As interest rates, inflation and war in Europe prey on investors minds, here’s a look at stocks Real Money and TheStreet columnists and writers are watching closely this week.
With the start of the second quarter of 2022, investors should avoid a growing number of market land mines.
That’s the outlook from TheStreet’s Bret Jensen, who cites rising interest rates and high food and fuel prices as issues at the top of the list for traders right now.
“The S&P 500 is down roughly 5% for the year to date and the Nasdaq has shed almost 10%. Interest rates have increased rapidly in response to the highest inflation levels in four decades,” Jensen said. “The yield on the 10-year Treasury is rapidly approaching 2.4% and the yield curve just inverted for the first time in a decade and a half.”
Additionally, oil fell hard last week thanks to a decision to release a good chunk of the Strategic Petroleum Reserve over the next six months and new COVID lockdowns in Shanghai.
“The Strategic Petroleum Reserve announcement is the same political stunt both parties have engaged in for decades whenever crude spikes, and the impact once again is likely to be temporary,” Jensen noted. “Even with last week’s hard decline in oil, black gold remains near $100 a barrel and gasoline is still four bucks a gallon.”
Other problems include Ukraine and a slowing domestic and global economy. Jensen’s biggest concern is whether the Federal Reserve will be able to thread the needle perfectly as it has just commenced its first monetary tightening efforts since 2018.
“The problem the Fed faces is simple in my view,” he said. “It needs to tighten considerably to tame the inflation beast. Unfortunately, I think anything more than 100 to 150 basis points of tightening has the potential to tank the economy and/or the markets. And anything less than 300 basis points is probably not going to put much more than a dent in inflation.”
Meanwhile, rapidly rising interest rates are starting to cool the housing market.
“Two years ago, the average home sale was just under $325,000,” Jensen noted. “Now the average sale price is north of $400,000, and combined with higher mortgage rates buyers of the same average home are seeing a roughly 50% increase in their monthly mortgage payments. The jump will price many potential homebuyers out of the market and reduce housing activity, which is a key engine of the economy.”
GDP forecasts have been taken down throughout the first quarter and investment banks such as Goldman Sachs now see a 35% chance of recession on the horizon.
“My view is it is more like a coin flip,” he added. “With the S&P 500 trading around 20x forward earnings and with stagflation looking more and more likely, I remain very cautious on the overall markets as the second quarter gets underway.”
Twitter’s TWTR $50.42. 5-day performance. $28.81.
Elon Musk, controversial billionaire extraordinaire, is putting his money where his mouth was a week ago by purchasing 9.2% of Twitter’s (TWTR) – Get Twitter, Inc. Report stock.
The move makes Musk the largest TWTR shareholder after canvassing Twitter users in an informal online survey about Twitter and free speech last week. That after a growing number of social media users criticized the social media giant for its perceived resistance to free speech.
“This is interesting because though Musk has long been a frequent user of Twitter’s platform, he has recently been critical,” said TheStreet’s Stephen Guilfoyle.
On March 27th, Musk tweeted the following:
Given that Twitter serves as the de facto public town square, failing to adhere to free speech principles fundamentally undermines democracy. What should be done?”
Do you believe Twitter rigorously adheres to this principle? The consequences of this poll will be important. Please vote carefully.”
About two million of Musk’s followers did respond. Over 70% of them voted “no.”
“It’s apparent that Musk meant it when he mentioned that the consequences of the poll were important,” Guilfoyle said. “He obviously meant to do something about it, being that he had indicated in the past that he would like to start his own social media platform. Five-star (rated by TipRanks) analyst Dan Ives of Wedbush sees the stake as a potential precursor to a full-blown takeover bid.”
Twitter’s share price surged 30% on the day of Musk’s trade.
For investors not sure whether or not to board the Twitter/Musk bandwagon, an update on the company’s financials.
Twitter will not report first-quarter earnings for another three and a half weeks.
Currently, Wall Street is looking for EPS of $0.03 (within a range of $0.15 to $-0.49) on revenue of $1.23B. (within a range of $1.17B to $1.31B). If realized, these expectations would show earnings contraction from $0.16 for Q1 2021, but revenue growth of 19.3%. This sales number would be the continuance of a deceleration of annual growth that over the past three quarters after peaking at 74%, fell to 37% and 22% successively. The stock closed on Friday at $39.31, which is about 47 times 12 month forward looking earnings, and six times trailing 12 months’ sales. About 5.6% of the entire float, at least three weeks ago, was held in short positions.
Twitter posted cash from operating activity for the fourth quarter of $632.7M, and cash from Investing activity of $52.6M. Then, the firm takes a hit ($-472.8M) from financing activities, and then there is a negative impact from exchange rates. Ultimately, for the quarter, Twitter ran with levered free cash flow of $205.6M.
Turning to the balance sheet, Twitter ended the quarter/year with a net cash position of $6.393.7B, which was down more than $1B from the previous quarter.
“This took current assets down to $7.918.4B as accounts receivable and prepaid expenses partially offset the drop in cash,” Guilfoyle noted. “Current liabilities also dropped significantly to $1.343.9B. This left Twitter with a current ratio of 5.89, which is shockingly healthy.”
By year’s end, total assets had increased to $14,059.5B, and compared to total liabilities of $6.752.3B. “One item of note, long-term debt jumped to $4.353B,” Guilfoyle added. “I know, still “small” enough to be covered by the net cash position, but also growth of about $1.7B over three months’ time.”
According to Guilfoyle, the balance sheet easily passes his smell test and appears to be far healthier than does the underlying business.
Trading-wise, Twitter has tested the $31 to $32 level on four occasions, confirming that as a level of support as the shares formed a rounded bottom.
“This created what looks to me to possibly be a developing cupping pattern,” he added. “The shares were trading with a $48 handle in pre-opening action, which would create a gap that may have to fill at a later date, while also threatening to retrace a full 50% of the October through late February selloff.”
“This could, with a little more push, put TWTR’s 50-day SMA ($52.14) in play as well.”
Should you invest in Twitter here? That’s a tough tough question.
“The silent voice inside my head wants me to short TWTR when I get the chance, but I definitely bat less than .500 when I bet against Elon Musk,” Guilfoyle said. “To get long and stay long, I would need a discount in order to feel comfortable.”
Here’s how Guilfoyle would play the stock.
“An investor interested in getting long TWTR could buy 100 shares of common stock at close to $48, and sell one May 20th $55 call option against that position for about $2.10,” he said. “Another investor could just write one TWTR May 20th $46 put for about $3.40. That takes the potential for equity risk down to a net $42.60.”
Starbucks SBUX $87.73. 5-day performance (-) 1.17%.
Starbucks (SBUX) – Get Starbucks Corporation Report shares are in a slump as CEO Howard Schultz suspends the company’s stock buyback program.
What does that mean for SBUX investors? TheStreet’s Martin Baccardax is on the case.
“Schultz, who stepped down as CEO in 2008 but served as executive chairman until 2018, returned to the helm following the surprise retirement of former CEO Kevin Johnson and vowed to employees to “work with all of you to design our next Starbucks … where we work together to create a positive impact in the world,” Baccardax reported.
Starbucks had said, under CEO Johnson in February, that it “stood by” its commitment to returning $20 billion to shareholders, in dividends and buybacks, over the next three years. In a statement last week, Schultz said cash spent on buybacks would be better directed towards “investing more into our people and our stores”, adding it is the “only way to create long-term value for all stakeholders.”
Starbucks has been facing a number of unionization drives at its stores.
Overall, S&P 500 companies bought back $882 billion worth of shares last year, the highest total on record, and the Biden Administration wants to limit the ways in which CEOs — and other company executives — can sell their own shares back to the company as part of those repurchases.
On the financial side of the ledger, Starbucks lowered its 2022 profit guidance last month, and said it would begin hiking prices across its food and beverage menu, amid the ongoing hit to input costs from supply chain disruptions and slowing sales in China.
“The group posted weaker-than-expected earnings of 72 cents per share, missing Street forecasts by 8 cents, even as sales rose 19% to $8.1 billion,” Baccardax reported. “Sales in China, however, its most important market outside of the United States, fell 14% on a like-for-like basis amid Covid-linked disruptions in the world’s second-largest economy.”
BlackBerry BB $6.97. 5-day performance (-) 9.13%.
Thinking of buying BlackBerry (BB) – Get BlackBerry Limited Report shares after a big earnings decline?
Don’t bother, said TheStreet’s Bret Kenwell.
Here’s the back story. Shares of BlackBerry slid significantly on Friday, April 1st – the stock was down about 11% on the day after the company reported earnings.
Given the trend of this stock though, it seems unlikely that the overall market’s performance would have much of an impact on this one.
“While AMC Entertainment (AMC) – Get AMC Entertainment Holdings, Inc. Class A Report and GameStop (GME) – Get GameStop Corp. Class A Report have both been trading well lately – and the latter has been particularly good and now plans for a stock split – BlackBerry has not enjoyed the same ride as some of its other meme-stock peers,” Kenwell noted.
BlackBerry stock is now down close to 20% from this week’s high and is down almost 30% so far for the year. Further, shares are down 67% from the 52-week high.
Now the worry becomes, will BlackBerry go on to make new 52-week lows?
“While that characteristic is not necessarily unique to BlackBerry, it’s quite pronounced in this case,” Kenwell said. “Look at the way $9.50 went from support to resistance. The same thing has now happened with $8, which rejected the stock a few days ago.”
Now rotating lower on a bearish earnings reaction, BlackBerry stock has gapped below the 10-day, 21-day and 50-day moving averages. With the continued selling throughout the session, shares are also trading below the 61.8% retracement of the current range as well.
If the stock continues lower from here, it could have $6 written all over it,” Kenwell said.
“That’s about where uptrend support (blue line) comes into play, while BlackBerry has posted significant bounces from the $5.80 to $5.90 area twice in the last two months,” he noted.
At this point, BlackBerry is not a stock for Kenwell. “Not only is it struggling fundamentally, but the technicals are not cooperating either,” he said. “In fact, the technicals are bearish.”
“At a time where we have companies with bullish fundamentals and bullish technicals — or at least one of the attributes — why choose a stock with neither?,” he added.
