🚘 One Industry's Pain is Another's Gain

Happy Sunday to everyone on The Street.

Last week the consumer price index fell 0.1% in December. This was "the biggest drop since April 2020," according to CNBC. If you strip out the superlative phrasing of that sentence, this was in line with expectations. Moreover, core CPI rose 0.3% and the headline number is still 6.5% higher than a year ago.

Still not great, many would argue. Others, however, are celebrating the fact that we may have reached peak inflation, which could pave the runway for a soft landing. Even this glass-half-full crowd seems to be holding their breaths though.

That's because this week Wall Street gets a glimpse of what many think could be the beginning of a US earnings recession. Between rising interest rates, elevated costs, and downward trending consumer sentiment investors are waiting to see how badly the Fed scratched the bottom of the boat with its aggressive rate hiking campaign.

Morgan Stanley’s Michael Wilson thinks stocks have the potential to fall roughly 25% this quarter due to downbeat earnings and lackluster forward guidance.

Global strategist at JPMorgan's Private Bank, Madison Faller, thinks executives will provide cautious commentaries over the next few weeks. “With developed economies slowing, we think Street estimates will likely continue to move lower, but not collapse immediately,” Faller said. “Margin degradation will likely continue into 2023 and will be the focus in management discussions with investors.”

As you tune into calls on your watchlist, there are five topics to keep on your radar. The first is a potential fed pivot. Earnings are important, but any monetary-policy-related comments will continue to drive overall sentiment. Consumer spending is another key area of focus. If Americans are tapping their savings and leaning harder on credit cards, this doesn't bode well for discretionary spending. Job cuts will continue to be important to monitor as well. We wrote about this a few weeks ago. The final two are also subjects we've covered including how China's reopening impacts the global economy and where energy costs go from here.

Before we dive in, we want to congratulate Jim Z. from South Carolina for winning our year-end survey giveaway. Even though the contest is over, you can still feel free to fill it out. It helps us fine-tune what you're reading and as we mentioned last week, one of the questions asks if you would like to be notified about private investment offers including venture capital and real estate opportunities. Click here to fill out the form if you want to be notified.

Review

US stocks rose Friday as investors reacted to a series of earnings reports from the banking sector. All of the major indexes rallied to finish in the green, helping the S&P 500 and Nasdaq post their best weekly performance since November.

Now, with that said, given the banking sector is closely tied to the economy as a whole, recessionary concerns were still front and center on Wall Street at week’s end.

JPMorgan Chase beat estimates on the top and bottom lines, but CFO Jeremy Barnum echoed the company’s prediction that the US will enter a recession at some point this year.

Bank of America also said it’s preparing for a recession in 2023, warning that employment may increase rapidly. Meanwhile, Wells Fargo reported that its profit for the most recent quarter was cut in half.

Elsewhere in company-specific news, insurance giant UnitedHealth Group exceeded analyst estimates for earnings in the fourth quarter, and upheld its full-year profit guidance.

On the economic data front, consumer sentiment increased for the second straight month, although it's still hovering near all-time lows. One-year inflation expectations declined in the University of Michigan’s survey, down to 4.0% from 4.4% in December. The bond market’s recent rally stalled, as the yield on the benchmark US 10-Year Treasury rose.

In commodities, oil prices increased. Both international standard Brent crude and US benchmark WTI saw their price per barrel rise. Traders are betting China’s post-COVID reopening will push energy demand higher.

Related Reading: How to Play the End of Zero COVID

Overseas, stocks in the UK and Europe gained, as some investors believe the Eurozone may be able to steer clear of a deep recession driven by higher energy costs.

For the week as a whole, the Dow Jones Industrial Average gained 2.0%. The S&P 500 rose 2.67%, and the Nasdaq Composite climbed 4.82%.

Preview

Tomorrow markets are closed in observance of Martin Luther King Jr. Day.

Tuesday, the January Empire State Manufacturing Index will be released, which highlights the general business activity in New York. This monthly metric declined in December as participants in the survey reported subdued optimism.

Wednesday, investors will get a look at December’s retail sales as well as the January NAHB home builders' index. In December, the home builders’ index continued a downward trend that persisted in 2022, as interest rates rose and housing grew more unaffordable throughout the year.

On Thursday, initial and continuing jobless claims will be reported. Last week, the amount of new jobless claims fell by just 1,000 clocking in at a total of 205,000. This was the lowest overall amount in the past three months, providing further evidence of the strong job market in the US.

Friday will round out the week with a report on existing home sales for the month of December. In November, this metric fell 7.7%, marking the tenth monthly decline in a row. Given mortgage rates remain elevated in comparison to this time last year, it’s likely existing home sales will continue to decline.

Earnings

This week will be heavily focused on the financial sector, with Goldman Sachs (GS) and Morgan Stanley (MS) kicking things off Tuesday. Last week, Goldman Sachs had one of its most significant rounds of layoffs since 2008, cutting ties with 3,200 employees. Investors will be eager for more insight from the banking giant concerning its outlook for the company and the broader economy.

