🥣 Cereal Sales Getting Soggy

Happy Sunday to everyone on The Street.

We can’t take credit for this, but we thought it was so interesting we had to point it out. The analysis comes from The Kobeissi Letter on X, which noted that:

“The S&P 493, which is the S&P 500 excluding 7 technology stocks, is now up just 4% this year.

Meanwhile, the S&P 7, also known as the 7 largest S&P 500 companies, is up 52%.

Combined, the S&P 500 as a whole is up 13% this year.

In other words, if you buy the S&P 500 today, you are basically buying a handful of companies that are driving the entire market.

The 7 largest stocks in the S&P 500 now account for a massive 34% of the entire index's value.

Without these 7 stocks, the S&P 500 is basically FLAT this year.”

Pretty wild stuff. Let’s dive in.

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We’re celebrating 25 years of success with total shareholder returns up 1,200% and 810% Market Cap Growth since our formation in 1998. At Sempra, progress means investing in the infrastructure needed for the energy transition and providing safe, reliable and increasingly cleaner energy to those we are privileged to serve. Join us on our journey and learn about our strategy for the next 25 years.

Review

US stocks fell on Friday for a fourth straight day, ending the week sharply in the red. The week was marked by a selloff following the Fed’s policy update, which suggested that interest rates are likely to remain higher for longer.

In economic data, US business activity teetered on the brink of contraction in September per the S&P Global's flash Composite PMI index, showing a reading of 50.1 where 50 denotes the threshold between growth and decline.

Business activity was characterized by a sluggish services sector expanding at the slowest pace since February, while new orders declined.

So far, the US economy has sidestepped a downturn, thanks in part to resilient consumer spending.

In company news, the UAW is expanding its strikes against two of the Big Three automakers, General Motors and Stellantis, to 38 facilities across 20 states. The union said it had made progress in negotiations with Ford, including wage tiers and profit sharing.

Elsewhere, McDonald’s is raising its royalty fee for the first time in nearly three decades, increasing the fee collected from franchises to 5% from 4% of gross sales at all new locations starting in January.

In total for the week, the Dow Jones Industrial Average finished 1.9% lower, while the S&P 500 declined 2.9%. The Nasdaq Composite fell 3.6%.

Preview

On Tuesday, the Case Shiller Home Price Index will be released for August. In June, this 20-city home price index fell by 1.2% from last year, marking the fourth consecutive month of declining home prices. Investors will also watch for a report on the number of new homes sold in August.

On Wednesday, investors can expect an update on durable goods orders for August. In July, new orders for manufactured durable goods in the U.S. dropped by 5.2%. There will also be an update to the 30-year fixed-rate mortgage, which stubbornly remains above 7%.

Thursday will see the release of the quarterly GDP growth rate, jobless claims, and quarterly PCE prices. The core PCE price index is the Federal Reserve’s favored inflation measure, and Fed Chair Jerome Powell’s speech in the afternoon may offer insight into the latest PCE data within the larger context of the central bank’s interest rate policy.

On Friday, the release of both spending and income metrics for August will shine a light on the current state of the American consumer. In July, spending increased by 0.8%, while income increased by just 0.2%.

Earnings Spotlight

Tomorrow, Thor Industries (THO) will kick off the earnings week by handing in its latest quarterly report card. Investors will expect updates on recent management changes, as well as the RV maker’s partnership extension with the Girl Scouts of America.

On Tuesday, one of the nation’s largest retailers, Costco (COST), will present its latest earnings report to investors. The big box retailer will look to expand on its August sales report, in which it posted net sales of $18.4 billion, an increase of 5% from $17.6 billion last year.

On Wednesday, Paychex (PAYX) will keep the action going by releasing its latest earnings report. The payroll provider will likely discuss the departure of its CFO.

Thursday will be the busiest day of the week, with earnings reports coming in from Accenture (ACN), CarMax (KMX), and Nike (NKE). In particular, investors will be eager to hear about Accenture’s recent investment in generative AI startup Writer, along with its other AI ventures.

Bulls Are Betting On A Turnaround For Mercury Systems

Moving up the Value Chain

Mercury Systems (MRCY) is moving up the value chain with the hopes of resurrecting the struggling defense stock.

The company has spent billions of dollars on M&A to expand its business over the past seven years. They’ve scooped up other companies that make everything from flight control units and aircraft display programs to computers and radio-frequency components.

The plan was to combine a diverse range of solutions under one massive platform and then resell this to sub-contractors. The execution didn’t meet expectations, however. COVID-19-related supply chain disruptions only exacerbated the situation.

Earnings in its most recent fiscal year fell by 54% to an adjusted $1 per share as a result. Revenue remained stagnant at $974 million. Then there was also the unsuccessful attempt to sell the company at the urging of activist investors. As a result, the stock which traded at a high of $92.80 in April 2020, sells for under $40 a share today.

Bulls are banking on a turnaround led by the new CEO and CFO proposed by activist investors Starboard Value and Jana Partners.

New CEO at the Helm

Jana Partners was behind the appointment of new CEO Bill Ballhaus, an aerospace engineer with years of experience heading major defense contractors. Ballhaus officially took over as CEO last month. The company has also welcomed a new CFO, David Farnsworth, from Raytheon (RTX), along with new board members.

The goal of the new management team is to find and fix programs that have stalled, draining resources and causing profit loss. Out of Mercury's 300+ programs, twenty were accountable for a $56 million reduction in its fiscal 2023 financial performance.

