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🍞 Butter Up the Toast? Wells Fargo Thinks So
Plus, bulls are buying Hertz and presidential stock market performances.
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Happy Sunday to everyone on The Street.
Tomorrow is Presidents Day. Or is it Presidents’ Day? Or maybe President’s Day? Like many things in the United States, no one can seem to agree on the correct spelling for the holiday. Nevertheless, in honor of Washington’s birthday, which is what the Federal government calls it, I thought it would be interesting to see which Presidents oversaw the best stock market performances. It’s a risky exercise in our highly partisan environment, and a lot of it simply depends on timing. But, I’m a big fan of history, and this felt relevant so here’s the data according to Kiplinger.
The worst Presidential performance belongs to a man who occupied the Oval Office from March 4, 1929 - March 4, 1933. During that time he oversaw a 77.1% cumulative loss and 30.8% annualized compound loss. That would be the West Branch, Iowa-born Republican, Herbert Hoover. The Stanford educated President took office just months before the 1929 crash that ushered in the worst bear market in US history, Charles Sizemore, writes. But don't feel too bad for him. "He played his part in bringing about the whole mess. More than a thousand economists signed a letter warning him not to sign the Smoot-Hawley Tariff Act into law … yet he did it anyway. This helped to turn what might have been a garden-variety recession into the Great Depression."
Now, on the other end of the spectrum, you'll actually find another Republican — Mr. Calvin Coolidge. He was born in Vermont and was President from Aug. 2, 1923 - March 4, 1929. So yes, just before Mr. Hoover took the reins. This is the man who presided over the boom years of the Roaring Twenties. "In Coolidge’s five-and-a-half years in office, the Dow soared an incredible 266%, translating to compound annualized gains of 26.1% per year." An icon among small-government conservatives for his hands-off approach to government, Coolidge famously said, “After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing, and prospering in the world.”
It’s interesting to note the stock market performance under Barack Obama and Donald Trump. One just barely edged out the other.
Now, on a completely unrelated note, here’s another thing I’m watching this week. In one of our first editions of the year, we covered the potential for a box office bounce back. There are some big titles being released this year, which could bode well for movie ticket sales in North America.
Then, there are lower-budget films, which are riskier and could be “career-enders”. That’s how Elizabeth Banks is describing her new release, Cocaine Bear, which hits theaters this Friday. Inspired by the true story of the "Cocaine Bear", an American black bear that ingested a duffel bag full of cocaine in 1985, the film is budgeted in the mid- to high-$30 million range.
The premise is just so absurd, you have to wonder if this will capture the curiosity of the country. Chances are it flops but given some of the reactions I’ve seen on social, and a thin slate of competing titles, it might also have the chance to pop. Let’s see. Until next week, enjoy the “recognition of the birthday of George Washington,” which is how North Dakota officially recognizes tomorrow’s holiday.
Review
US stocks finished mixed Friday after St. Louis Fed President James Bullard said he wouldn’t rule out a 50-basis-point increase at the Fed’s March meeting.
Although President Bullard isn’t currently a voting member of the FOMC, a slew of hotter-than-expected inflation numbers and strong employment reports have made the hawkish move a greater possibility. As it stands, markets are only pricing about a 1 in 5 chance of a 50-basis-point increase.
On the economic front, US import prices, which track the change in price of goods and services purchased from foreign entities, fell for a seventh consecutive month. The 0.2% decline from the month earlier was in line with expectations and largely driven by a decline in fuel costs.
On the other hand, export prices came in well above expectations, with a 0.8% month-over-month increase. This marked the first rise in export prices since June 2022 and was mostly due to rising prices for industrial supplies and materials.
In earnings news, DraftKings beat analyst expectations with a smaller-than-expected loss and revenue of $855 million, a full 81% higher than the previous year. With the legalization of sports gambling spreading further across the nation, DraftKings is now operating in 21 states and counting.
In other company-specific news, Roku received a double upgrade from Bank of America after the firm stated that the streaming device company has been outperforming the broader advertising market. After posting a smaller-than-expected loss for its recent earnings, the bank also added that it sees Roku headed toward revenue and margin improvement.
