✈️ Google's Trojan Horse Travel Strategy

Happy Sunday to everyone on The Street. Another week, another wild inflation reading. The only thing we could think about when this latest CPI figure was released was Jack Dorsey's tweet from last October.

Guy saw this coming from a mile away. Maybe it's time the BLS starts integrating point-of-sale data into its CPI calculation so there's not a 9-month lag. Next week's a big one for the real estate industry on the economic data front, but before we dive in here are the results from the polls last week:

• Which stock below do you think will perform the worst over the next 12 months? Answer: NVIDIA (NVDA)

• Are you bullish or bearish on Activision? 58% of you were BULLISH, 42% of you were BEARISH.

• Are you bullish or bearish on the concept of "reshoring" or bringing more manufacturing back to America? 76% of you were BULLISH, 24% of you were BEARISH

Final thought: The bears above may want to think twice about betting against NVIDIA. Paul Pelosi, House Speaker Nancy Pelosi’s husband, recently bought up to $5 million worth of the computer chip company.

Pelosi's purchase comes ahead of a vote in the Senate this week on a bill "to boost the US semiconductor industry and improve competitiveness with China," according to Reuters. "The bill would include, at a minimum, billions of dollars in subsidies for the semiconductor industry and an investment tax credit to boost US manufacturing." 

As one of the largest chip manufacturers in not only the US but also the world, there's a pretty decent chance NVIDIA stands to benefit from this bill. We'll keep an eye on this. For now, let's get to it. 

Review

US stocks rose Friday following a fresh round of earnings reports and better-than-expected retail sales data.

Wells Fargo reported its second-quarter profit declined 48% year-over-year, but noted it has set aside funds to cover sour loans that may come due in the future. Citigroup beat analyst estimates as executives said the rising-rate environment boosted the bank’s bottom line.

The banking sector has been in focus and will be again this week as the market looks for clues concerning a potential recession. Broadly stated, the performance of bank stocks is often linked to the economy's overall health.

Meanwhile, June’s retail sales increased 1% month-over-month. The number was padded by purchases of gasoline and automobiles. This could have convinced some investors that a recession is less imminent, giving equities a boost.

Zooming out, the Federal Reserve is also paying close attention to bank earnings and consumer habits. Although it may seem unlikely based on the latest inflation reading some aren't so sure that a 100 basis point rate hike is a guaranteed reaction from the central bank. Some think this is why the market popped on the final day of the week. 

Elsewhere on the economic front, the University of Michigan Consumer Sentiment Index rose in July, but remains near historic lows. On the positive side, the survey found consumers were less worried about inflation than in previous reports.

In company-specific news, UnitedHealth beat Wall Street profit expectations and posted revenue in excess of $80 billion. The Minnesota-based insurance giant also raised its full-year outlook.

Last but not least, oil prices rose Friday, which helped boost the share price of both Valero Energy and Marathon Petroleum.

Despite Friday’s rally, for the week as a whole, the Dow Jones Industrial Average fell 0.16%. The S&P 500 slipped 0.93%, and the Nasdaq Composite lost 1.57%.

Preview

The NAHB/Wells Fargo (WFC) home builders confidence index is due tomorrow. June’s reading hit a two-year low as inflation and rising mortgage rates weighed on sentiment.

On Tuesday, investors will look to gain further insight into the real estate market as June’s building permits and housing starts are due. In May, homebuilding declined to a 13-month low and permits also fell, suggesting the housing market may be cooling. This is likely due to rising mortgage rates leaving some potential buyers sidelined. Will this continue to push up rents? We'll see. 

Wednesday, June’s existing home sales report will be published. According to the National Association of Realtors® existing home sales fell 3.4% in May from April and 8.6% year-over-year. With that said, the median sales price rose above $400,000 for the first time.

Thursday, initial and existing jobless claims are due. Last week’s jobless claims reached their highest level in nearly eight months. The number of Americans filing for first-time unemployment benefits rose to 244,000. Also, watch for the Philadelphia Fed’s regional manufacturing survey and the Conference Board’s leading economic index.

Friday, S&P Global will release July’s flash manufacturing and services PMI. June’s services PMI showed only moderate growth within the sector. Meanwhile, the manufacturing PMI posted the slowest growth in factory activity since July 2020.

On the earnings front, both Bank of America (BAC) and Goldman Sachs (GS) are scheduled to hand in their report cards on Monday. Netflix (NFLX) is up Tuesday. Tesla (TSLA) and fellow automaker Volvo (VLVLY) are due on Wednesday. Then, on Thursday, AT&T (T) will publish its latest earnings data and on Friday, fellow telecom sector giant Verizon (VZ) will share its most recent report. American Express (AXP) will also report its earnings Friday, providing some insight into consumer spending habits amid rising inflation. An interesting call will be Abbott Labs' (ABT) on Wednesday. The company just restarted baby formula production at a plant in Michigan. 

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Google's Trojan Horse Travel Strategy

Expedia and Booking Aren’t the Low-Cost Leaders Anymore

Google’s (GOOGL) effort to democratize online travel planning has been a boon to upstarts and hotel chains as cash-strapped consumers search for deals. For Expedia (EXPE) and Booking.com (BKNG), however, long the traditional leaders in internet travel, it spells gloom and maybe a little doom.

For context, last year Google began allowing hotels and online travel platforms to list their rooms for free on Google Travel. So nice of Google, right? Maybe so, but this benevolent move was really just a trojan horse. More listings means more competition. And in order to stand out, who do these hotels have to pay? That’s right: Google. And their plan is working.

