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⚒️ AI Picks & Shovels

⚒️ AI Picks & Shovels

Plus, don't sleep on this natural gas giant.

February 04, 2024

Happy Sunday to everyone on The Street.

Today we’re going to mix two controversial topics together to kick off the newsletter because, why not? Let’s talk about crypto and politics. More specifically, let’s talk about who the crypto world thinks would be a good politician.

Crypto bettors on Polymarket, a cryptocurrency-based prediction market, think former First Lady Michelle Obama's chances to enter the 2024 presidential race — and potentially win the presidency — are rising.

Obama's chances to be the next U.S. President have quadrupled, rising from 2% on Jan. 30 to 8% on the morning of Feb. 1.

Traders' increased interest in Ms. Obama's chances may be traced back to an op-ed in the New York Post, titled "Don't be shocked if Michelle Obama sneaks her way into 2024 race."

The speculation was later picked up by Megyn Kelly, citing unsubstantiated rumors that Obama could be "subbed in" for Biden at the Democratic Convention in May.

Political analyst Mark Halperin pushed back against the rumors in a segment on Newsmax, saying "she's not interested in politics, she's not interested in being President, she will not run."

Either way, continued speculation on the prospects of the former First Lady will likely attract further interest from prediction market traders.

The biggest holder of Obama "Yes" shares — tellingly named "SLEEPYJOE" — stands to win $1.2 million if she were to become President. So with that, we have to ask:

In a head to head battle, who would win the Presidential nomination?

PS: While the Presidential Election Winner market attracts the most interest, several derivative markets have also sprung up. New York Congresswoman Elise Stefanik is the front-runner in the Republican VP nominee market, with traders putting her chances at 20%.

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Review

Wall Street witnessed a stark contrast in tech earnings this week, as Alphabet, Advanced Micro Devices, and Apple fell slightly short of expectations, while Meta Platforms and Amazon.com outperformed, delivering results that exceeded forecasts and offering optimistic outlooks.

Meta Platforms, formerly Facebook, announced its first dividend, prompting a 15% stock surge after stellar quarterly results. CEO Mark Zuckerberg declared Meta’s goal to develop the “most popular and most advanced” AI products and services.

Amazon had a remarkable Q4, generating $170 billion in revenue, a 14% YoY growth that outpaced predictions. Earnings per share exceeded expectations, driven by a record-breaking holiday season. This growth was seen across all segments, including AWS, and bodes well for a promising Q1 revenue outlook.

CNBC's Jim Cramer criticized Apple’s “terrible” performance in China, highlighting a significant 12.9% revenue drop despite global successes. This downturn is linked to stiff competition, geopolitical tensions and a tough economic environment, spotlighting challenges for Apple in a key market.

Fed Chair Powell indicated a March interest rate cut is unlikely, highlighting the need for sustained achievement of the Fed's 2% inflation target before easing policy.

January saw a strong jobs report with non-farm payrolls surging by 353,000, the highest in a year, almost doubling expectations. Average hourly earnings grew by 0.6% for the month and 4.5% annually, outperforming predictions.

Preview

Economic Data

Monday: S&P final U.S. services PMI, ISM services, Chicago Fed President Austan Goolsbee TV appearance
Tuesday: Speeches from Minneapolis Fed President Neel Kashkari, Cleveland Fed President Loretta Mester, Boston Fed President Susan Collins, and Philadelphia Fed President Patrick Harker
Wednesday: U.S. trade deficit, Consumer credit, CBO briefing on budget and economic outlook
Thursday: Initial jobless claims, Wholesale inventories
Friday: CPI seasonal factor revisions

Earnings

Monday: VF Corp, Atico Mining, Arrowhead Pharmaceuticals
Tuesday: Advanced Energy Industries, Eli Lilly and Co, Amcor, Autohome, Amgen, H&R Block, KKR
Wednesday: 23andMe Holding Co., Allstate, Alibaba, Spirit Airlines, O'Reilly Automotive, Topgolf Callaway Brands, Yum! Brands
Thursday: Aurora Cannabis, Apartment Income REIT, Hershey Co, Ralph Lauren
Friday: Canopy Growth Corp, Catalent, PepsiCo

Two Are Better Than One

Energy Merger Presents Opportunity

Barron’s is pounding the table on Chesapeake Energy stock (CHK).

