🤔 Bad News is Good News

Happy Sunday to everyone on The Street. 

How many times do you think you heard the word inflation over the past year? If I gave you an over-under of 1,000 what would you say? It's been non-stop and for good reason. Prices for everyday goods and services jumped at their fastest pace in 40 years, especially for items like shelter and energy. "Gas Prices Near Me" was the number one "near me" search on Google in 2022.

While elevated prices will likely persist, a new figure may take the spotlight in 2023. According to Christopher Harvey, head of equity strategy at Wells Fargo Securities, it's time for the CPI report to move over and make way for the jobs report.

During his last press conference, Federal Reserve Chair Jerome Powell specifically called out the persistence of wage inflation. “As a result, we believe CPI could take a backseat to jobs reports in 2023 as the marginal driver of Fed hawkishness,” Harvey wrote in a Friday note.

If the labor market is becoming more important to the Fed, unfortunately, this means bad news is "good" news. Or, if we see lackluster job creation and unemployment rise (bad news), this could spur the central bank to take its foot off the gas when it comes to rate hikes (good news).

This brings us back to the concept of a "soft landing". Or the Fed's ability to thread the needle by slowing down the economy just enough to where they feel comfortable pivoting, but not too much to the point where there are massive layoffs and job destruction. It's going to be extremely difficult to say the very least so no matter what happens be sure to buckle up.

Review

US stocks fell Friday. The negative close contributed to a second straight down week for Wall Street as recession fears loom large. Broadly speaking, investors seem increasingly pessimistic that the Federal Reserve will be able to pull off a soft landing amid its consistent rate-hike campaign. 

Last week included a cooler-than-expected inflation print, which was welcomed news. However, the Fed did announce another 50-basis-point rate hike. The hike was widely anticipated and smaller than the previous four hikes of 75-basis points, but still not the "pivot" that traders are waiting for. The central bank said it would continue hiking rates to 5.1% throughout next year. This is a larger figure than previously expected.

A more hawkish outlook for 2023 and lagging retail sales have increased concerns that a broader economic slowdown might be on the horizon. The December S&P Global composite PMI didn't help boost sentiment either. The latest reading indicated that business activity experienced its most significant decline in two and a half years.

In the commodities space, oil prices fell, continuing a period of volatility for energy markets. While a protracted recession would drag on demand for oil, some traders are expecting demand to increase significantly as China eases its COVID-19 rules. 

For the week as a whole, the Dow Jones Industrial Average lost 556 points or 1.66%. The S&P 500 shed 2.08%, and the Nasdaq Composite dropped 2.72%.

Preview

Tomorrow, the NAHB housing market index for December will be released. This barometer of the single-family housing market has been trending downward for 11 straight months.

Tuesday, investors will gain insight into the state of home building as November’s building permits will be published. Permits act as a proxy for future construction. The metric fell 3.3% in October, month-over-month. This is its lowest level since June 2020 as rising mortgage rates diminish demand.

On Wednesday, the week’s real estate focus continues, with November’s existing home sales due. These tumbled 5.9% in October to an annual rate of 4.43 million, the lowest since 2011, except for a brief drop at the beginning of the pandemic. Additionally, Canada will release its inflation rate for November, which came in at 6.9% on an annual basis in October.

On Thursday, watch for the November Chicago Fed National Activity Index, an indicator of broad economic activity and inflationary pressure, as well as the revised third-quarter GDP. As of the most recent print earlier this month, US gross domestic product grew 2.9% in the third quarter, beating estimates.

On Friday, investors will learn more about how American consumers have fared over the holiday season, with reports on personal income and personal spending both due for the month of November. In October, personal income was up 0.7% month-over-month, while personal spending was up 0.8%.

Earnings

On Monday, aerospace and electronics company HEICO (HEI) will release its fourth-quarter results, after market close. In October, the firm announced it had acquired TRAD, a France-based radiation engineering firm.

Tuesday is a busy one, with FedEx (FDX), General Mills (GIS), and Nike (NKE) all set to report earnings. Given FedEx’s role as a global logistics and shipping company, its report will give investors insight into trends in consumer confidence. And, after Nike increased its dividend last quarter, investors will be curious if more good news is on the way from the sneaker giant.

On Wednesday, Rite Aid (RAD) will offer an update on its business and will likely discuss its new partnership with GrubHub (JTKWY). Additionally, Carnival Cruise Line (CCL) will let us know if luxury sea travel is following air travel’s trend of returning to pre-pandemic levels.

On Thursday, CarMax (KMX) will offer more clarity into the used car market. Its competitor Carvana (CVNA) has struggled this year, so investors will want to see how CarMax is performing by comparison. Industry experts say that, while used car prices are down 3.3% from a year ago, they remain heavily inflated.

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This Pandemic Darling May Not Be Such a Dud

Monday.com Poised for Upside? JPMorgan Thinks So 

Pandemic darlings have been in the doldrums for months, and for good reason. People have traded their exercise bikes for gym memberships and their video calls for in-person meetings. Sales of these goods and services have cooled since the dark days of lockdowns ended. As a result, their stocks have slumped. 

Monday.com, a project management software company that caters to small and medium-sized businesses, is a perfect example. After riding high during the pandemic, its stock has plummeted more than 60% this year. Some investors feared its customers would curtail spending, which weighed on the stock. It's the reason JPMorgan analyst, Pinjalim Bora, initiated coverage of the company in May, tagging it with a neutral rating. 

Bora is singing a different tune now. The analyst raised his rating on Monday.com to overweight from neutral and upped his price target by $10 to $140. For context, the stock closed at $122.64 on Friday.  

