🐉 How to Play the End of Zero COVID
Plus, value is still in vogue.
Happy Sunday to everyone on The Street.
As we kick off another crazy year, we’re assuming many of you are taking a look at your personal portfolio to see what worked and what didn’t in 2022. If you own your own business or work in the FP&A department of a larger corporation you’re probably examining the successes and failures of that enterprise as well in order to get ready for the next 12 months.
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CJ Gustafson, the author of Mostly Metrics, wrote the first story below titled, "Financial Metrics Worth Revisiting As the Year Comes to An End," so you can get a sample of what to expect. For the nerds out there (us included) be sure to check out this post as well: The Death of the DCF Model.
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US stocks rose Friday as the December jobs report gave investors confidence that inflation could be leveling off.
While the economy added 223,000 jobs last month, which exceeded expectations, average hourly earnings fell from November. Given wage growth is a key driver of inflation, this particular data point boosted sentiment on Wall Street.
Another economic report gave the market a boost as well, when the ISM services index for December showed the sector contracted last month. Some on Wall Street think this shows the Fed’s rate-hike campaign is helping to cool the economy.
In response to the December jobs report, bond yields fell. Meanwhile, in the commodities space, oil prices rose, continuing their rally after starting off the first few trading sessions of the year on a down note. With the fourth-quarter corporate earnings season kicking off in earnest this week, investors will be closely watching companies’ bottom lines.
Speaking of corporate headlines, Tesla’s stock came under pressure to close out the week after a report said the EV giant experienced a sharp drop in deliveries in China.
Southwest Airlines said it expects to post a loss for the fourth quarter as a result of the airline’s holiday travel meltdown. Between Christmas and New Year’s Eve, Southwest canceled more than 16,700 flights, shaving between $725 million and $825 million off its bottom line.
On the flipside, Costco reported upbeat December sales, giving the stock a boost after its share price hit a half-year low in premarket trading Friday. Analysts consider this a positive sign for retailers and a turnaround from November’s trends.
For the week as a whole, both the Dow Jones Industrial Average and S&P 500 rose 1.5%. The Nasdaq Composite rose 1% helping all three major averages finish in positive territory for the first trading week of the New Year.
Tomorrow, the Federal Reserve will publish November’s consumer credit figures. In October, consumer credit increased at a seasonally-adjusted rate of 6.9%. Revolving credit, such as credit cards, rose 10.4%. Also watch for the New York Fed’s December inflation expectations survey.
Tuesday, the December NFIB small business optimism index is due. In November, the index rose slightly to 91.9, exceeding expectations. Still, it marked the 11th straight month in which the figure remained below the 49-year average of 98. Business owners identify inflation as the most persistent problem. November’s revised wholesale inventories will also be released.
Wednesday, Wall Street’s focus will shift to mortgages, as the MBA releases its weekly mortgage application figures, refinance and marketing indexes, and the average rate on a 30-year fixed mortgage. Mortgage volume plummeted at the end of December as rates rose yet again.
Thursday, the market will be paying close attention as the latest inflation print is due. In November, the CPI showed prices rising 7.1% year-over-year, but just 0.1% from October, leading to some optimism that inflation may have peaked. Inflationary data is key to predicting the Fed’s plan for 2023. Also watch for weekly jobless claims and the December federal budget.
Friday, the University of Michigan will release its January consumer sentiment index, as well as this month’s consumer inflation expectations. The December import and export price indexes are also set for release.
Tomorrow, lighting company Acuity Brands (AYI) will announce its fiscal first-quarter results. Last month, the firm reported it entered into an agreement with Dhyan Networks to integrate the tech company’s software. Also scheduled to report are cannabis company Tilray Brands (TLRY), warehouse membership company PriceSmart (PSMT), and lubricant manufacturer WD-40 (WDFC).
Tuesday, supermarket giant Albertsons (ACI) will publish its fiscal third-quarter results. Later this month, the Washington State Supreme Court will decide whether the company is allowed to pay out a $4 billion dividend to its shareholders, ahead of a planned merger with Kroger (K). Beleaguered retailer Bed Bath & Beyond (BBBY) is also scheduled to report earnings, after disclosing last week that it is considering bankruptcy, as its cash reserves run low.
