“One step forward and five steps back” are seemingly the musical notes the stock market is dancing to as it tries to reconcile the correct rhythm between risk and value. But when will the punishment end? Investors who are in the bullish camp are eagerly waiting for that question to be answered. After painfully watching the effect rising inflation has had on the overall market, investors are scrambling to find any sign of optimism. This week revealed more of the same.
In the wake of the Federal Reserve’s 50-basis point interest rate increase on Wednesday, stocks declined for a third straight session to send the major benchmarks towards another weekly loss. The market continues to worry about a pending recession driven by higher interest rates increases from the Federal Reserve. On Friday the The Dow Jones Industrial Average fell 281.76 points, or 0.85%, to close at 32,920.46, but avoided the session's low of 32,654.59.
Declines in Apple (AAPL), IBM (IBM), Nike (NKE), Salesforce (CRM) and Microsoft (MSFT) sent the blue chip index back below a key support level which was thought to be the bottom. The S&P 500 Index dropped 43.39 points, or 1.11%, to close at 3,852.36, while the tech-heavy Nasdaq Composite gave up 105.11 points, or 0.97%, to end the session at 10,705.41. On a weekly basis, the Dow has fallen 1.7%, while the S&P 500 has lost 2.1%. With a weekly pullback of 2.7% the Nasdaq suffered the largest decline.
The sharp declines and surging volatility are in response to the Fed’s action on Wednesday to raise interest rates. Although the 50-basis point increase came in as expected, it nonetheless prompted investors to exit risk assets. Amid the recent volatility, there is still a “bright side” within this scenario as stocks appear oversold even as they have bounced strongly off the lows from three months ago. What’s more, all of the bad news appear to be priced into the valuations. The main question on the minds of investors continues to be regarding the recession. Can it be avoided?
The other question is, will there be a Santa Clause rally? Surprisingly, investors are already betting on the the Fed to start cutting interest rates sometime in the first quarter of next year, according to the CME’s FedWatch tool. It remains to be seen whether the decline in stocks continue. However, increasing exposure to the most beaten-down segments of the market such as Technology and consumer discretionary stocks may soon pay off.
On the earnings front, here are this week’s stocks I’ll be watching.
BlackBerry (BB) - Reports after the close, Tuesday, Dec. 20
Wall Street expects BlackBerry to lose 7 cents per share on revenue of $168.73 million. This compares to the year-ago quarter when earnings were 0 cents per share on revenue of $184 million.
What to watch: BlackBerry shares have plunged some 54% year to date, while dropping 52% over the past twelve months. And if you’ve bought and held the stock in the past three and five years, you’re likely down 25% and 60% in both spans, respectively. Growth in the company’s Enterprise Software Services segment (its largest business) has been the major cause of the punishment and it doesn’t appear as if things will immediately improve. Wall Street analysts have been busy slashing their projections ahead of Tuesday’s release, driven by prolonged weakness in the cybersecurity segment which has spans several quarters. The company is expected for a 8% year-over-year decline in revenue for the just-ended quarter. Notably, this would be the ninth consecutive quarter with declining revenue. Nevertheless, the management aims to hit revenue of $1.2 billion in fiscal 2027, believing it has an enormous opportunity to service customers in need of device security as the number of connected devices continue to grow. However, the company has not shown it can make significant cybersecurity strides to capture that sort of market share. Nevertheless, with BlackBerry stock still down so much this year, the market will want to see whether its fundamentals can justify a higher price.
Nike (NKE) - Reports after the close, Tuesday, Dec. 20
Wall Street expects Nike to earn 65 cents per share on revenue of $12.56 billion. This compares to the year-ago quarter when earnings came to 83 cents per share on revenue of $11.36 billion.
What to watch: With the stock down 40% year to date and 35% over the past twelve moths, it’s hard to argue that Nike might be the most undervalued name in retail apparel, especially when compared to the company’s long-term potential with its Direct-to-Consumer (DTC) business. That segment is not only more profitable business than wholesale, it also gives Nike more pricing power while allowing the company to affect the consumer buying experience. In fiscal 2022, the DTC business generated $18.7 billion, rising 14% year over year, thanks to increases in digital sales. As it stands, DTC now accounts for 43% of the company’s total revenue, compared to 27.5% six years ago. This suggests that the decline in Nike’s stock does not reflect the operational excellence the company has displayed over the past several years. That discount may soon end, according to Citigroup analyst Paul Lejuez. The investment firm recently place Nike on a 30-day Positive Catalyst Watch calling for a near-term rally after earnings, citing recent sales and margin momentum. Lejuez believe that consumers continue to respond well to Nike’s promotions, saying that not only have prior issues with excess inventory gotten better, the company has also seen improvements in China, which has relaxed some of its COVID restrictions. On Tuesday the stock will react as expected if the company issues positive guidance.
Micron (MU) - Reports after the close, Wednesday, Dec. 21
Wall Street expects Micron to lose 12 cents per share on revenue of $4.12 billion. This compares to the year-ago quarter when earnings came to $2.16 per share on revenue of $4.3 billion.
What to watch: Driven by the sharp and sustained decline of memory chip prices, shares of Micron have been in a steady downtrend over the past year, falling some 40% in twelve months, while plunging almost 45% year to date. Aside from weak demand and falling prices, the company has also dealt with supply chain headwinds in a memory market which were already highly volatile to match fluctuations with demand. And it doesn't appear as if things will get immediately better. Deutsche Bank analyst Sidney Ho recently downgraded Micron, citing significant risks to an oversupply of products in the market at a time when cloud demand has started to "weaken." The analyst lowered his rating on Micron to Hold, noting that "We believe investor optimism that the business will soon reach a cyclical trough now looks premature.” That said, the stock is attractive relative to its historical trends. The shares are currently trading at roughly 1.2 times book value. Plus, management is expected to cut operating expenses by up to 40%, according to Citigroup analyst Atif Malik. These cost cuts should help Micron achieve its profitability goals as it waits for demand and price stability to return. On Wednesday these are among the topics the company will need to discuss, along with issuing positive guidance that instill confidence that memory pricing can rebound in the quarters ahead.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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