The Longhorn Investment Team Weekly Insight: Halloween Edition (11/1/19)

Hope everyone had a wonderful Halloween and are ready to enter the colder months of the year! It looks like the market this week has been doing well, as seen below:

S&P 500: 3,066.91 (+29.35, +0.97%)

DJI: 27,347.36 (+301.13, +1.11%)

Nasdaq: 8,386.40 (+94.04, +1.13%)

The biggest contributor to a great Friday market close?

On Friday, the U.S. Bureau of Labor Statistics released their October end-of-month report on job statistics, and investors lost their minds. 128,000 jobs were just added to the economy with wages up 3% yoy. In the face of slowing business investment and a massive labor strike with GM autoworkers last month, investors were shocked by the impressive job gains. Importantly, the labor force participation rate rose to 63.3%, the highest it has been since 2013. These results have encouraged investing and optimism about the future, allowing for the market to perform well overall. Remember that yield curve we were freaking out about earlier? It’s returning to its normal upward-pointing shape as investors are more and more willing to turn to riskier assets.

However, despite the market performing well, the economy grew only 1.9% this last quarter compared to the White House forecast of 3%. This may be a sign of more foreboding economic news…

It looks like manufacturing is down this month.

According to the Institute for Supply Management (ISM), manufacturing slumped last calendar quarter even after slight improvement since September. This indicates a contraction in the sector, as people are more cautious in investing in manufacturing due to the current political climate. The report explains that demand, prices, new orders, and productions were down overall. Experts point to the trade war as the cause. Opponents to the trade war claim that by finalizing a deal with China and removing all the tariffs, manufacturing will rebound.

We’re just gonna manufacture a transition real quick and discuss some highlights from tech and energy earnings from the past week . . .

Did Google just come for Apple and the Apple Watch?

This week, Google just announced its acquisition of Fitbit for $2.1 billion. Acquiring Fitbit allows Google the opportunity to strengthen its foothold in the wearables market. Although Google did work on Wear OS for Android smartwatches, it hasn’t developed hardware to compete in the market. Using Fitbit’s developed hardware would allow Google to further develop the technology and release it into a market where Android owns a 75% market share of the smartphone OS market.

Another tech company worth watching…

Things are looking up for Alibaba.

As of this week, Alibaba’s stock is up almost 30% sine the start of 2019. Baba got another boost on Friday thanks to their stellar earnings call, which stated a yoy revenue growth of 40%. To make the report even spicier, cloud segment revenues increased 64% yoy (Amazon Web Services only grew 35%). Most investors consider BABA to be the Chinese Amazon, making them an enticing way for investors to get exposure to foreign markets. Alibaba’s core consumer business still accounts for 85% of revenues.

Speaking of earnings…

Earnings and Energy

This week, the two energy giants ExxonMobil and Chevron announced their Q3 earnings, and the result is quite surprising to investors. Currently, the industry is facing lower prices and higher costs due to company and geopolitical conditions. However, for Chevron, third-quarter earnings exceeded investor expectations, in part due to the strong production that Chevron has had over the last few months. Additionally, although ExxonMobil suffered a 49% decline in third-quarter earnings, earnings exceeded analyst expectations due to the 4% increase in production in the Permian Basin. In fact, when looking at all the major oil companies, every company beat earnings expectations but fell short of revenue expectations and year-ago earnings.

Low oil prices can actually be a good thing for world’s biggest oil producers because as smaller oil companies go out of business (they can’t whether a storm of low prices for very long) their land is acquired by oil giants for relatively cheap. As a result, the largest oil companies are able to replete their oil production without spending as much on land acquisitions.

Does this mean we should all run to invest in energy? Maybe. However, it is important to note that these companies have been experiencing a downward trend in revenues, and it may continue to decline. Additionally, keep in mind that over the last 10 years, the industry has repeatedly faced long-term bearish patterns and there may be additional risk if exposure is taken.

Energy wasn’t the only industry to have earnings calls this week…

Pinterest kills earnings and tanks

Pinterest just announced its Q3 earnings, and both revenue and earnings surpassed investor expectations. They even raised guidance for the next quarter a little. This is in part to an expanding user base and improved advertising platform.

Pinterest has developed their platform by making it more shopping-friendly for users, optimizing the machine learning algos built into their features, and by adding new features such as dark mode. Honestly, the folks here at lit have been waiting for Pinterest dark mode for years. Finally, we can check out macaroni art at 2:00 am without straining our corneas. Overall, it is clear that Pinterest has taken an active approach in improving the user experience.

Their stock tanked 17% after the earnings call. Why? Because the stock wasn’t cheap. Some see this as a case of the company doing fine, but the stock being overvalued because it was overhyped. Overhyped and 2019 IPO stock are synonyms at this point, so it makes sense that Pinterest could fall even after a solid earnings call (the market was valuing them at 10x their revenue before the selloff).