💻 Is Boring Better?

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THE STREET SAYS

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REVIEW

US stocks rose Friday, helping the Dow and S&P 500 snap multiple week-long losing streaks. The market enjoyed several positive sessions this week following an extended period of selling that dates back nearly two full months.

Market observers contend upbeat earnings reports from Macy’s, Dollar Tree, and Dollar General may have helped boost sentiment last week, as the retail sector has been in focus recently. Broadly stated, some worry rising inflation and gasoline prices are affecting consumer spending habits, all while retailers face increased operating costs.

On that same front, Americans boosted spending by 0.9% in April, beating expectations. Sticking with economic data, the Federal Reserve’s preferred inflation gauge eased up last month, potentially lifting sentiment as well.

Zooming out, it’s worth noting not many economists are talking about this recent sell-off as having reached a market bottom. Rather, the central bank is continuing to tighten its monetary policy in an attempt to slow inflation, the war in Ukraine endures, and COVID-19 lockdowns are ongoing in China. Taken together, these headwinds are posing serious challenges to the global economy, and some wonder if the Fed can navigate its approach to taming inflation without tipping the economy into a recession.

For the week as a whole, the Dow Jones Industrial Average gained 6.2%. The S&P 500 rose 6.6% and the Nasdaq Composite climbed 6.8%.

PREVIEW

Tomorrow no economic data is scheduled to be released. Markets are closed for Memorial Day.

Tuesday, watch for May’s consumer confidence index. Investors will be paying close attention given the recent focus on the retail sector and inflation’s potential impact on Americans’ spending habits. The Conference Board’s index edged down in April but remained high by historical standards. May’s national home price index is also due from S&P Case-Shiller and the FHFA, which track the change in single-family home prices, year-over-year.

Wednesday, April’s Job Openings and Labor Turnover Survey, or JOLTS, is set for release. In March a record number of people quit their jobs, while job openings rose to 11.5 million, an all-time high. Economists have described this as the “Great Resignation.” April’s construction spending is scheduled to be published as well after the number rose in March, but less than expected. Also, keep an eye out for S&P Global’s manufacturing PMI, and ISM’s manufacturing index, both of which track this month’s activity.

Thursday, weekly jobless claims are due. Claims for the week ending May 21 checked in 8,000 lower. Unemployment claims are down near pre-pandemic levels observed in 2019 when the labor market was also tight. ADP’s employment report for May will shed further insight into the job market, while April’s factory orders are also scheduled to be published.

Friday, the labor market remains front and center. May’s unemployment rate and nonfarm payrolls will be released. In April the unemployment rate checked in at 3.6%, which was unchanged month-over-month. The economy added 428,000 jobs in April, exceeding expectations. May’s labor-force participation rate and average hourly earnings are also on the calendar.

On the earnings front, Salesforce (CRM) Microsoft (MSFT), and Hewlett Packard Enterprise (HPE) report this week. The trio will allow investors to pop the hood on what's happening in the enterprise tech space. Lululemon (LULU) and Hormel Foods (HRL) are also scheduled to report Thursday and Friday, respectively.

Lululemon will be an interesting company to watch given the volatility in the retail space. While the company faces headwinds in the form of higher fuel and labor costs as well as declining consumer confidence, a favorable report from Morgan Stanley (MS) last week argued that Lululemon is “well-positioned” to ride out inflation.

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Hunting for Bargains at Off-Price Retailers

Excess Inventory

It’s truly amazing what a difference a year makes when looking at the retail sector. Around this time in 2021, discount chains including T.J. Max (TJX) and Ross Stores (ROST) were struggling to get their hands on apparel and other items as supply-chain woes resulted in limited inventory.

While off-price retailers typically buy unsold apparel from higher-end clothing stores, they were instead forced to buy directly from factories and vendors, which weighed on margins.

Things have changed. Many retailers are now looking to get rid of excess inventory, presenting an opportunity for T.J. Max and Ross Stores to load up for less. Both companies recently indicated there is ample supply out there, putting them in the driver’s seat from a pricing perspective.

Boosted Margins

Widespread availability of inventory bodes well for off-price retailers’ margins, and their ability to grow the bottom line. Credit Suisse analyst Michael Binetti estimates the glut of supply should add 2.5 percentage points to the sector’s margins over the next 24 months.

Now, with that said, T.J. Max and Ross Stores still face challenges, much like everyone else in the retail space. Inflation is at a 40-year high and it seems like gas prices hit a new record every day. That puts pressure on consumers’ discretionary spending. When T.J. Max reported quarterly earnings at the end of April, its same-store sales were flat year-over-year. Meanwhile, comparable-store sales at Ross Stores fell 7% during the same period.

