18 - 22 October 2021: Weekly Round-Up

Published 23 Oct 2021

A quick look at some of the broader market measures that we like to keep an eye on and we see the dollar index is hovering in the upper-93 range, gold has strengthened to the upper-$1700s region, WTI crude prices are holding in the low-$80s per barrel region and 10-year Treasury yields have advanced to around the 1.65% level.

Within the portfolio we heard from Nucor (NUE) this week (update here). Next week will be the biggest, most busy week for our portfolio.

What we learned this week:  

In addition to earnings, we received several key macroeconomic data points.

On Monday, the Federal Reserve reported that industrial production fell 1.3% in September, missing expectations for a 0.2% advance while capacity utilization decreased to 75.2%, missing expectations of 76.5%. Driving the industrial production number was a 0.7% decline in manufacturing, compounded by a 2.3% decline in mining and a 3.6% pullback in utilities. As for capacity utilization, we saw a 0.6 percentage point (pp) decline in manufacturing, a 1.6pp contraction in mining and a 2.8pp pullback in utilities. With September’s results, industrial production is up 4.6% YoY while capacity has increased 0.2% from the same time last year.

Thursday, the U.S. Department of Labor reported that in the week ending October 16, initial jobless claims were 290,000, representing a weekly decline of 6,000 and better than expectations of 297,000. Moreover, this was the lowest level of initial claims since March 14, 2020 when it was 256,000. Partly offsetting the solid report, the prior week’s reading was revised higher to 296,000, up from 293,000 previously reported. Importantly, the 4-week moving average, used to smooth out weekly volatility, came in at 319,750, representing a decline of 15.250 from the previous week’s revised average of 335,000 (revised up from 334,250 previously reported). Similar to the weekly number, this represents the lowest level for the moving average since March 14, 2020 when it was 225,500.

Finally, on Friday, IHS Markit Group reported that the Flash U.S. Composite PMI Output Index for October registered at 57.3, up from 55.0 in September and marking a 3-month high for the index. Similar to ISM PMI numbers, any reading over 50 represents expansion of the manufacturing sector, while anything below 50 indicates a contraction. 

Oil market: we entered the week with crude oil above $82/bbl, a new seven-year high. While oil prices ticked higher during the week, they finished the week little changed. That's despite that supplies in the U.S. remain tight. U.S. Energy Information Administration data on Wednesday showed crude stocks fell to 31.2 million barrels, their lowest level since October 2018. During the week, Beijing signaled it might intervene to cool surging prices that have led to a power crunch across much of the country. Reports suggest China is pushing miners to ramp up coal production and is increasing imports, so that power stations can rebuild stockpiles before the winter heating season, but even so the expectation is coal shortages are likely to persist for at least another few months. To remind everyone, energy prices are very important and can move stock market, given their impact on input and transportation costs for companies, and also can dampen consumer desire to spend. 

All in, it was mixed week on the macroeconomic front, however, the market took it in stride as the supply chain, semiconductor and labor shortage dynamics are well understood at this point. However, it's important to remind that these macroeconomic readings are backward looking and investors are more focused on the real time updates we are getting from management teams now that we are in the heart of earnings season.

What we are watching ahead: 

Looking ahead, earnings season continues next week with several of our portfolio companies set to report. Eli Lilly - LLY (Tuesday, before the open), Alphabet - GOOGL (Tuesday, after the close), Microsoft - MSFT (Tuesday, after the close), Advanced Micro Devices - AMD (Tuesday, after the close), Ford-F (Wednesday, after the close), Amazon - AMZN (Thursday, after the close), Apple - AAPL (Thursday, after the close). Below you will find our thoughts on those companies going into earnings.

Portfolio Overview:

Amazon (AMZN): Amazon will report its September quarter results after the market close on Oct. 28. We expect Amazon to give guidance about the holiday season. We don't think demands will be a problem. Adobe (ADBE) forecasts online holiday sales will increase 10% this year from last year's level to reach a record tally of $207 billion during November and December. Adobe also sees pre-November digital spending up 59% as more consumer shop earlier than usual. All told, Adobe sees total 2021 online holiday sales 45% higher than the 2019 level. The problem lies in supply chain issue, how Amazon will be able to fulfill all of its orders, given its partners like United Postal Services and FedEx have spoken about their inabilities to meet demands. On this issue, Amazon previously announced plans to hire over 40,000 new corporate and tech jobs and 125,000 full and part-time fulfillment and transportation jobs, Amazon announced it will look to hire 150,000 seasonal jobs across the U.S. that will support 250 new fulfillment centers, sortation centers, regional air hubs, and delivery stations that opened in the U.S. in 2021. 

Apple (AAPL): Early in the week, Apple unveiled several new products during its latest virtual event, including updated Air Pods and HomePod mini smart speakers as well as new M1-powered Macs. Wednesday, Target (TGT) announced it will expand the in-store footprint of portfolio holding Apple to 36 locations, more than doubling it from the current 17 in time for the 2021 holiday shopping season. While that isn't a huge increase, we doubt Apple would agree to such a move unless it would be able to meet Target's demand expectations across its product line. This suggest that supply constraints for Apple may be somewhat overblown, the company is overestimating the shortfalls. 

