A Banking Kerfuffle, Amid a Torrent of Earnings: Jarvis® Update May 5, 2023

It's been a barrage of earnings amid plenty of macroeconomic events. We cover this and much more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian.

It's great to be back here again with everyone. Before we get started, love to ask you to like and share the video if you find it useful and hit the bell for notifications and subscribe. That way you find out when the next video comes out. And we're out on a biweekly cadence with our Jarvis update videos. But first, a preview. Markets held up pretty well considering all the macroeconomic turmoil. Two topics as we discuss this week's market activity. The first is banking woes and the Fed. And the second is a torrent of earnings reports. We have a few announcements for you before we get started. First of all, we produce this show for you, the everyday investor, whether you have a 401(k) or an IRA, whether you work with an advisor or if you manage your own investments. We'd love to be a resource for you. If you'd like a second opinion on your portfolio as we go through some difficult times in the market, definitely reach out to us on the number below. We'd love to have a conversation with you, set something on the calendar. And provide you with our thoughts. If you're an institutional investor, we've got something for you as well. That's our research service, Left Brain Investment Research. We're folding that into our wealth management business and we'll see that on our new website, which we are, which we are launching this week. We have 6 to 8 reports for you each month coming from our analyst team on some of our favorite stocks and bonds. Follow the link on the screen below if you want to learn more about that. Either way, sign up for our monthly newsletter. Our last edition came out last week and will be out again in a few weeks, so sign up below and you can get our content, both our newsletter and our video content every week. So let's jump right into our market recap. First of all, the S&P was down about 1.8% this week. The Nasdaq was down about 1.5%, and small-cap Russell 2000 Index was down about 1.9%. Considering all the bad news and headlines that we had this week, we think that's a pretty good result for the market. We also noticed that Treasury rates are falling pretty significantly as investors do look for safety. We see the 10-year Treasury down to an 8-month low of around 3.3% today. And also we wanted to mention oil continuing to slide. The oil futures now are down under $70. That's an 18-month low. So a lot is going on. Also, we had the Fed in the spotlight this week. We got the Fed announcement. Another rate hike from the Fed gets us to about 5.25% on the Fed funds rate. We'll cover that and banking in the first topic. But, Nolan, how do you interpret this week's action, especially in terms of the interest rate moves that we've seen?

It's still cloudy, still very murky. We were hoping that some of those clouds would part this week and our friend Jerome Powell would add some clarity, but no luck there. So we did get a quarter point interest rate increase. Unfortunately, what the market was looking for is for him to signal the end and hopefully the beginning of rate cuts. And we got no such confirmation. So I think that's why you got a little bit of a sell-off yesterday and some follow-through today. So still really murky. I think the corporate earnings side, we're going to talk about this a little bit later. I still think corporations are kind of stuck a little bit between the proverbial rock and a hard place. On the one side, you got the banks and the regional banking issue. That's not helpful. For corporate America. At the same time, you have an economic slowdown. So you have deals starting to leak, and you're starting to have more uncertainty as it relates to capital expenses, capital expenditures, and budgets. And so from an earnings standpoint, you're still having companies having a really tough time with guidance, particularly upside guidance, and they're still being very, very conservative and guiding down. So what do I make of it? We have a lot of crosscurrents. The uncertainty is going to be with us a little bit longer until some of these issues start getting worked out.

Oh, Nolan, I'm looking forward to the time when we don't have crosscurrents. Thank you for that overview. We'll jump right into our topics. So topic 1 is the macro comes roaring back into focus. First of all, the Federal Reserve, like Nolan said, did raise interest rates yet again. They did signal a potential pause, but there's still some uncertainty behind that. We're not really at the point yet where we can expect interest rate increases to stop. You saw more turmoil in regional banks. Uh, of course, interest rates going higher fast has put some strain on banks. We also have the inflation issue and a number of other issues in the economy that are challenging banks, like commercial real estate. We saw early in the week JP Morgan taking over First Republic Bank. That was one of the regional banks that was certainly under threat. Others like PacWest and, uh, a number of other banks are still under pressure. Nolan, we usually try to stay out of this macro malaise, but we're unable to ignore what's been happening, happening recently. How should investors respond to what we're seeing in the connected topics of the both the Fed and the banking crisis?

You know, I get the sense, Brian, from talking to investors that, you know, I haven't run across any investors that have a lot of bank exposure to these names. You know, you got Silvergate Bank and, uh, Silicon Valley Bank, First Republic Bank, and These are either just niche, niche banks or very small banks that, you know, a lot of investors don't have exposure to. I think the bigger risk is that the same issue that befell these banks, if it spreads and befalls other banks, i.e., bigger banks, then it could have a ripple impact. I think that's the bigger sort of implication. And I think investors are edgy because of it, primarily because the FDIC and the regulators haven't come up with a fix for the issue. And just so the listeners or the viewers are aware of the issue, you know, it's amazing in the last 12 months how the pendulum has swung. 12 months ago, we were saying, hey, these banks are going to be minting money because interest rates are going up. So they're going to earn a lot more money on their deposits and the money that they have with the Fed. And they're going to have to be able to lend money at wider spreads. And they were just minting money. And if you take a look at the banking shares, they were doing very well. And now that same thing that gave us gold before is giving us lead now because interest rates continue to go up and nobody thought about how it would impact the assets on their balance sheet. And just so the viewers are aware, it's that relationship, that seesaw that you see. Interest rates up, bond prices down, and vice versa. And these bonds that these banks own bonds as assets on their balance sheet. Because they have to. And so now that rates are up, those asset values are down, and that causes a hole in their balance sheet. And that's the same thing that happened to all of these banks. So the FDIC, the regulators are going to have to come up with some fix, both for that and the deposit issue. And until they do, we're still going to be— we're going to be seeing this uncertainty.

Yes, we know markets dislike uncertainty. And with the banking issue, we're certainly going to have uncertainty for the foreseeable future. Let's talk about more of what we're interested in. That's the microeconomics. Let's move to topic 2. So topic 2, Nolan, earnings season rages on. So we're right in the throes of earnings season. We've seen most of the major companies report this week. We had quite a few consequential earnings reports. That includes Shopify. That's SHOP. We also heard from one of our favorite investments, Starbucks, SBUX. Couple others that we heard from, Arista Networks, A-N-E-T, and finally Uber. I think we all know about Uber, U-B-E-R. Nolan, you noted earlier this week we haven't seen a lot of explosive reactions to the upside on these earnings reports throughout this earnings season, but we have seen some downside surprises. You also sort of alluded to a fact that we noticed, which was there are a lot of companies that had really good first quarters, but they're being a little bit more conservative what they're expecting for the second quarter. And also for the rest of the year. And what we saw was a lot of market reactions or maybe potentially overreactions, just selling these stocks off when they saw the words lower guidance, just slamming those stocks. So we saw that in a few cases, including Starbucks. Do you have any interpretation, Nolan, of, of the pattern we're seeing there? And from there, what are some of the most surprising or notable reports you saw so far in this quarter?

Yeah, I'm going to give two, one positive, one, one negative. I don't know if I have an overall guiding takeaway. Earnings releases are somewhat random. The investor response to earnings report is somewhat random. Sometimes you can see a company that does a terrible— they do terrible with earnings. You know, they were expected to earn a dollar and they earned 80 cents or something, and you would expect the stock price to be down a lot, and sometimes it rallies. For strange reasons. Could be guidance in the future, could be layoffs, it could be a number of things. And then sometimes you'll see the opposite. Some company was supposed to earn 80 cents and they earn a dollar and the stock goes down a whole lot, and you're like, what happened? So sometimes these reactions don't necessarily match the release. And so there are— sometimes you can find an opportunity. But there's two big things that's happening right now in the markets. One of them is technology And the other one is healthcare. Let's start with technology first, primarily AI or artificial intelligence. It's the thing that really has gotten the market moving and working this year. You mentioned, you mentioned Arista Networks, which does networking for data centers, and they do have some AI exposure. Earlier in the year when AI was all the talk with ChatGPT getting released, the stock ran up. They came out with earnings earlier this week and the stock fell. Not that it was a bad earnings release, I think it was a buy the rumor, sell the news sort of thing. But AI is here. It is going to impact maybe all industries, but certainly here it's on top of investors' mind. And that's a theme that's running through the technology space. So I think that bears paying attention to and watching. And then the other one is just going on in, uh, in healthcare right now, not only biotech, but the one thing that you and I pay attention to with healthcare is these diabetes drugs and what's going on with diabetes, which is you know, unfortunately, a growth business around the world, but especially the US. And there's these drug manufacturers and medtech companies— I'm sorry, I'm having a connection loss— that are coming out with solutions. One of these companies is Eli Lilly that has a drug that originally was given FDA approval for diabetes, but one of the side effects is weight loss. And now it's off-label for weight loss. And so sales there are absolutely booming. And we think that that's good for consumers, certainly good for all of these diabetes companies and shareholders. But we think that there's going to be a couple of other companies, a second order effect, that are going to benefit. So you asked about earnings reports. There's two that impressed me. And let's start where we ended, which is the diabetes drugs with people losing weight. And hopefully this helps our obese population here. The side effect is though you lose weight, now you have loose skin. That skin needs to be tightened. That's an aesthetic procedure. And a company called InMode, they make the radio frequency devices for skin tightening and body contouring. And so we think that this is gonna be a big winner. We liked the business before growing at 25% plus with no debt, with a lot of cash. You see med spas pop up all over the place. We think this is a long-term winner. They released earnings which were fantastic earlier this week. That really impressed me. The stock reaction fell after the earnings release, which was sort of a head-scratcher, but the business is intact and we like where it stands. The other thing I mentioned, which is AI, there's a, a company we haven't spoken about before, which is Supermicro. The ticker is SMCI. It's a smaller cap business as well. It's about a $7 billion market cap. But for artificial intelligence, they take all those GPU chips that are used for AI, builds motherboards in these racks, uh, that are using data centers. And so as you see more AI, more AI applications, I think this is going to continue to lead to rapid growth in their business. They did come out with earnings yesterday which were fantastic, and the stock shot up over 20%. So those are two names that stood out from this week's earnings releases for me.

Thank you for that, Nolan. I want to point out to the audience, this is why you listen to the Jarvis Update. You know, you're not going to hear anywhere else about these smaller and mid-cap type of companies like Supermicro and InMode. And that's part of our process. We're digging deep into the markets, looking for opportunities, not just buying the top 10 stocks in the S&P and forgetting about it. There are opportunities galore in the markets if you can dig through and find the best businesses. And that's what we're all about here in Left Brain. Nolan, thank you for being with us. We appreciate your insights. Any final thoughts as we head into the weekend?

Go Heat! Go Heat! Go Heat! And this is a fantastic finals. We had the NBA— we had the NFL Draft last week, and this period is sports lovers' paradise here for the next month. So go Heat! And, uh, for all of you that are preparing for summer, Have a wonderful summer vacation.

Thank you, Nolan. Thank you to the audience, and we'll see you again next month.