✈️ One Way to Play the Summer Travel Boom

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THE STREET SAYS

Good afternoon everyone and happy Mother's Day to all of the moms out there. Last weekend we asked you if the US economy is headed for a recession within the next 12 months. The majority of respondents said YES there will be a recession (78%) while less than a quarter said NO (22%).

UP NEXT: April's CPI is due this week, with inflation remaining at its highest level in 40 years, as of the most recent reading. In March the CPI checked in at 8.6%, year-over-year.

VOTE: Do you think April's year-over-year CPI reading will be higher or lower than 8.6%? Click here to vote.

REVIEW

US stocks fell Friday, following the market’s worst day of the year with more losses to end the week. Stocks were choppy after the Fed’s mid-week rate hike and accompanying policy statement, which indicated additional 50-basis-point increases are likely coming in the months ahead.

Investors originally showed signs of optimism because the central bank’s outlook was less hawkish than some expected, but that seemed to fade as the week continued. One factor may be the relatively-robust jobs market, as analysts say that gives the Fed leeway to enact an increasingly tighter monetary policy.

The Fed is attempting to combat runaway inflation, but some worry economic growth could be hampered in the process. Meanwhile, the bond market and commodity prices remain highly volatile. Analysts argue assets like gold and certain bonds aren’t acting as “safe-haven” options given the rising rate environment. The yield on the benchmark 10-Year US Treasury is at its highest level since 2018, putting pressure on equities.

On the economic front, the unemployment rate held steady at 3.6% in April, while the economy added 428,000 jobs. That exceeded expectations and US employers have now added over 400,000 jobs for 12 straight months. The labor participation rate fell by 363,000, the first such decline since March of 2021.

In company-specific news, Under Armour’s share price plummeted after it missed analyst expectations on the top and bottom lines. The news seemed to impact Nike as well, sending its share price lower.

Staying in the fitness space, reports say Peloton is looking to sell a sizable minority stake in the company.

Johnson & Johnson slipped after the FDA put limits on the use of its COVID-19 vaccine.

DraftKings posted better-than-expected revenue and increased its full-year sales forecast.

Financial services and digital payments company Block also posted upbeat guidance.

Ticketmaster parent Live Nation reported a smaller-than-expected first-quarter loss, as well as strong demand from both advertisers and consumers.

For the week as a whole, the Dow Jones Industrial Average and S&P 500 dropped 0.2%. The Nasdaq Composite fell 1.5%.

PREVIEW

Tomorrow, the New York Fed will release April’s one-year and three-year consumer inflation expectations survey. In March inflation expectations hit a new high at 6.6% for the one-year reading, also referred to as the short term. The medium-term expectations, the three-year reading, eased up a bit in March coming in at 3.7%. Also, be on the lookout for March’s revised wholesale inventories.

Tuesday, April’s NFIB Small Business Index is due, after falling to a two-year low in March. The reading measures small business owner optimism. Unsurprisingly, many owners list inflation as their biggest challenge. Real household debt is also set for release.

Wednesday, the April Consumer Price Index will be published, with inflation at its highest level in 40 years. Last month’s CPI showed prices increasing 8.6% year-over-year. The most recent data did show some easing in the core CPI, which strips out highly volatile food and fuel costs. Also be on the lookout for April’s federal budget.

Thursday jobless claims are due. April’s PPI for final demand will be released as well.

Friday the University of Michigan is set to publish this month’s preliminary consumer sentiment and five-year inflation expectations. April’s Import Price Index is also due.

On the earnings front, here are a few companies to keep an eye on:

Tomorrow, meal delivery service company Blue Apron (APRN) will report its first-quarter data, after it announced last week it had secured a $70.5 million capital infusion through debt and equity financings.

Tuesday, Norwegian Cruise Line (NCLH) will post earnings, after missing on the top and bottom lines during its most recent quarter.

Wednesday, Beyond Meat (BYND) will hand in its first-quarter report card. In late April fast-food giant McDonald’s (MCD) announced future plans to expand its partnership with the plant-based meats company.

Thursday, Six Flags Entertainment (SIX) will share its latest results. The amusement park company just announced plans to hire 15,000 seasonal workers across the US.

Friday, New York City REIT (NYC) will report first-quarter earnings.

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Wheels Up! Vacation Season Is Right Around the Corner

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Beat Down Lithia Motors Has Open Road Ahead

Still Some Gas in the Tank

Used car dealers are in a tough spot. Since the start of the pandemic, strong demand and supply chain woes have made it hard to come by both new and used cars, sending prices soaring but also hurting sales. Now, with inflation at a 40-year high and interest rates rising, some are concerned the economy will slow and demand for used cars will drop significantly. Plus, traditional used car dealers face added competition from online sellers like Carvana (CVNA) and Vroom (VRM).

As these issues have played out, used car dealer Lithia Motors (LAD) has seen its share price fall by 27% over the last 12 months. That sell-off may prove to be overblown, however. Analysts say that’s because the company is growing, with strong margins that could hold up even as supply chain issues ease.

Looking Like a Growth Stock

Over the past five years, Lithia has been able to grow its sales by about 20% on an annual basis, with operating income up around 38% each year. By comparison, Amazon (AMZN) has grown sales 28% and operating income 43% over the same time frame. This year Lithia is projected to post sales of $29 billion. In 2025 that expectation jumps to $50 billion.

