💥 Business Travel Pops Thanks to Mom and Pop

Happy Sunday to everyone on The Street. 

There are a few things I thought were worth mentioning this week before we dive in. 

First off, buybacks are back. Last month, announced buybacks from corporate America topped the highest total ever to start the year. They tripled to $132 billion from a year ago and demand doesn't seem to be slowing down. Morgan Stanley's buyback execution desk saw orders increase 5% last week. 

Secondly, these buybacks are putting Big Oil in a sticky position. After a record 2022, industry leaders look like Scrooge McDuck diving into that vault of money. Now, executives at these "supermajors" are damned if they do and damned if they don't. Wall Street wants more buybacks, but Washington doesn't. Look at Chevron and Exxon for example. The former was verbally spanked by the White House and Democratic members of Congress after announcing a $75 billion stock repurchase program on January 25th. Although it's slipped since then, it's stock initially popped on the news. Exxon, meanwhile, didn't announce any changes (or increases) to its buyback approach, which Wall Street didn't love. In reality, this didn't appease policymakers either. The White House still called the record profit, "outrageous." Remember, we covered the impending buybacks in the energy space a few weeks ago.

Finally, on a somewhat unrelated note (even though Meta also announced a $40 billion stock buyback), I thought comments from a few Big Tech firms during their latest earnings calls were interesting, especially in regard to their remarks on real estate. Here are the passing comments from the CFOs of Meta and Alphabet:

• Susan Li, Meta: "We identified opportunities to consolidate our office facilities and we have streamlined our future data centers to a new architecture ... The reduced outlook reflects our updated plans for lower data center construction spend in 2023 ... We now expect to record an estimated $1 billion in restructuring charges in 2023 related to consolidating our office facilities footprint. "

• Ruth Porat, Alphabet: “In the first quarter of 2023, we expect to incur approximately $500mn of costs related to exiting leases to align our office space with our adjusted global headcount . . . This will be reflected in corporate costs. We will continue to optimize our real estate footprint.”

I think a lot of people, including myself, are trying to figure out if the work-from-home trend is here to stay. The comments above seem to suggest companies are downsizing and a hybrid schedule is winning the day. However, office attendance did just top 50% of pre-pandemic averages in the 10 biggest US cities, according to Kastle systems. The question is: where does this figure level out? Let me know if you know the answer and tell me what I’m missing elsewhere. 

- Brooks

Review

US stocks finished lower Friday after better-than-expected employment numbers and a flurry of disappointing earnings from Wall Street’s giants.

Apple saw the steepest decline in its revenue since 2016, citing supply chain issues that impacted iPhone sales as the primary driver. Meanwhile, Google-parent Alphabet missed both its top and bottom line expectations, largely driven by declining ad revenue and increased operational expenses. Finally, Amazon reported better-than-expected revenue, but still finished 2022 with the slowest yearly growth since the company went public.

Overall, this latest round of earnings painted a less-than-ideal picture for Big Tech, drawing into question each company's ability to navigate the uncertain road ahead.

On the economic front, the unemployment rate surprised on the upside, dropping to 3.4%, which was lower than consensus estimates of 3.6%. Despite the headwind of an aggressive cycle of rate hikes, this is the lowest jobless level since 1969.

Meanwhile, Non-Farm Payrolls came in significantly better than expected, showing that the US added 517,000 jobs, compared to the 187,000 forecast. The dramatic increase marked the strongest gain since July 2022. Combined, both employment numbers highlight a surprisingly resilient labor market in the face of a historically hawkish Federal Reserve.

While job creation jumped, average wages didn't see a correlated pop. Some on Wall Street viewed this as a positive development that shows the economy can continue to grow without driving up inflation.

The main takeaway and major question on investors' minds is, “how will the Federal Reserve react to this latest jobs report?” More specifically, how long will the central bank hold rates near 5% as opposed to reversing and implementing rate cuts? This is something to watch in the coming weeks.

For the week as a whole, the Dow Jones Industrial Average experienced a minor decline of 0.15%, while the S&P 500 added 1.62%. The Nasdaq Composite surged 3.31%.