In total for the week, the Dow ended down 0.13%, its third negative week in a row — a first since September. The S&P 500 lost 0.28% posting its second negative week in a row. Lastly, the Nasdaq rose 0.59%.
Preview
There are no major reports scheduled for tomorrow due to President's Day.
Tuesday will start off strong with the release of the January existing home sales report. In December, home sales were down 1.5% which marked the longest stretch of declining sales since 1999 (11 straight months). The real estate sector has a broad impact on the overall economy and individuals’ net worth, which is why Wall Street pays close attention to data points and trends in the space.
Speaking of homes, Wednesday, Wall Street will get an update on the current 30-year fixed-mortgage rate. For the week ending February 10th, the average mortgage rate clocked in at 6.39%. Additionally, minutes from the FOMC meeting will be released which will help guide investors as they try to anticipate the Fed’s next move.
On Thursday, US GDP information will be published. In particular, the release of the second estimates for GDP growth rate and the US gross domestic price index. In Q4, the US economy expanded at an annualized rate of 2.9%.
Friday will round out the week with monthly numbers for personal spending and income. In December, personal spending dropped 0.2% while income nudged up 0.2%. Additionally, the Core PCE Price Index, a measure of inflation that excludes food and energy, will be released.
Earnings Spotlight
Tuesday is a massive day for the retail industry as both Home Depot (HD) and Walmart (WMT) will report their earnings from the past quarter and year. In Q3 2022, Walmart posted revenue of $152.8 billion, up 8.7%, and raised its guidance for the remainder of the year. Investors will look to see if Walmart’s strong predictions held true and what the rest of 2023 has in store. Additionally, Coinbase (COIN) will report earnings and offer insight into the crypto markets.
Wednesday, TJX Companies (TJX), the owner of HomeGoods and TJMaxx will announce earnings and expand on Walmart’s insights. Additionally, the electric vehicle company Lucid Group (LCID) will give investors an update on the state of the EV market.
Thursday is another jam-packed earnings day with reports from Dominos (DPZ), Papa Johns (PZZA), Moderna (MRNA), and Block Inc (SQ). In particular, after shining in 2021, COVID-19 vaccine maker Moderna saw its revenue decline for three straight quarters during 2022, from $6.07 billion in Q1 to $3.36 in Q3. Wall Street will be eager to know what the biotechnology company plans to do now that COVID is seemingly in the rearview.
Finally, on Friday, Cinemark Holdings (CNK) will give its latest financial update. In Q3, this movie theater chain posted revenue of $650 million, a yearly increase of 50%.
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Hertz is Back in the Driver's Seat
This Isn’t the Hertz of Yesteryear
When we mention Hertz (HTZ), what comes to mind? The color yellow for sure. Maybe you think of Tom Brady or even OJ Simpson. You might feel mixed emotions, which is totally warranted. The company did file for bankruptcy and before that, it was known as a rabble-rouser in an industry prone to boom-and-bust cycles. Uneasy might be the best word to sum up any initial reactions.
Much has changed in a relatively short period of time, however, which makes Hertz worth another look. Today car rentals are dominated by three major players: Hertz, Avis Budget (CAR), and Enterprise Rent-a-Car. This oligopoly of sorts controls 90% of the US market which means the industry is more stable than in years past.
When comparing it against rivals, Hertz seems to have an edge. It’s profitable, adding more electric vehicles to its rental fleet than Avis and Enterprise, and it’s engaging in shareholder-friendly moves. Since emerging from bankruptcy in mid-2021, it has repurchased more than 30% of its shares. Its stock is also cheap, trading at just eight times projected earnings for 2023. That’s a discount, albeit a small one, to Avis.
Why Hertz is Cheap
The macro knock on Hertz is that it operates in the travel industry, which is cyclical in nature and one that could see a downdraft if a deeper recession materializes.
Profits are also poised to fall about 40% this year as the used rental car market calms down after two years of price increases. Hertz also has to sell older vehicles in its fleet to make room for new models. That has been enough to keep investors on the sidelines, but bulls think they should reconsider.
