👟 Hooked on Hoka

Happy Sunday to everyone on The Street.

44 days. That's how long Liz Truss held the title of Prime Minister in the United Kingdom. She beat George Canning, who was prime minister for 119 days in 1827. She also beat a head of lettuce. Wait, what? Yes, a British tabloid started a live stream to test a simple hypothesis: could the shelf life of a head of lettuce outlast her time as prime minister? Truss lost to the lettuce and now a replacement will be elected this week. The betting markets (which are way more fun to follow than professional polls) have Former Chancellor Rishi Sunak in the lead. This is according to Ladbrokes which also has some pretty favorable odds on BoJo as well.

Meanwhile, thousands of miles away, Chinese President Xi Jinping is poised to serve a historic third five-year term. The dichotomy is striking, but what does it really say about the way these two groups of people live their lives? Despite the "chaos" in the UK, we're willing to bet people carried on with their day-to-day routines relatively unscathed by the drama at 10 Downing Street. If anything, the news just made for more interesting chatter at the pubs that night. Meanwhile, in China, Xi's prolonged rule means millions will still be subjected to full or partial COVID lockdowns. This means it will be hard for this group of people to go to their "pubs" to discuss politics, and any discussion online while they're locked up at home will be squashed and censored.

It's in these moments that history serves us well. We can turn to famous figures of the past that also faced uncertain times. In that sense, Winston Churchill once said that “democracy is the worst form of government – except for all the others that have been tried.” As the two countries navigate the future under very different forms of government, let's see if the British Bulldog's quote withstands the test of time.

Before we dive in, here are the poll results from last week.

• Are you bullish or bearish on MSGS? 51% of you said BEARISH, 49% of you said Bullish.

• Are you bullish or bearish on Illumina over the next 12 months? 77% said BULLISH, 23% said Bearish.

• Are you bullish or bearish on Ford over the next 12 months? 56% said BULLISH, 44% said bearish.

Review

US stocks rose Friday, despite a choppy session. Investors studied more corporate earnings reports and considered the impact of additional rate hikes from the Federal Reserve.

US Government bond rates have been climbing recently, putting pressure on stocks. However, Treasury yields fell from their highs to close out the week, following a report in the Wall Street Journal that suggested some Fed officials are worried about over-tightening in a bid to fight inflation. Stocks appeared to receive a boost from the news, with the Dow climbing 700 points, clinching its best week since June.

It's been a mixed bag for earnings. A handful of strong reports earlier in the week boosted sentiment. However, there were some gloomier announcements on Thursday and Friday that brought Wall Street back down to earth.

Zooming out, volatility is expected for the foreseeable future until the Fed sends a clear signal to the markets that it's done with its rate hike crusade.

In terms of company announcements that stood out, Verizon posted a downbeat report. The Dow component's profit fell 23% and it reportedly lost 189,000 subscribers. Analysts contend Verizon’s high prices are encouraging customers to leave for cheaper providers. Friday was also a down session for American Express, despite the credit card service company raising its guidance through the end of the year. CEO Stephen Squeri said they haven’t noticed any changes in consumer spending but are still prepared for a recession.

In the tech-sphere, Twitter saw its share price slip after a report suggested Elon Musk’s ventures could come under additional scrutiny from federal officials. In the energy space, oil-service provider Schlumberger beat quarterly estimates for profit as international drilling has increased.

For the week as a whole, the Dow Jones Industrial Average rose 4.89%. The S&P 500 increased by 4.75%, and the Nasdaq Composite jumped 5.22%.

Preview

Tomorrow, the Chicago Fed releases its National Activity Index – or CFNAI – for September, a gauge of economic activity and inflationary pressure. In August, this metric showed that economic growth slowed compared to July’s growth. The S&P US Manufacturing PMI – or Purchasing Managers’ Index – will also be released. In September, the index came in at 52%. In general, a PMI reading of over 50% indicates growth in the manufacturing sector.

Tuesday, the S&P Case-Shiller US National Home Price Index for August will give investors insight into the housing market. In July, single-family home prices rose 15.8% on an annual basis, sharply lower than the 18.1% year-over-year increase observed in June. Also, keep an eye out for the October Consumer Confidence Index.

On Wednesday, the September New Home Sales report will further illuminate the US real estate market. In August, 685,000 new houses were sold, up 28.8% from July.

On Thursday, the labor market will take the spotlight as initial and continuing jobless claims are due. Also, watch for the initial estimate of the third-quarter GDP as well as September’s durable goods and core capital equipment orders.

Finally, on Friday, look for a flurry of reports including the Q3 Employment Cost Index and September PCE Price Index, the Fed’s preferred measure of inflation. September’s consumer spending and pending home sales index are also due, as well as the University of Michigan’s October consumer sentiment.

