🌳 Redefining Weed Control

The Street Says: Median rent for an apartment in Manhattan climbed to $4,000 a month in May, surging 25% from a year ago. Here’s our extremely vague and subjective question for you this week: Is New York City Back? Click here to vote.

Plus: We thought this was interesting. Do you know where most NFT users live? It's not the United States. In fact, the US ranked third.

Also: This song is still so good. 

Alright, let's dive in🏊‍♂️

Review

US stocks fell Friday as inflation remains at a 40-year high, and consumer sentiment has hit a record low. May’s CPI checked in at 8.6%, the highest mark since 1981. Wall Street observers say the latest data confirms some of traders’ worst fears, as equities have been driven lower in recent weeks over concerns tied to rising prices.

Meanwhile, analysts say the University of Michigan’s consumer expectations survey coming in so low shows the CPI makes a major impact on sentiment. Stubborn inflation has led some to worry about a potential recession. The Federal Reserve already raised rates twice this year and remains committed to more hikes. It’s fair to assume this latest CPI reading will encourage the central bank to continue tightening its monetary policy, which has also included offloading assets from its balance sheet.

Elsewhere gasoline prices crossed $5 per gallon on average, something economists also point to regarding a potential slowdown.

In company-specific news, it was a down session for sectors that tend to struggle when the broader economy isn’t performing well. This includes bank stocks such as Wells Fargo, which saw its share price fall. Boeing is of a similar profile and finished down for the session.

The tech sector sold off amid concerns over rising rates. Chipmaker NVIDIA slipped, as did streaming giant Netflix. DocuSign plummeted after it reported slowing growth.

On the flipside, Vail Resorts said revenue and profit surged during its third-quarter as COVID-19 related restrictions eased in comparison to this time last year.

For the week as a whole, the Dow Jones Industrial Average fell 4.6%. The S&P 500 slipped 5.1% and the Nasdaq Industrial Average declined 5.6%.

Preview

Tomorrow the New York Fed will release its consumer inflation expectations for May. The survey looks at where people see prices heading over the near and medium-term. In April one-year median consumer inflation expectations declined 0.3% month-over-month. This means consumers expect inflation to slow its pace slightly over the next 12 months. Three-year median inflation expectations rose 0.2%.

Tuesday, the National Federation of Independent Business is scheduled to publish May’s small business optimism index. In April the figure hit a 48-year low. Three in every ten business owners list inflation as their biggest problem. The Producer Price Index final demand is also due for May.

Wednesday, be on the lookout for May’s retail sales stats. This comes amid a period of intense scrutiny for the retail sector as rising fuel and labor costs have put pressure on companies’ bottom lines. Retail sales rose 0.9% in April despite persistent inflation. On a related note, the FOMC will release its policy statement and Fed Chair Jerome Powell will give a press conference outlining the central bank’s plan to rein in price increases. The NAHB home builder’s index for June is also due.

Thursday, jobless claims are released after last week’s number hit a five-month high. Initial claims jumped by 27,000 to hit 229,000 overall. Some economists downplayed the increase and said the labor market remains tight. Also on the economic calendar are May’s building permits and housing starts.

Friday, the Federal Reserve will publish May’s industrial production index. In April industrial production increased 1.1%, topping expectations. Capacity utilization for May is also due after it rose in April and exceeded estimates. Leading economic indicators for May are also set for release.

On the earnings front American software company Oracle (ORCL) reports tomorrow. Motorcar Parts of America (MPAA) and John Wiley & Sons (WLY) are up Tuesday and Wednesday, respectively. Kroger (KR) announces on Thursday and Alithya Group (ALYA) wraps up the week on Friday. We have our eyes on Kroger. Last week activist investor Carl Icahn said he was dropping his proxy fight with Kroger concerning their treatment of pregnant pigs. The Cincinnati-based grocery chain also announced plans to expand into South Florida. How are consumers reacting to rising food prices? The Kroger call should provide an interesting window into the lives of everyday Americans. 

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Redefining Weed Control

A Cannabis High

Scotts Miracle-Gro (SMG) is redefining the phrase, “weed control”. While the 154-year-old company made a name for itself via green grass behind white picket fences, now it’s helping pot farmers' crops under white fluorescent lights. Hawthorne Gardening, Scotts' cannabis-focused unit, already has a major footing in the budding industry. This division includes the hydroponics, lighting, equipment, and other supplies necessary for ganja growth operations.

But that’s not the only way Scotts Miracle-Gro is bolstering this burgeoning industry. The company is also throwing its weight and money behind legislative efforts. This includes the push to make pot legal on a federal level. Scotts Miracle-Gro is even positioning itself to someday sell cannabis directly to the public.

Scotts Selling Pot

The way Scotts sees it, federal legalization is coming at some point. If and when this day comes, companies that sell cannabis itself in its various forms stand to make the most money. Scotts’ game plan from now until then winds through the Empire and Garden States. 

