🎯 This Retailer is Ready for a Turnaround

Happy Sunday to everyone on The Street.

21 years ago, 19 Islamic extremists hijacked four airplanes and carried out suicide attacks against targets in the United States. Almost 3,000 people lost their lives, including citizens of 78 countries.

According to History.com, "On the first day of trading after the attacks, the market fell 7.1 percent or 684 points. New York City’s economy alone lost 143,000 jobs a month and $2.8 billion wages in the first three months. The heaviest losses were in finance and air transportation, which accounted for 60 percent of lost jobs. The estimated cost of the World Trade Center damage is $60 billion. The cost to clean the debris at Ground Zero was $750 million."

Despite the billions in damage, no amount of money can bring back the ones we lost, or make up for the way these attacks changed our country and the world. On this day and all days, may we Never Forget.

And quickly before we start:

Last week we asked you what your ideal work set-up is, and the hybrid option (going into the office 2-3 days per week) was the overwhelming favorite, claiming 55% of the votes. Roughly one-third of you want to work remotely 100% of the time and just 12% of you want a full return to the office.

Let's dive in.

Review

US stocks rose Friday morning, following volatile trading sessions throughout the week. Most of the focus is still squarely on interest-rate-related news, and how central banks across the world plan on addressing record inflation.

Overseas, the European Central Bank raised its key rate by 0.75 percentage points Thursday. Back home, Chairman Jerome Powell reaffirmed the Federal Reserve's commitment to rein in price increases. Speaking at a virtual conference hosted by the Cato Institute on Thursday, Powell said “It is very much our view, and my view, that we need to act now forthrightly, strongly, as we have been doing, and we need to keep at it until the job is done.”

Fed officials do not want inflation becoming entrenched as it did in the 1970s, therefore many analysts expect the central bank to enact a third consecutive 0.75-percentage-point rate rise later this month.

Speaking of interest rate moves, the Bank of England postponed its September policy meeting until September 22 following the death of Queen Elizabeth II. The BOE's last interest rate increase was its biggest since 1995 as inflation in the country topped 10% in July.

One sector that appears to be outperforming in light of higher interest rates is banks. European banks specifically saw their shares rise at the end of last week as investors bet their profits will get a boost.

Elsewhere, Bitcoin also saw a bit of reprieve on Friday. After falling to $19,000, its lowest level since June, the cryptocurrency jumped above $21,000 on the final day of the week. Although Bitcoin has been heralded as an independent asset that is somewhat removed from macro-level news flow, the asset's jump coincided with a rally in stock futures. In fact, Bitcoin's correlation with equities is the highest it's ever been. This week investors will be focusing on Ethereum’s scheduled “merge” which many think will increase yields and attract new investors.

On the whole, all three major averages snapped a three-week losing streak. The Dow added 2.66% last week, while the S&P 500 gained 3.65%. The Nasdaq Composite ended 4.14% higher.

Preview

Today the New York Fed will release its inflation expectations survey for August. July’s report showed significant declines in expectations for inflation over the short, medium, and longer term. Consumers also indicated they expect price increases for food and gasoline to slow considerably a year from now.

Tomorrow the widely anticipated August CPI will be published, providing the market with the latest update as to where inflation stands. The July CPI reading was unchanged from June, but still 8.5% higher from the same time last year. The Fed’s tightening monetary policy in response to inflation has arguably had the biggest impact on stocks in 2022, so Wall Street will be paying close attention. Also, watch for the August NFIB Small Business Index and August’s Federal budget.

Wednesday the Bureau of Labor Statistics will publish August’s PPI, a measure of inflation in wholesale prices. In July the PPI declined 0.5% month-over-month as energy prices fell. That said, the index was up 9.8% on an annual basis.

Thursday jobless claims for the previous week will be released. The most recent report indicated fewer people filing for unemployment claims, hitting a three-month low and showing the job market remains tight. Also, keep an eye out for August’s retail sales as well as the Philadelphia and Empire State regional manufacturing Indexes for September.

Friday the University of Michigan will release September consumer sentiment and five-year inflation expectations. In August consumer sentiment came in higher than expected. The inflation expectations report was similarly upbeat, hitting its lowest mark since February.

On the earnings front, Oracle (ORCL) reports tomorrow, Core & Main (CNM) is up on Tuesday, and Canadian manufacturer of recreational vehicles BRP Inc. (DOOO) will publish on Wednesday. Adobe (ADBE) and Aurora Mobile (JG) will wrap up on Thursday.

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Target's Terrible Year Will End At Some Point

An Interesting Opportunity

It’s been a tough year for Target (TGT). Excess inventory and rising inflation have forced the retailer to cut its guidance twice. The company also missed its earnings forecast for the fiscal second quarter. The combined headwinds have put downward pressure on Target’s stock, which is off 25% since the start of 2022.

Despite the obstacles, some analysts think these problems won’t last forever, which could present an opportunity for investors. For starters, a lot of the bad news may already be baked into the stock price. The company is also growing its market share among competitors and is boosting its dividend. Now, this doesn’t mean it's smooth sailing ahead, but for those who can handle choppy water, it may be a nice little shopping window.

Market Share Gains

Let’s pop the hood and focus on Target’s market share gains. In 2020, its market share grew by $9 billion and more is expected in 2022. Sales are projected to increase 3.5% in the fiscal year, hitting a record $110 billion.

