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Sell Nvidia? In This Economy?

Sell Nvidia? In This Economy?

Plus, a perfect storm for oil prices.

April 21, 2024

Happy Sunday to everyone on The Street.

Tensions are running high in the Middle East following Iran’s missile strike on Israel last Saturday and Israel’s retaliatory strike Thursday night.

JPMorgan warned that the situation in the Middle East has the potential to seriously impact the US economy, especially in terms of inflation via surging energy costs:

The Middle East accounts for roughly a third of global oil production.
20% of the global oil supply and a significant portion of all shipping volumes go through the Straight of Hormuz, a channel close to Iran.

The IMF also called attention to how a broader conflict is more concerning at a time when the financial markets are trying to pull off a soft landing and avoid a recession.

On the bright side, there are signs that the tensions between Iran and Israel are easing. Israel’s strike on Iran was limited, and Iran’s state-run IRNA news agency downplayed the attack— a signal the nation is attempting to de-escalate.

Even if we were to experience a pronounced energy disruption from the Middle East conflict, JPMorgan believes US oil producers would bring additional supply online and mitigate some of the impacts.

🛢️ Will Middle East conflict significantly increase 2024 energy prices?

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Review

The Nasdaq 100’s technology stocks wrapped up their fourth consecutive week in the red, marking their most dismal stretch and sharpest declines since late 2022, as investors opted to pocket profits against a backdrop of mounting concerns over inflation and geopolitical tensions.

On Friday, Israel responded to Iranian attacks from the preceding week, adding another layer of uncertainty to the volatile situation in the Middle East despite widespread international calls for de-escalation.

On Wednesday, Fed Chair Jerome Powell firmly shut the door on rate cuts, citing lack of confidence in progress on inflation. This stance pushed two-year Treasury yields to 5%, their highest level since November 2023.

Gold prices notched their fifth consecutive week of gains, marking their longest streak since August 2020.

Debt Sustainability Concerns

Gita Gopinath, International Monetary Fund deputy chief, has voiced concerns over the U.S. national debt, stressing the need to reduce the federal deficit, which equals 7% of GDP. Projections indicate the U.S. deficit will remain above 6% through 2029, pushing the debt-to-GDP ratio to 134%.

Bitcoin Halving Looms

BlackRock Inc. and Coinbase Global Inc. have launched educational advertising campaigns to explain the Bitcoin halving process. This event, which halves the creation rate of new bitcoins, aims to reduce inflationary pressure and potentially boost Bitcoin prices.

Cybertruck Recall Alert

Tesla is recalling 3,878 Cybertruck vehicles due to a risk of unintended acceleration caused by a potentially dislodging accelerator pedal pad. The company, which has not reported any injuries or accidents from this issue, will replace the accelerator assemblies for free and has adjusted the production to include a new pedal design.

Lockheed’s $17B Contract

Lockheed Martin Corp. has been awarded a $17-billion contract by the U.S. Missile Defense Agency to develop the Next Generation Interceptor aimed at countering missile threats from North Korea and Iran. The contract is a part of a broader U.S. strategy to enhance missile defenses, with the NGI expected to be operational by 2028.

Musk Announces Layoffs

Tesla is reportedly laying off over 14,000 employees, which amounts to more than 10% of its global workforce. Elon Musk, in a companywide email, stated that this painful decision is necessary to reduce costs and eliminate redundancy in job functions.

Preview

Economic Data

Monday: None
Tuesday: S&P flash US services PMI, S&P flash US manufacturing PMI, New home sales
Wednesday: Durable-goods orders, Durable-goods minus transportation
Thursday: GDP, Pending home sales, Advanced retail inventories
Friday: Personal spending, PCE index, Consumer sentiment (final)

Earnings

Monday: Northeast Bank, Washington Trust Bancorp
Tuesday: JetBlue Airways, Alphabet, Timberland, Sherwin-Williams, Raytheon, Lockheed Martin, Halliburton
Wednesday: Group 1 Automotive, AT&T, Boeing, Blackstone Mortgage Trust
Thursday: American Airlines, Southwest Airlines, Amazon, ADT
Friday: AutoNation, Chevron, Piper Sandler Companies

Playing D-Fence

Protecting Portfolios

With tension high in the Middle East, a Wall Street titan is giving the green light on a defensive name.

JPMorgan (JPM) has upgraded Lockheed Martin (LMT) from neutral to overweight.

The company makes tech and planes for the military and its stock is roughly flat this year, trailing the S&P 500 which has gained around 5%.

JPMorgan thinks investors are overlooking Lockheed’s potential. The stock currently trades at around $450 per share, but the bank gives it a price target of $518.

A Common Sense Approach

JPM’s upgrade has a basic explanation behind it.

The thought behind the upgrade is that the tension between Israel and Iran will spur more investment in military preparedness. If nations increase their defense spending, the bank says it should boost Lockheed Martin’s earnings.

Analyst Seth Seifman also says institutional ownership of LMT is too low. He thinks that will change shortly as other Wall Street players look toward defensive names.

The Block Is Hot

The Middle East isn’t the only region experiencing tension and conflict.

The war between Russia and Ukraine continues, and there is mounting tension between China and Taiwan. JPMorgan thinks all of these situations will bolster defense spending.

While JPM is bullish, it’s in the minority among its peers. The majority of analysts have a hold rating for Lockheed Martin, and the average price target implies a modest 7% gain from current levels.

How will Lockheed Martin (LMT) stock perform throughout the rest of 2024?

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Shares of every offering are limited, but The Street Sheet readers can skip the waitlist with this exclusive link.

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Past performance is not indicative of future returns, investing involves risk. See disclosures masterworks.com/cd

A Perfect Storm for Oil Prices

Supply and Demand

Morgan Stanley (MS) is bullish on energy stocks this summer – particularly oil stocks.

The bank recently upgraded its outlook on the sector to “attractive” and predicts that oil demand will swell by 1.5 million barrels per day this year, up from its typical growth of 1.4 million.

This comes as OPEC+ is cutting production, Middle East tensions are rising, and Ukraine continues to attack Russian refineries, creating a perfect storm for oil prices to rise.

According to analyst Martijn Rats, the probability of an oil shortage this summer is high, and Brent prices could hit $94 per barrel.

Repsol

Spanish energy company Repsol (REPYY) is one stock Morgan Stanley has put in the spotlight. The bank believes it could provide a free cash flow yield of 14% through 2025, the highest among its peers.

Should that come to fruition, shareholder distributions would reach around 14%.

Morgan Stanley has given the stock a price target of $20.44, about a 23% increase from Monday’s close.

TotalEnergies

French energy company TotalEnergies (TTE) is also on Morgan Stanley’s radar.

The investment bank points out that TotalEnergies’ growth, returns, and earnings volatility look more attractive than its competition.

Morgan Stanley has given the stock a price target of $85.70, around a 19% increase from Monday’s close.

While no one likes high oil prices, these stocks could provide an opportunity for investors ready to jump into the energy sector.

Which stock do you think will outperform over the next 12 months?

Sell Nvidia? In This Economy?

Managing Risk

Nvidia (NVDA) has been the star of the AI show over the past 12 months, up over 210% over that timeframe.

Despite the massive gains, one of Nvidia’s largest shareholders has been selling. Jennison Associates got in early and currently owns around $7 billion worth of the stock, around 0.57% of the company. At the end of 2022, it owned 0.95%.

Jennison’s Global Equity Opportunities strategy returned 41.6% last year. Despite its Nvidia selloff, the strategy still has Nvidia as its second-largest holding at 6.1% of the portfolio.

According to managing director Raj Shant, the firm is selling to mitigate risk, not because it’s bearish on the stock. Due to the massive gains, the stock was accounting for a large portion of Jennison’s holdings. Selling some off was necessary to maintain a balanced portfolio.

The Fundamentals

According to Shant, the firm sells growth stocks for three reasons: to buy a more attractive stock, to realize a profit, or if a company's fundamentals change.

He stressed that the firm uses a long-term strategy and that short-term fluctuations, such as Nvidia’s recent 10% price decline, do not dictate decisions.

Factors like insufficient growth and lack of demand are much more likely to cause Jennison to sell than day-to-day market fluctuations.

Shant also pointed out that when companies like Nvidia are growing rapidly, they often have quarters where they can’t meet demand, leading to earnings misses.

Is Nvidia Still a Good Buy?

According to Shant, Nvidia is still an attractive stock, but only if investors can overlook short-term volatility. He believes it will continue to outperform the broader market over the long term.

Not all institutional investors share Shant’s sentiment. Norges Bank, manager of the largest sovereign wealth fund, bought shares in the stock at the end of 2023 valued at $15 billion today.

Like any investment, Nvidia will have its ups and downs. But these tips from Jennison’s management could give investors a roadmap for deciding to hold or sell.