Despite these trends, the company has failed to gain much traction in terms of its share price. Investors seem worried gross margins will start to shrink over time, putting pressure on Lithia’s bottom line. As a reflection of these concerns, the stock is currently trading at just six times 12-month forward earnings.

Margin Pressure Overinflated?

There’s little question that Lithia’s profit margins benefited from skyrocketing car prices during the pandemic, and while pricing equilibrium is likely over time, Wall Street doesn’t expect it will happen overnight. Market watchers note the company’s online business is booming, thanks to the successful implementation of an omnichannel strategy that looks to make the buying process seamless.

Lithia is also in growth mode, expanding its dealership footprint through the purchase of 30 dealerships over the last three years. It also maintains an auto loan business that finances around 4% of the vehicles sold by the company. Analysts say that number could grow up to 15% in the future, further boosting margins.

The used car industry has had some stall outs since the pandemic hit. Demand and historically-high prices may eventually fall, but Lithia looks poised for growth regardless. Figuring out where that leaves them in comparison to Carvana and Vroom is a bit further down the road.

Inflation Keeps Heating Up, Here's How To Cool Down Your Portfolio

Springtime Check Up

Inflation is at a 40-year high and despite actions taken by the White House and Federal Reserve, it doesn’t appear to be slowing down anytime soon. For many investors, this is uncharted territory. Occasional price fluctuations at the grocery store or gas pump are nothing new, but when prices increase this rapidly it affects the entire portfolio.

This type of environment should have investors closely examining their stock and bond holdings. Some may consider adding commodities to their portfolios. The bottom line is that what worked in a low inflationary environment may not be a recipe for success when prices are soaring and interest rates are rising.

Adjustments in Order?

The bond market is a good starting point, as it took a beating during the year’s first quarter. Despite being viewed as a safe haven when equities struggle, the investment-grade corporate bond market’s total return checked in at -12.3% as of late April. With that said, analysts argue bonds can still factor into an investment strategy, even if they don’t provide as much protection today in comparison to the past. In a broad sense, for people investing in stocks, bonds are an important way to diversify your portfolio. Inflation would have to stay at a rolling rate of 3.5% over ten years for bonds to lose their diversification power and that’s not expected to happen.

Individual stock holdings are worth examining as well, as they may need an overhaul. Tech and high growth stocks may have performed well in recent years, but in a rising rate environment they’ve historically underperformed. On the flipside, value and small cap stocks in the banking and energy markets tend to benefit when rates are on the rise.

Keep Commodities and Cash on Mind

Amid the struggles of stocks and bonds during the first three months of 2022, commodities enjoyed their best quarter in thirty years. Supply and demand imbalances caused by supply chain disruptions and the War in Ukraine have prices of commodities soaring. Market watchers contend demand for commodities will remain robust, particularly energy. This is tied to the increased desire for renewable sources of energy and the so-called green movement, as well as increased military spending.

Investors are also being advised not to forget about cash as they navigate this environment. With the Fed raising rates and the stock market contending with a high rate of volatility, keeping some dry powder on hand isn’t a bad idea. Rates on CDs are moving higher and cash may come in handy amid another market downturn, particularly for bargain hunters.

STREET TREATS

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Plastic Purchasing Power: What's Up With Credit Cards

Travel Transactions

Discover Financial (DFS), Mastercard (MA), Visa (V), Fiserv (FISV), and American Express (AXP) have held their own in recent weeks despite a double digit decline in financial and information technology sector stocks. The group has benefited from an uptick in travel, particularly by more affluent consumers in the US. That trend has kept business booming, money flowing in, and their share prices largely insulated from the broader market sell-off.

Credit card investors who are thinking about cashing out may want to reconsider. Wall Street bulls see more runway for the group, particularly in overseas travel, even if rising interest rates and inflation puts a damper on consumer spending stateside.

Driving (and Flying) Growth

Some Wall Street analysts see international travel as a big opportunity for credit card companies this year, with the Asia-Pacific region in particular seeing an uptick in activity. The China market may not perform so well, but India, Thailand, Australia, and New Zealand are all seeing an increase in travel demand which should translate to more spending on credit cards. Even in the US analysts expect travel to stay strong despite higher gas and airfare prices.

Travel’s rebound isn’t the credit card sector’s only tailwind, as it should continue to benefit from online shopping and services-driven e-commerce. One result of the pandemic is people becoming more comfortable paying for goods, food, haircuts, and other services online. Cryptocurrency purchases are also driving sales at credit card companies.

Debit-Card Spending, AKA The Wild Card

Travel and services spending aside, market watchers say there are still concerns and risks facing the credit card industry. The potential decline of everyday spending on debit cards is included here. With the Fed enacting a 50 basis point rate hike last week, and inflation soaring, consumer spending habits may change. This is potentially evidenced by what happened during the first three months of 2022, as debit payment volume growth slowed at both Mastercard and Visa. Separately, some worry online spending will slow in the years to come after pandemic driven hyper growth.

The market is highly volatile and investors are looking for places to hide out during this period of uncertainty. For credit card stocks, the hope is a busy summer travel season will keep the party going.

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security. Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing.