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Monday, February 7, 2022
Bigger isn’t always better.
Case in point: Lots of trading desks are locked in on the dramatic underperformance of the small-cap Russell 2000 Index amid the bounce-back in broader stocks from the late January lows. The Russell 2000 — which is often viewed a proxy for the strength (or lack thereof) of the domestic economy — is down 10.5% this year compared to a 6% drop for the S&P 500 and 3.6% decline for the Dow Jones Industrial Average.
The Russell 2000 has lagged the S&P 500 by 25 percentage points in the past 12 months, its worst 12-month relative return since 1999, notes Goldman Sachs’ David Kostin.
“Decelerating GDP growth has been one headwind to the cyclical small-cap index. During the last 20 years, small-caps have lagged on average in periods when the yield curve was flattening, economic growth was strong but decelerating, or financial conditions were tightening,” Kostin says.
Traders are now trying to determine whether the weakness in the Russell 2000 suggests another pullback in the markets is in the offing. After all, larger cap stocks are exposed to the same things (tightening financial conditions, higher interest rates, inflation, etc.) as smaller companies.
“The small cap Russell 2000 has been a “canary in the coal mine” for stocks for much of the past year — first warning softly as small cap momentum peaked along with other areas of euphoric sentiment in 1Q21 even as large caps continued to rise, and then more urgently as its breakdown from a year long range led the broader market lower. As stocks bounce from their January slide, though, small caps have shown signs of sputtering below their prior support. Floors can often become resistant when broken, and with the Russell 2000’s recent track record as a leading indicator for broader market weakness, we will be watching the reaction to this level closely. Failure would suggest further correction in stocks lies ahead, while a break above could indicate stabilization,” explains Evercore ISI’s Julian Emanuel.
Of course, the Russell 2000 sucking wind could mean absolutely nothing to the S&P 500’s next big move. No analysis is fool proof. Just file this under your “Things to Watch List,” especially as the bulls begin to resurface and blow their normal smoke in your face.
Now go forth and conquer in what will be another mentally draining week of corporate earnings. Happy trading!
Odds and ends
The worst, almost: As I approach a milestone birthday, I am realizing a couple things. First, I still look amazing. Second, I still feel amazing. And three, in about 19 years of being involved with public companies (first as an analyst, then as a journalist) I have seen my fair share of terrible management teams and out-to-lunch boards. Hands down the worst management team and board I have ever seen (and may ever see for as long as I decide to do this stuff) is Sears. Financier Eddie Lampert running a retailer? What a joke — he and his puppet board drove the company right into the local dump (something I chronicled along the way).
But after careful consideration this weekend, I have to put a new management team and board into second place on my worst of all-time list. That is Kohl’s. The company’s rejection of two buyout offers late on Friday after only two weeks — and the adoption of a poison pill — is absurd. What kind of sales process was run here? Probably next to none, reflecting a board that is largely dominated by people who have been there seemingly forever (except three folks added last year as part of a settlement with activist investor Macellum). Another way of saying this is that the 14-member board is entrenched — and from what I have heard comprised mostly of folks just looking to collect checks. Bottom line: shares of Kohl’s are trading at the same price they were in October 2009 when some of these people were still on the board. That is insane, and comes despite Kohl’s having considerable real estate assets, an Amazon returns deal and thousands of fewer bricks-and-mortar competitors. Something ain’t working here, and it shows in the company’s margin performance (and obviously the stock price) this past decade. I look forward to another extensive chat with Kohl’s activist Jonathan Duskin at Macellum on Yahoo Finance Live. Bring your coffee and tune in here at 10 a.m. ET.
Tech musings: Another fun session is on tap for Peloton after a Friday evening story from The Wall Street Journal said Amazon and Nike have expressed interest in buying the exercise bike maker. Shares exploded 26% after hours on Friday. Amazon was said to tap Echelon late in 2020 to develop a connected bike (it never happened). And then for Nike, it signed popular Peloton instructor Tunde Oyeneyin to an endorsement deal late in 2021. Where there is smoke there is often fire — I wouldn’t be shocked that amid Peloton’s stock crash, which has attracted an activist investor, the company ends up in the hands of either firm. Peloton reports earnings on Tuesday after the close.
