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By Nicholas Jasinski | Wednesday, November 20
Review and Preview didn’t go out last night because of a publishing error. Here’s last night’s edition. Stock index futures are heading for a small rise at Wednesday’s open.
Chipping In. Stocks recovered from early losses to eke out modest gains today, while bond yields pulled back slightly. The S&P 500 added 0.4% and the Nasdaq Composite rose 1%. The Dow Jones Industrial Average slipped 0.3%, the fourth-straight loss for the blue-chip index.
It was a narrow market today: only 191 of the S&P 500's components finished in the green, but they included enough of the megacaps to lift the overall index.
Walmart was today's earnings highlight, with the retail giant delivering an upbeat tone ahead of the all-important holiday shopping season. Earnings and revenue both beat expectations and management boosted its guidance for the current quarter.
My colleague Sabrina Escobar covered the results. She wrote:
Given that the holiday season is well underway, investors have been especially keen to hear what the company has to say about shopping patterns. Tuesday’s earnings—and the decision to raise guidance—will help boost confidence that Americans continue to spend at a healthy clip. Walmart’s outlook assumes a “generally stable consumer,” the company said.
“U.S. customers remain resilient, with behaviors largely consistent over the past four to six quarters,” said John David Rainey, Walmart’s chief financial officer. “They continue to seek value to maximize their budgets, while also choosing convenient options to save time.”
Management also said the company had seen strong back-to-school and Halloween sales, which are encouraging signs that demand is maintaining its momentum into the final stretch of the year. General merchandise is also selling well, they added, with strength in home decor, toys, and apparel.
Walmart stock finished the day up 3% to stretch its year-to-date gain to 65%.
Tomorrow’s main event will be quarterly results from Nvidia. The chipmaker's net income in the August-September-October quarter is expected to be up a whopping 89% from a year ago, to $17.4 billion.
That's astounding growth from a company of Nvidia's scale, but it would be the slowest profit growth in a year and a half.
The stakes are high, given Nvidia's market heft and integral position in the AI trade. Just look at semiconductor-equipment maker Applied Materials, which tanked the whole chip sector on Friday following its disappointing outlook for the current quarter.
A 4.9% jump by Nvidia stock today put it right back neck and neck with Apple for the most valuable company in the world, with each worth just below $3.5 trillion.
DJIA: -0.28% to 43,268.94
S&P 500: +0.40% to 5,916.98
Nasdaq: +1.04% to 18,987.47
The Hot Stock: Super Micro Computer +31.2%
The Biggest Loser: Incyte -8.3%
Best Sector: Technology +0.8%
Worst Sector: Financials -0.7%
Shop 'til They Drop
Walmart has been a notable standout in an otherwise tough environment for retailers. It's one of only a handful of companies in the industry to outperform the broader market this year, alongside Costco Wholesale.
The SPDR S&P Retail exchange traded fund has added 9% so far in 2024, versus 24% for the the S&P 500. Walmart is up 65% year to date and Costco has gained 41%.
Higher interest rates have hit consumer demand, while inflation-weary shoppers have become more price conscious in 2024. Gone are the days when stores could pass along cost increases with little pushback from consumers, putting pressure on profit margins for many companies. The retail landscape is also littered with well-past-their-prime chains like Macy's, far from their former pre-internet glory.
Barron's retail reporter Sabrina Escobar recently sat down with Mari Shor, a senior equity analyst covering consumer stocks at Columbia Threadneedle Investments.
Here are a few highlights from their conversation about the rapidly changing retail industry and how to invest in the space:
Barron's: What makes a company—and a stock—a winner in today’s retail landscape?
Value and convenience are resonating with consumers as the cumulative impact of food and housing inflation continues to weigh on households. We see that in Costco’s business, which is doing incredibly well. We see it in the strength of Walmart and off-price retailers such as TJX, Burlington Stores, and Ross Stores. It is also about product and marketing, because without a good product, consumers really don’t care.
We have also seen the importance of good supply chains, especially during the Covid era. You can have the best product in the world, but if you have too much of it, or if you aren’t able to adjust to a changing backdrop, that’s a big problem.
Will the winners this holiday season differ from the companies you have identified as winners in the sector?
The value message resonates even more strongly during the holiday shopping season. Everyone is looking for a deal. We have seen the biggest players, such as Walmart and Amazon and Target, try to stay on top of the trend. So, no, I don’t see a big difference unless a retailer does something irrational on the promotional side to try to drive traffic.
If anything, the start to earnings-reporting season has confirmed the widening gap between the winners and losers. We saw strong reports from companies such as Kontoor Brands [an apparel company whose brands include Wrangler and Lee] and Ralph Lauren, and pretty weak reports from companies such as VF Corp., Canada Goose, and Estée Lauder.
Winning retail stocks tend to trade at high multiples of earnings. Are they still a good buy?
Investors are still willing to pay a premium for consistent, quality growth. Given the volatile macro backdrop and the weakness in certain parts of the consumer-discretionary sector, the consistency premium has gone up even more.
However, there are idiosyncratic drivers for certain stocks that support a premium multiple. The best example is Walmart. It is fundamentally a different company today than 10 years ago. It has become a true omnichannel retailer that is also building out alternative profit drivers, similar to Amazon, that will change the P&L [profit and loss] and the growth algorithm. Yes, Walmart is trading at a premium partly because of that “consistency” premium, but also because the business is changing. In the future, it will grow at a higher rate than it did historically.
Which companies or segments are you concerned about?
The continued normalizing of demand in the athletic space, plus some execution issues, is something we have to keep an eye on. You’re seeing a significant difference right now between the players gaining share and those losing it, such as Nike or Under Armour.
We still see weak demand and pricing trends for anything big-ticket, whether it’s TVs, appliances, certain sporting goods, or recreation vehicles—anything that was strong during the pandemic.
The final category that bears watching is certain parts of the value segment. Companies such as Walmart, the warehouse clubs, and even Target are gaining share, and it feels like that has come at the expense of the dollar stores.
Read the rest of the Q&A here.
The Calendar
Nvidia, Palo Alto Networks, Snowflake, Target, TJX Cos., and Williams-Sonoma report quarterly results tomorrow.
What We're Reading Today
- Trump Still Needs a Treasury Chief. What the Markets Are Hoping For.
- Merck’s Cancer Shot Works. Its Post-Keytruda Plans Are Shaping Up Again.
- Bitcoin ETF Options Go Live in Busy Trading. Most Bets Are on Gains.
- Super Micro Stock Soars 31%. Why It Isn’t Out of the Woods Yet.
- Tesla Is Selling a Toy Bot. Musk’s Life-Size Version Is a Long Way Off.
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