Ticker Take: a weekly newsletter on investing.
A recap of the week.
Let’s begin with Biden…
Another day brings another political calculation for the stock market. Investors will have to assess how Joe Biden’s decision to end his election campaign and endorse Vice President Kamala Harris will impact the race for the White House.
Of course, we’ve had some time to consider this possibility.
After last weekend’s assassination attempt, stocks initially rallied on the idea that a Trump Presidency would be generally good for business — lower taxes, less regulation, etc.
Now that Biden has officially stepped aside, we’ll watch what new considerations enter the mix.
Worth noting — the most recent example of a sitting President not seeking a second term was Lyndon Johnson in 1968, so that data set is a bit dusty!
A lot of folks are slicing and dicing the impacts on various sectors.
That could be a good use of your time, but for now, it’s worth nothing that election years are generally good for the stock market regardless of who wins.
Since 1960, every election cycle except for 2000 and 2008 were positive years for the S&P 500.
Longer term, two industries that seem poised to benefit — or lag — depending on the outcome are big banks and big pharma. With Trump, they would largely receive more favorable treatment, compared to the current environment.
Cuban’s call on Bitcoin
Mark Cuban kicked off a crypto conversation this past week, when he put forward a theory on why Silicon Valley — after opposing Donald Trump’s run for President in 2016 — is increasingly backing Trump in 2024.
“It’s a bitcoin play,” he wrote on X, suggesting a Trump administration “makes it easier to operate a crypto business because of the inevitable, and required, changes” at the SEC.
Meanwhile, Cuban had an additional piece to his argument…
“What will drive the price of Bitcoin is lower tax rates and tariffs, which if history is any guide (and it’s not always ), will be inflationary.”
“Combine that with global uncertainty as to the geopolitical role of the USA, and the impact on the US Dollar as a reserve currency, and you can’t align the stars any better for a BTC price acceleration.”
Trump’s plans to weaken the U.S. dollar?
One aspect of the election that Karl Schamotta, Chief Market Strategist at Corpay, is watching… is team Trump’s general view that the U.S. dollar is too strong.
In light of that, Schamotta has been exploring how exactly a Trump administration might manage to weaken the currency.
He noted that the likelihood of a 21st century version of the Plaza Agreement - in which other countries agree to raise exchange rates relative to the dollar - looks decidedly low, given Trump’s limited political capital abroad and penchant for transactional negotiations.
Meanwhile undermining the Fed’s independence to keep interest rates low and weaken the dollar would risk touching off an inflationary spiral.
So, let’s put this one in the rhetoric box for now.
What’s next for Crowdstrike?
Crowdstrike had been one of the hottest stocks in the market, before the company found itself at the center of a computer crash that disrupted industries around the globe.
Analyst Mandeep Singh of Bloomberg Intelligence believes Crowdstrike’s reputation has taken a hit and it will take time for the company to recover — an opportunity, perhaps for rivals such as Palo Alto Networks.
One of his immediate concerns is the risk of lawsuits related to the disruptions caused by the outage. And, if Crowdstrike has to provide credits or discounts to avoid losing customers, that could be a drag on free cash flow — which might limit its ability to make acquisitions, such as Google’s reported deal to buy Wiz.
For now, Crowdstrike remains a very well liked stock.
Ironically, the IT update-gone-wrong could boost overall cybersecurity spending, even though the incident itself was not deemed a cyber incident.
“We’re not bears…we’re teddy bears”
I had a good conversation this week with Drew Pettit. He’s a strategist with Citi Research and he’s concerned about the valuations for AI stocks. Drew does not believe we’ve entered bubble territory, but he does think that analysts who cover the sector have pushed their expectations for future earnings up so much that inevitably, these companies won’t be able to deliver crowd pleasing results.
“We’re not talking about a market that is pricing in a good earnings season or a good year. It’s five consecutive years of growing at more than 25%,” Petit noted.
