The Week Ahead – March 14, 2022

Stagflation is real. And the Fed is aware of the risk.

The Fed’s main tool for managing the economy is the Fed Funds Rate. This rate impacts borrowing costs for consumers, as well as companies and the broader macroeconomy.

How it works: In simple terms, raising interest rates slows down the economy as borrowing capital becomes more expensive. More consumers, businesses and corporations hold off on purchases or investments, thereby cooling demand and dampening prices.

It’s a careful balancing act and a soft landing can be challenging. Wait too long to raise rates and inflation can surge – suppressing activity and risking a “stagflation” scenario – while acting too early could leave workers on the sidelines and possibly trigger a recession.

The central bank raised interest rates by 25 basis points, with this hike coming in-line with expectations.

A hawkish Fed expects more rate hikes in 2022 and 2023. The U.S. central bank projected the equivalent of quarter-percentage-point rate increases at each of its six remaining policy meetings this year.

This would push its benchmark overnight interest rate to 1.75% to 2.00% by the end of 2022. It is projected to further rise to 2.80% by the end of next year, above the 2.40% level officials now feel would slow the economy.

Corona is Back, and China is on Lockdown

45 million people are now under lockdown as coronavirus cases climb to over 5,000 a day.

Hong Kong has seen a huge surge in infections with almost 700,000 confirmed cases and thousands of fatalities since December.  China has avoided severe outbreaks since the original Wuhan outbreak in late 2019.  However, according to the Chinese CDC the daily case count on Sunday jumped to more than 4 times the number from a week earlier with outbreaks reported in 23 of 31 national administrative districts.  This suggests that China could be on the verge of a major wave.  This could also have global economic implications with potential shutdowns across manufacturing facilities and ports either because of widespread illness or attempts to suppress it.

Crude – Swinging harder than Vince Vaughn

After surging to $120 a barrel last week, WTI crude dropped precipitously to under $100 on Tuesday, entering a bear market just five days after settling near 14-year highs. Traders are betting on a hit to demand due to the strict measures seen in China. There are reports that the U.S. could lift sanctions on Venezuelan oil.

Stagflation – Should you be concerned?

An economic slowdown is already underway. Policymakers marked down their GDP growth estimate for 2022 to 2.8%, from the 4% projected in December, as they began to discount the new risks facing the global economy.

Even with rate increases, the Fed expects inflation to remain more than double its 2% target, dropping to 2.7% in 2023 and to 2.3% in 2024.

Markets Respond

U.S. stocks climbed and bond yields jumped Wednesday after the Federal Reserve officially said it would raise interest rates for the first time since 2018.

The major indexes held gains on Wednesday even after a report on retail sales showed a sharper than expected deceleration in consumer spending last month, with rising inflation beginning to curb some discretionary purchases.

Energy prices steadied after unwinding gains. West Texas crude oil futures dipped below $95 per barrel before rising more than 1% intraday. Earlier this week, U.S. crude oil first entered bear market territory, with prices sliding more than 20% from recent closing highs set just a week ago. Brent crude, the international standard, hovered below $100 per barrel.

Earnings

On the lighter side of things, the NCAA basketball begins next week with sports betting operators like DraftKings (DKNG), BetMGM (MGM), Caesars Sportsbook (CZR) and FanDuel (DUEL) looking for a huge amount of betting action.

Monday, March 14
Vail Resorts (MTN).

I like Six Flags (SIX) more than Vail. Not much to say here. SIX is below.

Tuesday, March 15
Caleres (CAL) and Dole Plc.

Cal is profitable and reasonably valued in the apparel retail space.

However, I like Genesco Inc. (GCO) more.

• Genesco has been a free cash flow machine in 2020-21.
• The stock remains substantially undervalued if operating results for 2022 mirror 2021.
• For investors wanting cheap retail exposure, this name should be near the top of your research list. Strong technical trading momentum is continuing, perhaps pointing to another burst higher in price during the year.

Wednesday, March 16
Jabil (JBL), Lennar (LEN), Williams-Sonoma (WSM), and ZTO Express (ZTO).

I like Jabil a lot. JBL operates in the electronics manufacturing services sector.

• Jabil stock was up 66% last year, more than double the return of the S&P500. Still, the stock is undervalued and trades at a TTM P/E of only 12.4x.
• The company has focused on higher margin and well-diversified businesses instead of revenue growth simply for growth’s sake.
• Jabil is generating strong EPS, margin, and free cash flow growth. FCF in FY21 was $640 million and is expected to reach $700 million in FY22.
• Emerging trends in healthcare, electric vehicles, and 5G/Cloud continue to be strong tailwinds for the company’s manufacturing operations.
• Jabil is an under-followed diamond-in-the-rough and could easily trade up to $75 by year-end, a near 25% gain, and still only be an 11.5x multiple on estimated EPS.

I also like Williams-Sonoma.

• The sharp pullback in WSM’s price from November 2021 to January 2022 is overdone for a profitable company that has growth (41.91% EPS and 12.61% revenue in 2022) in it.
• WSM is a double-digit dividend compounder at a huge discount. The fast-growing dividend will help to juice total returns.
• WSM has successfully transitioned to an e-commerce company.

Thursday, March 17

Dollar General (DG), FedEx (FDX), Gamestop (GME), and Torrid (CRV).

I am a long-term holder of Dollar General. And I believe that, amidst the inequality crisis in this country, this stock will continue to thrive and grow dividends.

• The retailer has unique business model that revolves around stores in isolated towns with few shopping options.
• The company remains fairly valued versus the market.
• The company expanded rapidly in 2021.

The company enjoys a 5-year return on invested capital (ROIC) of 15.4%, more than triple Dollar Tree’s ROIC and higher than Target’s.

Friday, March 18 
On Holding (ONON)

This is the performance running shoemaker. On’s market capitalization is at $12.81 billion with earnings estimated to grow by 55.56% in 2022.

I read an article by Stella Mwende recently where she notes that “the footwear industry is running wild especially for long-term investors. Despite a monthly share price decrease of 7.77%, Deckers Outdoor Corporation (DECK), has soared 529.16% in the last 5 years. Over the same period, Crocs, Inc. (CROX) is up close to 2,000% with Steven Madden, Ltd. (SHOO) up 218.98% in the 10-year return analysis.”

EV/Sales ratio is at 9.30 (TTM) against a price-to-book ratio of 8.2 (TTM). Q3 2021 was the strongest quarter for On in its history with net sales growing 68% to stand at CHF 218.0 million. Revenues grew from $276.1 million in December 2019 to $705.9 million in September 2021 (+155.67%).

Analysts, however, expect a dim fourth quarter as the pressure of the factory closures and supply challenges take a toll on the company’s finances. Fourth Quarter EBITDA may fall as a result of reduced profitability. These challenges, I believe, are transitory and I expect the company to pull its resources and begin to relocate production.

IPO Watch 
IPO activity tracking has been down more than 70% so far this year compared to last year, while follow-on offerings are 76% lower and new SPACs down 88%. However, the IPO market returns to action this week with Akanda (AKAN) and Genius Group (GNS) both slated to start trading, while new SPACs that could start trading include Peter Thiel-backed Bridgetown 2 Holdings taking Singapore online real estate firm Property Guru and FirstMark Horizon Acquisition (FMAC) taking U.S. fixed wireless broadband provider Starry public.