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👴 Out With the New, in With the Old

👴 Out With the New, in With the Old

Plus, "Big Short" investor Steve Eisman is bullish on these picks.

April 14, 2024

Happy Sunday to everyone on The Street.

Banks kicked off earnings season on Friday, with JPMorgan, Citigroup, BlackRock, and Wells Fargo filing first-quarter results.

Based on the initial headlines from those earnings reports, you’d think we would see a surge in bank stocks as BlackRock hit a record $10.5 trillion in AUM, JPMorgan’s profit rose 6% to $13.42 billion, and Wells Fargo’s revenue beat Wall Street expectations.

However, we saw anything but a bank stock surge on Friday:

Wells Fargo: -0.40%
Citigroup: -1.7%
BlackRock: -3%
JPMorgan: -6%

So, what happened? Well, aside from those headlines, the banks’ earnings reports showed investors how the highest interest rates in two decades are affecting banks— and they didn’t like what they saw.

Once the Fed started raising interest rates in March 2022 to tame inflation, it boosted the banks’ net interest income (NII) and led to high profits. But that effect is waning fast. For example, Wells Fargo’s NII fell 8% in the first quarter, and JPMorgan’s interest income fell short of analyst expectations.

Many investors are now skeptical about how much banks will bring in from interest payments in the coming months.

🏦 Are you Bullish or Bearish on Bank Stocks in Q2

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Review

Volatility stormed back into the markets, shaking things up in a week where inflation defiantly outstripped estimates for the third straight month in March, leading investors to substantially slash their expectations for Federal Reserve interest rate cuts.

Geopolitical tensions in the Middle East fueled a surge in commodities like oil and gold. Meanwhile, the start of the earnings season saw major banks slightly surpassing estimates, yet the overall negative sentiment has still triggered a negative response from stocks.

On Friday, the CBOE Volatility Index, or VIX, spiked the most in more than a year, amid rising indications of an imminent Iranian attack on Israeli soil, with President Joe Biden acknowledging it could occur “sooner rather than later.”

Rate Cut Expectations Delayed

Following recent hotter-than-expected inflation data, the likelihood of a June rate cut plummeted from 60% to 20%. Some Wall Street analysts now expect only one rate cut in December.

Mortgage Rates Surge

U.S. mortgage rates are on the rise, with the 30-year fixed rate hitting 6.88%, as recent inflationary pressures raised long-term Treasury yields and weakened expectations for Federal Reserve rate cuts. This surge raises affordability concerns for homebuyers, exacerbating the housing market’s challenges with high prices and low inventory.

Consumer Sentiment Drops

The sentiment among U.S. consumers fell in April, missing economist forecasts, per the University of Michigan. The report underscored the increased economic anxiety that comes with rising inflation expectations.

Confidence In Musk Fades

Wall Street’s confidence in Tesla CEO Elon Musk is declining, as highlighted by CNBC's Jim Cramer. Amid a substantial drop in Tesla’s stock driven by vehicle price cuts and strong competition, Musk faces skepticism about his focus due to his other ventures. In contrast, Warren Buffett‘s Berkshire Hathaway Inc. garners praise for its robust long-term performance.

Ark Bets On OpenAI

Cathie Wood‘s Ark Invest took a stake in OpenAI through its Ark Venture Fund, seeking to capitalize on the growing interest in artificial intelligence technologies. This investment allows Ark’s clients to gain exposure to OpenAI, along with other high-profile companies such as SpaceX and X Holdings.

AI Power Fears

By 2030, artificial intelligence technologies could account for up to 25% of U.S. energy consumption, according to Arm Holdings CEO Rene Haas. This projection emphasized the significant increase in electricity demand driven by artificial intelligence data centers needed for sophisticated AI models like ChatGPT.

Preview

Economic Data

Monday: U.S. retail sales, New York Fed President John Williams TV appearance, Home builder confidence index
Tuesday: Housing starts, Industrial production, Fed Chair Jerome Powell speaks
Wednesday: Fed Beige Book, Cleveland Fed President Loretta Mester speaks, Fed Governor Michelle Bowman speaks
Thursday: Initial jobless claims, U.S. leading economic indicators, Atlanta Fed President Raphael Bostic speaks
Friday: Chicago Fed President Austan Goolsbee speaks

Earnings

Monday: M&T Bank, Charles Schwab
Tuesday: Bank of America, United Airlines, Morgan Stanley
Wednesday: Volvo, US Bancorp, Citizens Financial Group
Thursday: Blackstone Inc, Alaska Air Group
Friday: Western Alliance Bancorp, American Express

Out With the New, in With the Old

The Case for Ditching Tech

If the classic mustache of the 1970s can make a comeback, maybe Wall Street’s favorite sectors from years past can hop back in the spotlight.

