US consumer giants reporting, wage data to be released and our take on how to navigate the market

With the market having pulled back in recent times, more opportunities are presenting themselves. High quality companies which were previously a little expensive are becoming more attractively valued. With some turbulence in the market, no one can predict if the market will go down further or go back up, so I thought I’d share some advice from one of the most successful investors ever, Peter Lynch. He managed the Magellan Fund at Fidelity investments, where his annual return was more than double the S&P 500 during his time as portfolio manager.

He said “when stocks are attractive, you buy them. I’ve bought stocks at $12 that went to $2, but then they later went to $30. You just don’t know when you can find the bottom”. This draws on the age old investment rule that you cannot time the market. What you can do though, is invest in a company which you believe is now undervalued and trust the company fundamentals will bring you a gain over time.

Ideally, you should be looking at companies which can prevail against the current conditions. This would include companies with pricing power who are able to pass on inflation without losing business, as opposed to companies that face high price competition. Another feature to look for are companies with a strong earnings profile, as opposed to long duration companies, in which the bulk of their earnings will be years away. Consequentially, these long-duration earnings will be more heavily discounted by higher interest rates, due to the concept of the time value of money.

What else is a part of the current conditions? Think of what companies benefit and what companies don’t with the reopening of the world and the normalisation of life in regards to living with Covid-19. People are streaming less and aren’t shopping online as much. That’s why lockdown winners such as streaming services Netflix (NASDAQ: NFLX) and Roku (NASDAQ: ROKU), and e-commerce businesses eBay (NASDAQ: EBAY) and Kogan (ASX: KGN) are getting punished, with even Amazon facing some struggles (NASDAQ: AMZN). A good example of a strong company with pricing power is consumer staples giant Procter & Gamble (NYSE: PG).

Talking of consumer giants, Walmart (NYSE: WMT) is reporting this week. Walmart is expected to post an earnings per share of US$1.47 and revenue of US$138.83 billion for the first quarter of their 2023 fiscal year. Walmart generates the most revenue out of all US corporations, where in 2021 they posted a full year revenue of US$559.2 billion. This earned them first place on the Fortune 500. To put this into perspective, second placed was Amazon, who’s full year revenue was about US US$173.1 billion less than Walmart’s. That will be the interesting finance fact for the week.

There will be other large consumer companies reporting as well. Wall Street expects Home Depot (NYSE: HD) to announce an earnings per share of US$3.68 and revenue of US$36.57 billion for the quarter. Target (NYSE: TGT), which has no relation to the Target in Australia, is forecasted to post an earnings per share of US$3.06 with revenue of US$24.41 billion.

We will also be looking into the results of Applied Materials (NASDAQ: AMAT) who provide equipment for companies to produce semiconductors. We will be interested to see if this gives us a lead on how the semiconductor space is doing at the very start of the supply chain. They are expected to post an earnings per share of US$1.90 and revenue is forecasted to be US$6.35 billion.

Ultimately, companies and their value are affected by macroeconomic conditions to different extents. This is why we will be tuning in to Fed chairman Jay Powell’s speech this week, to get further clarity on how US monetary policy will be managed in the medium-term. The minutes from the RBA meeting will also be released, which we will be dissecting to shed more light on the RBA’s view of the state of the economy going forward, and to get a better indication on where interest rates are going in the next couple of years.

There will be some important economic data being released this week. Perhaps most significant is the Wage Price Index. Economists have forecasted 0.8% quarter-on-quarter growth for the first quarter of 2022. Before Australia’s CPI data was released a few weeks ago, there was a view that the RBA would potentially hold off from the first rate rise in 11 years until this wage data was released, as RBA governor Phillip Lowe has been emphasising for months the need to see wage growth in order to confirm the need for a rate rise. However, Lowe justified hiking rates before this data was released as the RBA’s internal business surveys had given him a strong indication that wages were rising. We will be interested to see if he was indeed correct.

Just as important will be the unemployment rate, not because a 0.1% drop to 3.9% will fundamentally change our view of the economy, but more so because you will definitely hear it in the news headlines. Having a ‘3’ in front of the unemployment rate just days before the federal election is something that I will guarantee is a statistic that the incumbent Government will hammer home. In fact, the previous print for the unemployment rate started with a ‘3’, but was closer to 4% than 3.9% so ultimately it got rounded up to 4%. Either way, it signifies that the job market is very tight and most people who want to get employed are employed.

This expected improvement to 3.9% is aided by the forecast of 25,000 more people being employed last month, with the participation rate remaining steady at 66.4%.

Over in the US, initial jobless claims are expected to come in at 200,000. Year-on-year growth for Chinese industrial production is expected to be 0.4% in April, which has been affected by lockdowns and restrictions in multiple cities. This has led to a cooling of iron ore prices down below US$130 a tonne.

Have a great week,

Sam Waldron - Research Analyst

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