VIDEO: Here's Where the Market’s Rebound Leaves Us
As we enjoy the portfolio’s success, we won’t become complacent.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
In today’s Daily Rundown, Chris Versace discusses why quarterly results from PepsiCo PEP reinforce our focus on earnings prospects for the coming quarters.
He also explains why the market’s positive finish for the week puts us right back where we were coming into it ahead of comments from Fed Chair Powell on Monday.
Transcript
CHRIS VERSACE: Hey, folks. Chris Versace here, July 12, Friday, end of the week, and the market is moving nicely higher, rebounding from the pullback of sorts that we saw yesterday. But we're also seeing some very nice follow through on several portfolio positions that we happen to raise the price targets for earlier this week.
I'm talking Apple, Nvidia, Qualcomm, and Universal Display, all after a series of events that just simply supported our thesis for each of those positions. You know what I'm talking about. You've seen the Alerts.
But I also wanted to share that we are starting to see some movement in some other portfolio positions, some of which have been, you know, near oversold or oversold territory. I'm referring here, of course, to Coty, Builders FirstSource, which has had a nice move as the market kind of comes around to our way of thinking that eventual rate cuts should be positive for homebuilding activity, especially as home builders look to maintain their margins or improve them by embracing value-added products like the ones offered by Builders FirstSource. So, we continue to that position. Even though we've seen a nice move, we do think that our one rating still stands for that.
Another example would be PepsiCo, which as we saw, was kind of pulling back towards the low 160s. Shares have rebounded nicely. And the reason for that really speaks to one of our points of focus as we move deeper into the current earnings season. And I'm talking about earnings expectations for the second half of the year.
Why am I calling out PepsiCo for this? Well, yesterday the company reiterated its guidance for 815 and EPS for 2024. And when we size that up to the first half of the year, it shows that the company should deliver around 19% earnings growth in the second half of the year compared to the first half. As we know, that is significantly better than what the market consensus has for the overall EPS growth in the second half of the year for the S&P 500.
And if you read the note about PepsiCo, you kind of saw what I was talking about in this. And I think the market kind of has to come around and realize that there is more to PepsiCo than simply the North American Beverage business and the salty snack business. I'm referring, of course, to the rebound that we're starting to see unfold in Quaker, which had been a drag on the company's bottom line earlier this year, but also the continued efforts are starting to pay off on the international markets. So PepsiCo continues to look primed to deliver further margin expansion across all of its businesses and faster than market earnings growth.
So with that, we do want to continue to monitor the competitive landscape because while PepsiCo is looking to smartly, in our view, focus on margins, there could be some of its competitors out there-- Coke, Dr. Pepper, Keurig, or others-- that might look to simply take market share in the near term. In our view that is a long-term losing strategy. And we'll continue to stick with PepsiCo, watching for opportunities to potentially pick up some additional shares for the portfolio now that we've got the second quarter in the rearview mirror.
I also wanted to say that today's move in the market, while positive, is also putting the S&P 500 pretty much back to where we were at the beginning of the week. What do I mean by that? It has re-entered overbought territory. And as a result of that, yes, the PE multiple is continuing to look a little stretched. And that, of course, has us on guard for what potentially lies ahead.
So on the one hand, the portfolio is doing well and I do appreciate the comments that members are posting in the comment sections for some of the articles or over in the forum. A lot of what we've been angling towards is starting to really pay off and I'm very happy about that. But we also know that we have a long way to go before the end of the year and beyond, which means that while the portfolio is doing well, we cannot afford to become complacent.
As we know all too well, things evolve and they change, which means that we will need to pay attention to the shifting landscapes for each of our positions-- their competitors, their customers, but also for the market, and of course, the overall economy. So as we move deeper into the current quarter earnings season, we are going to start to see the velocity of earnings reports really start to heat up. We'll get more economic data. So we'll be updating our investment mosaic for the second half of the year as we go through that.
And as it relates to corporate earnings reports, we will be paying attention to those, obviously, for the ones in the portfolio. But we'll also be digging into those for their customers, their competitors, and their suppliers. So again, we can really have a nice update for the road ahead. And as that gets updated, we will, of course, revisit the positions in the portfolio, making any adjustments that we might need to. But I have to say, as we sit here today, I do feel rather good about the majority of the portfolio.
As we go through that earnings season, we will also be paying close attention to earnings prospects for the second half of the year, both for companies in the portfolio, just like we did with PepsiCo, but also for the overall market. Again, we're going to want to continue to focus in on companies that are growing their earnings faster than the market. The next couple of weeks will give us a nice ability to update that thinking.
One other thing, if you saw our Alert today about the June PPI report, obviously the data inside of that for the month of June surprised a little bit to the upside. But when we looked at the trend on year-over-year core PPI, even on a trailing basis, the last few months show that it's been ticking-- I hate to say this, but in the wrong direction. Our thinking that that is not going to go unnoticed by the Fed. And that means we will have to spend even more attention to what Fed Chair Powell has to say on Monday.
Earlier this week, in his back-to-back testimony, he was incrementally favorable, I would say, with body language and tone towards the notion of rate cuts. But again, the Fed is data-dependent, as are we. And what we saw today in the June PPI report is going to push back a little bit on that. Powell's comments on Friday will give us some indication as to how much my thinking and the thinking I shared in the note with you is that this latest data point reaffirms the notion that the move down to the Fed's target or even to levels at which it's going to consider start cutting interest rates, it's not going to be a smooth, declining curve.
There will be fits and starts to it. As a result, I think that this means that the Fed's going to acknowledge that we are going to want to see even more good data. We do have a lot of data coming at us for the month of July, August and September before the Fed's September policy meeting. So we'll continue to monitor this and update our thinking about rate cuts, their timing, and their number for 2024 as fresh data becomes available. And as we do that, we will continue to steer the portfolio as needed.
So with that, I would just say, please be sure to check your emails, check your Alerts. We want you always right there with us in our latest thinking and if we make any moves with the portfolio. I would also say join us back here on Monday when we're going to lay out our game plan for the week ahead. And with that, folks, have a wonderful weekend.
At the time of publication, TheStreet Pro Portfolio was long PEP.
