👻 Should Music Labels Fear Fake Drake?

Plus, how to play the reshoring of corporate American. Hint: look at your printer.

Happy Sunday to everyone on The Street.

“Globalization has stood as a critical driver of the world's economic order for decades, representing a complex process characterized by increased integration and interdependence among nations. Emerging from World War II, the world witnessed a shift toward peace, unipolarity, and a second industrial revolution. The mechanisms that fueled this include the proliferation of free trade, unrestricted capital movement, and rapid technological innovations. However, contemporary trends indicate the world might be moving toward another paradigm shift: from globalization to deglobalization.

This whitepaper is designed to illuminate the underlying causes driving this shift, examine its implications for financial markets, and propose strategic responses for financial institutions.”

ICYMI: We operate an agency and create newsletters, blogs, podcasts, and more for clients. The text above is from one of our latest whitepapers examining the topic of “Globalization to Deglobalization”. If you or your firm needs help creating high-quality, professional finance content drop us a note.

Alright, on to the show.

Brooks

PRESENTED BY WORLD OPPORTUNITY INVESTOR

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Review

US stocks finished lower Friday as the Nasdaq solidified its first losing week since mid-April.

Bullish sentiment on Wall Street has tapered following hawkish remarks from Chairman Powell and other Fed members regarding the future of interest rate policy after June’s pause.

Markets are now pricing a roughly 75% chance the Fed will hike rates by another 25 basis points at its next meeting.

In company-specific news, the baristas union Starbucks Workers United claimed some Starbucks stores were not allowed to put up Pride decorations. Starbucks denied the claim, stating its policy on decorating has not changed, but Workers United has filed an unfair labor practice charge over the alleged change in policy. Workers are now set to strike at more than 150 Starbucks locations across the US, starting in Seattle.

Meanwhile, Goldman Sachs is expected to take a large writedown for its acquisition of fintech lender GreenSky after seeking to unload the business. The bank is continuing negotiations with a smaller group of bidders in the hopes of ratcheting up the ultimate price.

The acquisition was announced with a $2.24 billion valuation, but it was worth closer to $1.7 billion by the time the transaction closed half a year later. Current bidders reportedly value GreenSky between $300 and $500 million.

Finally, Ford is reportedly preparing for a new round of layoffs for its salaried workers in the US. The automaker did not specify the number of cuts, but they are expected to impact employees at the company's EV, gas, and software units. Last August, the company said it would cut a total of 3,000 salaried and contract positions.

In total for the week, the Dow Jones Industrial Average fell 572 points or 1.67%, while the S&P 500 finished 1.39% lower. The Nasdaq Composite was down 1.44%.

Preview

Tomorrow, the Federal Reserve Bank of Dallas will release its manufacturing index for June. This metric measures productivity within the Lone Star State. It sank by 5.7 points in May, the lowest decrease since the pandemic.

Tuesday, investors will get insight into the state of real estate in the US, with the release of both the home price index and the number of new home sales in May. In April, sales of new homes unexpectedly grew 4.1% to 683,000, the highest figure seen in more than a year.

On Wednesday, Jerome Powell, chair of the Federal Reserve, will follow up last week’s testimony to the US House and Senate with another scheduled speech. The Fed Chair will offer further insight into the central bank’s decision to not raise interest rates in June. In his testimonies, Powell suggested further hikes might be seen throughout the year, but added the speed of said rate hikes is “not very important now.” Investors will also get an update to the average 30-year fixed-rate mortgage. It currently sits at 6.73%.

On Thursday, there will be a flurry of reports — jobless claims, pending home sales, and the US GDP growth rate for the second quarter. The US GDP grew by an annualized 1.3% in Q1.

On Friday, the Fed’s favored inflation metric, the core PCE index, will be released for May. In April, this inflation metric — which excludes food and energy prices — rose 0.4% on a monthly basis. Given the Fed’s newly pronounced data-driven approach to policy decisions, the May PCE reading could foreshadow the central bank’s next move.

Earnings Spotlight

Monday, Carnival Cruise Line (CCL) will report. The major cruise operator is still struggling to recover from the pandemic and posted just a fraction of pre-pandemic annual revenue in 2020, 2021, and 2022. But with travel restrictions in the rearview and a busy summer season forecast, investors may be expecting sunny skies ahead.

Tuesday, Walgreens Boots Alliance (WBA) will report earnings. With retail theft and shrinkage marring the pharmacist’s earnings calls in recent years, it may mention its new anti-theft store design. A Chicago Walgreens has been revamped to have only two aisles, with most high-price items stocked behind a staffed counter. Unmanned aircraft system company AeroVironment (AVAV) will also hand in its report card.

On Wednesday, General Mills (GIS) is set to report earnings. Grocery prices were hit especially hard by inflation, so investors will look to see if the cereal giant gets a boost as inflation continues to abate. Meanwhile, serial snackers might tune in simply for an update on the company’s new line of Häagen-Dazs ice-cream-inspired yogurt, or its latest addition to its line of Monster Cereals, Carmella Creeper.

On Thursday, Nike (NKE) is set to report earnings. The sneaker icon will likely discuss its improving inventory levels. Meanwhile, payroll provider Paychex (PAYX) will share whether this past quarter was as successful as Q1, for which it posted revenue of $1.38 billion, up 8% year-over-year.

On Friday, alcohol conglomerate Constellation Brands (STZ) will round out the week. It is sure to tout Modelo’s rise to become America’s best selling beer over the past few weeks.

AI’s Threat Against Music Labels, Examined

Sell-Off Maybe Overblown

Video killed the radio star - thank you MTV and The Buggles. Now, will AI kill music company stocks? That’s the question weighing on investors worried the technology makes it too easy to mimic existing musicians as well as make music without the help of the studios. These are a couple of the reasons shares of Universal Music Group (UNVGY) and Warner Music Group (WMG) are down double digits so far this year. Also weighing on the stocks are concerns advertiser dollars are drying up and streaming revenue is declining.

That sell-off, which has left shares of both stocks near their lowest price-to-earnings ratios since becoming publicly traded companies, may be overdone, which could present an opportunity for investors.

Streaming Prices on the Rise?

Take worries about streaming for starters. Streaming demand is booming, but the revenue the music companies make from it is not. That could change if Spotify (SPOT) raises subscription prices for consumers. The price change is expected later this year. That would translate into better contracts for the labels, potentially reigniting growth.

As it stands, music streaming services are underpricing themselves when compared to movie streaming services. From 2011 to 2023 Spotify has kept its $9.99 per month pricing even as Netflix’s (NFLX) most popular subscription jumped to $15.49 from $7.99. The labels can’t tell the streaming services to raise their prices. However, they are bringing the issue to the table during renegotiation discussions. If Spotify raises prices, more money should flow to them. The labels would subsequently receive more royalties from partnerships like the one they have with TikTok.

AI Isn’t All Bad

Then there are the AI fears. Sure, there are a lot of unknowns about how the technology will impact the music industry, but it's in the early innings and those concerns may prove to be overblown. After all, labels are already using AI to improve songs and find new talent. It can also bring new life to old songs, even if the artist is dead.

That was on display earlier this month when Paul McCartney used AI and a snippet of John Lennon’s voice to make a new Beatles album which will be released later this year. If music labels continue to embrace AI, it could drive sales at a lower cost. Although it might be a strange and jarring listening experience, don’t fear “Fake Drake” just yet.

Do you think AI poses a major threat to music label stocks?

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Adidas’ Gameplan

China, Messi, West All Seen as Growth Drivers

Adidas (ADDYY) is trying to get out of the penalty box, and it may have China and soccer star Lionel Messi to thank if it succeeds. With much of the inventory overhang resolved after its failed relationship with Kanye West, the sneaker and apparel company is regrouping.

That has piqued the interest of some on Wall Street who are getting more bullish on the comeback story, including Bernstein analyst Aneesha Sherman. Sherman raised her investment rating on Adidas from “market perform” to “outperform” and increased her price target to $204.50 a share. For context, shares of the company closed at $96.56 on Friday.

