Welcome to your new week.
Letโs kick things off with some โreal talkโ from a very important business leader.
Jamie Dimon โ the CEO of JPMorgan Chase โ has warned that interest rates could increase significantly beyond their current range of 5.25%-5.5%.
In an interview with The Times of India โ he said that nobody knows the true risks of a hard landing for the US economy.
โโฆrates may go up more. But I hope and pray there is a soft landingโฆ
I am not sure if the world is prepared for 7%. I ask people in business, โare you prepared for something like 7%?โ The worst case is 7% with stagflation. If they are going to have lower volumes and higher rates โ there will be stress in the system.
We urge our clients to be prepared for that kind of stress. Warren Buffets says that you find out who is swimming naked when the tide goes out. That will be the tide going out. These 200bps will be more painful than the 3% to 5%.โ
โ Jamie Dimon
Portfolio Updates:
Itโs a new month, which means new capital to deploy! As I mentioned a few weeks ago, Iโll be spending the next few weeks adjusting the portfolio in the following ways:
Double down on the biggest winners w/ clear momentum
Adjust / eliminate positions in clear losers I was wrong about
Open new positions in โboringโ businesses
When I say โboring businesses,โ Iโm talking about companies like A. O. Smith Corporation (AOS) โ a water heater company. I donโt know about you, but I like to take hot showers in the morning and I donโt think Iโm in the minority on that one.
Expect a detailed breakdown of a few more โboringโ businesses later this week.
Also, as a quick update on my Tesla covered call position โ itโs still going strong! I was considering โrollingโ my position forward through November 17, allowing me to collect another ~$700 or so in premium, but I think Iโm just going to let the contract expire before writing another.
With that being said, I want to remind everyone that these covered call option contracts can be done with any single stock you own more than 100 shares of. Iโve had a few people email me with questions about this strategy and Iโve helped walk them through the process. Feel free to do the same and Iโll help as best I can!
Finally, cryptocurrency. We saw Chainlink (LINK), my largest crypto position, move up about +30% in value over the last few weeks in anticipation of their SmartCon 2023 Web3 conference.
Iโm not the best with technical analysis, but it seems to me like the last time LINKโs monthly MACD crossed โbullishโ was in June of 2020 โ when the price saw a 10X explosion over the coming year.
Obviously this isnโt me trying to predict the price of something Iโm inherently bias towards โ but Iโm very optimistic about this one for the coming 18-24 months.
Week in Review โ Too Long, Didnโt Read:
Costco printed $6.7 billion in free cash flow, Nikeโs revenue lagged in both North America and China, Congress puts a Band-Aid on the government shutdown, Amazon is heading to federal court, small business bankruptcies are on their worst pace since Covid began, the recent Core PCE reading is helping support J-Powellโs rate hike pause, and the famous 20-City Home Price Index shows half of the cities reaching all-time-highs.
Key Earnings Announcements:
Costco printed $6.7B in free cash flow as Nikeโs revenue lags expectations.
Costco Wholesale (COST)
Key Metrics
Revenue: $78.9 billion, an increase of +10% YoY
Operating Income: $2.8 billion, an increase of +11% YoY
Profits: $2.2 billion, an increase of +15% YoY
Earnings Call Callout
โWithin the sales of big ticket discretionary, appliance were up over 30% in the quarter.
Second, I've gotten a couple of calls that people have seen online that we've been selling 1-ounce gold bars. Yes, but when we load them on the site, they're typically gone within a few hours and we limit two per member.
And lastly, I'll point out Costco Next. We continue to grow that. We currently have 62 suppliers on costconext.com, and we're continuing to onboard additional ones in many product areas, from home improvement to apparel, to pet, to home and kitchen, to electronics and accessories, to sports and bicycles and toys and the like.โ
My Takeaway
Costco doing what Costco does best โ thereโs a reason itโs a favorite of Warren Buffettโs. Despite the overarching retail industry being in a choppy holding pattern given lingering economics concerns and consumer uncertainty (higher interest rates, student loan repayments, etc.) the long-term business of Costco remains resilient.
For example, US and global traffic consistently remain positive and total members continue to grow nicely on a year-over-year basis.
Additionally, the companyโs balance sheet is clean as a whistle and theyโre absolutely printing free cash flow for their investors ($6.7 billion this quarter โ $900 million more than expected).
I remain a shareholder of this company for a few reasons โ their product mix (52% food / consumables) ensures theyโre not relying too heavily on discretionary spending for their customers, their membership base is sticky (93% US renewal rate), and without fail they continue to prove to the world they deserve a slice of your wallet (increased traffic growth despite rising economic concerns).
Now letโs be clear โ the companyโs stock price has traded at 39X price-to-earnings on average over the last several years, a premium to say the least. But you pay for quality, and thatโs what youโre buying with Costco.
Nike (NKE)
Key Metrics
Revenue: $12.9 billion, an increase of +2% YoY
Operating Income: $1.6 billion, compared to $1.8 billion last year
Profits: $1.5 billion, flat YoY
Earnings Release Callout
โQ1 offered proof of what NIKE can deliver when we connect great innovation, great storytelling and great marketplace experiences to consumers.
Moving forward, we are laser-focused on scaling these successes with greater consistency and speed as we continue to integrate and streamline our business. This is how weโll extend our leadership position and drive growth over the long-term.โ
My Takeaway
If I could summarize this quarterโs results in one sentence, it would be โbetter than feared, but not a narrative changing quarter.โ
Total revenue came in a bit light when compared to expectations, with North America lagging sequentially โ as well as China. However, the company managed to report better gross margins than last quarter supported by both better pricing on products and leaner operating costs. Their lower tax rate this quarter also helped lift their year-over-year profits out of the red.
Donโt get me wrong, I can appreciate the brand strength of Nike as well as their โathleisureโ tailwinds โ but I think the macroeconomic headwinds in both the US and China are going to negatively impact Nike in the near-term.
With that being said, Iโm on the sidelines and believe there are better places to park capital over the coming 12-18 months.
Investor Events / Global Affairs:
Congress avoids a shutdown (for now), Amazon gets SERVED, and small business bankruptcies continue to rise at an unsettling pace.
Congress Punts Government Shutdown to November
Congress has temporarily averted a government shutdown by voting to fund federal operations until mid-November.
However โ this short-term solution didnโt address contentious issues such as funding for Ukraine, immigration policy, or overall government spending.
The upcoming weeks will be crucial for resolving these disputes, especially regarding support for Kyiv and government spending levels. There is also uncertainty surrounding House Speaker Kevin McCarthy's leadership role โ as some Republicans are turning up the pressure to oust him as the partyโs leader.
The threat of a government shutdown looms, with the possibility of deep cuts to social programs and regulatory agencies being a major point of contention.
Ben Harris of the Brookings Institution made a great point about a government shutdown hurting the Fedโs ability to make decisions:
โThe thought of the Fed trying to make such an important, critical decision without big pieces of information is just downright terrifyingโฆ Itโs like a pilot trying to land a plane without knowing what the runway looks like.โ
Amazonโs (AMZN) Big Legal Issues