After a bull market like the one we experienced prior to 2022, it can be tempting to stick to the same investment strategies that have been working. But the underlying economic factors are set to be materially different in the coming years, which means the market is likely to look very different from what we’ve seen in the past 10-plus years.
- PCE inflation data, Fed rate hike expectations, recession fears in focus.
- Nike shares are a buy with upbeat earnings on deck.
- Micron stock is set to struggle amid shrinking profit and revenue growth.
Stocks on Wall Street declined on Friday, with the major indices suffering their second straight week of losses as hopes for a year-end rally fizzled amid mounting concerns about further Federal Reserve and a possible recession.
For the week, the blue-chip dropped 1.7%, while the benchmark and technology-heavy fell 2.1% and 2.7% respectively.
The coming week – which will be the last full trading week of 2022 – is expected to be another eventful one as markets continue to weigh the rate hike plans for the months ahead.
Meanwhile, on the economic calendar, most important could be Friday’s personal consumption expenditures data, which includes the price index, the Fed’s preferred inflation measure.
There will also be important third-quarter , which will provide more clues as to whether the economy is heading for a recession.
Elsewhere, on the earnings docket, there are just a handful of corporate results due as Q3 earning season winds down, including Nike (NYSE:), Micron (NASDAQ:), FedEx (NYSE:), General Mills (NYSE:), and Carnival (NYSE:).
Regardless of which direction the market goes, below we highlight one stock likely to be in demand and another that could see further downside.
Remember though, our time frame is just for the upcoming week.
Stock To Buy: Nike
I expect Nike shares to rally in the week ahead as the sports apparel and footwear giant is forecast to report upbeat financial results and strong guidance when it delivers its latest earnings after the closing bell on Tuesday, Dec. 20.
As per moves in the options market, traders are pricing in a significant swing of 9.3% in either direction for NKE stock following the earnings update.
Consensus expectations call for the Beaverton, Ore.-based sneaker company – which has topped Wall Street’s profit estimates for nine consecutive quarters – to post earnings per share of $0.65 for its fiscal second quarter, according to analysts polled by InvestingPro+. That would be 21.7% lower than EPS of $0.83 in the year-ago period.
Nike Earnings Data
Revenue growth is expected to accelerate for the second straight quarter, with an anticipated 10.7% year-over-year rise to $12.58 billion, as it benefits from favorable consumer trends for sports and recreation clothing and equipment.
In my opinion, Nike’s sales growth in North America will surprise to the upside, as demand remained strong heading into the holiday shopping season despite a difficult backdrop of rampant and recession fears.
Perhaps of greater importance, sales figures from China are expected to reveal that revenue growth rebounded sharply in fiscal Q2 thanks to receding COVID-19 restrictions after falling 16% in the preceding quarter.
As a result, I anticipate Nike’s management will provide an upbeat outlook for the months ahead amid easing worries over the impact of excess inventory and gross margins in spite of a challenging environment for retailers.
NKE stock closed at $105.95 on Friday, earning the athletic apparel and footwear giant a valuation of roughly $165.8 billion.
Shares, which have bounced off their recent lows along with the major stock indexes, are down 36.7% year to date and are approximately 38.1% below their all-time high of $179.10 reached in December 2021.
Stock To Dump: Micron Technology
I reckon Micron’s stock will suffer a challenging week ahead, with a potential breakdown to new multi-month lows on the horizon, as the struggling memory-and-storage chipmaker’s latest earnings results are likely to reveal a sharp slowdown in profit and sales growth due to the challenging operating environment.
Micron is scheduled to deliver fiscal Q1 numbers on Wednesday after the bell.
Market players expect a large swing in MU shares following the results, according to the options market, with a possible implied move of 9.8% in either direction.
According to Investing.com, Micron is forecast to deliver a loss of $0.01 a share, plunging from a profit of $2.16 per share in the same quarter last year. If confirmed, that would mark Micron’s first quarterly loss on record due to the negative impact of rising operating expenses and weakening enterprise demand for its DRAM and NAND chips.
Unsurprisingly, an InvestingPro+ survey of analyst earnings revisions points to mounting pessimism ahead of the report, with analysts cutting their EPS estimates 25 times in the past 90 days to reflect a drop of -100.4% from their initial expectations.
Meanwhile, revenue is forecast to tumble 46% year over year to $4.15 billion – which would be the lowest level since Q1 2016 – amid numerous headwinds, including ongoing inventory and supply-chain issues.
