Is the stock market prepared to finally – and sustainably – climb out of its recent doldrums?
The Dow Jones Index did snap back last week and Monday, although the index is still down for 2022. Meanwhile, the tech-heavy Nasdaq Composite Index is down around 10% for the past month, with technology companies burdened by increasing inflation and an ongoing supply chain crisis.
Things have unraveled to the point where some long-time market watchers say the Federal Reserve won’t lift a finger to help, even if stocks slide further downhill.
This from TheStreet’s Dan Weil.
“The Federal Reserve is prepared to let the stock market drop another 15% to 20% before it acts in any way to stem the decline, says Greg Jensen, co-chief investment officer at Bridgewater Associates, the world’s biggest hedge fund,” told Bloomberg.
A further market decline won’t bother Federal Reserve policy makers, who tend to take the long view in moderate market declines.
“Some decline in asset prices is not a bad thing from the Fed’s perspective, so they’re going to let it happen,” Jensen said. “At these levels, it would take a much bigger move to get the ‘Fed put’ into the money. They’re a long way from that.” The “Fed put” is the idea that the central bank will bail out a plunging stock market by easing policy.
The recent market decline has been “mostly healthy,” as it’s “deflated some of the bubbles,” such as cryptocurrencies, Jensen said.
Looking forward, investors can expect the Fed to raise interest rates five times this year, according to the CME Fed Watch Tool.
“Before the Fed’s meeting, which ended Wednesday, the consensus among many economists and investors was for four rate hikes this year,” Weil reported. “But Fed Chairman Jerome Powell issued hawkish commentary after the meeting.”
With traders continuing to monitor the market closely, here are some of the stocks TheStreet’s investing experts are looking at this week.
Boeing
Boeing (BA) $192.18. 5-Day Performance (-)6.67%. Airline stocks have been crushed, as have travel trends – so it’s no surprise that Boeing has been hit hard too.
Still, things could have been worse for BA.
“Despite the booming Covid case count due to the omicron variant, the airline stocks actually held up pretty well until recently,” said TheStreet’s Bret Kenwell. “Boeing stock was also trading pretty well, but it’s now working on its seventh straight lower close. At last week’s low, the stock was down over 16% from the previous week’s high.”
The broader picture isn’t exactly rosy.
“Bears will argue that it will be years before the global travel trends return to normal and even longer before the airlines are in a position to start placing significant orders for new jets,” Kenwell said.
Additionally, the company did book a massive loss in the most recent quarter, which is rubbing investors the wrong way today..
“Even before this latest spill, Boeing stock has struggled with the 50-week moving average, as well as the $230 area. That’s been the case for months and in fact, really for all of the fourth quarter,” noted Kenwell
“Breaking below the $205 to $207 area, investors find Boeing stock below the 10-week, 21-week and 50-week moving averages,” Kenwell said. “The stock is also below the $200 level.”
That leaves the stock in an interesting area, as Boeing struggles to find its footing.
“If Boeing can reclaim $200, then the $205-ish area will be back on watch, but it’s really the 10-week and 21-week moving averages that it needs to reclaim,” Kenwell added. “Below those marks and the trend remains unfavorable for the bulls. Above them could put the 50-week moving average and $225 back in play.”
ACCO
ACCO Brands (ACCO) $7.95. 5-Day Performance (-3.17%). ACCO Brands is one consumer brand company that has a history of strong rebounds from its declines. That tendency may steer particularly anxious investors to the stock.
Real Money’s Paul Price said the stock can serve as both a trading vehicle and a longer term investing.
ACCO Brands appears to be exactly that type of holding. The company is behind such brands as Barrilito, Derwent, Leitz, and Mead.
“You can sometimes find a stock that looks terrific as a trading vehicle, yet also appears poised for substantial gains over time,” he said.
In recent years, ACCO’s five most recent multi-month declines have averaged losses of 49.1%, Price pointed out. However, the five rebounds averaged a much better 142.7%. “Clearly, buying ACCO after major drawdowns has been a proven way to generate excellent profits,” he said.
