Friday Four Play: “Slacking off on the Fed”
Fed, Fed, Fed … it’s all we’ve heard this week.
Interest rates, monetary policy, Jerome Powell … I’m done. Finished. Finito.
How about you? I’m betting you’re tired of hearing about it as well. So, here are four decidedly non-Fed tips for you as we head into the weekend.
No. 1: Man, It Feels Good to Be a Slacker
A real slacker plays his cards right. A real slacker gets in on the 2019 IPO game late and scores big.
The hype surrounding this company is so thick, you’d have trouble cutting it with a knife.
Slack is on a tear and now sports a market cap of $19.5 billion.
The biggest problem with investing in Slack right now is volatility. The company went public with a direct listing. No initial public offering (IPO). No IPO-pricing “road show.”
In other words, the market will decide what you pay for WORK. But Slack is new to the market, so that price is bound to fluctuate as investors take a closer look at the company. That means volatility.
In Slack’s favor, however, is that the company didn’t need the cash influx of an IPO. It’s already sitting on 800 million greenbacks. That’s how successful Slack has been, making it a great investment … but only if your nerves can handle a little bouncing around.
If you’re looking for a bit more peace of mind in IPO investing, we’ve got you covered.
No. 2: Micron Meets Its Maker
How bad is the Huawei situation for Micron Technology Inc. (Nasdaq: MU)? We’re about to find out next week.
Micron steps into the earnings confessional next week, and it should have quite a story to tell. The brokerage bunch expects earnings to plunge 73.6% to $0.83 per share. But the whisper number is calling for a drop to just $0.75 per share.
It’s worse than if Thanos snapped his fingers.
JPMorgan Chase tried to explain the situation: “Replacing bits sold to Huawei may take some time to normalize on substitution effects.” Bits? Normalize on what?
Well, JPMorgan cut its price target to $50 from $64, so you know it thinks it’s bad.
While it sucks at putting things in layman’s terms, JPMorgan is on to something. Micron’s bottom line will suffer due to the U.S. government’s blacklisting of Huawei.
It’s going to hurt, and earnings expectations reflect that. The whisper number shows that at least some people are expecting worse-than-expected results (say that five times fast).
Take this as a warning if you’re holding MU or were considering buying in ahead of earnings.
No. 3: Chewy, We’re Home
Wedbush Securities is playing a dangerous game. It’s not wise to upset a pet owner — or a Wookie. And Wedbush has just done both.
The research and ratings firm initiated coverage of Chewy Inc. (NYSE: CHWY) at neutral with a $30 price target. This after CHWY soared more than 60% following its IPO.
So, why does Wedbush hate pets? Valuation. Wedbush analyst Seth Basham sees potential for Chewy, but still believes that the company is overvalued at current levels. He recommends waiting for a better entry price for the stock.
Let’s get this out of the way. Chewy is not Pets.com. Chewy actually has a business model that doesn’t hinge on a fad-driven dot-com name. Furthermore, Chewy had revenue of more than $3.5 billion last year, with average revenue growth of 68%. You’d be hard-pressed to find an IPO in the recent crop of 2019 candidates that comes anywhere close to this.
The bottom line is that people love their pets, and they’re willing to spend big bucks to take care of them. Chewy’s IPO is tapping into that market in a big way.
No. 4: Smokin’ Loonies
The world’s largest cannabis company is a big spender, and investors are worried all that cash is going up in smoke.
Last night, Canopy Growth Corp. (NYSE: CGC) reported a net loss of CA$323.4 million, down considerably from a loss of CA$54.5 million last year. Net revenue, however, more than tripled to CA$94.1 million.
Despite the impressive revenue growth, investors just couldn’t get over the idea that Canopy was blowing smoke in their faces with the net loss.
Analysts pointed out that the sale of recreational pot in Canada fell sharply on the quarter, worrying that it was a sign that the market wasn’t as strong as projected.
CGC quickly dropped more than 8% on the news and has struggled to bounce back in intraday trading.
Some investors just can’t hold their smoke. That’s what it is. There are a two problems with the knee-jerk reaction to Canopy’s earnings report.
First, the company made several acquisitions during the quarter, designed to move into the U.S. once pot becomes legal here. In other words, Canopy is planning for future growth. That’s where all the money went. Furthermore, the company still has quite a bit of cash from Constellation Brands Inc. (NYSE: STZ) to work with. This spending is a good thing, not a bad thing.
Second, have you been to Canada? It’s freaking cold up there in the first part of the year. People stay indoors and tourism drops like bad bong water. Weed tourism and outdoor recreational use are a major part of the cannabis culture, and most of that happens in the summer. Especially in Canada … because it’s freaking cold.
Look for a major rebound in Canopy Growth’s sales and revenue when this happens.
In light of these developments, I believe that lowering the target range for the Federal funds rate at this time would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks.
Even if a sharper-than-expected slowdown does not materialize, a rate cut would help promote a more rapid return of inflation and inflation expectations to target.
The Federal Open Market Committee voted 9-to-1 to keep rates steady this week. The quote above is from the one dissenting voice. There’s your dose of Fed today. Are you happy now?
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