Raging inflation is hampering U.S. global economic recovery efforts, with investors growing increasingly skittish on stock purchase opportunities.
RealMoney’s Bret Jensen reported that prices climbed 7.5% on a year-over-year basis, “a bit over expectations.”
“Those of us in the 'real' world have been all too aware of the rampage of inflation throughout the economy for many quarters now, with stocks suffering as a result,” he said.
Jensen points to the U.S. residential rental market as proof of the damage inflation is having on the economy.
“Surging rents are one key reason why consumer sentiment is near decade lows,” Jensen said. “This will also continue to be a key driver of inflation and a drag on consumer spending in coming quarters, and one of myriad factors that will trigger a huge 'wave' election come November.”
According to Jensen, it’s easy to see why investors are growing increasingly skittish these days.
“The Federal Reserve is about to embark on a series of interest rate hikes in order to help put the inflation genie back into the bottle,” he said. “The oracles at the central bank are also setting off on this path when the economy is cooling and with the markets selling at much higher valuations than is typical historically at the beginning of a tightening cycle (above).
Consequently, Jensen remains extremely cautious on equities, which is the same stance he’s had for a few quarters now.
“This means I have a higher-than-normal allocation to cash in my portfolio at the moment,” he said. “Financials could continue to get a boost from rising interest rates which is why OneMain Holdings (OMF) remains a core position for me. The stock is cheap and just bumped up its dividend by 35%. The shares now yield just over 7%.”
Enova International (ENVA) is another financial name that remains in Jensen’s portfolio. “The company recently easily beat fourth quarter expectations and just announced a new $100 million stock buyback authorization which will retire just under 7% of outstanding float at current prices,” he stated.
Meanwhile, commodity and energy stocks could continue to outperform the overall market as well if inflation continues to be persistent, which looks likely for a while. “Mosiac (MOS) w has gotten a lot of love from analysts recently, still has a reasonable valuation and just raised its dividend payout by 50% at the end of 2021,” Jensen added.
On the flip side, Jensen continues to remain underweight in the housing sector.
“I still think the migration out of highly populated places like New York City to less crowded and less costly locales is a theme that will continue to play out for years,” he said. “However, with the price increases across the housing sector we have seen in 2020 and 2021, and with the highest average mortgage rates since before the pandemic began in place, the housing market is likely to take a pause for some time.”
Even with inflation looming over the market, TheStreet’s market mavens see some solid “buy the dip” opportunities. This week, these stocks are at the top of the list.
Cullen/Frost Bankers $143.35. 5-Day Performance 0.77%.
On a recent Executive Decision segment of his "Mad Money" program Jim Cramer spoke with Phil Green, chairman and CEO of Cullen/Frost Bankers (CFR), a 150-year-old Texas-based bank.
Green said Cullen/Frost is in some of the best markets in the country, which is why in 2018 the company committed to doubling its footprint in two years. After completing that initiative in 2020, Cullen/Frost then committed to tripling locations in the Dallas market.
“When asked why Cullen/Frost chose to grow organically rather than just acquiring another bank, Green explained that when banks acquire other banks they typically don't have growth and are in need of new customers.”
On inflation, Green noted that the biggest challenge regarding inflation is labor costs, stating the bank simply can't find enough talented workers to fill positions. “Still, Cramer said while much of the focus on Wall Street is around money-center banks, there are many regional banks such as Cullen/Frost that are simply terrific.”
Real Money’s Bruce Kamich noted that “CFR prices have traded higher the past 12 months but there have been a number of corrections along the way.” In particular, “the rising 200-day moving average line was tested in July, September and December. Each pullback to the average line turned out to be a buying opportunity.”
Currently, CFR is trading above the rising 40-week moving average line. “The weekly OBV line shows a much stronger and bullish picture than the daily line, and the weekly MACD oscillator is in a bullish alignment above the zero line,” Kamich noted.
Kamich’s charts show a potential upside price target in the $187 area for CR shares.
“Traders could look to go long CFR on a dip under $135 if available,” he said.
Cleveland-Cliffs CLF $18.80. 5-Day Performance (1.08%).
Cleveland-Cliffs (CLF) released the firm's fourth quarter financial results early on February 11. The results were much better than one year ago – but just not what Wall Street expected, said RealMoney’s Stephen Guilfoyle.
The company posted adjusted EPS of $1.78 (GAAP EPS: $1.69).
That compares to $0.24 for Q4 2020. Results fell about a quarter of a dollar short of expectations. The firm also generated $5.35B in revenue over the three- month period. “That was good enough for year over year growth of 136.7%. “That also fell about $300M short of what Wall Street had in mind,” Guilfoyle said.
For the full year, Cleveland-Cliffs set annual records for revenue ($20.4B), net income ($3B), adjusted EBITDA ($5.3B), and operating cash flow ($2.8B). Fourth-quarter adjusted EBITDA was $1.5B, up from $286M a year ago. The firm also acquired the Ferrous Processing and Trading Company, paid down about $150M in principal debt, and reduced the firm's pension liabilities, net of assets, by about $1 billion.
“In addition, the firm's board has authorized a new share repurchase authorization permitting but not committing the firm to acquire up to $1B worth of outstanding common shares,” Guilfoyle added.
Production-wise, the firm sold 3.4 million net tons of steel products in Q4 2021, up from 1.9 million net tons in Q4 2020. Cost of goods increased from $1.867B to $3.907B, as the average selling price increased from $880 per net ton, to $1,423. For the year, the average selling price increased from $947 in 2020 to $1,187 in 2021.
According to Guilfoyle, this may be, on top of missing estimates, why the stock is under some pressure.
This From the Cleveland-Cliffs press conference.
"Due to the successful renewal of relevant fixed price sales contracts, and based on the current 2022 futures curve which implies an average hot-rolled coil steel index price of $925 per net ton for the remainder of the year, the Company would expect it's 2022 average selling price to be approximately $1.225 per ton."
“While this selling price would be up nicely over 2021, it would also be down sharply from Q4 2021,” Guilfoyle said.
Currently, the company’s balance sheet is manageable. The net cash position is slim, down to $48 million from $112 million a year earlier. Current assets have grown over the past year to $7.653B in the form of accounts receivable and inventories.
“This dwarfs current liabilities that have grown more slowly and only because of growth in accounts payable,” Guilfoyle said. “Total assets of $18.975B easily top total liabilities less equity of $13.201B. More work needs to be done reducing long-term debt, which still stands at $5.238B.”
Guilfoyle told Real Money readers that he’s traded CLF in the past and the name has been good to him.
“I actually expected to convince myself to buy this dip,” he said. “The chart has kind of talked me out of that. Interestingly the shares formed a double top reversal where the two peaks, August and October, topped out at the same spot... to the penny ($26.51).”
From an equity perspective, Guilfoyle said he’d rather buy this name on momentum above the 200-day line than where it is right now..
“There is no dividend, so nothing to miss out on by being patient,” he said. “I am thinking that the April $18 puts trading for about $1.05 and the April $15 puts that are going for about $0.35 look ripe for a sale that would expose the investor to highly discounted equity risk for a price rather than plain old equity risk.”
Chewy $53.49. 5-Day performance 16.74%.
Chewy CHWY is starting to draw attention with a recent 15% move.
“This is another huge short interest name with more than one-quarter of the shares borrowed,” noted RealMoney’s Timothy Collins. “Based on the current average volume, it would take shorts nearly five full trading days at average volume to cover all the outstanding shares. Remember, we aren't that far removed from a time of crazy short squeezes.”
Collins said the market is going to see shorts trying to hit this CHWY – and soon.
“After a three-week bounce that has taken the stock from $37 to $54, we're trading into the 50-day simple moving average (SMA),” he said. “This is a logical place for those who bought the dip to take some profits. It is also a price where shorts may try to bang the stock back lower.”
Chewy saw a similar push in December that failed.
“One key difference now is the secondary indicators are all quite strong,” Collins noted. “The MACD is making a new high and sits in a bullish divergence position. The Full Stochastics is also still positioned higher. Even price has broken above the recent trading channel. One could almost argue an inverse head and shoulders.”
But buying into the 50-day simple moving average is challenging right now
Traders may be better off waiting to buy above $53 or look to buy a bounce of the $46 to $48 area,” Collins added. “Neither of these involve sacrificing much upside during the day. The risk is a gap and run to the upside. It's possible in this market, especially if the stock catches an analyst upgrade combined with that huge short interest.”
A call spread would offer investors an attractive approach from the options side of the world.
“I see Chewy running as high as $60 from here, so we need to implement a wider spread to retain similar nominal value as buying the stock,” Collins stated. “Given its implied volatility levels, Chewy doesn't offer out the cheapest premiums though, so that's something to keep in mind.”
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