6 Stocks to Invest in if There’s Another Rate Hike

Posted on by The INO.com Team

Today, on August 31, the initial jobless claims for the week ending August 26 came in at 228,000, below market expectations of 235,000, thereby registering its lowest reading in four weeks.

This has followed further signs of economic slowdown in the form of JOLTS, which showed an unexpected drop in job openings to below 9 million for the first time since March 2021, the latest consumer confidence index, which came in at 106.1, lower than the previous Dow Jones estimate of 116 which was lower-than-expected addition of 177,000 jobs in August according to private payroll data from ADP, and a downward revision in the GDP growth rate for the second quarter.

However, such disappointing updates have been welcomed by market participants spooked by Fed chair Jerome Powell’s message at Jackson Hole in Wyoming on Friday, August 25.

While it was not as brief as last year’s, it was still equally unambiguous. 2% still remains the non-negotiable target for the inflation rate, and the Central Bank is prepared to raise policy rates further if required and hold them higher for longer until it is confident of sustained price stability.

While the 12-month PCE has since declined to 3% percent as of July from its peak of 7% in June 2022 due to a significant unwinding of the demand-supply imbalance, however, the core PCE, which excludes volatile food and energy prices and includes inflation for goods, housing services, and all other services, came in at 4.3% in July, indicating that there is significantly more ground left to cover through monetary policy tightening.

In such a scenario, despite increased optimism, businesses are expected to remain weighed down by high borrowing costs, and economic activity is expected to remain stifled due to relatively scarce credit.

Moreover, with every increase in benchmark interest rates, a selloff of long-duration fixed-income instruments, such as the 10-year treasury notes, gets triggered, which causes a slump in their market value and a consequent increase in their yields. This also increases the benchmark 30-year mortgage rates, thereby depressing demand and deepening the crisis in which real estate has lately been finding itself.

An increase in borrowing costs would not just raise the cost of servicing the $32.7 trillion national debt; significant markdowns and prices of legacy bonds could crush the loan portfolios of banks that could share the same fate as the Silicon Valley Bank and the First Republic Bank. In this context, S&P's move to downgrade multiple U.S. banks citing ‘tough’ operating conditions hardly comes as a surprise.

Speaking of banks, the Bank of Japan’s policy tweak loosened its yield curve control, sparking widespread shock in the markets. To compound the miseries further, after placing the country on negative watch amid the debt-ceiling standoff at Capitol Hill back in May, Fitch Ratings recently downgraded U.S. long-term rating to AA+ from AAA, citing the erosion of confidence in fiscal management.

While broad expectations are pricing in a rate hike in November after a pause in September’s FOMC meeting, being diligent investors confident enough to increase their stakes in fundamentally strong businesses could be a time-tested method to navigate potential turbulence ahead.
Here are a few which could be worthy of consideration:

Amazon.com, Inc. (AMZN)

The global retail giant provides its consumers a wide range of products and services through its online platform and offline supply chains. In addition to reselling merchandise and content offered by third-party resellers, the company also manufactures electronic devices to distribute its service. It operates through three segments: North America, International, and Amazon Web Services (AWS).

The AWS segment consists of global sales of computing, storage, databases, and other services for start-ups, enterprises, government agencies, and academic institutions. Recently, at the AWS Summit in New York, San Francisco-based cloud communication and customer engagement platform Twilio Inc. (TWLO)announced its strategic partnership with the company.

The renewal of vows and strengthening of ties, which seeks to enhance the company’s predictive AI proficiency, has closely followed a vote of confidence from the tech giant in which AMZN announced that it has acquired 1% stake in TWLO earlier in the week with its ownership of 1.77 million shares worth more than $108 million.

During the fiscal 2023 second quarter that ended June 30, AMZN’s net sales increased 11% to $134.4 billion, while its operating income more than doubled to $7.7 billion. Consequently, the behemoth’s net income came in at $6.7 billion, or $0.65 per share, compared to a net loss of $2 billion, or $0.20 per share, during the previous quarter.

Exxon Mobil Corporation (XOM)

XOM is engaged in the energy business through exploration for and production of crude oil and natural gas and the manufacture, trade, transport, and sale of crude oil, natural gas, petroleum products, petrochemicals, and a range of specialty products. The company’s segments include Upstream; Downstream; and Chemicals.

Over the past three years, XOM’s revenue has grown at a 19.8% CAGR. Over the same time horizon, the company’s EBITDA and net income have grown at 50.8% and 93.2% CAGRs, respectively.

On July 13, XOM announced the acquisition of Denbury Inc. (DEN), an experienced developer of carbon capture, utilization, and storage (CCS) solutions and enhanced oil recovery. The acquisition is an all-stock transaction valued at $4.9 billion, or $89.45 per share, based on XOM’s closing price on July 12, 2023.

During the fiscal 2023 second quarter that ended June 30, XOM’s total revenue and other income came in at $82.91 billion. During the same period, the net income attributable to it came in at $7.88 billion, or $1.94 per share.

