📍 Pinterested in Profits?

Happy Sunday to everyone on The Street.

I don’t know why, but I find the remote work vs. back-to-office battle fascinating. This past week, J.P. Morgan told its managing directors “to lead by example” by returning to their desks five days a week. Very interested to see how this plays out.

Meanwhile, out West, NBC’s Bay Area affiliate described San Francisco as a “ghost town" because offices in the city are historically empty. "The vacancy rate in San Francisco is about 30% or about 35 million square feet that is not currently being used," said Colin Yasukochi with commercial real estate firm CBRE. "And that's the highest that we've ever seen in San Francisco."

There's a connecting thread here, but there's also a tale of two cities playing out. While New York City is home to a large and growing tech sector (Silicon Alley), it's not overly dependent on the industry. San Francisco, on the other hand, "is getting hit harder because it has a high concentration of software firms that can easily keep having workers work remotely."

I don't want time to move faster than it already does, but looking back at the outcome of both of the above will be incredibly fascinating a decade from now.

— Brooks

Review

US stocks finished lower Friday after fresh economic data and earnings from some of Wall Street’s titans.

J.P. Morgan posted record revenue of $39.34 billion and adjusted earnings of $4.32 per share, well above the $3.41 estimate. The positive numbers were largely driven by a 49% increase in net interest income thanks to the decade-high rates the Fed is paying on bank reserves.

Investors saw similar results from Wells Fargo and Citigroup, highlighting the ability of big banks to outperform in this high-rate environment.

On the economic front, month-over-month retail sales in the US declined by 1% in March, well below expectations of a 0.4% decline. Following a downwardly revised 0.2% decline in February, the latest numbers point to inflation and rising interest rates weighing on consumer spending.

In company-specific news, Boeing saw its shares sink after warning of reduced 737 Max production and deliveries due to a parts issue with a supplier. The company said the issue affects some of its most popular models held by customers including American and Southwest Airlines. However, Boeing underscored the problem is not an immediate flight safety issue, and the in-service fleet can continue operating.

Meanwhile, Walmart sold the menswear brand Bonobos to WHP Global and Express in a $75 million deal. The big box retailer originally purchased Bonobos in 2017 for $310 million as it was growing its online presence to compete with Amazon, but this sale appears to signal the company is tightening its focus on its core retail business.

In total for the week, the Dow Jones Industrial Average finished 1.20% higher, while the S&P 500 added 0.79%. The Nasdaq Composite was up 0.29%.

Preview

Tomorrow, the NAHB housing market index for April will be released. In March, this gauge of housing sales conditions rose for the third straight month.

Tuesday, investors will get an updated report on building permits and housing starts. In February, building permits hit 1.55 million, the highest reading in 5 months. Housing starts also surged in February and hit 1.45 million, a 9.8% increase from January.

On Wednesday, even more housing data will be published, with a report on mortgage applications set to be released, as well as an update to the 30-year fixed-rate mortgage. For the week ended April 7th, mortgage applications rose 5.3%. Meanwhile, the average 30-year fixed-mortgage rate sits at 6.3%.

On Thursday, investors will learn how many existing homes are selling in the US. In February, the number of homes sold jumped 14.5%. This snapped a 12-month decrease and was the largest monthly jump since July 2020. Additionally, the number of people claiming unemployment, which was 239,000 for the week ended April 8th, will get a fresh update.

Friday will close out the week with the release of the US manufacturing PMI, which will offer insight into the state of the manufacturing sector.

Earnings Spotlight

Tomorrow, Charles Schwab (SCHW) will continue the streak of financial earnings reports that started last Friday, when JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) all announced earnings.

Tuesday, financial reports will continue to roll in, with Bank of America (BAC), BNY Mellon (BK), and Goldman Sachs (GS) reporting. Lockheed Martin (LMT) and Netflix (NFLX) will also report. This will be Netflix’s first quarter without CEO Reed Hastings at the helm. Instead, co-CEOs Greg Peters and Ted Sarandos will speak on a number of ongoing changes at the streaming pioneer: the performance of its new ad-supported subscription, its ongoing password-sharing crackdown, and the fact that it has fallen behind Amazon Prime (AMZN) in terms of number of US users.

Wednesday will be another busy day as IBM (IBM), Morgan Stanley (MS), and United Airlines (UAL) all offer insight on their first quarter. EV leader Tesla (TSLA) will also expand on the fact that it produced over 440,000 vehicles and delivered almost as many in the first quarter.

On Thursday, investors can expect updates from both American Express (AXP) and AT&T (T). Amex may expand on its recently announced sustainability initiatives.

On Friday, Procter & Gamble (PG) will give an update on its business. As the owner of dozens of household brands, P&G’s report can give insight into consumer spending habits and further signs of inflation’s abatement.

