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Happy Sunday, everyone.
As a quick recap, on Friday GRIT acquired Rate of Return by Austin Hankwitz. The post you’re now reading is the “Week in Review,” and will be published every Sunday evening going forward.
This post is comprehensive, analytical, and always my own perspective and opinions. Let’s dive in!
Portfolio Updates:
September has certainly been off to a rocky start. As we’ve been sharing for a few weeks now, it’s always important to keep an eye on seasonality in the markets. Of course looking backwards isn’t going perfectly translate into what to expect moving forward — but it certainly doesn’t hurt.
Source: Goldman Sachs Global Investment Research
As the markets continue to “broaden out” and away from Megacap Tech and AI, specific names inside of the Dividend Growth Stocks section of my portfolio are beginning to really experience momentum.
REITs, in particular, are seeing strength — as well as the more “boring” names.
Inside of the “Risky” section of my portfolio, some specific names like On Holdings (ONON) and Monday.com (MNDY) are having stellar years thus far.
As I look toward the remainder of 2024, I’m preparing for continued volatility. My plan is to dollar cost average into the existing names in the portfolio, as well as deploy net new capital to sector-specific ETFs (think Utilities, Financials, Consumer Staples, etc).
Week in Review — Too Long, Didn’t Read:
GitLab’s top line growth continues, Dick’s Sporting Good’s added +1.5M new “athletes,” Broadcom raised their 2024 AI-specific revenue expectations by +$1B (thank you Google), more data on the bizarre nature of September in the markets, the yield curve finally un-inverted, oil is quietly down -10% over the past month, nonfarm payrolls grew by +142K, S&P Manufacturing PMI hit an eight-month low, and construction spending misses on expectations once again.
Key Earnings Announcements:
GitLab’s top line growth continues, Dick’s Sporting Good’s added +1.5M new “athletes,” and Broadcom raised their 2024 AI-specific revenue expectations by +$1B (thank you Google).
GitLab (GTLB)
Key Metrics
Revenue: $182.6 million, an increase of +31% YoY
Operating Loss: -$41.0 million, compared to -$54.1 million last year
Profits: $12.9 million, compared to -$50.1 million last year
Earnings Release Callout
“Our second quarter fiscal year 2025 results validate the value that customers gain from GitLab’s integrated platform. We delivered another quarter of better than 30% top-line growth and significant year-over-year operating margin expansion.
As we enter the second half of fiscal year 2025, I'm confident in our ability to continue to exceed customer expectations and in the opportunity we have with AI to further accelerate tangible business outcomes.”
My Takeaway
As you all might remember, I added GitLab to my portfolio mid-Summer around the $45 / share range. At that price range they were trading around ~10X forward sales while growing at +30% per year — and free cash flow positive.
GitLab reported strong quarterly earnings results with total revenue and non-GAAP operating income exceeding Wall Street’s expectations. The company also raised their FY25 revenue guidance by +$7M, but more importantly their non-GAAP operating income by +$20M. This is likely why their stock price jumped by +20% after earnings.
Commentary by management was positive around customers adding their AI product, Duo, to their stack — as well as the efficiencies it’s driving for them (-90% reduction in time spent on toolchain operations, +50% faster vulnerability detection, etc). As the product continues to take shape, I expect it to meaningful contribute to the company’s bottom line.
Current remaining performance obligations (cRPO) grew by +42% during the quarter — forecasting what’s the come from a revenue growth perspective over the coming months and quarters ahead. I’ll continue to dollar cost average into my growing position as I believe GitLab is still very attractively-priced considering their cRPO growth, TAM, and AI product adoption.
Dick’s Sporting Goods (DKS)
Key Metrics
Revenue: $3.5 billion, an increase of +8% YoY
Operating Income: $470.1 million, an increase of +51% YoY
Profits: $362.3 million, an increase of +48% YoY
Earnings Release Callout
"We delivered a very strong second quarter. Powered by our compelling omni-channel athlete experience, differentiated product assortment, best-in-class teammate experience and our ability to create deep engagement with the DICK'S brand, we are driving sustained top-line momentum and gaining market share.
