👉 The Investing Week Ahead: 12/12/22

Some investors think Mr. Powell will flinch on raising rates once unemployment rises, but former Fed governor Randal Quarles, who has known the Fed chair since they worked in the Treasury Department in the early 1990s, said Mr. Powell is determined to avoid Mr. Burns’s mistakes of failing to control inflation.

“People really misjudge the fact that Jay [Powell] is a diplomat and a genuinely good guy to mean he’s a conciliator—which is absolutely not the case,” said Mr. Quarles, who served at the Fed from 2017 to 2021. “He’ll have a very clear view, and he’s committed to doing what the law requires,” which is to lower inflation.

During a panel discussion this spring, Mr. Quarles told a story of how a newly hired security guard had come to his Fed office late one night after Mr. Quarles accidentally triggered an alarm. After the guard showed interest in the artworks hung on his office wall, Mr. Quarles began explaining why he had displayed an abstract painting done by Mr. Burns.

No explanation was needed. “That’s the guy who let inflation get out of control,” the guard said.

The story shows, Mr. Quarles said, “that this is an institution from top to bottom that knows the one great sin that will be remembered by everyone 50 years later is if you let inflation get out of control.”

Key Question:

Will the Bank of England do what it takes to maintain inflation? Or is it a completely different situation than us because their energy crisis is infinitely worse?

Candidly… we wouldn’t be surprised to see riots popping up in the UK all winter long. These people are truly stuck between a rock and a hard place — and the poorest citizens always get hurt the most.

What We’re Watching:

This morning, Accenture was downgraded by Piper Sandler from “neutral” to “underweight” ahead of its report on Friday.

In October, JPMorgan also decreased their price target on Accenture from $329 to $306 and shifted its rating from a “buy” to “overweight.” This company is frothy.

The average S&P 500 company trades at ~16X earnings, Accenture has historically averaged trading at ~20x earnings, and the stock currently trades at ~26x earnings. With an unexciting dividend yield of ~1.5% — we wouldn’t be buying Accenture until it was closer to its historical P/E ratio of 20.

Show us Accenture around $220-$230 and we’d be a hell of a lot more interested.

You may recall us mentioning that Adobe’s Financial Analyst Day in October was full of a focus on content creators. This company realizes that it has many tools that creators (of all kinds) rely upon, and they want to capitalize on the ever-growing TAM of this space.

There was definitely some cause for concern after that event, with Adobe announcing that it expects only +9% revenue growth in 2023. This was a slap in the face to investors that saw nearly +13% revenue growth projections just a quarter earlier. We expect to see a lot more news of this nature heading into Q1 earnings.

Not that it comes as a surprise, but betting on Oracle is officially a bet on their performance in the Cloud infrastructure space.

The company now has over 45,000 customers running Oracle Cloud Applications. For FY20, Cloud operations drove ~20% of Oracle’s total revenue. For FY23, they expect Cloud to drive 30%+ of overall revenue. These updates came from Oracle’s Financial Analyst Meeting in October, so we’re eager to find out what may have changed for their 2023 outlook.

That list made us hungry…

…and maybe we should be ordering up some Yum! Brands (YUM) stock?

Last week, Cowen re-affirmed its positive sentiment on the company. Better yet, they even named YUM as one of the best ideas in the consumer sector for 2023. With ~12% 2022-2025E EPS CAGR, ~2% dividend yield, and room for multiple expansion — YUM could be a winner. 

The best part? Taco Bell makes up ~30% of YUM’s operating profit and it’s believed to have massive upside in emerging markets throughout the world.

We’ll report back in the next Week in Review. Our minds not quite made up on opening a position in the near-term, but YUM is on now on our watchlists.

There are some very happy people this morning.

Amgen will pay $116.50 per share to acquire Horizon — which had its trading halted to start Monday at just shy of $112.

Typically, when large companies are forking over tens of billions for acquisitions — the ‘buying’ company takes a decent hit and the ‘company being bought’ soars. Shares of Amgen are down ~2.7% over the past month, but as you can tell below — this is a beautiful looking stock chart from over the past year.

“One chart that might be particularly unnerving to policy makers is what average hourly wage growth looked like as of the October report (3.9% on a 3-month annualized basis) versus now (5.8%).” — Nick Timiraos AKA “The Fed Whisperer”

Hotter Than Expected?

Let’s talk through the chart above.

The Cleveland Fed has been ultra-reliable as a predictor for if the CPI will come in hotter than expected. Out of the last 19 inflation readings, the CPI report has been hotter than the Cleveland Fed’s estimates 16 times.

For that reason, it’s been relatively safe to assume that if the survey estimates for inflation (by banks, economists, etc.) are lower than the Cleveland Fed’s prediction — you can bet on things being higher.

This was all thrown to the wind with the October inflation data, as the Cleveland Fed overestimated the headline CPI by nearly 0.4%. The reason? The chart above.

The Cleveland Fed missed the changes in the way the BLS calculates health insurance premiums. Long story short, there was a major adjustment in the way that the Labor Department calculates the health insurance sub-index. This wasn’t widely accounted for ahead of the last inflation print — but it will be now.

Takeaways:

GET THOSE BUYBACKS IN, PEOPLE! The Inflation Reduction Act of 2022 included a new, non-deductible, 1% excise tax on stock repurchases by companies. This will go into effect as the calendar turns to 2023. It’d be interesting to know how many stock buybacks over the last few months has been due to this new tax.