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🏖️ Is Remote Work Winding Down?
Plus, four stocks that could have liquidity issues
Happy Sunday to everyone on The Street. It's Labor Day weekend, which means tomorrow is the last unofficial day of summer. In BC times ("Before COVID"), an overwhelming majority of us would be marching back to the office on Tuesday. The rise of remote work during the pandemic means this may no longer be the case. However, many executives are eyeing this weekend as "the best chance to finally lean on workers to return to the office this year," Chip Cutter and Katherine Bindley write for the Wall Street Journal.
"Employers including Apple Inc., Prudential Financial Inc., and BMO Financial Group plan broader September returns at their U.S. offices. Some companies, such as Ally Financial Inc., have sent notes in recent weeks reminding workers to come into the office consistently. Goldman Sachs Group Inc. said it was lifting all vaccination and other requirements to enter most of its offices after Labor Day, eliminating a final barrier to a full return."
Despite a relatively strong August jobs report and an unemployment rate of 3.7%, many companies have been announcing layoffs. "Social-media company Snap Inc. said Wednesday it plans to slash a fifth of its workforce. Others that have announced layoffs this year include Ford Motor Co., Carvana Co., Netflix Inc., Coinbase Global Inc., Robinhood Markets Inc., and Peloton Interactive Inc."
So what does this mean? Well, "Fears of a recession or job cuts could give employers an upper hand, but some remain reluctant to tell workers they will be fired for not showing up—even if companies are reserving the right to do so as a last resort."
Bottom line, there's a very interesting power dynamic playing out between employers and employees this Labor Day weekend, 2022. We'll wrap with thoughts from you:
What is your ideal work set-up? |
Plus, our poll results from last week:
Are you bullish or bearish on Hasbro? 70% of you are BEARISH, 30% are bullish.
Are you bullish or bearish on Getty over the next 12 months? 51% of you are BULLISH, 49% of you are bearish.
Review
US stocks fell Friday after the August jobs report failed to distract from ongoing concerns tied to the Fed’s tightening monetary policy. After rallying through the morning, all three major averages finished lower, including the Nasdaq which is on a six-day losing streak.
As to that jobs report, the economy added 315,000 positions last month, all while the unemployment rate ticked up to 3.7%. This indicates a solid rate of growth, although it's a bit slower than what was observed in July. Broadly speaking the report shows the labor market’s strength during a period of intense volatility for equities.
The Federal Reserve’s monetary policy has been in focus on Wall Street, as the central bank has indicated it’s willing to prioritize taming inflation over stoking growth with lower rates.
Market veterans have suggested that job growth of this kind increases the probability of a 75-basis-point hike at the Fed’s next policy meeting. That will likely put pressure on stocks.
Meanwhile, oil prices rose, potentially in connection to stalled nuclear talks between the US and Iran, undermining the prospect of more Iranian oil hitting the global market.
In company-specific news, Meta Platforms and Qualcomm signed a multi-year agreement that will focus on developing custom chipsets for virtual reality products. The move is in line with Facebook-parent Meta’s 2021 pivot toward focusing on the metaverse, while the project will be powered by Qualcomm’s Snapdragon extended reality platforms.
Elsewhere, fellow US tech giant Amazon lost its bid to overturn this past April’s historic union election in New York City. A National Labor Relations Board official said Amazon’s objections should be rejected, a decision which can be appealed. Workers at a warehouse on Staten Island voted to form the ecommerce giant’s first US union.
For the week as a whole, the Dow Jones Industrial Average lost 2.99%. The S&P 500 slipped 3.29%, and the Nasdaq Composite fell 4.21%.
Preview
On Tuesday, the services sector will be in focus, as S&P Global will release its final revision of August’s services PMI. July’s final reading was down from June, indicating the sharpest fall in output for the services sector since May 2020. The Institute for Supply Management will also release its services index for August, which rose month-over-month in July, backed by higher demand.