Our Q2 comps were driven by growth in average ticket and transactions, and with growth in sales, gross margin expansion and SG&A leverage, we delivered EBT margin of nearly 14%. Because of our strong Q2 performance and the confidence we have in our business, we are again raising our full year outlook."
My Takeaway
Source: FastGraphs
Dick’s Sporting Goods (DKS) delivered an impressive quarter, with comparables sales surpassing Wall Street’s expectations as the company continues to expand market share. It’s also helpful that the sporting goods category remains relevant with consumers, despite weakness in other areas of discretionary spending.
The company has continued to expand their House of Sport locations and next-generation stores (Fieldhouses), alongside investment in digital (GameChanger), and omni-channel capabilities. This expansion + continued investment has led to +1.5M new “athletes” in Q2, and +7M during the last 12-months.
While Dick’s Sporting Goods is not immune to industry pressures, such as increased promotions and cost inflation, the company has done an exceptional job navigating these challenges with a degree of resilience — sustaining a strong margin (35%) when compared to pre-pandemic levels. This has been accomplished through operational efficiencies and self-improvement measures through technology, supply chain, and more personalized offers to their “athletes.”
With that being said, shares of the stock are trading at ~16X forward earnings per share (EPS) — much higher than their 5-year median of ~11X and 1-year median of ~14X. As you can see above, I think much of the upside is already baked in / realized with this stock in the short-term — therefore I won’t be opening a position.
Broadcom (AVGO)
Key Metrics
Revenue: $13.1 billion, an increase of +5% YoY
Operating Income: $3.8 billion, an increase of +28% YoY
Net Loss: -$1.9 billion, compared to $2.1 billion last year
Earnings Release Callout
“Consolidated revenue grew 47% year-over-year to $13.1 billion, including the contribution from VMware, and was up 4% year-over-year, excluding VMware. Adjusted EBITDA increased 42% year-over-year to $8.2 billion.
Free cash flow, excluding restructuring and integration in the quarter, was $5.3 billion, up 14% year-over-year."
My Takeaway
After a week of poor stock price performance from Nvidia and many other AI-related names, investors were looking toward AVGO to save the day. Unfortunately for us investors, AVGO only reported a slight beat for the quarter and provided forward guidance that was shy of Wall Street’s expectations.
While the report was solid — no material soft points — its AI business lacked the clear upside Wall Street was looking for. This sent AVGO’s stock price down -14% to end the week. Despite the stock price volatility, AVGO’s FY24 AI revenue guidance increased +$1B to $12B in total, due to more continued demand from their largest AI customer (Google). Outside of their AI business, VMware’s business grew aggressively (+40% sequentially) during the quarter with its Annualized Bookings Value now sitting at $2.5B.
The company noted non-AI semiconductor revenue has stabilized, with bookings up +20% sequentially, pointing to a recovery in the areas of business that have been enduring a significant cyclical correction.
I’ll be taking advantage of the recent pullback to grow my position.
Investor Events / Global Affairs:
More data on the bizarre nature of September in the markets, the yield curve finally un-inverted, and oil is quietly down -10% over the past month.
Wake Me Up When September Ends?
Source: Carson Investment Research
The 13 times that the first day of the month was down -2% or more saw the rest of the month end higher. That’s the good news — the bad news is that the two worst ‘rest of the month’ returns both came in September (-9.9% in 1974 and -7.1% in 2002) as shown above.
Source: Barchart
On the positive side, October often paints an entirely different picture. According to Barchart, there have been 61 rallies of 10%+ since World War II — and a staggering 19 of them have started in October.
As always, historical data in the stock market should be taken with a grain of salt. It’s good context and helpful to review historical trends of the market, but it should not be used to try and predict the future.
In other words, hold on tight for a potentially wild ride!
The Yield Curve Finally Un-Inverts
Source: Game of Trades
The U.S. Treasury yield curve has officially ended the longest inversion in bond market history.
On Wednesday, the spread between the 10-year and 2-year Treasuries closed in positive territory after 565 straight sessions of inversion, surpassing the previous record of around 410 trading days set in the late 1970s.
Historically, most recessions over the past century began after the yield curve returned to positive. However, a perfect soft landing could still steepen the curve and, for the first time, challenge this indicator's predictive power.
The question that everyone is asking remains: will there be a hard landing, soft landing, or no landing at all?
As you read on and review the results of last week’s Jobs Report — the economy could be sending a troublesome message.
Hedge Funds Aren’t Loving Oil
Source: Bloomberg
Hedge funds have reduced their bullish bets on oil to the lowest level in over 13 years — reflecting concerns about rising supplies and weakening demand. For the week ending September 3, money managers cut their combined net-long positions on Brent and West Texas Intermediate oil by nearly -100,000 lots — bringing the total to 139,242 lots.
According to ICE Futures Europe and CFTC data — this is the lowest level since March of 2011.
Source: Seeking Alpha, Crude Oil Futures, 1-Month Chart
You may not have realized it, but Crude Oil Futures are down -10.23% over the past month. The sentiment shift has been driven by fears of declining demand in the U.S. and China.
Additionally, a potential deal to restore Libya’s production (Africa’s leading oil producer) and the prospect of increased OPEC+ output are further fueling the bearish outlook.
Major Economic Events:
Nonfarm payrolls grew by +142K, S&P Manufacturing PMI hit an eight-month low, and construction spending misses on expectations once again.
Jobs Report & Unemployment Rate
Source: WSJ
In August 2024, U.S. nonfarm payrolls grew by +142K — below estimates of +161K. Although it was higher than July’s revised results of +89K, this was still a largely disappointing employment update.
Source: CNBC
The unemployment rate marginally ticked down to 4.2% (as expected), while the broader “real” unemployment rate edged up to 7.9% — the highest reading since October 2021.
Average hourly earnings increased by +0.4% for the month and +3.8% year-over-year, both above expectations.
Given the downward revisions for payrolls in June and July — as well as the underperformance of this report — analysts are curious to see if the Fed will cut interest rates by -25 or -50 basis points (bps) in a couple of weeks.
The CME FedWatch Tool is currently projecting a 70% chance of a -25 bps cut and a 30% chance of a -50 bps cut in September.
“With the economy now in equipoise and inflation on a path to 2 percent, it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate.”
S&P Manufacturing PMI Hits Eight-Month Low
Source: S&P Global
The seasonally adjusted S&P Global US Manufacturing Purchasing Managers' Index™ (PMI®) posted 47.9 in August, down from 49.6 in July. The latest reading was the lowest since last December and signaled a second consecutive month of deteriorating manufacturing sector conditions.
Slower sales have led to rising inventories, as unsold goods accumulate in warehouses — marking some of the largest inventory gains since 2007.
New orders (especially export orders) declined at the sharpest rate in over a year, prompting factories to cut production and reduce payrolls.
“The combination of falling orders and rising inventory sends the gloomiest forward-indication of production trends seen for one-and-a-half years, and one of the most worrying signals witnessed since the global financial crisis.”
Construction Spending Falls More Than Expected (Again)
Source: U.S. Census Bureau
U.S. construction spending fell -0.3% in July — more than expectations of a -0.1% drop — due to continued heightened mortgage rates and excess supply impacting single-family homebuilding.
Private construction spending (including residential projects) dropped by -0.4%.
Public construction investment saw a slight uptick, while spending on private non-residential structures like factories dropped -0.4% as well.
Source: U.S. Census Bureau
Elevated mortgage rates in the spring have slowed homebuilding — leading to an inventory surplus and the lowest single-family homebuilding levels in 16 months.
We’ll see how things fluctuate as mortgage rates are expected to drop over the coming months!
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