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  • Week in Review: 5/22/22

Week in Review: 5/22/22

Layoffs may be a bigger issue than anticipated, the Housing Market has cooled, Cash App is killing it, Retailers are taking a beating, and Ray Dalio likes going to the movies.

22 May

At least it’s almost Memorial Day Weekend.

I think we all may need a cold one after seeing market activity over the last few months. Before we dive in, here’s a video about my plan for deploying cash in the stock market as things approach a bottom. It references the post below:

Quick Callout:

Ladies and gentlemen — things are getting ugly for Corporate America.

While many view the layoffs and hiring freeze issues as ‘only a tech problem’ — I tend to disagree. Many companies saw their stocks soar throughout the pandemic and had a higher propensity to offer frothy cash + stock packages for incoming employees.

Over the coming months, let’s keep a close eye on companies that are both directly and quietly announcing that the headcount of staff is becoming an issue to their bottom lines.

Carvana, Coinbase, Meta, Netflix, Robinhood, Twitter, Uber, and Wayfair have all announced either layoffs or hiring freezes. If this list grows substantially — I may be forced to lower my ‘bottom’ prediction for the S&P 500 beyond the current 3300-3500 range that I’m currently expecting.

Here’s an awesome site to track company layoffs in real time.

Week in Review — Too Long, Didn’t Read:

Shares of retail leaders get smashed despite increasing sales, Palo Alto Networks checks all the boxes, airport travelers love Clear Secure, Cash App is sweeping the country with no signs of stopping, billionaires’ disagreements range from Apple to AMC, and the housing market has officially pumped the brakes.

Key Earnings Announcements:

Inflation is crushing the profit margins of retailer giants like Walmart & Target, Palo Alto Networks posts impressive profitability profile & refreshing guidance, and I remain bullish on Clear Secure after total bookings rose +79% & the company announced a $100M stock repurchase.

  • Walmart (WMT)

Key Metrics

Revenue: $141.6 billion, an increase of +2% YoY

Operating Income: $5.3 billion, a decrease of -23% YoY

Profits: $2.0 billion, a decrease of -25%

Earnings Release Callout

“Bottomline results were unexpected and reflect the unusual environment. U.S. inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected.”

My Takeaway

Well, this is what we’ve been waiting for I suppose. Spending is there, sure, but the margins on the spending are not. The cost of doing business right now for Walmart is up +25% YoY (revenue increase + delta in operating income) — who do you think these costs will eventually get passed down to? In their earnings report their CEO said “We’re adjusting and will balance the needs of our customers for value with the need to deliver profit growth for our future,” which I interpret as higher prices to maintain historical operating margins.

However, if I were to choose a retailer that is more than likely well-positioned for a high inflation environment, Walmart is at the top of my list. It’s my humble opinion that Walmart will continue offering value-priced offerings (rollbacks) on core spending categories like food and clothing — which in times of high inflation should drive same-store revenue growth higher.

  • Target (TGT)

Key Metrics

Revenue: $24.8 billion, an increase of +4%

Operating Income: $1.3 billion, a decrease of -43% YoY

Profits: $1.0 billion, a decrease of -52% YoY

Earnings Release Callout

“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time.”

My Takeaway

Different name, same story. Target, who I’d argue is a place where folks that have some extra money shop at, reported a -52% decrease in profits for their business. This isn’t because people stopped shopping at their stores — revenue is up +4%. It’s because the cost of doing business is now increasing more expensive.

The increased cost of doing business, in this scenario, is more specifically surrounding freight and fuel — making up more than half of the boost in costs. I’m sure Target will bounce back over the coming quarters as they’re able to balance their operating margins again, but I’m not sure what’s going to happen to them during times of recession.

  • Palo Alto Networks (PANW)

Key Metrics

Revenue: $1.4 billion, an increase of +29% YoY

Billings: $1.8 billion, an increase of +40% YoY

Operating Loss: -$47.6 million, up from -$110.4 million

Net Loss: -$73.2 million, up from -$150.4 million

Earnings Release Callout

“On the back of this strength across our portfolio, we are again raising our guidance for the year across revenue, billings and earnings per share. Our drive to deliver strong total shareholder return in Q3 was headlined by our revenue growth, while we also balanced operating margin expansion and free cash flow conversion.”

My Takeaway

Let’s go! I’m so pumped about this positive report given my big conviction in the company as explained here. We all know cybersecurity isn’t going away anytime soon, and PANW is going to be remain a long-term winner.

Based on current market expectations, PANW is now expecting +26% revenue growth next quarter, +29% revenue growth full-year, and a free cash flow margin of +33%. Couldn’t be happier with these results and will continue to buy this dip and dollar cost average.

  • Clear Secure (YOU)

Key Metrics

Revenue: $90.5 million, an increase of +79% YoY

Operating Loss: -$18.2 million, compared to -$13.0 million last year

Net Loss: -$18.8 million, compared to -$13.1 million last year

Free Cash Flow: $19.4 million, compared to -$3.0 million last year

Earnings Release Callout

“Our first quarter performance continued the broad-based strength experienced in our fourth quarter. The business saw operating leverage and generated strong free cash flow. We remain bullish on travel as people are allocating more discretionary spend to experiences, including travel.”

My Takeaway

This is a company that I’m a customer of and will literally never cancel my subscription. This is a company that is “sort of” inflation proof given the people who can afford to be a customer are traveling enough to see the benefit of their services + if they travel that much they likely can afford their subscription without doubt.

This company’s LTV to CAC is now more than 18X. It’s incredible. As long as people travel and care about convenience, Clear Secure will prosper — in my humble opinion. Awesome quarter for the company.

