Week in review, week ahead, and robots

Earnings preview for Intel, Google, Tesla, IBM, Hasbro, Honeywell, Verizon, AT&T, ServiceNow, SAP, Coke, and more.

I think the most important and interesting part of price action this week was how the market traded ex-Nvidia. I spilled some ink last week complaining about the liquidity suck that was Nvidia. This was most noticeable on Tuesday after the CPI print when RSP (equal weight index pictured above) was down more than 1.5% tip to tail and the market cap index didn’t sell off until the last few minutes of the day, when it finished down around a third of a percent.

If you were diversified to anything outside of Nvidia, you had not a good day on Tuesday. Wednesday was a bit mixed as well, with the trial balloon of Powell getting fired and then popped when the market fell on the news. The market rallied hard afterwards.

From the top on Thursday the 10th, to the bottom of Wednesday the 16th, there was 6.5 points lost in the S&P equal weight, or approximately 4%. Almost all masked by Nvidia. This would be a pretty solid buyable pullback in a bull market. And given that low inflation but rising wages are good for the consumer, even one that’s defensively crouched, the real world economy is looking stable. Helping with the bullish impulse. As we make our way up another 5% - 8% through earnings season I think we’re in a for a solid move higher in the broad index.

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That is what today’s piece is about. With a focus on how other sectors are starting to be so cheap you kind of need to have expose to them as any mean reversion trade will be nasty. An example of this on a country wide basis is China, which was just left languishing but the moment the dollar turned stronger earlier this month it was going to see improved financial metrics on their factory numbers, which would bleed through the whole economy.

Or at least, that’s what enough macro economists would believe to turn interest in the country up enough to see real buying. Sure enough the last few weeks of China ownership has been great. All without much fanfare until the last few days.

That same trend is likely coming to some beaten down sectors.

I had this whole piece written about how I think Hess is the most attractive long in the energy space right now because of the merger arb with CVX was likely going to send the stock the moment the French got back from their summer vacation, but somehow the French courts work during the summer so the trade was completed on Friday and Hess delisted before open today.

So no energy pitch. Congrats on closing that arb though.

This is also playing out in earnings releases so far. Johnson & Johnson had the best reaction to earnings in the large cap space this week. No one cared going into earnings, and no one really cared after earnings either. They’ve had middling growth the last few years and broken below a more than decade long uptrend because of it. But due to tariff costs being less than expected, but more importantly due to the dollar getting weaker.

The dollar weakness also positively impacted other companies that make a physical produce, notably 3M company which saw margin expansion and raised guidance to close to $8 in EPS for the current year and likely 8.4 - 8.6 for next year. Making things better for 3M is that the company was aggressively buying back stock at the lows after their last earnings print, retiring almost 3% of shares year to date and trying to grab another 1.3%~ before the end of the year. Including the dividend yield that’s almost a 6% return on cash with a solid management team and a plan to see more growth in the future. I think 180 by the end of the year seems like its coming.

On the flip side, companies that are have been popular, or over owned have had a bad time this earnings season. The banks have been a mixed bag, with Citi doing well on actually showing solid growth across all metrics, while JPM and WFC pulled back, mostly on valuation concerns (and JPM saying they’re not going to be aggressive on buybacks while they’re trading at close to 3x book). Then you had AmEx today, who are looking like they’re putting in a nasty double top but also is relying more and more on younger generation who are a riskier credit profile to continue showing growth. Not exactly the recipe for success.

Then there’s Netflix. A stock that was under owned coming into the print was being pitched as a buy at any price at 50x FCF, limited growth but stable cash flow. Then even after a close to 70% move up YTD Netflix bulls were upset the stock sold off 5% today after a middling report. The stock moved up 30% since the last report and didn’t have a pullback in April with the market. It beat and raised by less than 5% and implied there wouldn’t be any more significant raises coming in the second half.

This upcoming week will see multiple companies I own from AT&T, Verizon, Google, IBM, Hasbro, Dow, Intel, and Honeywell, to others I don’t but want to see how the market responses to, like Coke, Tesla, ServiceNow, and SAP.

I’ve written about my thoughts on Hasbro and Honeywell a month ago. Nothing has much changed except Hasbro looks like its setting up for a strong move upwards and Honeywell is looking great into early next year.

This is what the earnings calendar looks like.