“Can their fundamentals deliver that?”
For this reason, Petit describes himself and his strategy team as “teddy bears,” as opposed to outright market bears.
In his view, it makes good sense to take some of the profits from AI stocks off the table and use them to invest in other, less appreciated parts of the markets.
In particular, he flagged sectors that will actually be leveraging AI, but don’t get any credit for doing so — bank stocks, fintech companies, defense players and industrials as some examples.
Amazon’s Prime Power
Amazon wrapped up another successful Prime Day, with Adobe estimating U.S. shoppers spent $14.2 billion online during the 48-hour spending bonanza, which was up 11% from last year.
I spoke with Amazon’s VP of Last Mile Delivery about the not-so-secret sauce that is the prime program, which in many ways, remains a moat around much of the Amazon empire.
Amazon is estimated to have more than 300 million prime members at this point and once you’re signed up, generally consumers stay committed.
According to Bloomberg Intelligence, retention rates on keeping Prime for at least 5 years stand at more than 38%!
The most bullish calls on big tech
The tech sector has looked a bit more wobbly of late, after a huge run-up.
But make no mistake, there are still plenty of Wall Street investors championing big tech. For example, this week, we spoke with Wedbush analyst Dan Ives who predicted the Nasdaq will at some point in the not-too-distant future make its way to the 20,000 level.
To get there, the index would need another double digit percent rally after already advancing 75 percent in the past two years. Now, one would have to assume if the Nasdaq rally is going to continue, the biggest names have to do some heavy lifting.
So we wanted to take a closer look at some of the most bullish calls on Wall Street, when it comes to those biggest names. Here they are…
Highest 12-month target prices on Wall Street
Apple – Loop Capital: $300 per share
Microsoft - Truist Securities: $600 per share
Tesla – Morgan Stanley: $310 per share
Meta – Wells Fargo: $625 per share
Alphabet - Wolfe Research: $240 per share
Nvidia – Rosenblatt securities: $200 per share
Amazon – Goldman Sachs: $250 per share
How to make money on a housing shortage.
Longtime guest John Goldsmith, head of Canadian Equities at Montrusco Bolton, joined us this week to talk about one of his favorite stocks — Mainstreet Equity.
Over the past 5 years, you’d be hard pressed to find a real estate play in the stock market that has performed as well as Mainstreet (it’s up more than 200% in that time).
Montrusco has been invested in the company for more than 6 years and believes strongly in the management team, led by founder Bob Dhillon.
Mainstreet benefits from Canada’s housing headaches — the reality that with record population and a tight housing market, rental demand has been remarkably strong.
The company operates a rental portfolio made up of more than 17,000 units across the provinces of Alberta, British Columbia, Saskatchewan and Manitoba. And the bulk of their units are in areas that do not have rent control.
Goldsmith says Mainstreet’s secret sauce is its ability to grow — they are plugged in, regarding what’s for sale and they have a turnkey solution when it comes to upgrading and renovating units, which in his opinion, they can do at a cheaper cost than most others.
Without being obligated to dividends like some of its peers (not to mention a solid balance sheet), Mainstreet can continue acquiring properties to maintain the growth momentum.
Finally, it can help when management is invested alongside investors — and in this case, they own roughly half of the shares.
Goldsmith would not be surprised to see the stock touch $270 a share in the next 3 years.
Analysts bullish on Cogeco
In Canada, telecom related stocks have struggled for a range of factors — including their attractiveness in this interest rate environment and concerns over competition.
But Cogeco shares popped after the company’s recent earnings report, with analysts reacting quite positively to the performance.
Bank of America’s research team offered up a rare double upgrade — increasing its view on the stock from an underperform to a buy. BofA believes the shares could climb to $65.
I spoke with the CEO, Frédéric Perron, about the changing sentiment surrounding Cogeco’s stock.
In his opinion, there are three things to like about the Cogeco story.