T-Mobile US, Inc. (TMUS)

Through its flagship brands, T-Mobile and Metro by T-Mobile, TMUS provides mobile communication services in the United States, Puerto Rico, and the United States Virgin Islands.

Over the past three years, TMUS’ revenue has grown at almost 15% CAGR. During the same time horizon, its EBITDA and net income have grown at 19.4% and 31.8% CAGRs, respectively.

On the 5G front, on August 15, TMUS expanded its coverage in Pennsylvania, while on August 17, the company expanded its REVVL lineup with its first-ever tablet and new 5G smartphones.

For the fiscal 2023 second quarter, TMUS’ and postpaid service revenues registered industry-leading growth rates of 2.8% and 5.5%, to come in at $15.7 billion and $12.1 billion, respectively. The company’s adjusted EBITDA increased by 5.7% year-over-year to $7.20 billion during the same period.
Consequently, its net income for the quarter came in at $2.22 billion, or $1.86 per share. With the expectation of adding a net 5.6 to 5.9 million customers compared to the earlier estimate of 5.3 million to 5.7 million, TMUS has revised its core adjusted EBITDA guidance upwards to a range between $28,900 and $29,200.

The Progressive Corporation (PGR)

As an insurance holding company, PGR operates throughout the U.S. through three segments: Personal Lines; Commercial Lines; and Property. The company’s non-insurance subsidiaries generally support its insurance and investment operations.

Over the past three years, PGR’s revenue and total assets have grown at 11.3% and 11.8% CAGRs, respectively. For the fiscal 2023 second quarter that ended June 30, PGR’s total revenue increased by 33.3% year-over-year to $15.35 billion. During the same period, the net income available to common shareholders came in at $335.9 million, or $0.57 per share, compared to the net loss of $549.6 million, or $0.94 per share.

Albemarle Corporation (ALB)

As a global developer, manufacturer, and marketer of specialty chemicals, ALB operates through three segments: Energy Storage, Specialties, and Ketjen.
Given the ALB’s burgeoning lithium mining operations in Latin America coinciding with the exponential increase in demand and price of white gold driven by the imperative of energy transition, the company’s revenue has ballooned at 42% CAGR over the past three years. During the same time horizon, its EBITDA and net income have increased at 61.5% and 107.5% CAGRs, respectively.

On July 19, ALB announced that it had agreed to amend the transaction terms signed earlier this year with Mineral Resources Limited (MALRF). Pending regulatory approvals, under the new agreement, ALB will take 100% ownership of the Kemerton lithium hydroxide processing facility in Australia that is currently jointly owned with MALRF through the MARBL joint venture. ALB will also retain full ownership of its Qinzhou and Meishan lithium processing facilities in China.

The amendment is expected to simplify commercial arrangements further and provide greater strategic opportunities for each company based on its global operations and the evolving lithium market.

On July 18, ALB announced its quarterly dividend of $0.40 per share, payable October 2, 2023, to shareholders of record at the close of business as of September 15, 2023. ALB currently pays $1.60 annually as dividends and has been able to increase its payouts for the past 28 years.

For the fiscal 2023 second quarter that ended June 30, ALB’s net sales increased by 60.2% year-over-year to $2.37 billion, while its adjusted EBITDA increased by 69.2% year-over-year to $1.03 billion. Consequently, the net income attributable to ALB increased by 59.8% year-over-year to $650 million, while its adjusted EPS increased by 112.5% year-over-year to $7.33.

Given the stellar performance, ALB raised its revenue and EPS guidance for the fiscal year to $10.4 - $11.5 billion and $25.00 - $29.50, in line with the current analyst estimates.

Coterra Energy Inc. (CTRA)

As an independent oil and gas company, CTRA is involved in developing, exploring, and producing oil, natural gas, and natural gas liquids (NGLs). The company’s operations are primarily concentrated in three areas: the Permian Basin in west Texas and southern New Mexico; the Marcellus Shale in northeast Pennsylvania; and the Anadarko Basin in the Mid-Continent region in Oklahoma.

Over the past three years, CTRA’s revenue has grown at a 70.9% CAGR. Over the same time horizon, the company’s EBITDA and net income have grown at 88.9% and 113.2% CAGRs, respectively.

During the fiscal 2023 second quarter that ended June 30, CTRA’s operating revenue came in at $1.19 billion, while its adjusted net income came in at $291 million, or $0.39 per share. Given the outstanding operational execution, the company has increased its 2023 BOE and natural gas production guidance by 2% and oil guidance by 3% at the mid-point.

Investors’ Playbook for Gannett (GCI): Navigating Potential Legal Challenges and Stock Impact

Posted on by The INO.com Team

Gannett Co., Inc. (GCI) was recently hit with a lawsuit alleging that its efforts to diversify its newsrooms led to discrimination against white employees. GCI is the largest media company by print audience and one of the largest by digital audience. The company has over 218 daily publications with several hundred weeklies.

