Tag: Analyst Comment/Recommendation

Etsy drifts further away from its roots with first Super Bowl ad

Etsy Inc., once known as a quirky marketplace for handmade, artisanal and vintage items, seems to be moving further away from its origins amid a much tougher e-commerce landscape and the impact of AI.

Etsy
ETSY,
+4.83%
will be marketing to a whole new audience on Sunday, when its first Super Bowl commercial will run. The 30-second ad is quirky; it depicts a generic 19th-century American leader who’s flummoxed over how to reciprocate France’s gift of the Statue of Liberty. With the help of an anachronistic smartphone, he and his team search on Etsy using its new Gift Mode option, and find its “Cheese Lover” category after determining that the French love cheese. Voilà — they decide to send the French some cheese.

The commercial is part of Etsy’s push of a new user interface featuring Gift Mode, which lets shoppers search for gifts for a specific type of person or occasion — combining generative AI and human curation to give gift buyers some unusual options.

But are these moves desperate and costly efforts to try to reach potential new buyers, coming on the heels of Etsy’s plans to lay off 11% of its staff?Or could running a TV ad at the most expensive time of the year actually lead to more sales on the once-fast growing marketplace?

Etsy believes these moves will help the company grow again, and its research shows the average American spends $1,600 a year on gifts. “There is no single market leader and Etsy sees a real opportunity to become the destination for gifting,” Etsy’s Chief Executive Josh Silverman said in a recent blog post.

Etsy is clearly under pressure after seeing its gross merchandise sales more than double in 2020 during the pandemic, when it became a go-to place to buy handmade masks and all kinds of items for the home, from vintage pieces to antiques to castoffs. From personal experience as an Etsy seller, I saw sales at my own small vintage-clothing shop more than double in 2020 and then fall back in 2021, while still remaining higher than in 2019. In the last two years, sales have slowed, and some other sellers have witnessed similar patterns, based on their comments in seller forums.

The number of sellers and buyers on the platform has increased on the same level as gross merchandise sales. But e-commerce competition has also gotten more fierce.

“Our main concern with Etsy is growing competition in the space from new players like Temu,” said Bernstein Research analyst Nikhil Devnani, in an email. Temu and fellow Chinese online retailer Shein have raised a lot of investor jitters, as Etsy’s gross merchandise sales have slipped over the last year and are forecast to fall again in its upcoming fourth-quarter earnings report later this month.

Devnani said a Super Bowl ad could potentially help the marketplace gain visibility, something it has always lacked.

“One dynamic they’ve talked about a lot is that brand awareness/recollection is still low, and this keeps frequency low,” he said, noting that Etsy buyers shop on the site about three times per year, on average. “They want to be more top-of-mind … Super Bowl ads are notoriously expensive of course, but can be impactful/get noticed.”

The company’s big focus on Gift Mode, however, could be a risky strategy. How many times a year do consumers look for gifts? And in a note Devnani wrote in October, before the company’s Gift Mode launch, he said that one of the concerns investors have is that Etsy is too niche. “’How often does someone need something special?’ is the rhetoric we hear most often,” he said. Etsy, then, is counting on buyers returning for other items for themselves.

Etsy CEO Silverman believes buyers will come back again and again to purchase gifts. Naved Khan, a B. Riley Securities analyst, said in a recent note to clients that he believes Gift Mode plays to Etsy’s core strengths, offering “unique goods at reasonable prices” versus the mass-produced products sold on Shein, Temu, Amazon.com Inc.
AMZN,
+2.71%,
and other sites.

Consumer spending has changed, though. At an investor conference in December, Silverman said that consumers are spending on dining out and traveling, instead of buying things.

But while investors still view Etsy as a niche e-commerce site, some buyers and sellers see it overrun with repetitive, non-relevant ads. Complaints about a decline in search capabilities, reliance on email and chat for support, and constant tech changes are common on seller forums and Facebook groups. AI-generated art offered by newer sellers as a side hustle has also become a thought-provoking, debated issue. And there are complaints about mass-produced items making their way on the site.

Etsy said that in addition to its human and automated efforts, it also relies on community flags to help take down infringing products that are not allowed on its marketplace, and that community members should contact the company when if they see mass-produced items for sale on the site.

It also continues to work on search. On its last earnings call, Silverman said the company was moving beyond relevance to the next frontier of search, one “focused on better identifying the quality of each Etsy listing utilizing humans and [machine-learning] technology, so that from a highly relevant result set we bring the very best of Etsy to the top — personalized to what we understand of your tastes and preferences.”

The pressure could build on the company if its latest moves don’t generate growth. Etsy recently gave a seat on its board to a partner at activist investor Elliott Management, which bought a “sizable” stake in the company in the last few months. Marc Steinberg, who is responsible for public and private investments at Elliott, has also has been on the board at Pinterest
PINS,
-9.45%
since December 2022.

Elliott Management did not respond to questions. But in a statement last week, Steinberg said he was joining the board because he “believe[s] there is an opportunity for significant value creation.” Some sellers fear that the pressure from investors and Wall Street will lead to Etsy allowing mass-produced products onto the site. In its fall update, Etsy said the number of listings it removed for violating its handmade policy jumped 112% and that it was further accelerating such actions.

Etsy’s stock before the news of Elliott’s stake was down about 18% this year. Its shares are now off about 3.65% this year, after recently having their best day in seven years on the news that Steinberg joined the board.

Etsy is a unique marketplace that for many years had a much better reputation than some of its rivals, like eBay
EBAY,
+0.98%.
But since going public and answering to Wall Street, the need to provide growth and profits for investors has become much more of a driver. The Super Bowl ad and Gift Mode may bring a broader awareness to Etsy, but will it be the right kind of awareness? Sellers like me hope these new efforts will stave off the continuing fight with the likes of Temu and other vendors of mass-produced products, and help Etsy retain the remaining unique aspects of its marketplace.

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February 9, 2024
How to navigate market risk from interest rates, the economy and politics in 2024

As the U.S. Federal Reserve’s three-year reign in the headlines potentially comes to an end, an analysis of this year’s market themes can offer valuable insights for predicting trends and ensuring attractive returns in 2024.

Beyond the central bank’s actions, pivotal factors shaping the investment landscape this year include fiscal policies, election outcomes, interest rates and earnings prospects.

Throughout 2023, a prominent theme emerged: that equities are influenced by factors beyond monetary policy. That trend is likely to persist.

A decline in interest rates could significantly increase the relative valuations of equities while simultaneously reducing interest expenses, potentially transforming market dynamics. Contrary to consensus estimates, 2023 brought a more robust earnings rebound, leaving analysts optimistic about 2024.

The 2024 U.S. presidential election, meanwhile, introduces a new element of uncertainty with the potential to cast a shadow over the market during much of the coming year.

Choppy trading, modest earnings growth

Anticipating a choppy first half of the year due to sluggish economic growth, we see a better opportunity for cyclicals and small-cap stocks to rebound in the latter part of the year. As uncertainty around the election and recession fears dissipate, a broad rally that includes previously ignored cyclicals and small-caps should help propel the S&P 500
SPX
higher.

Broader macroeconomic conditions support mid-single-digit growth in earnings per share throughout 2024. Factors such as moderate economic expansion, controlled inflation and stable interest rates are expected to provide a conducive environment for companies, enabling them to sustain and potentially improve their earnings performance. We estimate EPS growth of 6.5%. This projected growth aligns with the broader market sentiment indicating a steady upward trajectory in earnings for the upcoming year, fostering investor confidence and supporting valuation expectations across various sectors.

“ If the economy has not been in recession at the time of the first rate cut but enters one within a year, the Dow enters a bear market.”

When it comes to U.S. stock-market performance around rate cuts, the phase of the economic cycle matters. When there has been no recession, lower rates have juiced the markets, with the Dow Jones Industrial Average
DJIA
rallying by an average of 23.8% one year later.

If the economy has not been in recession at the time of the first cut but enters one within a year, the Dow has entered a bear market every time, declining by an average of 4.9% one year later. Our base case is a soft landing, but history shows how critical avoiding recession is for the bull market as the Fed prepares to ease policy.

Big on small-caps

This past year has posed a hurdle for small-cap stocks due to the absence of a driving force. These stocks typically perform better as the economy emerges from a recession. While they are currently undervalued, their earnings growth has been notably lacking. If concerns about a recession diminish, a normal yield curve could serve as a potential catalyst for small-cap stocks.

Growth vs. value

The ongoing outperformance of megacap growth stocks that we saw in 2023 might hinge on their ability to sustain superior earnings growth, validating their current valuations. Defensive sectors in the value category, meanwhile, are notably oversold and might exhibit strong performance, particularly toward the latter part of the first quarter. Should concerns about a recession dissipate, cyclical sectors within the value category could outperform, particularly if broader market conditions turn favorable in the latter half of the year.