The third-quarter earnings season is in full swing and some of the world’s biggest companies will report later this week.

Tuesday gets things off to a hot start with major tech companies like Google-parent Alphabet (GOOGL), Microsoft (MSFT), and Spotify (SPOT) shedding light on how Big Tech is faring. Meanwhile, Coca-Cola (KO), Visa (V), and UPS (UPS) will give investors a look at the pace of consumer spending.

On Wednesday, watch for a highly-anticipated report from Meta Platforms (META), who will update the market on its risky metaverse play. Additionally, two major manufacturers in Boeing (BA) and Ford (F) are set to share results. Each firm’s results can help the market understand the current state of transportation in America.

Thursday might just be the marquee event, with both Amazon (AMZN) and Apple (AAPL) set to publish quarterly results. Household names McDonald’s (MCD), Caterpillar (CAT), and Honeywell (HON) will report earnings as well. And, in the travel sector, look out for Spirit Airlines (SAVE) to hand in its latest report card. The company will surely discuss its merger with JetBlue (JBLU).

On Friday, oil giants Chevron (CVX) and Exxon (XOM) will round out the week. The market will be paying close attention to expectations regarding gas prices and oil demand, given recessionary concerns, planned production cuts from OPEC+, and additional releases from the US SPR.

Invest in Deep Tech

NanoVMs is a California-based company that is creating an operating system designed for today’s generation of cloud infrastructure.

The OS was built for cloud-based computing; utilizing a unikernel approach that takes up minimal resources and space, all while improving application speed and computer security. NanoVMs offers software solutions, subscription services, and technical support from industry experts. Here are a few reasons to consider investing:

• NanoVMs has received revenue from the US Airforce, including an Indefinite Delivery, Indefinite Quantity Contract (up to potentially $950M in value) for US Air Force Advanced Battle Management System (ABMS).

• Since founded in 2015, NanoVMs has raised over $2.4 million in funding, which includes $170k from the Department of Energy.

Learn more on how you can invest here.

Don't Doubt Deckers

Hooked on Hoka

Forget Uggs, the popular sheepskin-lined boots and slippers keeping countless consumers' feet warm during the colder months. When it comes to unlocking parent company Deckers' (DECK) true growth, cushioned running sneakers may win the race.

That may seem counterintuitive given Nike (NKE) and Under Armour (UAA) are both sitting on excess inventory and demand is slowing as the economy sputters. To be fair, Deckers may not be immune to these factors either. Don’t be surprised if the company lowers its financial outlook when it reports quarterly results later this month. With that said, however, these headwinds aren’t hindering the bulls. In fact, they see an opportunity in Deckers' non Uggs brand, Hoka.

The line of high-performance sneakers isn’t a household name yet but it’s in second place in the specialty sneaker market, posting some serious growth figures. Some investors think the Hoka line can account for half of Deckers' sales by 2025.

Deckers’ Diversification

The ability to diversify and show the world Deckers is not a one trick pony is driving a lot of investor enthusiasm. “Differentiated products matter, and Hoka really is different,” Raife Giovinazzo, managing partner and portfolio manager at Fuller & Thaler Asset Management said in a recent Barron’s interview. “[Hoka’s growth] is a tremendous achievement that people are still underappreciating.”

It doesn’t hurt that the sneakers go for around $200 a pop. They appeal to higher earners who have been able to continue spending even as the economy slows. From a product point of view, the sneaks speak for themselves. They’re lightweight, good looking, and super cushioned. This has helped Hoka more than double its revenue to almost $892 million in the two fiscal years ended in March. They’ve attracted the attention of everyone from athletes to fashion influencers.

The Shoes Are Expensive. The Stock is Cheap.

Deckers’ stock has held up better than the broader market, but bulls argue it's still cheap. DECK is currently changing hands for about 16.5 times forward earnings, which is less than its five-year average of 18.6 times forward earnings. This is higher than Crocs (CROX) but lower than Nike and Lululemon Athletica (LULU), which both trade at roughly 25 times forward earnings.

Josh Cummings, an analyst at Janus Henderson thinks the stock should trade around 18 times earnings, which would put shares around $385. On Friday, the stock closed at $363. Not too shabby for a company that is showing the world there’s more to life and their feet than sheepskin boots and slippers.

Is It Time to Buy Zoom Again?

Becoming a Verb

Zoom Video Communications (ZM) became a lifeline during the pandemic. The software kept the world connected amid lockdowns and remote work arrangements. Investors rewarded the stock by sending it soaring. Like category defining companies before it, including Uber and Airbnb, videoconferencing was so popular that Zoom even became the preferred verb.

