25 - 29 October 2021: Weekly Round-Up

Published 30 Oct 2021

Half of S&P 500 companies have already reported. Turning to the week ahead, not only will we have another round of earnings reports (although none in our portfolio), but there is also an FOMC meeting and press conference scheduled for Wednesday. We will be listening closely to Fed Chair Jerome Powell’s press conference to gain a better understanding of how he views the difference between tapering vs. raising rates and transitory vs. structural inflation.

A quick look at some of the broader market measures that we like to keep an eye on: the dollar index is hovering around the 94 range, gold is holding in the upper-$1,700s region. WTI crude prices mark the first week of decline in almost 8 weeks of gains, but are holding in the low-$80s per barrel region. The 10-year Treasury yield has pulled back to the 1.5% level.

Within the portfolio we heard from Eli Lilly, Alphabet, Microsoft, Advanced Micro Devices, Ford, Amazon, Apple. (Click the company names to read our analyses of their earnings report)

What we learned this week

Thursday was an eventful day as the Bureau of Economic Analysis reported its estimate that real gross domestic product (GDP) increased 2% in the third-quarter of 2021, a disappointing result versus expectations for 2.6%. This follows a 6.7% increase in the second-quarter. Additionally, the core personal consumption expenditures (PCE) price index — an important metric to monitor as the core PCE price index is the Fed’s favorite proxy for inflation and can therefore provide insight into future rate actions — increased 4.5% QoQ, a deceleration from the 6.1% QoQ gain seen in the second-quarter. On an annual basis, the core PCE price index was up 3.6%, an acceleration from the 3.4% YoY advance seen in the second-quarter.

Wrapping up the Thursday updates, the U.S. Department of Labor reported that in the week ending Oct. 23, initial jobless claims were 281,000, representing a weekly decline of 10,000 and better than expectations of 288,000. Moreover, this was the lowest level of initial claims since March 14, 2020, the early days of Covid, when it was 256,000. Marginally offsetting the solid report, the prior week’s reading was revised higher to 291,000, up from 290,000 previously reported. Importantly, the four-week moving average, used to smooth out weekly volatility, came in at 299,250, representing a decline of 20,750 from the previous week’s revised average of 320,000 (revised up from 319,750 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, the Bureau of Economic Analysis reported that personal income increased 0.2% ($35.3 billion) in August, better than expectations for a 0.3% decline. Disposable income (DPI) ticked up 0.1% ($18.9 billion) and personal consumption expenditures (PCE i.e., personal spending) advanced 0.8% (130.5 billion) on the month, ahead of the 0.6% expected. When adjusting for inflation, real DPI fell 0.3%, real PCE increased 0.4% and the core PCE price index increased 0.3% in August. Lastly, on an annual basis the core PCE price index — again, the Fed’s preferred measure of inflation — advanced 3.6% YoY, a tick below the 3.7% consensus.

Moreover, as was the case last week, these macroeconomic readings (which are backward looking) are taking a back seat to the more real time updates from management teams as this was one of the busiest earnings weeks of the season and most meaningful in terms of the size of market cap that reported.

What we are watching ahead: 

Monday 11/1

Open: ON Semi (ON) - get a gauge on the semiconductor industry

Close: Diamondback (FANG) - hear about what E&P companies think about oil prices, what they are going to do (more exploration or return capital to shareholders - we think the latter). 

Simon Properties (SPG) - hear about what the retail picture is like. SPG is the largest mall owner in the US: if they get a lot of rental renewals that suggest retailers see strong foot traffic for 2022.

Tuesday 11/2

Close: Lyft (LYFT) - hear about what Lyft management think about labor shortage. Are they getting drivers back?

Wednesday 11/3

FOMC meeting at 2PM, press conference afterwards, hear from Chairman Powell. We think (market thinks) the Fed will announce begin of tapering, likely in mid-November, at a pace of $15 billion a month with a targeted end around June 2022. We suspect that alongside that taper news, Fed Chair Powell will reiterate the distinction between tapering and tightening decisions, and reassure the market that any interest rate liftoff is a ways off. 

