Stock Alert: Just Another BUY THE DIP Opportunity

Posted on by The INO.com Team

Please enjoy this updated version of weekly commentary from the Reitmeister Total Return newsletter. Steve Reitmeister is the CEO of StockNews.com and Editor of the Reitmeister Total Return.Click Here to learn more about Reitmeister Total Return

SPY – Traders threw a tantrum after the Fed shared details on their rate hike plans. This has the S&P 500 (SPY) hitting the lowest level in quite a while. Gladly, things are not as dire as they seem. That is why Steve Reitmeister shares his latest insights to explain why a bull market is still in place…and how to target the best stocks and ETFs for the days ahead. Read on for the full story below…

 

The Fed was not kidding when they said “higher rates for longer”. That was reiterated with extra vigor on Wednesday….and investors were not pleased.

Does this change the bullish thesis? Or is this just a little detour south before the next leg north?

We will break it all down in today’s commentary.

Market Commentary

Here is the nutshell of the Wednesday Fed announcement.

The economy is doing better than we expected…so it’s going to take a bit longer to bring down inflation to target level…the good news is that we really believe we can do it without creating a recession.

So why did stocks go down on this seemingly positive outlook?

Because the dot plot of rate expectations by Fed officials now has the end of 2024 rate still way up at 5.1%. That was revised higher from the previous estimate of 4.6%.

Yes, this most certainly fits in with the Fed narrative of “higher rates for longer”, but much longer and higher than investors previously anticipated.

This notion of longer Fed involvement increases odds of overstaying their welcome creating a recession. Also it delays when rates are lowered which would be a catalyst for higher economic growth which begets higher earnings growth and higher stock prices.

Granted this update is not overly positive. But it’s not really negative either.

That’s because when you pull back and assess the big picture it still says that the odds of recession (and return to bear market) are very low. This is reinforced by Fed officials who now predict +1.5% GDP growth in 2024 up from previous projection of +1.1%.

To boil this all down…things are still bullish because odds of recession are so low. But the idea of when the Fed starts lowering rates to boost the economy and stock prices is also postponed.

Instead, I see slower earnings growth begetting more modest stock price increases for the overall market. For example, the S&P 500 (SPY) may only go up 5-10% next year. Not terrible…not exciting either.

But that 5-10% is the return for the average stock. Our goal is to invest in BETTER THAN AVERAGE stocks. Or to be totally honest, we want GREAT stocks.

Gladly that is easy to do thanks to our reliance on the consistent outperformance of the POWR Ratings. Focusing on the fundamentally most sound and reasonably priced stocks has always been a path to better returns.

In fact, historically many of my years of superior outperformance over the market is precisely this situation. Where superior stock selection handily beats mundane results for overall market.

So I welcome this chapter where every dip is just another opportunity to snap up the best stocks at even better prices.

How low could this recent dip go?

Moving Averages: 50 Day (yellow), 100 Day (orange), 200 Day (red)

We are enduring our first real test of the 100 day moving average (4,375) in quite some time as we broke below on Thursday. Maybe bounce back Friday…maybe take a real shot at scaring investors with a test down to the 200 day moving average at 4,189.

That would represent a stiff 10% correction for the overall market that could levy 50-100% more pain on riskier positions.

Honestly, I would welcome that move in the short run…because I know it would not be long lived. Also as a value investor I think that it would be fun to see all the overpriced glory stocks, that led the way the first half of the year, get their proper comeuppance now.

As shared earlier, I still see us in the midst of a long term bull market. However, investors were a bit too overzealous about when the Fed was going to lower rates…and thus a necessary pullback/correction is unfolding.

Maybe bottom is now at the 100 day moving average…but likely no worse than down at the 200 day moving average. Yet all that will truly do is get rid of recent excesses making it all the easier for the overall market to move higher by end of the year and into 2024.

Again, the key to outperformance is going to be superior stock selection. The next section will share with you some important insights on that front…

What To Do Next?

Discover my current portfolio of 7 stocks packed to the brim with the outperforming benefits found in our POWR Ratings model.

Plus I have added 4 ETFs that are all in sectors well positioned to outpace the market in the weeks and months ahead.

This is all based on my 43 years of investing experience seeing bull markets…bear markets…and everything between.

If you are curious to learn more, and want to see these 11 hand selected trades, then please click the link below to get started now.

Steve Reitmeister’s Trading Plan & Top Picks >

Wishing you a world of investment success!

SPY shares rose $0.10 (+0.02%) in after-hours trading Thursday. Year-to-date, SPY has gained 14.05%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

3 Stocks Benefiting From Rite Aid (RAD) Bankruptcy

Posted on by The INO.com Team

The public health crisis has considerably reshaped the landscape of the retail pharmacies and drug store industry. Despite significant supply chain disruptions and staffing shortages, the industry has seen a surge in demand due to the increasing need for remote medical services and patient care.

Mail-order pharmacies are experiencing growth, driven mainly by the rising prevalence of telehealth and remote monitoring services. In response to these changes, many retail industry players utilize digital technology to diversify their offerings beyond traditional brick-and-mortar stores. This shift has presented unique opportunities for industry heavyweights, investing strategically to simplify patient access to prescription and maintenance medications.

However, numerous challenges have weighed down these positives, including inflation, labor shortages, unfavorable drug pricing, reimbursement issues, and lawsuits facing the industry.

Among those significantly impacted is pharmacy giant Rite Aid Corporation (RAD). The company is preparing to file for Chapter 11 bankruptcy due to its considerable $3.30 billion debt as of June 3, 2023, and repercussions arising from pending litigation accusing it of contributing to the opioid epidemic through relaxed prescription policies for potent painkillers.

The company also faces adversity from the United States Justice Department, which sued RAD in March for purportedly filling 'unlawful prescriptions for controlled substances.' Officials have criticized the pharmaceutical retailer for disregarding "obvious red flags" related to potential misuse of prescribed medicines, including oxycodone and fentanyl.

As of June 3, 2023, RAD operated 2,284 pharmacy locations, representing a decline from previous years. The company closed 239 outlets since 2021, of which 145 came in 2022 and the remaining 27 in the last quarter ending June 3, 2023.

In its bankruptcy proceedings, RAD considers closing 400 to 500 stores out of more than 2,100 and transferring the remainder to creditors or willing buyers. Notwithstanding, a group of bondholders has preferred an even higher number of store closures, with discussions ongoing on the final count.

The company has been struggling with challenges beyond the opioid lawsuits as it seeks a path to profitability. For the fiscal first quarter that ended June 3, 2023, its revenues dropped 6% year-over-year to $5.65 billion. Its net loss nearly tripled from $110.19 million in the prior year quarter to $306.72 million.

RAD’s pharmacy services segment, Elixir, contributed to the overall loss. The pharmacy services segment revenues stood at $1.20 billion for the quarter, a decrease of 30.7% compared to the prior-year quarter.

The decrease in revenues was primarily the result of a reduction in Elixir Individual Part D Insurance membership due to a change in the company’s pricing structure and loss of commercial clients, partially offset by increased utilization and higher drug costs.

Shares of RAD plunged by about 50% after reports unveiled that the drugstore chain is preparing to file for Chapter 11 bankruptcy. This marked its largest-ever intraday fall and the culmination of a significant decrease from over $26 at the beginning of 2021 to below $1, where it has remained for nearly a month. The stock has declined 81.1% year-to-date to close its last trading session at $0.59.

RAD’s poor financial health has pushed many institutional holders to adjust their RAD stock holdings. Institutions hold roughly 34.5% of RAD shares. Of the 163 institutional holders, 88 have decreased their positions in the stock. Moreover, 50 institutions have sold their positions (1,512,808 shares), reflecting dwindling confidence in the company.

Furthermore, for the fiscal year 2024, the company anticipates its net loss between $650 million and $680 million, while adjusted net loss per share is expected to be between $4.29 and $4.78.

Given this backdrop, let’s look at three other stocks which could benefit from RAD’s bankruptcy:

Walmart Inc. (WMT)

WMT engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart U.S.; Walmart International; and Sam’s Club.

WMT was exploring the purchase of a majority stake in ChenMed, a value-based care organization of more than 125 primary care clinics in 15 states focused on treating older adults.

Given WMT’s ambitious growth goals for its healthcare operations, expanding its reach with value-based care makes sense. This could lead to greater engagement with patients, payers, and providers while broadening the payment models in which the companies participate.

WMT’s board of directors approved an annual dividend for the fiscal year 2024 of $2.28 per share. The annual dividend would be paid in four quarterly installments of $0.57 per share.

The annual dividend translates to a 1.40% yield on the current price. Its dividends have grown at 1.8% and 1.9% CAGRs over the past three and five years. Its four-year average dividend yield is 1.60%. WMT has increased its dividend in each of the past 49 years. This reflects its shareholder payment abilities.

WMT’s revenue grew at CAGRs of 5.2% and 4.3% over the past three and five years, respectively. Its EBITDA grew at 3.3% and 2.7% CAGRs over the same period. Also, its EBIT grew at CAGRs of 4.6% and 3.4% in the same time frame.

WMT’s trailing-12-month ROCE, ROTC, and ROTA of 17.87%, 10.60%, and 5.50% are 58.5%, 63.7%, and 28.1% higher than the industry averages of 11.28%, 6.48%, and 4.30%, respectively. Its trailing-12-month cash from operations of $37.80 billion is significantly higher than the $505 million industry average.

WMT’s total revenues for the fiscal second quarter that ended July 31, 2023, increased 5.7% year-over-year to $161.63 billion. The company’s adjusted operating income rose 8.1% over the prior-year quarter to $7.41 billion.

In addition, its consolidated net income attributable to WMT increased 53.3% over the prior-year quarter to $7.89 billion. Also, its adjusted EPS came in at $1.84, representing an increase of 4% year-over-year. As of July 31, 2023, its long-term debt stood at $2.90 billion, compared to $4.19 billion as of January 31, 2023.

Analysts expect WMT’s revenue and EPS for the fiscal third quarter ending October 2023 to increase 4.5% and 0.6% year-over-year to $158.28 billion and $1.51, respectively. The company surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

The stock has gained 14.5% year-to-date to close the last trading session at $162.35.

Moreover, ownership data indicates institutional holders have a significant interest in WMT, accounting for approximately 34% of WMT shares. Of the 3,041 institutional holders, 1,381 have increased their positions in the stock. Moreover, 168 institutions have taken new positions (4,947,591 shares), reflecting confidence in the company’s trajectory.