The founder of Blue Chip Daily Trend Report certainly thinks so. Strategist Larry Tentarelli believes investors should be adding funds from the industrial, energy, and financial sectors to their carts.

His argument has two main points. First, he views these sectors as cheaper in valuation compared to tech names. Second, Tentarelli sees the US economy continuing to grow steadily, which should boost these cyclical areas.

Bulldozers and Black Gold

On the industrial side, Tentarelli highlights Caterpillar (CAT). The stock is already having a terrific year, up more than 25% year-to-date. If the US economy is strong, construction spending could increase, benefitting Caterpillar.

When it comes to energy stocks, Phillips 66 (PSX) and Valero (VLO) get the nod. Both companies are refiners and could see earnings soar thanks to higher oil prices.

Bank On It

Tentarelli also backs some financial companies, with two names making the cut.

He says financials are trading at cheap valuations, making them ripe for the picking.

JP Morgan (JPM) is about 12 times forward earnings and Toronto-Dominion Bank (TD) is 8 times forward earnings, well below the S&P 500 which is around 20.

Big tech companies stole the show last year; maybe it’s time for more rugged stocks to get in the spotlight.

Which stock will have the best second half of 2024?

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French Stock Finds

Hedging Investor Fears

Goldman Sachs (GS) recently updated its top European stock picks and recommended investors follow a specific trading strategy. The strategy is centered around concerns over how much higher markets can go.

The pan-European Stoxx 600 index (SXXP) is up around 6% this year, but investors are beginning to fear it may be reaching its ceiling. In response, Goldman recommends a “barbell approach” that involves hedging against broader market uncertainty with overweight holdings in specific groups of stocks.

Goldman encouraged investors to focus on mature, defensive companies with strong balance sheet growth opportunities that reinvest excess cash to compound earnings growth. The investment bank also pointed investors towards small caps with low valuations.

Unibail-Rodamco-Westfield

Goldman has identified a French commercial real estate company - Unibail-Rodamco-Westfield (UNBLF) as a stock that fits the bill. According to analyst Jonathan Kownator, it should benefit from increased foot traffic in brick-and-mortar stores.

The French company’s real estate holdings are spread out across Europe and the US, with retail locations making up 92% of its portfolio. According to Kownator, most of its properties are occupied by stores with high sales densities in wealthy areas.

As retail demand grows, the firm has given it a price target of $115.97, a 43% increase from Monday’s price.

JCDecaux

Goldman has its sights set on another French company. JCDecaux (JCDXF) is an advertising firm specializing in bus stop ads, billboards, and street furniture.

Analyst Lisa Yang is bullish on the stock, largely due to the upcoming Paris Olympics and UEFA soccer championships. According to Yang, JCD should see a substantial windfall from the Olympics in terms of out-of-home advertising, looking at trends from the 2012 London Olympics. The company currently holds about 50% of the French market share in this space.

JCD could also see boosts from the UEFA football championships in Germany this year, where it holds 35% of the market share. Goldman has given the stock a price target of $28.11, an upside of around 44%.

These French stocks could give investors a good starting point for hedging against broader market uncertainty.

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

Not Shorting Anymore

High on Infrastructure

Steve Eisman, an investor made famous by the book and movie “The Big Short,” is touting infrastructure stocks following two years of research on the industry. Eisman is now the senior portfolio manager at Neuberger Berman.

He’s grown bullish on the industry following increased government spending. He’s identified 80 stocks as potential investments, but he points out that only around 30 of them are particularly good choices.

Eaton Corporation

Eisman particularly likes solar businesses that sell to utility companies. Eaton Corporation (ETN) is one such company.

Eaton is a power management company selling its products in more than 175 countries globally. Its operations focus on the electrification of factories.

Its stock is up over 31% this year and over 99% over the past 12 months. Analysts give the stock an average price target of $322.84, a downside of around 1% from Monday’s close.

CRH PLC

Eisman is also bullish on CRH PLC (CRH), an Irish materials company that does 75% of its business in the US. Eisman started buying CRH stock following the company’s decision to relist in the US in September.

The stock is up about 20% year-to-date and around 74% over the last 12 months. Analysts give it an average price target of $92.33, an 8% upside from Monday’s close.

If there’s one thing Eisman is known for, it's getting ahead of market trends. For investors looking to do the same, these stocks could provide a great opportunity.