Disney Punctuates a Week of Strong Earnings Reports: Jarvis Weekly Update February 11, 2022

Hello friends, and welcome back to the latest installment of the Jarvis Weekly Update on YouTube. This week we're going to cover earnings and we're also going to cover, uh, the hot inflation print. I'm your host and director of research here at Left Brain, Brian Dress, and I'm also joined by our CEO Nolan Langford. Nolan, welcome to the program today.

Hey Brian, it's good to be here. We're excited to be talking markets and always excited to be talking to our subscribers and our followers.

Well, let's just jump right in, Nolan. Plenty to talk about this week. We had plenty of earnings reports yet again for the third week in a row, and a lot of them were received positively. Market overall has been pretty strong, although, uh, today we're taping on Thursday, um, some weakness was shown after the inflation print and something we're going to get into later in the program. And we also saw some improvement in growth stocks. And also I want to highlight software stocks with the ticker IGV, which is a software ETF, up around 6% over the last 5 days. So there's definitely pockets of strength out here. Before we dig into earnings and inflation, Nolan, what's your overall view on this week's market action?

Um, so clearly it was much more positive, and, uh, it has been for the, you know, last 5 to 7 days. The market has shown strength. It looks like the breadth of the market has sort of widened out. And another positive takeaway is markets are actually functioning pretty well, and they're starting to make a little bit of sense, meaning that, you know, we're in earnings reporting season. So when companies are coming out, they're meeting their estimates of what they told the markets they were going to do. And, um, they present their forward-looking outlooks. The ones that are positive are being positively received, and the share prices are being rewarded. And the companies that flop— we'll talk about some of those here before the show is over— uh, are being met with selling. And, and that's as it should be. So if you're an investor, that has to be encouraging.

I agree, Nolan. That's something we've been telling investors the last few weeks to be looking for. A market that responds positively to positive news, and we're definitely starting to see a bit of that. Uh, we'll dig a little deeper, um, not only a couple of indexes but a little bit below the surface. I'm going to throw up the chart of the Russell here. The Russell led this week. Small caps were stronger than the broader market, so that's important to mention. We saw some risk-on indicators perking up. So we've watched a few of these different indicators as a sense of whether risk is on or off. So we saw strength in cryptos led by Bitcoin, as you can see here. XBI, the biotech index, was also quite strong, which is another one of our risk-on indicators. We also saw strength in the steel ETF, which is SLX, as you can see here. And then finally, cloud software, which has been sort of beleaguered over the last few months, showed some strength this week. SKYY is the chart we're showing here. So definitely some positive signs starting to develop after we've been fairly negative over the last few weeks. That's good to see. So let's move over to topic 1. So, Nolan, topic 1 is the hot inflation print. So this morning, Thursday morning, we got the Consumer Price Index data, the CPI. A lot of investors are sort of keying on this report, waiting to see what was going to happen, whether inflation has peaked or still moving higher. So this week we saw the CPI came in at 7.5, which is the highest rating since my birth year of 1982. And actually prices were up 0.6% month over month. So still really high inflation numbers. How do you interpret these data and what do you think are the implications for the broader market and for investors, Nolan?

Uh, 7.5% inflation is really not good for anybody. Uh, so it's not a good number. I think what we're wrestling with is, is that a temporary phenomenon, and, uh, is it longer lasting? And, uh, clearly if it's the latter, it's a, it's a bigger problem. Uh, that is a big number. It is a shocker. And, uh, the market, you know, the short, uh, competing forces here, if you will. One, you have the push-pull of, uh, inflation, um, and then you have interest rates. Everybody knows that the Federal Reserve Board is focused on that number. And the more aggressive that number, the more aggressive the Federal Reserve might be in raising interest rates. So that's what you have on the one side of it. The other side of it is you have— we're in earnings season. And so these companies that are coming out that present themselves as being really, really good businesses that continue to get good financial results. They continue to perform well. And it was interesting today, even after the print came out, on the headline the markets were negative, but there still were a lot of pockets of strength in the market for these companies where it reported really good numbers. So you can see investors, um, really having a tough time with the push-pull of interest rates versus business conditions.

It's good that you mentioned that. I think it's just, again, kind of what we were saying is that it's— we're going away from that indiscriminate selling sort of phenomenon and more toward a little more discernment among investors. And that's good to see. As I said before, you know, the first 4 days of our reporting period— again, we, we report between Fridays and Thursdays— S&P was, was pretty strong but erased most of its gains after this print. So market definitely responded negatively to this news. Let's move to topic 2. So, Nolan, topic 2 is earnings. This is the third week in a row we've, we've had a lot of earnings. This week we've seen a number of positive earnings results, including Chipotle, Twilio, Uber, Datadog. Before we get to our spotlight earnings, you know, the company that we're spotlighting this week, do you have any general thoughts on earnings, or were there any that stood out for you in particular?

There was a few that that, uh, that stood out. One of the things that I made note of is the sort of the crosscurrents in the market prior to earnings season here the last couple of weeks. It seemed to be a lot of sell first, ask questions later, particularly among growth stocks. We've been talking about this rotation that's happened in the market, really it's been for about 6 months, ever since the market got wind of interest rates may be going up at some point. Uh, the valuations of a lot of businesses really have been brought down and, uh, a lot of the selling really has been concentrated in the growth stocks. And, um, so one of the things that was interesting to me is a lot of these stocks that have, are down a lot over the last 6 months have been the ones that through earnings, we've seen a lot of sort of double-digit moves in stock prices. In some cases it's been 20, 30, 40%. In the case of Snap last week, it was 60%. So this is not normal. And so the volatility has certainly picked up on the downside and the upside. And, um, so that's something that, that, that stood out to me is the amount of stocks that moved double digits.

Nolan, would you say that Snap's, uh, stock snapped back?

Yeah, it certainly did. The day before, it got snapped by about 25% after that Facebook print.

Okay, well, it's good to get your general impressions. We wanted to talk about one of the bigger media companies out there, a big player in streaming and also in recreation, and that's Disney. We'll put up the chart of Disney, Walt Disney Company, DIS is the ticker. Nolan, before I get your thoughts, I'll just throw out a few of the highlights of the Disney report, which was pretty positive and met with positive vibes from the market. Revenues were up 34% for Disney. Media revenue is up 15%, and that's direct-to-consumer up 34% there. Also, parks where revenue was up over 100% year over year, obviously benefiting from easing of some of the pandemic restrictions. They saw 18% increase in paid subscriptions, 28% Disney Plus, and then, you know, the metric we always like to look at, ARPU, average revenue per user, was up 15%. So quite a lot to like out of the Disney report. Um, any thoughts on Disney itself? And then do you see any read-throughs for anyone else from this report?

Uh, you know, it was good to see that, um, we're getting back out in society. The parks revenue was up and the attendance was up, and I'm sure Disney will be happy to see that. They make a lot of revenue from that. But, you know, uh, Disney has been one of the dogs of the Dow for the last couple of years, and they— although this report was met with applause, um, in my opinion, they're still not out of the woods. There's still quite a few questions in regards to Disney. One of them is, you know, they do have that cruise business, which is probably going to be impacted for a while. And then the other one is streaming. You know, we made note of how many new Disney+ subscribers they have, but they're still not cash flow positive on that streaming business. And, um, the one read-through I get from a streaming business standpoint is we've had a lot of these streamers, uh, that have come out and that have announced, you know, we had Netflix, which was the, the big one, you know, Viacom announced some streaming information and showed that Comcast— one of the things that we know is the streaming business, uh, everybody has to spend a lot of money to compete. And to compete really with Netflix, which is really the, the big dog in the space. And we see how the investors met the Netflix report, you know, the shares were down a lot and they were worried about competition because of the subscriber growth. Well, if everybody else is paying, playing catch-up and spending billions, there's not a lot of industry profits in streaming right now. There's a lot of revenue, everybody's doing a land grab, But think of how much money Netflix has spent on their library and their originals for a very long time. They spend more than anybody else. They probably spend as much as the industry as a whole just themselves. And they just this year are getting to a point where they're free cash flow positive. So all these other people who want to enter streaming, you know, it's fierce competition, a lot of spending ahead. And that's part of one of the reasons the Disney shares have struggled the last couple years. It's not the only reason. They had some issues at ESPN, and also because of COVID we were shut out from the parks. But, um, that engine has growth, you know, that area has a growth in revenue, but just not profits.

So this, this, uh, month's earnings season, you know, there was a lot of consternation going in, people very concerned about stocks in general. You know, next week we're kind of winding down. We've got Airbnb, Roblox, Crocs, Applied Materials, Cisco, Nvidia, Walmart, and Roku, among quite a few others. So do you have any general impressions on earnings this season? I think we've seen quite a few positive reports, but obviously some really awful reports from Netflix, PayPal, and Facebook, Meta. Is it just a Netflix, PayPal, Meta problem, or what do you think? What are your general impressions of the earnings season so far?

The— though we— so I think earnings season is, is mixed, you know, you'd have to give it more thumbs up than thumbs down. And there's two things to remember. One is, you know, at the end of the quarter, and right now we're getting reports from the end of the year, so it's really important, and particularly when the economy is so much at a crossroads, it's really important to get these reads on not only what they reported in a quarter or for the year, but the outlook, what they're telling us going forward. You know, how businesses are handling inflation. Are they passing the cost through? Are they keeping it? What's going on with supply chains? Can they get all the merchandise ordered that they want? Can they get it here in time? How are they handling Omicron, Omicron, with their employees coming back to work? I mean, there's a lot of information, uh, that these companies give us at the end of the quarter and at the end of the year that's really important. And in addition to how their own businesses' sales and revenues are going, whether they're ahead of plan, behind plan, what are the competitive dynamics. And so it's one thing to hear how the companies did, whether they beat estimates and did what investors thought, and it's another thing to see the stock reaction. And they don't always mix. Case in point is like Peloton. They really had an awful earnings report, and initially the stock was down, but it's very positive the last week or so because, you know, there was a read-through that possibly they're an M&A candidate and they may get purchased by somebody. So it's very tricky around earnings. You know, some companies, you know, even Facebook, Meta, as an example, they reported a wonderful quarter and a wonderful year, and they beat estimates on earnings. It was the forward-looking guidance and the fact that there was a, um, a daily and monthly active users slowdown, uh, because of competitive dynamics, which will drive their future profitability. So you have to really be careful on earnings. It's not just what they report, it's also the commentary and everything else that surrounds the business.

I think that's helpful, Nolan. So topic 3, we want to see where is opportunity. So, Nolan, we know inflation and interest rates are kind of driving the story along with earnings. Where do you see opportunity, and what kind of a shopping list are you putting together, um, given the current environment?

Yeah, so there's, um, there's a lot here, uh, to unpack. One of the places you'd always look is, um, we look— companies that are showing strength. And there's a couple areas we look at for strength. One is just share price, but the other one is business conditions, and particularly accelerating business conditions. And sometimes you can get this weird— this sort of weird effect where business conditions are accelerating and share prices either stagnating or in some cases moving down for whatever trend. So one of the things that we're really focused on here is the absolute best businesses, the businesses that are able to generate the most positive free cash flow for its owners over time with the highest degree of confidence. And so we feel real good about cataloging and tracking these businesses. And some of them, the share prices have fallen a lot. So I'm— we're watching and tracking when share prices start to normalize and businesses continue to accelerate, what that valuation looks like, what point is that, because those will be very attractive shares to go in and, and buy. Um, so that would be the first thing is a shopping list or a watch list of things that we love. Maybe they were too expensive, maybe we owned them and we moved away from them because the share price fell, whatever happened, or we wanted to rebalance. But now we're still watching them because we know that they are really, really good businesses. That would be the one category for, uh, shares. For bonds, it's, um, it's interesting. Uh, the TLT this year, for those who are non-professionals, That's the ETF proxy for the long bond, which follows interest rates, and it's an inverse relationship. So the TLT is the exchange-traded funds that tracks long-term Treasury bonds. Bond prices up, interest rates down, and it's the opposite seesaw effect. If the TLT or the bond price is down, interest rates are up. And as interest rates have risen, the TLT or safe bond for Treasuries are down. And as of this taping, they're down over 6% year year-to-date. And every other fixed income security prices off the Treasury bond. So all of these income securities— Brian, you and I looked at these this afternoon in our research meeting, taking a look at the year-to-date return of all of these income securities, primarily these fixed income securities— and a lot of them are down a lot already this year. One of the things that, um, we're looking at is we want to combine two things, um, when we look for fixed income securities. One, we're looking in the high-yield space because there you generally get a lot more yield and a lot more cushion. It doesn't always save you from losses, but it certainly cushions it if you're getting, you know, 6% or 7% versus 2%. There's just a lot more room there. So one of the things that we're looking at is bonds, corporate bonds that mature in the next 3 years. So 3 years and in, so we don't— we're not outstanding for very long. We don't have to worry about much interest rate um, movement. And we like bonds trading in less than their mature— less than their maturity value. And one sector that looks really attractive in my mind is energy. Energy prices have been strong. A lot of companies issued bonds several years ago before oil prices went negative, and they went negative in April of 2020. So you have a lot of these energy companies that have bonds the credit rating hasn't caught up with the business conditions. So they still— a lot of these may carry a very low rating right into high yield because of business conditions a couple of years ago. But now, you know, that's when oil prices went negative and they were in the 30s, 40s, 50s. Now oil prices are strengthened in there from 80 to 90. These companies have tons of free cash flow. A lot of these companies are just paying back with free cash flow their bonds as they mature. Instead of refinancing. So that's what we're looking for on the credit side. Bonds, um, from some high-yield issuers that mature over the next 3 years, we don't have to worry too much about rate increases, where we're comfortable that the company has free cash flow to pay back even though the credit ratings may be lower.

Well, that was a lot, Nolan, but I appreciate all of it. I think it's all really useful for investors. We're going to wrap it up here. Just remind everyone that we have the Jarvis newsletter that comes out every weekend on Saturday morning. Check the link in the description below in order to get that in your inbox on Saturdays. And then, uh, yeah, we also have the Left Brain Investment Research where we get the, uh, the actual analyst reports that are available, uh, to subscribers. So also have the link in the description for that as well. With that, thank you, Nolan, and we'll see you again next week.

We'll be excited to see you, and, um, wherever you're rooting for, uh, viewers, for the Super Bowl, I hope your team wins.