Preview

There are no major economic reports scheduled for tomorrow.

Tuesday, the week will kick off with an updated report on the balance of trade between the US and key partners for the month of December. In November, the trade deficit narrowed to $61.5 billion which marked the lowest point since September 2020. The consumer credit report will also be released. 

On Wednesday, investors will get a flurry of mortgage-related info with the releases of reports like the average 30-year mortgage rate, the total number of mortgage applications, and the mortgage refinancing index. As for the average 30-year mortgage, rates have declined recently, hitting 6.19% for the week ending January 27th.

On Thursday, key unemployment data will be released. In particular, the initial jobless claims report which offers insight into the job market. In the week ending January 28th, initial claims fell by a seasonally adjusted 3,000 to 183,000. This marks the lowest level since April 2022 and the third consecutive weekly decrease.

On Friday, government officials will speak on the US budget deficit during the monthly budget statement. In December, the budget deficit nearly quadrupled to $85 billion.

Earnings

Two of the biggest video game producers, Activision Blizzard (ATVI) and Take-Two Interactive Software (TTWO), will keep the earnings train rolling this week when they announce their latest figures tomorrow. Notably, Activision Blizzard should offer insight into its ongoing acquisition by Microsoft (MSFT) which has been halted by regulators.

Tuesday, Royal Caribbean (RCL) will give investors insight into the state of sea travel while Chipotle (CMG) discusses, among other things, its plans to open up to 285 new locations this year. Similar to other fast-food chains, Chipotle has stressed the importance of prioritizing mobile orders.

Wednesday will be action-packed with earnings announcements expected from CVS (CVS), Disney (DIS), and Uber (UBER). In particular, Disney’s former-but-rehired CEO Bob Iger will discuss what changes he plans to make to Disney’s theme parks. Meanwhile, CVS execs will likely offer insight into CVS’s potential $10 billion acquisition of PCP Oak Street Health.

On Thursday, Hilton (HLT), which recently approved a stock buyback of $2.5 billion, will discuss its hefty project pipeline for the coming years. Additional reports are expected from PayPal (PYPL), Lyft (LYFT).

Finally, on Friday, investors can expect a report from the multinational health information technology company, Iqvia (IQV) to offer a glance at how its business fared in 2023.

A Million-Dollar Banksy Got Investors 32% Returns?

Mm-hmm, sure. So, what’s the catch? 

We know it may sound too good to be true. But it’s not only possible, it’s happening—and thousands of investors are smiling all the way to the bank, thanks to the fine-art investing platform Masterworks.  

These results aren’t cherry-picking. This is the whole bushel. Masterworks has built a track record of 8 exits, the last 3 realizing 10.4%, 35%, and 13.9% net returns even while financial markets plummeted.

But art? Really? Okay, skeptics, here are the numbers. Contemporary art prices:

• Outpaced the S&P 500 by 131% over the last 26 years

• Have the lowest correlation to equities of any asset class

• Remained stable through the dot-com bubble and ’08 crisis

Got your attention yet? Offerings can sell out in just minutes but Street Sheet readers can skip the waitlist with this exclusive link.

Small Biz Puts Business Travel on Its Back

“The Surge is Real”

Forget big corporations and tech startups. When it comes to business travel it's the nation’s small and medium-sized enterprises keeping hotels occupied these days.

Transactions by this group hit 80% of pre-pandemic levels in the third quarter, according to Amex GBT. That compares to 61% for global and multinational companies. Hotels offering extended stays and low-to-mid priced rates are doing brisk business serving construction crews staying near job sites, sales teams wooing local customers, and small businesses bringing remote workers together.

“This surge is real,” Choice Hotels International (CHH) Chief Executive Pat Pacious said in a recent interview. “Middle class, small business, construction, logistics—those industry verticals—that’s going to continue to expand.”

IPA Out, Coors In

To capitalize on the demand and hopefully build a base of loyal blue-collar workers, hotels are rolling out amenities that appeal to that specific demo. This includes on-site workspaces, cheaper booze, more food items, and extended hours to cater to late-shift workers. One Best Western in California swapped out pricey IPA beer for Coors Light, a more blue-collar beer choice. (Excellent decision if you ask us).

