CWS Market Review – February 20, 2024

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Lyft Soars 67% on Typo

After the close of trading last Tuesday, the ride-sharing company, Lyft (LYFT), released its quarterly earnings report. In it, the company said that it expects its profit margin to improve by 500 basis points.

Wow! In after-hours trading, the stock soared as much as 67%.

There was, however, one teeny-tiny problem: they meant to say 50 basis points, not 500.

A spokesperson for the company attributed the correction to a clerical error.

Oh!

Cue Emily Litella, “nevermind.”

The shares quickly fell back to Earth. This is a good reminder that the market is made up of people, and it’s subject to all the faults and foibles people have.

We have lots of fancy models that try to explain a process that can be highly irrational, or simply misinformed.

This is also a good reason why I’m leery of stop orders, especially for long-term investors. You can easily be stopped out of a good stock for a bad reason.

By the way, Lyft really did have a great quarter, and the stock is up, but much of the good news has been lost due to an embarrassing typo. It’s amazing how one wrong key stroke can duck things up.

Could the Fed Resume Hiking Rates?

In recent issues, I’ve talked about the market’s change of heart regarding what the Fed will do with interest rates. Not that long ago, the market thought the Fed would be cutting interest rates by now. Lately, it looks like the Fed won’t be cutting rates at its meetings in March or May. In fact, the June meeting may soon look doubtful.

What’s going on? Into all this jumps former Treasury Secretary Lawrence Summers who said the Fed may even raise interest rates. Specifically, Summers said, “There’s a meaningful chance—maybe it’s 15%—that the next move is going to be upwards in rates, not downwards.”

I’m not fully in Summers’s court just yet, but it’s an interesting take. Summers said that Wall Street economists had been expecting that plunging housing costs would hold back overall inflation, but that hasn’t happened.

Economists like to look at the “core rate” of inflation which excludes food and energy prices. There’s also the “super core rate” which is the cost of services except energy and housing. The super core rate has been getting a lot of attention lately.

This is important because it makes us focus on the issue of how much inflation is driven by wages, which is another way of asking, how much of inflation does the Fed control?

What happened is that during Covid, employees finally held the upper hand. It was a tight labor market and wages started to improve. Those increases were largely passed along in the form of higher prices for services, and not so much for goods.

I’m borrowing this example from the WSJ but it explains the phenomenon well. Let’s compare haircuts and televisions. The former is a service that’s driven by wages. The latter is a good and less dependent on wages.

The prices for haircuts are rising while TV prices are falling. It’s like two separate economies but it’s really showing us how much prices are influenced by wages. The January CPI report showed that super core prices rose by 0.85%. Summers is making the point that the prices that most concern the Fed are far from under control.

Walmart Beats the Street

Last week’s retail sales report came in below expectations. This morning, we got another retail sales report but this time, it wasn’t from the government, Instead, Walmart (WMT) released its earnings report.

The company is so big that its earnings report is effectively a report on Americans’ spending behavior. Walmart said that its quarterly revenue increased by 6% to $173.39 billion. That works out to about $1.3 million every minute.

Today’s report was for the key holiday spending months of November, December and January. For the quarter, Walmart earned $1.80 per share which was 15 cents higher than Wall Street’s consensus. The shares jumped a little over 3% in today’s trading.

Walmart had held up well during the recent (and perhaps, still ongoing) bout of inflation. As any shopper knows, Walmart is relentless in its quest to keep prices as low as possible. Last quarter, Walmart was helped by soaring e-commerce revenue. Global e-commerce sales rose 23%.

Going forward, Walmart said it expects sales growth of 4% to 5% for its fiscal Q1 (ending April 30), and earnings of $1.48 to $1.56 per share. For the year, Walmart expects earnings of $6.70 to $7.12 per share. That means the stock is going for about 25-26 times earnings. In my opinion, that’s too high.

While other companies have been holding back, Walmart has been expanding and upgrading its locations. The company said that it will raise the average income for store managers to $128,000 per year.

Shares of Walmart will split 3-for-1 after the market closes on Friday. This will be the retailer’s first stock split in 25 years. In the 25 years prior to that, Walmart split its stock nine times, all of them were 2-for-1.

According to the largest retailer on the planet, shoppers are plenty active.

Capital One Buys Discover for $35 Billion

“What’s in your wallet?” Apparently, Discover Financial Services.

A major acquisition was announced today in the credit card space. Capital One Financial (COF) said it’s buying Discover Financial Services (DFS) for $35 billion. The deal is all cash.

Here’s how the deal works. Discover shareholders will get 1.0192 shares of COF for each DFS share they own. That’s a nice 26% premium for Discover based on Friday’s close.

Once the deal is done, Capital One shareholders will own 60% of the company, while Discover shareholders will own the other 40%. The companies expect the deal to close later this year or early in 2025.

There’s still the issue of getting regulatory approval. The government doesn’t look too kindly on mergers of industry leaders, especially in industries that aren’t wildly popular with consumers.

When deals like this are announced, the market likes to poke around at what might be next. This time, I’m skeptical because there doesn’t appear to be an obvious candidate. Also, I suspect that getting the Feds to sign off on this deal may be harder than they think.

The big earnings report for tomorrow will come after the close when Nvidia (NVDA) reports its earnings. Nvidia has become the most prominent AI trade. The company recently surpassed Alphabet (GOOG) and Amazon (AMZN) in total market value.

I guess you can say that expectations are high as the shares have soared 450% over the last 16 months. Also, Nvidia has crushed its last three earnings reports. The company has exceeded expectations by (in order) 18%, 29% and 19%. Nvidia has really become the marquee name of the Magnificent 7 gang.

For tomorrow, Wall Street expects earnings of $4.63 per share. Between you and me, I think that really means at least $5 per share. Wall Street is expecting Nvidia’s sales to rise by 240%. Of course, a large amount of those sales are going to Microsoft, Google and Amazon. Last quarter, Nvidia’s gross margin was 75%.

This is a good case of expectations being so high that almost any number will be a disappointment. Nvidia closed down today by 4.3%.

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

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on February 20th, 2024 at 6:10 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.