Bed Bath & Beyond stock sinks more than 24% after earnings miss but analysts see opportunity


Bed Bath & Beyond Inc. stock took a 24.5% nosedive in Thursday trading after COVID-19-related closures drove wider-than-expected losses and steep sales declines, but analysts are upbeat about the path forward for the troubled home retailer.

Bed Bath & Beyond
BBBY,
+4.26%

reported a fiscal first quarter adjusted loss of $1.96 per share and a 49% sales decline to $1.31 billion. The FactSet consensus was for a loss of $1.27 per share and sales of $1.39 billion.

June sales fell just 7%, according to Gustavo Arnal, Bed Bath & Beyond’s chief financial officer, who spoke on the Thursday earnings call. And year-over-year digital growth was 80%.

Nearly all of the company’s stores have reopened but about 200 store closures are planned in the next couple of years.

Read:Brooks Brothers files for bankruptcy as its take on office gear falls out of step with more casual trends

“This bounce back is much sharper than reported by other leading department stores that have recently reopened their stores and speaks to the strength of Bed Bath and Beyond’s brand and a spending shift to the home goods category,” wrote Wedbush analysts led by Seth Basham.

The company also talked up its liquidity, ending the quarter with $1.2 billion in cash and investments. Bed Bath & Beyond announced a new $850 million three-year secured asset-based revolving credit facility on June 22.

“With improving operating performance, inventory reduction opportunities remaining, potential asset sales outstanding, (including the litigious Personalization Mall sale, the potential to sale of Christmas Tree Shop and Cost Plus, as well as what we estimate to be ~$200m in additional real-estate, we remain comfortable with Bed Bath and Beyond’s liquidity position,” analysts said.

Wedbush rates Bed Bath & Beyond stock outperform and raised its price target to $14 from $12.

Bank of America highlighted the annualized savings expectation of $250 million to $350 million from the plan to close 200 stores.

“This is something the market has long anticipated and with a plan to eliminate overlapping stores and online sales growing strongly, this on its own should provide a strong comp and earnings tailwind,” analysts led by Curtis Nagle wrote.

Watch:41% of Black small businesses have closed since the pandemic

Bank of America rates Bed Bath & Beyond stock buy with a $16 price objective, up from $14.50.

Not all analysts were as positive. UBS focused on the boost the retailer got from stimulus checks and the demand in the home category, which rose as lockdowns forced more people indoors.

“This will probably fade,” wrote analysts led by Michael Lasser. “Thus, we think it’s best to assume that Bed Bath and Beyond’s comp trends remain under pressure for at least the intermediate-term.”

UBS rates Bed Bath and Beyond stock neutral with a $10 price target, up from $5.

Raymond James notes the sales at Buybuy Baby, which Bed Bath & Beyond said were 20% of the first quarter, compared with about 10% last year. By analyst calculations, the chain would total about $1.1 billion in annual revenue.

See: RH is planning to open hotels and sell houses, but analysts ask whether it can pull it off

“In our history with the company, we believe this is the first time they have disclosed revenue figures on any individual concept,” analysts said.

Raymond James rates Bed Bath & Beyond strong buy with a target price of $12, down from $13.

Bed Bath & Beyond stock has fallen by more than half (52.6%) for the year to date while the S&P 500 index
SPX,
+1.04%

is down 1.4% for the period.



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Tesla: You Should Buy The Stock Not The Car (Part 2) (NASDAQ:TSLA)


After my initial article about the rationale of buying Tesla (NASDAQ:TSLA) shares rather than the car, the skyrocketting share price performance of Tesla (+493%) in the last 12 months got me thinking whether this is detached from reality, and if there is room for further upside.

Data by YCharts

Without jumping on overly optimistic statements, I would like to highlight the management ability to execute successfully (although not exactly on time) its target plan to accelerate the world’s transition to sustainable energy. First and foremost, the completion of Gigafactory Shanghai in a record time, which demonstrated how Tesla was efficient in opening a new factory in China without any partners. The timing turned out to be key as the factory is operational today and well positioned to benefit from the growing concern of Chinese consumers towards clean vehicles post-COVID-19 crisis. It removes any doubt to successfully build and operate new extension buildings nearby Giga Shanghai, but above all, Gigafactory Berlin, which is due to be operational in exactly a year time frame. Secondly, the company has been successfully able to develop a recurring revenue generation business thanks to its advanced software technology, which makes it comparable to Apple’s could business. Indeed, from premium connectivity ($9.99/months) to upgrading to Autopilot or Full-Self-Driving (FSD) are various sources of additional revenues that the company can leverage on after selling cars. Recent statements from CEO Elon Musk to achieve FSD by the end of the year give the company a pricing power over its over-the-air updates that technically do not require any additional installation costs for Tesla. Thirdly, the company’s ability to extend the product range caught many analysts by surprise after being able to deliver the model Y in North America (certainly with quality issues that are quickly improving) almost a year in advance. Bottom line, with new factories in the pipeline (GigaTexas or GigaTusla per say), closer deadline to unlock fully-autonomous vehicles (hence, robo taxi), and new models such as the roadster, pickup and semi, I am pretty confident the execution risk is very low.

Let’s take a step back and compare Tesla with its competitors as all eyes are on its market capitalisation that has surpassed Toyota (NYSE:TM). Clearly, the market is valuing the electric battery technology versus the traditional internal combustion engine (ICE). I am not sure comparing a stagnant company to a high-growth model is well justified, the same way as comparing Netflix (NASDAQ:NFLX) market capitalisation to Blockbuster back then. I would go a step further and compare Tesla’s valuation to another ICE manufacturer that is well priced such as Ferrari (NYSE:RACE). Indeed, Ferrari CEO stated it has no plans to switch to electric before 2025 as the technology will not be ready enough, so you can compare the valuation of two auto companies with different technologies.

ChartData by YCharts

It turns out that Ferrari has an enterprise value to revenues multiple that is +43% higher than Tesla. I would argue that Tesla is priced for its top-line growth rather than its EBITDA margins. Nevertheless, let’s take a look at the EV-to-EBITDA multiple to compare from both angles.

ChartData by YCharts

Tesla is indeed more expensive, but I would look at this comparison with a grain of salt as Tesla recently proved that its business is more resilient than other traditional carmakers during the COVID-19 crisis, and I doubt Ferrari’s EBITDA to be fully reflected going forward. Last but not least, Ferrari’s valuation per car produced in 2019 is $3,356,000 ($34bn in market cap. divided by 10,131 shipments) while Tesla is about $690,000 ($253bn in market cap. divided by 367,000 deliveries in 2019). Ferrari’s hefty valuation compared to Tesla by cars shipped amplifies looking at 2020 as the former does not plan to increase production of new cars.

Battery day, originally planned in spring 2020, is now scheduled for September 15th and will be a major milestone for Tesla. Indeed, it will first increase the lifetime of the battery as indicated in its name a million-mile battery, which means a lower battery degradation and also less recycling issues that may arise in the future from old generation batteries. In addition, this new battery technology is deemed to substantially lower the cost of battery per Kwh and make electric vehicles a larger threat to ICE vehicles with an initial purchasing price similar or even lower than traditional carmakers (which is not the case today at purchase, but true after a 5-year cost of ownership). Above all, the million mile battery will enable Tesla cars to manage the battery for uses other than mobility such as powering a house or another EV. On top of that, the battery will be able to support the trading of electricity by selling the power from the battery during peak hours (at high price) and charge it during the off-peak hours of the day (low price).

In conclusion, I believe that Tesla’s share price has still room to grow thanks to its pipeline of new products targeting a broader customer base while increasing retention, its cutting edge technology innovation and the fast-growing trend towards clean cities. My suggestion would be to buy shares until the launch of the million mile battery cars.

Disclosure: I am/we are long TSLA, RACE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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The cost of Biden’s economic plan to the stock market is more than you might think


While momentum investors are increasingly focused on ever-higher stock prices, prudent investors should start focusing on the presidential election.

Democratic front-runner Joe Biden released his “Buy American” economic plan to challenge President Trump. Still, investors need to ask how Biden would pay for the plan. He could take away Trump’s tax cuts for corporations and the rich. But Biden and Trump might also share a strategy: Borrow more and influence the Federal Reserve to print more money.

Readers know that I am politically agnostic. My sole job is to help investors. Let’s explore the issue with the help of a chart.

Chart

Please click here for an annotated chart of the Dow Jones Industrial Average ETF
DIA,
+0.92%
,
which tracks the Dow Jones Industrial Average
DJIA,
+0.92%
.
Note the following:

• The chart is monthly, giving investors a long-term perspective.

• The chart shows the middle support zone.

• The chart shows that based on Biden’s tax policies, the stock market in theory should drop to the middle buy zone. This is about a 20% drop in the stock market.

• Prudent investors should protect themselves from the tail risk of the stock market falling to the “mother of all support zones” shown on the chart.

• The chart shows Arora buy signals and calls for the Dow Jones Industrial Average to reach 30,000 points. From 2012 to today, the majority of the rise in the stock market is attributable to the Fed’s enlarged balance sheet and lower interest rates. Please see “Here’s the case for Dow 30,000 in Trump’s first term.”

• The big money is hiding in the five large-cap tech stocks of Apple
AAPL,
-0.30%
,
Amazon
AMZN,
+0.06%
,
Microsoft
MSFT,
-0.42%
,
Alphabet
GOOG,
+0.43%

GOOGL,
+0.14%

and Facebook
FB,
-0.93%
.
Those five stocks are experiencing a significant “pile-on” effect — buying for reasons that have nothing to do with fundamentals.

• Keep an eye on stocks that would benefit from the Biden plan. Examples include Tesla
TSLA,
+6.14%
,
Canopy Growth
CGC,
+5.74%

and Centene
CNC,
-0.74%
.

Five contributors to a stock market drop

Here is a simple calculus of what, in theory, should happen with Biden’s tax policy.

• Biden would be likely to increase the capital gains tax, perhaps as high as 39% for upper-income individuals. That could lead to selling before such a law were passed.

• Due to higher corporate tax rates, S&P 500
SPX,
+0.57%

earnings would take about a 7% hit.

• Due to more regulation, S&P 500 earnings would take a 2%-3% hit.

• Potential restrictions on buybacks and also less free cash flow due to higher corporate taxes would be a negative for the stock market.

• With wealthy individuals paying more taxes, they would have less money to buy stocks.

All in all, the foregoing calculates to about 20% hit to the stock market.

New stock market highs

None of it may matter, and the stock market may hit new highs, if the following two factors take hold:

• If Biden starts surging in the polls along with the possibility of a “blue sweep,” expect market professionals and hedge funds to build up short positions. Short positions act as fuel for a rally if subsequently a short squeeze takes hold. The chart linked above shows the 65% of the first leg of the rally from March 23 coronavirus low was short-squeeze-related. The chart shows that the second leg of the rally was 35% short-squeeze-related. If a short squeeze takes hold again, it could easily take the stock market to new highs.

• An up move due to a short squeeze these days goes a lot farther due to the momentum crowd jumping on. The momentum crowd has already formed a habit of buying stocks aggressively on the news of more government borrowing and more money printing. With more borrowing under the Biden administration, the prevailing wisdom among the momentum crowd that more borrowing and more money printing is good may lead to new stock market highs.

What does it all mean?

Prudent investors need to stay extra alert and nimble as well as have protective measures in place while positioned to take advantage of potential new stock market highs. Protective measures should be dynamically adjusted. Of course, if you are part of the momentum crowd, it is real easy — celebrate borrowing and money printing with more buying in the stock market. Please read “Here’s the secret sauce to handle the stock market’s election and virus fears.”

Disclosure: Arora Report portfolios have positions in Apple, Amazon, Alphabet, Microsoft and Facebook. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. He can be reached at Nigam@TheAroraReport.com.



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Underneath the global stock market’s impressive rebound, investors still doubt prospects for V-shaped recovery, says Morgan Stanley


Don’t believe the hype that markets have baked in a V-shaped recovery.

Analysts at Morgan Stanley note the sharp run-up in stock and corporate bond markets worldwide since March has led many to conclude that over-optimistic investors have already priced in a swift recovery from the coronavirus-driven recession.

But in a Wednesday note, they argue that there’s plenty of ways financial markets are reflecting a more bearish investor than the impressive rebound in risk assets might imply.

“If investors expect a robust economic bounceback, they have an odd way of expressing it,” said the team of Morgan Stanley’s cross-asset strategists led by Andrew Sheets.

Since plumbing its March low of 2,237.40, the S&P 500
SPX,
+0.19%

is up more than 40%. The Dow Jones Industrial Average
DJIA,
-0.01%

had also gained around 40% since touching its March nadir of 18591.93. Both large-cap indexes were on track to record modest gains on Wednesday.

In global equities, an exchange-traded fund
ACWI,
+0.22%

tracking the MSCI All Country World Index, a stock-market benchmark composed of equities from dozens of developed and emerging markets, was up nearly 44% from this year’s bottom.

Sheets lists out several ways markets actually reflect a deeper pessimism about prospects for a V-shaped recovery.

