⛳ Hole-in-One?

Happy Sunday to everyone on The Street.

Are you traveling 50 miles or more next weekend for the Memorial Day Holiday? If so, you’re one of the 42.3 million Americans expected to do so according to AAA. That’s a 7% increase from last year, which will apparently make 2023 the third busiest Memorial Day weekend since 2000. Roughly 3.4 million people are expected to fly to their destinations, an increase of 11% over last year.

For what it’s worth, airfare pricing is out of control right now. I’m seeing all sorts of reasons why: inflation, oil prices, not enough planes, not enough pilots, etc. I’m sure all of this adds up. But between the out-of-control plane ticket pricing and excessive tipping by restaurants and cafes, no two industries are “letting a good crisis go to waste” more than airlines and casual dining establishments. Okay, well maybe tech is leading the pack with the massive layoffs, but you get my point.

Before we dive in, be sure to check out today’s partner, Masterworks. I saw these guys give a presentation when they launched, and I always thought it was an interesting, out-of-the-box way to get access to an asset class that is off the beaten path. Click here to check ‘em out.

— Brooks

The Surprising Investment That Beat 94% of the S&P 500

In just 604 days, a $10,000 investment in a securitized offering from Masterworks would have secured a $4,900 profit. That's a 27.3% net annualized return – better than 470 of the world's 500 largest stocks over the same time period. (Nov 2020 to July 2022)

And although not all artworks see those gains, it's not the first time art prices rose quicker than stocks. In fact, over the last 26 years, contemporary art prices outpaced the S&P 500 by 131%.

It's also not the first time Masterworks has delivered impressive results for investors.

Because every single one of Masterworks 13 exits have been profitable so far, with 8 of those securing 20% net annualized returns or better.

Even better, over $10 trillion is expected to pour into alternative assets as a whole like art over the next few years, which means Masterworks is sitting at the heart of a major market megatrend.

Don’t you think it’s time you checked it out? Street Sheet readers can skip the waitlist with this exclusive link. See important disclosures here.

Review

US stocks finished lower Friday after debt ceiling negotiations on Capitol Hill came to an abrupt halt. GOP negotiators reportedly walked out of the room, suggesting the White House was unwilling to have a reasonable conversation over how to proceed.

On the earnings front, Foot Locker saw its shares drop more than 25% after missing on both top-and-bottom line estimates. Earnings per share were $0.70 and revenue was $1.93 billion, compared to the $0.81 and $1.99 billion predicted. Year-over-year sales also dropped 11.4%. The footwear company expects future sales to be down 6.5% to 8% as it proceeds with aggressive markdowns to offset the challenging macroeconomic backdrop.

Meanwhile, Deere & Company easily surpassed analyst estimates with per-share earnings of $9.65 and a 30% increase in revenue at $17.39 billion. Both numbers were well above the respective $8.58 and $14.89 expectations, largely driven by a 53% sales jump in its Production & Precision Agriculture segment, as well as a 7% increase in operating margins.

In economic news, Fed Chairman Jerome Powell spoke at the Thomas Laubach Research Conference where he reiterated the Fed’s strong commitment to its 2% inflation target. Despite a number of Fed speakers offering hawkish remarks earlier in the week, Powell did not confirm or deny any future rate increases.

In company-specific news, Nike could be fined over $530 million for misclassifying thousands of workers as independent contractors. Independent reports compiled for the company suggest Nike management’s handling of independent contractors has left it open to considerable fines from tax authorities and the possibility of class action lawsuits.

In total for the week, the Dow Jones Industrial Average finished 0.38% higher, while the S&P 500 added 1.65%. The Nasdaq Composite surged 3.04%. It was the best weekly performance since March for the S&P 500 and Nasdaq Composite.

Preview

The week will feature a number of speeches by members of the Federal Reserve, with the St. Louis Fed’s Jim Bullard kicking things off tomorrow. Bullard will offer commentary on the Fed’s decision to raise the fed funds rate to 5% to 5.25% during its May meeting. This marked 10 straight months of rate increases and the highest level seen since 2007.

Tuesday, Lorie Logan of the Dallas Fed will follow up Jim Bullard’s comments with a speech of her own. The new home sales report will also be released. This metric surged 9.6% month-over-month in March 2023.

On Wednesday, the minutes from the FOMC’s meeting will be released, giving investors greater insight as to the Fed’s thinking regarding future rate hikes. The 30-year fixed mortgage rate will also be updated. It currently sits at 6.57%.

Thursday will be another busy day, with the releases of reports like jobless claims, pending home sales, and the US GDP growth rate. There will also be yet another speech from a Fed president — this time from the Boston Fed’s Susan Collins.

On Friday, another flurry of reports will be released, including personal income, personal spending, and durable goods orders. On top of that, investors will get an update on the current trade deficit, which sat at 84.6 billion in March.

Earnings Spotlight

Tomorrow, Zoom (ZM) will deliver an earnings report most likely focused on – you guessed it – AI. Last March, Zoom announced a partnership with ChatGPT-owner OpenAI, following a trend across the tech sector. Recently, it also announced it’s teaming up with Anthropic, a startup in which Google (GOOGL) has invested. Zoom plans to integrate AI to improve its customer service functionality.