“Hertz trades at a single-digit P/E, has low leverage, and is rapidly buying back shares,” Andy Taylor, a portfolio manager at Carronade Capital Management recently said in an interview. “The industry has learned cash generation is better than unprofitable market share.”
DB Analyst Thinks There’s Upside
Hertz acknowledges the macro concerns but doesn’t seem too worried. CFO Kenny Cheung told Barron’s airplane travel as of last week was up 20% year-over-year while corporate travel is back to between 80% and 85% of 2019 levels. Meanwhile, international travel to the US is around 50% to 55% of 2019 levels. The latter is important since this group tends to spend a lot on rental cars.
Then, there is the EV angle. Hertz owns more than 40,000 Teslas, which accounts for 9% of its fleet. The aim is to get that figure to 25% by the end of next year. It's ahead of rivals, making it more attractive to corporate customers that increasingly want their staff behind the wheels of EVs. EV rentals go for a premium and require less maintenance. As a result, they are more profitable.
Bulls think these combined factors mean Hertz is poised for more growth. Deutsche Bank analyst Chris Woronka thinks Hertz will generate $1 billion of free cash flow in 2023, which he expects will be largely used to buy back shares. The analyst has a buy rating and $27 price target on the stock. On Friday, shares closed at $19.46.
Are you bullish or bearish on Hertz over the next 12 months? |
Toast Should Be on the Menu, WF Says
Waiterless Ordering Driving the Boom
“Waiter I’ll take the check” just rolls off the tongue better than “Waiter I’ll take the contactless payment terminal.” Nevertheless, the latter is preferred by a lot of customers, and at least one company.
Toast (TOST) makes those payment kiosks, as well as a suite of software to help restaurants manage back office functions, saving them time and money. Unlike its peers, Toast is all in with the restaurant industry, angling to be a one-stop-shop offering everything from ordering and payment processing to capital loans.
That gives Toast an edge in the space, which is notorious for low-profit margins and fickle customers. Owners are always on the hunt to streamline operations and reduce costs and Toast wants to help them do that and more. That’s a departure from its rival, Square (SQ) and Clover (FISV). They offer a one-size-fits-all solution that works whether you run a store or a cafe.
Market Share Poised to Increase
Toast is used in around 74,000 restaurants, just 9% of the roughly 860,000 eateries in the US. With such low penetration, it has the potential to grow.
“We expect them to gain market share going forward,” Wells Fargo analyst Jeff Cantwell said in a recent interview. “That’s a function of them having a very high-quality platform across software and payments. So we expect faster revenue growth than peers as well as the ability to expand profit margins as they grow.”
Cantwell expects Toast’s market share to increase to 30% of small and medium-sized restaurants by 2028. The analyst has a buy rating on Toast and a price target of $27, roughly $7 higher than where the stock closed on Friday.
Now, since Toast went public in the fall of 2021, the stock has underperformed. It debuted at $40 per share, reached a high of $65 per share, then plummeted to the low teens. Today, the stock is hovering in the low $20s per share range.
Profit on the Horizon
With cash of nearly $1 billion on hand, bulls think Toast has the potential to turn a profit eventually. Analysts expect Toast to lose $600 million from 2023 to 2025. After that, however, it should be out of the red. Revenue is projected to grow to $6.7 billion from $2.7 billion in that same time frame. On an EBIDTA basis, Toast expects to reach profitability this year. The Street pegs that at the second half of 2023.
Driving profitability is scaling Toast’s payments business. As more customers use its card readers, its processing payments business will increase. That will increase profit margins and help grow its software-as-a-service business. The cost to bring in new customers should also fall as it gains more recognition, which will further boost its profits.
“This is a classic example of a small company in the expensive land grab phase [of its growth],” Gregg Fisher, founder and portfolio manager at Quent Capital said recently. “As Toast gets bigger, it’s going to become profitable.”
Toast is in the lead and poised for more growth. Granted, its stock hasn’t supported that story just yet. But it takes time to turn bread into toast.