Handling uncertainty

The Fed’s enduring influence regarding the prospect of a soft landing in 2024 remains a pivotal point in the market’s focus. Considering the themes of the past year and the multifaceted influences on equities beyond monetary policy, investors are advised to navigate through uncertainties stemming from unintended fiscal shifts, upcoming elections and the impact of fluctuating interest rates. While a potentially choppy start to the year is anticipated, it could create opportunities for cyclical and small-cap stocks later in the year.

Ed Clissold is chief of U.S. strategies at Ned Davis Research.

Also read: Mortgage rates dip after Fed meeting. Freddie Mac expects rates to decline more.

More: After the Fed’s comments, grab these CD rates while you still can

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February 3, 2024
Meta’s stock is the most overbought in 11 years, but that could be a good thing

There’s a common belief that “overbought” is a technical condition for a stock, but in practice it seems to be more of an ability.

Meta Platforms Inc.’s stock
META,
+20.32%
soared so much Friday after a blowout earnings report, that some technical readings have reached levels not seen in 11 years.

The stock rocketed 20.9% to close at a record $474.99, to book the third-biggest gain since going public in May 2012. The only bigger rallies were 23.3% on Feb. 2, 2023 and 29.6% on July 25, 2013, which were also after earnings reports.

The stock’s Relative Strength Index, which is a momentum indicator that measures the magnitudes of recent gains and losses, climbed to 86.48. That’s the highest level seen since it closed at a record 89.39 on July 30, 2013.

But that shouldn’t scare off Meta bulls.

Many chart watchers believe RSI readings above 70 are signs of “overbought” conditions, which suggests bulls need a breather after running faster and farther than they are used to.

There are also many who believe the ability to become overbought is a sign of underlying strength, since a stock tends to be trending higher when RSI hurdles 70. (Read Constance Brown’s “Technical Analysis for the Trading Professional.”)

For example, the record RSI reading came three days after the record stock-price rally of 29.6% on July 25, 2013. Even though RSI closed at what was then a record of 88.27 after a record price gain on the 25th, the stock continued to rally and become even more overbought.

It was that spike that snapped the stock out of the year-long doldrum that followed the initial public offering, and flipped the long-term narrative on the stock to bullish. (Read “Facebook’s ‘breakaway gap’ is a bullish game changer,” from The Wall Street Journal.)

FactSet, MarketWatch

And while the record RSI readings in July 2013 did lead to a minor short-term pullback, it didn’t stop the stock from embarking on a long-term uptrend, in which RSI made multiple forays above 70.

FactSet, MarketWatch

And the last time RSI closed above 85 was Feb. 2, 2023, when it closed at 86.07, also after a blowout earnings report.

And similar to 10 years earlier, that historically high overbought reading helped launch another long-term rally.

FactSet, MarketWatch

So yes, Meta’s stock is now facing historically high overbought conditions. But as many chart watchers like to say, overbought doesn’t mean over.

One thing to consider, however, is that the two prior times RSI spiked above 85 were while the long-term fates of the stock were still in question — the stocks were working on short-term bounces following long-term downtrends.

FactSet, MarketWatch

But Friday’s blast off happened just days after the stock closed at a record high. There was no resistance to hurdle, so rather than a bullish “breakaway gap,” Friday’s jump could be considered more a bullish leap of faith.

Also read:

Meta’s killer stock rally could add $200 billion in market cap — a historic haul.

Nvidia’s stock could rise above $600 — despite signs it’s already overbought.

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February 2, 2024
Denim pioneer Levi’s is rolling out ‘tech pants’ and other new offerings this year. But will retailers stock them?

With a rough 2023 in the rearview mirror, Levi Strauss & Co. this year is trying to tackle its problems with new pants.

That includes pants with lighter-weight denim; pants for women that can be worn as high-rise or low-rise; and even nondenim pants that management, during Levi’s
LEVI,
+1.27%
earnings call on Thursday, referred to as a “tech pant” for men with “moisture control and 360 mobility.” The company also plans to expand its offerings of Performance Cool pants intended to keep the wearer cool and dry on hotter days.

But as those products roll out, the retailers that account for most of Levi’s sales are still cautious about packing their shelves with new apparel — even though Levi’s executives pointed to slightly better demand from clothing stores during the fourth quarter and holiday period. And as the denim pioneer cuts costs, brings in new leadership and tries to be a bigger e-commerce player, Wall Street will now be digging around for signs of a payoff.

“Ultimately, the market will be looking for evidence new strategies can drive accelerated growth,” Stifel analyst Jim Duffy said in a research note on Thursday.

“We continue to believe in brand vitality and opportunities for extension. With product reflective of new direction arriving in the marketplace across 2024, the proof will be in consumer response,” he continued.

In an interview with MarketWatch on Friday, Duffy said he was optimistic about Levi’s standing as an established brand and stronger demand for its dresses, skirts and other women’s clothing items. But the more products a company rolls out, he suggested, the more it has to invest to make them work — and the more it needs to manage if sales falter.

“The risk, as I see it, is that more categories means more SKUs and more product that is fashion rather than core basic styles, and more investment and inventory that, if it doesn’t translate to the marketplace, could result in higher markdowns,” he said, referring to the stock-keeping units by which retailers track inventory.

Levi’s on Thursday said it would lay off between 10% and 15% of its global corporate staff in the first half of this year, a move intended to save $100 million in costs over that period. The layoffs are part of a two-year plan, called Project FUEL, intended to save money and strengthen the part of Levi’s business that sells directly to consumers via its own e-commerce network and its physical stores, as opposed to third-party retail operations.

The layoff announcement arrived days ahead of Chief Executive Chip Berg’s departure from that role, with Michelle Gass taking over on Jan. 29. As the company tries to be bigger than men’s jeans, Gass, in Levi’s earnings release on Thursday, said she saw an opportunity to grow internationally, make Levi’s own online and bricks-and-mortar sales a greater priority, and turn the brand into a larger “denim apparel lifestyle business.”

Levi’s shares fell after hours Thursday, after the company’s full-year profit forecast came in below expectations. The stock rebounded 1.3% on Friday but is still down 10.3% over the past 12 months.

Still, Levi’s direct-to-consumer sales jumped 11% during the fourth quarter, and accounted for 42% of sales overall. Duffy said that the company has pushed deeper into its direct-sales business because it gives executives greater insight into what consumers want, as well as more control over how it markets and sells its clothing. Cutting out other retailers also widens margins on sales, he noted.

Levi’s operating margins were higher in the fourth quarter. It also declared a dividend of 12 cents per share, payable in cash on Feb. 23.

But sales in Levi’s wholesale segment — the sales it gets from retailers who buy Levi’s product, then sell it to consumers — fell 2%. Better results in the U.S. and Asia were offset by a drop in Europe, the company said.

Retailers have spent the past two years trying to clear unwanted clothes from their stockrooms, and cutting prices in the process, after spiking inflation restricted many shoppers’ appetites to basics.

As Gass prepares to take the reins, she sought to put a positive spin on retail-chain sentiment. “So net-net, overall, as a company, we’re exiting the year on a strong note,” Gass said on the earnings call. “And U.S. wholesale, we’re encouraged. But as it relates to that channel, we’re not declaring victory yet. There’s been a lot of volatility this past year, some in our control, some outside. And so we are taking a cautious approach as we look forward.”

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January 26, 2024
The U.S. dollar had a strong start to 2024. Here’s why it’s unlikely to last.

The U.S. dollar has had a relatively strong start to 2024 — but some analysts believe the greenback is still more likely than not to depreciate over the course of this year.

The ICE U.S. Dollar Index
DXY,
which tracks the currency against a basket of six major rivals, has climbed about 2.1% so far this year, per Dow Jones Market Data.

The dollar has risen as traders scale back their expectations on when the Federal Reserve will begin cutting interest rates this year, according to analysts at BofA Global Research.

As recently as late December, traders were pricing a likelihood as high as 90% for a rate cut in March — but those chances have since fallen to around 46% as of Friday, according to the CME FedWatch Tool. Meanwhile, the total amount of rate cuts priced in for this year, which reached as high as 170 basis points in mid-January, has now slipped to around 135 to 150 basis points.

However, the greenback is likely to see depreciation throughout the rest of this year, analysts at the investment bank wrote in a Thursday note, adding that much of the retreat would likely happen in the second half of 2024.

The BofA analysts said expect no recession this year and anticipate that the Federal Reserve will start cutting its key policy rate in March. Such a scenario is negative for the dollar, as the Fed’s easing would likely support risk assets with U.S. economic growth remaining resilient, according to the analysts.

Based on historical data, the ICE U.S. Dollar Index’s performance has been mixed from the onset of the Fed’s first rate cut over the past six cycles, and has been relatively flat on average over the following quarters, the analysts said.