Transition Year

As the company executes its vision, Ballhaus believes that the fiscal year 2024, ending in June will be a year of transition for the company.

While revenue is expected to remain stable, profits and cash flow should see improvement. The company anticipates income of $950 million to $1 billion and a 33% growth in profits to $1.33 per share.

“At Mercury, the immaturity and lack of full integration in key functional areas have led to the significant challenges the company experienced in forecasting business performance over the past several quarters,” the CEO said during its August fourth-quarter earnings call. “That said, maturing in these areas is achievable, within our control, and already underway."

Cash Is King, For Now

Here’s Why Bulls Are Banking on Cash for the Rest of 2023

In 1993 the Wu-Tang Clan released the song “C.R.E.M.E.”, an acronym for "Cash Rules Everything Around Me". Three decades later Wall Street banks seem to be singing the same tune.

When it comes to where to park your cash, many strategists on the Street think you should just leave it right there — in cash. In May, for example, the yield on the 30-day US Treasury bill topped 5%. It’s remained there since.

This mostly has to do with the Federal Reserve’s aggressive rate hike campaign. Since March 2022, the Fed has raised interest rates 11 times, driving yields higher.

Heading into the fourth quarter of the year, some are questioning whether stocks or cash will outperform. Here’s a sampling of what’s being said on the Street.

Cash Will Still Be King in Q4

Cash outperformed stocks in the third quarter and bulls think the same will be true in the fourth quarter.

Barclays, in a recent research note, questioned why investors would choose stocks or bonds over cash when yields can reach as high as 5.4%. Even if the US GDP weakens in the first half of 2024, the higher interest rate environment should safeguard cash yields. Barclays also expressed a preference for cash over commodities, and foreign exchange investments.

JPMorgan is also bullish. The Wall Street firm said earlier this month that it's reallocating 1% of its position in government bonds to cash. JPMorgan believes that a hike in commodity prices could fuel inflation and prompt central banks to continue raising rates.

Probably Not A Long-Term Play

Not everyone thinks moving to cash is the ideal long-term strategy. Historically, cash has fallen behind traditional growth assets in terms of performance.

In a recent report, Veronica Willis, a global investment strategist at Wells Fargo Investment Institute, noted that even very conservative portfolio allocations have had higher returns than cash over extended periods of time. In the long run, Wells Fargo expects every “strategic asset class” to outperform cash.

Cash is king for good reason: Yields on assets like money market accounts are surpassing 5% right now. How long you can take that to the bank is up for debate.

PRESENTED BY SEMPRA

A Growth-Focused Utility with a Historically Strong Dividend

We’re celebrating 25 years of success with total shareholder returns up 1,200% and 810% Market Cap Growth since our formation in 1998. At Sempra, progress means investing in the infrastructure needed for the energy transition and providing safe, reliable and increasingly cleaner energy to those we are privileged to serve. Join us on our journey and learn about our strategy for the next 25 years.

Cereal Is Getting Soggy

Consumers Opt For Other Options

Cereal is losing its luster as consumers seek other options to start their day. That poses a challenge for General Mills (GIS), Kellogg (K), and Post Holdings (POST), all of whom have built their reputations on serving traditional boxed cereals.

That’s not to say cereal is becoming extinct — a pandemic boost in popularity has helped — but making money in this category is increasingly difficult.

Continuous reinventions and marketing are needed to stay in the game. Last year saw a 3.9% drop in cereal sales. This year isn’t looking much better. Both Kellogg and Post have recently expressed their expectations for a gradual decline in sales, with annual results likely to remain flat or decline by a low single-digit percentage.

Kellogg Takes Matters Into Its Hands

To address the issue, Kellogg’s has chosen to take action by spinning off its cereal unit into a new independent entity named WK Kellogg, with the transition scheduled for October.

WK Kellogg plans to invest heavily in modernizing the supply chain to improve margins. The company anticipates the advantages of having a dedicated sales team exclusively focused on cereal.

It may prove futile. To maintain market share, Kellogg’s and the other cereal companies will need to constantly reinvent themselves. Kellogg’s has already taken steps in this direction with brands like Special K and Kashi. These new versions initially performed well, but keeping up the momentum proved challenging.

To maintain this pace, Kellogg’s will have to continually introduce new products — a strategy that runs counter to the company’s stated goal of boosting profit margins.

General Mills Bucks the Trend

General Mills is the outlier here. Unlike its rivals, the company has been gaining market share in recent years. Part of that was due to problems at Kellogg, including a strike, and a fire. Most of General Mills' success, however, is simply due to better execution than its peers.

Take, for example, marketing for its Cheerios brand. Through an effective heart-themed marketing campaign displayed on cereal boxes and in commercials, General Mills has successfully positioned Cheerios as the healthy choice. This has resonated with consumers. Even its sugary brands of Cheerios are perceived to be good for the heart.

Nevertheless, selling cereal remains a challenge in today's market. Constant reinvention of the product is good for consumers but harder to digest for companies looking to increase profit margins.

Last Week's Poll Results

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

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨🟨🟨⬜️⬜️⬜️ 🐻 Bearish

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

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨🟨🟨🟨⬜️⬜️ 🐻 Bearish

Which stock do you think will outperform over the next 12 months?

🟩🟩🟩🟩🟩🟩 Quanta Services (PWR)

🟨⬜️⬜️⬜️⬜️⬜️ MasTec (MTZ)

🟨⬜️⬜️⬜️⬜️⬜️ Primoris Services (PRIM)

🟨⬜️⬜️⬜️⬜️⬜️ AECOM (ACM)

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