The Week Ahead – June 13, 2022

Summary

Investors are not likely to get a break from the recent volatility. Action this week is set to be dictated by the (1) Fed’s fight with inflation and (2) lingering supply chain constraints.

This week we will get economic reports on producer prices, retail sales, and manufacturing.

The big news is the FOMC rate announcement on June 15 and subsequent press conference with Fed Chairman Jerome Powell. Following a red hot CPI report, the odds for a 75-point rate hike jumped to 20% from 5% to add some intrigue to the meeting.

Cisco, New York Times, and Splunk will hold big investor events this week, while the Kroger earnings report has the potential to help a battered retail sector.

In the crypto world, Ethereum could make news as it works to shift from an energy-intensive proof-of-work method for securing the network to a proof-of-stake model with lower transactions costs. If cryptocurrencies are lined up to make a comeback, ETH shift could prove to be the catalyst.

Recession?

An increasing number of economists are now doubting the possibility of a “soft landing,” which would see the Fed get inflation under control without triggering an economic downturn. The market is already coming off its worst week since January as consumer prices stay at 40-year highs and gasoline remains firmly over $5 per gallon.

“I’ve become more pessimistic about the opportunity of stabilizing inflation at an acceptable level without a recession,” said JPMorgan Chase chief economist Bruce Kasman.

Early Monday, the 2-year Treasury rate jumped more than 16 basis points to 3.21%, briefly topping the benchmark 10-year yield to flash another recession signal (the two last inverted back in April).

Want to Bet on Higher Yields?

Market participants that are betting on higher yields can invest in inverse ETFs that are designed to bet against bond prices and are active again in the premarket session. Four examples and their YTD prices include:

1) ProShares Short 20+ Year Treasury ETF (TBF) +23%,
2) ProShares UltraShort 20+ Year Treasury ETF (TBT)+51%,
3) ProShares UltraPro Short 20+ Year Treasury (TTT) +82%, and the
4) Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA: TMV) +82%.

Earnings

Monday, June 13 – Oracle.

Oracle shares surged as much as 11% in after-hours trading Monday as the software giant said it expects earnings and sales to continue to grow due to strength in its cloud-based offerings and its recent acquisition of healthcare technology services company Cerner.

Oracle’s results came following what has been a rough last few market sessions for cloud software companies, as weak business forecasts from the likes of DocuSign (DOCU), coupled with growing speculation that the economy is close to going into a recession has led to widespread selling of software stocks.

Tuesday, June 14 – Planet Labs, Li-Cycle Holdings, and Sprinklr.

Stay away from Planet Labs. It is fast-growing, but unprofitable. The company is building out a satellite network to provide geospatial data delivered globally to customers through an online platform.

Li-Cycle I like as a long-term play. The company is growing its customer base beyond North America to Europe, with its recent partnership with Morrow Batteries. Its 4Q21 and FY2022 guidance was solid and this points to the huge demand for battery recycling and the need for Li-Cycle’s value added offerings. Li-Cycle announced 2 strategic investors, Koch Strategic Platforms and LG Chem, both of which are highly aligned to Li-Cycle’s mission and demonstrating their confidence in Li-Cycle to succeed. Li-Cycle could be a leader in lithium ion battery recycling sector, an early stage but fast-growing industry for the next few decades to come. Li-Cycle’s technology advantage and patented business model is underappreciated by the market.

Sprinklr provides enterprise cloud software. This stock is a HOLD for me at the present time. Little to say here.

Wednesday, June 15 – John Wiley & Sons.

WLY is a profitable company. Management expects to surpass $2 billion in revenue for the first time in its 215-year operating history. 28 consecutive years of dividend increases and a $200 million authorized share buyback program consistently rewards investors for ownership. In the midst of a supply-chain disruption and the Russia-Ukraine war, the company anticipates being unscathed because more than 90% of its revenues have been transitioned to tech-enabled services and its core business is not sensitive to geopolitical tensions. For Q4 2022, the company anticipates paying a dividend at a yield of 2.8% and repurchasing 448,000 shares at an average price of $55.48 per share, which is higher than the current share price.

Per management guidance, with an 8% growth rate and 20% EBITDA margin, using the DCF analysis shown below, the fair value of the company share price is $80.00+, which represents more than 50% increase above the current price.

Earnings spotlight: Thursday, June 16 – Adobe, Kroger, and Jabil.

Adobe stock is down 43% from all-time highs. Surprisingly, that is actually a low amount amidst the wreckage in the tech sector. While the near-term outlook remains murky, the stock remains highly buyable over the long term. ADBE has guided for the second quarter to see $4.34 billion in revenues, representing 13% year over year growth. Non-GAAP earnings per share is expected to grow by 9% YOY. ADBE is trading at 10.4x forward sales and 29x forward earnings. Those aren’t obviously cheap multiples considering that the company is expected to grow at a low double-digit clip over the next several years. Remember that this is a market where growth premiums have all but vanished.

Kroger. It’s a boring stock. But it works. One type of business that should be quite resilient during a down market is the grocery business.  In 2021, the grocery chain was able to list a $3.5 billion operating profit on a GAAP basis, which translated to an EPS number of $2.17. Kroger looks to provide between 8% and 11% for investor returns on an annualized basis, which includes 5-6% in dividends and share repurchases. The best part of this stock is the fact that it sits in a sector of the economy that should perform relatively well in a recession.

I like Jabil. Revenue, margin, and free-cash-flow continue to grow at an impressive clip. Nothing in the secular growth and long-term fundamental outlook for the diversified/electronics manufacturing has changed. Jabil is expected to generate ~$700 million in FCF in FY22. That equates to an estimated $4.78/share. Jabil operates two segments: Diversified Manufacturing Services (“DMS”) and Electronics Manufacturing Services (“EMS”). Jabil’s management team has done an excellent job navigating the global pandemic and resulting supply-chain disruptions. There is still strong secular demand for many of the end-markets that Jabil serves: 5G, healthcare, EVs and autos, mobility, and industrial & semi-caps. Jabil continues to grow revenue and margins, and that has led to out-sized gains on the bottom line and in the generation of excellent growth in free-cash-flow. Jabil is trading at 8.2X forward P/E. Jabil is a BUY in the low $50s.

IPOs

Connexa Sports Technologies is expected to start trading on June 14. The connected sports company aims to build a direct connection to consumers with products and technologies, while also building out the infrastructure to enhance automated production live-streaming, fan engagement and monetization opportunities.