  • The yield curve remains flat. The spread between the 2-year note and the 10-year note, a gauge of the curve’s slope, stands at 49 basis points.
  • Long-term bond yields in the U.S. and Europe are near historic lows. The 10-year Treasury note yield
    TMUBMUSD10Y,
    0.654%

    is trading at 0.65%, while the 10-year German government bond yield was at negative 0.48%.

  • Investments sensitive to expectations for economic growth are underperforming. Shares of larger companies were outpacing their small-cap equities.
  • Higher rated investment-grade debt are offering much scantier yields than the lowest rated investment-grade corporate bonds.
  • Growth stocks are trading at historically expensive levels compared to their value peers.

“Needless to say, all those represent wagers against a strong recovery, and instead, on a world where growth remains weak and uncertainty remains high,” he said.

Sheets conceded there has been a partial unwind of these longstanding trends since risk asset prices slid to their March bottom, with inflation expectations starting to rise, yield curves beginning to steepen, and equities in growth-sensitive areas playing catch up.

Even so, “valuations are still a long way from implying a normal recovery, and instead reflect a market that remains concerned about long-term growth,” he said.



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This spot-on predictor of who will win the 2020 presidential election is not the stock market or even opinion polls


Does the stock market predict the winner of U.S. presidential elections? Many argue that it does, pointing to the historical correlation between the incumbent party retaining the White House and the stock market’s strength in the months leading up to Election Day in November.

Given President Donald Trump’s preoccupation with the stock market, he apparently agrees. Recently he tweeted that if he’s not re-elected, investors’ 401(k)s will disintegrate and disappear — though one major Wall Street firm sees quite a different outcome for retirement savers if Trump’s presumptive challenger Joe Biden is elected.

Read: How to position your portfolio for a Joe Biden presidency

I’m not so sure about this alleged correlation between the stock market and the incumbent party’s chances of retaining the White House. Consider what I found upon analyzing the Dow Jones Industrial Average’s
DJIA,
+0.68%

return in every U.S. presidential election since 1900. I searched for any correlations between the Dow’s pre-election strength and whether the incumbent political party retaining the White House. I measured that strength over periods as short as the month prior, to as long as the entire year-to-date period (10+ months).

The results do not inspire statistical confidence. While some of the correlations appeared to be impressive, the majority were not significant at the 95% confidence level that statisticians often use when determining if a correlation is real. The lack of any consistent pattern suggests that there is less here than meets the eye, and so investors shouldn’t count out Trump’s re-election chances even if the stock market performs poorly between now and Election Day.

For example, the stock market’s year-to-date strength on Election Day is not correlated with the incumbent party’s chances. Nor is the market’s strength over the eight months leading up to the election. But, strangely, when the focus is on market strength over a period whose length is between these two — specifically, nine months rather than eight or 10 — the result in fact does become statistically significant.

Unless one can come up with a theory why market strength over a nine-month horizon should be predictive of the election outcome, but not over a slightly shorter or longer time horizon, then we should dismiss this apparent correlation.

The same inconsistency emerged when I focused on shorter time periods. The market’s return over the three months prior to the election is significantly correlated with the incumbent party’s chances—but not over the 1-month or 6-month periods prior to Election Day. This is especially important to keep in mind now since a factoid that’s making the rounds on Wall Street right now is that the stock market’s return over the three months prior to elections can predict the outcome.

Watch the betting markets

If these results aren’t enough to lead you to question the stock market’s record as an election handicapper, check out electronic betting markets such as PredictIt.org and the University of Iowa’s Iowa Electronic Markets.

These online futures markets allow users to bet on various outcomes, such as whether Trump will win re-election. The futures that trade on these sites are all-or-nothing contracts, paying 100% if the particular outcome comes to pass and nothing if it doesn’t. Accordingly, prices reflect investors’ collective bets about that outcome’s probabilities. Extensive research has found that online betting markets are better at forecasting the presidential election outcome than opinion polls.

Correlating the stock market’s gyrations with those of the Trump contract at PredictIt.org, for example, as shown in the chart above, provides insight into what investors collectively think of the president’s re-election chances. As of July 6, the PredictIt.org odds of Trump’s winning re-election are 40% — down from above 50% less than three months ago. Over those three months, in contrast, the S&P 500
SPX,
+0.78%

gained 20%.

These results make it hard to argue that the stock market will decline if Trump’s odds of winning re-election sink even further.

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: Here’s the real reason that Mary Trump’s tell-all book matters in the presidential election

Also read: Trump, Biden fight for primacy on social media platforms



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