In 2020 there were roughly six bidders in a Google auction for a hotel room. This year there’s an average of more than 26. In one instance, almost 50 websites were competing for clicks for a stay at Vegas’ MGM Grand. Good for Google. Not so good for Booking.com and Expedia as they are no longer the cheapest option.  

Timing is Everything 

The newfound competition couldn’t come at a worse time. Travel demand is soaring, but consumers have less purchasing power thanks to record high inflation. 

They’re looking for deals whether it's from Expedia or an unknown travel platform listing on Google. According to a recent analysis by Wall Street firm AB Bernstein, in 2021 Booking and Expedia-owned brands offered the lowest, earliest price more than 50% of the time. This year it’s down to 28% of the time. 

Relatively unknown online travel agents are making a splash in Google’s hotel auctions. eDreams hailing out of Spain is one example. It has been in more auctions than Booking.com in recent weeks. 

Google Wins Too 

Google is also winning with this new focus on hotel listings. Competing on price alone doesn’t work well in all aspects of travel, but in the hotel market, it does. 

Margins are high, which means more room for discounts. By letting hotel operators and travel platforms list their rooms for free Google has now become a digital five-star resort, so to speak. Two months after letting merchants list for free clicks increased 70% and impressions rose 130%. 

Google’s increasing dominance in yet another sector only makes us think that some lawmaker somewhere is gearing up to call foul. Until then, however, it looks like the sky is the limit for the search giant even if this comes at the expense of Expedia and Booking. 

Which stock below do you think will perform the worst over the next 12 months?

This Frigid Performance May Be Oversold

Housing Bust, Recession Worries Weighs on the Stock 

It might as well be winter the way HVAC leader Watsco’s (WSO) shares are performing. Despite rising temperatures, the stock is off about 20% year-to-date. For one of the leaders in the cooling and heating market, that’s not so hot. Watsco has 670 stores around the country, selling thousands of products and serving hundreds of thousands of contractors.

Investors think rising mortgage rates will put a damper on demand for Watsco’s products. There are also concerns a recession is looming, which will hurt companies in many consumer-facing segments including cooling and heating.  

Bulls see a different story. They think the stock is oversold and provides investors with growth and stability, two things every portfolio could benefit from. 

Stability is What You Get 

Take stability for starters. Watsco’s business has long been a stable one offering investors consistent earnings and sales. It's also a defensive play in the current environment. 

About 85% of its top line comes from repairs and replacement parts. Sure, it sells expensive items like AC units which could see demand slow if a recession dents consumer spending. But this business segment doesn’t drive the lion's share of its revenue. 

Additionally, investors don’t have to sacrifice growth for stability with Watsco either. Sales have risen 8% annually over the past five years while operating profits have grown 13%. Wall Street expects more of the same through 2024. Keep in mind, according to NOAA June 2022 was Earth’s 6th-warmest on record.

Watsco is a Growth Story 

Government regulations calling for more efficient air conditioners and a migration of the population south is also part of Watsco’s growth story. So are acquisitions. 

The company has been making bolt-on buys in the HVAC distribution market, which is highly fragmented. Last year it made three acquisitions, helping it control roughly 13% of the $50 billion market. 

With the potential for more growth and stability, Watsco's stock could be a bargain. It is trading at 17.8 times 2023 estimated earnings. While that’s more than the S&P 500, the company’s stock usually trades at a premium of around 50%. That would put its valuation around 23 times 2023 earnings, providing a potential entry point for bargain-hunting investors. 

Are you bullish or bearish on Watsco?

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Play Defense With These Dividend Stocks

If a Recession Comes, These Stocks May Hold Up 

Investors looking for dividend-paying stocks to ride out a potential recession may want to consider Exxon Mobil (XOM), Chevron (CVX), Johnson & Johnson (JNJ), and Cincinnati Financial (CINF). They possess important qualities during a rising rate environment in which businesses may succumb to a slow down. These foundational pillars are low debt-to-equity, respectable dividend payouts, and outperformance relative to the S&P 500. 

In essence, these companies are stable and are growing their dividends at a consistent rate. They tend to hold up better in recessionary times than dividend payers who only have high yields to boast about. When business goes south, the company still has to be able to afford the payout.

Yield of Dreams 

Take ExxonMobil and Chevron for starters. Exxon’s dividend yield is 4.2% while Chevron’s is 4%. Both stocks are up double digits this year, benefiting from soaring prices for oil and gas. That hasn’t shown any signs of cooling down yet. 

Last year Exxon raised its quarterly dividend by a penny. At the start of the year, Chevron raised its quarterly dividend by 8 cents or about 6%. Both companies have debt-to-equity ratios below 50%. That’s important in a rising rate environment. If there is a lot of debt on the balance sheet it can increase borrowing costs for the company. 

JNJ, Cincinnati Financial Worth a Look 

In the healthcare market, Johnson & Johnson is another defensive play. Its stock yields 2.5% and is up about 6% so far in 2022. It's a favorite among income-seeking investors who view its dividend as a solid bet. 

On the financial front property-casualty insurer, Cincinnati Financial makes the cut. Its stock yields 2.3% this year and is up about 6% as well. Chubb (CB) and Aflac (AFL) also have similar stats and provide investors with a way to ride out the potential malaise. 

Interest rates are rising, inflation is soaring, and some economists are predicting a recession is looming. Income-seeking investors need places to hide out and the stocks above may be where to take cover. 

Are you bullish or bearish on dividend-yielding energy stocks like Exxon Mobil and Chevron over the next 12 months?

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