Other Abbreviated Earnings Results:

Some notable callouts from the rest of the field.

  • 📉 Home Depot (HD): — shares fell -2.0% 💰 Current Price: $287 — Wall Street Price Target: $363

  • 📉 Lowe’s (LOW): — shares fell -3.7%💰 Current Price: $185 — Wall Street Price Target: $250

  • 📉 John Deere (DE): — shares plummeted -16.8%💰 Current Price: $313 — Wall Street Price Target: $440

  • 📈 Monday.com (MNDY): — shares rose +4.1% 💰 Current Price: $114 — Wall Street Price Target: $186

  • 📈 JD.com (JD): — shares rose +1.9%💰 Current Price: $52 — Wall Street Price Target: $83

  • 📉 Cisco (CSCO): — shares plummeted -13.3% 💰 Current Price: $43 — Wall Street Price Target: $52

  • 📉 On Holdings (ONON): — shares fell -9.2% 💰 Current Price: $20 — Wall Street Price Target: $31

  • 📈 Sea Limited (SE): — shares rose +8.9% 💰 Current Price: $80 — Wall Street Price Target: $144

  • 📈 Analog Devices (ADI): — shares rose +3.7%💰 Current Price: $162 — Wall Street Price Target: $200

  • 📉 Applied Materials (AMAT): — shares fell -3.1%💰 Current Price: $106 — Wall Street Price Target: $147

  • 📉 Colgate-Palmolive (CL): — shares fell -3.7%💰 Current Price: $75 — Wall Street Price Target: $83

Investor Events:

Cash App’s eating Venmo’s lunch and institutional investors are making wild market moves.

  • Block Investor Day

Block (formerly Square) held an Investor Day this week, and it was nothing short of impressive. More specifically, the most important part of Block’s business model — Cash App — registered ‘knock-your-socks-off’ growth.

  • Annual Active Accounts: ~80 million

  • Customer Acquisition Cost (CAC): $10

  • #1 Finance App in the App Store for 5 Years

  • #8 Most Downloaded App in the US in 2021

  • >6X ROI Over the Last 3 Years

  • Steadily Increasing Gross Profit Per Active User

The name of the game for fintech apps is how much it costs to acquire customers. If Cash App can keep up its momentum throughout a time of recession, especially from a social and cultural perspective, I’ll have no choice but to consider adding Block to my portfolio.

Here’s a link to a great thread about Cash App from my friend, Rex Woodbury.

  • Hedge Fund 13F Filing Takeaways

As a reminder, 13F Filings are reported to the SEC by institutional investment managers with at least $100 million in assets under management (AUM). Above are the Top 10 Holdings for Bridgewater Associates (Ray Dalio) and Renaissance Technologies (Jim Simons).

Here’s a great source for some quick highlights of buys and sells. Did you know that Michael Burry (‘The Big Short’ guy) is betting big against Apple? But at the same time — Burry’s Scion Asset Management fund built stakes in both Alphabet and Meta. Bridgewater added a position in AMC, while Renaissance Technology slashed their’s by -61%. These moves are predictably ‘all over the place’ as institutions try to find a bottom in the stock market’s future.

As I believe the S&P 500 will trade down by another -8-12%, I’m eager to see which of the investing leaders will be proven the most clairvoyant.

Major Economic Updates:

Conflicting retail results and the housing market has officially cooled down.

  • Retail Sales

Retail Sales in the US increased +0.9% month-over-month, pleasing many analysts and investors after fears that a negative reading was inbound.

After all, the health of the US economy is measured based on GDP — and GDP is dependent on the American consumers remaining active.

I’m a believer that the relative ‘strength’ of retail spending is a false hope that a recession will stay away. During Q1 of 2022, total US household debt rose by $266 billion (+1.7%) to $15.64 TRILLION.

Retail spending is increasing at a decreasing rate. Household debt is increasing at an increasing rate. Inflationary pressures are clearly causing Americans to continue to make purchases across a variety of sectors — but far too much of purchasing is coming from the use of credit that could lead to credit worthiness and loan default issues during a recession.

Retail data doesn’t adjust for inflation, so while the total amount of money being spent continues to increase — the value end consumers receive and profit margins of companies are both shrinking.

  • NAHB Housing Market Index

The NAHB Index measures sentiment among builders of U.S. single-family homes, and is a widely watched gauge of the U.S. housing sector. The reading for May came in below market forecasts and notched the 5th consecutive month of declines.

This housing ‘pulse check’ is currently at its lowest level since June of 2020 — hurt by rocketing mortgage rates and building material costs.

“The housing market is facing growing challenges. Building material costs are up 19% from a year ago; in less than three months mortgage rates have surged to a 12-year high, and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family.” 

— Robert Dietz, NAHB Chief Economist

  • Existing Home Sales

Existing home sales in the US declined by -2.4% to a seasonally adjusted annual rate of 5.61 million in April of 2022 — the lowest since June of 2020 and slightly below forecasts of 5.65 million.

Sales went down for a third consecutive month, in another sign the housing market is cooling, as higher home prices and mortgage rates have reduced buyer activity. Total housing inventory amounted to 1,030,000 units, up +10.8% from March and the median existing-home price for all housing types was $391,200, up +14.8% from April 2021.

"It looks like more declines are imminent in the upcoming months, and we'll likely return to the pre-pandemic home sales activity after the remarkable surge over the past two years.” — Lawrence Yun, NAR Chief Economist

If you’re starting your investing journey or want to change to a cleaner, social-focused investing platform, consider visiting Public.com.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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