⚡ How to Play the Electrification of Everything

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REVIEW

US stocks rose Friday as the market moved into a new quarter and investors tried to digest the latest indicators from the bond market that could signal an economic downturn is on the horizon. The 2-year and 10-year Treasury yields inverted for the first time since 2019. In some past cases that’s predicted a recession.

Zooming out, the first three months of 2021 saw the market record its first negative quarter in two years. Still, there were some positive signs at the end of last week as oil prices fell.

The price per barrel moved lower for both US benchmark West Texas Intermediate and global standard Brent crude. This followed the announcement of President Biden’s plans to release up to one million barrels of oil daily from the nation’s strategic reserve in an attempt to drive down gasoline prices. Energy prices have been highly volatile lately, especially in response to Russia’s invasion of Ukraine.

Fighting continued Friday in and around the capital city of Kyiv, where Ukrainian officials said some Russian forces had been pushed back.

On the economic front, US employers added 431,000 jobs in March, while the unemployment rate fell to 3.6%. The number came in below the 490,000 initial forecast and was significantly lower than February’s 750,000 figure. Overall, the economy added 1.7 million jobs in the year’s first quarter. Construction spending increased by 0.5% in February month-over-month, which failed to meet analyst expectations.

For the week as a whole, the Dow Jones Industrial Average lost 0.1%. The S&P 500 inched up 0.1% and the Nasdaq Composite gained 0.7%.

PREVIEW

On Monday, be on the lookout for February’s factory orders, which rose by 1.4% in January. Core capital equipment orders are also due for February.

Tuesday, February’s foreign trade deficit is set for release. The deficit rose by 9.4% to hit a record $89.7 billion in January. Analysts attributed this to a significant uptick in imports, as well as higher prices. The recently-merged S&P Global and IHS Markit, which are now collectively known as S&P Global Mobility, will publish its final services PMI for March. The ISM service index is also due.

Wednesday, the Federal Open Market Committee releases the minutes from its most recent meeting, as investors look to gain further insight into the central bank’s rate-hike game plan.

Thursday, the week’s initial jobless claims will be published. Last week’s number came in at 202,000, which was a slight increase after the previous report showed a 50-year low. 

Friday, the US Census Bureau will release its final number for February’s wholesale inventories. This takes stock of wholesaler's unsold products, which is an indicator of retail demand. The original report showed last month’s wholesale inventories growing by 2.1% from January.

Here are several companies to watch during this week's earnings reports:

Tuesday, Acuity Brands (AYI) is set to hand in its latest report card, after beating analyst expectations on top and bottom lines during its two most recent earnings calls. Wednesday, apparel company Levi Strauss (LEVI) will report earnings. Also on Wednesday, cannabis stock Tilray Brands (TLRY) is scheduled to share its most recent results. Thursday, lubricant maker WD-40 (WDFC) is scheduled to post its most recent quarterly earnings. The company recently announced it will increase its dividend to $0.78 on April 29, which translates to a yield of 1.6%, lagging behind the industry average. Friday, Sunlands Technology Group (STG) will share its results for Q4 2021 and the previous year as a whole. It’s been a challenging past 12 months for the stock, during which its share price has fallen by upwards of 60%.

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Despite Rising Rates, There are Reasons to Like Real Estate

Investor Optimism

The real estate market could be facing a slowdown as the Federal Reserve begins raising rates in an attempt to tame inflation. Mortgage rates are already moving higher in response, helping drive sales of existing homes down 7% in February. That trend is expected to continue throughout 2022. Fed Chairman Jerome Powell has suggested that the Fed will raise rates several times in half-point increments.

Despite this backdrop, some investors are still betting on bricks and pushing forward with real estate purchases. Their gamble assumes the industry will fare better during this rising rate cycle when compared to past ones. For those bullish on real estate, strong demand for residential homes, and the Fed’s willingness to quickly respond to an economic downturn, are seen as reasons to be optimistic.

Residential Market Stays Hot 

While the Fed shifts its policy in an effort to cool the economy, many investors are gravitating to real assets. They’re putting cash to use and purchasing properties with the hopes that rents will keep rising.

Throughout the first three months of 2022, real estate purchases jumped 42% year-over-year, with investors representing 33% of US homebuyers. That’s higher than what’s typically been observed over the past decade. To some extent, investors aren’t as impacted by rising rates because, unlike most homebuyers, their purchases are often made with cash. This type of investor activity is expected to continue over the next nine months, potentially preventing existing home sales from plummeting as mortgage rates move higher.

Meanwhile, inflation and supply-chain issues are hurting homebuilders, so prices of existing homes are expected to continue to rise. The last time mortgage rates reached 4.5% there were roughly one million more homes on the market than there are at the present moment. This is another factor real estate bulls often cite. Less inventory equals higher prices.