“This is due in large part to the USD’s perceived ‘safe haven’ status and its negative correlation to risk, as cutting cycles have often been associated with recessions,” they wrote.

Jonathan Petersen, senior market economist at Capital Economics, echoed that point in a Thursday note. He expects the dollar to face headwinds from strong risk appetite in global markets and falling bond yields in the U.S. over the course of the year, and anticipates the greenback will remain rangebound against most major currencies for most of 2024.

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January 26, 2024
Beware ‘pricey’ stocks as inflation may ‘roller-coaster back up,’ says BlackRock

U.S. stocks appear on course for “another year of flip-flopping market narratives” as falling inflation may “roller-coaster back up” and rattle investor expectations for a “soft landing,” according to BlackRock.

“Market jitters in early January suggest there is some anxiety about macro risks further out,” said BlackRock Investment Institute strategists in a note Tuesday. “We stay selective as we expect resurgent inflation to come into view.”

The strategists also pointed to “pricey valuations” in the U.S. stock market.

Markets have favored a small group of seven megacap stocks “for their ability to leverage artificial intelligence,” they said. Those stocks’ price-to-earnings ratios for the next 12 months are “about a third higher than for the S&P 500 and when excluding them,” a chart in their note shows.

BLACKROCK INVESTMENT INSTITUTE NOTE DATED JAN. 16, 2024

Price-to-earnings ratios, which “divide a company’s share price by its earnings per share,” fell in the second half of 2023 as stronger earnings expectations supported the megacap rally, the BlackRock strategists said. The so-called Magnificent Seven, as those market-leading megacap tech stocks are known, skyrocketed last year, fueling the S&P 500 index’s 24% surge.

“Even after the market-wide rally in December, market concentration in a handful of megacaps — firms with ultra-large market capitalizations — remains high,” the strategists said.

The seven companies with massive market values — Apple Inc.
AAPL,
-1.24%,
Microsoft Corp.
MSFT,
+0.49%,
Google parent Alphabet Inc.
GOOGL,
-0.11%

GOOG,
-0.11%,
Amazon.com Inc.
AMZN,
-0.94%,
Nvidia Corp.
NVDA,
+3.09%,
Facebook parent Meta Platforms Inc.
META,
-1.88%
and Tesla Inc.
TSLA,
+0.49%
— have an outsized weighting in the S&P 500.

Chip maker Nvidia was among the best-performing stocks in the S&P 500 in afternoon trading on Tuesday, with a sharp gain of 2.7% at last check, according to FactSet data. By contrast, the broad S&P 500 index
SPX
was down 0.7% on Tuesday afternoon, while the Dow Jones Industrial Average
DJIA
and technology-heavy Nasdaq Composite
COMP
were also declining.

Read: What’s next for stocks as ‘tired’ market stalls in 2024 ahead of closely watched retail sales

Potential catalysts

“We find valuations tend to matter more for long-term rather than near-term stock returns, and that’s why they usually aren’t enough to spoil market sentiment without a catalyst,” the BlackRock strategists wrote.

“Earnings could be a catalyst,” as well as inflation, they said.

Consensus expectations for earnings growth rose last year, with forecasts now calling for an increase of as much as 11% in the next 12 months, their note says, citing LSEG data.

BlackRock expects that U.S. inflation will this year subside to near the Federal Reserve’s 2% target. For now, that may support the soft-landing scenario the stock market and Fed have “largely embraced,” in which the U.S. may avoid a recession as inflation falls to that desired target, according to the strategists.

Many investors expect the Fed may start cutting interest rates this year as inflation eases, after the central bank hiked rates aggressively in a bid to tame it.

“The problem: Inflation won’t remain at that target, in our view, and this risk becoming clearer could challenge upbeat sentiment,” the BlackRock strategists said. “So we monitor earnings season for any signs of cracks given pricey valuations.”

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January 16, 2024
Why Donald Trump is unlikely to get his wish for a 2024 U.S. stock-market crash

Donald Trump is unlikely to get his wish that a U.S. stock-market crash occurs this year.

I’m referring to the former U.S. president’s comments last week that he hopes the market crashes in 2024, since if he is elected in November and takes office a year from now, he doesn’t want to be another Herbert Hoover. Hoover was President when the stock market crashed in 1929.

The stock market did plunge in two of the last four presidential-election years, so it’s understandable why one would worry that 2024 could see a repeat. In 2008, in the middle of the Global Financial Crisis, the S&P 500
SPX
lost 38.5% for the year. In 2020, as the economy ground to a halt because of the COVID-19 pandemic, the S&P 500 lost 34% in little more than a month’s time.

It’s possible that a crash could occur at any time, of course, so a crash this year can’t be ruled out. Nevertheless, the odds of one occurring this year are significantly below average. That’s according to the latest “State Street US Froth Forecasts,” which are derived from research on crashes conducted by Robin Greenwood, Professor of Banking and Finance at Harvard Business School.

In that research, Greenwood and his co-authors found that it’s possible to identify when there is an elevated probability of a crash. In an interview, Greenwood said that “crash probabilities are low” right now, not only for the market as a whole but “across the board” for individual market sectors as well.

Greenwood’s model is based on a number of factors, such as performance over the trailing two-year period, volatility, share turnover, IPO activity and the price path of the trailing two-year runup. For example, he and his fellow researchers found that when an industry beats the market by 150 or more percentage points over a two-year period, there’s an 80% probability that it will crash — which they define as a drop of at least 40% over the subsequent two years. As you can see from the accompanying chart, State Street is reporting low crash probabilities for all sectors — in each case well below the average forecasted crash probabilities of the past five years.

These probabilities don’t mean that stocks will have a great year in 2024. A new bear market could begin this year without the decline satisfying the researchers’ definition of a crash.

Nevertheless, the takeaway from the State Street US Froth Forecasts is that there are bigger things to worry about this year than the possibility of a crash.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Trump says he hopes market crashes in 2024 under Biden: ‘I don’t want to be Herbert Hoover

Also read: Iowa caucuses are make-or-break for Donald Trump

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January 15, 2024
If Nvidia looked more like Salesforce, it might unlock billions more in cash

Nvidia Corp. is raking in billions in cash, but one analyst thinks the chip maker could throw $100 billion more onto the pile if it started to look more like Salesforce Inc.

Nvidia
NVDA,
+2.29%
might unlock even more cash by developing businesses that expand recurring revenue, according to BofA Securities analyst Vivek Arya. The company has suffered some boom-and-bust cycles in recent years, and another bust could be smoothed by developing longer-term software contracts akin to those of Salesforce
CRM,
-0.05%.
, Workday Inc.
WDAY,
-0.48%
and ServiceNow Inc.
NOW,
+0.64%,
which generate recurring revenue from their customers.

Arya sees a pathway for Nvidia to rake in $100 billion in incremental free cash flow over the next two years if it can bulk up its own recurring-revenue options.

Read: Apple’s stock needs to get ‘unstuck’ — and its innovation rut may not be helping

“While NVDA has a solid lead in AI, hardware-oriented businesses are not valued as highly as visibility tends to be limited,” Arya wrote. Nvidia generates only about $1 billion, or 2%, of its sales from software and subscriptions. Arya doesn’t think the company can get much higher than $5 billion with its software and subscription offerings unless it turns to acquisitions.

Nvidia has shown some openness to deals that would beef up its intellectual property and software offerings, Arya notes, as it tried to buy British chip designer Arm Holdings
ARM,
-1.96%
before facing regulatory pushback.

“We envision [Nvidia] considering more enhanced partnerships/M&A of software companies that are helping traditional enterprise customers deploy, monitor and analyze [generative AI] apps,” he wrote. Nvidia “is already serving them via on-premise hardware and/or its DGX cloud service, but we believe greater direct recurring software/service channel could be more impactful.”

The addition of more recurring-revenue streams could help Nvidia’s “relatively depressed trading multiple,” in Arya’s view. Nvidia shares trade at a 20% to 30% discount to its “Magnificent Seven” peers on the basis of price to earnings as well as enterprise value to free cash flow, even though the company’s compound annual growth rate on the top line is three times what it is for those other tech giants.

The discount is “partly due to uncertainty in [calendar 2025] growth prospects, and partly due to a very hardware-dependent business unlike other large-cap software/internet peers that have recurring-revenue profiles,” he wrote.

Arya has a buy rating and $700 price objective on the stock.

See also: Amazon’s stock could be helped by this secret weapon in 2024, BofA says

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January 5, 2024

The Russell 2000 Index has soared, but you might be better off looking elsewhere for quality small-cap stocks

The Russell 2000 Index soared 12% in December, which might reflect investors’ exuberance about the state of the U.S. economy — it appears the Federal Reserve has won its battle against inflation.

But if you are looking to broaden your exposure to the stock market beyond the large-cap S&P 500
SPX,
buying shares of a fund that tracks the Russell 2000 Index
RUT
might not be the best way to do it. This is because the Russell 2000 isn’t selective — it is made up of the smallest 2,000 companies by market capitalization in the Russell 3000 Index
RUA,
which itself is designed to capture about 98% of the U.S. public equity market.

A better choice might be the S&P Small Cap 600 Index
SML
because S&P Global requires companies to show four consecutive quarters of profitability to be initially included in the index, among other criteria.

Below is a screen of analysts’ favorite stocks among the S&P Small Cap 600, along with another for the Russell 2000.

Watch for a “head fake”

Much of the small-cap buying in December might have resulted from covering of short positions by hedge-fund managers. This idea is backed by the timing of trading activity immediately following the Federal Open Market Committee’s announcement on Dec. 13 that it wouldn’t change its interest-rate policy, according to MacroTourist blogger Kevin Muir. The Fed’s economic projections released the same day also indicate three cuts to the federal-funds rate in 2024.

Heading into the end of the year, a fund manager who had shorted small-caps, and then was surprised by the Fed’s interest-rate projections, might have scrambled to buy stocks it had shorted to close-out the positions and hopefully lock in gains, or limit losses.

That buying activity and resulting pop in small-cap prices could set up a typical “head fake” for investors as the new year begins, according to Muir.

The long-term case for quality

Looking at data for companies’ most recently reported fiscal quarters, 58% of the Russell 2000 reported positive earnings per share, according to data provided by FactSet. In other words, hundreds of these companies were losing money. These might include promising companies facing “binary events,” such as make-or-break drug trials in the biotechnology industry.

In comparison, 78% of companies among the S&P Small Cap 600 were profitable, and 93% of the S&P 500 were in the black.

Here are long-term performance figures for exchange-traded funds that track all three indexes:

ETF	Ticker	2023	3 years	5 years	10 years	15 years	20 years
iShares Russell 2000 ETF	IWM	17%	7%	61%	99%	428%	365%
iShares Core S&P Small Cap ETF	IJR	16%	25%	69%	129%	540%	515%
SPDR S&P 500 ETF Trust	SPY	26%	34%	108%	210%	629%	527%
Source: FactSet

An approach tracking the S&P Small Cap 600 has outperformed the Russell 2000 for all periods, with margins widening as you go further back.

Brett Arends: You own the wrong small-cap fund. How to get into a better one.

Looking ahead for quality… or not

For the first screen, we began with the S&P Small Cap 600 and narrowed the list to 385 companies covered by at least five analysts polled by FactSet. Then we cut the list to 92 companies with “buy” or equivalent ratings among at least 75% of the covering analysts.

Here are the 20 remaining stocks among the S&P Small Cap 600 with the highest 12-month upside potential indicated by analysts’ consensus price targets:

Company	Ticker	Share “buy” ratings	Dec. 29 price	Consensus price target	Implied 12-month upside potential
Vir Biotechnology Inc.	VIR, +4.47%	88%	$10.06	$32.00	218%
Arcus Biosciences Inc.	RCUS, +3.04%	82%	$19.10	$41.00	115%
Xencor Inc.	XNCR, +6.03%	92%	$21.23	$39.83	88%
Dynavax Technologies Corp.	DVAX, +2.86%	100%	$13.98	$24.80	77%
ModivCare Inc.	MODV, +0.95%	100%	$43.99	$75.50	72%
Xperi Inc	XPER, +1.81%	80%	$11.02	$18.20	65%
Thryv Holdings Inc.	THRY,	100%	$20.35	$32.75	61%
Ligand Pharmaceuticals Inc.	LGND, +1.25%	100%	$71.42	$114.80	61%
Green Plains Inc.	GPRE, -1.67%	80%	$25.22	$40.30	60%
Patterson-UTI Energy Inc.	PTEN, +0.28%	75%	$10.80	$17.00	57%
Ironwood Pharmaceuticals Inc. Class A	IRWD, +8.48%	83%	$11.44	$17.83	56%
Catalyst Pharmaceuticals Inc.	CPRX, +1.78%	100%	$16.81	$26.20	56%
Payoneer Global Inc.	PAYO, -3.45%	100%	$5.21	$8.00	54%
Helix Energy Solutions Group Inc.	HLX, -2.63%	83%	$10.28	$15.00	46%
Arlo Technologies Inc.	ARLO, -3.05%	100%	$9.52	$13.80	45%
Pacira Biosciences Inc.	PCRX, -5.16%	100%	$33.74	$48.40	43%
Privia Health Group Inc.	PRVA, +2.95%	100%	$23.03	$32.53	41%
Semtech Corp.	SMTC, -1.23%	92%	$21.91	$30.90	41%
Talos Energy Inc.	TALO, +1.19%	78%	$14.23	$20.00	41%
Digi International Inc.	DGII, -1.21%	100%	$26.00	$36.14	39%
Source: FactSet

Any stock screen should only be considered a starting point. You should do your own research to form your own opinion before making any investment. one way to begin is by clicking on the tickers for more about each company.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Moving on to the Russell 2000, when we narrowed this group to stocks covered by at least five analysts polled by FactSet, we were left with 936 companies. Among these, 355 have “buy” or equivalent ratings among at least 75% of the covering analysts.

Among those 355 stocks in the Russell 2000, these 20 have the highest implied upside over the next year, based on consensus price targets:

Company	Ticker	Share “buy” ratings	Dec. 29 price	Consensus price target	Implied 12-month upside potential
Karyopharm Therapeutics Inc.	KPTI, +4.18%	75%	$0.87	$6.00	594%
Rallybio Corp.	RLYB, +0.42%	100%	$2.39	$16.50	590%
Vor Biopharma Inc.	VOR, -0.89%	100%	$2.25	$15.44	586%
Tenaya Therapeutics Inc.	TNYA, -0.62%	100%	$3.24	$19.14	491%
Compass Therapeutics Inc.	CMPX, -5.13%	86%	$1.56	$9.17	488%
Vigil Neuroscience Inc.	VIGL, +2.66%	88%	$3.38	$18.75	455%
Trevi Therapeutics Inc.	TRVI, -2.99%	100%	$1.34	$7.33	447%
Inozyme Pharma Inc.	INZY, +1.64%	100%	$4.26	$21.00	393%
Gritstone bio Inc.	GRTS, +6.86%	100%	$2.04	$10.00	390%
Actinium Pharmaceuticals Inc.	ATNM, +4.72%	83%	$5.08	$23.36	360%
Lineage Cell Therapeutics Inc.	LCTX,	86%	$1.09	$4.83	343%
Century Therapeutics Inc.	IPSC, +9.64%	86%	$3.32	$14.67	342%
Acrivon Therapeutics Inc.	ACRV, +1.83%	100%	$4.92	$21.13	329%
Avidity Biosciences Inc.	RNA, +1.22%	100%	$9.05	$37.50	314%
Longboard Pharmaceuticals Inc.	LBPH, +316.25%	100%	$6.03	$24.17	301%
Omega Therapeutics Inc.	OMGA, -1.33%	100%	$3.01	$12.00	299%
Allogene Therapeutics Inc.	ALLO, +12.77%	82%	$3.21	$12.79	298%
X4 Pharmaceuticals Inc.	XFOR, +5.21%	86%	$0.84	$3.26	289%
Caribou Biosciences Inc.	CRBU, -2.79%	89%	$5.73	$22.25	288%
Stoke Therapeutics Inc.	STOK, +11.41%	78%	$5.26	$19.33	268%
Source: FactSet

That’s right — this Russell 2000 list is all biotech. And in case you are wondering if any companies are on both lists, the answer is no.

Don’t miss: 11 dividend stocks with high yields expected to be well supported in 2024 per strict criteria

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January 2, 2024

Uber and Lyft shares rallied in 2023 but may not go much higher, analysts say

Shares of Uber Technologies Inc. and the ride-hailing giant’s smaller rival, Lyft Inc., have sprinted higher this year. But analysts on Friday suggested there might not be much left in the tank for either stock heading into 2024.

Nomura analysts Anindya Das and Masataka Kunugimoto on Friday downgraded Uber
UBER,
-2.49%
to a neutral rating from buy, arguing that most of the things that could drive the stock higher are already baked into the price. They also downgraded Lyft
LYFT,
-3.54%
to their equivalent of a sell rating from buy, saying the company failed to fully capitalize on the travel industry’s post-pandemic recovery.

Shares of Uber, which closed out the year up 142%, were down 2.5% on Friday. Lyft’s stock gave up 3.4% and finished 2023 up 34.8%.