Meanwhile, Spotify has reportedly pulled dozens of Joe Rogan podcasts and the star apologized on Saturday for using racial slurs. At what point does Spotify founder Daniel Ek say Rogan isn’t worth the headache? Perhaps when Ek realizes how the stock price has done since Spotify signed Rogan to a $100 million deal. That may help put things slightly into perspective. Spotify announced the signing of Rogan on May 19, 2020, its stock closed the session up 8% to $175.03, according to Yahoo Finance Plus data. Shares then closed at $189.80 on May 20, $192.74 on May 21 and $190.17 on May 22. The stock went on to hit an all-time closing high of $364.59 in February 2021, in large part on optimism that Rogan would assist in driving a subscriber and profitability surge. Today, Spotify’s stock stands at $174.74 — about the same as when Rogan was signed. The company’s net loss combined for 2021 and 2020 tallied 615 million euros.
And lastly for you GameStop fans, I will be talking with Immutable co-founder Robbie Ferguson in the 9 a.m. ET hour on Yahoo Finance Live. Immutable inked a deal last week with GameStop to build out its NFT marketplace. I am very interested in how this is going to work for both companies.
Charts to watch: If there is any positive in what has been a decidedly mixed earnings season, it’s that companies are complaining less about supply chain bottlenecks as the chart from Bank of America’s Savita Subramanian shows below. But don’t start jumping for joy that this suggests supply chains are back to any form of normal. “Companies have mentioned supply chain and labor less than they did in 4Q, but we believe it is merely because it has been well-telegraphed by now, not because of a change in underlying trend, as many companies expect a bigger inflation headwind in 1Q than 4Q,” said Subramanian.
Disney’s earnings hit after the close of trading on Feb. 9, and the number to watch is 7 million. That is the net adds Wall Street analysts estimate for Disney+ in the quarter. The streaming platform added a disappointing 2.1 million subscribers in the preceding quarter (shares have fallen about 17% since that miss in early November of last year). Download trends for Disney+ appear to have improved during the latest quarter, per the below chart from Evercore ISI’s Vijay Jayant showing global monthly app downloads.
Other business news: The WSJ reports the Super Bowl will be inundated with crypto ads, with FTX, Coinbase and Crypto.com running spots. Myself, Julie Hyman and David Hollerith recently had an interesting chat with FTX founder Sam Bankman-Fried — it’s worth a watch. TechCrunch, Yahoo Finance’s sister publication, looks into how long Meta founder Mark Zuckerberg could “bankroll” the AR/VR market. Staying within the Yahoo ecosystem, our friends at Autoblog deliver a hot take on the new Spirit of Ecstasy hood ornament from Rolls-Royce. I don’t like the new design, for what it is worth.
What to watch today
6:30 a.m. ET: Hasbro (HAS) is expected to report adjusted earnings of 90 cents per share on revenue of $1.87 billion
7:30 a.m. ET: Tyson Foods (TSN) is expected to report adjusted earnings of $1.93 per share on revenue of $12.18 billion
8:00 a.m. ET: ON Semiconductor Corp. (ON) is expected to report adjusted earnings of 94 cents per share on revenue of $1.79 billion
4:05 p.m. ET: Chegg (CHGG) is expected to report adjusted earnings of 31 cents per share on revenue of $195.00 million
4:05 p.m. ET: Take-Two Interactive (TTWO) is expected to report adjusted earnings of $1.13 per share on revenue of $871.10 million
4:10 p.m. ET: Simon Property Group (SPG) is expected to report adjusted earnings of $2.90 per share on revenue of $1.28 billion
4:10 p.m. ET: Tenet Healthcare Corp. (THC) is expected to report adjusted earnings of $1.52 per share on revenue of $5.00 billion
4:10 p.m. ET: Nuance Communications (NUAN) is expected to report adjusted earnings of 19 cents per share on revenue of $364.00 million
4:00 p.m. ET: Amgen (AMGN) is expected to report adjusted earnings of $4.03 per share on revenue of $6.86 billion
President Biden welcomes German Chancellor Olaf Scholz to the White House today to discuss the situation in Ukraine and other issues. Scholz has drawn sharp criticism for not working harder to avert a possible Russian invasion of Ukraine with some charging it’s in order “to keep the gas flowing” to Germany.
European markets open higher after US jobs report boosts confidence [Yahoo Finance UK]
Yahoo Finance Highlights