Inflation on the High End

Rising prices are a headwind battering the entire retail sector, but a resulting trend has the potential to boost off-price outlets.

Pricing is relative. At the onset of the 2008 recession, off-price retailers felt the pinch, as their customer base held back spending. The sector then posted gains as the financial pain spilled over to consumers with more money, and they showed an increased preference for discount stores. Some think that could happen again given where inflation and gas prices are headed.

Investors will also note that off-price retailers’ share prices are trading at a discount when compared to the likes of Macy’s (M), Target (TGT), and others in the S&P Retail Select Industry Index. In that sense, it may turn out that bargains aren’t exclusively reserved for the clothes themselves.

Is Boring Better?

Steady Success

Computer company Dell (DELL) isn’t a sexy name investors often bring up when discussing tech stocks. A darling of the dot-com era, Dell now focuses on more mature areas of the market including PCs, computer servers, and storage. That may seem boring in comparison to smartphones and blockchain servers, but investors would be wise not to dismiss the company so quickly.

As it stands, Dell is one of only six tech firms generating more than $100 billion in annual revenue. Dell’s stock is also cheap when compared to Apple (AAPL), Microsoft (MSFT), and even HP (HPQ).

Apple and Microsoft trade at roughly 20 times forward earnings. Dell trades at less than six times forward earnings. HP’s stock is up around 1.9% year-to-date, while around a month ago Berkshire Hathaway announced it had purchased an increased stake. Meanwhile, Dell’s share price is down 13% year-to-date.

The PC Market

For those bearish on Dell, concerns are typically tied to its exposure in the PC market, which saw a boom during the pandemic. With people working from home demand for PCs, screens and other computer peripherals was high.

Even with the demand for PCs now fading, Dell is in an enviable position in the market. It has strong exposure to corporations, which is driving sales.

According to market research firm IDC, Dell’s PC shipments increased 6% in the first quarter. Rivals Lenovo and HP saw their shipments decline by 9% and 18%, respectively. Of those three companies, only Dell gained market share in 2021. With the hybrid work model bringing workers back into the office, corporations will need to keep buying PCs for employees. This bodes well for Dell.

COVID Wild Card

The outlook for Dell’s server and storage businesses is arguably less clear-cut. With COVID-19 related shutdowns re-emerging in China, getting the components needed for servers and data storage may prove challenging. This could then constrain Dell’s ability to make its products, harming sales.

Cisco Systems (CSCO) warned about this possibility during its most recent earnings call. Cisco missed on revenue, which executives blamed on supply chain issues. The news cast a shadow over Dell and HP.

Still, uncertainty in the broader market may not be a bad thing for Dell. Highlighting its ability to better manage supply chain challenges in comparison to industry competitors may be the key. If that’s the case, the recent tech sell-off could have investors looking for an unsexy name to add to their portfolio.

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Why Smooth Seas May Lie Ahead for This Shipping Stock

Wind Left in its Sails?

Genco Shipping & Trading (GNK) has seen its share price rise over 53% this year, but with the company paying down debt and instituting a new dividend policy, there may be more room to grow.

Industry observers note shipping stocks are volatile in nature, as they ebb and flow based on demand. That has arguably kept many investors on the sidelines, given the potential downside and uncertainty concerning things like consumer spending and ecommerce.

There are a number of factors that could benefit Genco and make it worth a second look. The company’s diversification is noteworthy in this respect. It operates 44 dry bulk ships that transport an array of commodities such as iron ore, coal, cement, and grains. Its business is therefore not concentrated in one area, which tends to cushion the blow when there is less demand for one particular commodity.

Debt Discipline

Genco charted a conservative course during the pandemic and focused on paying down its debt, instead of boosting its dividend while cargo shipping rates soared. As industry rivals made generous increases to their payouts, Genco kept things more modest. The strategy resulted in more than $250 million in debt being paid off. That has reduced Genco’s interest payments and slashed the daily costs of running its ships to about $8,100.

Unproven Strategy

One rather significant unknown is Genco’s new approach to its dividend, which is designed to payout even if the shipping industry experiences a downturn. The dividend is tied to quarterly operating cash flow minus any capital expenditures, debt repayment, and cash reserve. The first quarter dividend payout was 79 cents a share, which is much higher than the 5 cents a share Genco paid out in the first quarter of last year. If Genco maintains that rate, its yield will be 14% using a recent close of $22.20.

At first glance, investors may wonder how much additional room Genco has to grow. Its share price is up more than 40% so far in 2022 and its new dividend approach remains unproven. Still, when considering broader trends in ecommerce and the market’s need to ship goods, Genco could be worth a closer look.

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security. Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing.