Something’s happening. You can feel it. The down days, as painful as they are, seem more muted. The up days show a dearth of supply. Most important: When we get through earnings, we will have plenty of companies buying back shares and, more than ever, it might matter. If there is not much “above,” meaning not a lot for sale, the bulls could really romp.
The skepticism is certainly there. My wife Lisa has her own mezcal called Fosforo (which means “match” for the smoke in her expression) and we had a chance to go to Chicago to do some bottle signing at a couple of Binny’s, the dominant liquor chain in the region. She tells the story of the brand, I talk stocks to fans of that wonderful town and we take a lot of pictures.
We had tremendous 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 weren’t persuaded by Friday’s rally, when the S&P 500 and the Nasdaq rose 2.37% and 2.31%, respectively. They have been hurt by the semiconductor stocks which, in turn, have been hurt by President Joe Biden.
I get that. The intellectual power of semiconductors may make even the slowest of chips from Advanced Micro Devices (AMD) and Nvidia (NVDA) the target of White House bans. Perhaps the Chinese find a way to put them in the data centers. Or use them militarily. It might prove to be too much for President Biden to allow.
That’s why we have backed away from the group, despite the decline, and instead are focusing on many of our defensive names.
There was no appetite for our most recent buys, however.
That’s a mistake. Owning a Johnson & Johnson (JNJ) or a Constellation Brands (STZ) isn’t exciting. But they have some of the strongest cash flows and best balance sheets in the business. Johnson & Johnson truly had a terrific quarter and, perhaps more importantly, we know now that its consumer products business is a faster grower than any of the other spinoffs by drug companies. That matters because it will become the darling of a new group.
Constellation Brands was front and center at Binny’s, as the maker of beer brands Modelo Negra, Corona and Pacifico keep taking share. CEO Bill Newlands is reinvesting in a conservative way. No more money spent on cannabis or dud craft beers, which means more money returned to shareholders. I am valuing Canopy, the company’s pot play, as a zero at this point. Constellation has so many strong brands to export that I am always surprised that they haven’t even gotten to Victoria, a huge high-end seller in Mexico, and in Bar San Miguel.
The stock that most intrigues me at this point is Eli Lilly (LLY). It feels remarkably like Merck (MRK) during its historic run in the late 80s when it discovered a linkage between cholesterol and heart disease and created a drug called Mevacor to reduce cholesterol. It was a remarkable success and even more remarkable that not a single analyst was able to keep up with the numbers from a drug they thought would never do more than $400 million. It and its ilk ended up being the best-selling set of drugs of all time, with the biggest being Lipitor.
This time the drug is called tirzepatide, which has shown to produce about a 22% weight loss in adults with obesity. The name we will get to know is Mounjaro. It’s why Eli Lilly’s stock been such a horse and why it was the only stock in the S&P 500 to hit an all-time high on Friday.
As Club members I want you to think about this. Back in 1987 when Mevacor was powering Merck ever higher, the stock got hit by the crash and then kept right on going. I used to pray it would come down so I could buy more. That’s what will happen as this drug gets fast track approval by the Food and Drug Administration because obesity is such a killer for so many. Right now it is still in trials, but it is being taken off label. Once it gets full approval, we will see a huge wave of number bumps from analysts.
But let’s step back for a second and talk about the entire market.
First, we are in one of the most important seasonal patterns of the year. As my good friend and legendary technician Larry Williams reminded me, we have now passed the point of the most pain. And while we could have a downturn in November, this is still the right time to buy.
The Dow Jones Industrial Average is leading the way, Larry tells me. When I look at the companies that have reported already, I like Home Depot (HD) and UnitedHealth (UNH), Procter & Gamble (PG) and Johnson & Johnson. Financials like Goldman Sachs (GS) and JPMorgan (JPM) could go much higher. Drugmakers like Merck and Amgen (AMGN) can go higher.
But the actual industrials don’t seem in all that great shape. Caterpillar (CAT) could surprise with infrastructure orders. Honeywell’s (HON) stock is way too depressed. McDonald’s (MCD) always manages to pull the quarter out. And I saw nothing wrong with IBM. Coca-Cola (KO) should be good to go. It will be more of a group move.
A lot of what I see is predicated on the idea that we may be seeing a peak in what the Federal Reserve will do to us and also a stabilization in hiring. The gauntlet we have to go through — which includes the unemployment report and the Fed meeting (Nov. 1 and 2, respectively) — may not matter as much as the midterm elections. Do we really think a political neutral person like Federal Reserve Chair Jerome Powell wants to signal more rate hikes on the eve of the elections? If he says he will do an interest rate hike of 75 basis points and that’s all, that could cause a rally in itself.
Now coming out of earnings season, I do see new leadership from the companies that have high been stuck with endlessly higher raw costs, especially transports and plastic and paper, which will next year turn from headwinds into tailwinds. We are also going to get a huge boost from that short-end, as the analysts are still not factoring in the monster investing power that the banks have as they take your deposits and go with risk-free investing.
But the best part of the next few weeks should be the realization that there has been any new issuance for a year, and yet there is still plenty of money looking for a home. Yes, the 2-year Treasury, yielding 4.46%, is amazing competition and I embrace it. However, with stocks this low, you have to invest in at least some high-quality health care and financials while staying away from tech.
Sure, FAANG seems intriguing. Netflix (NFLX) had an amazing quarter and can keep going higher, maybe much higher. Amazon (AMZN) has so much going for it when it comes to costs coming down. Meta Platforms (META) is a dark horse at this point. Alphabet (GOOGL) needs to show some real growth in the cloud and some good growth in YouTube advertising. And Apple (AAPL)? Let’s just say it is the trickiest of all. If it gets hit, though, we will all be buying shares.
So, I like what I see. It does feel different. The bear market’s almost a year old.
Enough is enough.
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