Tuesday will be the busiest day of the earnings week, with reports expected from AutoZone (AZO), Lowe’s (LOW), Dick’s Sporting Goods (DKS), and Intuit (INTU). Notably, Intuit-owned TurboTax has come under fire recently after announcing a $141 million-dollar settlement for using deceptive marketing to steer low-income Americans away from free tax-filing services.

On Wednesday, NVIDIA (NVDA) will report earnings from the previous quarter. As one of the largest producers of GPU chips, investors will be eager to get better insight into the company’s performance over the past few months. These chips are integral to many AI tools, and the rising demand for that emerging technology has already helped Nvidia’s stock to double this year.

Thursday will round out the earnings week with reports from Costco (COST), Workday (WDAY), and Best Buy. Best Buy will face investor scrutiny after announcing a round of layoffs.

Is Topgolf a Hole-In-One Or A Shot From the Rough?

Bulls Think Sell-off Is an Opportunity

Topgolf Callaway (MODG) may not be constantly hitting the fairway right now, but bulls think the company can be a scratch golfer.

Shares of the golfing company have been under pressure ever since it reported first-quarter earnings. Sure, it was able to beat Wall Street’s EPS consensus, but it lowered its guidance because of its corporate events business which makes up about 20% of its sales.

Topgolf expects same-venue sales growth in the mid-to-high single-digit range for 2023, down from high single-digit growth in that unit. That prompted analysts to lower their estimates for the year, sending the stock plummeting.

Without a doubt, there are some issues with that line of business, but bulls don’t think it's enough to warrant a massive sell-off. They argue Topgolf should be out of the sandtraps and in investors' portfolios. “It’s just giving investors a great entry point to own a fast-growing business,” Jonathan Boyar, president of Boyar Intrinsic Value Research, told Barron’s recently.

Reasons to Be Optimistic

Behind the optimism are Topgolf’s other verticals, which are experiencing strong growth. Take its driving range business which is popular with individuals and families. Not only can you use Topgolf’s ball-flight technology to get some practice in, but there are also bars, dining areas, and special event venues located on the premises.

In the first quarter, same-store sales grew 11% at the ranges. Topgolf also sells golf equipment, including clubs and balls. Additionally, the company makes and sells apparel, footwear, and golf accessories under the Callaway, JackWolfskin, and TravisMathew brands.

It doesn’t hurt that when Topgolf reported earnings, CEO Chip Brewer told analysts that problems with its corporate events businesses won’t change its 2023 estimate of $640 million in EBITDA. “I don’t want to give you the impression that this just fell off a cliff,” he said during an earnings conference call.

Driving Ranges Drive Growth

One of the big drivers of future growth and why bulls think the stock’s sell-off presents an opportunity is its driving ranges. It currently has 80 high-tech ranges located across the US in both big and small markets.

It has been adding around 11 locations each year in the US and aims to eventually have 250 driving ranges total. EBITDA for that segment clocked in at $235 million last year, accounting for about 42% of its total EBITDA. Topgolf expects that segment to represent half of EBITDA this year.

Zooming out CEO Chip Brewer estimates that adding 11 Topgolf venues every year will bring in three to four million new off-course golfers. It’s a game that many people picked up during the pandemic and now Topgolf is betting on their lifelong love for the sport, as well as welcoming new players to the game. Bulls think that story is a hole-in-one.

Mario, Zelda, and a Switch

Nintendo Has More than Game Consoles to Drive Growth

A new Nintendo (NTDOY) Switch is still a couple of years in the making, but that doesn’t mean investors should stay away from the stock.

For years Nintendo has been largely focused on churning out games, paying little attention to monetizing beloved characters like Mario, Luigi, Zelda, and Kirby. That all changed with The Super Mario Bros. Movie, which came out in early April. Since it’s release, the gaming flick has grossed $1.16 billion worldwide, eclipsing hits like Minions and Captain America: Civil War, according to Box Office Mojo.

The success of the movie should also increase interest in Nintendo’s theme park areas which are found at Universal Studios in Japan and California. A third Super Nintendo World area is being added to Universal Studios in Orlando.

If that’s not enough, the company just released The Legend of Zelda: Tears of the Kingdom, which could turn out to be one of its biggest game releases in years.

Investors Aren’t Convinced

So far investors don’t seem to agree, however. Nintendo’s ADR shares are up only 4% this year. For comparison purposes, the Nasdaq Composite index is up over 20% YTD. The release of Zelda and the success of the Mario movie could change that.

“It’s one of the few global [intellectual properties] that requires absolutely no education for the vast majority of consumers,” says Julia Alexander, director of strategy at media research firm Parrot Analytics of Super Mario Brothers. “When you look at a character like Mario, you look at a universe like the Super Mario World universe. It is so attractive because it is so universally accessible for generations of consumers.”