Editor's Note: Interestingly enough, you'll note that both Hertz and Toast are trading at almost the same level and both just got upgraded to $27 per share. This was unintentional on our part, but it will be interesting to see which one crosses the finish line first.
Are you bullish or bearish on Toast over the next 12 months? |
The Pillow for Side Sleepers
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At the same time, cooling-infused memory foam and ventilated zipper gussets help create better airflow and regulate your body temperature, so you stay cool during the night, while its antimicrobial shell repels unwelcomed guests like dust mites and bacteria.
The pillow has been perfected over eight years with numerous research, surveys, and prototypes, but to ensure satisfaction, it's also backed by Brooklinen's best-in-class customer service and a risk-free warranty.
Save up to 40% in bundles + an extra 10% off. Plus, don’t miss the President's Day sale, from 2/15 - 2/23!
BoA Has Head in the Cloud With this Upgrade
Bulls: Stock Could More Than Double
Fastly (FSLY), the cloud computing company, is in turnaround mode. Bulls think this repositioning will be a boon to its stock. In fact, it could be fastly approaching profitability.
Bank of America (BAC) recently raised its price target on Fastly shares from underperform to buy. Pointing to a renewed focus on core strengths and cost-cutting under new CEO Todd Nightingale, BofA analyst Tal Liani thinks shares can more than double to $16 per share. For context, it closed at $X per share this past week. Profitability, which has so far eluded Fastly, could happen as soon as next year, according to the analyst.
“Fastly’s new CEO Nightingale has taken steps to streamline the product portfolio, pricing, and other operational aspects,” Liani wrote in a recent research report. “We believe this could drive revenue growth reacceleration and margin expansion, with the company reaching profitability by 2024.”
Stock is Down but Not Out
Fastly went public in 2019, part of a crop of debuting tech companies including Uber (UBER), Zoom (ZM), Pinterest (PINS), and Lyft (LYFT). The stock took off in 2020, skyrocketing over 300%.
But, in recent years, Fastly stock has had a tough go of it, falling 59% in 2021 and 76% in 2022. In September, Nightingale took over as CEO. The company has been in turnaround mode ever since.
It's the execution of that strategy that has Liani so bullish. The Wall Street analyst thinks Fastly’s core cloud technology is a differentiator that needs to be sharpened and unlocked.
“Short term results could still fluctuate, but we focus on the potential value creation in the intermediate term, and believe Fastly has solid underlying foundations, which the new management team is aiming to expose, coupled with greater focus on security and edge cloud solutions,” Liani wrote. “The technology could serve as a solid foundation for the other adjacent services.”
Cost-Cutting To Speed Up
Fastly is also in cost-cutting mode, focusing on improving its operating margins. That should help its bottom line and the stock going forward. In 2023, Liani expects Fastly to have operating margins of -7% compared to -19% in 2022. In 2024, the Wall Street analyst is forecasting EPS to hit -29 cents per share, up from -64 cents per share in 2022.
It’s been a roller coaster ride for Fastly since its market debut in 2019, but Bank of America thinks there is a lot of room for improvement. Its core technology has yet to be fully leveraged and expansion into adjacent markets is in the cards. Add a new CEO and streamlined operations to the mix and it's enough to get Bank of America’s Liani excited.
Now only one question remains: is it enough for investors?
Are you bullish or bearish on Fastly over the next 24 months? |
Last Week's Poll Results
Are you bullish or bearish on Tinder over the next 12 months?
🟩🟩🟩🟩🟩🟩 🐂 Bullish
🟨🟨🟨🟨🟨⬜️ 🐻 Bearish
Are you more bullish on blockchain or artificial intelligence?
🟨🟨⬜️⬜️⬜️⬜️ ⛓️ Blockchain
🟩🟩🟩🟩🟩🟩 🤖 Artificial Intelligence
Which ETF will outperform over the next 12 months: NANC and KRUZ?
🟩🟩🟩🟩🟩🟩 👵 NANC
🟨⬜️⬜️⬜️⬜️⬜️ 👨 KRUZ
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