👴 How to Bet on Boomers

Plus, a luxury company that happens to make cars.


TOGETHER WITH


Happy Sunday to everyone on The Street. 

And happy National Puzzle Day to all of you dissectologists out there. As we collectively try to piece together what the next eleven months of 2023 will look like (yes, the first month of the year is essentially done), every data point is worth dissecting.

One that likely flew under the radar last week was the Conference Board's leading economic indicator index which was released on Monday. The LEI showed a 1% drop in December, which was larger than expected. More importantly, it marks the 10th straight drop since the index peaked last February. The index tracks hours worked, jobless claims, building permits, stock market indexes, credit spreads, and other data points.

Now, while we all know that "past performance is not a guarantee of future results" (yada-yada) Ed Yardeni shared an interesting nugget before the LEI's latest reading. According to the investment strategist, the LEI, on average, has topped out 12 months before a downturn in the business cycle.

So, if the past holds true in the present, then the much-debated recession has a chance of starting next month. Time will tell if reading these economic tea leaves proves to be true. In the meantime, here's The Economist running paid advertising against one of their articles stating that a recession is "inevitable" just to make sure we can all will it into existence.

Now, just to make sure we cover our bases, not everyone on Wall Street thinks a recession is imminent. In fact, last week's better-than-expected fourth-quarter GDP report and somewhat decent personal consumption expenditures price index was catnip for bulls who think the Fed might be able to pull off a soft landing.

That's why all eyes are on the central bank's meeting this week and the job report that's due on Friday. For what it's worth the Fed is widely expected to enact a 25 basis point hike so mark your calendars for Wednesday at 2 PM ET to see if this comes to fruition. With that said, we'll see you in February.


Reminders:

🌯 Poll results from last week are now at the bottom of the email in a Wordle-y style format. It looks like we have a bunch of Chipotle bulls, and maybe they're onto something. The company is aiming to hire 15,000 full-time and part-time employees ahead of its busiest time of the year, or what it calls "burrito season."

📈 Interested in private investment opportunities? Click here to fill out our survey. If you've already filled it out keep an eye out for an email from us in the next week or two.


Review

US stocks were mixed Friday but ultimately ended the day higher as investors digested another round of corporate earnings and economic data.

PCE inflation slowed to 4.4%, the lowest annual increase since October 2021. Meanwhile, the latest consumer spending numbers indicated that households cut spending in December.

On the earnings front, Intel shocked investors with a larger-than-expected quarterly loss, missing on both the top and bottom lines. Chevron, on the other hand, saw its annual profit double to a record $36.5 billion. Oil in general saw a pop on the final day of the week, boosted by better-than-expected US economic growth and increased demand from China.

In company-specific news, Bed Bath & Beyond defaulted on its credit line, warning it would be unable to pay down its debts. On the flip side, Buzzfeed extended its gains for a second day after sharing that it would be using artificial intelligence to help produce content.

Many investors tried to find their footing ahead of this week’s announcement from the Federal Reserve. In the wake of what looks to be cooling inflation, Wall Street is wondering if the central bank will continue to raise interest rates, or consider taking a brief pause.

Many strategists will also be paying attention to developments overseas. After the week-long Lunar New Year holiday, China markets are back online. Many are expecting the mood to be upbeat in the Asian country as officials have reported a drop in COVID deaths. Meanwhile, in Europe the ECB meets on Thursday to discuss its own monetary policy. Officials are expected to raise rates by 50 bps to 2.5%.

Finally, some big names in tech will report earnings this week. Meta, Facebook’s parent company, reports on Wednesday, while Apple, Amazon, and Alphabet will all hand in their latest report cards on Thursday. Investors and consumers alike will be tuning in to see how some of the biggest companies in the United States weathered a volatile 2022 and what their outlook is for the rest of the year.

For the week as a whole, the Nasdaq rose 4.32%, posting its fourth week of gains. It’s on pace for its best monthly performance since July. The S&P and Dow added 2.47% and 1.81%, respectively.


Preview

Tomorrow, the Dallas Fed Manufacturing Index will be released. This monthly metric fell again in December, marking the 8th straight contraction.

Tuesday, investors will get insight into employment costs as it relates to wages and benefits for the 4th quarter of 2022. In Q3, wages increased by 1.3% while benefits increased by 1%.

Wednesday will be one of the biggest days of the month with the release of the Federal Reserve’s Interest Rate Decision. The fed funds rate currently sits at 4.25%-4.5%, the highest level since 2007. At the previous Fed meeting, officials signaled their intention to lift the rate above 5% in 2023 and then maintain that level. In addition to the Fed meeting, we will also get reports on JOLTs job openings and ISM manufacturing PMI.

On Thursday, the weekly report for initial jobless claims will be released. Last week, the number of Americans filing for unemployment hit 186,000 which was the lowest since April.

Finally, on Friday, investors will get a more cohesive look at the job market with the release of the unemployment rate. In December, the unemployment rate was 3.5% which was below expectations.

Earnings Spotlight

GE Healthcare Technologies (GEHC) kicks off the week with an earnings release tomorrow. GE recently completed the spin-off of GE HealthCare after market close on January 3, 2023. Many analysts are interested to hear what's in store for the newly minted medical technology company.

Earnings announcements keep rolling Tuesday with Electronic Arts (EA), Exxon Mobile (XOM), and Snap Inc (SNAP) all giving reports. Additionally, Pfizer, (PFE) will keep us updated on all things COVID-19 related, including a potential link between its updated booster and higher stroke risk in adults.

On Wednesday, Meta Platforms (META) will fill investors in on its portfolio of social media apps as well as the construction of the metaverse. Notably, daily active users, a key metric for Meta, was up 3% to 1.98 billion in Q3 after slipping earlier in the year. Investors will want to see if this progress continues.

Thursday is perhaps one of the most important days this quarter as Amazon (AMZN), Apple, and Google-owner Alphabet (GOOGL) all release reports. With a combined market cap of just under $4.45 trillion, these three wield an outsized influence on US markets. In particular, it will be interesting to hear Google’s thoughts on ChatGPT and its potential to disrupt internet search, along with the recently announced search monopoly allegations from the Department of Justice.

Cigna (CI) will round out the week on Friday. In Q3, this global health services company posted revenue of $45.3 billion and raised its full-year outlook for 2022.


Fintech is Changing, Keep Up

The fintech industry is valued at around $180 billion as of 2022. It’s also the one suffering the biggest layoffs and shifts with the economy.

There are massive changes happening in the space and Alex Johnson, a former credit expert, covers it all in his weekly newsletter, Fintech Takes. Subscribe for free.


Betting on Boomers

The Nation Is Getting Older, Here’s How to Capitalize 

Aging in place is exploding as more boomers choose to live out their retirement years at home. Predictably, many companies see this trend as an opportunity to cash in. As a result, they are responding by churning out technology, products, and services to assist in the process.

Demographically speaking, Americans are living longer. This is a good thing. This also means they will need more support to stay in their homes later in life. By 2034, older adults will outnumber children for the first time ever, according to the US Census Bureau.

“If you’re looking at developed markets, it’s pretty clear that we’re going to have almost like this backward or upside down triangle of demographics as birth rates are slowing,” Michelle Laliberte, thematic investment strategist at UBS said in a recent interview. “People are living much longer.” With boomers near or in retirement, companies and investors have several ways to gain exposure to the growing space.

Tech Heavy Hitters Eye the Market

For many investors homecare health services like the ones offered by Addus Homecare (ADUS) and Amedisys (AMED) are the top ways to play the trend. Now with the likes of Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Best Buy (BBY), and Home Depot (HD) getting into the game, there are other options too.

“Most products and services targeting this group have historically just been focused on health care and leisure,” said Brian Miller, head of ETF Platform at Hartford Funds. “These areas, of course, are important, but we think there’s a broader opportunity. And, it’s kind of underserved.”

Miller runs the Hartford Longevity Economy ETF (HLGE) which invests in companies serving the aging population. Home Depot, Alphabet, Amazon, and Best Buy are among its holdings. The fund is up 6.37% so far in 2023 after tanking 15.74% last year.

Looking for Exposure to Longevity

Tech companies are trying to capitalize by launching services around their existing devices. Amazon’s Alexa Together service and Google’s Nest smart-home system both assist seniors if they need urgent care. They can also detect falls and offer other remote help. The Apple Watch can detect if someone falls as well, monitor sleep, and track heart rate among other things.

On the retail front, Best Buy is building a presence in the market via acquisitions. In recent years the electronics retailer acquired Critical Signal Technologies and Current Health, which offer senior remote monitoring and telehealth services. Then there’s Home Depot and Lowes (LOW). Money managers see both playing a big role in retrofitting homes to support aging in place.

Boomers are getting older and they want to do so in their current homes. Investors looking for exposure to longevity have options beyond home healthcare services.


Bulls: Carbon Capture Stock Poised to Pop. Bears: Not So Fast.

Aker is Innovating

Cement and steelmaking companies emit a lot of carbon emissions. To curb these chemicals, appease regulators, and cater to environmentally conscious investors firms are willing to spend top dollar. That’s where Aker Carbon Capture (AKCCF) comes into play. The Norway-based company builds carbon capture and storage plants for industrial cement and steelmaking facilities. With demand for its services growing, bulls think the stock could soar over the next twelve months.

One of the reasons is its new technology that recycles internal waste heat, reducing the energy required to capture carbon by 10%. That will help it win customers and improve its future profitability, says Berenberg, a German bank.

“Clearly, an efficient solvent combined with optimal heat recovery can have a positive impact on system economics and potentially accelerate scale-up of the industry,” Berenberg analysts wrote in a note to clients. Berenberg expects the stock to surge 49% over its current price. That’s lower than the 65% median price target increase for the eight analysts that cover Aker.

Carbon Capture Plants in Demand

Aker’s carbon capture plants are another reason to take a deeper look at the stock. The company is busy building the first model on a cement-making facility. Aker, which said the carbon capture plant will lower emissions by over 90%, plans to transport the captured carbon dioxide via ship and store it on the Norwegian continental shelf. Aker says it inked contracts to remove as much as 10 million tons of carbon each year starting in 2025. That is roughly equal to the combined emissions from 10 large-scale cement plants.