Uber, the analysts said, had managed to grow this year while occasionally turning a profit, and consolidated its grip on the ride-sharing markets in the U.S. and Canada. Meanwhile, Lyft, they said, had stumbled in its efforts to take advantage of the travel rebound after pandemic restrictions eased, cutting more staff this year after doing the same in 2022.

After years of losing money, they said Uber’s stronger financials this year allowed it to refinance its debt at a lower interest rate and extend the terms of that debt. They noted the company recently joined the S&P 500 Index
SPX
and that the market is expecting more stock buybacks from the company, as well as interest-rate cuts by the Federal Reserve next year.

“Thus, most of the milestones and catalysts that we were anticipating to boost Uber’s stock value have been largely met,” they said.

They added: “At this time, we think most of the catalysts for the stock are already priced in, and Uber is fairly valued at the current price. We therefore downgrade it to Neutral from Buy.”

Lyft has tried to cut its prices to compete with Uber, and has held off on expanding into areas like food delivery. But as travel demand settles, the analysts suggested, the advantages would still flow to its archrival.

“We expect 2024 to be more of a ‘normal’ year, in terms of people’s propensity to travel,” the analysts said. “Once the current rebound in travel subsides, we think Lyft’s subscale market positioning, and lack of cross-selling opportunities (unlike Uber), could constrain topline growth for the company.”

“Offsetting a more moderate pace of ridership growth by raising prices would be challenging for Lyft,” they said, “as we think it would be bound by the actions of its larger and more profitable peer, Uber.”

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December 29, 2023
GE's stock has its best year on record ahead of final breakup

General Electric Co. has saved its best year for its last.

At the beginning of the second quarter, GE’s power and renewable-energy business will be spun off as GE Vernova, while its remaining business will be relaunched as GE Aerospace. That follows the conglomerate’s separation of GE HealthCare Technologies Inc.
GEHC,
-0.28%
in December 2022.

But rather than mourn the final breakup of the 150-year old company, which was co-founded by Thomas Edison, Wall Street cheered like it never had before.

GE’s stock
GE,
-0.54%
has rocketed 95.1% in 2023 as of afternoon trading Friday. That would be by far the stock’s best year on record, based on available data going back to 1972, according to Dow Jones Market Data. The next best year was 1982, when it gained 65.4%. In comparison, the S&P 500 index
SPX
has rallied 24.2% this year.

Read: GE stock sees biggest rally in more than 2 years after a big earnings beat, raised outlook.

As good as the stock’s performance has been leading up to the breakup, most analysts feel like investors still have more to gain. Keep in mind that in many cases, a company’s parts are worth more individually than they are valued as part of a whole.

Wells Fargo’s Matthew Akers has a pre-breakup target of $144 on GE’s stock, which implies about 13% upside from current levels.

“GE combines an attractive business with high aftermarket mix, solid management team with a clean balance sheet, L-T margin upside and built-in catalyst with the Vernova spin in early Q2,” Akers wrote.

J.P. Morgan’s Seth Seifman said he believes the combined equity values of GE Vernova and GE Aerospace, when including the company’s equity stake in GE HealthCare, is about $149 billion. That compares with GE’s current market capitalization of about $139 billion.

Of the 18 analysts surveyed by FactSet who cover GE, 12 are bullish and six are neutral, while there are no bears. And the average price target is $139.23, or about 9% above current levels.

GE’s 2023 marks the culmination of a five-year turnaround for the stock engineered by current Chief Executive Larry Culp, who will remain as CEO of GE Aerospace.

GE’s stock has nearly tripled in the five years that Larry Culp has been CEO, outperforming the S&P 500 by a wide margin.

General Electric Co.

The stock had suffered its worst year ever in 2018, plunging 56.6%, just after it had its fourth-worst year in 2017, when it suffered a 44.8% decline.

Things got so bad for GE that it got booted from the Dow Jones Industrial Average
DJIA
in June 2018, ending a record 111-year run in the blue-chip barometer.

Culp was named CEO in October 2018. During his tenure, GE’s stock has had only two down years. It fell 3.2% in 2020 as the COVID-19 pandemic wreaked havoc on the aerospace business, and slumped 11.3% in 2022 as spiking inflation and interest rates fueled fears that a recession was on the horizon.

But since the end of 2018, GE’s stock has climbed 181%, while the S&P 500 has rallied 90% and the Dow has gained 61%.

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December 29, 2023
Nike says 'newness' is crucial to its growth. One analyst says it's not working

As sneaker makers try to stay relevant amid waning demand, Nike Inc. executives on Thursday said they were banking on “newness and innovation” to win over reluctant shoppers. And as sales deals on shoes proliferate, they said interest in its sneakers that cost over $100 is still solid, and that an expansion of its Jordan brand — beyond basketball gear and shoes — represents an opportunity to boost profits.

But one analyst on Friday cast doubt over whether those plans will work for all of Nike’s
NKE,
-11.83%
customers in the long term.

“Nike needs improved marketing outside of basketball, streetwear and lifestyle trends,” TD Cowen analyst John Kernan said in a research note on Friday. “Innovation at the higher end of its assortment is not resonating at scale while . . . Nike faces disruption from smaller competitors in footwear and apparel. Jordan brand moving into lower price points and away from a scarcity model creates risk to the fastest-growing piece of the business.”

That assessment came after Nike’s quarterly results and dimmer outlook after the market close on Thursday sent shares reeling. Management said that consumers were still cautious, as higher prices for essential goods siphon away what they can spend on new sneakers and clothes.

Following the results, TD Cowen analysts on Friday downgraded the stock to their version of a hold rating. CFRA, meanwhile, also lowered its opinion on the stock to sell from hold.

Shares of Nike were down 11.6% on Friday.

During Nike’s fiscal second quarter, sales trends were shaky in both the athletic-gear maker’s digital channels and its markets abroad, executives said Thursday. In North America, sales slipped 4% year over year. For the holidays, sales were softer outside of the big discount days like Black Friday and Cyber Monday. And competition from the likes of Adidas
ADDYY,
-5.55%,
Deckers Brands
DECK,
-1.48%
subsidiary Hoka One One and running-shoe maker On Holding
ONON,
-3.71%
hasn’t gone anywhere.

Nike’s results, Kernan said, were a sign that Wall Street’s profit estimates were too high for Adidas and other competitors like Vans owner VF Corp.
VFC,
-3.23%
and Under Armour
UA,
-3.52%.

On the company’s earnings call Thursday, Nike said it didn’t plan on getting sucked into a “race to the bottom on digital,” where weaker online traffic forced more markdowns. But like Kernan, Raymond James analyst Rick Patel also had questions about Nike’s efforts to push full-priced product.

“Nike noted that it intends to focus on full-price selling and doesn’t want to participate in aggressive discounting,” he said. “Also, it aims to manage inventories for key franchises more carefully going forward in order to avoid the promotional fray, which also limits sales growth. We view these as the right moves to protect the health of the brand, but also acknowledge that it leaves Nike at a near-term competitive disadvantage to drive revenue.”

CFRA analyst Zachary Warring, in emailed commentary, said some of Nike’s other rivals could cut into demand.

“Although Nike maintains a fortress balance sheet with significant capital returns, we believe the multiple will trend back down to pre-pandemic levels as the company faces competition from brands like Hoka and On [Holding] while it looks for new growth drivers and focuses on cutting costs,” Warring said.

Nike executives on Thursday said Jordan-branded clothing and products for golf, soccer and football, along with products for women and children, would bring stronger results. They said the same for bras, leggings, retro-themed running shoes and other offerings in its business geared toward women.

The company also announced plans to save up to $2 billion over the next three years. That savings effort, it said, could include simplifying its product selection, bringing more automation into its operations, and “streamlining” the company by shedding management layers.

Nike has reportedly already begun laying off workers. The company on Thursday said it expected to book pre-tax restructuring charges of around $400 million to $450 million “primarily associated with employee-severance costs.”

Nike plans to reinvest those savings back into the company. But as the company tries to fatten margins, Jefferies analyst Randal Konik said those reinvestments could do the opposite.

“We would expect [management] to reinvest a majority of these cost savings, likely leaving less margin and earnings ‘cushion’ should top-line performance continue to soften over the next 6-12 months,” he said.

In recent years, Nike has been trying to sell fewer items through outside retail chains and more through its own stores and online channels. But executives on Thursday said that multiyear effort had created “complexity and inefficiencies”

Edward Jones analyst Brian Yarbrough told MarketWatch that Nike is likely cutting costs after weighing the broader economic backdrop and weakness in its digital business against its sales and margin goals.

“Combined with a slower revenue-growth environment — and the fact that digital, which is their more profitable channel, is slowing and in some markets declining — I think they probably said, ‘If we’re going to get there, it’s probably going to have to come with some cost cuts,’” Yarbrough said.

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December 22, 2023
Fed could be the Grinch who 'stole' cash earning 5%. What a Powell pivot means for investors.

Yields on 3-month
BX:TMUBMUSD03M
and 6-month
BX:TMUBMUSD06M
Treasury bills have been seeing yields north of 5% since March when Silicon Valley Bank’s collapse ignited fears of a broader instability in the U.S. banking sector from rapid-fire Fed rate hikes.

Six months later, the Fed, in its final meeting of the year, opted to keep its policy rate unchanged at 5.25% to 5.5%, a 22-year high, but Powell also finally signaled that enough was likely enough, and that a policy pivot to interest rate cuts was likely next year.

Importantly, the central bank chair also said he doesn’t want to make the mistake of keeping borrowing costs too high for too long. Powell’s comments helped lift the Dow Jones Industrial Average
DJIA
above 37,000 for the first time ever on Wednesday, while the blue-chip index on Friday scored a third record close in a row.

“People were really shocked by Powell’s comments,” said Robert Tipp, chief investment strategist, at PGIM Fixed Income. Rather than dampen rate-cut exuberance building in markets, Powell instead opened the door to rate cuts by midyear, he said.

New York Fed President John Williams on Friday tried to temper speculation about rate cuts, but as Tipp argued, Williams also affirmed the central bank’s new “dot plot” reflecting a path to lower rates.

“Eventually, you end up with a lower fed-funds rate,” Tipp said in an interview. The risk is that cuts come suddenly, and can erase 5% yields on T-bills, money-market funds and other “cash-like” investments in the blink of an eye.

Swift pace of Fed cuts

When the Fed cut rates in the past 30 years it has been swift about it, often bringing them down quickly.

Fed rate-cutting cycles since the ’90s trace the sharp pullback also seen in 3-month T-bill rates, as shown below. They fell to about 1% from 6.5% after the early 2000 dot-com stock bust. They also dropped to almost zero from 5% in the teeth of the global financial crisis in 2008, and raced back down to a bottom during the COVID crisis in 2020.

Rates on 3-month Treasury bills dropped suddenly in past Fed rate-cutting cycles

FRED data

“I don’t think we are moving, in any way, back to a zero interest-rate world,” said Tim Horan, chief investment officer fixed income at Chilton Trust. “We are going to still be in a world where real interest rates matter.”

Burt Horan also said the market has reacted to Powell’s pivot signal by “partying on,” pointing to stocks that were back to record territory and benchmark 10-year Treasury yield’s
BX:TMUBMUSD10Y
that has dropped from a 5% peak in October to 3.927% Friday, the lowest yield in about five months.

“The question now, in my mind,” Horan said, is how does the Fed orchestrate a pivot to rate cuts if financial conditions continue to loosen meanwhile.

“When they begin, the are going to continue with rate cuts,” said Horan, a former Fed staffer. With that, he expects the Fed to remain very cautious before pulling the trigger on the first cut of the cycle.

“What we are witnessing,” he said, “is a repositioning for that.”

Pivoting on the pivot

The most recent data for money-market funds shows a shift, even if temporary, out of “cash-like” assets.

The rush into money-market funds, which continued to attract record levels of assets this year after the failure of Silicon Valley Bank, fell in the past week by about $11.6 billion to roughly $5.9 trillion through Dec. 13, according to the Investment Company Institute.

Investors also pulled about $2.6 billion out of short and intermediate government and Treasury fixed income exchange-traded funds in the past week, according to the latest LSEG Lipper data.

Tipp at PGIM Fixed Income said he expects to see another “ping pong” year in long-term yields, akin to the volatility of 2023, with the 10-year yield likely to hinge on economic data, and what it means for the Fed as it works on the last leg of getting inflation down to its 2% annual target.

“The big driver in bonds is going to be the yield,” Tipp said. “If you are extending duration in bonds, you have a lot more assurance of earning an income stream over people who stay in cash.”

Molly McGown, U.S. rates strategist at TD Securities, said that economic data will continue to be a driving force in signaling if the Fed’s first rate cut of this cycle happens sooner or later.

With that backdrop, she expects next Friday’s reading of the personal-consumption expenditures price index, or PCE, for November to be a focus for markets, especially with Wall Street likely to be more sparsely staffed in the final week before the Christmas holiday.

The PCE is the Fed’s preferred inflation gauge, and it eased to a 3% annual rate in October from 3.4% a month before, but still sits above the Fed’s 2% annual target.

“Our view is that the Fed will hold rates at these levels in first half of 2024, before starting cutting rates in second half and 2025,” said Sid Vaidya, U.S. Wealth Chief Investment Strategist at TD Wealth.

U.S. housing data due on Monday, Tuesday and Wednesday of next week also will be a focus for investors, particularly with 30-year fixed mortgage rate falling below 7% for the first time since August.

The major U.S. stock indexes logged a seventh straight week of gains. The Dow advanced 2.9% for the week, while the S&P 500
SPX
gained 2.5%, ending 1.6% away from its Jan. 3, 2022 record close, according to Dow Jones Market Data.

The Nasdaq Composite Index
COMP
advanced 2.9% for the week and the small-cap Russell 2000 index
RUT
outperformed, gaining 5.6% for the week.

Read: Russell 2000 on pace for best month versus S&P 500 in nearly 3 years

Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.

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December 17, 2023
'Smidcap' companies are becoming a big deal. Here's a look at some of the best.

The stocks of long-neglected small companies are finally showing signs of life as the market rally broadens. But these tiny companies still remain vastly undervalued. So, they are one of the best buys in the stock market right now.

Small- and medium-cap companies, or smidcaps, have not been this cheap since the Great Financial Crisis 15 years ago. “Smidcaps relative to large caps look very attractive,” says says portfolio manager Aram Green, at the ClearBridge Select Fund LBFIX, which specializes in this space. “Over the long term you will be rewarded.”

Green is worth listening to because he is one of the better fund managers in the smidcap arena. ClearBridge Select beats both its midcap growth category and Morningstar U.S. midcap growth index over the past five- and 10 years, says Morningstar Direct. This is no easy feat, in a mutual fund world where so many funds lag their benchmarks.

The timing for smidcap outperformance seems about right, since these stocks do well coming out of recessions. Technically, we have not recently had a recession. But there was an economic slowdown in the first half of the year, and the U.S. did have an earnings recession earlier this year. So that may count.

To get smidcap exposure, consider the funds of outperforming managers like Green, and if you want to throw in some individual stocks, Green is a great guide on how to find the best names in this space.

I recently caught up with him to see what we can learn about analyzing smidcaps. Below are four tactics that contribute to his fund’s outperformance, with nine company examples to consider.

1. Look for an entrepreneurial mindset: Green’s background gives him an edge in investing. He’s an entrepreneur who co-founded a software company called iCollege in 1997. It was bought out by BlackBoard in 2001. He knows how to understand innovative trends, identify a good idea, secure capital and quickly ramp up a business. This experience gives him a “private market mindset” that helps him pick stocks to this day.

“Founder-run companies regularly outperform.”

Green looks for managers with an entrepreneurial mindset. You can glean this from company calls and filings, but it helps a lot to meet management — something most individual investors cannot do. But Green offers a shortcut, one which I regularly use, as well. Look for companies that are run by founders. This will give you exposure to managers with entrepreneurial spirit.

Here, Green cites the marketing software company HubSpot
HUBS,
+0.79%,
a 1.9% fund position as of the end of the third quarter. It was founded by Massachusetts Institute of Technology college buddies Brian Halligan and Dharmesh Shah. They’re on the company’s board, and Shah is chief technology officer.

Academic studies confirm founder-run companies regularly outperform. My guess is this is because many founders never lose the entrepreneurial spirit, no matter how easy it would be to quit and sip Mai Tai’s on a beach after making a bundle.

In the private market, Green cites Databricks, a data management and analytics company with an AI angle. This competitor of Snowflake
SNOW,
-0.92%
is likely to go public in 2024. If you feel like an outsider because you lack access to private market investing, note that Green says he typically buys more exposure to private companies on the initial public offering (IPO), and then in the market. “We like to spend time with them when they are private so we can pounce when they are public,” Green says.

2. Look for organic growth: When companies make acquisitions their stocks often decline, and for good reason. Managers make mistakes in acquisitions because they overestimate “synergies.” Or they get wrapped up in ego-enhancing empire building.

“We favor entrepreneurial management teams that do not make a lot of acquisitions to grow, but use their resources to develop new products to keep extending the runway,” says Green.

Here, he cites ServiceNow
NOW,
+2.62%,
which has grown by “extending the runway” with new offerings developed internally. It started off supporting information technology service desks, and has expanded into operations management of servers and security, onboarding employees, data analytics, and software that powers 911 emergency call systems. Green obviously thinks there is a lot more upside to come, given that this is an overweight position, at 4.6% of the portfolio (the fund’s biggest holding).

Green also puts the “Amazon.com of Latin America” MercadoLibre
MELI,
+0.17%
in this category, because it continues to expand geographically and in areas such as logistics and payment systems. “They have really morphed into a fintech company,” Green says. He puts HubSpot and the marketing software company Klaviyo
KVYO,
-5.73%
in this category, too.

3. Look for differentiated business models: Green likes companies with offerings that are special and different. That means they’ll take market share, and face minimal competition. They’ll also enjoy pricing power. “This leads to high margins. You don’t have someone beating you up on price,” he says.

Green cites the decking company Trex
TREX,
+0.10%,
which offers composite decking and railing made from recycled materials. This gives it an eco-friendly allure. Compared to wood, composite material lasts longer and requires less maintenance. It costs more up front but less over the long term. Says Green: “The alternative decking market has taken about 20% of the market and that can get to 50%.”

Of course, entrepreneurs notice success, and try to imitate it. That’s a risk here. But Trex has an edge in its understanding of how to make the composite material. It has a strong brand. And it is building relationships with big-box retailers Home Depot and Lowe’s. These qualities may keep competitors at bay.

4. Put some ballast in your portfolio: Green likes to keep the fund’s portfolio balanced by sector, size, and business dynamic. So the portfolio includes the food distributor Performance Food Group
PFGC,
-1.69%.
The company is posting mid-single digit sale growth, expanding market share and paying down debt. Energy drinks company Monster
MNST,
-0.85%
also offers ballast. Monster’s popular product line up helps the company to take share and enjoy pricing power, Green says.

It’s admittedly unusual to see a food companies in a portfolio loaded with high-growth tech innovators. But for Green, it’s all part of the game plan. “Rapid growth, disrupting businesses are not going to work year in year out. There are times they fall out of favor, like 2022. So, having that balance is important because it keeps you invested in the equity market.”

In other words, keeping some ballast means you’re less likely to get shaken out by sharp declines in high-growth and high-beta tech innovators when trouble strikes the market.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned AMZN, TSLA and MELI. Brush has suggested AMZN, TSLA, NOW, MELI, HD and LOW in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks

More: Nvidia, Disney and Tesla are among 2023’s buzziest stocks. Can they continue to sizzle in 2024?

Also read: Presidential election years like 2024 are usually winners for U.S. stocks

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December 17, 2023
Mortgage rates' dip to 7% could be brief if jobs market stays strong, Fannie Mae economist says

November’s sharp pullback in 30-year fixed mortgage rates may not last if the labor market remains strong, said Mark Palim, deputy chief economist at Fannie Mae.

Palim was speaking to the robust jobs report released on Friday, showing the U.S. added 199,000 jobs in November and that wages rose, albeit with the figures somewhat inflated by the return of striking workers from the auto industry and from Hollywood.

Homebuyers can benefit from a robust labor market and the near 80 basis point decline in mortgage rates since the end of October, Palim said. But if the “labor markets remain this strong, we believe the pace of mortgage rate declines will likely not continue in the near term or may partially reverse,” he said in a statement.

The benchmark 30-year fixed mortgage rate was edging down to 7.05% on Friday, after surging to nearly 8% in October, according to Mortgage Daily News.

Optimism around the potential for falling mortgage costs to thaw home sales helped lift shares of Toll Brothers Inc.,
TOL,
+1.86%
and a slew of other homebuilders tracked by the SPDR S&P Homebuilders ETF,
XH,
to record highs earlier this week, even while investors in some homebuilder bonds have been sellers in recent weeks.

Yields on 10-year
BX:TMUBMUSD10Y
and 30-year Treasury notes
BX:TMUBMUSD30Y
were up sharply Friday, to about 4.23% and 4.32%, respectively, but still below the highs of about 5% in October. The surge in long-term borrowing costs was stoked by tough talk by Federal Reserve officials about the need to keep rates higher for longer to bring inflation down to a 2% annual target.

Read: Solid job growth, sharp wage gains sends Treasury yields up by the most in months

U.S. stocks were up Friday afternoon, shaking off earlier weakness following the jobs report. The Dow Jones Industrial Average
DJIA
was 0.2% higher, further narrowing the gap between its last record close set two years ago, the S&P 500 index
SPX
and the Nasdaq Composite Index
COMP
also were up 0.2%, according to FactSet data.

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December 8, 2023
What to expect as Netflix, Disney and other big streaming names shift strategy

Streaming customers are likely to see more familiar faces and less megabudget content in the coming year.

Shifting consumer tastes and corporate strategies portend changes in programming, with artificial intelligence looming in the background, as major streaming services consider how to use technology and new forms of programming without escalating annual multibillion-dollar content budgets.

“The big quandary is, how do we make [services] profitable? Things have shifted so dramatically and so quickly in how people consume,” Cole Strain, head of research and development at Samba TV, which tracks viewership of shows, said in an interview. “The streamers that find out what consumers truly want — they win.”

Streaming services are facing some big choices, noted Jacqueline Corbelli, CEO of software company BrightLine. “The cost of the content and the length of the content war will force them to make some major decisions. They are trying to figure it out,” she said in an interview.

“Great content has to be paid for, and investors want to see an increasingly efficient and profitable business,” she said, adding: “Right now the economics of these are at odds with one another.”

This year’s prolonged Hollywood strikes, the prevalence of up-close-and-personal sports documentaries and the increased licensing of older cable-TV shows are the most tangible evidence so far of how content is evolving. Throw in cost-cutting, and customers of services like Netflix Inc.
NFLX,
+0.28%,
Walt Disney Co.’s
DIS,
-1.33%
Disney+ and Hulu, and Amazon.com Inc.’s
AMZN,
+1.41%
Prime Video are looking at a vastly different content landscape.

What’s at stake? Streaming’s big guns continue to spend lavishly in the pursuit of engagement, which is the single most important metric in media. During its third-quarter earnings calls, Netflix said it would spend $17 billion on content in 2024, while Disney pledged $25 billion, including sports rights.

“‘I think when it comes to creativity, quality is critical, of course, and quantity in many ways can destroy quality.’”

— Disney CEO Bob Iger

Complicating matters and raising the urgency is the pressure, particularly at Disney, to cut costs. The very future of blockbuster movies is also in doubt in the wake of box-office misfires such as “Wish,” “Indiana Jones and the Dial of Destiny” and the latest Marvel entries, “Ant-Man and the Wasp: Quantumania” and “The Marvels.”

“One of the reasons I believe it’s fallen off a bit is that we were making too much,” Disney CEO Bob Iger said at a recent employee town hall meeting in New York City. “I think when it comes to creativity, quality is critical, of course, and quantity in many ways can destroy quality. Storytelling, obviously, is the core of what we do as a company.”

Also read: Disney CEO Bob Iger walks back comments about asset sales

Speaking at the New York Times DealBook Summit last week, Iger acknowledged that “the movie business is changing. Box office is about 75% of what it was pre-COVID.” Noting the $7 monthly fee for a Disney+ subscription, he said the experience of viewing content from home on large TV screens is both more convenient and less expensive than going to the movie theater.

Iger’s task is significantly more fraught than those faced by his rivals. He is in the midst of a turnaround at Disney aimed at making streaming profitable and is simultaneously fending off yet another proxy fight from activist investor Nelson Peltz.

Part of Iger’s plan is to slash costs. Of the $7.5 billion Disney intends to save in 2024, $4.5 billion will come out of the content budget. Previously, the company was aiming at a $3 billion content cut out of a total annual reduction of $5.5 billion. Disney plans to spend $25 billion on content in 2024, down from $27.2 billion in 2023 and a record $29.9 billion in 2022.

Read more: Bob Iger: ‘I was not seeking to return’ as Disney CEO

What streamers have done so far hews closely to the classic TV model of producing original movies and series, broadcasting live sporting events and throwing in licensed content, or syndication. They’ve also displayed a willingness to place ads on their services after vowing not to (in the case of Netflix) and have managed to mitigate spending on pricey sports rights with behind-the-scenes content.

Most prominently, Netflix has licensed older shows like USA Networks’ “Suits,” reintroducing the cast, including a then-unknown Meghan Markle, to solid viewership. “As the competitive environment evolves, we may have increased opportunities to license more hit titles to complement our original programming,” Netflix said in its third-quarter earnings statement.

During the company’s earnings call in October, Netflix co-CEO Ted Sarandos pointed to the historic streaming success of “Suits.” “This continues to be important for us to add a lot of breadth of storytelling,” he said. “Our consumers have a wide range of tastes, and we can’t make everything, but we can help you find just about anything. That’s really the strength.”

The success of “Suits” and of original sports programming, among several tweaks, indicates that consumers like what they see so far. Streaming additions at Netflix and Disney were significant — 8.76 million and nearly 7 million, respectively — during the recently completed third calendar quarter.

