👉 The Investing Week Ahead: 10/3/22

The thin black lines in the RSI chart are at 70 and 30 (out of 100). If the RSI is above 70 — stocks are considered “overbought.” If the RSI is below 30 — stocks are considered “oversold.” The RSI currently sits at 28.45 at time of writing.

As you can see, investing (for the long-term) after big drawdowns is typically a great idea.

Especially when we look at the historic trends of stock market performance at the beginning of October, specifically during midterm election years:

Consumer Goods Inflation, Directly from Major Players:

Remember — hearing the impacts of inflation from government-sponsored data collection is important, but it can also be too widely measured and lack clear detail.

This week, we get to hear from Conagra Brands (market cap of ~$16B), Constellation Brands (market cap of ~$44B), and McCormick (market cap of ~19B).

As you can see in the graphic above, Constellation Brands still projects fantastic operating margins for its beer business. Recession or not, people still love beer (and Slim Jims, and popcorn, and spices, etc).

The question we’d like answered is how much do these companies think they’ll truly be impacted? The three are all generally projecting lower profitability, but will we see updated revisions downward in growth? We’ll report back in the Week in Review, with details straight from the horse’s mouth.

I Really Don’t Care, I Love my iPhone!

Us too, and most of North America agrees with you (see above). But we care about buying Google stock at beaten-down prices after a this next potential market dip. If Google can gain a more meaningful share of the North American smartphone market, its stock could see unanticipated tailwinds. Just look at this growth below!

We’re not saying this is something we’re well-versed on or is a reason to place bets, but we don’t think the market has priced in Google growing its hardware sales through smartphones — +230% market share growth year-over-year! If they can do it, this could be a very big storyline a year or two down the road.

So Why Not Pile Into COST?

Keep in mind — anyone in the ‘groceries’ category has to execute near-flawlessly. Making small mistakes in the amounts of cents in one or two areas can quite literally cause millions to be lost from the bottom line. As you can see from the above graphic, Costco saw memberships and gross margin drop from ‘21 to ‘22 — but their EPS still had remarkable growth. This signals having a management team that knows what changes need to be made during volatile economic times.

Costco has all the makings of remaining a long-term winner, but we’re looking closely at their margin management. Trading at a 15x EPS multiple and a 32x PE multiple is certainly not cheap. We’d love the opportunity to add to our Costco positions if they falter a bit over the coming quarters. 

An Interesting Spread of Companies Seem to Still Care…

Crypto is certainly ugly right now, but seeing a diverse group of leadership from Chipotle (CMG), NVIDIA (NVDA), Proctor & Gamble (PG), & Walmart (WMT) at a metaverse event is pretty cool.

‘West Vs. East’ is Happening Right Before Our Eyes.

“With demand down, Chinese companies that signed long-term contracts to buy U.S. liquefied natural gas are selling the excess and making hundreds of millions of dollars per cargo. Buyers include Europe, Japan and South Korea. Just 19 LNG vessels from the U.S. docked in China in the first eight months of the year, compared with 133 for the same period last year. 

China is getting nearly 30% more gas from Russia so far this year, Chinese customs data show. The boost is due to a scheduled delivery increase from the Power of Siberia pipeline and from purchases of Russian LNG, typically at a steep discount, shipping data shows.” — Sha Hua, WSJ Reporter Covering China

Keep watching this relationship. It will likely become more and more important over time to the US.

It’s a Lose-Lose with the Jobs Report:

Our market is currently so backwards that there’s actually no winning with the jobs report.

See below from Fed Chair Powell’s Q&A in late September:

Question — Do the odds now favor, given where you are and where you're going with interest rates, favor a recession, 4.4 percent unemployment is about 1.3 million jobs, is that acceptable job loss? And then, given that the data you look at is backward looking, and the lags in your policy are forward looking and you don't know what they are, how will you know, or will you know, if you've gone too far?

Answer — I think that there's a very high likelihood that we'll have a period of what I've mentioned is below trend growth, by which I mean much lower growth and we're seeing that now. …And then below trend next year I think the median was 1.2 percent… and it could give rise to increases in unemployment but I think that's, so that is something that we think we need to have and we think we need to have softer labor market conditions as well... And if we want to set ourselves up really light the way to another period of a very strong labor market, we have got to get inflation behind us.

Interpretation — If the unemployment rate meets expectations of remaining at 3.7% this week, we believe the next rate hike will have an increased chance of being 75 basis points (+0.75%). If the unemployment rate does go up, the likelihood of abnormally large rate hikes goes down — but more people are obviously out of work. As it has been throughout the year, both upward and downward changes in the unemployment rate can be perceived as negative. We discussed this concept many times over the past few months (Examples here, here, & here — just use ‘Command F’ and search ‘unemployment’).

Reality Check — C’mon folks. Look at the chart above. The lowest level of unemployment since 1948 was 2.5% (in 1953). The Fed is clearly signaling that economic pain needs to increase enough for more layoffs to take place. Our friend Nate O’Brien even made a noteworthy tweet about this backwards situation. DocuSign does online document signing and has nearly 7,500 employees. Zoom is a virtual meeting software and has nearly 7,200 employees.

America over-hired during a bull market, and America (sadly) needs to aggressively reduce headcount as a result. We believe time will prove this to be correct. 

Stock buybacks lead the way for events-driven movers last week. Here’s a spot-on thread we enjoyed about the grand conundrum of stock compensation / how companies approach stock grants management: