As US consumer inflation rose to a 40-year high in January, many financial watchers expect the US Federal Reserve to take a more hawkish stance this year to tame red-hot commodity prices and ease the financial pressure on American companies and their profitability.
Uncertainty over the impact of surging costs and the inflation trajectory has weighed on markets in the US and overseas, but some consumer companies in the US are taking advantage of this scenario to hike output costs — in levels not seen in nearly two decades since IHS Markit started tracking private-sector activity — in a bid to bolster profit margins.
Data from the survey released last week showed that inflationary pressures worsened in February as input costs climbed from the 10-month low recorded in January on the back of higher raw material, transportation and wage costs, and supply constraints.
This prompted American manufacturers and service providers to hike their selling prices to help offset the costs. Starbucks (NASDAQ: SBUX) in its most recent earnings call, hinted at plans to further lift prices this year after already announcing adjustments in October and January.
Starbucks President and CEO Kevin Johnson attributed the move to inflationary pressures, particularly in its home market, which together with China accounts for 61% of its global store network. Johnson also noted the impact of high inflation, the lingering pandemic and higher wage costs to the company’s profitability in recent quarters.
In December, supply chain-driven inflationary costs weighed on Starbucks’ US business by more than 170 basis points on margin in its most recent quarter. The same goes for McDonald’s (NYSE: MCD), which also highlighted higher labor inflation in its recent earnings report.
In 2021, the US fast-food chain boosted its menu prices by 6%, which according to CFO Kevin Ozan was "to deal with the 4% commodity price increases,” higher labor costs and a competitive market. The executive acknowledged that these factors will again weigh on the company’s margins and cash flow this year.
Still, efforts to cover higher costs have resulted in higher revenues for companies like Starbucks, McDonald’s, and companies in the gaming sector.
Wynn Resorts (NASDAQ: WYNN) recently reported narrower losses in the fourth quarter as its revenue surpassed estimates after the casino operator continued to adjust its cost structure. CFO Craig Billings told a recent earnings call that customers who were cooped up for 2020 and early 2021 are now "traveling and spending again with a vengeance.”
The company expects to have "strong pricing power” on rooms, food, and beverage this year, Billings added.
With limited supply, a recovering labor market, and the unleashing of pent-up demand, consumers are looking past higher prices, allowing companies to further make upward price adjustments. In January, US retail sales rose by the most in 10 months, with the value of sales reaching a record high as consumers splurged on automobiles and other goods.
We are only 20 days into 2022, and several developing events are already looking like they will become year defining. Here are 3 events that may define trading in 2022.
3 rate hikes are tentatively planned by the US Federal Reserve this year. According to Fed board members, such as Christopher Waller and Patrick Harker, 3 rate hikes is the baseline number needed to control the current level of inflation, but 4 or more hikes is definitely on the table and up for discussion if warranted.
The aggressiveness of each hike is likely to play an equally important role in trading in 2022. While 25-basis point hikes are usual for the Fed (and what is anticipated by the market), some commentators, such as Bill Ackerman, suggest that the Fed may have to double this value for its initial rate hike to help restore its institutional credibility.
The first hike is expected as early as March, but a February hike is entirely possible.
Naturally, as the cost of debt increases (via the aforementioned rate hikes from the US Fed), the growth prospects of the Nasdaq 100 can be squeezed, leading to a flat or negative year for the Nasdaq 100 index.
The last time the Nasdaq 100 had a genuinely negative year was in 2008, dropping in value by 41.9%. The Nasdaq 100 fell 1.04% in 2018, but this is arguably characterised as a flat year rather than a negative year.
With at least 3 rate hikes on the cards for the US Fed, the possibility of a negative year for the index is perhaps higher than a flat year. Bolstering this sentiment is the prediction of Jamie Dimon, CEO of JP Morgan Chase (NYSE: JPM). Dimon has floated the idea that the Fed may have to resort to six or seven rate hikes to tame the 40-year high inflation that the US is currently experiencing. However, Dimon didn’t specify if he believed all these rate hikes should take place in 2022.
Several big banks, including Goldman Sachs (NYSE: GS), predict that oil could hit $100 per barrel in 2022 or 2023.
Oil is currently in a solid position, trading between US $80 and US$90 a barrel and not far off the US $100 forecast.
Without OPEC committing to any significant increase in oil output, it looks unlikely that the price of oil will fall without a demand reduction. Yet, even with the possibility of new covid variants emerging or tightening monetary policy of some nation’s central banks, OPEC is confident in predicting that oil demand will grow by 4.2 million barrels per day over 2022.
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As you progress on your investing journey, many new words and anagrams will appear. Having a complete understanding of these words can help minimise misunderstandings and misinterpretations, and consequently, costly investing mistakes.
In this article, I have ventured to explain what constitutes a Preference Share, hoping to help round out your investing knowledge.
Preference Shares, otherwise known as Preferred Stock, can be thought of like a Corporate Bond. Preference Shares are ‘fixed income’ or ‘dividend shares’ that are prioritised over Common Shares when it comes to dividend payments.
In addition to priority dividend payments, Preference Shareholders also hold priority over Common Shareholders when it comes to recouping the value of their investment if the company is liquidated.
One downside of Preference Shares is that their voting rights are typically restricted or non-existent.
Several kinds of Preference Shares exist, but the most common are Cumulative Preference Shares and Non-Cumulative Preference Shares.
For any dividends that a company cancels or fails to pay, a Cumulative Preference Shareholder will retain the right to be paid this dividend in the future. Moreover, the Cumulative Preference Shareholder will have to be paid any missed dividends before any future dividends can be paid to any other shareholder.
Non-Cumulative Shares do not have this same right.
While the majority of Preference Shares do not have a maturity date, there are means by which these Shares can be discontinued.
Preference Shares can be converted to Common Shares or removed from circulation altogether. To do so, the issuing company may have to pay a premium over the Preference Shares’ face value to recall them.
Alternatively, Preference Shares can be issued with the condition that gives the issuer the right to redeem or convert the shares at some specific price, some specific date, or when some other condition is meet.
The Bank of America (NYSE:BAC) has several Cumulative and Non-Cumulative Preference Shares on its books, some dating back to 1997. From July to September 2021, the Bank of America issued 8 new series of Preference Shares. As illustrated in the table below, each series was issued with different conditions related to the dividend amount, the frequency of payment, and its redeemability.
To begin, it may pay to define what a stock split is: A stock split is a simple mechanism that a listed company can employ to increase the number of issued shares while keeping its market capitalisation/ valuation the same.
There are a couple of reasons a company may elect to perform a stock split, the chief among them is to increase the liquidity (or accessibility/ tradability) of their stock.
The most popular stock split ratios are 2:1, 3:2, and 3:1. By way of example, if a hypothetical company were to perform a 3-for-1 stock split, its shareholders would be issued an additional two shares for every share they owned before the split. In conjunction with the split, the value of each share would be devalued to 1/3 of its pre-split value. Effectively, the total value of three shares after the stock split should be worth the same value as one share before the stock split.
A reverse stock split is when a company reduces the number of shares available while keeping its market capitalisation/ valuation the same. A company cannot simply remove shares as easily as it can issue new shares. Therefore, with a reverse stock split, a company is forced to revoke all existing shares and issue new shares, proportional to the reduction that the company is pursuing.
A primary reason a company performs a reverse stock split is to avoid being delisted from its stock exchange which may have set minimum share-price conditions on its listees.
Tesla (NASDAQ: TSLA) performed a 5:1 split of its stock in August 2020. At the time, TSLA shares were trading above US $1,300. Tesla CEO Elon Musk believed the EV Company’s shares were too expensive for retail investors, so he reduced its price via a stock split.
Microsoft (NASDAQ: MSFT) has been a serial stock splitter. Since listing on the Nasdaq in 1986, The Software Company has performed nine stock splits, the last occurring in 2003. Consequently, 100 MSFT shares in 1986 would now total approximately 30,000 shares.
The beleaguered General Electric (NYSE:GE) performed a 1:8 reverse stock split in July 2021. Before the reverse stock split, GE shares were teetering around US $12. The reverse stock split meant that GE shares began trading above US $100 per share, a threshold not crossed for a very long time.
Two recent stock events have called into question how markets are pricing stocks. The first event is the OG meme stock, Tesla (NASDAQ: TSLA), hitting a one trillion-dollar market cap. And the second event is EV newcomer Rivian Automotive (NASDAQ: RIVN), surpassing the valuation of Ford Motor Company (NYSE: F) after listing on the NASDAQ.
One way to gauge how overvalued a stock may be is to find its multiple (aka, Price-To-Earnings ratio). In the case of Tesla, it's multiple, as of writing, is ~350. In the case of Rivian, it doesn't have any sales to speak of, so a multiple for this Company is not discernible (as reported by Bloomberg; "Rivian is now the biggest US company with no sales"). Investors can be concerned about high multiples if the Company in question is unlikely to grow its profitability to a level that better reflects the stock's current price. Tesla and Rivian are just two companies that analysts (incl. Tesla’s CEO Elon Musk) commonly point out as overvalued.
Keep reading to learn what other 3 stocks market analysts commonly categorise as overvalued.
Several outlets, including Forbes, noted the athleisure wear company to be overvalued in the first half of 2021. Yet, difficult to discourage, investors have continued to support the Company and further bumped up the stock's price. LULU is currently trading at an 15% premium above its first-half peak price (US $404 vs US $465). Its current valuation places its multiple at ~74x earnings.
The momentum behind the stock is driven by its consistent earnings report beats and ambitious sales targets set by management, which are being hit or surpassed with surprising frequency. The Company's outlook is buoyed by a growing (and incredibly loyal) customer base and higher margins. In this way, Lululemon stock may well be within a fair valuation if it continues to ride the growth momentum in which it is currently swept up.
Numerous Analysts were calling Netflix overvalued in 2020, even as the streaming giant reported subscriber growth beats during quarantine lockdowns and beyond. Bearish comments would call attention to the cash-burn needed by Netflix for the foreseeable future to maintain its industry leadership and satisfy its growing user base.
Bullish sentiment could counter this argument by pointing to the Company improving operating margins (e.g., Netflix has improved its operating margin from 16% to 23.5% YTD). However, Netflix does not include content generation spending as an operating cost. Instead, it is considered a fixed cost for the business. Yet, suppose Netflix is going to be burning cash producing content for the foreseeable future. In that case, the improving operating margin might be considered no more an accounting trick than a meaningful metric.
As of writing, Netflix shares are trading at US ~$690, indicating a multiple of approximately ~62 earnings.
The digital payment provider Square appears to be firmly in the camp of overvalued tech stock. At least, according to Morningstar analysts, SQ is trading at more than double its "fair value estimate" (US ~$230 vs. $112) with a Price-To-Earnings value of ~240. SQ shares have not traded at US $112.00 or below since July 13, 2020.
While SQ does deliver on growth, it still has a very long way to go to justify its ~240x multiple. Square's dubious long-term outlook is compounded by the increasingly tense competition from PayPal (NASDAQ: PYPL) and Fiserv's (NASDAQ: FISV) Clover application. While younger than Square's payment solution, the latter is already processing more payments across the US, and importantly, growing at a faster pace.
Q3 earning season is currently underway, and most high-profile companies are delivering revenue beats. Yet, Q3 revenue is not the only thing investors are watching. Investors are interested in revenue growth, customer acquisition, and pace of growth alongside the balance sheet. Inflationary and supply chain pressures that may affect the outlook of reporting companies are an additional concern for investors.
Tesla's Q3, 2021 earnings were, once again, record-setting for the Company. The Company is increasing sales and has stated it is on track to "achieve 50% average annual growth in vehicle deliveries" at a time when chip shortages are hampering other automakers ability to do so. Improving gross margins (up to 30.5%) was also a significant factor in Tesla performance in Q3.
TSLA shares since earnings report:
The popularity of Netflix's series Squid Game hadn't completely filtered into the Company's finances at the time of its Q3, 2021 earnings report. Yet, Netflix delivered a favourable report, with revenue coming in on par and subscriber growth beating expectations. Squid Game IP is estimated to be worth $900 million to Netflix and should help boost its Q4 earnings, which typically get a seasonal bump anyway.
NFLX shares since earnings report:
Johnson & Johnson's Q3 earnings-per-share beat expectations, with revenue climbing 10.7% from the previous corresponding period. J&J increased its (bottom-end) revenue guidance for the full year from $93.8 billion - $94.6 billion to $94.1 billion to $94.6 billion. J&J noted that its Covid vaccine would be responsible for $2.5 billion at years end and $502 million of its Q3 revenue.
JNJ shares since earnings report:
PG beat revenue estimates, increasing sales revenue by 5% over the last quarter, but expects to fall short of 2020 revenue. The consumer goods Company also noted that rising producer costs, particularly as it relates to shipping and raw commodity prices, has already had and is going to continue to have a larger-than-anticipated effect on its earnings. In response, PG has begun raising the prices of some of its premium products as a quick remedy to help offset its rising costs.
PG shares since earnings report:
There are plenty more juicy earning reports due next week.
For many first-time investors, some financial market terminology can be confusing. A question that often crops up is ‘what is the difference between the Nasdaq and the nasdaq100?’. Effectively this question can be answered by defining the difference between a ‘Stock Exchange’ and a ‘Stock Exchange Index’.
A Stock Exchange is a marketplace where the buyers and sellers of company stock (aka shares) can transact.
The owners of Stock Exchanges oversee that the companies whose stock is listed adhere to rules that ensure fair market conditions for buyers and sellers. In short, they make sure that companies are continually disclosing information that buyers and sellers would deem necessary to make informed financial decisions regarding the buying, holding, or selling of stock.
The organisations that oversee Stock Exchanges earn the bulk of their revenue from transaction fees. In fact, Stock Exchange companies can be incredibly lucrative. In 2020, the largest Stock Exchange in the world, the New York Stock Exchange (NYSE), generated US $50.9 billion in revenue. The next largest Stock Exchange in the world, the Nasdaq, generated US $5.6 billion in revenue in the same year.
Interestingly, many organisations that own exchanges are themselves listed on exchanges. The owner of the NYSE, Intercontinental Exchange (NYSE: ICE), can be found on none other than the NYSE. The owner of the Nasdaq, Nasdaq Inc (NASDAQ: NDAQ), is, of course, listed on the Nasdaq.
A Stock Exchange Index is a way to measure the stock performance of companies listed on Stock Exchanges. Companies can be grouped by size, industry, or several other categorisations.
The performance of the companies in an index informs the performance of the index. Essentially, if the share price of the companies in the index are rising, so will the index.
A Stock Exchange Index may measure the entire Stock Exchange or only a section of the Stock Exchange. For example, the Nasdaq 100 measures the performance of the largest 100 companies that are listed on the Nasdaq. The Nasdaq Composite is a similar Stock Exchange Index, except this Index does not discriminate. As such, the Nasdaq Composite is representative of all 3,700 companies listed on the Nasdaq.
The S&P500 (SPX) accomplished a historic milestone last week. For the first time in its 64-year history, the Index recorded seven straight record level closes. The Index closed on Friday 02/07/21 at 4352.34, up by 0.75% for the day, up by 1.59% for the week, and up by 2.02% for the seven record-setting days.
Events bookending the Index’s growth over this timeframe were Congress passing a US$1.5 trillion infrastructure spending bill and a robust Nonfarm Payroll report.
Setting off the SPX’s record run was the announcement on 24 June that the Biden Administration had struck a deal to pass a sizable bipartisan Infrastructure bill. By the opening of the market on 25 June, The SPX was trading 0.58% higher. Naturally, the SPX is, in part, comprised of the most significant US construction, utility, and manufacturing Companies. These companies will likely benefit from the Government’s heavy (and overdue) investment in the country’s infrastructure. Companies such as Fortinet Inc (NASDAQ: FTNT) and Qualcomm Inc (NASDAQ: QCOM), who will be integral in building out the country’s digital infrastructure, were some of the big gainers over these seven days, up by 3.4% and 1.9%, respectively.
It might be best to keep a keen eye on news regarding additional government spending in this area. The Biden Administration has already indicated that they want more infrastructure spending and are aggressively pursuing this line.
The Nonfarm Payroll report, released on Friday (2 July), beat expectations by 150K. In total, 850K jobs were added to the US economy, against an expectation of 690K. By the end of the Friday session, the Index was up by 32.4 points, accounting for half of the week’s gains.
SPX futures are trading slightly lower on Monday, indicating that Friday’s jubilance might be weakening before the start of the US trading week. The Futures have plenty of time to reverse as the US markets are closed on Monday due to the observance of the country’s national holiday, Independence Day.
YTD, the Index is up 17.6%. Quickly browsing the Index’s historical growth data, double-digit figures close to 20% are not all that uncommon. Taking the previous five years as an example, starting from 2020, the Index grew 16.3%, 28.9%, -6.2%, 19.4%, and 9.5%.
If we want to make history as a predictor of the future, we could note that the SPX has never closed lower for the year after logging double-digit growth in the first half of the year. However, this fact is unrelated to the probability that the SPX could be lower than its half-year position by the close of the year.
At least in the short term, I would expect the jubilance in the market to continue. The Index is startlingly close to crossing the 4350.00 level. Perhaps it will achieve this feat sometime this week. Further afield, 4360.00 and 4400.00 are some barriers for the Index to travel in the immediate term.
If we want to be a little more pessimistic, we could look at some retracement points for the Index. The 50% Level appears to be an obvious point of retracement, although the resistance at this point would have to switch to support. A more appropriate level for retracement might be in the middle of the 61.8% and 100% levels. At this point, approximately 4191.00, there exists a historical story of support.
Last week the US Senate confirmed the appointment of Lina Kahn as chair of the Federal Trade Commission (FTC). A lawyer and academic known for her antitrust research, Kahn is the youngest ever chair of the department responsible for policing the US’s biggest corporations.
With Kahn at the helm of the FTC, companies hailing from silicon valley could finally be held account for their antitrust and anticompetition practices. The organisations likely to be first to garner Kahn’s attentions are those Big Tech household names that hog much of the media headlines.
It is not just headlines that Big Tech hog. They also hog much of the weight of US indices, in particular the Nasdaq100. Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB), Alphabet (NASDAQ: GOOGL, GOOG), Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT) make up approximately half of the weight of the Nasdaq100. As such, some argue they are a little too big. All the above examples have operations spanning multiple disparate industries and find it a little too easy to stifle innovation and competition by buying up rivals as they emerge.
Khan has already indicated that she plans to apply special scrutiny to the Big Tech players in her role as FTC chair. Support for her security could find cross-party support as her stance on Big Tech was widely known by democrats and republicans alike before her confirmation as FTC chair. If United States Democrats and Republicans can agree on anything, it might be in regard to the need to rein in Big Tech.
Kahn’s scrutiny could extend as far as proposing and bringing forward action to break up some of the Big Tech companies into several smaller, more manageable companies (from a regulatory perspective). If this is a road that Kahn and her team push down, whether eventually successful or not, we can expect a high level of uncertainty and instability in the Nasdaq100. As of writing (Thursday 24/06), the Nasdaq100 hit a record level above 14,200, largely on the back of the growth experienced in Big Tech. This could be a case of 'the bigger they are, the harder they fall'.
One of the first events the FTC will be scrutinising during Kahn tenure is the acquisition of MGM Studios by Amazon. Typically, the FTC would share responsibility with the Department of Justice to review the proposed Amazon-MGM merger. However, it is said that the FTC lobbied for the right to examine this merger as it already has an open investigation into Amazon’s antitrust practices.
It appears that Kahn has already begun to apply her special level of scrutiny to the Big Tech behemoths. However, as it stands, the market is yet to react to Kahn's appointment. In fact, Big Tech have never been more popular with investors (MSFT recently joined Apple in the $2 Trillion club), while the Nasdaq is hitting fresh intraday records every other day.
A theory: Elon Musk will hand Tesla Inc (NASDAQ: TSLA) over to a successor when Tesla can no longer generate much fanfare. At least, not as much as they currently do. This point in time will come once legacy car manufactures are firmly entrenched in the EV space. It is likely General Motors Company (NYSE: GM), Stellantis NV (BIT: STLA), and the dominant Asian brands will outcompete Tesla on price, range, and looks. Consequently, Tesla will be relegated to a periphery player. If legacy car brands convert their production to EV as fast as they say they will, I expect Musk will move on to his next project before 2030.
To stay in the game, Tesla will have to double down on its status as a luxury vehicle. I think this would be the right move for Tesla in the long run. Imagine this; Tesla becomes an electric equivalent of Ferrari, Lamborghini, or McLaren.
Last week, Ferrari NV (BIT: RACE) announced Benedetto Vigna as its new CEO. The appointment of Vigna surprised the market as his background is in computer engineering rather than the automotive or luxury goods sector.
The appointment strongly indicates a new priority for vehicle manufacturers. Moving forward, the success of their respective businesses will be heavily dependent on their electronic and computing technology.
Tesla's CFO (Master of Coin), Zachary Kirkhorn, easily fulfils the criteria to lead the Company. After all, Kirkhorn holds degrees in both economics and engineering. Tesla's Senior VP, Andrew Baglino, an electrical engineer, is an equally appropriate choice to head the Company.
However, Elon probably won't play by the industry rules. Instead, Elon may hand the reins over to his little brother, Kimbal Musk, a Tesla board member and a self-described chef, restauranteur, and philanthropist. I am not hinting that Kimbal's Directorship is undeserved. Rather, I am noting the unconventional choice in the same manner that his ascension to CEO would be unconventional.
While Kimbal Musk does not profess a penchant for electrical or computer engineering, he is very successful in his own right within the technology space. In addition to his culinary pursuits, Kimbal has co-founded and directed many of Elon's technology companies, including Zip2, SpaceX and X.com.