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Market Outlook

Annual Earnings Forecast for Q2-2024

Analysts forecast that the S&P 500 index’s earnings will likely grow above 12% for the second quarter and about 11-12% for the year to 247.

Source: FactSet

This is way above the 8% average growth, mostly because of a weaker Q2-2023, when earnings actually declined 4% over the previous year. 

Besides, S&P 500 earnings have been stagnant at $220 for the past two years so 2024 had beat the average significantly just to catch up and revert to the mean. 

Here are past 5 years – basically smoothening out the effects of Covid. After the big pandemic fall of 14% in 2020, there was that massive jump of 48% in 2021, and then two years of indigestion and inflation, which now leads to the 12% expected jump in 2024.

FactSet estimates that over the past ten years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.8% on average – everybody sandbags, (under promises and over delivers). I wouldn’t be surprised if earnings actually close over $250 for 2024.

Great, earnings look good with the 11-12% increase, but what about valuations?

The bottom-up target price for the next 12 months for the S&P 500 is 6006.66, which is 7.6% above the closing price of 5,584.54. 

The Forward P/E Ratio is 21.4, which is above the 10-Year Average (17.9), and above the 5-year average of 19.3. 

The two main causes for the high P/E 

a) Out performance and AI expectations, from the Magnificent 7, which controls about 33% of the index.

b) Decline in inflation and expectations of interest rate cuts.

I believe there is exhaustion in the M-7 – there is over participation (everybody and their uncle own Nvidia) and over bought. We we saw it for a bit in the last 3 weeks with Nvidia slowing down, but Apple and Tesla picked up the slack – Tesla rose 40% and 7 days in a row! What looked like a possible correction in the middle of June, never really materialized.

Secondly, now the 10 year has finally come down to about 4.19% and two interest rate cuts are a certainly after benign inflation numbers (still high over 3% and above the Fed target of 2% but definitely in the right direction). I believe the 10 Year will be between 3.5% and 3.75% for the most of 2025, if not lower.

Strategy for the second half of 2024 and beyond. High valuations should keep the index in check, and even cause a 5-7% correction, which is actually a good thing in my opinion. Lower interest rates will keep a floor.

What should we do? In my opinion, 

  1. Lower expectations for sure, if we make a return of 8-10% a year + dividends, that’s great, thus with this target, we can lower risk as well. For most of the year, almost every stock I had recommended had expectation of at least 15% Returns.
  2.  You don’t have to necessarily move away from tech but a mixture of Growth At a Reasonable Price (the GARP strategy) and absolutely looking for and investing in bargains should be the cornerstone of investing for the next 12 months. In two cases recently, GitLabs (GTLB) and Samsara (IOT) waiting for bargain prices have worked very well. I started the first 5% purchase, higher and slowly worked my way down as they kept falling and in both cases the prices are 15- 20% higher than my average cost.
  3. Keep cash handy for corrections and drops – On June 19th, I had sold 15-20% of semi stocks as profit taking; I’m still holding onto about 10% cash, which at 4-5% in money market funds is safe and I won’t invest till I get an outstanding bargain.
  4. Rotation – This week I’ll identify and recommend some GARPS, some dividend picks, and cyclicals.
  1. I picked up Duolingo, consumer, which is expensive – about 40% invested but am adding in the 190 range.

I’ve been pyramiding in the two big pharma companies – Eli and Novo, which is the exact opposite of cost averaging, buying smaller quantities even as they get higher, simply this obesity craze will last, and they’re relatively inured with strong pipelines.

Categories
Market Outlook

 Earnings season for Q2-2024

As usual, the first to report were the big banks. I always look at credit provisioning and charge offs as indicators of economic weakness. 

JP Morgan (JPM) confirmed guidance for the rest of the year for earnings and revenue; earnings growth will be less than 1%, while revenues will grow at a modest 5%. JPM did increase credit loss provisioning to $3.05Bn, higher than 2.8Bn earlier, this is also higher than 1.88Bn in Q1, and 2.9Bn in Q2. Charge offs (mainly on credit card delinquencies) were also higher by $820Mn at $2.2Bn. Jamie Dimon, CEO of JP Morgan, was cautious as usual, JPM tends to over-provide for losses and has been doing it for years.

