The Best Offense is a Good Defense: Earnings Season Begins

Earnings season is upon us. We cover that and much more in this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thanks, Brian. It's great to be on.

Before we get started, a couple of announcements. As always, we have the Jarvis Newsletter, comes to your inbox every Saturday morning. So if you want to get on the list To receive that, make sure you click the link in the description below. We also have our subscription service. That's 8 to 10 full-length stock reports every month. And The Chosen, that's our favorite stock and bond every month. So again, click the link in the description below and check that out. Finally, we have our podcast, The Left Brain Thinking Podcast. We've had our first episode. We just taped our second with a guest. Our new format. So again, uh, go to iTunes or wherever you get your podcast, search for Left Brain Thinking, make sure you're on the list, and you'll find out, uh, every time a new one comes out. Should be every other Tuesday, so mark your calendars. With that, we'll jump into our market recap. Markets were looking pretty strong until Thursday morning, uh, but we ended up mixed. NASDAQ was down about a percent, Russell and S&P down a fraction of a percent. So, uh, kind of a rally was upended by some hawkish Fed talk. The 10-year yield's now above 2.9%. I think all of us been watching the rates move higher. Seems like a one-way trade there. And we had Jay Powell come out this morning and he said the word Volcker. So that made me cringe and probably a lot of others. But we had some more hawkish commentary. We're expecting 50 or 75 basis points points hike at the next Fed meeting. So I think that spooked a lot of investors, especially kind of in the growth stock arena, but really pretty much everything sold off. Nolan, with all that in mind, what are your general thoughts as we get started here?

The market doesn't like it and stocks sold off across the board. There really hasn't been any safe havens to speak of. And I think the market might be telling the Fed although they need to raise rates. The risk— there's a very real risk that they may tip the economy. I mean, they walk in a tight— they're walking a tightrope. They're trying to slow down inflation but also keep the economy from, uh, from falling into a recession. That 75 basis point, um, I think the market's having a hard time digesting that. It's a big number.

Geez, I don't remember any time even in my lifetime they did a 75 raise, but, uh, sounds Sounds like they got the bazooka out. So topic one, we're in earnings. Earnings season's upon us. We had a mixed bag of earnings this week. The first that we want to talk about is Netflix. They kicked off earnings season pretty inauspiciously. I think the stock dropped over 30% in a day. The news was subscriber growth was negative. That is the death knell for a stock like Netflix where everyone's kind of conditioned to expect positive subscriber growth. But it wasn't all bad this week. We saw airlines coming out looking strong after earnings. And then we also heard from Tesla. As Nolan pointed out, actually, 2-day return is negative on Tesla, but it had a pretty nice showing after its report. Tesla's been able to fight off supply chain concerns more effectively than almost any other business on the globe. So we're definitely impressed by what we see from there. Um, so Nolan, if you have any comments on any of those 3 or any other earnings.

So Tesla, what do you expect from a company that has Iron Man running it? You know, you're going to get that. The other thing for Netflix, that was a bomb. You know, if you're a growth stock and you stop growing, that, that, that is a problem. But there's a lot of competition in streaming, as we all know, and they're all fighting for viewership. They're fighting for time and eyeballs. And they're fighting for prices, they're fighting for production, and so they're going to have to spend more money to stand out. It's a problem in streaming for the, the content companies themselves. So that caught my eye. There were some good fundamental stories that came out. They were more from the, from the value side of it. So the recovering from COVID plays— place number 1 is the airlines. Travel demand is up. It's almost back to 2019 levels, and profitability for the airlines are probably going to be higher than they were in 2019, even though revenues may be lower. So margins are higher.

Let's talk more about travel, Nolan. Um, you know, obviously the airlines are an option. You have hotel businesses, you've got car rental businesses. You know, a number of businesses that are poised to take advantage of people obviously clamoring to get back to travel. Do you like any of those segments, or is there something else? Is there another way to play it that, uh, you think really stands out?

What you worry about with travel, it's getting a spike now, and you wonder if the spike's going to hold. And certain parts of travel, I think, is probably just getting started. So the leisure stuff I don't know what we're in it, what inning we're in, in leisure travel, but, you know, it's not the first inning. But I think for business travel, it is. So business travel, I think, is just getting started. I think international travel is just really getting started. The game hasn't even started there. But the name we like in travel is not any of these sort of travel businesses themselves. It's the platform to make reservations and have experience. Is, and that's Airbnb. And I think that is a name that's going to be a premier name in travel, and I think it's going to be a premier name for a very long time.

Uh, just a little preview of next week, we're going to be right in the thick of earnings season. Just throw out a few of the names we'll be, we'll be watching. We've got, uh, Raytheon, we've got Chipotle coming out, Microsoft, Visa and Mastercard, you've got Boeing, so some travel exposure there, Ford and PayPal. ServiceNow, Teladoc, Amazon, Atlassian, and Roku. And then actually one of the stocks that's really performing this year, ExxonMobil, XOM. So a lot to look forward to next week. Anything on your agenda, Nolan, that you're really going to be watching?

Yeah, I will be not taking very many breaks to not even eat next week because it's going to be a whole flood of earnings. I'll be interested to see not just what the companies report earnings from the first quarter, but more importantly, the commentary, what they forecast going forward. And then what'll really be interesting is how investors react to what companies report. So, uh, I'm excited, can't wait to see what happens. And always every quarter, you know, there's a company or two that really stands out where you didn't expect anything from, and all of a sudden they reset the bar much higher.