“Adidas brand heat languished through 2022,” Sherman wrote when making the call. “Now we are seeing it heat up again.” The analyst pointed to China, Messi, and the West as reasons for optimism.

China Revitalizing

Take China for starters. Sherman says the business is picking up after falling behind its rivals last year. Some of the growth drivers include Adidas’ Samba, with its accessible price point, and T-toe styles, selling well in China and globally.

Then there is Messi, who has had a deal with Adidas for years. Messi is fresh off of a World Cup win last year and is joining Major League Soccer’s Inter Miami to begin playing in July. That should boost sales of Messi sneakers in the U.S.

Finally, Adidas has been able to work off excess inventory from its expensive break with West, the controversial rapper, with much of the inventory now sold out.

More Upside?

Combined, Sherman thinks Adidas is poised for growth in 2024. While Adidas’ American depositary receipts are up close to 40% this year, the analyst argued viewing the company as undervalued isn’t too much of a leap of faith. Even if Adidas doesn’t return to double-digit revenue growth, there is a lot of upside in the cards, according to Sherman.

Adidas has had a rough run of late but seems to be regrouping. If it can pull off this hat trick, it may surge even more. Time will tell if it gets out of the penalty box.

Are you bullish or bearish on Adidas over the next 12 months?

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Street Sheet Spotlight: No More Wasteful Waste, Nostalgia Goldmine, Smart Money Moves

🌱 Landfills don’t have to be wasteful. SusGlobal is changing the way we address food waste, harnessing millions of tons of organic food waste to create highly effective fertilizers, rivaling or surpassing expensive alternatives. Take a moment to read about SusGlobal — it could change the world’s future, and yours.

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How to Play the Reshoring of Corporate America

Robotics and Automation to Drive Growth

The COVID-19 pandemic taught businesses that manufacturing needs to be stateside. That would avoid the supply chain and labor problems that caused havoc during the pandemic. It's something that U.S.-based companies are embracing at a growing rate. According to UBS, the number of corporate U.S. reshoring announcements has increased 17% between the third and fourth quarters of 2022 and is 300% higher since the end of 2019.

The reshoring of manufacturing benefits not just the companies. Even if it costs more at the jump, it can also be a boon to investors, granted they have stakes in the companies that benefit from reshoring. The good news: there are many ways to play it, from HP (HPQ) to Rockwell Automation (ROK).

HP’s 3D Printers All the Rage

Take HP for starters. They are expected to be a big beneficiary of the pickup of robotics in the U.S. Both the CHIPS Act and Inflation Reduction Act include measures to help the U.S. revive its robotics prowess, as they can help businesses create smaller manufacturing footprints that require less labor.

HP, with its large cadre of 3D printers, should benefit from this trend, helping companies with the production of low-volume, high-value parts. Evercore ISI’s analyst Amit Daryanani said HP’s robotics-as-a-service offering can help companies reduce upfront investment costs, which should drive sales of its printers and services.

The analyst also likes Azenta (AZTA) as a robotics play. They make precision robotics for the chip market. The industry is expected to embrace even more automation in the production process. It doesn’t hurt that the stock is down over 32% in the last 12 months, which may entice bargain shoppers.

Rockwell Automation in the Pole Position

Then there is Rockwell Automation which provides working information capital to manufacturers. It's a favorite of Wall Street analysts, with Morgan Stanley recently calling Rockwell the best way to play the U.S. reshoring theme. The Wall Street firm has an overweight rating on the stock.

Morgan Stanley thinks the scale of manufacturing investments in the U.S. should drive an upside, even if the stock is gaining this year. Emerson Electric (EMR) and Lincoln Electric (LECO) were also named as stocks that should benefit from this reshoring boon.

Do you think reshoring will be a net positive or net negative for the US economy?

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Last Week's Poll Results

Are you bullish or bearish on TreeHouse (THS) over the next 12 months?

🟩🟩🟩🟩🟩🟩 🐂 Bullish

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🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨⬜️⬜️⬜️⬜️⬜️ 🐻 Bearish

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