Wednesday, PNC Financial Services (PNC) will keep banking in the spotlight, while Q4 earnings from United Airlines (UAL) lend insight into the embattled travel industry. The airline’s pilots’ union rejected a new contract agreement last November. Investors should expect an update on these negotiations, as well as the airline’s plans for its new fleet of jets.

Thursday will be one of the busiest earnings days of the week, with Discover Financial (DFS), Procter & Gamble (PG), and Netflix (NFLX) all set to report. An update concerning P&G’s portfolio of products will provide investors insight into how inflation is impacting America’s favorite consumer brands. Additionally, Netflix will be able to report on the initial success of its ad-supported tier and its plan to crack down on password-sharing.

On Friday, it’s back to banking, as Ally Financial (ALLY) rounds out the week. As Ally specializes in auto lending, its report may illuminate how Americans with auto payments are faring, in the face of rising interest rates.

There's One Big Opportunity Left in Home Automation 🏡

When you think of home automation, all the great investment opportunities have been taken, right?

You've got Nest, the smart thermostat, that Google bought for $3.2 billion, Ring, the smart doorbell, that Amazon bought for $1.2 billion, and August Lock that Assa Abloy acquired.

But there's one area of automation that hasn't gone mainstream yet. And this company is about to do just that.

• This one tech company has returned investors 40% year-over-year, even in this market downturn

• And early investors have already seen a 10X return since 2015

• This company has incredibly strong patents in the smart home space, patents capable of removing copycat sellers from Amazon

• This startup has already generated over $5 million in online sales only, and is now at an inflection point, about to scale aggressively into retail and B2B real estate developers.

• This company has the potential to be the next Ring or Nest, yielding major gains for early investors.

Learn more about this exciting opportunity at invest.helloryse.com

Buybacks Bolster Energy Behemoths

Stocks Holding Steady

Oil and gas prices may be falling but the same can’t be said for energy stocks. The sector is having a solid run despite falling crude oil prices, which are now around $80 per barrel. Last year prices were hovering around $100 per barrel. Natural gas prices have also come down, trading in northwest Europe at prices seen prior to Russia’s invasion of Ukraine. An unusually warm winter has also negatively impacted demand across the pond. Check out these pictures of Europe’s snowless ski resorts.

Given this backdrop, energy stocks should be slipping but they’re holding relatively strong. Investors can thank share buybacks for bolstering some big names. Among integrated European energy companies, Wall Street firm Bernstein found free cash flow hit a whopping $141 billion last year, close to double 2021 levels. Many companies used that cash to increase their dividends and buy back roughly $42 billion of their own shares. Shell (SHEL), for example, accounts for almost half of the total amount.

Macro-Movements That Could Continue to Help

This shareholder-friendly approach is helping buoy stocks in the face of flagging growth and other headwinds. For example, European energy companies also face additional taxes which will eat into profits. Shell said it's on the hook for $2 billion in windfall levies in the fourth quarter.

There is one wild card that should play in the energy firms’ favor: higher oil and gas prices. Just because they are down now doesn’t mean they will stay that way. Europe will need to fill up for another winter without Russian pipeline inflows. They will also need to pay higher prices in a more competitive market. As China reopens, it is expected to be a bigger buyer that will suck up supply and drive the price of natural gas higher.

Oil prices are also poised to increase. Russia is banning the sale of its products to any country that backed the recent cap by G7 nations on the price of Russian oil. The Kremlin also said it would reduce production by as much as 7% because of the $60 cap.

Goldman’s Energy Picks

Goldman Sachs is bullish on the energy sector in 2023. Analyst Neil Mehta thinks crude oil prices will be in the $80 to $100 per barrel range. He also believes company-specific drivers and capital returns will boost the stocks.

The Wall Street firm expects the industry to see 13% gains this year. More specifically, it sees some stocks potentially increasing by 26% on average. Any pullbacks in the stocks during the year should be viewed as buying opportunities, Mehta said in a recent note.

Among its picks are Antero Resources (AR), Cheniere Energy (LNG), Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BKR), ExxonMobil (XOM), and ConocoPhillips (COP).

After a strong 2022, many of these energy giants are cash-rich helping them implement some very shareholder-friendly initiatives. It’s hard to string together successful back-to-back years in any industry, but the energy sector is one worth watching during what promises to be another interesting twelve months.

One Industry's Pain is Another's Gain

Cash-Strapped Consumers May Hail a Ride

Sometimes one industry’s pain is another industry’s gain. Right now this inverse relationship might be playing out in the auto market. Despite the downward trend, inflation is still high, interest rates are still poised to rise, and countless consumers are worried about an impending recession. As a result, many are expected to put off buying a new car and will opt for cheaper ways to get from point A to point B.

