The Weekend Edition # 31

Defensive takes the lead, Gold; The Inventory-to-Sales Ratio; Earnings- General thoughts, $WMT, $DE

February 21, 2022

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week!

This week we cover:

  • Market Recap - Defensive, Gold

  • Chart of the Week - Inventory-to-Sales Ratio

  • Earnings of Week - Some general thoughts, WMT, DE

  • Around the Markets

  • The Week Ahead - Economic Calendar & Earnings

  • Closing Thoughts

Let’s dive in ⬇️

Market Recap - Feb 14 to Feb 18, 2022

The markets are nowhere close to settling down. All market indices closed lower for the week because of the uncertainty in the geopolitical situation combined with less than stellar stock performance after earnings.

Friday also saw options expiries and flight to safety in the bond market, with the 10-year yield heading back below 2%.

The FOMC minutes also came out this week. Seemed like the market liked the message. Somehow people were hoping for a confirmation of a 50bps rate hike in March 2022. Obviously, there was none of that in the minutes, and the market saw a temporary relief.

Friday saw decliners outpacing advancers (NYSE 1256/2046, NASDAQ 1474/3133) and new lows outpacing new highs (NYSE 23/178, NASDAQ 30/454).

Sector rotations show the market is favoring defensive plays with consumer staples leading the way.

Looking a little further into the sectors, Gold has been doing well as a “safe haven” trade, with people chasing gold miners as a proxy play. It didn’t hurt that Barrick Gold (GOLD) also reported this week with top and bottom line beats.

Chart of the Week - Inventory-to-Sales Ratio

When the economy is in an expansionary mode, inventory-to-sales ratios begin to decline gradually as companies use their inventory to meet the strong demand.

In the late cycle of the expansion however, the inventory-to-sales ratio start to increase as companies order more inventory in anticipation of continued strong demand.

As the economy begins to slow down, inventory levels begin to rise faster and finally as recession hits, inventories peak and then fall sometimes quite drastically as people lose faith in sales and stop increasing inventory levels. (The shaded areas in the chart above indicate a recession). So a a rising inventory-to-sales ratio is often looked at as a red flag indicating an economic slowdown.

Where do we stand now? Well, it’s hard to say with the supply chain issues that the economy has been experiencing. But, it looks like all three indicators have started to increase, albeit slightly. All three numbers hit a low point in Oct 2021. Here’s a zoomed in version.

As monetary tightening begins, sales will usually begin to slow and therefore, we may begin to see a very different picture in the next couple of months. Like all other indicators, you probably need to view this in conjunction with other data and of course, it’s not perfect. But, I definitely think this is one to keep an eye on.

Earnings of the Week

Another tough round of earnings this week, particularly in the growth space. NVIDIA (NVDA), Shopify (SHOP), Roblox (RBLX), Roku (ROKU), DraftKings (DKNG), Fastly (FSLY), and Redfin (RDFN) all declined on earnings . The market has been unforgiving.

Even a company like NDVA that beat both top and bottom line, and guided upwards saw its share price fall on market open - quite possibly because of their discussion on supply chain still being a problem and their write off for the ARM acquisition ($1.36B).

Walmart (WMT) came through though with a decent set of earnings on the back of a strong holiday season. US same store growth came in at +5.6% slightly above guidance and +10.4% for Sam's Club. But, there’s a decline from YoY comps from Y2020 when US same store growth tracked +8.6%. Clearly, the withdrawal of stimulus and increased prices due to inflation is taking its toll.

Deere (DE) posted a decent quarter overall but, they did experience significant margin compressions because of supply chain shortages. Despite hiking prices, demand remains strong and the De’s largest segment - Production & Precision Ag - grew at superb pace of 9% YoY to $3.36B for the quarter because of higher realized prices.

Earnings comps are going to get more and more challenging as we go on. Even according to FactSet, we’re not tracking as splendidly as we did last quarter:

84% of the companies in the S&P 500 have reported earnings for the fourth quarter. Of these companies, 77% have reported actual EPS above the mean EPS estimate, which is slightly above the five-year average of 76%. In aggregate, earnings have exceeded estimates by 8.5%, which is slightly below the five-year average of 8.6%.

The market is not rewarding companies with positive EPS surprises as much as before.

Around the Markets

A few bits and pieces from around the market

  • President Biden signs bill to fund government through March 11

  • DuPont (DD) agreed to sell the majority of its Mobility & Materials business to Celanese (CE) for $11 billion in cash.

  • General Electric (GE) in investor letter says it continues to see supply chain pressure across most of its businesses; expects these challenges to persist at least through the first half of the year

  • American Airlines (AAL) is continuing to cutdown its summer international flying schedule due to delays with Boeing's (BA) 787 Dreamliners, according to the WSJ

The Week Ahead

Economic Calendar

Thu - Feb 24 - New Home Sales

Fri - Feb 25 - Personal Income, Spending and PCE (Inflation indicators)

Fri - Feb 25 - Durable Goods Orders

Fri - Feb 25 - Pending home sales

Earnings

(I got my personalized calendar from Fincredible!) They’re incredible.

Closing Thoughts

Since the markets are closed on Monday, 21 Feb, I decided to take a break and release the newsletter a bit later. Well, the futures market, Asian & European markets are all open though and so far, it hasn’t been pretty. The markets are being hit with uncertainty from the geopolitical tensions over Ukraine and Russia and futures have been seriously volatile. I think some of this will carry over until markets open on Tuesday.

It’s a been a difficult market to trade and an even more difficult market to invest in. As liquidity retreats we’re seeing sharper moves, and mostly to the downside as the market remains in a bearish trend. We still have a few big earnings coming up next week to finish out February. Whether trading or investing, any new positions still remain small.

Here’s wishing you a happy weekend and safe investing. 

Please take a moment to share and subscribe, if you found this newsletter useful.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $DE as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.

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