After we saw Netflix this week, I might be watching these, uh, come in with a helmet on. We'll see. So topic 2, we're calling Playing Offense, and it's the barbell portfolio. We're bringing this concept back again. I know it's kind of a defensive feel to the market, but we're looking to play offense in a way to take advantage of 2- and 3- and 5-year trends as, as we're long-term investors here at Left Brain. So We'll just point out a couple of areas that we think have been strong or relatively strong. Old economy names have been strong, although this week there was some giveback. Oil pipelines, you know, that's Nolan's favorite, that's been strong all year. Energy, materials, and mining and metals, that's been weak this week. We've got healthcare starting to show some strength, and also we're seeing some signs of recovery in what we're calling old school tech, and then finally cybersecurity. It's kind of the one growth area that's shown some strength in a sea of weakness. It's a defensive world out there, but how can we play offense as investors?

Just so the listeners are aware, you know, we follow the macro here somewhat, but we're really interested in the micro. Micro is more important, and those are earnings releases. Hey, how's the business? How are they doing? How's the sales of Tesla? What are the earnings trajectory? What's the cash flow trajectory of the business? And what sectors are really poised to accelerate versus decelerate. So that's the micro versus the macro. And then we also follow the fundamental versus the technical. So fundamental is, you know, hey, a business is doing really well, that sales were growing at 12%, now they're growing at 18%, earnings were growing at 15%, now they're growing at 20%. That's the fundamental. Uh, the technical is, if you look at a chart How are the shares performing? Are they going from the lower left to the upper right? Those are the things that we follow. And there's generally— now there's crosscurrents because there are businesses that fundamentally look healthy, but investors are still selling the shares off. That means the valuation is compressing. What I'm looking for during these earnings releases are businesses that are healthy and growing and expanding into new markets and continuing to pile up cash and strengthen their competitive positions, but where the stock's getting cheaper. And when you can have those two together and shares stop falling, then you can get some valuation expansion and you can get the twin engines of growth going. The Barbell portfolio itself is on the one side, there's these stocks that are sort of built for a tougher economy. Where I think people are putting money kind of as a place to hide, if you will. You know, you can't really own bonds in this market because of interest rates. You don't want to sit in cash because inflation rates are 6% or 7% right now, so that's melting like an ice cube. But stocks themselves are having a rough go of it. And so we have this category of stocks. You hit the nail on the head. You know, healthcare is an area that's working. Utilities were working, consumer staples, pipelines, things with high dividend yields and growing dividends. People are comfortable owning those even in tougher economic conditions. On the other side, you do have these what we call broken growth stocks. So that's these, hey, if I look out 2 or 3 years from now, these businesses have a high probability of their share prices being much higher 2 years from now than you are today. When the economy and the market conditions sort of normalize, most people will look back and won't remember this period. But there are some stocks that are really suffering right now. And if you can add those on the other part of the, the barbell, that when things normalize, the share prices can move and move up quickly. And we always say either get cheap You know, you get cheap prices or good news, but not both. And so in a couple years, you could be doing very well even though there's some pain today.

All right, Nolan. Well, I'm looking forward to not remembering this period. So, uh, before we get on to topic 3, we're gonna take a quick timeout and let you know we need you to like, subscribe, uh, to the videos and drop a comment. We'll be happy to engage with any investment questions you might have. If you find this content useful, definitely share it with your network. Helps it be found by other investors. Topic 3 is the consumer. Nolan, we've been back and forth about the consumer all year. Consumer discretionary stocks are down around 15% year to date, but they're starting to level off. They're flat over the last month. Consumer staples, you know, non-discretionary, it's up 4% year to date, up around 8% in the last month. So those are starting to move. And then we saw from JPMorgan last week, Jamie Dimon, the CEO, said the consumer looks strong. How do you view the consumer and how can investors get exposure?

Getting exposure part, that's the easy part because there's a lot of consumer stocks. And these consumer stocks, the interesting thing is they're going to be names that people know— Starbucks, McDonald's, Chipotle, Nike, Target, Walmart, Kroger. And so it's very easy to get exposure to the names if clients want to buy them or investors want to buy them. I think what's interesting in the consumer sector, the consumer stocks that are doing the best are the most defensive. So if you take a look at the dollar stores, you take a look at Walmart, you take a look at Procter Gamble, the maker of Crest toothpaste and Tide detergent, I think they're buying them now because You know, they do have consistent revenue, though it's low. They do have high dividend yields, and I think they probably theorize they have some pricing power. So I think that's the take on the consumer. Brian, I think it's still undetermined how the consumer will fare. You know, again, we have sort of mixed messages. On the really growth side of the consumer, home furnishings, apparel, those stocks have really been weak. And that would tell you that all is not well in consumer land. And again, the defensive part of the consumer that'll hold up even in a recession, those are the stocks that are doing the best. So, it's very much mixed at this point. And it could go either way for the consumer. The consumer has to pay more at the pump with gas prices, more in rent, more in mortgage rates. And so, home prices and mortgage payments are up. And it's very uncertain with the consumer. And I think it's to be determined, you know, based off of what the Federal Reserve Board does with interest rates, in addition to everything else. A lot of the sentiment, you know, people start feeling worse about their economic situation, they're gonna start spending less. And I think that's why, like, things that are non-discretionary, like healthcare and consumer staples, are doing so well, because people know that you have to shell out money for insurance, whether it's health insurance or home or auto insurance, regardless to what the economy is doing. So it, it's mixed.

I want to thank everyone for joining us again this week. Another week in the books. It's been a little bit of a rocky one, but, uh, we'll be right back at it next week. So, um, thanks everyone for being with us, and thank you, Nolan.

Go Heat! Thank you.