Many families will share cars. Others will carpool. And, according to one investment firm, a large segment will turn to ride-hailing apps. That’s the thinking behind Piper Sandler’s recent upgrade of Uber (UBER) from neutral to overweight. The Wall Street shop recently raised its price target on the stock to $33 per share from $31. On Friday the stock closed at $29.44 per share.

“Vehicle prices are near all-time highs, and a quick reversion to historical pricing seems unlikely. As a result, we think cash-strapped consumers will increasingly opt to hail rides instead of trying to replace old cars,” Alexander Potter, an analyst at Piper Sandler wrote in a recent research note. “In November, the average price of a new car was ~$49k in the United States. And while used car prices have ‘rolled over’, the real price of buying a used car is still rising (at least if financed using a loan).”

Uber Outshines Lyft

When it comes to ride-hailing apps, Potter prefers Uber over Lyft (LYFT), calling Uber the “#1 way to invest in this theme.” The analyst pointed to Uber’s scale as a reason it should outperform its rivals.

Now, this doesn’t mean Uber is home-free. There are a few issues investors need to keep their eyes on. For example, 36% of Uber’s revenue comes from deliveries. That area of its business could face downward pressure if the US falls into a deeper recession. It's the reason Potter downgraded his rating on DoorDash (DASH) to underweight from neutral.

There is one silver lining if economic conditions worsen. These ride-sharing companies may have an easier time attracting talent. Bank of America estimates that as many as 450,000 new drivers could join Uber and Lyft this year. The Wall Street firm thinks up to 600,000 new couriers could join DoorDash and Uber Eats if people lose their jobs and need a new source of income.

Driver Dilution on the Horizon?

That increase in labor supply, argues Bank of America, could offset any declines in ride-hailing and delivery. Uber won’t have to spend cash to lure gig workers to its platforms like it had to do in years past. This dynamic isn’t great for existing gig workers who fear a flood of drivers and couriers will lower their earnings potential. But it bodes well for Uber.

If Uber is able to decrease its marketing costs to attract new drivers while simultaneously benefitting from an uplift in demand due to consumer appetites, its stock may be set for surge pricing.

There's One Big Opportunity Left in Home Automation 🏡

When you think of home automation, all the great investment opportunities have been taken, right?

You've got Nest, the smart thermostat, that Google bought for $3.2 billion, Ring, the smart doorbell, that Amazon bought for $1.2 billion, and August Lock that Assa Abloy acquired.

But there's one area of automation that hasn't gone mainstream yet. And this company is about to do just that.

• This one tech company has returned investors 40% year-over-year, even in this market downturn

• And early investors have already seen a 10X return since 2015

• This company has incredibly strong patents in the smart home space, patents capable of removing copycat sellers from Amazon

• This startup has already generated over $5 million in online sales only, and is now at an inflection point, about to scale aggressively into retail and B2B real estate developers.

• This company has the potential to be the next Ring or Nest, yielding major gains for early investors.

Learn more about this exciting opportunity at invest.helloryse.com

Property Peeping Site Could Pop

Zillow Gets a Buy

The real estate market is in a tricky position. This is largely thanks to rising mortgage rates and home affordability that is near a 40-year low. These combined factors have weighed on many real estate-related stocks including Zillow (ZG). The addicting, voyeuristic online marketplace has underperformed the market for the past two years. Last year, Zillow’s stock finished lower by 54%.

Now, with that said, Bank of America thinks Zillow is a buy. The Wall Street firm raised its rating to Buy from Outperform last week and nearly doubled its price target to $42 per share from $22. Analyst Curtis Nagel’s new price target implies a 20% upside for Zillow’s stock. That’s even though Nagel thinks real estate transactions will decline 21.3% year-over-year in 2023. For context, last year's transactions fell 8.1% and Zillow’s shares tumbled as well.

Market Trough in Early 2023

So what’s behind Nagel’s bullish bet? The analyst expects the real estate market to trough in the early part of 2023 and return to growth next year.

“While real estate fundamentals remain very challenged given the macroeconomic environment and rates pressure, we believe the market may trough in early 2023 and are more confident that growth can return to double-digits in 2024 on improving affordability,” wrote the analyst in a recent research report.

He noted the decline in mortgage applications has started to ease since October, which could mean home volume trends will begin improving in the second quarter. Nagel expects home transactions to accelerate 10% in 2024 as home prices fall and mortgage rates decline.

Zillow Specific Growth Drivers

In addition to benefiting from an improvement in the real estate market Nagel thinks there are some Zillow-specific projects that support his buy rating and $42 price target. They include online tour scheduling, 3D virtual tours, and providing tools to realtors to help them find more high intent home buyers.

The outlook for the real-estate market this year is decidedly foggy. Certain companies like Zillow have been bearing a lot of the brunt for the uncertainty. Sometimes this weakness translates into interesting buying opportunities if investors can stomach some of the near term volatility. Bank of America seems to think that Zillow might be an interesting bet.

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