Taking that into account, I believe there is a growing downside risk that Micron’s management could once again cut its full-year profit and sales guidance as data centers cut back spending on memory and storage chips.
MU stock ended Friday’s session at $52.07, reapproaching its mid-September two-year low of $48.45. At current levels, the Boise, Idaho-based company has a market cap of $56.6 billion.
Micron has seen its valuation collapse throughout 2022, with the stock falling 44.1% year to date. Even more worrying, shares are approximately 47% below their record peak of $98.45 reached on January 5.
Disclosure: At the time of writing, Jesse is short on the S&P 500 and via the ProShares Short S&P 500 ETF (NYSE:) and ProShares Short QQQ ETF (NYSE:).
The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.
CPPIB to invest $205-million in IndoSpace's new real estate fund – The Globe and Mail
Indian warehouse and parks developer IndoSpace on Monday said the Canada Pension Plan Investment Board (CPPIB) will invest $205-million in the company’s new real estate fund.
The investment from Canada’s biggest pension fund is part of IndoSpace’s new fund targeting $600-million in equity commitments.
CPPIB’s latest investment in the Indian property developer will take its partnership with the company to over $1-billion in assets, IndoSpace said in a statement.
“We have made numerous investments in India’s industrial space, where we see strong demand as the manufacturing sector continues to grow and the e-commerce sector matures,” said Hari Krishna V, Managing Director, Head of Real Estate India at CPPIB.
IndoSpace is a joint venture between the Everstone Group, a Southeast Asia-focused private equity, and U.S.-based investors GLP and Realterm.
Predictions for the housing market, lower internet costs and stable stocks: Must-read business and investing stories – The Globe and Mail
Getting caught up on a week that got away? Here’s your weekly digest of The Globe and Mail’s most essential business and investing stories, with insights and analysis from the pros, stock tips, portfolio strategies and more.
High interest rates will continue putting pressure on Canada’s housing market
The Bank of Canada this week increased interest rates for the eighth consecutive time but said that it expects to hold off on further hikes to “assess whether monetary policy is sufficiently restrictive to bring inflation back to the 2-per-cent target.” As Mark Rendell reports, the central bank raised its benchmark rate by a quarter of a percentage point, bringing the policy rate to 4.5 per cent, the highest level since 2007. With borrowing costs and mortgage rates at their highest level in years, many potential homebuyers have been shut out of the real estate market, writes Rachelle Younglai. The typical home price across the country is already down 13 per cent from its peak last February amid the bank’s attempts to rein in runaway inflation by reducing access to cheap loans. As such, the bank is predicting home prices will decline further before sales pick up later in the year.
These stocks offer portfolio stability amid rising prices
Rising interest rates were the main contributor to the woes of the stock markets in 2022. Interest-sensitive securities such as REITs, utilities, telecoms and bonds all tumbled as rates steadily increased. Combined with the collapse of tech stocks as the economy that benefited from pandemic lockdowns dissipated, we ended up with all the major stock markets in the red, and the Canadian bond market experiencing its worst loss in four decades. But there were some inflation-beaters. Gordon Pape looks at a number of inflation-beating securities that thrived in a rising price environment and are still doing well, although momentum is slowing.
The clearest sign that inflation is declining
When assessing inflation, central bankers and economists will often exclude food and energy costs, but in a recent report, Karyne Charbonneau, executive director of economics at CIBC Capital Markets, said the Bank of Canada should consider the rapid climb in mortgage interest costs “when judging the underlying inflationary trend.” As Matt Lundy writes, while the bank is raising interest rates to cool demand and tamp down inflation, its efforts are having the opposite effect on mortgage payments, which have jumped 18 per cent in the past year. Although mortgages carry only 3-per-cent weight in how the Consumer Price Index is calculated, the increase is substantial enough that mortgages are now the largest contributor to annual inflation.
Could lower cellphone and internet costs be coming?
Lowering cellphone and internet bills is a top priority for Vicky Eatrides, the new chair of Canada’s broadcast and telecommunications regulator, Irene Galea reports. Unfortunately, Ms. Eatrides is inheriting a commission that is widely seen as slow to make decisions. The continuing legal proceedings of Rogers Communications Inc.’s takeover of Shaw Communications Inc. are attracting unprecedented attention to the inner workings of the telecom industry and the future of cellular service competition in Canada. Meanwhile, two CTRC policies, concerning industry rates for broadband and wireless networks, finalized during the previous chair’s term, are still being debated among industry players. Ms. Eatrides would not reveal specifics related to her plan to lower cellphone and internet costs, but added she hopes to speed up the commission’s decision-making process.