The Times Are Changing – Deel With It

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The workforce looks a little different these days. Whether it’s hiring in line with new regulations or onboarding remote workers, Deel can help you future-proof your business, keeping it innovative and inclusive.

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Investors May Want to Put a Pin in Pinterest

Interest in Pinterest

Pinterest (PINS) has had a tough go of it over the past couple of years. Rising interest rates have put a damper on growth stocks, while the end of the pandemic has hurt social media usage rates. It also had to install a new CEO last summer.

As a result, its stock is a far cry from its peak of $89 per share set in February 2021. These days, Pinterest trades around $28 a share. Bulls, however, have yet to lose interest.

For starters, they point to new CEO Bill Ready. He comes from Google (GOOGL) and has already begun to improve operations. User growth has moderated but Pinterest has figured out a way to make more money off its existing user base. It's also boosting its business outside the US, which may result in more revenue gains. If those aren’t enough catalysts, there’s also talk that Pinterest could be a takeover target. Activist investment firm Elliot Management bought a stake in the social media company last year.

Pinterest is 450 Million Users Strong

Pinterest isn’t the first company you think about when talking about popular social media sites. But it does have over 450 million monthly active users who share pictures and ideas about everything from home decor to workouts.

It's also easy to purchase things users see on the platform, which is attractive to advertisers. “[It’s] a very relevant site where there’s specific information for what the user wants,” Kimberly Scott, a senior portfolio manager at Macquarie, told Barron’s in a recent interview. “The Pinterest platform is a very compelling platform for advertisers.” That has yet to result in the revenue that its rivals like Meta’s Facebook (META) and TikTok garner. But it is starting to close the gap.

In January the company partnered with LiveRamp (RAMP) which helps brands measure ad-campaign performance. Feedback from advertisers since then has been positive, which should increase the amount marketers spend on the platform. “Advertisers tell us Pinterest is taking bolder steps and moving more rapidly under its new CEO,” wrote UBS Securities analyst Lloyd Walmsley in a recent research note.

International Growth

Beyond improving its relationship with advertisers, Pinterest has a lot of opportunities internationally. As it stands, international users represent about 80% of its monthly active users, but only 20% of Pinterest’s sales. In the US and Canada, average revenue per user is about $25. Internationally, it's under $1.50, which presents a big opportunity for the social media company. If it is able to increase the number of ads per page and the rate it charges, some bulls think revenue per user may double internationally.

All told, Wells Fargo analyst Brian Fitzgerald thinks Pinterest sales could be more than $6 billion by 2027 which should help it become profitable – something all growth companies must do. Fitzgerald thinks shares could hit $34. Not too shabby for a stock that’s been in the doldrums for months.

Pinterest may not be as big as Facebook, TikTok, or even Snapchat (SNAP). But it's an attractive platform for marketers thanks to its 450 million user base of consumers who know what they want and can easily buy it. Now Pinterest just needs to attract investor interest too.

Guilt by Association Isn't Always Fair

Jack Henry Selloff Warranted?

Guilt by association seems to be the rap leveled at Jack Henry & Associates (JKHY) lately.

With the collapse of two regional banks and concerns about the US banking system’s health weighing heavy on investors’ minds, many financial firms are facing selloffs, including Jack Henry. Never mind that Jack Henry isn’t even a bank, instead churning out software for the financial industry. With about 8,000 small banks and financial institutions as customers, investors are spooked. The stock is down 12% this year.

However, some bulls think this isn’t a bad sign, but rather a buying opportunity. Analysts say the stock could hit $175 this year. On Friday shares closed at $153.96. It also has little debt and pays an annual dividend yield of 1.4%, which income-seeking investors may find attractive.

Same Old

What short-sighted investors may be missing is that Jack Henry’s long term prospects have not changed, even with two regional bank failures. Jack Henry’s software helps banks run their everyday operations. This in essence makes its software non-discretionary – it keeps the lights on and the vault secure. Without such software, banks can’t open customer accounts, process checks, or handle deposits and loans.

Banks are also expected to continue to invest in tech as they become more digital and automated. A 2022 UBS survey of tech executives at 100 banks and credit unions found 78% plan to up their spending on IT services like those offered by Jack Henry. Of the survey respondents, zero plan to decrease spending.

Barring a truly widespread banking collapse, Jack Henry may be okay for the foreseeable future. Its customer base is big and diverse, which means revenue may not be meaningfully impacted by the turmoil that has transpired in recent weeks. It doesn’t hurt that over 80% of its revenue is recurring, with contracts averaging seven years.

Banks Collapse a Non-Event?