Wednesday, investors will be paying close attention to Cleveland Fed President Loretta Mester as she’s scheduled to address the central bank’s monetary policy on a live webcast. July’s international trade balance is also due. July’s deficit was narrower-than-expected at -$79.6 billion. Keep an eye out for the Fed’s Beige Book as well, also known formally as the Summary of Commentary on Current Economic Conditions. The report is released eight times a year.
Thursday, jobless claims are due. Last week’s number surprised analysts by falling to 232,000. That’s a nine-week low. Layoffs remain down by historical standards. July’s change in consumer credit will also be published, after the category grew by 10.5% on an annual basis in June.
Friday, July’s wholesale inventories will be released. June’s report showed businesses slowing down the replenishment of their stocks as consumer spending has come under pressure from inflation.
On the earnings front, Kingsoft Cloud (KC) will disclose its second-quarter results on Tuesday. GameStop (GME) is on deck for Wednesday. Up on Thursday is Shanghai-based video sharing website Bilibili (BILI). Finally, facility management company ABM Industries (ABM) is set to post earnings on Friday. GameStop will be a notable company to keep an eye on, given its status as a meme stock. Last week, it was revealed a film called “Dumb Money” is in the works, chronicling GameStop’s run as a meme stock in early 2021.
Making The Most of a Recession
Thinking about how you could make a recession work in your favor? A lot of investors may feel compelled to sell off their stocks before and during a downturn. The folks at The Wealthy Investor think that may not be the best idea. Instead, they reveal three stocks that have made money in the most recent recessions.
A Rough Patch for Zillow
Housing Downturn Hits Zillow
Investors who are betting the bottom is near for Zillow (Z) may need to think again. More pain may be on the way for the housing market and its online real estate leader.
Shares of Zillow have plummeted over the past year as the real estate market turned thanks to rising mortgage rates, stubbornly high valuations, and (slightly) waning demand. In July, sales of new single-family homes were down close to 30% year-over-year. When Zillow reported second-quarter earnings in August it warned transactions on its platform will “meaningfully contract” in 2022.
Even more telling, Zillow CEO Rich Barton announced a new employee retention plan aimed at keeping talent from leaving as equity compensation at the company loses value.
Ad Model Under Pressure
Even Zillow’s advertising business is at risk. Some analysts think fewer buyers means real estate agents will advertise more to stay competitive, but that may not be the case. During the same earnings call, Zillow warned agent ad spending could slow along with demand. Agents pay for leads not eyeballs. If ads on Zillow aren’t translating into deals, they may pull back or advertise elsewhere.
It's worth noting that about 234 million people visit Zillow’s apps and sites each month but Zillow is only responsible for 3% of all the real estate deals in the US. The decline in ad revenue should be evident sooner rather than later, potentially adding more short-term pressure to the stock.
Play the Long Game
Over the longer term, Zillow's situation could improve. It has a new deal with Opendoor (OPEN) that keeps it in the home flipping market. It's an area Zillow exited earlier this year as demand started to decline and Zillow was stuck with excess inventory. Under the partnership, Zillow gets a kickback every time one of its customers sells their home to Opendoor.
The company is also hoping to funnel those customers to its own network of agents. The partnership also gives Zillow access to home buyers it can sell ancillary services to, such as mortgages, title insurance, and escrow.
The real estate market is down but it won’t be out forever. For Zillow investors, it's all about playing the long game.
Highly Leveraged Stocks At Risk Amid Rising Rates
Four Stocks That Could Have Liquidity Issues
Rising interest rates are making it more costly to borrow money. For consumers, this means higher monthly costs on products like mortgages. For companies, this means higher monthly costs on outstanding debt. This could cause trouble for some of the nation’s riskier issuers that need to refinance their debt or borrow more money.