The real savings of owning an electric vehicle
With gas prices yo-yoing this past year, are the savings associated with the lower operating costs of purchasing an electric vehicle ultimately worth it? David Berman, a Hyundai Ioniq 5 owner, compares charging costs for EVs to gas-powered vehicle costs over the same travelling distance. “I’ve driven almost 10,000 kilometres – did I mention that I don’t drive much?” he writes. “I’ve saved about $780 over the past year. Over 10 years, these savings would rise, theoretically, to a total of $7,800.” Additionally, he got a $5,000 federal EV rebate when purchasing the car in Ontario in early 2022, whittling down the nearly $50,000 list price for his vehicle to about $37,200 compared with a hypothetical gas-burning version of itself.
Record-low rental vacancy rate
There are fewer apartments available to rent in Canada than at any time since 2001, according to Canada Mortgage and Housing Corp’s annual rental report released this week. As Rachelle Younglai reports, the country’s apartment vacancy rate dropped to 1.9 per cent in 2022 – down from 3.1 the year before and the lowest level in more than two decades – owing to higher net migration, the return of postsecondary students to the campus and the spike in borrowing costs. The country’s largest rental markets were under particular stress, with Toronto’s apartment vacancy rate dropping to 1.7 per cent last year from 4.4 per cent in 2021, Montreal to 2.3 per cent from 3.7 per cent and Vancouver to 0.9 per cent from 1.2 per cent. The national average monthly rental price for a two-bedroom rose 5.6 per cent to $1,258 last year, with Vancouver and Toronto commanding the highest rents at an average of $2,002 and $1,765 monthly.
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Now that you’re all caught up, prepare for the week ahead with the Globe’s investing calendar.
3 reasons dividend stocks can lead the next bull market
Dividends may make up a larger portion of the total return
Over the past decade, dividends have contributed less than 25 per cent of the S&P 500’s total return, as years of low interest rates helped inflate asset valuations. Historically, though, dividends have made up a larger portion of the market’s total return. Dividends have accounted for an average of 40 per cent of the S&P 500’s total return since the 1930s, according to data from Fidelity Investments.
If inflation remains high, it will be very difficult for the market to grow via multiple expansion as it has during the past 10 years. This opens the door to dividends regressing to the long-term mean and making up a larger percentage of the total return than it has recently.
Valuations are attractive for dividend stocks
Dividend-paying stocks are currently undervalued relative to the broader market judging by the price-to-earnings (P/E) ratio. The P/E for dividend-paying stocks in the S&P 500 Dividend Aristocrats was lower than the P/E for the S&P 500 as of Dec. 30, 2022. This suggests dividend-paying stocks may offer better value for investors compared to non-dividend-paying stocks.
This is common during a bear market like the one we experienced last year. The good is thrown out with the bad, as companies with consistent earnings are sold off with the same urgency as less profitable companies. This creates an opportunity that can be identified by using the P/E ratio.
Great companies with robust business models and long histories of profitability rarely go on sale, so this can be a great opportunity to add quality names to a portfolio.
Better track record
Dividend-paying stocks have outperformed non-dividend-paying stocks over long periods of time. A study of the S&P/TSX composite index from 1986 to 2021 by RBC Global Asset Management found that stocks growing their dividend had an average annual return of 11.2 per cent compared to 6.5 per cent for the overall index and an abysmal 1.4 per cent for non-dividend-paying stocks.
This trend has even held up during economic recessions, as dividend-paying stocks have shown to be more stable and less volatile than non-dividend-paying stocks. For example, the same RBC study found that dividend-paying stocks in the composite index had a standard deviation (a measure of volatility) of 13.9 per cent, compared to 23.3 per cent for non-dividend paying stocks. This indicates dividend-paying stocks have been less volatile over the long term.
Remember that investing in the stock market carries risks and a professional investment adviser can help assess your investment goals and risk tolerance and develop a personalized investment strategy tailored to your specific needs and circumstances.
Taylor Burns is an investment adviser at Manulife Securities Inc. and Balanced Financial Wealth Management. The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Inc.
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