🎯Incoming: 60/40 Bull Run

Happy Sunday to everyone on The Street. 

Buckle up and bring something to keep you entertained because travel over the upcoming Thanksgiving holiday period is expected to reach 98% of pre-pandemic volume according to AAA. Air travel is projected to jump 8% from last year and nearly 49 million people are expected to hit the roads. 

We'll do our best to provide you with some fresh finance content during your travels. You can only do so much doom-scrolling. Additionally, since we're nearing the end of the year, it's time to take stock of what you like, don't like, and want more of from The Street Sheet. 

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Review

US stocks were mixed Friday, topping off a volatile week during which investors were trying to make sense of mixed messaging surrounding interest rates.

Robust labor market data and strong quarterly results from the retail sector suggest the Federal Reserve’s rate hike campaign has not upended the economy. That likely means the central bank will remain aggressive in its approach toward inflation, which entails future rate hikes. That hawkish stance has weighed on equities over the past 10 months.

Meanwhile, the ongoing turmoil surrounding cryptocurrency following the collapse of FTX doesn’t seem to have seeped into the broader financial system. Bitcoin’s price appears to have stabilized somewhat, as well.

Oil prices fell Friday, with traders citing concern over rising interest rates, as well as potentially weakening demand out of China.

Checking economic data, existing home sales fell for the ninth-straight month in October, which is a record. It also speaks to how much demand has dropped amid rising mortgage rates, leading some analysts to describe current conditions as a buyer’s market, although prices remain elevated on a historical basis.

In company-specific news, Palo Alto Networks beat expectations for revenue and earnings per share. The cybersecurity firm also boosted its guidance. Discount retailer Ross Stores exceeded top and bottom line estimates. JD.com, which is China’s largest retailer both online and overall, soared past analyst expectations for the third quarter as its adjusted profit nearly doubled.

Gap beat analyst expectations for revenue in the third quarter. But the parent company of Old Navy, Athleta, Banana Republic, and the eponymous mall mainstay offered a cautious outlook for the remainder of the year. 

For the week as a whole, the Dow finished 0.01% lower. The S&P 500 lost 0.69%, while the Nasdaq shed 1.57%. All three indexes are positive for the month.

Preview

Tomorrow, watch for the Chicago Fed’s National Activity Index for October. This report is designed to gauge overall economic activity, as well as the impact of inflation. The index held steady in September.

Tuesday, the Redbook Index will be released, which measures same-store sales growth across roughly 9,000 different retailers, year-over-year. This metric increased by 6.8% in the week ending November 12.

On Wednesday, all investor eyes will be on the release of the Federal Open Market Committee meeting minutes. During its November meeting earlier this month, the Fed raised interest rates for the sixth consecutive time, bringing the federal funds rate to a range of 3.75% to 4%. Also, watch for last month’s new home sales, as well as its durable goods orders.

On Thursday, the stock market will be closed for the Thanksgiving holiday and there are no major economic reports due. The stock market closes early on Friday as well, and no major economic data will be published.

Earnings

Tomorrow, Urban Outfitters (URBN) will share its most recent data, as the retail sector remains in focus. Also, watch for earnings results from JM Smucker (SJM) and Zoom (ZM).

Tuesday is the earnings calendar’s busiest day of the week, with reports due from several major retailers, including American Eagle (AEO), Abercrombie & Fitch (ANF), Nordstrom (JWN), Best Buy (BBY), Dick’s Sporting Goods (DKS), and Dollar Tree (DLTR). These results will give investors a better sense of where consumer spending is headed, and what sentiment looks like heading into the holidays.

On Wednesday, heavy equipment manufacturer John Deere (DE) will hold a call with analysts to discuss its earnings. Last week, the company received two CES® Innovation Awards from the Consumer Technology Association for work in robotics and in vehicle intelligence.

With Thursday’s Thanksgiving holiday and Black Friday rounding out the week’s calendar, no major earnings reports are scheduled for release. Black Friday remains an extremely important day for the retail sector, although online shopping has diminished that to an extent.

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Don't Call it a Comeback

60/40’s Time to Shine

Dust off your Series 7 books, remember the balanced portfolio? The one made up of 60% stocks and 40% bonds? It’s been a tough stretch for this infamous basket of equities and fixed-income. One proxy of the portfolio’s performance is the iShares Core Growth Allocation ETF, which has a target mix of 60/40. So far it's down over 15% in 2022.

The poor performance may persist through the end of the year, but over the long haul, some are calling for a big rebound. JPMorgan, for example, is predicting 7.2% annual returns over the next ten-plus years, up from its previous forecast of 4.3% growth.

 “The painful slump in stock and bond markets in 2022 may not yet be over, but over the longer term we see this year’s turmoil creating the most attractive investment opportunities we’ve seen in a decade,” John Bilton, JPMorgan Asset Management’s head of global multi-asset strategy, said last week. 

No More Serial Losers 

One big reason JPMorgan thinks the 60/40 will outperform is a leveling-off, and eventual decline, in price increases. The Wall Street bank expects inflation to fall back to 2.6% over the next two years. 

If and when inflation returns to normal, this will prompt the Fed and other central banks to lower their policy rates. According to Bilton, this means bonds will no longer look like “serial losers” and it will also likely help segments of the economy that have a big impact on overall GDP. Housing, for example, is one sector that comes to mind. 

Meanwhile, equity returns during the same time period are predicted to rise. If this comes to fruition, this means both stocks and fixed income will be marching higher at the same time. The 60/40 allocation gives investors the best of both worlds: the potential for growth and some downside protection. 