Five current and former employees claimed they were either fired or ignored for promotions in favor of lesser-qualified women and people of color. The plaintiffs said these decisions were driven by the company’s Reverse Race Discrimination Policy in 2020 to make its workforce as diverse as the country by 2025.

The plaintiffs alleged that the policy discriminated against non-minorities based on their race. The lawsuit read, “Gannett executed their reverse race discrimination policy with a callous indifference towards civil rights laws or the welfare of the workers, and prospective works, whose lives would be upended by it.” According to the lawsuit, GCI had tied executive bonuses and promotions to achieve the goals indicated in the policy.

The suit cites the Supreme Court’s decision to eliminate race-based college admissions. The court rejected practices that allowed race to be sometimes a deciding factor in a person’s admission to a college. Chief Justice John Roberts remarked, “eliminating racial discrimination means eliminating all of it.”

In a statement, GCI’s chief legal counsel, Polly Grunfeld Sack, said, “Gannett always seeks to recruit and retain the most qualified individuals for all roles within the company. We will vigorously defend our practice of ensuring equal opportunities for all our valued employees against this meritless lawsuit.”

The plaintiffs and class are seeking an order to eliminate GCI’s Reverse Race Discrimination Policy and lost wages, back pay, including lost fringe benefits. GCI is not the first company to be sued for its diversity programs. However, unlike other cases brought by conservative groups, GCI is being sued by its former and current employees.

GCI’s stock doesn’t appear to have reacted to the news, as it has gained 6.6% over the past month.

Here’s what could influence GCI’s performance in the upcoming months:

Mixed Financials

GCI’s total operating revenues for the second quarter ended June 30, 2023, declined 10.2% year-over-year to $672.36 million. Its same-store total revenues decreased 8.6% over the prior-year quarter to $673.26 million. The company’s adjusted net loss attributable to GCI narrowed 85.3% year-over-year to $5.98 million.

On the other hand, its adjusted EBITDA rose 39.9% over the prior-year quarter to $71.15 million. Its non-GAAP free cash flow came in at $38.42 million, compared to a negative non-GAAP free cash flow of $43.27 million.

Mixed Analyst Estimates

Analysts expect GCI’s EPS for fiscal 2023 to increase 131.6% year-over-year to $0.18. On the other hand, its EPS for fiscal 2024 is expected to decline 44.4% year-over-year to $0.10. Its fiscal 2023 and 2024 revenue is expected to decrease 7.7% and 2.3% year-over-year to $2.72 billion and $2.65 billion.
Discounted Valuation

In terms of forward EV/Sales, GCI’s 0.62x is 65.9% lower than the 1.81x industry average. Its 5.63x forward EV/EBITDA is 33.4% lower than the 8.45x industry average. Likewise, its 14.02x forward EV/EBIT is 9.9% lower than the 15.57x industry average.

Mixed Profitability

In terms of the trailing-12-month Return on Total Capital, GCI’s 4.15% is 18.8% higher than the 3.49% industry average. Likewise, its 1.12x trailing-12-month asset turnover ratio is 132.1% higher than the industry average of 0.48x.

On the other hand, GCI’s 9.95% trailing-12-month EBITDA margin is 45.9% lower than the 18.38% industry average. Likewise, its 4.37% trailing-12-month EBIT margin is 48.7% lower than the 8.50% industry average. Furthermore, the stock’s 4.12% trailing-12-month levered FCF margin is 48.6% lower than the industry average of 8.01%.

Bottom Line

Although GCI has been sued by workers over its Reverse Race Discrimination Policy, the company’s workforce comprises more than 70% white. Moreover, more than 80% of leadership positions are held by white individuals. However, if the lawsuit against GCI is successful, the company may have to overturn its reverse race discrimination policy and compensate the plaintiffs and the class.

Amid this potential uncertainty arising from this legal challenge and its mined financials, it could be wise to wait for a better entry point in the stock.

Investor Alert: Are These 11 Back-to-School Stocks Making Big Moves?

Posted on by The INO.com Team

The end of summer and the onset of fall usually mean one thing in the United States — it’s time to replenish supplies and head back to school. This also translates to wardrobe refreshes and gadget upgrades. The average planned back-to-school spending per household in the United States has gradually increased year-over-year to $848.9 in 2021, with electronics or computer-related equipment emerging as the biggest category.

While stressed American consumers have been forced to go bargain hunting to squeeze out the maximum possible value from money for bare essentials so that more of it can be set aside in favor of outdoor experiences instead of manufactured goods, the trend is unlikely to be significantly impacted even by the seismic shifts in the consumption ecosystem.

In fact, since the supply chain disruptions in the aftermath of the pandemic, concern for stockouts has only pulled back-to-school sales have increasingly been pulled forward to the end of July, compared to the conventional peak during the beginning of August. Prime Week by Amazon.com, Inc. (AMZN) has also done its fair bit to catalyze that shift.

Given the above, we have shortlisted a few relevant apparel/fashion/luxury, grocery, and technology stocks below that are expected to benefit from back-to-school sales to determine if they are worth buying in the aftermath of the sales event and ahead of the holiday season.