Aker’s stock is also expected to get a lift when the UK announces plans to build carbon capture plants. This win has already been priced into its shares somewhat, but Berenberg and other bulls see this as a favorable tailwind.

Not Everyone is Bullish

There are detractors who aren’t sold on the Aker story. Arctic Securities, the Norwegian bank is among them. The investment firm thinks Aker’s stock will be flat over the next 12 months. Even if it gets a big win from the UK government, Arctic Securities predicts Aker will remain about 30% below its 2025 carbon removal target.

“We have revised down our 2023-2025 revenues estimates by ~18- 33% as a result of somewhat slower estimated order intake and backlog conversion on new contracts,” said Lukas Daul, an analyst at Arctic Securities, in a note to clients late last year.

The world is getting greener and as a result, needs ways to curb emissions. Carbon capture plants may not be the perfect solution, but for now it's a top choice. All it has critics, Aker may be in an interesting position to capitalize on this demand.


Fintech is Changing, Keep Up

The fintech industry is valued at around $180 billion as of 2022. It’s also the one suffering the biggest layoffs and shifts with the economy.

There are massive changes happening in the space and Alex Johnson, a former credit expert, covers it all in his weekly newsletter, Fintech Takes. Subscribe for free.


Ferrari Isn't Your Average Car Maker

Ferrari the Luxury Brand

It’s safe to say Ferrari (RACE), the Italian car manufacturer, has street cred amongst Formula 1 fanatics and luxury lovers alike. Bulls think the company can turn this street cred into credit on The Street, which will send its stock surging.

Its valuation is much higher than mass-market automaker rivals, but for good reason. Ferrari is a luxury brand catering to well-heeled consumers who can afford to drop $250,000 plus on a sports car. The stock, bulls argue, should trade like other luxury brands including LVMH Moët Hennessy Louis Vuitton (MC), Kering (KER), Richemont (CFR), or Hermès International (RMS), and not General Motors (GM), Toyota Motor (TM), or Volkswagen (VWAPY).

“One doesn’t buy a Ferrari just to go from A to B,” says Brian Lum, a portfolio manager at Baillie Gifford, which owns 5% of Ferrari shares. “This isn’t a car company, this is a luxury company that happens to make cars.”

Scarcity and Exclusivity

Just like the companies rolling out luxury watches, jewelry, clothing, and bags, Ferrari only makes a limited number of its vehicles and prices them at a premium. That creates a sense of scarcity and exclusivity. Its gross margins are over 50% compared to 20% at GM and other car makers. The backlog for its vehicles is long, which gives Ferrari more steady and stable sales.

Ferrari trades at a hefty premium to its car rivals, but some argue these are the wrong comps. Bulls think the stock is more reasonable when lined up amongst other luxury brands. Recently Ferrari’s stock was trading at 36 times the coming year’s earnings consensus. Over the past 18 months, it has traded between 30 and 50 times earnings. Hermès is trading at 47 times earnings, while LVMH is going for about 24 times forward earnings.

When adjusted for expected long-term growth which is calculated by dividing the stock’s multiple by annual growth in EBIT through 2030, Ferrari is trading for less than Hermès and LVMH. Additionally, it’s trading at a small premium to Richemont and Kering. Outside of Tesla (TSLA), vehicle manufacturers are sporting mid-single-digit multiples.

New Models, Higher Prices

Driving the growth at Ferrari are several new model launches, a shift to electric vehicles, and continued increases in prices. This is according to Tom Narayan, an analyst at RBC Capital Markets, who thinks this will result in revenue almost doubling by 2030.

The luxury car maker’s first SUV dubbed the Purosangue is expected to be rolled out sometime this year. Equipped with a 725-horsepower V-12 engine, it can go from 0 to 60 miles an hour in 3.3 seconds. The new SUV sold out in weeks this past fall with deliveries scheduled for the middle of 2023. The vehicle will start at $421,000.

“You have this double whammy of pricing power in addition to volumes,” said RVC analyst Narayan in a recent interview. “That’s why the growth story here is really, really compelling.” The analyst expects Ferrari to deliver 20,000 vehicles in 2030 which is considerably higher than the 13,000 it delivered last year. He rates the stock a buy and expects shares to appreciate about 20% this year.

Ferrari vehicles are not for the faint of heart nor is its stock. For investors willing to overlook its valuation compared to other car makers they may be rewarded as Ferrari gets revved up for a big year.


Last Week's Poll Results

Are you bullish or bearish on the box office in 2023?

  • 🟩🟩🟩🟩🟩🟩 🐂 Bullish
  • 🟨🟨🟨🟨⬜️⬜️ 🐻 Bearish

Are you bullish or bearish on Chipotle in 2023?

  • 🟩🟩🟩🟩🟩🟩 🐂 Bullish
  • 🟨🟨⬜️⬜️⬜️⬜️ 🐻 Bearish

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security.  Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing. The Street Sheet is reader-supported. When you buy through links on our site, we may earn an affiliate commission.