Chesapeake has agreed to combine with Southwestern Energy (SWN) to create a natural gas behemoth.

Chesapeake shares are down around 2% since rumors of the deal first surfaced in early January. However, experts believe investors are underestimating how lucrative the merged entity might be.

Fire up the (Gas Powered) Stove

One reason to be optimistic involves prospects for natural gas demand.

Whether it be for cooking or warming up a home, natural gas has remained essential. India and China are increasing natural gas usage, which could elevate natural gas prices in the future.

After the merger, the Chesapeake Southwestern entity (yet to be named) will be the biggest producer of natural gas in the US.

Do the Math

Barron’s push for Chesapeake stock is rooted in data.

The merger should give the company a better ability to pay off debt, cleaning up its balance sheet. Chesapeake will also reduce costs by combining facilities and streamlining operations.

T. Rowe Price points out that Chesapeake has become “more shareholder-friendly” in recent years, prioritizing buybacks and dividends over lofty growth targets.

If natural gas prices do rise, and Chesapeake’s management maximizes cost savings, Barron’s might have picked a winner.

What rating would you give Chesapeake stock (CHK)?

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AI Picks & Shovels

Non-AI Stocks Could Benefit From AI Craze

Microsoft (MSFT) and NVIDIA (NVDA) stocks have drawn much attention from traders lately with their success amidst the rise of AI. Investors could look to other sectors that might benefit from this movement.

Scotiabank put together a list of six non-AI stocks it sees as winners.

The Canadian bank argues that the growth of artificial intelligence will increase the need for data centers and electrical power.

All About the Data

Artificial intelligence requires data storage to operate, increasing demand for data centers.

Enter Equinix (EQIX) and Digital Realty (DLR), two companies specializing in data storage.

Digital Realty expects global data usage to increase by 28% from 2020 to 2025. Equinix recently launched new products catering to businesses using Nvidia AI.

Scotiabank gives Equinix a price target 15% above current levels. It also predicts a 9% upside for Digital Reality.

More Power Please

The Street expects electricity demand to increase as well to handle artificial intelligence functions.

Scotiabank sees renewable energy firms getting a boost, including Brookfield Renewable Partners (BEP). Brookfield currently trades at around $26 a share. This is well below highs made in 2021, when it traded at nearly $50.

Investors can decide for themselves which non-AI stocks to bet on, but the AI boom is certainly making waves in other sectors.

Which stock will have the best 2024 returns?

Skating on Thin Ice

Homebuilding as a Barometer for the Economy

Historically, new home construction has been a good indicator of the health of the US economy. If consumers are buying and building new homes, they must be able to afford them.

For this reason, the iShares US Home Construction ETF (ITB) has been a helpful gauge for the broader economy. Unfortunately, it's not looking too hot right now.

The Hits Keep Coming

ITB closed out 2023 strong, mostly thanks to lower interest rates. But now the 10-year Treasury is back over 4%, and the ETF isn’t seeing expected gains.

ITB’s share price has held relatively stable between $97 and $104 over the last month. But, its relative strength index has been falling.

This pattern usually indicates the end of a bull run and a possible drop-off on the horizon.

Adding to the pain, D.R Horton Inc (DHI), ITB’s largest holding, missed earnings in its most recent report.

Clinging To Support

According to analysts, $97 per share is the support level for ITB, and that support is being tested. Should the share price fall below $97, it could open the floodgates.

Q1 is historically an economically weak quarter, and if this year follows that pattern, experts believe the share price could go as low as $84.

The Fed’s interest rate decisions will play a crucial role in housing market performance. There is no doubt that investors will be watching this ETF as the year unfolds.