Apple Inc. (AAPL)

The technology and consumer electronics giant, which has a history of revolutionizing products like the personal computer, smartphone, and tablet, has begun scripting the next key chapter in its success story with the announcement of its first product in the AR/VR market, the Apple Vision headset, which will sell for $3,499 when it is released early next year.

Despite its 7.9% dip during the past month, AAPL’s stock has gained 22.2% over the past six months. While the business boasts excellent profitability, in view of its stretched valuation in the face of frigid trade relations between the U.S. and China, AAPL’s manufacturing hub and key market, investors should wait for a better entry point.

Walmart Inc. (WMT)

Sam Walton, founder of the largest grocer in the world, built the company on a no-frills approach aimed at making groceries and other products more affordable. With 60% of its revenue in the U.S. coming from the grocery segment, the retail giant’s focus on value through “everyday low prices” has helped it become relatively immune to the seismic shifts in the consumption ecosystem.

WMT’s stock has dipped slightly over the past month but has gained 11.7% over the past six months. With core PCE at 4.3%, indicating stretched budgets and high borrowing costs in the foreseeable future, WMT is best positioned to capture the upside from “modest improvement” in sales of big-ticket and discretionary items like electronics during the Back-to-School season.

Target Corporation (TGT)

TGT sells an assortment of general merchandise and food items to its guests through its stores and digital channels. With product categories such as apparel and accessories, beauty and household essentials, food and beverage, and home furnishing and décor, the budget retailer has converted its 1900+ stores into mini-malls offering a range of “cheap chic” items.

Due to the recent miss in revenue and a not-so-optimistic outlook for the holiday season, TGT’s stock has lost 9.5% over the past month. However, the slump has also brought the stock to a more attractive valuation, which could protect investors from downside risks and a potential upside from a mid-term recovery in consumer confidence and market sentiment.

Ross Stores, Inc. (ROST)

ROST operates two brands of off-price retail apparel and home fashion stores, Ross Dress for Less (Ross) and dd’s DISCOUNTS, with the latter offering in-season, name-brand apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 70% off department and discount store regular prices every day.

ROST’s shares have gained about 5% over the past month and 8.5% over the past six months. Given its healthy profitability, investors could consider buying the stock to capitalize on a rally during Back to School and the holiday season.

Dollar General Corporation (DG)

As a discount retailer, DG offers merchandise, including consumable items, seasonal items, home products, and apparel.

DG’s stock has plummeted 7.4% over the past month and 27.6% over the past six months. In view of its bleak prospects, investors are advised to stand by until sentiments improve before investing in the stock.

Logitech International S.A. (LOGI)

Headquartered in Lausanne, Switzerland, LOGI designs, manufactures, and markets products that connect people to working, creating, gaming, and streaming worldwide. The company offers accessories, such as mice, keyboards, webcams, and other accessories for mobile devices. The company sells its products under the Logitech, Logitech G, ASTRO Gaming, Streamlabs, Blue Microphones, and Ultimate Ears brands.

Despite a 4.3% dip in the past month, LOGI’s shares have gained 24.2% over the past six months. While the business boasts excellent profitability, investors could wait for the pendulum of personal consumption to swing from services back in favor of high-ticket discretionary goods before buying into it.

Crocs, Inc. (CROX)

CROX designs, develops, and markets casual lifestyle footwear and accessories for women, men, and children, containing Croslite material, a proprietary, molded footwear technology. The company’s segments include North America; Asia Pacific; Europe, the Middle East, Africa, and Latin America (EMEALA); and the HEYDUDE Brand.

CROX’s stock has lost 7.8% over the past month. While the decently profitable business is well-positioned to benefit from increased expenditure on outdoor expenses, investors could wait for further valuation comfort before taking a long position in the stock.

Dillard's, Inc. (DDS)

DDS is a fashion apparel, home furnishings, and cosmetics retailer. The company’s operating segments include its retail department stores and a general contracting construction company.

DDS’ stock has gained 5.6% over the past month. Despite the recent price gains, its excellent profitability at a decent valuation means that investors could benefit from further upside in the stock.

Levi Strauss & Co. (LEVI)

The well-known apparel company designs and markets jeans, casual wear, and related accessories for men, women, and children under the Levi's, Signature by Levi Strauss & Co., Denizen, Dockers, and Beyond Yoga brands.

LEVI’s stock has lost 5.9% over the past month and 22.4% over the past six months. While the sentiment has been improving lately, investors would be wise to wait for its valuation to improve before deciding to add the stock to their portfolio.

Abercrombie & Fitch Co. (ANF)

As an omnichannel specialty retailer of apparel, personal care products, and accessories for men, women, and kids, ANF sells its offerings primarily through its digital channels, company-owned stores, and various third-party arrangements.

ANF’s stock has surged 26.3% over the past month and 68.3% over the past six months. Given its excellent track record and profitability, investors could consider investing in the stock.