Open: Marriott (MAR) - what does their booking rate look like? What is their outlook?

Close: Qualcom (QCOM) - semiconductor 

Pioneer Nat (PXD) - similar story as for FANG: forecasts on oil prices. How company plans to return capital to shareholders.

Booking Holdings (BKNG), MGM Resorts (MGM) - travel.

Electronic Arts (EA), Take-Two (TTWO) - gaming. Hear about gaming demands& forecast, which are key for portfolio companies like Microsoft, Advanced Micro Devices.

Thursday 11/4

Open: Moderna (MRNA) - we like this name but haven't had a chance to do a thorough valuation. It always feel expensive to us. Would like to hear what management say about vaccine demands going forward; also any other interesting developments in their pipeline.

Close: Uber (UBER) - how they're getting drivers back to work.

Carvana (CVNA) - Ford says they'll have more new cars to the market. Interested to hear what Carvana forecast about used cars.

Portfolio Overview:

Amazon (AMZN): Amazon reported top- and bottom-line misses relative to consensus expectations for its September quarter, despite posting double-digit year-over-year growth in each of its business segments. While overall revenue missed expectations of less than $1 billion on a reported $110.8 billion quarter, we'd point out overall revenue rose 15.2% year-over-year. The biggest growth for Amazon from a revenue perspective was at Amazon Web Services, which rose almost 39% year-over-year with margins little changed year-over-year. From a profit generation perspective, AWS remained the lion's share as both the North American and International segments were under pressure. Hitting Amazon's bottom line was an estimated $2 billion in operating costs during the quarter due to cost of labor, labor-related productivity losses, and cost inflation. Those costs are expected to rise to $4 billion in the current quarter while Amazon also continues to once again invest for future growth opportunities such as sub-day delivery. With cloud adoption continuing, driving earnings and cash flow, we see these investments, much like ones in the past, becoming fruitful for Amazon and shareholders in the coming quarters. We continue to see AMZN shares as one to own for the long-term, and subscribers that are underweight should use the near-term pull back as a longer-term opportunity. We want to point out how Amazon opened Friday down ~4%, but was met with huge buying pressure throughout the day to push it to a ~-2% down on the day. 

Apple (AAPL): Apple reported weaker-than-expected September-quarter revenue despite delivering 29% revenue growth on a year-over-year basis for the quarter. As was widely expected the company was plagued by component shortage that reportedly equated to $6 billion in unmet demand for the quarter. Supply chain issues are expected to worsen in the current quarter, but even so the company sees an "all-time record quarter," which suggests not only the power of the Apple supply chain but perhaps the worst of the shortages may be overstated. Even so, we will stay with Apple shares for the long-term as the 5G upgrade cycle continues, the company continues to refresh its product portfolio like it did this year, and grows its services business. 

Advanced Micro Devices (AMD): Advanced Micro Devices (AMD) reported better-than-consensus top and bottom line results, with revenue climbing 54% year-over-year and guided revenue for the current quarter above consensus. The drivers for both quarters: robust demand and share gains at graphics and data center. For the full year 2021, AMD now expects revenue to grow approximately 65% vs. its prior guidance for 60% with growth across all businesses. The earnings beat, upward revision, as well as continued growth in data center construction (through Xylinx acquisition) in the coming quarters are the fuel to keep optimism in owning this name, and will be the conviction to buy more on the downside.  

Salesforce (CRM): Shares of Salesforce rose to all-time high this week despite no company-specific news, as  the services/ software sector got a boost from strong Microsoft, Amazon, Apple earnings. Also, comments from companies about the supply chain issue make investors look towards companies with no exposure to supply chain problems.  

