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WEEK AHEAD
Feb 27-Mar 3
With interest rate uncertainty weighing on stocks as the S&P 500 returned -2.66% for the week and no economic sentiment change, Sowell’s tactical signals rest comfortably in a neutral position (60/40). Future guidance of any change will weigh heavily on the FOMC and its interest rate stance.
Another week of the major markets being rocked by fear of rising inflation and interest rates continue to spook stocks and bonds. News of Personal Spending coming in at 1.8%, above consensus estimates, and release of the FOMC Meeting Minutes continued to put pressure on rising interest rates. An extract from the FOMC Minutes, “Members agreed that the Committee seeks to achieve maximum employment and inflation at 2 percent over the longer run. In support of these goals, members agreed to raise the target range for the federal funds rate to 4½ to 4¾ percent. Members anticipated that ongoing increases in the target range would be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” signaled to the market more rate increases are forthcoming. Even with most companies last week reporting better than consensus earnings, their stocks all succumbed to forward guidance of uncertainty. Only companies like Intuit (INTU +3.82%) and NVIDIA (NVDA +8.87) posted positive gains for the week on explicit positive forward guidance. The outlook for the week will largely focus on the consumers and the state of major retailers reporting, including Costco, Dollar General, Kohl’s, Nordstrom, and Target. Investors will continue to anticipate the likelihood of rising interest rates as Durable Goods, Wholesale Inventories, and Unit Labor Costs report hoping that bad news is good news.
“One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect. Controlled businesses are a different breed. They sometimes command ridiculously higher prices than justified but are almost never available at bargain valuations. Unless under duress, the owner of a controlled business gives no thought to selling at a panic-type valuation” – Warren Buffett, Berkshire Hathaway Annual Report 2022, February 25, 2023
It doesn’t all have to be about FAANG: Invest in Businesses
Over the last five years, most investors have been bombarded with the constant hype around the FANG names, Facebook, Apple, Netflix, and Google. To be straight, there is no argument that these companies are generational and have products or businesses that are more than apparent in their impact and success. In fact, these FANG names represent very well the “market,” and anyone holding the S&P 500 should feel comforted that they didn’t miss out, and these names and others of the same ilk represent upwards of 25%+ of the index.
However, over the last five years, companies like United Rentals (URI) have outpaced FANG with a 175% approximate return as the world’s largest equipment rental business. Equipment used for construction, heavy and light, and other tools and services for the massive construction and infrastructure markets hold almost 13% market share generating about $12 billion in revenues and $5.4 billion in EBITDA. More importantly, a company like this brings diversification and elements of value with a Forward P/E of 10.4x and a modest dividend to a portfolio. We see the value prop of renting versus owning large equipment as a huge benefit. Companies benefit by conserving capital and increasing profitability by paying for equipment only when needed. Throw in the cost of carry like maintenance and insurance, and renting becomes quite compelling. URI has grown through acquisition and offers high free cash flow. Investors might see this as a name to sink their fangs or teeth into for the future
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.