CWS Market Review – January 18, 2022

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The Stock Market Drops to a One-Month Low

The stock market had another rough day today. The index dropped over 1.8%. The poor folks at Goldman Sachs (GS) saw their stock drop by 7%. (Don’t worry too much for them. I have a feeling they’ll be fine.)

At one point, the S&P 500 was down over 2% on the day. The index is still below its 50-day moving average which is often a bad omen.

The S&P 500 has now closed lower seven times in the last ten sessions. The S&P 500 closed lower today than where it was just before Halloween. That means the stock market has been completely flat for nearly three months. That’s actually better than some areas of the market. This Nasdaq Composite is lower than where it was in early July.

Whenever there’s a drop like today, I like to look at how different stock groupings are performing. If growth stocks drop more than value, then I know the market is concerned about valuations. Today, the growth index fell by 1.08% more than the value index. That’s interesting as it signals possible nervousness about the pace of the recent rally.

Further evidence of the market’s desire for safety can be found in the bond market. The yield on the 10-year Treasury soared all the way up to a two-year high. Of course, it seems odd writing that since we’re only talking about a yield of 1.8%. That’s far less than inflation, but it does tell us how much things have changed. Eighteen months ago, the yield on the 10-year was about 0.5%.

Small-cap stocks were especially weak today. The Russell 2000 lost over 3% today. The small-cap indexes are skewed toward domestic manufacturers. I think of the Russell 2000 as a semi-cyclical index. Indeed, we saw some weakness in financial and tech stocks today.

The three worst-performing stocks today in the S&P 500 were all banks: Goldman Sachs (GS), JP Morgan (JPM) and Morgan Stanley (MS). What kind of day was it? Put it this way: Exxon (XOM), Chevron (CVX) and ConocoPhillips (COP) all made new 52-week highs today while Zoom (ZM), Snap (SNAP) and Twitter (TWTR) all made new lows.

Microsoft Buys Activision Blizzard for $68.7 Billion

The big merger news today is that Microsoft (MSFT) is buying videogame giant Activision Blizzard (ATVI) for $95 per share. That works out to $68.7 billion.

That may sound like a lot, and it is, but it’s less than 3% of Microsoft’s overall market value. The deal will be all cash. If you’re curious, Microsoft has $130 billion in cash on hand. This will be Microsoft’s largest deal ever. Globally, three billion people play video games.

Shares of ATVI soared today. The stock closed Friday at $65.39 per share. Interestingly, ATVI jumped to $82.32, which is still well short of MSFT’s offer. Perhaps the market has some reservations about this deal. Or maybe they think it will take longer than expected.

If you were to buy ATVI today and the deal goes through, you’d make a 15% return on your investment. Of course, that’s not a sure thing and we don’t know how long it would take. Also anti-trust regulators have said they want to be tougher on mergers, especially tech mergers.

Activision Blizzard is best-known for being the folks behind Call of Duty and many other games. The stock has been extremely successful. Gaming is a massive industry. In 2020, the U.S. video game market grew to $57 billion. According to NPD Group, that’s bigger than music and movies combined. In 2008, Activision merged with Vivendi and five years later, they split off from them.

Less than a year ago, ATVI reached $104.53 per share. The stock had received some speculative attention lately because it had done so poorly. Last month, ATVI dropped down to $56.40.

Activision Blizzard is one of those companies that seems to generate terrible news for itself and it’s usually their fault. They’re facing several sexual harassment lawsuits. Worse yet, their CEO, Bobby Kotick, allegedly knew about the behavior and failed to inform the board.

Kotick took a 99.9% pay cut which dropped his annual pay from $154 million to $62,500. Apparently, it’s going to stay down until the company’s gender roles are met. We’ll see.

By the way, the $154 million was the reduced figure following criticism.

Kotick is quite a piece of work. A few years ago, he also allegedly threatened to have one of his assistants killed. Allegedly. Employees last year staged a walkout in protest of Kotick’s behavior.

Kotick is expected to step down after the deal closes. (Microsoft isn’t dumb.)

Look for Strong Earnings from Thermo Fisher

Earnings season started on Friday when a few of the big banks reported Q4 earnings. Some of these big banks have been very profitable. On Friday, Wells Fargo said it made $1.25 per share for Q4 which beat by 12 cents per share. Citigroup made $1.46 per share versus estimates of $1.38 per share.

JP Morgan made $3.33 per share while analysts had been expecting $3.01 per share. The bank had net income of $10.4 billion. BlackRock, which owns just about everything, made $10.42 per share for Q4. That beat estimates of $10.16 per share.

This morning, the disappointment came from Goldman Sachs. The Wall Street powerhouse made “only” $10.81 per share. The Street had been expecting $11.76 per share. Morgan Stanley reports tomorrow, and Netflix is on Thursday.

Earnings for our Buy List stocks are about to start soon. One stock that I’m particularly excited about is Thermo Fisher Scientific (TMO). The company is due to report its earnings on February 2.

For Q3, the company had an outstanding quarter. Thermo said it made $5.76 per share for Q3. That easily beat Wall Street’s estimate of $4.67 per share.

Q3 revenue increased by 9% to $9.33 billion. Of that, COVID-19 response revenue was $2.05 billion. Thermo’s adjusted operating margin was 29.8% compared with 32.9% in the third quarter of 2020.

Thermo increased its full-year revenue guidance by $1.2 billion to $37.1 billion. That’s revenue growth of 15%. The company also raised its EPS guidance by $1.30 to $23.37. That’s growth of 20% over last year.

Let’s get mathy. For the first three quarters, TMO made $18.57 per share so that works out to Q4 guidance of $4.80 per share. There’s no way they’re going to make that little. Wall Street isn’t fooled, either. The current consensus on Wall Street is for earnings of $5.23 per share. Last year, the stock gained 43% for us. I currently rate TMO a buy up to $640 per share.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on January 18th, 2022 at 7:15 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.