Walgreens Boots Alliance, Inc. (WBA)

The Illinois-headquartered integrated healthcare, pharmacy, and retailing company WBA has recently partnered with Pearl Health, a pioneering tech platform for primary care physicians within value-based care setups.

The collaborative endeavor aims to enable community-based primary care practitioners to oversee value-based care within ACO Reach, Medicare’s accountable care scheme. Beginning in 2024, the objective is to broaden the initiative to encompass Medicare Advantage, potentially including commercial payers and Medicare in the future.

Should this partnership flourish, WBA could reap substantial benefits of wider retail opportunities and reduced reliance on fee-for-service volumes. Furthermore, WBA's offering of ancillary services, such as prescription fulfillment, medication adherence, immunizations, care gap closure, and diagnostic testing, complement this collaboration. They will also work alongside providers to aid patients transitioning from hospital environments to home-based recuperation.

As such, WBA strategically positions itself as the preferred ally for healthcare providers and systems eager to transition to value-based care and bolster community well-being. It will be worthwhile to monitor the speed at which this alliance progresses and its effects on patient referrals and hospital partnerships.

On September 12, WBA paid a quarterly dividend to its shareholders of 48 cents per share. It pays an annual dividend of $1.92 that yields 9.09% on the current market price, higher than the 4-year average dividend yield of 4.54%.

WBA’s revenue grew at CAGRs of 2.7% and 1.2% over the past three and five years, respectively. Its total assets grew at CAGRs of 4.5% and 7.1% in the same time frame.

WBA’s trailing-12-month asset turnover ratio of 1.42x is 56.4% higher than the industry average of 0.91x. Its trailing-12-month cash from operations of $1.30 billion is 158.4% higher than the $505 million industry average.

For the fiscal third quarter that ended May 31, 2023, WBA’s sales rose 8.6% year-over-year to $35.42 billion, with its U.S. Retail Pharmacy segment sales increasing 4.4% from the year-ago quarter to $27.90 billion. Its net earnings attributable to WBA and net earnings per share came at $118 million and $0.14, respectively.

As of May 31, 2023, WBA’s long-term debt stood at $8.84 billion, compared to $10.62 billion as of August 31, 2022.

Analysts expect WBA’s revenue for the fiscal first quarter ending November 2023 to increase 6% year-over-year to $35.38 billion. Its EPS is expected to come at $0.92 for the same quarter. The company surpassed the consensus revenue estimates in each of the trailing four quarters and EPS in three of the trailing four quarters.

Moreover, ownership data indicates institutional holders have made changes in WBA stock holding. Institutional holdings account for approximately 58.4% of WBA shares. Of the 1,315 institutional holders, 554 have increased their positions in the stock. Moreover, 83 institutions have taken new positions (3,286,184 shares), reflecting confidence in the company’s trajectory.

Wag! Group Co. (PET)

PET develops and supports a proprietary marketplace technology platform available as a website and mobile app that enables independent pet caregivers to connect with pet parents. It offers on-demand access to 5-star pet care, pet insurance options, premium pet products, and expert pet advice.

PET’s trailing-12-month gross profit and levered FCF margins of 74.79% and 41.37% are 111% and 712% higher than the industry averages of 35.45% and 5.09%, respectively. Its asset turnover ratio of 1.93x is 92.4% higher than the industry average of 1x.

For the fiscal second quarter that ended June 30, 2023, PET’s sales rose 55% year-over-year to $19.82 million. Its adjusted EBITDA stood at $107 thousand, compared to negative $875 thousand in the prior year quarter. Moreover, its cash, cash equivalents, and restricted cash for the six months that ended June 30, 2023, stood at $ 24.79 million, up 916.9% year-over-year.

For the fiscal year 2023, PET expects its revenue from $80 million to $84 million.

Analysts expect PET’s revenue for the fiscal third quarter ending September 2023 to increase 27.5% year-over-year to $19.60 billion. The company surpassed the consensus revenue estimates in each of the trailing four quarters.

Changes have been observed concerning institutions' holdings of PET shares. Approximately 54.2% of PET shares are presently held by institutions. Of the 31 institutional holders, 12 have increased their positions in the stock. Moreover, five institutions have taken new positions (99,056 shares).

Bottom Line

The escalating incidence of chronic diseases is boosting demand for healthcare products and medications, propelling growth in the retail pharmacy market. Increasing reliance from individuals for long-term medication management and disease-focused solutions on retail pharmacies underpins this growth momentum.

Technological advancements are expected to improve retail pharmacies' efficiency while attracting more consumers and facilitating market expansion. The global retail pharmacy is expected to reach $1.22 trillion by 2032, growing at a CAGR of 7.1%.

Meanwhile, RAD finds itself in precarious financial straits. Fueled by the few earnings from its regular business operations, the company is grappling with a debt burden of approximately $3.30 billion as of June 3, 2023. With liabilities outstripping assets by roughly $1 billion and only around $135 million cash-in-hand, RAD is at a financial crossroads.

The most viable solution appears to be filing for bankruptcy, enabling management to restructure their debt portfolio and possibly address any pending opioid settlements within one unified process.

Nevertheless, given the industry tailwinds, RAD’s competitors – WMT, WBA, and PET, stand to benefit.