Shoe Carnival, Inc. (SCVL)

SCVL is an omnichannel family footwear retailer that offers customers an assortment of dress, casual, and athletic footwear for men, women, and children.
SCVL’s stock has plummeted 15.9% over the past month. While valuations have become more attractive, investors are advised to wait for the outlook to improve before acquiring a stake in the business.

Are General Motors (GM), Ford Motor (F), and Stellantis (STLA) Investors Facing a Troubled September?

Posted on by The INO.com Team

The automobile industry navigated a tumultuous period featured by the pandemic-induced supply chain hiccups, soaring inflation, and climbing interest rates. However, the situation is improving lately thanks to the surge in EV demand.

According to Cox Automotive, during the first half of 2023, new vehicle sales in the U.S. surged 12.3% year-over-year, taking total sales to 7.69 million units, exceeding the estimated projections of 7.65 million.

However, this respite in the auto industry could be short-lived due to looming tensions wrought by potential strikes threatened by the United Auto Workers (UAW) union at Stellantis (STLA), Ford Motor Company (F), and General Motors (GM), should contractual negotiations not reach a successful conclusion by September 14, 2023.

In a recent authorization vote surrounding the possibility of walk-outs at these major plants, referred to as the ‘Big Three,’ employing 150,000 UAW-unionized workers, an overwhelming 97% of UAW members voiced their support.

UAW has outlined several ambitious targets. There will be a determined attempt to reinstate specific contractual provisions relinquished during the 2007 negotiations, including retiree health insurance and the abolition of a conventional pension scheme.

Since 2010, the number of U.S. automobile manufacturing jobs has risen. However, exponential advancements in EVs, increasingly supported by the government, could result in mass staff layoffs.

The main apprehensions of American autoworkers are twofold. First, the predicted transition to EV production could usher in layoffs and factory closures. Second, because many battery production companies are joint ventures, these entities might not pledge primary allegiance to union demands.

Adding to the frustration, workers have expressed discontent over profit distribution, claiming that corporate executives pocket vast returns, leaving little for the rank-and-file.

Substantiating this fear is that each of the three auto manufacturers has scaled down their employment figures over the past year. In June, Ford undertook a series of layoffs impacting nearly 1,000 workers across its gas-powered, EV production, and software development sectors. While it rationalizes the reductions as realignments based on ‘skills and expertise,’ hiring was reported only in ‘key area.’

Similarly, GM shut down an IT center in Arizona in October last year and initiated layoffs impacting about 940 workers. Moreover, the company acknowledged that over 5,000 salaried employees had opted for buyout offers as part of a broader cost-saving execution amid economic recession fears.

Furthermore, STLA, following a similar suit, offered buyouts to over 33,000 employees in April to avert layoffs that have befallen other automakers.

Amid these events, the union has vocalized its intent to secure protection against employment terminations and plant closures.

Potential Impact of the Strike

Halting production for even one big automaker during a strike could have acute ramifications, directly harming thousands of workers, and the companies could face significant financial losses due to diminished sales and stalled production.

F employs the highest number of UAWs, approximately 57,000 across all its U.S. manufacturing units, while its counterparts GM and STLA have 46,000 and 44,000 UAW members, respectively.

The UAW has amassed over $825 million in its strike fund to provide employees on strike with a weekly allowance of $500, projected to be exhausted within 11 weeks. Strikers would lose out on wages that would only be partially offset by the union’s weekly benefit.

During strikes, the financial implications for auto companies can be catastrophic. The 2019 40-day strike reportedly cost GM a staggering $3.6 billion. A prolonged strike may also threaten the UAW’s efforts to restore its reputation after several corruption allegations.

The fallout from a strike on the 'Big Three' automakers could result in production delays or potential shutdowns, influencing their overall revenues. Meanwhile, there has been news of F preparing its salaried and white-collar workforce to step into production roles should the UAW members initiate a strike.

Negotiations ensuing these situations could add over $80 billion in labor costs to each automaker over the contract period and increase the likelihood of work stoppages.

The Anderson Economic Group forecasts that potential work stoppages could inflict an economic loss exceeding $5 billion within 10 days. Similarly, Deutsche Bank hypothesizes that each automaker could endure earnings losses ranging between $400 million and $500 million for each week of halted production.

It could jeopardize production schedules within the Big Three's auto manufacturing realm. If the production losses escalate rapidly, it might lead to approximately 1.5 million units forfeiting. However, these aggressive tactics primarily favor the interests of the UAW rather than the companies or their shareholders.

If the demands are fulfilled without any revisions to other benefits, the hourly labor cost for automakers will more than double, representing a significant increase compared to the rates settled in the preceding four-year agreements.

Considering the current scenario, let us understand where the ‘Big Three’ automakers stand.

Stellantis N.V. (STLA)

Headquartered in Hoofddorp, the Netherlands, STLA reported a record-breaking earnings report for the six months ended June 30, 2023. Its net revenues increased 11.8% year-over-year to €98.37 billion ($104.52 billion), while adjusted operating income grew 11% from the year-ago value to €14.13 billion ($15.32 billion). The company’s net profit rose 37.2% year-over-year to €10.92 billion ($11.84 billion).