A lot has changed since then. Sure, companies and households still stay connected via the video conferencing platform but it’s not being used as much as it was. That hasn’t been lost on investors who pivoted away from pandemic darlings including Peloton (PTON), Fastly (FSLY), and Teladoc (TDOC).

It doesn’t help that tech stocks in general are taking a big hit as the Federal Reserve raises rates in an attempt to slow the economy. The Nasdaq 100, which is composed of the top 100 names in tech, is down roughly 30% since the end of last year.

Still Growing

Shares of Zoom have fared worse than the broader benchmark with the stock now 86% lower than its peak in 2020. Zoom is currently trading at 20.3 times adjusted earnings expectations for its fiscal year ending in January. That’s lower than the average Nasdaq 100 stock which is trading around 20.8 times forward earnings. The discount is drawing out bargain hunters who see an opportunity to get Zoom shares for a slight discount.

It's not just the cheap price that is attracting investors. They think Zoom can still be a growth story even if sales aren’t growing like gangbusters. In its fiscal second quarter revenue increased 8% year-over-year to $1.1 billion. That’s a far cry from the 96.1% compound annual growth Zoom enjoyed over the past three years, but the company is still making more money.

All In with Enterprise

The key to Zoom’s future success is expanding its offering with its enterprise customers. Leaning into that segment, the video conferencing company recently launched add-on services including Zoom Rooms, Zoom Phone, Zoom Contact Center, and Zoom IQ for Sales.

For the three months ending in July Zoom’s net dollar expansion rate was 120% among corporate customers. That means businesses who came on board during the pandemic are sticking around, which is good news to the company, investors, and the share price.

Without a doubt, Zoom is battered and bruised. It went from being a high-flying name to one that got grouped in with other “losers”. Although Zoom isn’t receiving the public attention it once was, some investors see an opportunity to buy a pandemic darling for a bargain.

Invest in Deep Tech

NanoVMs is a California-based company that is creating an operating system designed for today’s generation of cloud infrastructure.

The OS was built for cloud-based computing; utilizing a unikernel approach that takes up minimal resources and space, all while improving application speed and computer security. NanoVMs offers software solutions, subscription services, and technical support from industry experts. Here are a few reasons to consider investing:

• NanoVMs has received revenue from the US Airforce, including an Indefinite Delivery, Indefinite Quantity Contract (up to potentially $950M in value) for US Air Force Advanced Battle Management System (ABMS).

• Since founded in 2015, NanoVMs has raised over $2.4 million in funding, which includes $170k from the Department of Energy.

Learn more on how you can invest here.

Meddling with Miners

Strong Balance Sheets and Solid Earnings

Mining stocks may not seem like a sure bet with the global economy heading towards a slowdown. Any level of deceleration could hurt metal prices, weighing on shares in the sector.

Companies like BHP (BHP), Rio Tinto (RIO), Glencore (GLNCY) and Anglo American (NGLOY) are hard to read in a rocky environment. The same is true for pure play metal stocks like Freeport-McMoRan (FCX), Alcoa (AA), Barrick Gold (GOLD) and Newmont (NEM).

Despite the macro volatility and lack of forward-looking visibility, it turns out the world still needs copper, iron, cobalt, and gold even if global business conditions are slowing. With strong balance sheets, solid earnings, little in the way of debt, ample reserves, and decent dividends, the group should be able to weather a looming economic downturn.

Green Movement Might be Good for These Names

Take iron and copper producers for starters. There’s a lot of political and economic risk that could weigh on prices and demand. Any additional headwinds would be bad news given iron ore prices are already down 61% year-over-year.

Chris LaFemina, a mining analyst at Jefferies, isn’t worried though. LaFemina thinks iron ore prices should hold their own at current levels of about $100 per metric ton. At that price it’s still very profitable for BHP and Rio Tinto, which spend about $40 a ton for production and transportation.

The long-term outlook for iron ore, aluminum, copper, nickel, and cobalt also looks good thanks to green energy. A lot of metals are used to produce wind farms, transmission lines, and electric vehicles. As demand for green products increases so will the need for these metals.

Long Term Plays

The miners are also in a good position to wait for a rebound in prices. They have ample cash in the bank and already slashed costs. Most of the major players are spending roughly half on capital expenditures than they did ten years ago, according to Van Eck Global Resources fund senior analyst Charl Malan. He thinks the industry will remain that way going forward.

Mining stocks may not offer investors a lot of growth in the current environment, but sometimes the portfolio calls for long term, foundational plays. At the very least, some of these names warrant further research. Who knows, you might strike gold.

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