VIDEO: 4 Key Things to Watch Next Week — Including Costco

In today’s Daily Rundown video, Chris Versace shares what the portfolio will be looking at next week when more retailers report their quarterly results, including Costco (COST). 

He also points out the economic reports the market will focus on next week, and why he’s more focused on the April PCE Price Index data.

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here. It is, Friday, May 24, the end of the week. And I suspect we're going to have a very quiet day of trading today, especially the afternoon session. "Why" behind that is it's very simple-- we have a three-day weekend ahead of us.

That's right. US equity markets are closed on Monday to celebrate the Memorial Day holiday. And I think that as a result, trading volumes will thin out, know, there won't be a lot of conviction in the afternoon market activity. Instead, I think that folks will be wanting to get out, enjoy that holiday weekend. And I encourage you to do the same.

But I also wanted to take a minute just to recap what our current plan for the portfolio is and relate that to what we'll be looking at next week, which will be one of those compressed weeks -- only four trading days during the week as we close out the month of May. So our plan with the portfolio is to prudently put some capital to work. As I mentioned in yesterday's video, we are seeing the market kind of come back around to our line of thinking about the economy and about the timing of Fed rate cuts.

Typically, when the market has to rethink things, it kind of, particularly when it comes off a greedy and euphoric mode, stocks tend to retreat, and that gives us an opportunity to potentially pick up or round out some shares of existing positions in the portfolio, perhaps maybe even allow us to bring something new into the portfolio. Now, to be clear, I'm not saying that we're going to do either, but we are doing our homework on that as we go into the holiday weekend. And this will mean that you should really pay attention to our alerts and our thoughts when we come back from the holiday weekend and move into the compressed week that is next week.

In terms of that week, there are a number of things going on, particularly on the earnings front. We're going to continue to have another wave of retail-facing companies, the likes of Abercrombie & Fitch, American Eagle, Dick's Sporting Goods, Foot Locker, and, of course, Ulta. When it comes to Ulta, you know that we'll be paying attention for what they have to say about their domestic business, particularly as a read-through for cosmetic demand, fragrance demand, and what that means for Coty.

Yesterday, we did add to our Coty position on the back of favorable comments both from Target on its beauty business and Elf Beauty's upbeat outlook. I do expect that we'll see more of that from Ulta. But we have to remember, too, that Ulta and Sephora are kind of battling it out for market share.

So while we'll be mindful of Ulta's comments, we will want to take a larger look as we think about Coty's shares. Our position on Coty, just to remind you all, is that we continue to like the company because of its turnaround strategy that is paying off-- market share gains, improving margins. And, as I shared in our trade alert yesterday, when we look at the next three quarters, meaning the June, September, and December quarters, we see robust earnings growth on a year-over-year basis, more than double what's expected for the S&P 500. So that's what's keeping us bullish. But of course, we will continue to catch and examine new data points as they become available.

Also next week, we have quarterly results from Costco. Now, look, when we measure Costco's recent monthly sales reports against the retail sales reports and other retailers-- Target, for example, that saw declining comp sales-- it's very obvious to us that Costco is continuing to win consumer wallet share. So we know this, but then the question becomes, what will we be focusing on when Costco reports, really, two things.

First, we want an updated look at the expansion plans for its membership warehouse growth. This is the key, remember, to driving incremental revenue growth for that very high margin membership fee revenue stream. That accounts for a significant percentage of the company's bottom line.

So as it continues to grow that, we should see continued earnings growth. The second thing we'll be listening for when it comes to Costco is areas that it's seeing of disinflation. We'll be factoring that into our larger thoughts about the economy, and inflation, and Fed rate cut potential.

The wild card when it comes to Costco is whether or not they'll finally discuss the much anticipated, highly awaited membership fee price increase. We could get it. I'm not saying we will. But it's something we will be listening for because it will lead to a wave of price target increases pretty much across the board, I believe. And, certainly, it would allow us to revisit our current price target for Costco shares likely higher as well.

Now, when it comes to the economy and data next week, there's really two key data points that folks are going to be looking at, ourselves included. First is going to be the next revision for GDP. Remember, the first quarter GDP print was 1.6%. This is the first revision for that. By and large, it's expected to move higher. But we'll have to see what degree.

And, again, as we get that, we'll be rethinking, as needed, our views on the economy and prospects for earnings expectations. But candidly, given that we're going to be almost 2/3 of the way through the current quarter, I would argue that the GDP revision for the first quarter is rather rearview-facing.

We'll pay attention to it. We'll be mindful, but I don't think it's going to be as constructive as some of the upcoming data that we'll get in the next few weeks that really paints the picture for the month of May. The second data point, though, that we will be focusing will be the April personal income, and spending, and PCE price index data.

When it comes to the personal income and spending data, we will want to see, are wages continuing to grow? Are we seeing the continuation of real wage growth, which helps power consumer spending? On the spending side, we will want to dig into the categories of the report and see exactly where are consumer spending, how does that match up with what we've been hearing from companies, and how does that stack up against how we're positioned inside the portfolio?

Again, it's one of these reports that will give us a nice check on where we are and, potentially, it could give us some clues as to where we might want to be thinking as we understand more granularly where consumers are spending. That will be important. But I would argue that the more important aspect of that trio of data is going to be the PCE price index, especially the core PCE price index.

As we close out this week, the consensus expectation is for the April core PCE price index to fall to 2.7% from 2.8%. That would be a positive development on the inflation front. And we know the Fed will be paying attention to this because that is one of their preferred inflation metrics. But we will also want to revisit those expectations as we get closer to the report when it's out on Friday, May 31.

We will be sharing those updated expectations with you later next week. And again, based on what we learn, we will revisit our expectations for Fed rate cuts. But, candidly, just given the comments from what we heard from a variety of Fed heads this week, including Fed Governor Waller, that we'll need to see three to five months of continued improvement, plus what we saw in the flash May PMI report, inflation is, indeed, persistent, not really backing down, I think that this will be a nice data point if we see progress in the core April PCE price index, but, again, we're going to need to see more. So we will continue to evaluate things as we move forward both for the portfolio, as well as the economy and expectations for Fed rate cuts.

With that, folks, I'm going to wish you a happy holiday weekend. Get out there, enjoy yourselves, but please be sure to check back. We will have some roundup comments for you. And we'll also have some more sharings from our notebook, i.e. signals for the portfolio. So please be sure to take a look at those, whether it's later today, over the weekend, at your leisure. But again, get out, have some fun, and we'll see you back here Tuesday morning. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio was long COST.