CWS Market Review – April 18, 2023

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More Evidence of a Coming Recession

The case for a recession continues to get stronger. On Friday, we learned that consumer spending fell in March. This was the second month in a row that Americans cut back on their shopping.

An economy can withstand a lot, but it’s particularly hard to grow when folks aren’t out there in the malls.

For March, retail sales fell by 1%. That comes after a drop of 0.2% in February. It’s even worse than it sounds because these numbers aren’t adjusted for inflation.

This comes on top of other troubling news. Job openings are down, unemployment claims are up and we’re looking at another weak quarter for corporate earnings.

Still, I’d caution investors against getting too pessimistic. The odds are that we’re facing a brief and shallow recession. This slowdown was caused by the Fed, and the central bank can easily reverse course.

The other factor to watch is the credit markets. The banking sector got a big scare in March, but we still don’t know how widespread the damage was. The fact is that many smaller banks have been losing customers to the big banks.

Friday was the unofficial kickoff of Q1 earnings season as several of the big banks reported earnings. JPMorgan Chase (JPM) led the way with a big earnings beat. For Q1, JPM earned $4.32 per share compared with the Street’s forecast of $3.41.

JPM said that net interest income will be about $81 billion for 2023. That’s an increase of about $7 billion from its previous forecast. But here’s the interesting part. That forecast is based on JPM paying less to depositors later in 2023. In other words, JPMorgan Chase thinks interest rates will go down later this year. I suspect they’re right.

Wells Fargo (WFC) also did well last quarter. For Q1, the bank earned $1.23 per share which was 10 cents more than expectations. WFC’s net interest income increased by 45%. The CEO said, “the majority of our businesses remain strong.”

Citigroup (C) earned $1.86 per share which was 19 cents ahead of expectations. The bank has been cutting back on its international operations. Many of the big banks are going for less than 10 times earnings.

Shares of State Street (STT) got hit hard on Monday after the bank showed an outflow of deposits. Charles Schwab (SCHW) also fell hard after it said it lost $41 billion in deposits during Q1. This stock has been beaten up this year, but the company said that it can withstand customer outflows. On Monday, Schwab said its Q1 earnings rose to 93 cents per share, three cents more than Wall Street’s consensus.

The downfall of Silicon Valley Bank and Signature Bank probably happened too late during Q1 to have a noticeable impact on this round of earnings. The top-tier banks are doing well, but the concern is still among the regional banks. This could still get messy.

On Thursday, one of my favorite regional banks, Hingham Institution for Savings (HIFS), reported disappointing results. For Q1, HIFS said it made $3.87 per share. That’s down from the $5.38 it made in last year’s Q1. The bank provides unlimited deposit insurance for all its depositors.

Shares of HIFS got dinged for an 8% loss on Friday. It was down again on Monday, and it hit a fresh 52-week low. The stock is nearly back to where it was five years ago. Still, I can’t say I’m terribly worried about Hingham. The company has a great long-term track record and it’s still not followed by any analysts on Wall Street. I also like that Hingham often pays a special dividend near the end of the year.

The Bank of Apple

On Monday, Apple (AAPL) and Goldman Sachs (GS) announced a new partnership, the Apple Card savings account. This is a savings account that pays 4.15% per year. That’s far higher than most savings accounts.

So what’s the catch?

Nothing, really. The savings account is for users of Apple’s credit card (also a Goldman partnership). There are no fees. No minimum deposit. The account max is $250,000. It looks simple. You can set up an account from the Wallet app on your iPhone.

Not only that, but Apple Card rewards program offers 3% on purchases. If you want, that money is deposited directly in your Apple savings account.

This offering comes during a rough time for many banks. As rates go higher, there’s more pressure to entice savers with better rates. Over the last year, customers have pulled $800 billion from U.S. commercial banks.

As odd as this may seem, Apple has already taken on some of the trappings of being a bank. Of course, Apple has Apple Pay and Apple Wallet. Apple also has a “buy now, pay later” service. The new savings account should really be seen as logical progression to those businesses.

If you add up all the cash and marketable securities on Apple’s balance sheet, it comes to $169 billion. That’s far larger than all but a few banks.

If you’re interested, here’s how you can set up an Apple savings account in your iPhone.

Bottom-Fishing with Whirlpool

I’ve been looking at shares of Whirlpool (WHR) recently. I wanted to highlight it for you this week because it’s an interesting example of bottom fishing, and why that’s a very hard thing to do.

I’ll try to walk you through my reasoning. By most metrics, Whirlpool is an inexpensive stock. Just going by the dividend, WHR currently yields 5.2%. That’s certainly tempting.

Also, the stock has not performed well. Two years ago, WHR was going for over $250 per share. Lately, it’s been around $135 per share, but a lower stock doesn’t mean it’s inexpensive. That only means that it’s cheaper than where it was before.

Bottom-fishing for stocks is notoriously difficult. Oftentimes, stocks are down for very good reasons. Investors can be tempted by low valuations which prove to illusionary. But if your bottom-fishing works out, you can reel in big profits.

Let’s start with some basics. Whirlpool is a major home appliance company. It was founded by Louis Upton in 1911. (Kate Upton is a descendent.) You’re very likely to find a Whirlpool product in just about every kitchen or laundry room across the U.S.

Business has been rough lately and Whirlpool’s earnings have not done well. In 2021, the company made $26.59 per share. Last year, that fell to $19.64 per share. Wall Street expects it to earn $15.84 per share for this year, and $18.08 for 2024. If the latter figure is correct, that means that Whirlpool is going for about 7.5 times forward earnings. Clearly, traders are wary of WHR.

In January, Whirlpool said it expects earnings to fall slightly this year due to supply-chain issues. WHR’s Q4 sales fell 15%. For the year, sales were down just over 10%.

For this year, Whirlpool sees earnings ranging between $16 and $18 per share on revenues of $19.4 billion. Whirlpool has $1.4 billion in cash from operating activities and about $800 million in free cash flow.

Whirlpool is also working to alter its business. The company has divested its businesses in Europe, Africa and the Middle East, but it’s not leaving Europe. Instead, Whirlpool plans to work with Arcelik, a Turkish company, to make a company that’s focused on the European market. Whirlpool will own 25% of the venture.

The company recently closed on a $3 billion acquisition of Emerson Electric’s InSinkErator business.

Whirlpool has also been cutting costs. The company expects to save between $800 million and $900 million this year. The company is sitting on $2 billion in cash.

If Whirlpool can manage its transition well, then it’s probably a very cheap stock right now. Last week, Goldman Sachs upgraded the shares from neutral to buy. That was the first good news it’s had in some time. Goldman has a price target of $160 per share. (Personally, I think price targets are pointless.)

We’ll soon learn more. Whirlpool will report its Q1 earnings on Monday, April 24. Wall Street expects earnings of $2.20 per share.

For now, I would rate Whirlpool a risky buy. It’s not part of our Buy List but it’s one to keep an eye on.

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 April 18th, 2023 at 4:22 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.