Patience Required 

Building, holding, and benefiting from a balanced portfolio does require patience. There are undoubtedly storm clouds on the horizon, which could dampen returns before it’s sunshine and roses for the 60/40. 

That’s why JPMorgan is urging investors who are staring at losses in their portfolios to stay put and ride out the storm. Those who are “... able to avoid selling during drops tend to be rewarded in the longer run,” Bilton added. In fact, “... the sharpest gains are often banked early in the cycle as markets first turn.”

Bumble Might be Worth a Second Date

It’s Currently in the “Show Me” Camp

Bumble (BMBL) is getting ghosted by investors but there’s still a lot of matchmaking happening on its app. Yes, the stock is down over 30% this year, which is almost twice as much as the S&P 500. But it’s worth popping the hood on this Zillennial-focused platform. 

Let’s start with Bumble’s bearish signals, which include missed sales expectations for its fiscal third quarter and weak fourth-quarter guidance. While grim, they could prove to be overblown. 

Roughly $6 million of the revenue miss was due to the strong US dollar. Bumble also experienced product delays which hurt growth during the quarter. Those hiccups will ultimately be ironed out, paving the way for new features and enhanced functionality on the app. 

Despite the product delays, its total paying user base just topped 2.1 million. Although it’s not an apples-to-apples comparison, there were 6.14 million paid subscribers to The New York Time Company's digital-only news product in the second quarter of 2022. It’s interesting context when you think about how long both companies have been operational. 

“Overall, we realize BMBL results are a mixed bag and the product issues likely place BMBL in the show-me camp for some investors, but we’d buy the…pullback,” wrote J.P. Morgan analyst Cory Carpenter in a recent research report.  

A Big Focus is Bumble’s Bottom Line

More growth generally portends more profit (unless you’re FTX). The bottom line is now what some Wall Street bulls are focusing on. For the year, Bumble is expected to spend $245 million on marketing, which is about 27% of its sales. As that spending declines, Evercore analyst Shweta Khajuria thinks Bumble’s margins could grow to 35% from 25%. Khajuria also thinks Bumble can increase annual EBITDA by closer to 30% over time. 

Cost cutting is one way to boost EBITDA. Another piece of the puzzle is figuring out ways to squeeze more money out of its users. For the uninitiated, Bumble users can pay $20 per month for “unlimited swipes” or limitless chances at love. Bumble may soon begin letting paying users send compliments to matches. The average spend per user is currently hovering around $300. Some of these features may get this figure closer to $380 according to projections.   

Tinder’s a Formidable Rival 

There is one wrinkle in the Bumble growth story: Match Group (MTCH). Match, which also owns popular dating apps Tinder, OKCupid, and Hinge, is the industry leader, controlling about 72% of the market based on monthly active users. At last count, over 11 million people pay for Tinder’s premium tier. Profit margins for that app alone are nearing 35%. Bumble’s market share stands at 19%, which is up from 13% at the beginning of 2019, but it’s got a ways to go.

One good thing for both Tinder and Bumble is that the mobile dating app market is growing. Total spending is projected to hit $11 billion by 2028, according to Grand View Research. For context, this year's total spending on online dating is forecast to be around $7 billion.

With a stock that’s down double digits and an app that’s growing, investors may want to give Bumble a second date.  

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Too Much of a Good Thing May Hurt Hasbro

Go Slow Hasbro

Slow and steady wins the race. This antiquated adage is something Hasbro (HAS) might want to consider according to one Wall Street analyst. The iconic toy maker is attempting to ride the high of its “Magic: The Gathering” trading card game, releasing new series and editions at a rapid rate. That’s boosting sales in the short-term but Bank of America (BAC) worries it's at the expense of long-term gains.  

“The primary concern is that Hasbro has been overproducing Magic cards which has propped up Hasbro’s recent results but is destroying the long-term value of the brand,” wrote BofA analyst Jason Haas. This perspective is partially why Haas slashed his rating on the stock to underperform from buy. Haas also took an ax to his price target, cutting it to $42 from $73 a share. This week the stock hovered between $56-60 per share.

Killing Its Golden Goose

As it stands Hasbro’s “Magic” trading card business makes up 15% of its revenue and 35% of EBITDA. Sales popped during the pandemic. To capitalize on the demand, Hasbro decided to increase the cadence of new releases.

Now, there might be too much of a good thing. Hasbro is starting to annoy loyal fans, who complain they can’t keep up with all the changes. When looking at the last eight releases, seven have declined in value according to Bank of America’s estimate. It's gotten so bad that BofA’s Haas warned the company is “killing its golden goose.” 

Meanwhile, on the retail front, outlets across the country are already struggling to move excess inventory. This includes “Magic” which some national retailers are cutting altogether. 

Even Collectors are Mad

These troubling trends aren’t stopping Hasbro from releasing a 30th-anniversary set, another source of concern for Haas. The special edition costs a whopping $999 and includes four booster packs. For comparison, a normal set’s pack costs $5. 

When you flood the market with reprints, this will also have an impact on secondary sales. Apparently, some of these packs include cards from the “Reserved List," a batch that the company previously said it would never reprint. The lack of scarcity is eroding value. In 2021 the aggregate price of reserve list cards hit $250,000. Now, this figure is down to $150,000.

Sometimes you really can have too much of a good thing. Excess inventory is leading to value destruction. Now if only the US housing market could take a note from Hasbro’s playbook. 

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