The Fed Course Could Change 

While the Fed is gearing up to raise interest rates several times this year, the central bank has shown a willingness to switch gears. Some analysts think the Fed could enact rate hikes more slowly if the economy takes a turn. After all, the whole point is to cool down the economy by making the cost of borrowing more expensive. If rising rates do too much and the economy comes to a screeching halt, the Fed may alter its course. Broadly speaking, investors are betting the Fed will opt to protect economic growth over pursuing its quest to lower inflation. The two are absolutely related, but it’s a balancing act. 

The real estate market is historically very sensitive to rising interest rates but there are signs things could be better this time around. With demand for property high, and the Fed potentially willing to pump the brakes on its hawkish agenda, there are reasons the bulls are still betting on real estate as rates rise.

nVent Poised to Surge Amid the Electrification of Everything Trend

Everything Goes Electric

While oil and natural gas will be around for a long time there’s no question the world is slowly moving away from fossil fuels, ushering in a new era that’s seemingly hellbent on electrifying everything. From manufacturing to heating homes, the idea is that anything that needs power should run on electricity.

One company poised to benefit from that trend is nVent Electric (NVT), a spinoff of Pentair (PNR), which makes surge and heat protectors for electrical infrastructures. It also churns out products associated with cables and wiring in homes and businesses.

There are a number of trends driving nVent’s potential growth. Automation is growing in importance, data centers are expanding, and demand for sensors has increased given the need to monitor increasingly complex systems. As a result, some on Wall Street are betting on long-term growth, despite the fact nVent has seen its share price fall 8.6% this year.

Growth and Expansion on the Menu

nVent is currently in growth mode, all while churning out products in thermal and electrical protection and enclosures, which are core parts of its business. It’s also expanding outside the US, with sales in Canada hitting $900 million last year, up from $760 million in 2018.

The company has been focused on paying down its debt and beefing up its balance sheet. Executives say nVent is in a strong position to invest in future growth and continue its pursuit of mergers and acquisitions. Supply-chain issues also don’t seem to be hurting nVent as much as investors feared earlier this year.

nVent is expected to generate sales of $2.7 billion this year, which is 9% higher than 2021. Earnings-per-share growth is forecast to increase 11% year-over-year. In 2023, Wall Street predicts that sales will grow another 5% while EPS will increase 10%. From 2018 through 2021 revenue growth stood around 3% while EPS growth was about 4%.

A Takeover Target?

In comparison to its rivals, nVent’s stock is cheap. The company is trading at about 16 times 2022 projected earnings. That compares to the broader S&P 500, which is trading at 20 times 2022 earnings. Similarly sized industrial companies in the Russell 2000 index are trading at 18 times.

There’s another reason some are excited about nVent, which is its status as a takeover target. Market watchers have said nVent could be an attractive target for a big electrical equipment supplier. Eaton (ETN), ABB (ABB), Schneider Electric (SBGSY), and Hubbell (HUBB) could all be potential suitors, according to RBC Capital Markets analyst Deane Dray. Even if it isn’t acquired, nVent’s prospects appear bright, as everything is getting electrified.

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Berkshire is getting Acquisitive Again

Recent Purchases Provide Upside

Warren Buffett, the Oracle of Omaha, is showing an appetite for acquisitions again. Berkshire Hathaway (BRK.A) investors seem appreciative. The conglomerate, under Buffett’s charge, has recently spent $11.6 billion to acquire Alleghany (Y), the insurance company, and $8 billion for a nearly 15% stake in Occidental Petroleum (OXY). 

Some reports indicate Buffett wants more of the oil giant and could be willing to spend upwards of $70 billion to buy the whole company. If it pans out, close to half of Berkshire’s $150 billion war chest would be working, giving the company and investors a bigger return than the Treasury bills, which make up a significant portion of Berkshire’s holdings.

Buybacks Are Slowing 

Berkshire’s share price has been soaring lately. So far in 2022, the stock is up 19.6%, blowing past the 4.7% gain for the broader S&P 500. The company’s share price hit a record high as investors applauded the acquisitive moves.

Shares are not cheap by any measure but there is the potential for more upside. After all, Berkshire has a strong balance sheet, is very diversified, and has little overseas exposure. Roughly 85% of its sales are from US businesses including Geico, Burlington Northern Santa Fe, and Berkshire Hathaway Energy.

Share buybacks were a big part of the company’s story in 2021, but that’s slowing this year. In the first two months of the second quarter, there was $2 billion spent on stock buybacks, according to an estimate from Barron’s. In 2021, around $7 billion was spent on buybacks every quarter. It’s possible that number falls even more significantly if Berkshire decides the acquisition price is too high.

Risks Ahead? 

While Wall Street watchers are optimistic Berkshire’s stock can appreciate more, there are risks. If the broader market declines for a sustained period, the stock’s overall performance may suffer. The same goes for a protracted recession. There’s also the lingering question of CEO succession given Buffett is 91. The heir apparent, Vice Chairman Greg Abel, isn’t well known. 

Still, amid the company’s recent acquisitions it seems Berkshire is on the right footing. It’s paying less for Alleghany than it did for other insurance companies in recent years, and Berkshire is very familiar with Occidental. Those two deals and the potential for more could provide Berkshire investors with more upside, all while the potential risks must be acknowledged.

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.