Disney (DIS): Walt Disney raised the price of a single admission to its California theme parks on the busiest days by 6.5% to $164, part of the company's shift to a system that ties admissions costs to demand. We note the company's timing comes just ahead of the re-opening of U.S. borders to vaccinated travelers while other reports indicate Disney has trimmed back on complimentary services at the parks, a move designed to drive profits as visitors return. Also this week JP Morgan cut its 2022 Disney+ subscriber forecast to 164 million from 185 million. Shares of Disney continue to be an underperformer this week, although as we said multiple times, we are willing to be patient with this name. Disney will report its September quarter results on Nov. 10. 

Ford (F): Ford announced results that beat the highest EPS estimate by a whopping 21% and reported automotive revenue that was 5.2% higher than forecasts. While commenting that semiconductor supplies remain challenging, the company did say that the situation had markedly improved from Q2, but it also sees the chip shortage extending through 2022 and possibly into 2023. It also raised its full year EBT outlook to $10.5 billion-$11 billion up from its prior guidance of $9 billion-$10 billion. The company also reinstated its quarterly dividend at $0.10 per share per quarter. If the shares pull back to $16, we would be inclined to buy more even though Ford shares take up the largest space in our portfolio. 

Google (GOOGL): Following the company's better-than-expected September-quarter results and prospects for margin improvement to continue, shares of GOOGL traded up to all-time high. We like the company's core Google search business and its thriving YouTube. We were glad to get a starter position in this name before the print, however, we are not going to buy more here. Also this week, Baird boosted its GOOGL target to $3,175 from $3,100 while Oppenheimer raised its to $3,500 from $3,000. 

Microsoft (MSFT): September-quarter results from Microsoft (MSFT) topped both top- and bottom-line expectations with double-digit gains reported at its Productivity and Business Processes, Intelligent Cloud and More Personal Computing segments. With this beat, Microsoft was the strongest performer amongst the mega-cap tech stocks. This outperformance also comes from the fact that Microsoft has very little exposure to the supply chain issues, and therefore continue to be loved by investors. We continue to keep our conviction in this stock, but we're not going to buy at all-time highs here. It is likely that we will make some sales to realize gains in November, and wait long until next year to buy more.

Nucor (NUE): This week negotiations are back in Washington for the Biden's infrastructure bill. We were never doubting that this bill would pass, but market seemed to discounted this for the past couple weeks, and now is coming back to this stock. As a result, shares of Nucor ended this week up nearly 10%. While we didn't hear anything specifically from Nucor, we heard about the steel demands from other companies that reported this week. For example, when Ford gave outlook, they warned of increasing steel costs. This was also expressed during the Amazon's conference call. These notes show that steel demands remain strong for 2022, and soon analysts will have to raise estimates for Nucor. Right now analysts are estimating Nucor's earnings to be cut in half for 2022, which we thing is absurd given steel demand is not going down any time soon.

Paypal (PYPL): Even though Paypal came out and refutes the Pinterest acquisition rumors since Monday, shares of Paypal still ended the week on a sour note, down 3% while almost every other sectors went up. We bought on the way down, and will continue to buy more as shares approach 2021 lows. Also this week, Piper Sandler reiterated its Outperform rating on the shares in part because the company's Mobile Cash and Venmo apps continue to rank in the Top 10 of Apple's App Store. Piper continues to see PayPal becoming a "super app" for financial services. PayPal will report its quarterly results on Nov. 8. 

Morgan Stanley (MS): Deutsche Bank raised its price target on Morgan Stanley shares to $105 from $79. 

Wells Fargo (WFC): There was no company-specific news this week.

Eli Lilly (LLY): Eli Lilly reported its Q3 2021 results this week. It was a slight miss but largely due to tax complications. Because of this headline miss, shares traded down initially, but this was definitely a buying opportunity as shares ended the day up ~2% and continue to head higher. Company demonstrated strong growth in its key pipelines, as long as updates about development process for Alzheimer's drug. We believe Eli Lilly is a well-managed, well-positioned, high-quality pharmaceutical company with a history of strong execution and commitment to returning capital to shareholders. We got in with a good cost basis and there's nothing to do at this level.