Following these impressive financial results, STLA projects that its adjusted operating income margin will reach double digits and maintain a positive industrial free cash flow for the 2023 fiscal year.

On August 24, it announced the expansion of its SPOTiCAR program to the U.S. This initiative aims to streamline vehicle purchases for individuals and businesses through digital tools and specialized dealerships, thereby increasing customer satisfaction and future product value.

On August 23, the company completed an agreement with AGI, a leader in nationwide branded infrastructure programs for more than 50 years, to support national U.S. dealership electrification and EV charging capabilities. These moves are expected to help STLA fulfill its Dare Forward 2030 strategy to achieve 50% battery-EV sales by the end of this decade. This strategic partnership with AGI will significantly augment STLA's revenue generation capacity.

As a result of such developments, Analysts expect STLA’s revenue and EPS in the fiscal year (ending December 2023) to be $205.16 billion and $5.70, registering growths of 7.8% and 3.2% year-over-year, respectively. Moreover, the company surpassed the consensus revenue estimates in all the trailing four quarters.

Shares of STLA have gained 28.9% year-to-date and lost 10.9% over the past month to close the last trading session at $18.30.

Institutional investors and hedge funds have recently changed their STLA stock holdings. Institutions hold roughly 29.3% of STLA shares. Of the 433 institutional holders, 200 have increased their positions in the stock. Moreover, 60 institutions have taken new positions (7,111,951 shares), while 42 have sold positions in the stock (30,938,367 shares).

Ford Motor Company (F)

Legacy automaker F posted better-than-expected second-quarter earnings and raised their respective 2023 projections.

During the second quarter, F’s revenues rose 11.9% year-over-year to $44.95 billion, and automotive revenues peaked at $42.43 billion, surpassing the $40.38 billion estimate. The net income almost tripled to $1.92 billion, marking an 187.4% year-over-year increase.

The automaker raised its full-year adjusted EBIT guidance range from $9 billion and $11 billion to $11 billion and $12 billion while simultaneously raising its adjusted free cash flow guidance from $6 billion to $6.5 billion and $7 billion. The company anticipates to hit an 8% EBIT target by 2026.

In August, SK On, EcoProBM, and F announced a C$1.2 billion investment to construct a cathode manufacturing facility that will provide materials to supply batteries to solidify the EV supply chain in North America. With production anticipated to commence by the first half of 2026, the facility is expected to produce up to 45,000 tonnes of CAM annually. Being F's inaugural investment in Québec, this new facility aligns with the company's goal of localizing vital battery raw material processing in regions where EV manufacturing occurs.

On August 1, F reopened its Rouge Electric Vehicle Center after a six-week expansion project, increasing its capacity to 150,000 units by the fall to meet the heavy demand. Nevertheless, a strike projected for September threatens to curtail the benefits of this additional capacity, given the likely slowdown in production.

Investor apprehension was fueled by multiple facets of the company's earnings and guidance. Notably, the EV segment of the business, recently rebranded as Model E, reported a pre-tax loss of $1.08 billion. The firm anticipates losses for this segment could mount to $4.5 billion in 2023, a startling increase of 50% compared to previous estimates.

Amid a global price war, F reduced prices for its 2023 Motor Trend Car of the Year F-150 Lightning Electric Truck, directly responding to price cuts implemented by rival Tesla. Consequently, this strategy spurred a six-fold demand surge in orders and over 50% for its XLT trim level. The price cuts are anticipated to dent the profitability of industry players.

Additionally, the company has publicly acknowledged the slow pace of EV adoption and consequently has dialed back its ambitious EV production plans. The company now expects to hit an annual production capacity of 600,000 vehicles by 2024 instead of 2023 while being “flexible” about the goal of 2 million vehicles it previously forecast by 2026.

Analysts expect F’s revenue and EPS in the fiscal year (ending December 2023) to be $166.11 billion and $2.07, registering 11.5% and 10.2% year-over-year growths, respectively. Moreover, the company surpassed the consensus revenue estimates in three of the trailing four quarters.

Considering these developments, F’s shares have been facing pressures, sending its stock down to May 2023 levels. Over the past year, the stock declined 22.8% and 10.3% over the past month to close the last trading session at $11.90.

Institutions hold roughly 54.7% of F shares. Of the 1,798 institutional holders, 773 have decreased their positions in the stock. Moreover, 131 institutions have taken new positions (12,514,405 shares), while 135 have sold positions in the stock (18,347,658 shares).

General Motors (GM)

Detroit’s auto giant, GM, reported impressive revenue and profit growth, upgrading its profit prediction for the second time this year. Despite global challenges, the company continues to see robust demand for its vehicles and reduced expenditure.