Some of Jack Henry’s sales do come from transactions such as debit card or check payments. This is where much of the concern lies. The pervading fear is that, if consumers pull their money out of smaller banks and credit unions, Jack Henry’s business would suffer. This fear too may be unwarranted.

During the 2008-2009 financial crisis, the company was still able to post revenue growth. In the current environment, Jack Henry stands to benefit if consumers spread their cash among several banks to keep their balances below the $250,000 FDIC insurance limit. That could boost the portion of its revenue that is reliant on the number of banking and credit union customers.

“I believe there’s a misconception in the market right now that if deposits potentially move over to the largest banks, then Jack Henry will be negatively affected,” says UBS analyst Rayna Kumar. “But no—as long as the bank exists, Jack Henry will still get paid because its model isn’t based on deposits.”

The Times Are Changing – Deel With It

Do you own a business? It’s an exciting time to be a business owner – as long as you can keep up with the rapid workforce changes. Deel is the easiest way to do exactly that.

The workforce looks a little different these days. Whether it’s hiring in line with new regulations or onboarding remote workers, Deel can help you future-proof your business, keeping it innovative and inclusive.

Deel makes running a business easy. See for yourself – request a demo today.

Fight Uncertainty With These Second Quarter Picks

Upside Forecast

We may not be able to predict if the Federal Reserve will raise rates again or if inflation will continue to decline. But there are some stocks that Wall Street thinks will have upside in the quarter that ends in June.

These include Simon Property (SPG), Netflix (NFLX), and Palo Alto Networks (PANW). All three are leaders in their respective fields and have strong short and long-term prospects. They either pay a dividend, operate in a fast growing market, or are on the road to recovery. They also sport lower valuations, which makes them attractive to bargain-seeking investors.

Simon Property, Netflix Poised for Upside?

Take Simon Property for starters. The real estate investment trust is a top pick for Compass Point in the second quarter. Compass likes Simon Property because it has a portfolio of high quality tenants, including last year’s largest company, Apple (AAPL).

“SPG is also the largest landlord to Apple, the true anchor of high productivity retail, and is the biggest beneficiary of luxury tenant demand,” wrote Compass Point analyst Floris van Dijkum in a recent research report. “We are perhaps most constructive on shares of SPG over the next year, given their 12% lower valuation since the start of the year despite continued demand from luxury tenants & strong tenant sales performance.”

The analyst also pointed to Simon Property’s dividend and balance sheet as reasons why investors should consider the stock. “SPG has over $7.8 billion of liquidity which we anticipate to be utilized during market disruption,” he noted in the research report.

Netflix, the streaming content provider, is another leading player that has landed on Wall Street’s radar for the second quarter, including at Bank of America (BAC). Analyst Jessica Reif Ehrlich named Netflix a top pick for the second quarter and over the long-term thanks to its “world class brand” and leadership position in the marketplace.

Netflix is also improving operations by cracking down on password sharing and launching an ad-supported tier to increase its number of subscribers and improve cash flow. “We believe 1Q23 results will mark the low point of FY23 reflecting the initial impact of password sharing efforts in select markets,” Reif Ehrlich wrote in a recent research note.

Cybersecurity Silver Linings

Then there is cybersecurity company Palo Alto Networks, which was named by RBC as a top pick for the second quarter.

Analyst Matthew Hedberg thinks shares can continue to climb, even if they are already up more than 43% this year. The analyst pointed to market share gains and growing demand for cybersecurity as reasons to like the stock. “The company should be able to grow into a growing network & endpoint security market by expanding within its customer base while increasing its reach to new customers through a larger portfolio, geographical expansion & share shift,” he wrote in a recent research report.

Additional growth drivers include expanding business outside the US, an increase in subscriptions, and an uptick in the number of security breaches. “We view Palo Alto as well positioned to benefit from an increasingly complex security and threat landscape and as an industry leader in security,” noted Hedberg.

Last Week's Poll Results

Are you bullish or bearish on Zoetis (ZTS) over the next 12 months?

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨⬜️⬜️⬜️⬜️⬜️ 🐻 Bearish

Which stock do you think will outperform over the next 6 months?

🟩🟩🟩🟩🟩🟩 Estée Lauder Cos. (EL)

🟨🟨⬜️⬜️⬜️⬜️ ON Holding (ONON)

🟨🟨⬜️⬜️⬜️⬜️ Pacific Premier Bancorp (PNBI)

Which defense stock will outperform over the rest of the year?

🟩🟩🟩🟩🟩🟩 Raytheon Technologies (RTX)

🟨🟨🟨⬜️⬜️⬜️ L3Harris Technologies (LHX)

🟨🟨⬜️⬜️⬜️⬜️ Lockheed Martin (LMT)

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