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Monday, February 14, 2022
On Super Bowl Sunday, there was Dwayne “The Rock” Johnson getting the Super Bowl started on the right foot as only he could.
Couple things stood out to me while The Great One was speaking:
1) He never trips up over his words on the mic, going back to his days with WWE.
2) Under Armour needs a bigger deal with The Rock (they signed him up for an apparel line in 2016).
3) His arms are huge, just like the valuation on the S&P 500 (yes, this is how I am always thinking).
While the S&P 500’s valuation is big and bulky just like the The Rock’s biceps, only one deserves to be deflated. Rest assured The Rock’s fine arm specimens aren’t what need deflating.
Nope, it’s the stock market’s valuation that warrants air being let out. To that end, enter big and brawny Wall Street.
On Monday, Goldman’s chief U.S. equity strategist David Kostin slashed his 2022 year-end S&P 500 target to 4,900 from 5,100. This was to be expected after his colleague Jan Hatzius, Goldman’s chief economist, raised his expectation for interest rate hikes this year to seven from five last week.
“Uncertainty abounds regarding the path of inflation and Fed policy. We believe two-sided risks exist to our baseline S&P 500 forecast, but with a larger downside tail,” Kostin says.
Some of you will say, “Brian, Kostin’s new target still assumes 11% upside from current levels.” To that I say it doesn’t matter in this cautious environment. It’s more about the cut itself and what signal it sends to investors — Goldman Sachs is less bullish on stocks, and maybe it’s time to get a little defensive.
I would expect more downgrade calls like Kostin’s ahead of the Fed meeting next month, which could compound the geopolitical pressures now facing markets thanks to the Russia/Ukraine/U.S. situation. Inflation isn’t decelerating. Corporate profit margins are under siege. Interest rates could be sharply higher before the summer.
All of that isn’t a risk-on set-up.
“If you have something like seven increases in the Federal funds rate in 2022, price-to-earnings ratios are coming down, upside potential for the stock market is coming down. I don’t know if we are talking 4,000 [for the S&P 500], but we are certainly talking lower than we are right now,” said veteran market strategist Hugh Johnson on Yahoo Finance Live.
So hit those weights and eat lean.
Odds and ends
Super Bowl ads, fast takeaways: A hat tip to Coinbase for forcing the world to engage with its expensive Super Bowl ad by slapping a dancing QR code on screen. For more on Coinbase, here’s what the company’s CFO told me about all things crypto. Good to see the E-Trade baby make his return from a retirement he began in 2014. Note the end of the commercial said “E-Trade by Morgan Stanley.” For those new to the market, Morgan Stanley closed on its $13 billion acquisition of E-Trade in October 2020. And also returning to the airwaves was 80s McDonald’s fast-food icon Grimace. Next up for Micky D’s: The return of Ronald McDonald during a World Series commercial? It may be time to welcome Ronald back from exile.
Remaking the NYSE: On Jan. 3, Lynn Martin walked through the door of the New York Stock Exchange as the 68th president of the iconic 226-year-old institution. Martin told me in an interview on the NYSE floor (which she doesn’t see going away despite the rise of the computers) her mission is pretty straightforward. That is to harness her extensive tech resume (she is a computer programmer by trade, and her first gig was at IBM) and focus on ESG disclosures to take the NYSE further into the future as it battles with Nasdaq for fees and new listings. Martin also has to keep the new listings flowing in the near-term as the markets deal with heightened bouts of volatility with interest rates rising. The fellow Long Island-native tells me her outlook for IPOs this year, “So I think the first quarter is going be pretty quiet, particularly relative to last first quarter. But I think we’re going to end the year strong — the pipeline is tremendous.” My full interview with Martin will air on Yahoo Finance Live this morning, so tune in.
Deal chatter: I have covered Cisco for some time (to that end, myself and Julie Hyman just had a fun chat with Cisco’s former long-time CEO John Chambers), and I have learned where there is smoke there is often fire when deal chatter surfaces as it did Friday night with a reported $20 billion bid for software maker Splunk. I don’t believe a deal is imminent based on those I have talked with, but it very likely could happen. Cisco is an acquisition machine (a strategy first employed by Chambers), it has north of $22 billion in cash, borrowing costs are still low, and Splunk does useful stuff. Splunk also really doesn’t have a CEO right now after the departure of Doug Merritt amid several weak quarters. Sounds like a prime opportunity for Cisco to swoop in.
“While the news is purely speculation at this point, we believe that Cisco is a strategic buyer of Splunk and that the transaction would have a lot of potential synergies. Splunk has over $2.5B in annual revs today and security represents half of the business. Splunk’s sizable presence in security would present a significant opportunity for Cisco, who has been lagging other vendors in the security operations space. The other half of Splunk’s business in observability would be a natural complement to Cisco’s existing monitoring solutions (AppDynamics/ThousandEyes) and could better position Cisco as an end-to-end platform to compete with rising stars such as CrowdStrike, Datadog and others,” Jefferies analyst Brent Thill says.
Expect execs to be tight-lipped on this one when Cisco reports earnings on Wednesday. Both companies declined to comment to Yahoo Finance on the report.
IBM’s ‘dinobabies’: Meanwhile, expect the term “dinobabies” to be used a fair amount in coming weeks on social media and who knows, perhaps in a Saturday Night Live skit. The term was reportedly coined by top IBM execs to refer to older workers they wanted to push out of the company, according to in-depth reporting from The New York Times.
Below is a Yahoo Finance Plus chart showing the impact of IBM execs spending too much time in meetings (perhaps discussing dinobabies) and generally cushy gigs to the company’s stock price. Don’t tweet me and ask me to overlay an IBM chart with Apple or Microsoft, I am in a good mood. No need for such negativity. One of the reasons I am feeling cheery is AMD CEO Dr. Lisa Su will be back on Yahoo Finance Live this morning as the company’s $35 billion deal for Xilinx is expected to close. This is a major deal for AMD, and I am looking forward to hearing Su’s take on what it means for the chip giant’s future.
Kohl’s: And last but not least, activist investor Macellum is turning the screws on stumbling and bumbling Kohl’s by nominating 10 new board members. “We really see a board that we think is behaving somewhat disingenuously. They seem very self-serving, very entrenched. They seem intent on protecting their jobs over creating shareholder value and exploring ways to create shareholder value,” Macellum CEO Jonathan Duskin told me on Yahoo Finance Live.
Dislocation: I get asked a lot: How to find great investing opportunities? After I share my boilerplate disclosure, “I no longer pick stocks for a living,” I tend to follow it up with “you want to find dislocations in the market.” Given my background in fundamental analysis, dislocations represent a situation where the stock price today — for whatever reason — doesn’t represent the future value of the company.
A potential dislocation has emerged in tire giant Goodyear (note I said potential, go do your own homework on the company — start here with their latest earnings release). Shares got crushed on Friday by 27% as the company warned about inflation lasting for “several quarters” and impacting the first quarter “significantly.” I get the market’s knee-jerk reaction, inflation is elevated and Goodyear’s earnings report arrived hours after a 7.5% headline CPI print. But the swift sell-off loses sight of a few factors (1) the significant amount of new cars sold during the pandemic will be needing new tires soon (sometimes analysis is that simple); (2) the push to electric vehicles will usher in new tire technology that Goodyear is leading on; (3) Add Goodyear to the list of manufacturers that has pricing power in an inflationary environment (you aren’t going to drive around on three wheels because Goodyear tires cost $30 more versus 2020). Last year, I spent the day at Goodyear’s HQ in Ohio and chatted with CEO Rich Kramer — I can tell you this company has the mindset to do quite well during inflationary periods and is working on some mind-blowing products.
Charts to watch: In the “well this sucks” category, is the below chart from Jefferies Chief Financial Economist Aneta Markowska showing the impact to GDP growth from rising interest rates. Take note of the impact beginning in the fall, which could mean a pickup in volatility in markets this spring if one lives by the adage stocks price in the future six months in advance.
Over at LPL Financial, data cruncher Ryan Detrick highlights how the stock market has historically reacted to major geopolitical events such as the one that developed on Friday with Russia that sent stocks tanking. The takeaway: Stocks bounce back from these events.
What to watch today
TreeHouse Foods (THS) is expected to report adjusted earnings of $0.10 per share on revenue of $1.12 billion
Weber Inc. (WEBR) is expected to report an adjusted loss of $0.07 per share on revenue of $310.71 million
Vornado Realty Trust (VNO) is expected to report adjusted earnings of $0.75 per share on revenue of $1.8 billion
Avis Budget Group (CAR )is expected to report adjusted earnings of $6.07 per share on revenue of $2.29 billion
Arista Networks (ANET) is expected to report adjusted earnings of $0.74 per share on revenue of $790.8 million
Advance Auto Parts (AAP) is expected to report adjusted earnings of $1.95 per share on revenue of $2.36 billion
European markets suffer Valentine’s Day slump amid Russia-Ukraine conflict [Yahoo Finance UK]
Yahoo Finance Highlights