🏠 It’s a Rental World After All

Happy Sunday to everyone on The Street. Congress passed the bill we've been chronicling that will boost US semiconductor production. US House Speaker Nancy Pelosi's husband sold his shares of chipmaker Nvidia on Tuesday before the vote. Here is an update on that. 

Perceived conflicts of interest are not a one-party issue. This past week federal authorities filed criminal and civil insider trading charges against former Indiana Republican Rep. Stephen Buyer. Here's more on his arrest. 

Here's our question of the week. When it comes to politicians on both sides of the aisle:

Plus results from last week's polls:

• Are you bullish or bearish on Estée Lauder? 60% said BEARISH, 40% said BULLISH.

• Are you bullish or bearish on apartment REITs? 82% said BULLISH, 18% said BEARISH.

Review

US stocks rose Friday, driven higher by upbeat earnings from Apple and Amazon.

Apple beat analyst expectations on the top and bottom lines during its fiscal third quarter. The iPhone maker did report slower growth with CEO Tim Cook citing “pockets of softness,” while predicting revenue would accelerate.

Meanwhile, ecommerce giant Amazon exceeded analyst expectations for both sales and profit during the second quarter. The company said it's making progress in terms of controlling costs, and delivered upbeat guidance for the third quarter.

According to data from Factset, over half of S&P 500 companies have reported earnings, with 72% of those names beating expectations. The robust reports helped investors shrug off another 75-basis-point increase from the Federal Reserve and a negative US GDP reading.

Meanwhile, the University of Michigan Consumer Sentiment Index came in at 51.5 on Friday, which was a slight improvement from June's all-time low of 50.

Despite markets being mostly in the green last week, there is a pervasive sense of unease on The Street. Inflation is still running at record highs and the ongoing war between Russia and Ukraine is injecting fresh uncertainty into the markets. There are also fresh fears that China may take military action against Taiwan sooner than some predicted so geopolitical flare-ups continue to be a wildcard in the investing landscape.

As for the week as a whole, the Dow rose roughly 3%, while the S&P 500 and the Nasdaq Composite gained about 4.3% and 4.7%, respectively.

Preview

Tomorrow, the US manufacturing sector will be in focus with two key data points set for release. First up will be S&P Global’s final print of July manufacturing PMI. The initial flash reading showed the first contraction in business activity in two years. The July ISM manufacturing index is also due. In June the reading fell more than 2%, month-over-month. Also keep an eye out for May’s construction spending, which is considered a good way to check the overall health of the economy.

Tuesday, all eyes turn to the job market as the June JOLTS report is due. This tracks both job quits and openings. Job openings and quits declined in May but the number of open positions still outnumbered available workers by nearly two-to-one.

Wednesday, the market will get a snapshot view into how the services sector performed last month. S&P Global’s services PMI and ISM’s services index are set for release. June’s factory orders are also due. Some real estate data is on the way as the second-quarter’s rental vacancy rate and homeowner vacancy rate will be published.

Thursday, jobless claims will be released by the Labor Department. Last week’s number of initial claims fell after hitting an eight-month high. June’s trade deficit is also due.

Finally, on Friday, July’s nonfarm payrolls are set for release. The economy added 372,000 jobs in June, exceeding the expectation of economists, who had predicted just 250,000. While the economy has largely struggled this year the job market has remained a relative bright spot. Watch for July’s unemployment rate, which held steady at 3.6% in June. July’s average hourly earnings and the labor force participation rate will also be published.

On the earnings front, Activision Blizzard (ATVI), Starbucks (SBUX), Booking.com (BKNG), CVS (CVS), Eli Lilly (LLY), and DraftKings (DKNG) will release their second-quarter results. We have our eyes on Activision Blizzard and Starbucks. In regards to the former, we want to know where the Microsoft merger stands. As for the latter, Starbucks is one of those quintessential "barometer" companies that will give us some insight into consumer spending, inflation, supply chain constraints, and labor disputes.

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A Test Retailers Need to Pass

Back-to-School Make or Break for Nation’s Retailers

Retailers have a lot riding on this back-to-school season and so do their investors. Shares of Walmart (WMT), Target (TGT), and other retailers have taken a beating in recent weeks after first-quarter results showed demand for discretionary items slowed. That spooked investors sending their stocks lower.

To redeem themselves, retailers need a strong back-to-school season. That may prove to be challenging given inflation is at a 40-year high, consumer confidence is plunging, and retailers are sitting on excess inventory they still need to move. Companies like Walmart and Target are also facing tough annual comparisons. Last year sales were up 14.4% during the same season. That’s going to be tough to beat.