For the fiscal second quarter that ended June 30, 2023, GM’s total revenues grew 25.1% year-over-year to $44.75 billion, while its adjusted EBIT rose 38% year-over-year to $3.23 billion. Its net income attributable to stockholders rose 51.7% year-over-year to $2.57 billion, while its adjusted EPS came in at $1.91, representing a 67.5% increase year-over-year. GM’s adjusted automotive free cash flow amplified 294.3% year-over-year to $5.55 billion.

The company has revised its net income expectations for the ongoing fiscal year from an earlier high-end estimate of $9.3 billion to $10.7 billion. Its automotive division’s free cash flow is also expected to come between $7 billion and $9 billion, up from $5.5 billion to $7.5 billion.

This impressive financial performance, fueled by a thriving conventional auto business spotlighting profitable trucks and SUVs, has facilitated the company's intensified entry into the electric vehicle (EV) sector. GM said it would increase cost-cutting measures through next year by an additional $1 billion in expenditures.

Investors can look forward to significant potential gains if the company successfully leverages new business opportunities and smoothly transitions from reliance on internal combustion engine sales to EVs.

By aligning focus on the promising sectors of electric and autonomous vehicles, connected services, and new business models, GM anticipates being able to double company revenue by the decade’s end. Additionally, it envisages its EV wing reaching profitability by 2025, boasting an EV production capacity of 1 million units in North America and approximately $50 billion in EV-generated revenue.

GM's endeavors to explore fresh avenues of income are highlighted by its autonomous robotaxi unit, Cruise. The company recently declared the commencement of production for numerous EVs based on the freshly conceptualized Ultium platform from 2023’s second half. Initiated in 2018, the Ultium EV platform is versatile enough to produce various vehicle sizes and types across segments. The wide range of the platform will help streamline production and improve its supply chain, helping push toward more profitable EVs.

However, GM has struggled to ramp up production of its EVs this year, citing problems with battery module availability. GM said it is resolving that issue, and EV production is expected to improve in the second half of 2023.

Analysts expect GM’s revenue and EPS in the fiscal year (ending December 2023) to be $171.71 billion and $7.73, registering 9.6% and 1.9% year-over-year growth, respectively. Moreover, the company surpassed the consensus EPS estimates in all the trailing four quarters.

Institutional investors have recently changed their holdings of GM stock. Institutions hold roughly 82% of GM shares. Of the 1,346 institutional holders, 575 have decreased their positions in the stock. Moreover, 110 institutions have taken new positions (6,710,244 shares), while 95 have sold positions in the stock (7,158,230 shares).

Warren Buffett’s Berkshire Hathaway recently announced a significant reduction in its stake in GM during the second quarter by 45%, from about 40 million to about 22 million. The decision could be related to the challenging contract negotiations.

Considering these developments, GM’s shares have been facing pressure. Over the past year, the stock declined 15.6% and 13% over the past month to close the last trading session at $33.12.

Observations

GM and F might face over 10% decline in their earnings, should a prolonged strike occur. However, STLA is less susceptible to this risk due to its primary business concentration in Europe, regions lacking a UAW union presence.

American Axle, for instance, gets an estimated 55% to 65% of its revenue from operations dependent on UAW workers, while Magna International gets 35% to 40%, and Lear gets 30% to 35%.

The repercussions of the UAW contract could resonate nationally, affecting the steel industry and smaller US manufacturers that supply parts to the Detroit Three automakers.

Furthermore, the replacement rates, indicating the percentage of product portfolio to be swapped with brand-new products in the next four years, carry significant implications. It impacts the age of products displayed in showrooms, the market share companies can capture, and their corresponding profitability.

John Murphy, the Lead U.S. Auto Analyst at Bank of America’s Equity Research, highlighted that companies with lower replacement rates indicate a less fresh product and are expected to lose more market share. Conversely, businesses with higher replacement rates tend to gain more market share.

According to the Car Wars study, the anticipated vehicle replacement rate between 2024 and 2027 is expected to align with the historical average of 15%. In this respect, F appears optimally positioned, while STLA lags. GM, on the other hand, “marginally” lags the industry’s average replacement rate.

GM's replacement rate is forecasted to land close to the industry average of 22.8%. F's forecasted replacement rate is the highest in the industry, at 24.8%, while STLA’s is at the bottom of the list with a forecasted replacement rate of 15.9%.

Bottom Line

The auto industry in the U.S. constitutes approximately 4% of the nation's Gross Domestic Product (GDP). Underpinning this, an upward trend in the industry is anticipated to generate a broader economic resurgence.

The strike is anticipated to impact the three big automakers, their shareholders, the associated industries, and the overall auto market. However, what looms on the horizon involves more than simply elevating individual living standards. A contemplative eye must be cast toward the imminent influence of technology on prospective employment within the sector.

As Peter Berg, Professor of Employment Relations at Michigan State University, posited, the gradual transition from combustion engines to battery-operated electric vehicles will inevitably reconfigure manufacturing, requiring a fewer workforce possessing divergent skill sets.