She said the movie gives Nintendo a chance to expand the general audience more and to double down on a brand consumers love. “The goal is to monopolize attention across active and passive and immersive entertainment,” Alexander told Barron’s. There are other movie opportunities beyond Mario. Nintendo could put Donkey Kong, Pikmin, Metroid, and Kirby on the big screen.

Gaming Side Needs a Switch

Despite the momentum, what's worrying investors is the gaming side of Nintendo’s business. In its most recent earnings report, Switch console sales were down 22% year-over-year. The fiscal year 2023 ended in March, and Nintendo posted a 6% decline in revenue and a 15% dip in operating profit.

While the entire industry is seeing demand for game consoles decline, that could be a blessing in disguise for Nintendo. It may hasten its pace to get a new Switch out which could boost sales. Jefferies analyst Atul Goyal gives it a 70% probability a new game console will be launched this fiscal year ending March 2024. By the next fiscal year, the analyst gives it a 100% chance.

That should bode well for Nintendo since historically, new consoles released with big franchise games drive sales and profits for one to two years. None of those potential gains are factored into Wall Street estimates or in its stock. Goyal thinks a surprise Switch release could drive profits by 30% or more.

Nintendo’s stock may be down, but Wall Street bulls aren’t counting it out. From a blockbuster movie to an impending hardware launch there’s a lot to like about the company beyond Mario and Luigi.

The Surprising Investment That Beat 94% of the S&P 500

In just 604 days, a $10,000 investment in a securitized offering from Masterworks would have secured a $4,900 profit. That's a 27.3% net annualized return – better than 470 of the world's 500 largest stocks over the same time period. (Nov 2020 to July 2022)

And although not all artworks see those gains, it's not the first time art prices rose quicker than stocks. In fact, over the last 26 years, contemporary art prices outpaced the S&P 500 by 131%.

It's also not the first time Masterworks has delivered impressive results for investors.

Because every single one of Masterworks 13 exits have been profitable so far, with 8 of those securing 20% net annualized returns or better.

Even better, over $10 trillion is expected to pour into alternative assets as a whole like art over the next few years, which means Masterworks is sitting at the heart of a major market megatrend.

Don’t you think it’s time you checked it out? Street Sheet readers can skip the waitlist with this exclusive link. See important disclosures here.

Bank of America's Picks From Across the Pond

Financials, Industrials Lead the Pack

Markets are choppy right now. Are we heading towards a recession? Are we not? Is the US in trouble if an agreement can’t be reached regarding the debt ceiling? There’s a lot of noise stateside so it might be time to turn our attention to our long-lost cousins across the pond. That’s what Bank of America is doing.

The Wall Street firm sees opportunities overseas, particularly in Europe. So much so that it has come up with a list of picks it calls the “Beat Factor Top 10.” These are ten European stocks that BoA thinks are currently undervalued and thus could provide substantial returns.

To generate this list of stocks that trade on the FTSE Eurofirst 300, Bank of America took a quantitative approach, using price targets and earnings estimates to find undervalued equity picks.

The list is comprised of Airbus (EADSY), Thales (THLLY), BAE Systems (BAESY), and Safran (SAFRY) on the industrial side. BNP Paribas (BNPQY) and Credit Agricole (CRARY) are holding it down for financials. Rounding out the top ten are Louis Vuitton Moët Hennessy, Verbund (OEZVY), the electricity utility, Norsk Hydro (NHY) the aluminum producer, and L’Oreal (LRLCY), the cosmetics company.

Airbus Ready for Takeoff?

Airbus made the list because Bank of America’s price target is 46% higher than the consensus forecast. The bank’s EPS estimates for this year and next are 8% more than what analysts are projecting. Over the next 12 months, Bank of America expects shares of Airbus to surge 64%. Why? Well, BoA likes Airbus because of improvements in the supply chain for parts, growing demand for big planes, and the reopening of China following the pandemic.

On Safran, BoA has a price target that is almost 30% more than the consensus. As for Thales and BAE Systems the Wall Street firm assigned price targets that are 10% higher than the Street.

BNP Paribas Shares to Surge More?

On the financial side, BNP Paribas had the highest Beat Factor score. Bank of America thinks the stock has a chance to surge 22% above the average price target.

It’s also forecasting EPS to be 28% higher than consensus projections for this year. That’s even with the stock a top short for investors in the European banking sector. As for the non-industrial and non-financial stocks on the list, LVMH is the most pricey one. Its stock is up close to 30% this year but Bank of America is still optimistic coming out of earnings season.

If your summer includes a transatlantic flight, it might be worth adding a transatlantic stock pick to your portfolio to really ring in the European summer.

Last Week's Poll Results

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

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨🟨⬜️⬜️⬜️⬜️ 🐻 Bearish

Which stock do you think will outperform over the next 3 months?

🟩🟩🟩🟩🟩🟩 United Airlines

🟨🟨⬜️⬜️⬜️⬜️ Whitebread

🟨⬜️⬜️⬜️⬜️⬜️ Marriott International

Are you bullish or bearish on the EdTech sector in general?

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨🟨⬜️⬜️⬜️⬜️ 🐻 Bearish

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