 

PayPal (PYPL) Struggles to Rebound Means Opportunity for 3 Stocks

Posted on by The INO.com Team

Leading fintech company PayPal Holdings, Inc. (PYPL) has underperformed the market, with its stock declining more than 30% over the past year. Investor interest in the digital payments company has declined due to rising competition and innovative disruptions brought by its peers.

The pandemic was a good period for fintech companies like PYPL. The fintech companies commanded high valuations as investors’ interest in the sector rose with accelerated digital technology adoption. Fintech companies played a vital role in supporting businesses and consumers during the crisis.

However, the high-interest rate environment and growing competition within the fintech sector have hit PYPL’s fortunes lately. Competition from the likes of tech giant Apple Inc. (AAPL), which has entered the sector with financial services such as the savings account from Goldman Sachs, which offers a 4.15% APY, Buy Now Pay Later Service, contactless payments through Tap to Pay on iPhone, Apple Card, and Apple Pay have affected PYPL’s market share.

Earlier this year, PYPL announced that it would lay off 2,000 people, or 7% of its workforce, to reduce costs and focus its resources on core strategic priorities. Although PYPL surpassed the consensus revenue estimate in the second quarter, it failed to top analysts’ earnings estimates.

Its EPS was 0.3% below the consensus estimate, while its revenue beat analyst estimates by 0.2% in the second quarter. Its net revenues for the second quarter ended June 30, 2023, rose 7% year-over-year to $7.30 billion. Its non-GAAP EPS came in at $1.16, representing an increase of 24% year-over-year. Also, its total payment volume increased 11% year-over-year to $376.50 billion.

However, PYPL ended the second quarter with 431 million users on its platform, declining 2 million sequentially and 4 million year-over-year. This was the second consecutive quarterly decline in its users. The decline in users is alarming as it affects PYPL’s revenue and earnings. For the third quarter, PYPL forecasted its revenues to grow approximately 8% to reach $7.40 billion.

Also, its non-GAAP EPS is expected to grow between 13% and 14% to $1.22 and $1.24. For fiscal 2023, the company expects non-GAAP EPS to grow approximately 20% year-over-year to $4.95.

SVB MoffettNathanson analyst Lisa Ellis downgraded PYPL to ‘market perform.’ Ellis said, “Looking forward, unfortunately, we expect PayPal’s gross profit growth to remain lackluster, in the low-to mid-single digits. We see the potential for further downside to our estimates, particularly given the strong momentum of Apple Pay, which we worry will begin to benefit from the powerful network effects in payments.”

Alex Chriss is expected to take over as the company’s new CEO from September 27. The change in leadership comes during a challenging period for the company. Although the appointment holds promise, whether the new CEO can turn PYPL’s fortunes around has to be seen.

Although the global digital payments and financial services ecosystem remains well-positioned to register strong long-term growth, PYPL faces several headwinds. Amid PYPL’s current challenges, fundamentally stable financial services stocks Visa Inc. (V), Mastercard Incorporated (MA), and American Express Company (AXP) might benefit.

Let’s discuss these stocks in detail.

Visa Inc. (V)

V is a global payments technology company that enables digital payments between customers, merchants, financial institutions, enterprises, strategic partners, and government agencies. It also administers VisaNet, a transaction processing network that allows for the authorization, clearing, and settlement of payment transactions.

On June 28, 2023, V announced that it signed a definitive agreement to acquire Pismo, a cloud-native issuer processing and core banking platform with operations in Latin America, Asia Pacific, and Europe. V’s Chief Product and Strategy Officer Jack Forestell said, “Through the acquisition of Pismo, Visa can better serve our financial institution and fintech clients with more differentiated core banking and issuer solutions they can offer their customers.”

V’s revenue grew at a CAGR of 11.6% over the past three years. Its EBITDA grew at a CAGR of 12.1% over the past three years. In addition, its EPS grew at a CAGR of 14.4% in the same time frame.

V’s 51.94% trailing-12-month net income margin is 101.4% higher than the 25.78% industry average. Likewise, its 67.09% trailing-12-month EBIT margin is 238.7% higher than the 19.81% industry average. Furthermore, the stock’s 51.61% trailing-12-month levered FCF margin is 252.3% higher than the 14.65% industry average.

V’s net revenues for the third quarter ended June 30, 2023, increased 12% year-over-year to $8.12 billion. Its non-GAAP net income rose 7% year-over-year to $4.50 billion. The company’s operating income increased 21.1% over the prior-year quarter to $5.02 billion. Its non-GAAP EPS came in at $2.16, representing an increase of 9.1% year-over-year.

Analysts expect V’s EPS and revenue for the quarter ending September 30, 2023, to increase 16.3% and 9.9% year-over-year to $2.24 and $8.56 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters.

Mastercard Incorporated (MA)

MA is a technology company that provides transaction processing and other payment-related products and services. It facilitates the processing of payment transactions, including authorization, clearing, and settlement, as well as delivers other payment-related products and services. The company offers integrated products and value-added services for account holders, merchants, financial institutions, and businesses.

On May 26, 2023, MA and UniCredit announced the expansion of their payment partnership. The multi-year partnership will provide the necessary resources to achieve the shared ambition to increase the speed of innovation within the payments space and put customers at the center.

On April 5, 2023, MA announced that it was accelerating efforts to remove first-use PVC plastics from payment cards on its networks by 2028. This move reinforces the company’s sustainable efforts.