New York and New Jersey’s cannabis markets, once matured, could become among the nation's largest. Scotts has already backed successful legalization efforts in both states. Meanwhile, RIV Capital, partly funded by Scott’s Hawthorne Gardening, has acquired a New York dispensary for $247 million. It gives Scotts exposure to consumer sales, provided federal legalization becomes reality.

Patchy Growth

It's hard to imagine the road to cannabis dominance will be smooth. The pot industry is not immune to supply chain woes, soaring inflation, and declining consumer spending. In the second quarter, Hawthorne posted a 44% decline in sales, partially as a result of these trends. There's also a glut of cannabis in states like California and Oklahoma as well as rising raw material costs. Add more expensive labor to the mix and it's not surprising Hawthorne is struggling.

Analysts don't expect this rough patch to last. New highs are in sight as upstart markets come online, particularly in the Northeast. Some industry observers predict the next 12 to 18 months will be a period of significant growth. Excess supply may wane and legalization efforts look to be moving forward, albeit at a slow pace. As a result, many are bullish on the industry. While Scotts continues to make products that kill weeds, it's also pushing forward with efforts to help other varieties grow.

Why the Sun is Shining on Solar Stocks Again

White House Grants Relief 

This past week the White House gave solar stocks some relief by lifting tariffs on components coming from Southeast Asia. This includes solar panel shipments from Cambodia, Malaysia, Thailand, and Vietnam. Notably, levies on China and Taiwan solar products will remain in place. The Biden Administration is also imposing a two-year moratorium on any new solar-related tariffs and invoking the Defense Production Act to spur domestic production.

As the Russian invasion of Ukraine rages on some have criticized the tariffs that were originally put in place by the Trump administration. The argument is that tariffs aren't helping with elevated energy prices that have been driven up around the world as a result of the war. 

Sunrun (RUN), Enphase Energy (ENPH), SolarEdge Technology (SEDG), SunPower (SPWR), and Array Technologies (ARRY) all moved higher after the announcement.

Solar-Coaster

In late 2020 and 2021, solar stocks crept steadily higher as Wall Street awaited federal support for the industry. Democrats, who generally tend to support renewables, had just won the White House and majorities in both chambers of Congress. 

The excitement faded, however, when the Build Back Better bill hit a wall. The ambitious plan included clean energy spending, but it never saw the light of day.

The sector took a beating in recent months as investors pivoted away from growth stocks and shifted to value plays.

Why Some Aren’t Convinced

The Biden Administration hopes the move will help spur more domestic production, but not everyone agrees. US panel makers, who are struggling to compete with Asian competitors, cried foul. They argue two years is not long enough to establish a lasting solution. 

A common complaint lies in the lack of clarity over the long term. Planning future projects is difficult when considering the moratorium lasts just 24-months. The White House may also face challenges in court.

You can’t please everyone as the Biden Administration learned last week. But at least solar investors have two years of daylight ahead of them.

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The Big Pharma Stock That Was Down ... But Not Out

A Bumpy Road for Bristol Myers

Bristol Myers’ (BMY) share price has had a solid start to the year. It’s up more than 20% and may have more room to run.

For context, the stock is only just returning to the level it traded at in 2016. In August of that year, BMY took a beating after a cancer drug trial failed. Additionally, there were patent expiration concerns surrounding Revlimid, a breakthrough myeloma treatment and one of BMY’s major revenue drivers.

While those two speedbumps certainly weighed on the company’s stock Bristol Myers has new drugs coming online and some could be blockbusters.

New Drugs the Cure?

When analyzing Bristol Myers’ prospects, Revlimid is still an important consideration. Since the drugmaker's exclusive patent expired revenue has fallen significantly. In 2021 Revlimid sales were $12.8 billion. By 2027 Wall Street analysts expect that to be a few hundred million dollars.

One of the company's new drugs in development is Opdualag, a melanoma treatment. The FDA has already granted it approval. There’s also Camzyos, a drug for heart ailments, which also has FDA backing. There are more drugs in the pipeline which could offset the hit from Revlimid. Investors seem to be banking on future releases, boosting Bristol Myer's share price.

Discount by Comparison

At November's investor meeting Bristol Myers said it had over 50 drugs in the pipeline. Twelve of them are in oncology or the prevention, diagnosis, and treatment of cancer. While it's fair to assume most won't make it to market, several should succeed. In the pharmaceutical sector, it only takes one or two major drugs to send share prices soaring.

Despite being up double digits this year, Bristol Myers is trading at a relative discount. Right now BMY is trading at 10x the ~$7.81 per share that the pharma giant is expected to earn over the next year. By comparison, rival Eli Lilly (LLY) trades at 34x forward earnings per share, using a recent closing price. Johnson & Johnson (JNJ) is trading at 17x and Merck (MRK) is at 12.7x earnings per share. 

While the loss of Revlimid exclusivity is an obstacle to overcome, Bristol Myers retains upside. Its prospects hinge on getting new blockbuster drugs across the finish line, and that race is underway.

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