Wednesday, KB Home (KBH) will share its fourth-quarter earnings. This will provide the market with insight into the state of home building, which has fallen off as mortgage rates have risen, dampening demand.
Thursday, fiber-optic cable manufacturer RF Industries (RFIL) is scheduled to publish its latest quarterly data. Last month, the company offered upbeat guidance regarding its full-year sales figures.
Friday closes the week off with a busy day in the banking sector, as Bank of America (BAC), Bank of New York Mellon (BK), Wells Fargo (WFC), First Republic Bank (FRC), and Citigroup (C) are all set to publish results.
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Financial Metrics Worth Revisiting As the Year Comes to An End, And Another One Begins
The post below was written by CJ Gustafson at Mostly Metrics. For more on financial metrics and business models click here to sign-up.
The Rule of 40
- Trying to measure efficiency when you’re losing money can be a mixed bag of burritos.
- Some businesses raise a ton of money so they can prioritize growth at all costs (see: Gitlab).
- Other businesses are designed to run like a money printer, spitting out free cash flow and fat dividends for shareholders (see: Qualcomm).
- But for many businesses, the truth lies somewhere in the middle. Some investors validate a “good” balance between growth and profitability by checking if the revenue growth rate plus profit (or loss) rate exceeds 40%.
- Rule of 40 = YoY ARR Growth + LTM EBITDA Margin > 40%
- So, if you’re growing at 50% y/y and have a -15% EBITDA margin, your Rule of 40% = 35%… womp womp.
- The Rule of 40 has always been a solid gut check for the general balance of a company’s growth and profitability.
- However, it’s become increasingly important as a driver of how businesses are valued.
- For earlier stage companies, Rule of 40 can vary widely from quarter to quarter.
- Achieving 40 each quarter is not required. But, it is required to have a grasp on what caused a drop or spike, and what can be done to get to 40 in the long term.
- Net Retention is a measure of how much your existing customers expand in a given period, net of any churn or shrink.
- Ways to impact Net Retention are to:
- Churn less
- Sell more of the same product to customers
- Sell new products to customers
- Increase existing customer usage
- Generally, anything over 110% is good and anything over 130% is great
- Enterprise customers usually have better net retention than smaller customers
- Usage Based monetization models have an easier time increasing Net Retention compared to Subscription
- Net Retention is a way to build “free” growth into your sales motion. It’s liberating to realize how high net retention frees you up to invest more in other parts of your biz, as you’ve got bonus growth and cash flow coming your way. It typically takes less effort (read: less money) to grow an existing customer than to go out and land a net new one.
CAC Payback Period
- Customer Acquisition Cost is what you spend in sales and marketing costs to go out and get a net new customer.
- CAC Payback Period is a derivative of Customer Acquisition Cost, and spits out the number of months it takes to breakeven on that new customer.
- CAC Payback Period also incorporates the customer support and maintenance costs associated with getting the customer to stick around.
- CAC Payback is maybe the single best measure of the efficiency of your go-to-market engine
- The median CAC payback period for private software companies is somewhere between 12 and 15 months depending on scale.
- The median for public software companies is 25 months, and top quartile is in the high teens.
Below are the three most common ways to calculate CAC Payback:
- CAC Payback Period is important because it shows how efficient your GTM machine is. Investors care about it because you can’t trade a buck for eighty-five cents forever, and this indicates if you built a model that can get to profitability and keep growing.
Value is Still in Vogue
Value Stocks Have More Room for Upside
Value was in vogue last year and that trend may be true this year too. With the Federal Reserve raising interest rates to fight inflation, investors have turned to value stocks to ride out the doom and gloom. They tend to have solid fundamentals and trade at a discount to the market, making them attractive in a rising rate environment, something that’s expected to continue in 2023.
Value stocks can be found in every industry but they aren’t all equal. Some are projected to outperform the market in 2023 including the following Wall Street favorites: Dish Networks (DISH), Mattel (MAT), Alphabet (GOOG), and EQT (EQT).
All of these names have market caps of more than $2 billion, are included in the iShares Russell 1000 Value ETF (IWD), have a trailing price-to-earnings ratio below the S&P 500′s, and at least 60% of analysts following them rating them a buy.
Alphabet a Value Stock?
Take Dish Networks for starters. Analysts expect the stock to gain 124% over the next 12 months. That’s not a typo. It doesn’t hurt that the stock is trading at a big discount to the broader market and has a price-to-earnings ratio of just 4.8 times earnings. The stock tumbled more than 55% last year. Nevertheless, about two-thirds of analysts covering Dish rate it a buy.
Alphabet is another stock that is on value-focused analysts’ radars. While the parent company of Google seems more like a growth stock than a value play, it is trading at a discount to the S&P 500 and had a dismal 2022. Three-quarters of Wall Street analysts covering Alphabet now rate it a buy.
“While advertising revenues represented approximately 80% of consolidated revenues in 2021 for Alphabet, non-advertising segments (such as Google Cloud) may help soften the headwinds faced in the advertising sector,” wrote William Blair analyst Jason Ader in a recent research note.
Even EQT is a Value Play
Then there is Mattel and EQT, two value stocks playing in completely different fields. Toy maker Mattel falls into the value category with a price-to-earnings ratio of 10. The stock sports a buy rating by 73% of analysts who cover it and is forecast to rise 59% in the year to come. In October Mattel posted third-quarter earnings that beat Wall Street expectations but it did temper its full-year EPS.
EQT also made the cut even though the stock was one of the best performers in the S&P 500 last year. Roughly three-quarters of analysts who cover EQT rate it a buy. It may be because it has a price-to-earnings ratio of just 8.2.
Value stocks have been a good place to hide out in a high inflationary and rising interest rate environment. With more of the same expected in 2023, value stocks like Dish, Alphabet, Mattel and EQT may be worth a look.
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How to Play the End of Zero COVID
Stocks Poised to Benefit as China Reopens
China’s zero COVID policy has hurt the Asian giant’s economy and stocks with exposure to that corner of the world. That may change in 2023 as China opens up. After three years, China announced its reopening on January 8, 2023, which in case you forgot, is today.
Chinese leaders are targeting GDP growth of over 5% this year as a result of lifting COVID restrictions. That could present an opportunity for investors who want to get more China exposure ahead of a potential rally.
“Of the many issues facing China, end of zero COVID is the most definitive factor that will continue to support the market,” Desh Peramunetilleke, Jefferies’ global head of microstrategy wrote in a research report recently. “While there will be a few direct long-term beneficiaries such as airlines and casino operators, more broadly US companies with China exposure are likely to benefit as China’s economy rebounds from both the re-opening and recent property market stabilization measures.”
Hotel Stocks and Electric Cars
Hotel and casino stocks should be a direct beneficiary of an improving Chinese economy. Las Vegas Sands (LVS) has about 70% exposure to China and Hong Kong while Wynn Resorts (WYNN) has slightly more than 40%, according to Peramunetilleke.
Both stocks have moved with news coming out of China. When the Chinese government granted hotel operators provisional licenses to continue to conduct business in gambling mecca Macau in late November, shares of the two moved higher. Those provisional licenses signaled to the market that China is lifting its COVID restrictions.
The electric vehicle sector is another area that should see improvements as COVID restrictions ease. One stock that should benefit is Tesla (TSLA). The electric vehicle maker has 25% exposure to China. Supply chain issues and COVID restrictions have tempered demand for electric vehicles. In December Tesla cut output by more than 20% for one model being produced at its Shanghai plant. That should change in 2023.
Apple Could Be a Big Winner
Then there is Apple (AAPL) which has the most exposure of US companies to China and Hong Kong. Its iPhones are not only produced there (although some manufacturing is moving out of China) but are popular among its consumers. COVID lockdowns dented Apple’s production ability so as these restrictions ease, Apple may experience less friction which could be beneficial. Other tech stocks with exposure to China include Qualcomm (QCOM) and Microchip Technology (MCHP).
China’s zero COVID policy may have kept the pandemic at bay for a certain amount of time, but at the expense of economic growth in the country. With restrictions poised to ease, Peramunetilleke thinks there are ways to play the reopening.