First, as a mid-sized player, the opportunity to grow is greater compared to some of its peers.
Second, the company is unique within Canada’s telecom landscape, in being a cross-border business. Its cable and internet operations extend to 13 states, including New York, Ohio and Florida.
And third, Cogeco has now officially rolled out its wireless offering. They started recently in the U.S. and remain in discussions to launch in Canada.
As Perron explains it, that will allow the company to bundle its existing offerings with its wireless services.
The bull case for Johnson & Johnson
While there has been a huge appetite for certain drug stocks recently — weight loss drugmakers Novo Nordisk and Eli Lilly come to mind — shares of Johnson & Johnson have struggled.
The stock has lost close to 10% of its value in the past year.
But following J&J’s latest earnings report, RBC Capital Markets analyst Shagun Singh Chadha is quite upbeat on the company.
She’s been covering J&J for nearly two decades and notes that the stock is currently trading at the lower end of its historical multiple.
In her opinion, there have been several overhangs weighing down the shares, including worries over patent expiration of its Stelara drug and ongoing litigation tied to the talc cancer lawsuits.
These are all very legitimate concerns, but in Chadha’s view, they distract from some of the other things happening at J&J.
Keep in mind this is not the consumer product player it once was, following the spinoff of those businesses into the company that is called Kenvue.
Instead, Johnson & Johnson has two driving forces — its MedTech business and its Innovative Medicine unit.
Chadra has seen a real shift in strategy under CEO Joaquin Duato and CFO Joe Walk, as evidenced by J&J’s aggressive acquisition strategy — roughly $35 billion spent on deals in the past 18 months.
She believes that strategy will pay off and if the litigation issues play out as expected, there will be an opportunity to unlock more shareholder value.
Would Apple buy Peloton?
Expect to hear more chatter around this subject.
Peloton — the pandemic darling — has been on life support.
Bike sales have cooled off dramatically since Covid, which has made it more difficult to grow its subscription business.
There’s already been a ton of restructuring and management turnover. And now, there are looming debt maturities and mounting pressure to both cut costs and show growth.
For investors who have watched the stock sink from more than $120 three years ago to its current price below $5 a share, the big question is…what’s next?
I spoke this week with Bloomberg Intelligence analyst Geetha Ranganathan, who believes it’s time to talk more about the takeover possibility.
She says it’s worth a conversation around Apple possibly acquiring the business. But would it be willing to cough up $5-$10 billion to acquire Peloton? Apple has rarely spent big bucks on acquisitions (its $3 billion purchase of Beats a decade ago was as big as the deals typical get).
Ranganathan also brought up the possibility of Amazon or Nike buying the business.
But she estimates that given the restructuring work that lies ahead, this could be a project for private equity.
Netflix price hikes on the horizon?
Last week, we previewed Netflix’s quarter results. The company has since reported and had an impressive quarter and continues to add subscribers. Meanwhile, Netflix raised its operating margin guidance for the year, which highlights an improving bottom line story.
Longer term stories to watch? The decision on how much to spend on content will always be a profit consideration for Netflix.
Meanwhile, with the company has been realistic about subscriber growth (remember they’ll soon be shifting away from sharing those numbers).
Since subs may not go up forever, a growing number of Netflix watchers believe the company will choose to increase prices again.
The big ETF posting smaller returns
With more than $370 billion in assets, it’s hard to find an investment vehicle as big as the SPDR S&P 500 ETF Trust (SPY).
While it has long been a popular way to invest in the S&P 500, its returns over the longer term have been lagging similar exchange traded funds.
As Athan Psarofagis noted in our chat this week, SPY was set up as a unit-investment trust (UIT), unlike subsequent S&P 500 trackers like the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO).
UITs can't lend securities, as IVV and VOO do to reduce the cost of ownership. Also, UITs can't immediately reinvest dividends either, which can reduce gains in rising markets (while providing a cushion in bearish times).
