July 30th, 2022 | Stock Analysis, COVID-19 Vaccinations, Natural Gas, Stock Revenue, Housing Market, Chip Bill, GDP, Solar Energy, Raw Materials, & A/C
In a search for value at Wilsey Asset Management we’re always looking for companies that have gone on sale with strong fundamentals. What follows are four companies from last week that were down substantially from their 52-week highs. We have not done the research to see if they’re fundamentally strong, but they are definitely on sale. Snap which trades under the symbol SNAP fell to $9.96 last week and back in the fall of last year it was trading in the low $80s. We’ve also talked about the cannabis stocks and once again cannabis company Canopy Growth has continued to fall reaching $2.57 last week well off the high reached about a year ago of $19 a share. Back in 2018 the stock was around $50. The company trades under the symbol CGC. A company called Silver Gate Capital symbol SI which is a crypto bank, back in November was trading around $220 a share and Friday it closed at $86.50. I know cryptocurrencies have rallied lately but I don’t think investors will find any value here. And lastly Carnival Cruise lines which trades under the symbol CCL closed at $9.26 last week and if you look back to September/October of last year you will discover the stock was trading around $24-$25 a share. I do believe this company has a very weak balance sheet but maybe there is some value there if one digs deeper.
Last week President Biden reported that he had COVID-19 along with Dr. Fauci. They also have been very cautious and have received the vaccination and the double boosters that were recommended. It seems to me that no one really cares any longer about COVID-19 and that there is no reason to get the vaccination or the boosters if you still get the virus. What I think about is how hard Pfizer, the drug company, has pushed the vaccinations and the boosters to everyone including even infants. Their stock rose on the news last year but year to date their stock has fallen over 9%. I know this company has many other drugs but I’m just thinking that less people will be getting the vaccinations and boosters going forward and that could hit them on the revenue side. The stock is not expensive trading just under 10 times forward earnings of $5.46 and has a decent dividend yield of 3%, but I worry with the fear of Covid dropping I presume the vaccinations and the booster shots worldwide will decline. What that tells me is perhaps there could be a better time to buy Pfizer over the next six months or so. It is worth watching.
Natural gas has been extremely volatile this year and just about a month ago it seemed like it was heading in the right direction. That has now changed as the prices for natural gas has surged 77% in the month and is on pace for its largest monthly increase on record. Natural gas hit a high of $9.75 per million British thermal units (MMBtu) this morning which is the highest level since July 2008. This comes as Russia has said Gazprom's Nord Stream 1 pipeline will operate at just 20% of its capacity due to "turbine maintenance". This is such an important energy source and will likely lead to continued problems for inflation. Just to give you an idea how important the commodity is, natural gas is the largest source of energy for electricity generation at 38%, it's used in the industrial sector to produce chemicals, fertilizer, and hydrogen, and it's used in both the residential and commercial sectors to heat buildings and water, to cook, to dry clothes, and to operate refrigeration and cooling equipment. If we cannot get energy price inflation under control, I believe we will be unable to resolve inflation overall.
I was definitely not impressed by Microsoft's (MSFT) earnings report and was surprised to see the stock rally. I think it is just traders trying to "buy the dip" as the results were quite unimpressive. The company reported sales of $51.87 billion, vs. expectations of $52.44 billion and EPS of $2.23 vs. expectations of $2.29 per share. Revenue growth was just 12% and net income was up just 2% in the quarter. I say just because for a company trading at a forward P/E over 25x based on 2023 earnings, the growth should be much more impressive. Even cloud was a disappointment as revenue from Azure and other cloud services grew by 40% which decelerated from last quarter's 46% and missed analyst expectations of 43%. First quarter guidance of $49.25 billion to $50.25 billion in revenue also missed expectations of $51.49 billion. I continue to believe the stock is just too expensive, especially with numbers like this!
Rising interest rates are continuing to impact the housing market. Pending home sales just came out for the month of June and they were 20% lower than last year. Looking at the sales compared to May, sales were down 8.6% which was much wider than the 1% drop analysts were looking for. Excluding the first two months of Covid, sales came in at the slowest rate since September 2011. Mortgage applications have also remained weak as the recent report showed applications to purchase a home were down 18% compared to last year and applications to refinance were down 83% compared to last year. With a higher amount going to interest, homebuyer affordability is just too much of a problem which I continue to believe will weigh on housing prices.
To be clear, I was initially excited about the CHIPs act, but now I think it is just silly. The whole point of the bill was to help with semiconductor manufacturing, but of course they snuck in a bunch of other money. The legislation includes $52B in subsidies for domestic production and a previously reported investment tax credit for chip plants that could be worth an estimated $24B over the next decade, but now it also includes $200B to boost scientific research. It's just silly that they call it a "chip bill" but close to 75% of the money is going towards "scientific research".
Gross Domestic Product (GDP)
Based on the advanced estimate for Q2 GDP we are technically in a recession which is constituted as two consecutive quarters of declining GDP. The National Bureau of Economic Research officially declares recessions and expansions, but their determination will not come for a few months. Going back to 1948 every time there were two consecutive quarters of declining GDP the economy was considered to be in a recession. Looking at current dollar GDP it actually increased 7.8% at an annualized rate, but due to inflation real GDP declined 0.9% in the quarter. The consumer portion of the report increased just 1% as spending on services accelerated during the period by 4.1%, but that was offset by declines in nondurable goods of 5.5% and durable goods of 2.6%. Gross private domestic investment weighed negatively on the report with the change in private inventories subtracting 2.01% from the headline number. Government spending also reduced the headline number by 0.33% and trade or net exports was a major surprise as it added 1.43% to the headline number. Overall, I'd say this report isn't extremely troubling, inflation has just made it harder for the economy to grow.
Last week we did a post about the problems with solar energy in regard to the solar panels. Another problem with solar energy is it would take 13,000,000 acres to generate enough electricity for the US. And you can double that if you include energy storage, electric vehicle charging stations and increases in electrical infrastructure. So, you might say OK what’s the big deal let’s go ahead and do it to save the planet. Here is the problem, you already know food prices are rising and companies that want to lease land for the solar panels are turning to farmland in Texas and the Midwest. It is starting already to where some solar companies are paying $800 an acre to lease the land with high numbers being quoted at $2000 an acre. That means farmers can make a lot more money for just leasing the land than putting all the time, effort, and expense to farming the land. As you know we always talk about supply and demand, well if this were to happen there would be a drastic cut in the supply of food which would cause extremely high increases in food costs and could lead to food shortages. I don’t know about you but the more I read and learn about solar as an alternative energy the less and less I’m excited about it.
Prices on raw materials are beginning to fall dramatically which will help inflation 3 to 6 months down the road. If one looks at the current price per ton of economically sensitive copper at $7000, since March that’s a decline of 32% and even since early June that’s a 26% drop.
In the United Kingdom the weather is cooler than here in the US, but they can still see days when the thermometer climbs over 100 degrees. What is shocking is that only roughly 5% of homes in the UK have air conditioning, a far lower number than the United States with 90% of homes having air-conditioning. With all the problems we have in our country we still have many things we take for granted compared to the rest of the world. Let’s remain cool on the problems that we have.
Harrison Johnson, CFP®: