A Tale of Two Earnings Tapes | The Daily Peel | 5/26/2023

May 26, 2023 | Peel #469

In this issue of the Peel:

• The equities rally is heavily anchored to the outperformance of a handful of large-cap stocks.
• With earnings season in the rearview mirror, we parse through the rubble to find a divergence in the winners and losers
• Will the deadlock in Congress lead to a US Credit downgrade?

Market Snapshot

Happy Friday, apes.

There is only one more of The Daily Peel newsletter between you and a long holiday weekend, so let’s make it count!

Stocks rallied Thursday, thanks in large part to artificial intelligence, whose sexiness is window-dressing much of the ugliness elsewhere in the market.

*Cough cough* Yes, the ongoing fool’s errand of reaching a bipartisan debt ceiling agreement. Another day, another empty promise from Congress. Credit rating agencies have had enough and officially put the US on notice that it could potentially lose that coveted “AAA” bond status.

Volumes were pretty strong as investors looked to place their bets before jetting off for vacation. Here’s to hoping for a chill session ahead of Memorial Day Weekend.

Let’s get into it.

The Secret to Getting Hired in IB

Hey, ready to glow up your IB career? If you're looking for a way to ace your IB interviews, you need to attend WSO's IB Interview Bootcamp tomorrow - Saturday, May 27th.

It's only 4 hours of your time. But honestly, it's gonna be worth it because you'll learn from the best of the best—an actual IB professional that closes deals at a top bank. So you know you'll get the real deal on what it takes to make it in the industry. They won't sugarcoat anything or give you generic advice. They'll tell you how it is and how to nail it.

You'll also get lifetime access to WSO's IB Interview Course. Plus, you'll get 1-year access to the WSO Company Database (exclusive data on compensation, interviews, and employee reviews) and 60+ hours of IB specific videos, webinars, mock interviews, Q&A's, sample deals, and PPT & Excel templates.

Sounds dank? It gets better. Sign up here, and we'll get you access to WSO's Excel Modeling Course. No cap.

So don't miss this opportunity to impress your interviewers. This bootcamp will help you stand out from the crowd and land your dream job.

You don't want to have FOMO later, do you? Remember, WSO's IB Interview Bootcamp is where it's at.

Banana Bits

• Take a peek inside top executive pay packages at First Republic, including an anonymous banker who pocketed $35mn last year
• Attn, all bankers! There is one positive to come out of an abysmal bonus season last year. Hamptons landlords are slashing rental prices right before the summer surge
• Trouble in paradise, or much ado about nothing? Credit rating agency Fitch has placed the US on notice. The country is at risk of losing its “AAA” credit rating
• The hottest commodity among today’s celebrities, from Beyonce and Jay Z to Kim & Kanye, is a home designed by an 81-year-old Japanese architect

Macro Monkey Says

Sell in May and Go Away?

I’ve always found it funny how Wall Street develops quippy little sayings for every trading season. The “Santa Rally” in December, the “January Jump,” and the “Monday Blues.” I imagine a group of buttoned-up, stern old men sitting around a conference room, coming up with the next slogan to explain the stock market’s behavior.

"It becomes a self-fulfilling prophecy, almost like a run on the bank when you think about it."

One adage you may not be familiar with is “Sell in May and go away.” The basic premise is that the investing bigwigs sell out of significant positions in May and go away to their summer homes in the Hamptons, Cape Cod, and other places I can’t afford.

This leads to lower liquidity during the summer months until the industry jolts back to life in September. It becomes a self-fulfilling prophecy, almost like a run on the bank when you think about it.

Generally, people don’t want to invest when there isn’t ample liquidity, so they preemptively take their money out of the market. But because everyone is doing that, it leads to lower liquidity.

While definitely a catchy statement that has stuck throughout the years, does it actually stand the test of time? On the surface, statistical data seems to substantiate the theory.

"End-of-year bonuses may spur optimism ... Increased holiday shopping could also be another factor."

According to Fidelity Investments, the S&P has gained an average of ~2% from May to October versus an average of ~7% from November to April, going back to 1990. Other academic studies looking at data outside of the US actually came to similar conclusions.

Outside of investors closing their books before the summer, some other factors have been proposed. End-of-year bonuses may spur optimism toward the end of the year versus in the middle of the year when people are more conservative. Increased holiday shopping could also be another factor.

"...consumer retail stores tend to report higher earnings in the fourth quarter...while the Industrials sector..."

While the data seems to back it up, we should always take everything with a grain of salt. I’m not sure if I would go about implementing a trading strategy based on it. Market returns will always vary across sectors based on periods of business cycles and seasonality.

For example, consumer retail stores tend to report higher earnings in the fourth quarter, which could explain some of that sector’s outperformance, while the Industrials sector tends to benefit from strength in production in the beginning of the year.

Market movements cannot be explained by one or two factors but rather by a synthesis of data points with different weightings.

What's Ripe

Nvidia ($NVDA) ↑ 24.37% ↑

• Hopefully, you weren’t shorting this company. The stock that couldn’t get more expensive versus peers just got a little more expensive.
• Nvidia forecasted sales that absolutely smashed analyst expectations, coming in at 50% ahead of consensus. Demand for AI can be thanked for the earnings report. Nvidia, which makes the chips and processors that fuel the AI industry, will see $11bn in sales in the first half of the year.
• Nvidia’s success brought all the chipmaker stocks, which includes AMD and Micron, along for the ride. Short sellers suffered huge losses, reportedly losing $2.3 billion in one day.
• Oh, and we can’t forget to mention that Nvidia’s CEO Jensen Huang added another $7bn to his net worth. In one day. As you sit there reading this in your studio apartment, deciding between calling an Uber or taking the subway to save money.

elf Beauty Inc ($ELF) ↑ 20.50% ↑

• It turns out that consistently setting a lower and lower bar for yourself has some value. Anytime you cross that bar, the market throws a parade for you!
• elf earned $0.29 cents per share last quarter, or an increase of 80% (this sounds much more impressive). However you want to view it (which ultimately doesn’t matter), Mr. Market viewed this as a resounding success.
• elf’s earnings showed that even in a recessionary environment, beauty standards aren’t relaxing anytime soon. The company projects $705mn to $720mn in sales next year.

What's Rotten

Snowflake ($SNOW) ↓ 16.49% ↓

• Like a college student after a weekend bender, Snowflake’s stock is coming down hard. The culprit? You guessed it. Earnings reports always spoil the fun.
• So, here is an example of a strange, illogical fact about the market. Snowflake’s revenue was up 50% this year, and they forecasted another 34% for the next period. Sounds great, right? Although it looks great on the surface, the growth isn’t as fast as the market was expecting, so they punished the shares. This is in part because it hurts management’s credibility to predict stable revenue going forward, which analysts do not like.
• Snowflake’s cloud software business, which charges customers based on how much they use their products, is seeing a slight pullback in spending on information technology across the industry.
• Snowflake was once an IPO darling. Since going public during the tech craze two years ago, it has been one of the fastest-growing Enterprise SaaS companies. While the stock took it on the chin today, analysts across the bulge bracket banks remain optimistic for Snowflake’s future.

American Eagle ($AEO) ↓ 12.00% ↓

• Come with me on a trip down memory lane. It’s the mid-2000s, and American Eagle is at its peak. You’re in high school watching reruns of Dawson’s Creek. You have no concept of the stock market or what a stock even is. Life is Good.
• Fast forward to 2023. American Eagle’s stock took a tumble in its biggest intraday drop in 3 years. The company, unsurprisingly, reported that it anticipates a slowdown in spending at its stores for the foreseeable future.
• While you may be tempted to think that people have finally said “enough is enough” to walking around with embroidered pictures of eagles on their clothing (I’m genuinely surprised this company generates any sales at all at this point), this issue isn’t unique to American Eagle. The consumer retail industry is dealing with multiple setbacks from an overall slowdown in consumer spending as well as supply chain issues that impact the shipment of their merchandise.

Data Peel

Source

Thought Banana

The Market Is Short of Breadth

What do Apple, Amazon, Microsoft, Google, and Nvidia have in common? They are all mega-cap tech stocks that are up BIG this year. An average of 50%, to be exact.

Believe it or not, these 5 stocks account for a quarter of the S&P 500’s weighting, and they are responsible for nearly all of the index’s performance, driving 80% of the gains.

"...the S&P has become super top-heavy, with 5 stocks accounting for basically all of the index’s performance."

While an 8% YTD gain for the S&P and a 21% gain for the Nasdaq appear great on the outside, taking a look under the hood shows a market that severely lacks breadth.

A quick lesson in market cap weightings. An equal-weighted index means that each stock in the index has the same weight. So, Apple will have the same weight as the smallest stock in the index.

The S&P, on the other hand, is a market-cap-weighted index. This means that the weight of each individual constituent is influenced by its market cap.

This is how we arrived at the current situation where the S&P has become super top-heavy, with 5 stocks accounting for basically all of the index’s performance.

What does this mean for the everyday investor? For one, this is clearly not a broad-based rally, which is the true sign of a healthy economy.

"What’s happening now creates a false sense of security..."

What’s happening now creates a false sense of security that fears stemming from a banking crisis earlier in the year have abated. In reality, the flight to tech stocks away from other sectors highlights the underlying fear and uncertainty. In fact, only 3 out of the S&P’s 11 sectors are up this year.

The big takeaway: Stocks are having a tremendous year thus far, but it feels fragile. If tech stocks happen to fall out of favor, this market could drop expeditiously.

Banana Brain Teaser

Yesterday — The US Presidents made some horrible political decisions. They decided to hide from the mob coming after them by hiding in these five sentences. You are hired as a private sleuth to find each of them. Can you find their last names in these five sentences?

1. Ice pops taste the best on hot afternoons.
2. The weird dictator said that he would build magenta dams.
3. The man told his mother that he wouldn’t be home for dinner
4. I have to fill more of the holes our dog dug in the yard.
5. I was going to take the bus home, but I missed it.

Answers are indicated in capital letters:

1. Ice pops taste the best on hoT AFTernoons.
2. The weird dictator said that he would build magentA DAMS.
3. The man told his mother that he wouldn’t be home FOR Dinner.
4. I have to FILL MORE of the holes our dog dug in the yard.
5. I was going to take the BUS Home, but I missed it.

Today — It’s 50 bananas off the IB Interview Course for the first 3 correct respondents. LFG!

Two missiles are heading toward each other on a collision course. One missile is traveling at 9,000 miles per hour, and the other is traveling at 21,000 miles per hour. They are 1,317 miles apart at the moment. Without using pencil and paper, can you calculate how far apart the two missiles will be exactly one minute before they collide?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“Money is the opposite of the weather. Nobody talks about it, but everybody does something about it.” — Rebecca Johnson

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

Was this email forwarded to you? Sign up for the WSO Daily Peel here.