“ACCO just finished a fabulous year,” Price said. “If fourth-quarter results come in as expected, earnings per share will have grown from $0.70 in Covid-ravaged 2020 to about $1.30 - $1.35 in 2021. The real question is not why it's down 17%, but why it is not much, much higher. At $8.10 the shares sold for just 6.1-times trailing earnings.”
Price sees ACCO Brands as having a strong business model and good fundamentals.
Yet at the same time, its stock price has swung within a range of nearly 20 percent over the past year. This makes it a good stock for traders who want to turn a quick profit and investors who want to grow their portfolio over time.
“The best way to play appears to be outright purchase of shares. Selling puts with attractive break-even points is merely the icing on the cake,” Price said.
Microsoft
Microsoft (MSFT) $309.85. 5-Day Performance 4.01%. Microsoft shares are down around 8% for the new year.
Like most technology companies these days, Microsoft finds itself in turbulent waters from a share price point of view. But Real Money’s Stephen Guilfoyle sees abundant upside in the software giant going forward.
The numbers tell the tale.
For the firm's fiscal second quarter, Microsoft posted GAAP EPS of $2.48 on revenue of $51.7B. These numbers were good enough for earnings growth of 21% on revenue growth of 20%. Needless to say, Microsoft beat Wall Street's expectations for both the top and bottom lines. Operating income increased 24% to $22.2B. Net income grew to $18.8B.
“The numbers behind the numbers show that commercial bookings grew 37%, Microsoft (total) cloud revenue grew 32%, while cloud-based gross margin ticked slightly lower, down to 70%,” Guilfoyle said. “Operating expenses increased 14%, while capital expenditures printed above expectations. This led to a free cash flow miss. Free cash flow hit the tape at $8.6B, which was below the $10B that Wall Street was looking for. Keep in mind that the firm did return $10.9B to shareholders in the form of share repurchases and dividends.”
“This was up 9% from the year ago period,” he added.
Guilfoyle breaks down Microsoft’s latest quarterly financials as follows:
- Intelligent Cloud was top dog this quarter in terms of revenue generation. The segment experienced 26% sales growth, producing $18.3B. Operating income increased 26% to $8.2B. Server products and cloud services revenue increased 29% driven by Azure and other cloud services.
Azure grew 46%, which while certainly a fantastic number, fell short of some whispers that were up around 48%. This along with the rising firm-wide operating expenses were probably what caused the downside trend last week, before the conference call that led to the shares' dramatic overnight rally.
- Productivity and Business Processes experienced 19% revenue growth to $15.9B, and 34% growth in operating income to $7.69B. This is the business unit that includes Office Commercial and cloud services, Office 365, Office Consumer and cloud services, Dynamics, and LinkedIn. All of these businesses contributed well to the overall segment sales pie.
- More Personal Computing produced $17.5B in sales, up 15% from a year ago. This unit houses Windows, Windows commercial products and cloud, Surface, Search & Advertising, and Gaming/Xbox. Most of these units were strong, especially advertising and Windows. However, gaming in total was up 8%, with XBox services up 10%. Xbox hardware only grew 3% due to supply chain issues.
By and large, Guilfoyle sees another incredibly smooth quarter posted by a firm that has become a model of consistency, as well as a cloud-facing juggernaut under CEO Satya Nadella's leadership.
“The only "almost weak" spot was in gaming, and that was beyond the firm's control, and on top of that, the firm is addressing not only that weaker spot, but gaming’s' transition to the cloud through the recently announced $68.7B plan to acquire Activision Blizzard (ATVI),” Guilfoyle noted. “This deal, when closed (in 2023) would make Microsoft number three in the world in gaming.”
As of January 31, MSFT remained closer to being technically oversold than overbought, meaning that this rally (depending on the Fed) could potentially have legs.
“The stock bottomed on January 24 at very close to the 50% retracement of the November 2020 through November 2021,” gain Guilfoyle said. “That spot in November, 2020 was the last dip prior to MSFT breaking out of what was a period of consolidation at the time.”
Currently, MSFT shares have retaken their 200-day SMA, which likely gets more portfolio managers on board than any other single moving average.
“The 21-day EMA could provide some resistance, but I would see the 50-day SMA at $325 as the next significant hurdle prior to contending that triple top reversal at $350, which is where I would think the algos might come out in force,” Guilfoyle added.