School Supplies or Bust

There is one thing in play that favors retailers. Back-to-school supplies and gear tend to fall in the nondiscretionary bucket. That means consumers are still willing to spend on those items even if budgets are constrained.

According to a National Retail Federation survey, less than one-quarter of respondents said they would use last year’s supplies for the new school year. That’s more or less in line with what we’ve seen in prior surveys.

The National Retail Federation expects K-12 spending will be similar to last year while purchases by college students are forecast to rise 4% year-over-year.

Consumers Laser Focused on Price

With inflation at 9.1% consumers are expected to be laser-focused on prices with store and generic brands in higher demand. Big box retailers including Walmart, Sam’s Club, and Costco (COST) could benefit the most. Additionally, with gas prices elevated and COVID cases rising, consumers tend to gravitate to one-stop shops.

Back-to-school season is make or break for the nation’s retailers and they know it. Investors need them to ace it to see their stocks rise.

Hard Seltzer Gives Investors a Hangover

Cost-Conscious Consumers Shun Hard Seltzer

Hard seltzer is out and light beer is back as budget-conscious drinkers seek a cheaper alternative. White Claw, Truly, and a host of others were all the rage during the early stages of the pandemic as Americans passed the time consuming fruity beer alternatives.

The novelty has since worn off, with more non-beer products entering the market. Record high inflation doesn’t help. Consumers, especially those 35-44 are switching back to beer to save money. As a result, sales of hard seltzer are plunging. The malaise started last summer and has carried into this year.

Truly Sales Plummet

Boston Beer (SAM), maker of Truly, the number two hard seltzer, recently reported a 17% decline in 2Q sales. The beer maker has been warning for months that consumers’ preference for hard seltzer was waning. Last summer it said it overestimated demand and that the outlook was uncertain. It is now forecasting volumes for Truly to decline 15% to 20% in 2022. It had previously expected volumes to be flat to down 10%.

Boston Beer isn’t alone. According to an analysis of Nielsen data, for the four weeks ended July 2, sales of hard seltzers in retail stores fell 18%. That compares to an increase of 11% last year.

Too Good to Be True

Hard seltzers are a victim of their own success. With demand for White Claw and Truly soaring during the pandemic, other players including Bud Light, Corona, and Bacardi entered the fray. They rolled out their own hard seltzers and other canned cocktails. Consumers have way more choices which has put pressure on incumbents.

Hard seltzers have come a long way in two years. Back in 2020 Nielsen IQ said the category had the most sustainable growth trajectory in the US alcohol market. Now sales are plunging, leaving producers with excess inventory and lower profits. How long the hangover lasts remains to be seen.

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Renting is All the Rage Now

From Bikes to Homes, Companies Bet on Rentals

Why buy when you can rent is the new mantra for purveyors of everything from exercise bikes to homes. With consumer confidence plunging and uncertainty about the pandemic, stocks, and interest rates ongoing, companies are betting consumers are more willing to rent than own.

That’s a big part of Peloton’s (PTON) turnaround strategy. The company now allows customers to lease an exercise bike, paying $85 a month for the hardware and workout content. A monthly payment makes it more affordable for consumers rather than shelling out about $1,500 for the bike.

Peer-to-peer car rental startups including Turo and Getaround are hoping to capitalize on a shift toward rentals as well. With car ownership harder to come by these companies are seeing increased sales and profits.

RVs Get Into the Fray

Even recreational vehicle retailers are entering the fray. Camping World Holdings (CWH) is rolling out Rvrentals.com, an Airbnb for RVs. Rentals are expected to help the company find new customers who aren’t ready to make the leap into RV ownership just yet.

Outside of transportation, renting nannies is a popular service. Many remote working parents aren’t sure when they’ll have to return full-time making it hard to commit to a sitter. Instead, they are using on-demand services such as Bright Horizons Family Solutions’ (BFAM) “Sittercity” and IAC/InterActiveCorp.’s (IAC) Care.com. Since IAC purchased Care.com in February of 2020, subscriber growth is up 30%.

Home Rentals Soar

Of all the rental markets, real estate is by far the most popular. With mortgage rates rising and home values elevated, consumers are turning to rentals. Online real estate company Zillow (ZG) said unique user growth in rentals increased 38% year-over-year in the first quarter. Meanwhile, Redfin (RDFN) launched rentals on its website this year, after solely selling houses for close to twenty years.

With so much uncertainty out there consumers are reluctant to commit. Companies are trying to capitalize on that sentiment by making it easier to rent. For investors looking for a way to weather the economic storm, stocks that cater to renting may be worth considering.

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