MA’s revenue grew at a CAGR of 13.3% over the past three years. Its levered FCF grew at a CAGR of 15.2% over the past three years. In addition, its net income grew at a CAGR of 11.8% in the same time frame.

MA’s 100% trailing-12-month gross profit margin is 67.9% higher than the 59.55% industry average. Likewise, its 57.14% trailing-12-month EBIT margin is 188.5% higher than the 19.81% industry average. Furthermore, the stock’s 0.63x trailing-12-month asset turnover ratio is 198.7% higher than the 0.21x industry average.

For the fiscal second quarter ended June 30, 2023, MA’s net revenue increased 14% year-over-year to $6.27 billion. Its non-GAAP net income rose 9.8% over the prior-year quarter to $2.74 billion. Its non-GAAP operating margin came in at 58.6%, compared to a non-GAAP operating margin of 57.9% in the year-ago quarter. Also, its non-GAAP EPS came in at $2.89, representing an increase of 12.9% year-over-year.

For the quarter ending September 30, 2023, MA’s EPS and revenue are expected to increase 20% and 13.4% year-over-year to $3.22 and $6.53 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters.

American Express Company (AXP)

AXP provides charge and credit payment card products and travel-related services. The company operates through three segments: Global Consumer Services Group, Global Commercial Services, and Global Merchant and Network Services. Its products and services include payment and financing products; network services; accounts payable expense management products and services; and travel and lifestyle services.

AXP’s revenue grew at a CAGR of 15.7% over the past three years. Its EPS grew at a CAGR of 26.5% over the past three years. In addition, its net income grew at a CAGR of 22.3% in the same time frame.

AXP’s 3.19% trailing-12-month Capex/Sales is 59.3% higher than the 2.01% industry average. Likewise, its 29.34% trailing-12-month Return on Common Equity is 159.7% higher than the 11.30% industry average. Furthermore, the stock’s 0.24x trailing-12-month asset turnover ratio is 12.2% higher than the 0.21x industry average.

AXP’s total revenues net of interest expense for the second quarter ended June 30, 2023, increased 12.4% year-over-year to $15.05 billion. Its net interest income rose 31.6% over the prior-year quarter to $3.11 billion. The company’s net income increased 10.7% year-over-year to $2.17 billion. Also, its EPS came in at $2.89, representing an increase of 12.5% year-over-year.

Street expects AXP’s EPS and revenue for the quarter ending September 30, 2023, to increase 19.7% and 13.6% year-over-year to $2.96 and $15.40 billion, respectively.

Bank of America (BAC) Under the Spotlight: Buy or Sell in the Face of Inflation Concerns?

Posted on by The INO.com Team

In the aftermath of three regional banking collapses earlier this year, the U.S. banking sector has wrestled amid dwindling deposits with customers seeking higher yields, escalated deposit costs, low loan growth, and shrinking profit margins. However, the industry showcased a degree of stability.

This semblance of recovery emerged as the Federal Reserve raised the benchmark interest rates to the peak in over two decades, a trend anticipated to reverse in the upcoming year. Typically, increased interest rates produce gains for banks through elevated net interest income.

Nevertheless, the U.S. banking sector persists in hemorrhaging deposits. Deposits have declined for the fifth consecutive quarter ending June 30, 2023. During the second quarter alone, FDIC-insured banks witnessed a nearly $100 billion drop in deposits.

Furthermore, the industry’s net income saw a $9 billion reduction to $70.80 billion in the second quarter, and the average net interest margin shrank by three basis points to 3.28%.

The perceived stability was also questioned merely two weeks after Moody's decided to downgrade the credit ratings of 10 mid-sized and smaller banks. Adding to the unease, bond rating agency Fitch has issued warnings, and subsequently, S&P Global Ratings cut the ratings of five American banks and put an extra two on alert, given the increasingly complex high-interest rate business climate.

Such a succession of downgrades from credit rating agencies could make obtaining loans more complex and costly for borrowers. Shares of the nation’s second-largest bank, Bank of America Corporation (BAC), suffered along with other bank stocks after Fitch’s warnings.

The Current Scenario

BAC has reported an increased number of its customers struggling with credit card payments, acknowledging that its credit card sector's performance lags behind expectations. Rising charge-off rates delineate this underperformance.

In the second quarter of 2023, the bank saw consumer net charge-offs hit $869 million, up from $571 million from the prior year quarter. Concurrently, provisions for losses remained steady at $1.1 billion.

A surge in the net charge-off rate and the delinquency rate of BAC's BA Master Credit Card Trust II were noted in August. Nevertheless, these rates are still below those recorded before 2019.

The net charge-off rate for the trust was 2.13% in August, up from 1.89% in July but significantly less than the 2.49% registered in August 2019. Likewise, BAC's delinquency rate escalated to 1.26% in August, slightly higher than July's figure of 1.24% but keeping under the 2019 benchmark of 1.57%. While these elevated rates might indicate stable consumer conditions, some may perceive them more pessimistically.

BAC's principal receivables outstanding were valued at $13.8 billion in August, suggesting a nominal shift in lending activity relative to the preceding month. Until recently, consumers were predominantly focused on clearing their credit card and other loan debts. However, current macroeconomic instabilities might put this trend into reverse.