BWH Hotel Group, which owns Best Western, has been serving workforce travelers for about a decade. Recognizing an opportunity back then, it created a team of sales reps dedicated to landing business from companies that need worker housing such as utilities, railroad, and trucking companies. Today it's focused on expanding those accounts and holding on to the demand bump it got during the pandemic from medical personnel. Three of its large workforce travel accounts increased spending 15% year-over-year from 2021.

Operators Adapting

Choice Hotels started courting skilled workers in 2018, acquiring WoodSpring Suites, a hotel chain that caters to mid-sized business travelers. This past year it inked a deal to develop 21 hotels under its Everhome Suites Brand. The brand launched in 2020 to serve midsize business travelers as well. Choice Hotels has seen a 52% increase in workforce travel contracts since 2019.

Small and medium-sized business travelers are propping up the hotel industry with demand that’s expected to continue in light of some foggy economic forecasts. Operators like Choice Hotels and BWH Hotel Group are adapting in order to capitalize on the shift.

Goldman on Hydrogen: Not Just Hot Air

Zero Emissions Via Hydrogen

When it comes to clean energy, hydrogen is emerging as a clear winner. For good reason. Hydrogen is in abundance and generates a ton of power. It could be used for multiple purposes, from heating furnaces to making steel.

As a result, hydrogen is often looked at as the answer to achieving zero carbon emissions. The cost has long been a barrier, but with new methods of hydrogen production coming online, it's getting noticeably cheaper. That could be the catalyst for the industry and hydrogen in the years to come.

“We believe that clean hydrogen has emerged as a critical pillar to any aspiring net-zero path, aiding the de-carbonization of [circa] 15% of global [green house gas] emissions across sectors,” analysts at Goldman Sachs wrote in a recent research report.

$1 Trillion Market?

How big is the market potential? According to the Wall Street bank hydrogen generation could be worth over $1 trillion by 2050. To get the world to net zero by that time, $5 trillion will have to go into the hydrogen supply chain, Goldman Sachs estimates.

Hydrogen is abundant but needs to be extracted from other molecules. That can be achieved with fossil fuels but Goldman says green and blue hydrogen makes it cleaner and propels the industry forward.

Green hydrogen, for example, relies on water electrolysis to extract the molecule using renewable and low-carbon energy. Not only are there no emissions but as the price of renewables declines it's cheaper. Goldman thinks over $2 trillion will be spent on hydrogen electrolysis equipment.

Blue hydrogen, on the other hand, is created with natural gas but also uses carbon capture, utilization, and storage technologies. These technologies have been underfunded over the last decade and are vital for the transition to low-carbon low-cost hydrogen. Goldman thinks the market potential with blue hydrogen will triple in the coming years.

Okay, So Which Company Stands to Benefit?

For investors that want green hydrogen exposure in their portfolios, Goldman Sachs points to First Solar (FSLR), which it rates a Buy. The company is focused on generating green hydrogen. Additionally, it is expected to benefit from the Inflation Reduction Act, which includes credits for manufacturers that use hydrogen.

Another name on Goldman’s list is Plug Power (PLUG), the fuel cell manufacturer. The company, which has been in the green energy market for years, is focusing more on hydrogen generation.

Baker Hughes (BKR) is another way to get exposure. Goldman thinks it could end up operating in different areas of the hydrogen market, including storage.

Air Products & Chemicals (APD) and Linde (LIN) are also on the list. Both give investors exposure to the hydrogen supply chain. Air Products has earmarked $10 billion for its hydrogen efforts. Linde, meanwhile, is working on both blue and green hydrogen solutions.

The world is moving to zero emissions and hydrogen could be the answer.

LinkedIn's "Top Startup" Wants to Help You Hedge Market Volatility

Only “the best, completely game-changing ideas” made the rankings this year. One of the standouts was Masterworks, the sole investment platform on the list. 

Masterworks allows users to invest in shares of investment-grade art, a $1.7 trillion alternative asset. Many of Masterworks’ members cite inflation concerns, and volatile public markets, as top reasons they invest. 