What’s interesting is that Target is outpacing rivals in categories that tend to hold up in a recession. This includes food, beverages, essentials, and beauty. Sales in these categories jumped by double digits in the first quarter.

On a longer time horizon, Wall Street expects EPS to increase by over 45% in fiscal 2023. If these projections materialize, it would be the second most profitable fiscal year for Target. For context, in fiscal 2021 earnings were $13.56 per share.

Cheap Compared to Walmart

Even if more pain is on the way, Target shares appear relatively cheap. The stock is trading at 14.4x expected 12-month forward earnings. This is lower than the S&P 500, which is trading at 16.8x projected forward earnings. More importantly, compared to rival Walmart (WMT) Target’s stock is trading at a 33% discount. Typically, Target trades at a discount of about 15%.

For now, Walmart is benefiting more than Target as consumers rein in spending on items besides food and beauty. That trend could shift, however, which would make Target a more attractive retail play. Despite the fact Target has an uphill battle ahead, it’s certainly not down for the count. It’s a stock to keep an eye on at the very least.

China Grid Stocks Could Surge

China Pouring Billions in the Power Grid

After extreme weather events and blackouts gripped the country last month, China is increasing its power grid investments. That’s good news for some of the country’s grid stocks that have slumped so far this year.

State Grid-owned NARI Technology, for example, has lost 22% year to date. The stock is pricey at 20x forward earnings but given the expected investment inflows, some analysts think the only direction for the stock to trade is up. Other names on the radar include power equipment providers XJ Electric and Henan Pinggao Electric.

Eye-Popping Energy Spending

So far in 2022, China has spent $32 billion to upgrade and expand its power grid, which is up 10% year-over-year. Goldman Sachs expects this 10% figure to hold for the full year. State Grid, which is the largest of the two electric grid companies in China, is forecasting $76 billion in grid investments in 2022.

A lot of the money is flowing to ultrahigh voltage lines that enable power to be sent long distances. State Grid will begin building eight UHV lines later this year, costing over $22 billion. With much of China’s renewable energy in the west and more people living in the east, China wants to build a bigger network of UHV lines.

Renewable in Focus

Beyond UHV lines, China is also expanding its renewable power resources. It has already added 53 gigawatts of wind and solar this year. This represents a 73% increase from the same time period last year.

Just recently there was a power shortage in the Sichuan province due to a weather event. Sichuan is usually an electricity exporter. That underscores the importance of improving China’s grid by adding more UHV lines and renewable energy. With reliable energy a major focus for the Chinese government, grid stocks in the country could see a surge of good news.

Diversify Your Savings in Uncertain Times With Gold

Listen Up: With interest rate hikes, geopolitical unrest, increasing national debt, and inflation on the rise, there is no time like the present to protect the purchasing power of your savings with precious metals.

Inside Your FREE Gold Kit You’ll Discover:

How a Gold IRA Can Help Protect Your Purchasing Power: Opening a Gold IRA can help diversify savings by acquiring assets not traditionally correlated with other markets.

How a Gold IRA Can Grow Your Savings: Physical gold has a historical record of being a store of wealth for over 5,000 years.

How to Open a Gold IRA Tax- & Penalty-Free: Discover how you can use the little-known IRS exception to avoid penalties in your rollover.

ACT NOW and Receive Up to $5000 in Gold and Silver Coins when you open a new Gold IRA.

Affordable Housing Issue Worsens

Blowing Past the Buffer

Thanks to rising interest rates, supply chain issues, and stubbornly high inflation, multifamily developers are pulling back on affordable housing projects. That’s delaying the delivery of thousands of new units at a time when the US already has a dearth of inventory for low-income residents.

The current macro environment impacts all real estate developers but those focused on affordable housing feel it the most. They can only raise rents so much. Sometimes this could jeopardize federal tax credits, which throws off their entire business model.

In normal years affordable housing builders expect operation increases of 2%-3% and construction costs to rise by as much as 10%. This year operating costs are up between 9%-10% while many have blown past the 10% construction buffer.

Construction Delays Last Months

Developers that started construction but ran out of cash are now abandoning projects, leaving them unfinished. Enterprise Community Partners, an affordable housing nonprofit, has invested in some projects that have taken months longer to finish because of construction delays.

NRP Group, a multifamily developer based out of Cleveland, is one example. The company started 2022 with intentions to begin building close to 1,900 affordable housing units. It has since put about 200 of those units on hold as it looks for more financing. The company recently said in 18 years of developing affordable housing it hasn’t been this tough to get things done.

Reason for Optimism?

It's not all doom and gloom for the affordable housing market. Of the $350 billion in fiscal recovery funds the federal government issued last year, only 3% went for affordable housing as of the end of July. Since then, the Treasury has expanded rules on how those funds can be distributed which means more money should be flowing to affordable housing projects.

At the same time, developers are thinking outside the box in order to get projects moving. They are seeking funding from nonprofits and ordering materials before deals are closed to prevent supply chain delays. Some have requested more money from state and local governments.

What this means in the short term is that if demand stays consistent, and the supply isn’t there, rents should continue to rise on the affordable end of the spectrum. This will likely benefit those who have exposure to workforce housing, whether that's through direct investment or an institutional vehicle.

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