Something is happening. You can feel it. The dead days, as painful as they are, seem more discreet. Rising days show a shortage of supply. Most importantly, when we hit our earnings, many companies will buy back shares and, more than ever, that could matter. If there isn’t much “above”, i.e. not much to sell, the bulls could really let off steam.
The skepticism is certainly there. My wife Lisa has her own mezcal called Fosforo (which means “match” smoke in her phrase) and we were lucky enough to go to Chicago to sign bottles at two Binny’s, the area’s dominant liquor chain . She tells the story of the brand, I tell the fans about the stocks in this wonderful city and we take lots of photos.
We had huge crowds, including many grateful Club members, and I always make time to talk to everyone. Here’s what I found: Almost everyone was nervous about the stock market. They were unconvinced by Friday’s rally, when the S&P 500 and Nasdaq rose 2.37% and 2.31% respectively. They were hit by semiconductor stocks which, in turn, were hit by President Joe Biden.
I understand. The intellectual power of semiconductors can make even the slowest chips Advanced micro-systems (AMD) and Nvidia (NVDA) the target of White House bans. Maybe the Chinese will find a way to put them in the data centers. Or use them militarily. That might prove too difficult for President Biden to allow.
That’s why we’ve walked away from the group, despite the decline, and are instead focusing on many of our defensive names.
However, there was no appetite for our most recent purchases.
It is a mistake. Own a Johnson & Johnson (JNJ) or a Constellation Brands (STZ) is not exciting. But they have some of the strongest cash flow and best balance sheets in the industry. Johnson & Johnson really had a terrific quarter, and perhaps more importantly, we now know that its consumer products business is growing faster than any other spin-off from pharmaceutical companies. It counts because he will become the darling of a new group.
Constellation Brands was front and center at Binny’s, as the maker of Modelo Negra, Corona and Pacifico beer brands continues to take shares. CEO Bill Newlands is reinvesting conservatively. More money spent on cannabis or failed craft beers, which means more money returned to shareholders. I consider Canopy, the company’s pot game, a zero at this point. Constellation has so many strong brands to export that I’m still surprised they haven’t even made it to Victoria, a huge high-end seller in Mexico, and Bar San Miguel.
The stock that intrigues me the most at this point is Eli Lily (THERE IS). It feels remarkably like Merck (MRK) during his historic run in the late 80s when he discovered a link between cholesterol and heart disease and created a drug called Mevacor to lower cholesterol. It was a remarkable success and even more remarkable that no analysts were able to follow the numbers of a drug that they thought would never make more than $400 million. It and its ilk ended up being the best-selling set of drugs of all time, the biggest being Lipitor.
This time the drug is called tirzepatide, which has been shown to produce around 22% weight loss in obese adults. The name we will get to know is Mounjaro. That’s why Eli Lilly’s stock has been such a horse and why it was the only S&P 500 stock to hit an all-time high on Friday.
As members of the Club, I want you to think about this. In 1987, when Mevacor was pushing Merck ever higher, the stock was hit by the crash and then continued. I used to pray for it to come down so I could buy more. That’s what will happen when this drug gets fast-track approval from the Food and Drug Administration because obesity kills so many people. Currently, it is still in testing, but is being removed from the label. Once it’s fully approved, we’ll see a huge wave of analyst upside numbers.
But let’s step back for a moment and talk about the market as a whole.
First, we are in one of the most important seasonal patterns of the year. As my good friend and legendary tech Larry Williams reminded me, we are now past the most sore point. And while we may have a downturn in November, it’s still a good time to buy.
The Dow Jones Industrial Average is leading the way, Larry tells me. When I look at companies that have already reported, I like Home deposit (HD) and UnitedHealth (A H), Procter & Gamble (PG) and Johnson & Johnson. Financiers like Goldman Sachs (GS) and JP Morgan (JPM) could go much higher. Drugmakers like Merck and Amgen (AMGN) can go higher.
But the real industrial ones don’t seem to be in very good shape. caterpillar (CAT) could surprise with infrastructure orders. Honeywell’s (HON) the stock is way too depressed. McDonald’s (MCD) still manages to shoot the quarter. And I saw nothing wrong with IBM. Coca Cola (KO) should be good to go. Rather, it will be a collective move.
Much of what I see is based on the idea that we could see a spike in what the Federal Reserve is going to do to us and also a leveling off in hiring. The gauntlet we have to walk through — which includes the unemployment report and the Fed meeting (November 1 and 2, respectively) — may not matter as much as the midterm elections. Do we really think a politically neutral person like Federal Reserve Chairman Jerome Powell wants to signal more rate hikes on the eve of the election? If he says he will raise interest rates by 75 basis points and that’s it, that could trigger a rally in itself.
Coming out of the earnings season, I see new leadership from businesses that have been held back by ever-higher gross costs, especially transportation, plastics and paper, which will drop next year from headwinds to tailwinds. We’re also going to get a huge boost from this short term, as analysts still don’t factor in the monster investment power banks have when they take your deposits and go for risk-free investments.
But the best part of the next few weeks should be the realization that there hasn’t been any new shows for a year, and yet there’s still plenty of money looking for a home. Yes, the 2-year Treasury, yielding 4.46%, is incredible competition and I accept that. However, with stocks this low, you need to invest in at least high-quality healthcare and financial services while staying away from technology.
Of course, FAANG looks intriguing. netflix (NFLX) had an incredible quarter and can continue to rise, possibly much higher. Amazon (AMZN) has so much going for it to cut costs. Metaplatforms (META) is a dark horse at this point. Alphabet (GOOGL) should show real cloud growth and good YouTube advertising growth. And Apple (AAPL)? Let’s say it’s the trickiest of all. If it’s hit, we’ll all buy stocks.
So I like what I see. It’s different. The bear market is almost a year old.
Enough is enough.
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