It makes sense. Goldman Sachs recently reported that real assets like fine art can help protect wealth during periods of historically-high inflation. In fact, contemporary art has appreciated 13.5% annually on average, when inflation is above 3%. 

So while everyone else was panic-selling at double-digit losses, Masterworks’ last 3 sales realized 10.4%, 35.0%, and 13.9%.  

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Home Depot vs. Lowe's: Battle of the Builders

Lowes Is Gaining On Home Depot

The housing market is in the dumps and it may get worse as mortgage rates remain elevated and the economy slows. It's no wonder investors have unloaded shares of Home Depot (HD) and Lowe’s (LOW). If money is tight home improvements can sometimes fall to the wayside, which means fewer sales for home improvement retailers. For Lowe’s, however, the 21% sell-off in its stock since it hit a high in December of 2021, may be overdone.

Lowe’s isn’t as reliant on just the housing market for its business anymore. These days it's closing the gap with Home Depot when it comes to luring contractors and professionals its way. That could help it cushion the blow from a potential recession.

“A great business is getting cheaper—that’s when we want to own more,” Dan Eye, chief investment officer at Fort Pitt Capital Group and Lowes bull said in a recent interview. “It’s certainly one that we’re buying every day.”

Profit Margins Poised to Grow

For years Lowe’s played second fiddle to Home Depot on the professional side. Sure, it attracted a lot of DIY homeowners but landing the holy grail–professional contractors–was always elusive. Contractors over the years remained loyal to Home Depot but that's starting to change. In 2019, 19% of Lowes’ annual sales came from the pro market. As of the third quarter of 2022, it's up to about one-quarter.

Growth should continue. This is according to Wells Fargo Securities analyst Zachary Fadem who estimates enterprise sales will become 30% of Lowe’s total revenue in the coming years. Fadem expects the stock to hit $245. For context, the stock closed at $215.97 on Friday.

Lowe’s is also closing the operating profit margin gap with Home Depot. Its margins are just under 13% compared to 15% at Home Depot, but the retailer said it plans to grow it operating profit margin to 14.5% by about 2026. Lowes is also on the path to EPS of $20 per year. If Lowe’s hits that goal by 2026 it would represent a 10% compound annual growth rate from 2022. Not too shabby given the current environment.

Lowes Has a Plan

There is one wild card to the Lowe’s growth story: a major recession. If the economy falls into one the home improvements retailer will likely feel the pain just like everyone else. To minimize the impact, Lowe’s does have a plan in place. If push comes to shove it will reduce advertising expenses and put off longer-term projects.

If the worst were to happen Lowe’s said sales could decline to around $87 billion and same-store sales could fall about 4%. Margins would be around 13.3%, which is still better than 2022. It's also worth noting that Lowe’s stock is cheaper than Home Depot’s, trading at 14.8 times earnings compared to 19 times earnings at its rival.

Just like the housing market, it’s nearly impossible to time it perfectly by buying low and selling high. Lowes does give investors reasons to kick the tires, even if the economic outlook is unclear.

Last Week's Poll Results

Which Boomer Bet do you think will outperform over the next decade?

• 🟩🟩🟩🟩🟩🟩 Hartford Longevity Economy ETF (HLGE)

• 🟨⬜️⬜️⬜️⬜️⬜️ Addus Homecare (ADUS)

• ⬜️⬜️⬜️⬜️⬜️⬜️ Amedisys (AMED)

• 🟨🟨🟨⬜️⬜️⬜️ Amazon (AMZN)

• ⬜️⬜️⬜️⬜️⬜️⬜️ Best Buy (BBY)

• 🟨🟨⬜️⬜️⬜️⬜️ Home Depot (HD)

Are you bullish or bearish on Aker over the next 24 months?

• 🟨🟨🟨🟨⬜️⬜️ 🐂 Bullish

• 🟩🟩🟩🟩🟩🟩 🐻 Bearish

Are you bullish or bearish on Ferrari in 2023?

• 🟩🟩🟩🟩🟩🟩 🐂 Bullish

• 🟨⬜️⬜️⬜️⬜️⬜️ 🐻 Bearish

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