Moreover, if earnings suffer as well this could put pressure on free cash flow, or any funds firms use to service debt. For companies that are already highly leveraged, borrowing may not be an option, forcing enterprises to sell stock or worse become insolvent.
So which companies (and corresponding stocks) fit that bill? According to one screening, Royal Caribbean (RCL), Party City (PRTY), Bed, Bath & Beyond (BBBY), and Rite Aid (RAD) all fall into that category. Here’s why.
Consumer-Facing Stocks Highly Leveraged
Royal Caribbean is sitting on $5.5 billion in short-term debt, yet it only has $2.1 billion in cash. The company just issued $1.5 billion in convertible debt, which pushes out the due date until 2025 from 2023. Still, Royal Caribbean is paying 6% on the new debt, a higher rate than it was previously paying. It is on a mission to get the balance sheet back to where it was prior to the pandemic.
Then there’s Bed, Bath & Beyond. As of May Bed, Bath & Beyond had $108 million in cash. A year ago this figure stood at roughly $1 billion. The embattled retailer has $1 billion in a revolving line of credit and has to pay $335 million in rent next year.
Rising Rates, Inflation Weigh on Retailers
Party City is another retailer struggling amid soaring inflation. It's sitting on just $39 million in cash but has $350 million in debt and rent payments due in 2023. The retailer does have $157 million in a credit facility. It’s also planning to raise $22 million from its existing creditors. To shore up cash it can also cut costs and delay projects.
Rite Aid isn’t faring much better. Its debt is more long-term but it does have lease obligations of $574 million coming due. With about $56 million in cash as of May, paying that could prove to be difficult. To pay down debt, Rite Aid is looking at sale-leaseback options for stores it owns.
Rising interest rates are putting pressure on some of the nation’s consumers facing stocks that have a lot of outstanding debt. Without a boost in sales, or price increase reprieve, paying back their debt may prove to be extremely difficult. Sometimes the best stock screening comes from knowing which companies to steer clear of.
Don't Dump Your Stocks Just Yet
If you think you need to dump all your stocks in a recession, that may not be the best idea. While past performance is not a guarantee of future results, these three stocks have made money in the most recent recessions.
Looking For A Green Play? Consider Alcoa
Alcoa Wants to Be Carbon Free
Alcoa (AA) is down, with shares off 43% since March, but it isn’t out, particularly for investors looking for some green exposure. The aluminum maker not only has a stock value that ignores improving operating costs, balance sheet, and shareholder returns but it has one of the lowest carbon footprints in the aluminum-producing market. It is also working on new technology that may eliminate carbon emissions from aluminum smelting altogether.
Dubbed the Elysis smelting project, it's a joint venture between Alcoa and Rio Tinto (RIO) aiming to become a green aluminum producer. The process is being used on a small scale now but the companies hope to make it work on a larger scale in the years to come.
Customers Want Green Aluminum
Believe it or not, Alcoa is already among one of the greenest producers of aluminum even though making the material requires a lot of electricity. Alcoa keeps it green by getting 80% of its electricity from renewable energy, mainly carbon-free hydropower. As it stands Alcoa’s production emissions are about one-third of the industry, which gives it goodwill with customers such as Apple (AAPL) which are focused on lowering their carbon footprints.
It's also a key material used in everything from cars to solar panels. Back in July, during Alcoa’s earnings conference, CEO Roy Harvey predicted demand for aluminum could increase 80% by 2050 from where demand was in 2018.
China is a Wild Card
Alcoa does have to take on China which currently accounts for more than half the production across the globe. The country is facing backlash over how the aluminum is produced, giving Alcoa a green advantage. Some investors think a tax on dirty aluminum producers including in China and other countries is coming in the next decade that may amount to $100 per ton. That too would benefit Alcoa, particularly if its green smelting technology takes off.
Aluminum producers aren’t known for being green, but Alcoa is working on changing that. With an improving balance sheet, a depressed stock, and growing demand, it may be hard to overlook this aluminum producer.
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