kept secrets we've run into. That said, not only is the project multiple quarters out, we have no idea what the product will be, the price point or what the competitive landscape will look like. In short, we see this week's vehicle news pushing share higher, but it will be some time until Apple rubber hits the road. With AAPL shares bumping up against our price target, we will once again revisit potential upside to be had in the shares. 

Advanced Micro Devices (AMD): MediaTek and AMD today announced a collaboration to co-engineer industry leading Wi-Fi solutions, starting with the AMD RZ600 Series Wi-Fi 6E modules containing MediaTek's new Filogic 330P chipset. The Filogic 330P chipset will power next-generation AMD Ryzen-series laptop and desktop PCs in 2022 and beyond, delivering fast Wi-Fi speeds with low latency and less interference from other signals. 

Salesforce (CRM): With enterprises still migrating their business into the cloud and adopting productivity and customer service applications, Salesforce's cloud business looks poised to prosper. Bloomberg Intelligence sees this increased spending pushing Salesforce's current remaining performance obligation above 20% and close to 25% including Slack, which it sees growing 35%-40%. During the week, Salesforce COO Bret Taylor discussed how the work from anywhere is a positive for the company and a number of its tools, including Slack. Taylor also went on to say the metaverse is an opportunity for the company. We'll look to hear more on that when Salesforce reports its quarterly results on Nov. 30. 

Cisco Systems (CSCO): October quarter results at Cisco Systems (CSCO) came in mixed with better-than-expected bottom line results, even though the company's top line, which rose 8.1% year-over-year to $12.9 billion, came up short of the $12.98 billion consensus. While management shared order demand was robust, with three of its four customer groups generating order growth in excess of 30%, supply constraints are preventing the company from fully turning product orders into revenue. Like many other companies, Cisco is taking multiple steps to mitigate component shortages, including paying significantly higher logistics costs, modifying designs, and using alternative suppliers. And on the topic of prices, Cisco shared it has raised prices, but it will take some time for those benefits to be realized, which means in the near-term these supply chain shortages will likely hurt its margins. The shares are likely to be range-bound in the near-term at least until confirmation that global supply chains have improved. 

Disney (DIS): Marvel's Eternals repeated it place atop the box office leader board last week, crossing the $100 million mark domestically. During the week, Walt Disney announced it tapped former Netflix (NFLX) and ABC executive Bryan Noon as president of Disney TV Entertainment. Noon served as VP, Originals at Netflix for eight years ending in Oct. 2020. Quarter to date TSA checkpoint traveler throughput data shows the number of travelers is up 125% vs. the same period last year and we see that as a positive for Disney's Parks business. 

Ford (F): Late in the week, Ford announced a non-binding strategic collaboration with Global Foundries (GFS) that would allow for Global Foundries to create chip supplies for Ford's current vehicle line-up and news chips aimed at battery management systems, in-vehicle networking and other applications. We see this as a smart move by Ford to shore up its chip supply while also ensuring availability and chip content per vehicle continues to climb in the coming years. This allowed CEO Jim Farley to announce that by the end of 2023, Ford will have the capacity to produce 600000 EVs per year. Exiting the week, Ford announced plans to reduce debt on its balance sheet to the tune of $7.6 billion through a tender offer to be completed early next week. These moves all say one thing: management is doing an incredible job and we should be confident that there is more to come. 

Google (GOOGL): During the week there were several reports from DownDetector that Google and YouTube were down for periods of time, something we'll have to consider given the company's core advertising revenue stream. Also this week, Alphabet's Waymo announced an expanded relationship with UPS (UPS) for autonomous class 8 trucks with trials soon to be underway between UPS's North American facilities between Dallas-Fort Worth and Houston, Texas. And Google has been officially invited to bid on the Department of Defense's Joint Warfighting Cloud Capability contract alongside Amazon and Microsoft. 

Microsoft (MSFT): With the rebound in COVID-19 cases in Europe, Belgium, Germany, Ireland, and the Netherlands have re-established work from home mandates. We see this benefitting Microsoft's Teams platform as well as its cloud business that is part of Microsoft 365. Also this week, Microsoft filed with the European Commission for its planned acquisition of Nuance Communications (NUAN) and a provisional deadline for its response has been set for Dec. 21. Finally, Credit Suisse reinstated coverage on MSFT shares with a $400 price target vs. the current price target consensus of $358 and our $340 target. 

Nucor (NUE): President Biden signed into law a roughly $1 trillion infrastructure bill that is meant to bring the electrical grid into the modern era; expand access to broadband internet; upgrade airports, water, and transportation systems; and repair the country's seriously aging roads and bridges. We see this bolstering steel demand in the coming quarters and driving revenue gains for Nucor, even if steel prices decline soften some in the coming months from peak levels reached earlier this year. 

Morgan Stanley (MS): While there was no company specific-news, Morningstar, Inc. reported estimated U.S. mutual fund and exchange-traded fund (ETF) had $84 billion of inflows in October, up from $53 billion in September and U.S. equity funds had inflows of $32 billion to lead all U.S. category groups for the first time since a record $54 billion of inflows in March 2021. We see this as very positive for Morgan Stanley's asset management business. 

Wells Fargo (WFC): There was no company-specific news this week. The financials sector declined with lowering of yields. However we used this weakness as an opportunity, and wrote about that here.

Eli Lilly (LLY): There was no company-specific news this week. We added our position and wrote about that here.

Skyworks Solutions (SWKS): While there was no company-specific news this week, at its Investor Day Qualcomm (QCOM) shared its 5G handset shipment forecast though 2024, which calls for more than 1.1 billion 5G smartphones, up from 950 million in 2023, 750 million in 2022 and 525 million this year. Given our comments on increasing dollar content per 5G device for Skyworks, Qualcomm's forecast stokes our bullish stance on SWKS shares. Qualcomm also shared it sees the IoT market reaching $67 billion by 2024, up from $42 billion this year, which is also a target market for Skyworks, particularly following its acquisition of the Infrastructure and Automotive business from Silicon Labs (SLAB).