Meanwhile, the more obvious factor for SPY’s trailing performance is simply that it has a higher fee than the IVV and VOO (which both charge 3 bps).
If you invest $25 a day in the stock market…
You often hear the pros say it’s not about timing the market, but time in the market. Indeed two of the most powerful wealth creators are starting early and staying for the long term. Perhaps one example of this is to examine the compounding effects of committing to regular investments in the stock market, starting from a young age. We wanted to know what would happen if you were to set aside $25 a day and put that into the stock market. To keep things simple, we focused on the most talked about stock market index in the world – the S&P 500, which, over the past century has delivered an incredible annualized return of more than 10.5%. Obviously day to day and year to year, stock markets fluctuate. But that steady performance over the long term would really add some oomph to your portfolio. Have a look…
1 year later: $10,096
10 years later: $25,082
25 years later: $114,298
50 years later: $1,431,664
(based on S&P 500 returns over 100 years)
Consistent dividend boosters
We get a lot of inquiries about dividends and we wanted to zero in on some companies that have been fairly consistent in recent years in boosting their dividends – with a track record that suggests they’ll continue to increase investor payouts in the coming years. To do this analysis, we reviewed thousands of stocks in North America and their dividend growth over the past 3 to 5 years. On average, our list of companies, which generally had market valuations of at least $10 billion, had boosted dividends anywhere between 25 and 150% in recent years.
We also wanted a sense of whether these payout performers were on track to raise their dividends over the next 3 years. Bloomberg has an analysis tool that tracks that possibility. And then, after selecting companies who are expected to continue raising their dividends, we refined our search to only include stocks that are recommended by a majority of analysts on the street.
Here are the names that made the list…
Cenovus
Vertiv Holdings
Goldman Sachs
Cigna
Veren Inc
Voya Financial
Global Payments
Tradeweb Markets
SM Energy
Universal Display
Dick’s Sporting Goods
Lennar
NXP Semiconductor
American Homes 4 Rent
Visa
Mastercard
Broadcom
Vistra Corp
SS&C Technologies
Emcor
First Citizens Bancshares
Monolithic Power Systems
Zoetis
ASML
ConocoPhillips
Companies with big gross margins
A lot of pundits suggest investing in companies with great profit potential. There are a lot of different ways to measure earnings power. We wanted to take a look at gross margins, which measure profit after accounting for business costs. But we wanted to look at a more exclusive group of business that are on pace to report very high gross margins this year. So we focused on businesses that analysts estimate will generate gross margins of at least 75 percent this year. That is not an easy feat and it’s something that is often easier to do if you’re a software based business. Looking at a wide listing of North American names, we ended up with more than two dozen stocks. But we narrowed the list a bit to only include stocks that are currently recommended by a majority of the analysts who cover them. Here’s the list…
Cadence Design Systems
Workday
Autodesk
Edwards Lifesciences
Atlassian
Datadog
MSCI
EA
PG&E
Biogen
Alnylan Pharma
Samsara
PTC
Zscaler
Costar
Roblox
Hubspot
SBA Communications
Bull market behavior
A stat that caught my attention this week — the S&P 500 posting its longest stretch of sessions without a decline of 2% since 2007.
Bears argue that such a long period of tranquil behavior can only end badly.
The bull response? Chill out! Periods of market calm can last longer than you might expect.
Stay tuned!
Picks of The Week
Liz Miller, Summit Place Financial: BlackRock. Martin Marietta Materials
Barry Schwartz, Baskin Wealth: CCL Industries, Domino’s Pizza, Amazon
Brianne Gardner, Raymond James: Visa, UnitedHealth, Lululemon
Gordon Reid, Goodreid Investment: Amazon, NASDAQ Inc, Morgan Stanley
Christine Poole, GlobeInvest Capital: McDonald’s, Pembina Pipeline, RTX
Dennis Mitchell, Starlight Capital: Canadian Apartment REIT, Chartwell, Granite REIT