Dunks Update

The equity market rally that began at the June low for the S&P 500 continues to grind higher despite hawkish rhetoric from nearly all Fed governors suggesting that the “Dovish Pivot” interpretation has been incorrect.  Although there was a huge payroll employment figure released last week, investors are being more influenced by today’s softish CPI data release relative to expectations. 

Thus, it appears right now that the only things that really matter for equity markets are the belief that the inflation story is done, economic slowing will be contained, the Fed is not only basically finished but will also be easing fairly soon, and because of this, the negative earnings cycle that I have been forecasting, and getting, does not matter.  

Based on my research and my over two decades of experience on the Street, it is quite hard to come to these conclusions that seem to be the dominant driving factors impacting the ongoing equity market rally.   As I have written about over the last several months, my ASM indicator for the S&P 500 has always reached its max negative reading BEFORE the final price low for the index going back to 1990.   Is this time different?   Has the market already made its low and because of the view on where Fed policy is going, is the earnings backdrop irrelevant?   

I have continued to dive into these questions by looking deeper into my indicators and models, and having many discussions with other experts in many fields including economists, equity traders, fixed income traders, and lots of investors, both tactical and strategic. I have been shifted to consider that this time may indeed be different OR my base case just may need more time to play out.  In either case, I am beginning to evaluate scenarios where I temper my ongoing unfavorable views of equities.   

For the moment, I am going to reiterate my view that the ongoing rally still appears to be countertrend and should fail, but I am currently performing an evaluation of all my work to see if making a change is justified.  The goal here is not to end up with any particular view, be it bullish or bearish, but to get things right and help clients achieve good risk-adjusted return.  If need be and I find something that makes me shift, I will gladly do so.  Hence, I do not want to be stubborn for the sake of being stubborn and just hold onto an incorrect view, but if after my deep dive I cannot find plausible evidence that a shift to favorable is appropriate, I will remain patient and stick with my process.   

Stay tuned.  

The text below is a quick update on my Dunk’s list as many of the names have had some incremental news that is driving their performance. 

Dunks

The company had much better than expected 2Q22 results and also issued optimistic guidance for the following quarter. Revenue rose 7% and the company guided for a range of 13-17% growth in sales for 3Q22. AWS continues to be a strong area and is responsible for the bulk of profits. Overall, the company fared much better than hyper retailer peers, and cloud catalysts should continue to be a tailwind for next several quarters, at minimum.

Cameco reported blockbuster second-quarter earnings during the last week of July as it beat on both the top and bottom line. While the energy crisis that has occurred from the Russian invasion of Ukraine continues to fester, CCJ is primely positioned to benefit from the secular shift towards increasing use of nuclear energy. As a result, the Canadian uranium miner was able to take advantage of elevated prices. In addition, the company continues to add to its considerable reserves and has continued to acquire new mining assets to increase capacity.

Campbell’s Soup is one of the newer additions to the Dunks list, and unlike much of the more cyclically sensitive part of the equity market, it has posted earnings results and provided positive forward guidance.  This traditionally more defensive and less cyclical name has benefitted from pandemic demand for at-home food, and is getting tailwinds now as consumers feeling the pinch of inflation begins to “trade down” while keep being able to get good pricing.

Diamondback Energy has been the strongest performer on the Dunks list. In its recent earnings release, the company strongly beat on both the top and bottom lines and generated a record level of free cash flow at $1.3 billion as FANG continued to benefit from high energy prices.  It also announced that its board approved a 100% increase in share buyback authorization from $2 billion to $4 billion.

The company beat profit expectations when it released its 2Q22 earnings, which was helped by Raytheon’s private aviation business that benefited from the bumper summer travel season. The company maintained its guidance ranges.  Going forward, RTX is will likely get tailwinds from defense expenditures that are forecasted to rise at above historical rates in both North America and Europe. The company has a solid backlog and provides crucial weapons systems being utilized in fighting in Ukraine.

Mid-Range Jumpers

American Tower has been a steady stock amid the volatility during the first half of this year. The stock climbed after its earning beat late last month, and it raised the midpoint of its full-year 2022 outlook for AFFO per share.  Management commented during its earnings call that “we delivered strong financial and operational results in the second quarter, while generating double-digit dividend per share growth and building over 1,500 high-return towers.  This high-quality defensive dividend stock continues to be a stronghold amid the market turbulence, recession fears, and global uncertainty.

Costco CEO Craig Jelnick was just named one of the year’s best CEOs by Barrons. Costco’s discount model should thrive as price pressures ramp up on the consumer. The company also has an exemplary balance sheet. Costco is still loved by most analysts on Wall Street and is known as the best operator in retail. The company is serving a very resilient group of consumers and efforts to sell a premium-priced membership have been very successful. We like the stock as a high-quality leader, and the world’s third-largest retailer continues to outperform. The company’s superior operating proficiency and proven track record of growth through ups and downs should continue to serve shareholders.

Intuitive Surgical, which also is a Granny Shot, is one of the leaders in advanced robotics. Unlike some robotics and automation leaders, this company’s technology undertakes one of the most complicated tasks human beings perform rather than mundane ones. The firm’s DaVinci robotic surgical system is the undisputed leader in robotics applied to surgery. The company’s valuation and risk/reward has dramatically improved of the course of 2022 and Intuitive believes procedure growth will accelerate later this year. COVID should become less of a strain on the healthcare system, which will clear the way for more procedures using the sophisticated technology this company provides.

Live Nation’s earnings and revenues surpassed estimates this week, moving the stock up nicely, as both metrics improved year-over-year. LYV said a strong performance from Ticketmaster drove the company’s overall profitability as they have already sold more than 100 million tickets for shows in the second half of 2022 and 2023. During 2Q22, the company promoted more than 12,500 concerts for 33.5 million fans, up more than 20% compared to the second quarter of 2019.

Philip Morris posted second-quarter earnings on July 21, and its stock reacted favorably to the announcement.  PM reported adjusted earnings per share of $1.48 for the second quarter, above $1.25 expectations, and net revenue for $7.83 billion also was far above the $6.71 billion Wall Street expected, and it raised its forward guidance as well.  Despite the stronger U.S. dollar as a headwind, as well as the war in Ukraine, inflation, and supply-chain issues, the company has successfully navigated itself, thanks in part to net revenue for smoke-free products hovering just under 30% in the quarter. PM also has added more suppliers to its network and has redesigned its products.