Advanced Micro Devices (AMD): There was no company-specific news for AMD. However, competitor Intel's (INTC) Q3 2021 results point to continued data center share loss for them, suggesting gaining of market shares for AMD. Potential share gains along with Taiwan Semiconductor's (TSM) recent positive comments on High Performance Computing pushed AMD towards all-time high, setting a high-stake, high-expectation earnings report on Oct. 26. We published our thoughts here, and suggested de-risking before the event. 

Applied Materials (AMAT): Our thesis for AMAT shares was reinforced this week by quarterly earnings from both ASML Holdings (ASML) and Lam Research (LRCX) that rose strongly year over year. Both companies offered a favorable outlook with ASML's bookings for the quarter coming in at €6.2 billion vs. the €4.23 billion consensus and Lam sharing it is "seeing robust semiconductor demand across all segments, broadening of semiconductor applications across industries and rising capital intensity." Also this week, Micron Technology (MU) announced it will invest $150 billion in capex and R&D over the next decade. We suspect that like Lam Research, Applied's quarterly results will be strong but somewhat tempered given supply chain issues. Even so, the outlook remains very bright for the company and the shares. 

Salesforce (CRM): Wells Fargo reiterated its Buy rating on CRM shares as well as its $340 price target. 

Disney (DIS): Disney shares caught a downgrade from Barclays to Equal Weight from Over Weight, given concerns over a new subscriber slowdown at Disney+ despite what we see as new proprietary content across its brand rich tentpole content and expected rebound in the high margin Parks business. Also this week, the company announced a number of box office movie pushouts, primarily for the Marvel Cinematic Universe. We've seen this in the past but would remind subscribers that Disney will still release tree Marvel movies in 2022, all that's shifted is the dates. 

Ford (F): Starting mid-week, shares of Ford caught on fire (figuratively) and made 52-week high after a slew of analysts' upgrades. Credit Suisse upgraded the shares to Outperform from Neutral with a $20 price target, citing the company's improving position in the electric vehicle and autonomous vehicle markets. Soon thereafter, JPMorgan Chase also established a $20 target for F shares noting its vehicle production in the September quarter appears to have held up better than expected and better than the overall industry. Toward the end of the week, Ford announced its new Maverick Hybrid 2022 compact pickup truck is nearly sold out, with the automaker expecting the 2022 model to be fully reserved by early November. Ford will report its September quarter results on Oct. 27. We wrote our thoughts here, and suggested that with shares coming in hot like this, it is only discipline to take some off the table. 

Google (GOOGL): We initiated a position in Google on Friday following a ~100 points pullback in this stock, following a mass sell-off in digital advertising stocks. We will continue to build this position over time. 

This week, Google unveiled its new Pixel 6 smartphone models, which include the Pixel 6 and Pixel 6 Pro, and both have an under-display fingerprint sensors as well as the AI-focused Tensor system on a chip that should improve speech recognition. Also this week, Google cut fees for subscription based apps in its Play Store to 15% from 30% and promised lower fees for book and music services. Mizuho boosted its price target on the shares to $3,100 from $3,000. Alphabet will report its September quarter results on Oct. 26. 

Microsoft (MSFT): Data from NPD Group found video game sales were up 3% year-over-year in September to $4.36 billion, a record for the month. Hardware sales again provided a spark, even as consoles continued to be in short supply amid semiconductor shortages - rising 49% for September, to $412 million. We see this a positive for Microsoft's Xbox business. Microsoft will report its quarterly results on Oct. 26. Shares are coming into this event relatively hot, trading at all-time high. If you take a look at the chart of MSFT this year, it often pulls back after earnings if it comes in hot like this. We're not selling anything here, but will look for buying opportunities on the downside. 

Nucor (NUE): Shares of Nucor are trading off following the company's mixed September-quarter results. We sent out our thoughts here, and will look for buying opportunities at this price level. The company missed EPS expectations, coming in at $7.18 vs. the expected $7.42 and $0.63 in the year-ago quarter. Revenue for the quarter modestly topped expectations, surging more than 100% year-over-year, to $10.3 billion. We can understand the stock trading off given the bottom-line miss, but, in our view, this is one of the times when investors need to consider the earnings context as well as the prospects for what lies ahead. With Nucor, that's especially the case if Washington, D.C. gets its act together and passes a much-needed and long-awaited infrastructure spending bill. 

Paypal (PYPL): Reports suggest that portfolio holding PayPal is considering acquiring social media company Pinterest (PINS) in a transaction that would value Pinterest at $45 billion. Those same reports also note that negotiations between the two companies are ongoing and may not result in a transaction. While this would continue PayPal's streak of acquisitions, investors are scratching their heads with a simple question, "Why?" We wrote our thoughts here, and added shares on weakness.

Morgan Stanley (MS): Citigroup raised its price target on Morgan Stanley shares to $105 from $100.  

Wells Fargo (WFC): Treasury yields edging higher is helping to move this stock higher as well. We continue to like Wells Fargo, a money-center bank which will benefit hugely from higher interest rates in the future.