Wells Fargo (WFC) didn’t need to increase provisioning, but its charge offs were also higher – net loan charge-offs, as a percentage of average total loans, increased to 0.57% from 0.50% in Q1 and 0.32% in Q2 2023.  WFC’s bigger problem is net interest income, it now expects full-year 2024 net interest income to fall 8%-9% from 2023’s $52.4B, compared with its prior guidance of down 7%-9%.

Citi (C) was mixed with higher charge offs but lower provisioning, and also commentary from the CEO, that lower FICO score customers are pulling back on spending. In addition, he’s seeing signs that delinquencies may be bending back down.

These don’t set off any alarm bells but does confirm what we’ve been hearing for most of the year, that outside of tech, the economy is lackluster, and that inflation is stunting growth, especially for lower and middle income groups.

Categories
Fintech

Toast Inc (TOST): A Potential Pullback Opportunity for Investors

Toast (TOST) $23

Positives

Focused on restaurants – therefore scale in that segment helps in a commodity market, where they can compete on price.

One Stop Shop for restaurants, provides several financial/accounting/CRM/Marketing tools besides payment processing, reducing the need to go to several vendors. These have a strong attach rate and will be a key growth catalyst.

Non-GAAP profits with operating margins improving, hope to be GAAP profitable by 2025.

Good growth prospects – 23-25% revenue growth, priced at 2.5x sales, reasonable.

Negatives

Commodity, crowded business with a large number of competitors, little product differentiation, many compete on price alone.

Will find it difficult to perform outside its niche.

The stock is already up more than 60% from its low of $14, so expect some pullback.

This should be worth looking at $18-$20, I think the appreciation from here may be limited

Categories
Media

Meta Platforms Earnings: A 20% Drop After Hitting the High Bar

Source:Meta

Meta Platforms (META)

The bar was too high for Meta to clear.

Post earnings the markets punished it 20% for a marginally weaker guidance and higher than expected CAPEX. Pre-earnings the stock had been up 130% for the past year, so this 20% drop was perhaps, overdue.

Rev beat of 36.46Bn v 36.12Bn 27% YoY – but too little a beat.

Rev guidance 36.5Bn to 39Bn or a midpoint of 37.75 V 38.24,  still 18.5% YoY growth but too much of a miss.

Capex is higher at 37.5Bn midpoint now V 33.5Bn – bad for Meta but good for Nvidia/AI  most of the Capex is for AI.

META has a GAAP operating profit margin of 49% in the family of apps business – that’s a phenomenal margin, but it drops substantially because of losses in the Reality Labs business. Still, its company-wide margin was 38% – a 52% increase YoY.

Will parse through the earnings call/analysts’ upgrades tomorrow morning, the selloff may be overdone.

Categories
Market Outlook

Patience in the Market: Accumulating Quality Stocks Amid Volatility

Source: Chase Bank

The main strategy is patience to get more margin of safety, especially when a solid company like Adobe gets clobbered 20% for a slightly lower than expected guidance. With a higher 10 year yield of 4.30, long duration tech stories always face more resistance, even more than the overall market. And there’s the volatility as you mentioned. By one measure, trading in options has surpassed that in the stock market for the first time since 2021, according to Goldman Sachs. 

https://www.wsj.com/livecoverage/stock-market-today-dow-jones-03-15-2024/card/frenzy-over-ai-and-nvidia-turbocharges-the-options-market-PijdBZpnDW4BfwZMerfM

I don’t see this froth, volatility and overpricing dissipating; Algo trading, ODTE, (one day expiry options) are pretty much a regular part of the markets now. For us the best strategy is to be patient with limits and accumulate in tranches, even if we miss some opportunities. The goal is a 3-5 year investment and we’re not timing or trading in the market so we’ll have to ride through the rough patches, with confidence in the fundamentals.

Categories
Cybersecurity

Fortinet (FTNT) at $74: HOLD as Price Target Met, 10% Post-Earnings Pop Overdone

source

The long term story remains intact – it is currently fully priced to add more.

Fortinet released Q4-23, earnings after market yesterday.

While the results and guidance were good and met expectations, the 10% pop from $67 yesterday is overdone. In the previous quarter, Fortinet under performed and the stock was pummeled 25% – last evening’s reaction was more of a sigh of relief that results met expectations. As you can see below, there’s nothing extraordinary.

  • Q4-23
  • Revenue of $1.42B (+10.9% Y/Y) beats by $10M.
  • Billings1: Total billings were $1.86 billion for the fourth quarter of 2023, an increase of 8.5% compared to $1.72 billion for the same quarter of 2022.
  • For Q1-2024  Everything is in line with expectations and forecasted analysts estimates.
  • Revenue $1.300 billion to $1.360 billion vs $1.38B consensus – In line.
  • Billings in the range of $1.390 billion to $1.450 billion
  • Non-GAAP gross margin in the range of 76.5% to 77.5% – In line
  • Non-GAAP operating margin in the range of 25.5% to 26.5% – In line
  • For 2024, Fortinet : These are also in line with previous guidance and forecasts.
  • Revenue $5.715 billion to $5.815 billion vs $5.94B consensus – Just over 10% growth.
  • Service revenue in the range of $3.920 billion to $3.970 billion
  • Billings in the range of $6.400 billion to $6.600 billion
  • Non-GAAP gross margin in the range of 76.0% to 78.0%
  • Non-GAAP operating margin in the range of 25.5% to 27.5%
  • Service Revenue growth was impressive and the highlight of the quarter. Service revenue was $927.0 million for the fourth quarter of 2023, an increase of 24.8% compared to $742.9 million YoY.
Categories
Retail

BJ’s Wholesale Club (BJ) at $65: HOLD for Stability, But Look for Better Opportunities

source:bjs

BJ’s had been a decent performer, starting from the $40’s range in 2020, to $65. (A lot of it Covid outperformance)

That’s about 16% per year. Though in the past year, BJ’s has had a negative return of 10%.

Currently it’s priced at 15x earnings with forward estimates of 5-6% in earnings and 4-6% in revenues, so that’s a Price to Earnings Ratio (P/E) of 15, with growth of 5, that’s a PEG ratio (P/E to Growth) of 3, which is high. I normally try not to pay more than 2, unless there is really superior growth. Not likely in this sector.

Contrast that with closest competitor Costco, which has earnings growth of 10 to 11% but at a P/E of 35 and – that’s even more expensive!

That said, Costco is a far superior business, with more stable margins, operating efficiencies and scale, which attracts both high volume sellers and customers. Costco is about 10X BJ’s and both started out around the same time. BJ’s unlikely to take market share from Costco, 

Bottom line – If the stock becomes a bargain around $55 I could see it returning around 7-8% a year. On the other hand a company like this doesn’t fall as much in bad times, it’s a low risk stock.

Categories
Fintech

Upstart (UPST) at $32.50: Why It’s Best to Avoid for Now

source:upstart

From 2017 to 2021, Upstart grew at a frenetic pace of 70%, before higher interest rates, funding constraints and higher defaults led to a massive decline in revenue.

Upstart was supposed to be an agnostic “Fintech” marketplace without credit exposure, but they made the mistake of taking auto loans on their books, which completely negated the buying/bullish case.

Upstart has boosted its capital but even at its latest earnings call, management stated Upstart’s ability to approve borrowers is constrained due to a macroeconomic environment of low consumer savings and high credit default rates.

Right now revenue growth forecasts are low and there are no clear indications of a turnaround – sure lower interest rates and better participation from banks and other financial institutions could be tailwinds in the second half.

Interestingly, while researching this one, I looked at Sofi Technologies (SOFI) and Pagaya (PGY), which are in much better shape, much more resilient and could be winners. Pagaya has executed well in the high interest rate downturn. Both are on the riskier side, and I will update later today.

Categories
Semiconductors

Qualcomm Surpasses Q1 Earnings Expectations, Driven by Handset and Automotive Growth

source

Qualcomm (NASDAQ:QCOM) shares rose 2.7% in extended trading on Wednesday after the semiconductor company reported fiscal first-quarter results and guidance that topped expectations.

For the period ending Dec. 24, Qualcomm earned $2.75 per share on $9.92B V consensus estimates of $2.37 per share on $9.52B in revenue.

QCT revenue rose 7% year-over-year to $8.4B. 

Revenue from handsets rose 16% year-over-year to $6.69B 

Automotive sales jumped 31% to $598M. – this will be Qualcomm’s biggest growth catalyst.

Sales from IoT plunged 32% to $1.13B.

Licensing revenue fell 4% year-over-year to $1.46B.

Revenue and Earnings Midpoint Guidance is higher at$9.3Bn and $2.3 for the next quarter.

Qualcomm said it expects to earn between $2.20 and $2.40 per share, with revenue forecast between $8.9B and $9.7B. Analysts were expecting $2.25 per share in earnings and $9.28B in revenue.