Read more: Netflix’s stock jumps more than 10% on huge spike in subscribers, price hikes

“There exist a lot of popular, good shows that people hadn’t seen before. HBO Max has licensed ‘Band of Brothers.’ ‘Yellowstone’ is on the CBS network after performing well on Paramount Global
PARA,
-2.76%
and Comcast Corp.’s
CMCSA,
-3.41%
Peacock,” Jon Giegengack, founder and principal of Hub Entertainment Research, said in an interview. “Consumers increasingly don’t care if a show is new, if they haven’t seen it before.”

On the sports front, Netflix and Amazon Prime Video have sidestepped expensive rights to live sporting events and instead produced docuseries such as Netflix’s “Quarterback” and “Formula 1: Drive to Survive” and Amazon’s “Coach Prime” and “Redefined: J.R. Smith.” Amazon also continues to air “NFL Thursday Night Football.”

Competition for eyeballs is tight with so many suitors — from Alphabet Inc.’s
GOOGL,
+1.33%

GOOG,
+1.35%
YouTube to TikTok, both of which are developing long-form content — and viewers face “too many streaming options,” said Brittany Slattery, chief marketing officer at OpenAP, an advertising platform founded by the owners of most of the large TV networks.

“There is a high churn rate, because consumers keep popping in and out of services because they can’t afford all these services,” Slattery said in an interview.

Also see: Here’s what’s worth streaming in December 2023: Not much new, yet still a lot to watch

Mark Vena, CEO and principal analyst at SmarTech Research, sums up the typical customer experience: “There are too many services for streaming. I will buy service for a month, watch a movie and then cancel.”

Using technology for a new experience

Major streamers are pinning many of their hopes on technology as a way to entice viewers and expand beyond the traditional TV model they’ve adopted. Strategies include mobile gaming (Netflix), gambling (Disney’s ESPN Bet) and shoppable media (Amazon).

The biggest near-term change would bring ESPN exclusively to streaming, perhaps as early as 2025, although big games would probably be simulcast on network TV to retain older viewers.

“Technology will be a major impetus for being in the winning circle,” said Hunter Terry, head of connected TV at global data company Lotame, pointing to Amazon’s shoppable-media strategy during Prime Video’s broadcast of an NFL game on Black Friday.

The NFL game, the first ever on a Friday, featured QR codes of Amazon ads for direct purchases via mobile devices and PCs, contributing greatly to what the e-commerce giant said was its best-ever sales day — 7.5% higher than Black Friday 2022. The game drew between 9.6 million and 10.8 million viewers, according to Nielsen and Amazon, making it the highest-rated show on Black Friday for young adults (18-34) and adults (18-49).

And what of generative AI, a major flashpoint in the writers and actors strikes that roiled Hollywood for months earlier this year? Creators feared generative AI would be used to produce low- and middle-brow entertainment without the need for writers, actors or production crew.

The technology is as intriguing to streamers as it is vexing. Full-blown adoption would rankle creators as well as customers. There are also limitations: AI-created content is lacking in humor and original thought, said David Parekh, CEO of SRI International, a leading research and development organization serving government and industry.

“The pressing question is, who goes first among the streamers and risks getting blowback from studios and consumers?” said Rick Munarriz, a contributing analyst at the Motley Fool who covers streaming-service stocks. “You don’t want to offend people, but there are tools to create ideas” at little cost.

AI and machine learning are already being used to mine data to find out what resonates with viewers.

“It is very hard to produce successful content,” said Ron Gutman, CEO of Wurl, which helps streamers and publishers monetize and distribute content, and which was recently acquired by AppLovin Corp.
APP,
-0.80%
for $430 million. “The market is so fragmented. The problem is connecting people to content.”

Straight to streaming?

Big-budget busts present another potential source of content, by salvaging unreleased movies, according to experts.

The so-called dust-bin option is the natural successor to straight-to-video and straight-to-pay-per-view movies. There has been some precedent, with the release of Disney’s superhero hit “Black Widow” simultaneously on streaming and in theaters in May 2021.

Will streaming services end up as the first stop for movies abruptly canceled before release? Candidates include “Batgirl,” which cost $90 million to make and was in post-production when Warner Bros. Discovery Inc.
WBD,
-4.57%
pulled the plug.

The same fate could also await two other shelved Warner Bros. movies, “Scoob! Holiday Haunt” and the completed “Coyote vs. Acme.”

While the $90 million “Batgirl” is a tax write-off, there could be upside to “Coyote” and “Scoob!” if they went to streaming without a costly marketing campaign, said SmarTech Research’s Vena.

Still, the long-term plans of streaming giants to meld tech to TV remains a ticklish task, said Wurl’s Gutman. “TV is a lean-back experience, not a lean-into technology medium,” he said. “People are looking at their phones while watching TV. It is a passive experience.”

Tracy Swedlow, founder and co-producer of the TV of Tomorrow Show conference, said: “They’ve been burning a candle at both ends, investing in original content as well as licensing long-tail content such as ‘Suits’ and ‘Breaking Bad.’ Something has to give.”

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December 5, 2023
Will George Santos still qualify for a pension and strolling around the House floor?

Rep. George Santos was expelled from Congress in an historic vote Friday, following a House panel’s findings of substantial evidence of lawbreaking by the New York Republican.

But could Santos, 35, still enjoy some of the benefits that come with having served as his Long Island district’s congressman?

The answer is yes for some perks, but not all. Read on for details.

Question: Can an expelled member of Congress still collect a pension?

Answer: No, not if the lawmaker has served for less than five years. Santos was sworn into office just 11 months ago, after Republicans picked up enough seats in November 2022’s midterm elections to gain a small majority in the House.

U.S. lawmakers are eligible for a pension at age 62 only if they have completed at least five years of service, according to a Congressional Research Service report.

What’s more, lawmakers can lose their pension if they’re convicted of fraud-related offenses, and Santos is facing such charges. But that provision came relatively recently, with 2007’s Honest Leadership and Open Government Act, and some watchdogs say that law has loopholes that need to be closed up.

Question: Does an expelled member of Congress still get free healthcare?

Answer: It’s a myth that House lawmakers and U.S. senators get totally free healthcare, according to the office of Rep. Rep. Scott Perry of Pennsylvania.

Current members of Congress are authorized to receive free outpatient medical care and emergency dental care at military facilities in the Washington, D.C., area, but they’re billed for inpatient services and former members aren’t eligible, according to a separate CRS report.

Overall, just as tens of millions of Americans make use of employer-sponsored health insurance, members of Congress and designated congressional staff receive employer-sponsored insurance through the District of Columbia’s Obamacare exchange, known as DC Health Link, the report said, though some lawmakers have opted to pay for other health plans.

Question: Does an expelled member of Congress still get access to the House floor?

Answer: Yes. Former members of the House are entitled to admission to that chamber’s floor while it’s in session, as long as they aren’t lobbyists, according to another CRS report.

It’s among the courtesies and privileges for ex-lawmakers that come from U.S. law, chamber rules or as a matter of custom, the report said. Others include access to parking, athletic and dining facilities.

However, Santos on Friday sounded like he wouldn’t make use of his floor privileges or other such perks. “Why would I want to stay here? To hell with this place,” he told reporters after his expulsion, according to a CNN report.

Question: Can former House lawmakers lobby their old colleagues?

Answer: Yes, once they go through a one-year “cooling off” period.

Turning to lobbying is a common move. For example, at least 15 members of the 115th Congress had taken up work at lobbying firms by March 2019, just two months after the 116th Congress had been sworn in.

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December 1, 2023
No, Jeff Bezos hasn’t been unloading Amazon stock

A number of Amazon.com Inc. executives have disclosed sales of some of their Amazon stock holdings in recent weeks, but Jeff Bezos, the company’s executive chair and a mega-shareholder, was not among them.

Despite some reports to the contrary, Bezos hasn’t disclosed any sales of Amazon shares AMZN for two years, but he has given some shares away to nonprofit organizations.

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November 27, 2023
Congress returns to face big to-do list: Israel and Ukraine aid, possible border or tax deals, and more

Both the House and Senate are due to get back to work this week after their Thanksgiving break, and lawmakers have a lot on their plates.

A divided Washington put off the threat of a partial government shutdown until mid-January by enacting a short-term spending bill in mid-November, but the measure didn’t address President Joe Biden’s $106 billion funding request that includes wartime aid for Israel and Ukraine.

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November 26, 2023
Remote workers are flexing their muscle, and the best-run companies won’t fight them

When COVID-19 struck, companies had little choice but to adapt swiftly. Office spaces were replaced by living rooms and in-person meetings transitioned to virtual calls — a temporary solution, or so it was thought.

But months have turned into years, and now it’s clear this is not just a fleeting phase but a profound transformation in work dynamics.

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November 23, 2023