👉 The Investing Week Ahead: 02/20/23

“I think the hard part here is valuation…

We’re trading at about 18.2X forward earnings on the S&P 500. That 18.2X is very close to the prior peaks in valuation pre-pandemic. So we peaked about 18.5X-19X in early 2018 and early 2020.

In order for this market to move much higher from here… you essentially have the assume that we go back up into pandemic-era bubble valuations: 20X, 21X+.

But the only reason we were able to trade to those valuations is simply because we were flooding markets with liquidity. So we see a challenge that even if the Fed pauses from here — that’s not the equivalent of growing money supply by +20% or balance sheet expansion…

We think that valuation is the ceiling that acts on this rally.”

But how much will the following impact those profit margins moving forward?

What We’re Watching:

The short week begins with an earnings report from Walmart — which is expected to have operating margins under pressure.

Walmart stock had a volatile 2022, falling nearly -18% in the first half of the year. However, Walmart stock recovered nearly all its losses and ended the year down only -0.5%, well ahead of the -20.7% decline in the Morningstar US Market Index.

Shares of Walmart have have inched up +2% YTD.

This world's largest retailer is expected to post quarterly EPS of $1.51 (-1.3% YoY) and revenue of $158.94 billion (+4% YoY).

I currently have no position in Walmart (WMT).

The world’s largest home improvement retailer posted a whopping $38.9 billion in sales (+5.6% YoY) during its Q3 earnings report (in November).

At that time, the company reaffirmed fiscal 2022 guidance of a 15.4% operating margin, comparable sales growth of +3%, and diluted EPS percentage growth to be mid-single digits.

Analysts are expecting Home Depot’s Q4 EPS to land at $3.26 per share (+1% YoY) and sales to be $35.91 billion — virtually flat from a year ago.

After extremely strong sales growth over the last three years across leading retailers — we’re curious to see if a natural slowdown in revenue could be coming for both Home Depot and Walmart.

Home Depot makes up 2.5% of my portfolio.

Palo Alto Networks’ most recent report (in November) revealed a +44% increase in operating income, adj. free cash flow of $1.2 billion, and its second-straight quarter of GAAP profitability.

Analysts are expecting quarterly EPS of $0.78 (+34.5% YoY) and revenue of $1.65 billion (+25.2% YoY)

We’re interested to if concerns over customers delaying purchase orders due to recession concerns are valid.

Palo Alto Networks (PANW) makes up 1.2% of my portfolio.

“It’s triple trouble for credit card borrowers… Balances are up, rates are up and more people are carrying credit card debt.” — Ted Rossman, Senior Industry Analyst at Bankrate

For every one (1) billion dollars of credit card debt in Q4, there was more than four (4) billion dollars of mortgage debt. 

Let us put this into perspective for you… the total amount of mortgage debt in the United States is $11.92 trillion. The total GDP of the United Kingdom in 2022 was around $3.19 trillion.

Just the debt in the U.S. housing market alone is worth nearly 4x the GDP of the U.K.

Not Talked About Enough: Food Insecurity Woes:

Much of the world relies on just a few nations for most of its fertilizers — notably Russia, its ally Belarus and China. This is ringing major alarm bells in global capitals.

Just as semiconductors have become a lightning rod for geopolitical friction, so too has the race for fertilizers alerted the US and its allies to focus more on food security.

Last year’s jolt to the $250 billion global fertilizer industry highlighted the role of Russia and Belarus as exporters of almost a quarter of all the world’s crop nutrients.

What We’re Watching:

The PCE Index is expected to rise +0.5% in January from a month earlier — which would be the largest increase since mid-2022. The Core PCE Index (which excludes food & energy prices) is expected to rise +0.4% MoM.

Remember — this is the Fed’s preferred inflation measure because they view it as a more completely picture of consumer costs and spending.

The next Fed meeting minutes are set to be released this week, revealing much deeper detail about how unified its leadership is in decision-making.

A fun tool to occasionally check back on (which we include a few times each month) is the CME Fed Watch for the fed funds rate. The probability of a 500-525 bps target rate has increased from (a rather ignorant) 0% chance one month ago to a 21% chance currently.

As mentioned before, we expect rates to remain high for longer than most expect — regardless of if there’s a long pause in hikes.

Twilio (TWLO) is laying 1,500 employees — 17% of its workforce. The company’s growth has slowed substantially, but profitability is being taken far more seriously. Shares surged last week after the company reported EPS ($0.22) and revenue ($1.02B) beats — as well as a $1 billion stock buyback.