“Having seen the relative resiliency in the business in the face of a tough macro backdrop and the solid execution by management over the last two quarters, in addition to the stock coming back closer to our initial entry levels, we are now more comfortable moving to an overweight position,” Bora wrote in a recent research note to clients.

Increasing Work

Monday.com has significant exposure to small and medium-sized businesses. Therefore it's only natural investors have been bracing for churn as these enterprises cut costs in the face of economic headwinds. At the very least some analysts thought customers would downgrade their plans. Neither has happened, which Bora says supports his thesis that Monday.com is attractive even in a slowing economy.

Bora said some clients are even planning to increase work with Monday.com, something its rivals aren’t bragging about just yet. Among its competitors, which include Smartsheet (SMAR) and Asana (ASAN), JPMorgan's Bora said Monday.com is growing the fastest and has superior margins.

Bucking the Trend

Monday.com’s prospects look relatively solid even with choppy waters ahead. The software company isn’t 100% immune to a slowing economy but has been able to navigate the recent volatility successfully so far. Bora thinks Monday.com should continue to do so.

Growth drivers include selling operating systems to new customers and releasing code on the back end that improves scalability. The company is also well-positioned to benefit from the constant shift to digital and hybrid work trends. 

Many pandemic darlings are now duds but Monday.com may be able to buck that trend. During both good and bad times, small and medium-sized businesses are realizing that project management software can help them stay lean and on top of their operations. Many are turning to Monday.com making it a stock investors may want to pay attention to.

Cheesecake Factory Isn't Smiling

Restaurant Chain Poised for More Declines in 2023 

Consumers are reigning in their discretionary spending as recession worries persist. Meanwhile, labor and input costs remain high, putting pressure on many consumer-facing companies. One stock is caught in the middle of these troubling trends: The Cheesecake Factory (CAKE).

The restaurant chain is already starting to see traffic decline at the same time labor and supply costs remain stubbornly high. Some on Wall Street think more pain is on the way.  

These negative drivers are partially why Goldman Sachs analyst Jared Garber’s cut his rating on Cheesecake Factory to sell from neutral. The analyst also slashed his price target on the stock to $29 per share. On Friday the stock closed at $32.44.  

Cheesecake Factory Underperforms 

Many casual dining chains are at risk in the New Year but Garber said Cheesecake Factory is in one of the worst spots in the industry. It’s already underperforming its peers and with increases in pricing harder to pass on to customers, margins may take a hit in the coming months.

Adding to the woes, Garber expects mid-to-high-income consumers to see the smallest gains in year-over-year discretionary spending growth in 2023. This in turn will put downward pressure on sales at restaurants including Cheesecake Factory. As a result, the Goldman Sachs analyst thinks it will cause the stock to see top-line results fall and earnings growth slide.

“We see macroeconomic pressure in FY23 — across the Casual Dining space, as we’ve noted in this report — with limited pricing power support from broader inflation and incremental traffic declines, while cost pressures are likely to remain a headwind for margins,” the analyst wrote in a recent note to clients. 

Brinker International Downgraded Too 

The Cheesecake Factory isn’t the only restaurant stock in Goldman Sachs’ crosshairs. Garber also took the opportunity to downgrade his rating on Brinker International (EAT) to sell from neutral. Brinker operates Chili's and Maggiano's Little Italy restaurant chains.

The price target on the stock fell to $28. On Friday the stock closed at $35.43. Garber is optimistic that over the long haul Brinker could grow but in the near term, he expects earnings to come under pressure due to slower traffic. 

As consumers of all stripes reign in discretionary spending next year, casual dining may come under pressure. Investors looking to avoid this downdraft may want to consider trimming some of the fat from their portfolios.

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Little-Known Miner Poised for Outsized Growth

Sylvania Platinum is a Cash Cow Many Investors Don’t Know About 

Sylvania Platinum (SAPLF) isn’t a household name for many investors, but maybe it should be. Hailing out of London this global mining company is doing brisk business extracting platinum from scrapped cars and acquiring it from larger mining companies. The small-cap stock pays an 8% yield on its dividend. Moreover, it has posted an average annual growth of 67% in net cash flow from operating activities over the past four years.

Despite all those attributes it is largely ignored by Wall Street mainly because of its size. Sylvania sports a market cap of $265 million and a stock that’s up 12% so far this year, handily beating its benchmark FTSE All-Share Index which is only 0.42% higher. 

Ben Davis, an analyst at Liberum Capital thinks the stock can appreciate a further 50%.  “Sylvania’s cash balances continue to swell to new highs of $139m, giving the company plenty of firepower for both dividends and potential growth projects,” Davis wrote in a research note published this fall. 

Sylvania Keeps Costs Low 

What makes Sylvania Platinum attractive to investors is its ability to generate cash and keep costs down. The company extracts platinum-group metals through "recovery" and "retreatment". This means Sylvania is able to extract metals either as a by-product of a larger mining company’s operations or through the recycling of goods such as old cars.

With platinum prices up 6.5% this year, Sylvania Platinum is thriving. That’s not true for other miners. Copper prices are down 11.9% this year and other industrial metals are also seeing declines. 

It doesn’t hurt that investors and industrial customers are the big buyers of Sylvania’s platinum. That protects pricing when the economy slows. “It’s a genuine cashflow company. It’s a small cap, so it often gets neglected,” Neil Shah, director at the investment research group Edison Group told CNBC.

There Are Always a Few Risks Involved

Upside may be in the cards for Sylvania Platinum but that's not to say there isn’t some risk. Pricing is the main one. Used car prices are still elevated which means Sylvania is paying more to extract metals from the old vehicles. 

Many mining stocks have taken a beating in recent months but Sylvania has found an incredible niche. This small-cap, under the radar, miner is making money and keeping costs down. Is it enough to make the stock pop? Davis sure thinks so. 

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