Notably, the potential strike could exert a greater impact on automakers' operations and financial outcomes than one that occurred four years ago. This amplified threat is primarily attributable to the ongoing recovery of the U.S. auto industry from supply chain disruptions caused by the pandemic and lower vehicle inventory levels. Such elements make it imperative for negotiators to swiftly broker a satisfactory compromise to mitigate costly fiscal repercussions for all stakeholders involved.

How to Play this Stock Market Dip?

Posted on by The INO.com Team

Please enjoy this updated version of weekly commentary from the Reitmeister Total Return newsletter. Steve Reitmeister is the CEO of StockNews.com and Editor of the Reitmeister Total Return.Click Here to learn more about Reitmeister Total Return

SPY – Investing was a lot more fun during the non-stop rally between March and July. August has brought a long over due correction to the S&P 500 (SPY). The key for investors is figuring out when to buy this dip, and what are the best picks. Steve Reitmeister shares his thoughts including a preview of the 7 stocks and 4 ETFs he is recommending to investors now.

 

In my last market commentary, I talked about how stocks were falling short of regaining important ground above 4,400 for the S&P 500 (SPY).

Amazingly Wednesday we broke above with gusto…and then gave it all back and then some on Thursday closing at 4,376.

We will explore why this happened and where we head from here in the commentary below…

Market Commentary

The popular narrative for breaking back above 4,400 on Wednesday is that bond rates finally fell in a meaningful fashion from their recent peak. This improves the value equation for stocks with some hopes that this recent pullback was over.

Flash forward to Thursday. No news to speak of while bond rates were little changed. Stocks even started the session in the plus column. And yet tick by tick the gains frittered away leading to a dreadful -1.35% showing.

Not even beloved NVIDIA providing another breathtaking earnings beat could save the day. This begs the question…what the heck just happened?

The answer is: WELCOME TO THE NEW TRADING RANGE

Meaning 4,600 was too high for stocks. And the recent retreat nearer to 4,300 was too low. So now we are going to bounce around in a trading range for a while. This is not a surprise to anyone reading my recent commentaries citing that 4,600 was a bit too lofty given current fundamental conditions.

Trading ranges = erratic price action

That is because a new equilibrium has been established as investors await more clues that would have them become more or less bullish. But the vast majority of the time, the next move after a trading range is to get back to what you were doing before. In this case that means another leg higher.

The most important thing to appreciate about trading ranges is that pretty much all price moves inside the range are meaningless noise. As in, there may not be a logical reason. Case in point being the 1.35% haircut on Thursday.

Let’s get back to the conversation about government bond rates on the rise

There is a false narrative taking place on this vital topic. Some investment journalists are writing that it’s because investors see more long term inflation on the horizon. Yet most signs say that is not true.

Here is what I believe is taking place.

First, let’s step back to remember that since the Great Recession in 2008/2009 the Fed has used every tool necessary to lower rates. That includes Quantitative Easing that led to building a greater than $5 trillion portfolio of Treasury bonds.

That’s because less bonds on the free market = greater demand for the bonds left in circulation = lower rates on those bonds.

Now the Fed wants higher rates. And beyond the aggressive rate hike cycle for the Fed Funds Rate, they have been steadily selling off their bond portfolio (Quantitative Tightening). That leads to this equation:

More bonds on the free market = less demand for the bonds in circulation = rates need to rise to attract additional buyers.

Let’s also remember that the historical average for the 10 year Treasury rate is a little over 4% when the average inflation rate during those periods were a touch over 2%.

So perhaps all that is happening now with higher rates is that they are less manipulated by the Fed…and that they are returning to a true market rate.

That is also why I don’t think rates will go too much higher because looking out to the future inflation will get back to normal…and Fed funds rate will be lower…and thus bond rates will not need to be much higher than now.

Lastly, once the Fed wins their battle over inflation, they will lower the Fed funds rate which will allow the economy to grow faster. This equates to higher corporate earnings growth which is a much more natural catalyst for share price appreciation.

Putting it altogether, we are still in the midst of a new bull market…but one that got out of the gate a little too hot for the true state of the economic conditions. This leads to the trading range scenario we are in now.

We will break higher once investors are more convinced that the Fed has tamed inflation without causing a recession (aka Soft Landing). This tells everyone that rates will go lower in the future which is a green light for stock advancement.

Bottom Line: Buy the recent dip…and don’t sweat too much of the day to day volatility inside the trading range.

What To Do Next?

Discover my current portfolio of 7 stocks packed to the brim with the outperforming benefits found in our POWR Ratings model.

Plus I have added 4 ETFs that are all in sectors well positioned to outpace the market in the weeks and months ahead.

This is all based on my 43 years of investing experience seeing bull markets…bear markets…and everything between.

If you are curious to learn more, and want to see these 11 hand selected trades, then please click the link below to get started now.

Steve Reitmeister’s Trading Plan & Top Picks >

Wishing you a world of investment success!

SPY shares were trading at $441.03 per share on Friday afternoon, up $4.14 (+0.95%). Year-to-date, SPY has gained 16.19%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.