The Real Picture

U.S. consumers have demonstrated robust financial activity throughout this year, with persistent spending expected to catalyze a third-quarter GDP growth of up to 3.5%. Harnessing the ability of credit cards and buy-now-pay-later (BNPL) services, consumers continue to shop. Despite various cost-saving efforts, current consumption patterns still surpass the average consumer's affordability.

Bank charge-offs and write-offs maintained a steady level until a shift occurred in July when the country's six major banking institutions disclosed the highest loan loss rates since the onset of the pandemic. Credit card repayments were disproportionately affected. Credit card loans constitute nearly 25% of BAC's total charge-offs.

These heightened charge-off rates signal potential challenges as more consumers default on their monthly payments. This trend is emerging in a financial landscape where consumers grapple with escalating costs and interest rates. Concurrently, wage stagnation lags behind inflation, and supplemental benefits have been reduced.

Current consumer spending reflects necessity instead of robustness. Consumers are compelled to spend more despite receiving marginally lower goods or services than before. Instances of arrears are recorded across multiple debt avenues, including credit cards, auto loans, mortgages, and student loans. The absence of immediate full payment has fostered a propensity toward overspending.

Unsustainable spending patterns may cause a downturn in consumer spending by early 2024, fueled by mounting credit card debts and dwindling pandemic-era surplus savings. The second quarter witnessed a 4.6% spike in consumer credit card debt, setting a record $1.03 trillion, as opposed to $986 billion in the first quarter.

As the burden of irrecoverable debt continues to strain lenders' financial stability, net charge-offs for BAC will keep rising.

Investors might want to consider the following additional factors:

Recent Developments

BAC has been imposed with staggering financial penalties in the recent past, totaling $250 million, following a series of dubious practices that include overdraft fee manipulation, withholding credit card rewards, and the initiation of unauthorized accounts. While this may have short-term impacts on its financial performance for the upcoming quarter, it is not expected to cause substantial overall financial implications.

Furthermore, the bank ended the second quarter incurring over $100 billion in paper losses due to its aggressive investment in U.S. government bonds. This figure significantly surpasses the unrealized bond market losses of BAC's competitors.

BAC's investments in technology are evidently paying off. Its digitization efforts have successfully translated into an unprecedented increase in Zelle transactions by more than double since June 2020, along with a digital banking adoption rate of 74% among households. Engaging customers via online and mobile transactions is significantly less costly for the bank than traditional in-person interactions.

Over the past three years, the financial institution has conscientiously refined and modernized its financial centers nationwide. This integral enhancement enables the bank to bolster its digital services and effectively cross-market various products.

By 2026, it envisages expanding its financial center network into nine emergent markets. In conclusion, its investments in technology are expected to bolster the bank's operating efficiency.

On August 29, BAC declared the introduction of its highly acclaimed Global Digital Disbursements platform to commercial clients who hold deposit accounts at the bank's Canadian branch.

With this innovative solution, users can process an array of B2C payments and C2B collections using the client's email address or mobile phone number as identifiers. This feature presents a cost-effective and user-friendly alternative for companies seeking to replace cash or cheque payments.

Robust Financials

For the second quarter ended June 30, 2023, BAC’s total revenue, net of interest expense, increased 11.1% year-over-year to $25.20 billion. Its net income applicable to common stockholders rose 19.7% year-over-year to $7.10 billion.

Additionally, its EPS came in at $0.88, representing an increase of 20.5% year-over-year. Also, its net interest income rose 13.8% over the prior-year quarter to $14.16 billion. In addition, its CET1 ratio came in at 11.6%, compared to 10.5% in the year-ago quarter.

Robust Growth

Over the past three and five years, BAC’s revenue grew at 8% and 2.5% CAGRs, respectively. Its net interest income for the same periods grew at CAGRs of 6.4% and 4.3%, respectively.

Net income and EPS grew at 13.6% and 18.8% over the past three years, whereas, over the past five years, these grew at 6.7% and 12.8%, respectively. The company’s total assets grew at 4.4% and 6.4% CAGRs over the past three and five years, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, BAC’s 8.67x is 4.4% lower than the 9.07x industry average. Likewise, its 0.87x forward Price/Book is 10.4% lower than the 0.97x industry average.

On the other hand, in terms of forward Price/Sales, BAC’s 2.32x is 2.1% higher than the 2.27x industry average.

Mixed Profitability

BAC’s trailing-12-month Return on Common Equity (ROCE) of 11.41% is 1% higher than the 11.30% industry average, whereas its trailing-12-month Return on Total Assets (ROTA) of 0.95% is 16.9% lower than the 1.15% industry average.

The stock’s trailing-12-month cash from operations of $44.64 billion is significantly higher than the industry average of $137.73 million.

Growing Institutional Ownership

BAC’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently modified their BAC stock holdings.

Institutions hold roughly 69.7% of BAC shares. Of the 2,816 institutional holders, 1,226 have increased their positions in the stock. Moreover, 139 institutions have taken new positions (42,890,796 shares).

Price Performance

The stock has declined 13.5% year-to-date to close the last trading session at $28.65. However, over the past year, it lost 17.4%, whereas over the past six months, it gained 3%.

Shares of BAC have been making lower highs for the past 12 months, but they have not made a low since March. Its share price displayed upward and downward movement multiple times from January to September 2023. The overall value so far declined compared to the beginning of the year.

Moreover, BAC’s stock is trading below its 100-day and 200-day moving averages of $29.19 and $30.7, respectively, indicating a downtrend.

However, Wall Street analysts expect the stock to reach $35.13 in the next 12 months, indicating a potential upside of 22.6%. The price target ranges from a low of $27 to a high of $49.

Mixed Analyst Estimates

For the fiscal year ending December 2023, analysts expect both BAC’s revenue and EPS to increase 6.3% year-over-year to $100.91 billion and $3.39, respectively. Its revenue and EPS for fiscal 2024 are expected to decline 0.8% and 4.2% year-over-year to $100.13 billion and $3.25, respectively.

Moreover, for the quarter ending September 2023, its revenue is expected to surge 2.5% year-over-year to $25.12 billion, whereas its EPS is expected to decline marginally year-over-year to $0.80.

Bottom Line

The recent upturn in bank charge-offs marks a return to normalcy for the industry after an unprecedented period of low levels during the pandemic, attributed largely to decreased unemployment and substantial government financial relief initiatives.

However, this surge in 2023 introduces an anomaly in the banking sector. Several banking institutions have acquiesced under pressure, and financial experts caution that should unemployment rise above 7%, the industry could face significant complications.

Moreover, consumers will face the reinstatement of student debt payments throughout the latter half of the year, as the forbearance period concludes in October. This would force customers to navigate difficult choices regarding credit card and student debt payments, potentially causing a broader impact on delinquency rates nationwide.

Major banks maintain a positive front that there is little cause for concern moving forward. However, this optimism may rely heavily on steady unemployment rates around the 5% mark - a contingency for which plenty of banks have pre-prepared provisions. Yet, if unemployment rates deteriorate further, banks and consumers could encounter hardship during the latter half of 2023.

Despite the adversities presented, BAC continues to display a robust capacity for growth amidst a tumultuous climate. Notably, despite a downshift in revenues and net income for its Global Wealth and Investment Management unit during the second quarter, the bank still surpassed Wall Street's top and bottom-line estimates.

Also, in the last reported quarter, when most finance firms recorded subdued Investment Banking business performance, BAC’s IB numbers were impressive. Its total IB fees of $1.21 billion increased 7.4% year-over-year, which boosted its global banking unit's net income by 76% to $2.7 billion.

Nevertheless, considering the bank’s tepid price momentum, mixed analyst estimates, valuation, and profitability, it could be wise to wait for a better entry point in the stock.

TSM’s Demand Woes May Benefit 3 Chip Stocks

Posted on by The INO.com Team

Semiconductor sales reached their highest level last year despite witnessing a slowdown during the year's second half. The slowdown was primarily due to the decline in demand from the end-user markets because of macroeconomic headwinds.

According to Gartner, global semiconductor revenues will decline 11.2% in 2023. Popular chipmaker Taiwan Semiconductor Manufacturing Company Limited (TSM) is also witnessing a slowdown in demand. According to sources, the company, to control costs, has asked its major suppliers to delay the delivery of chipmaking equipment.

Although the long-term growth prospects of the semiconductor industry look bright, the near-term headwinds will continue to put pressure on the chip industry in the short term. Gartner’s Practice VP Richard Gordon said, “As economic headwinds persist, weak end-market electronics demand is spreading from consumers to businesses, creating an uncertain investment environment.”

“In addition, an oversupply of chips, which is elevating inventories and reducing chip prices, is accelerating the decline of the semiconductor market this year,” he added. In July, TSM, a major supplier to smartphone giant Apple Inc. (AAPL), forecasted that it would witness a 10% drop in sales in 2023, and its investment spending would be at the lower end of its estimate of $32 billion and $36 billion.

TSM CEO C.C. Wei highlighted that the decline in demand would be mostly due to a tepid recovery in China, soft demand in the end market, and a weak global economic scenario. Although the demand for artificial intelligence (AI) chips is likely to remain strong, it is unlikely to offset the softer demand in the end markets due to declining sales of smartphones, personal computers, laptops, etc.

Degroof Petercam’s analyst Michael Roeg said, “There has been a lot of excitement about artificial intelligence and the implications for the semiconductor industry. However, the strength in demand for AI chips is not strong enough to compensate (for) what is happening in other segments.”

After global demand for consumer electronics spiked during the pandemic, companies had stockpiled chips to meet the high demand. However, as the demand slowed down in the end markets due to high inflation, companies were stuck with excess inventories, and this led to a fall in the demand for chips, followed by a decline in their prices.

TSM’s CFO Wendell Huang said, “Moving into the third quarter 2023, we expect our business to be supported by the strong ramp of our 3-nanomenter technologies, partially offset by customers’ continued inventory adjustment.”

AAPL, a major TSM customer, announced its latest iPhone series with the cutting-edge 3-nanometer chip but did not raise prices, indicating softness in the smartphone market. AAPL is currently facing trouble in a key market like China as the Chinese government banned some government employees from using iPhones at work.

Furthermore, smartphone maker Huawei came up with the Mate 60 series, which utilizes an advanced chip made by Chinese chipmaker SMIC. All these factors might put pressure on iPhone sales this year, piling further pressure on TSM.

Moreover, TSM is facing delays at its Arizona plant. The company was forced to push back production at the plant by a year to 2025 as it faced difficulty recruiting workers and pushback from unions due to its efforts to bring workers from Taiwan. After investing heavily in expanding its capacity, the company is looking at a slower increase in capital expenditure in the coming years.

As TSM’s headwinds are expected to continue, fundamentally stable chip stocks Infineon Technologies AG (IFNNY), STMicroelectronics N.V. (STM), and ChipMOS TECHNOLOGIES INC. (IMOS) might benefit.

Let’s discuss these stocks in detail.

Infineon Technologies AG (IFNNY)

Headquartered in Neubiberg, Germany, IFNNY designs, develops, manufactures, and markets semiconductors and related system solutions worldwide.

On August 3, 2023, IFNNY announced its decision to expand its Kulim fab over and above the original investment announced in February 2022. The company will build the world’s largest 200-millimeter SiC (silicon carbide) Power Fab. The expansion is backed by new design wins in automotive and industrial applications for about five billion euros and about one billion euros in pre-payments.

The company will additionally invest up to €5 billion in Kulim during the second construction phase for Module Three. The investment will lead to an annual SiC revenue potential of about €7 billion by the end of the decade, together with the planned 200-millimeter SiC conversion of Villach and Kulim.

IFNNY’s CEO Jochen Hanebeck said, “The market for silicon carbide shows accelerating growth, not only in automotive but also in a broad range of industrial applications such as solar, energy storage, and high-power EV charging. With the Kulim expansion, we will secure our leadership position in this market.”

IFNNY’s revenue grew at a CAGR of 26.1% over the past three years. Its EBITDA grew at a CAGR of 45.7% over the past three years. In addition, its EPS grew at a CAGR of 96% in the same time frame.

In terms of trailing-12-month net income margin, IFNNY’s 19.13% is 840.7% higher than the 2.03% industry average. Likewise, its 35.32% trailing-12-month EBITDA margin is 285.9% higher than the industry average of 9.15%. Furthermore, the stock’s trailing-12-month Capex/Sales came in at 15.52%, compared to the industry average of 2.42%.

For the third quarter ended June 30, 2023, IFNNY’s revenue increased 13% year-over-year to €4.09 billion ($4.37 billion). Its adjusted gross margin came in at 46.2%, compared to 45.4% in the prior-year quarter. The company’s profit for the period rose 60.7% year-over-year to €831 million ($887.97 million). Also, its adjusted EPS came in at €0.68, representing an increase of 38.8% year-over-year.

Analysts expect IFNNY’s revenue for the quarter ending September 30, 2023, to increase 2% year-over-year to $4.37 billion. It surpassed the consensus EPS estimates in three of the trailing four quarters.

STMicroelectronics N.V. (STM)

Based in Geneva, Switzerland, STM designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. The company operates through the Automotive and Discrete Group, Analog, MEMS, and Sensors Group; and Microcontrollers and Digital ICs Group segments.

STM’s revenue grew at a CAGR of 21.6% over the past three years. Its EBIT grew at a CAGR of 65.7% over the past three years. In addition, its net income grew at a CAGR of 69.5% in the same time frame.

In terms of trailing-12-month net income margin, STM’s 27.45% is significantly higher than the 2.03% industry average. Likewise, its 29.78% trailing-12-month EBIT margin is 559.7% higher than the industry average of 4.51%. Furthermore, the stock’s trailing-12-month asset turnover ratio came in at 0.88x, compared to the industry average of 0.62x.

STM’s net revenues for the second quarter ended July 1, 2023, increased 12.7% year-over-year to $4.33 billion. Its net cash from operating activities rose 24.1% year-over-year to $1.31 billion. The company’s net income rose 15.5% year-over-year to $1 billion. Also, its EPS came in at $1.06, representing an increase of 15.2% year-over-year.

Street expects STM’s revenue for the quarter ending September 30, 2023, to increase 1.7% year-over-year to $4.38 billion. Its EPS for fiscal 2023 is expected to increase 3.3% year-over-year to $4.33. It surpassed the Street EPS estimates in three of the trailing four quarters.

ChipMOS TECHNOLOGIES INC. (IMOS)

Headquartered in Hsinchu, Taiwan, IMOS researches, develops, manufactures, and sells high-integration and high-precision integrated circuits and related assembly and testing services. It operates through Testing, Assembly, Testing, and Assembly for LCD, OLED, and Other Display Panel Driver Semiconductors, Bumping; and Others segments.

IMOS’s total assets grew at a CAGR of 8.7% over the past three years. Its Tang Book Value grew at a CAGR of 6.8% over the past three years. In addition, its revenue grew at a CAGR of 2.9% over the past five years.

In terms of trailing-12-month net income margin, IMOS’ 8.63% is 324.4% higher than the 2.03% industry average. Likewise, its 29.37% trailing-12-month EBITDA margin is 220.9% higher than the industry average of 9.15%. Furthermore, the stock’s trailing-12-month Capex/Sales is 15.32%, higher than the industry average of 2.42%.

For the fiscal second quarter ended June 30, 2023, IMOS’ revenue came in at NT$5.44 billion ($169.84 million). Its net non-operating income came in at NT$222.40 million ($6.94 million. The company’s net profit attributable to equity holders of the company came in at NT$628.50 million ($19.62 million). Also, its EPS came in at NT$0.86.

For the quarter ending September 30, 2023, IMOS’ revenue is expected to increase 6.9% year-over-year to $176.86 million.