VIDEO: Tying the Day's Biggest Results to Our Positions

In today’s Daily Rundown video, Chris Versace explains why the market is recalibrating rate cut expectations and relates quarterly results from PulteGroup PHM, Construction Partners ROAD, Herc Holdings HRI and SAP SE SAP to several of our holdings. 

Chris also reminds that the Portfolio will continue to look for opportunity but, ahead of the next Fed Beige Book and Thursday’s Flash October PMI data, the risk of more market recalibration means we’ll let stock prices come to us. Closing out today’s video, Chris offers his view on Lockheed Martin’s LMT earnings, sharing why it was favorable but also what it was missing.

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here, Tuesday, October 22. And as you've probably seen by now, the markets are a little bit in the red. Renewed concerns of the pace of Fed rate cuts are starting to take center stage, we could say.

We shared that this could very well happen with you last week, and we talked about it in yesterday's video as well. And today, in a kind of a long note with a bunch of supporting charts, we laid out some of our supporting thinking behind why we thought this would happen. When we closed out that note, one that I would really encourage you to take a look at, we shared that later this week, we have the Fed Beige Book, the latest iteration, as well as on Thursday, the Flash October PMI. They could lead to some additional what we could call recalibration in the market about the pace of Fed rate cuts.

As the market absorbs that and that recalibration occurs, it could bring some opportunities for us to put some capital to work, especially in some of our more interest rate sensitive names like Builders FirstSource, which you probably noticed is trading off today. Remember, we're not in a rush. We're going to let stock prices come to us, as I like to say. We're looking for more favorable risk to reward entry levels in various positions on our shopping list. We talked about that shopping list in Friday's weekly roundup.

The other thing that's going on this week is, yes, the pace of earnings, as I noted yesterday, is accelerating. And as you know, we'd like to really dig into customers, competitors, suppliers for the various holdings that we have ahead of their reports, in part so we can get ready for what they're likely to say, but also to update our investment thinking and our relative thesis for these various positions. Remember, we're not crockpot investors, as I say, we are active investors, consuming a lot of data to make sure that we are on the right path with our holdings.

Now, with that, let's take a look at some of the reports that came in the last, let's call it 24 hours or so. First one I want to look at is home builder PulteGroup. Now, we've talked quite a bit about other home builders from Lennar to KB Home when they reported in September, and they talked about a very nice second half delivery expectations. But we also know that the housing market's a little regional and depending on the home builder, they might be impacted more or less based on what happened with the rash of hurricanes that we've seen.

Pulte is one that kind of fits into that camp. During the first half of the year, they delivered or closed, as they like to say, 15,192 homes. They closed about 7,924 in the third quarter. And their guidance, when we take a look at it, says that they'll probably do somewhere between 15,800 to 16,200 plus or minus in the second half of the year. In other words, about 4% to 6% higher compared to the first half of the year.

Again, not as much as those double digit figures put out by the likes of KB Home and Lennar. But this is also after the hurricane. So we have to factor that into our thinking. On the earnings call, Pulte management talked about some of the issues that they were facing, particularly in Florida and other southeastern regions as it relates to the hurricanes. Combination of things. Lost construction days, obviously, but also power and the restoration of power taking longer as utilities focus more on getting the grid up, serving not only businesses and residential homes, but they're focused more on that than on new home construction. Kind of understandable.

As we sit back and think about what Pulte is saying here, even though they still see a stronger second half of the year, it's kind of in line with the resetting of expectations that we saw yesterday from Construction Partners for their back half of the year, again impacted by a series of hurricanes. So when it comes to Builders FirstSource, United Rentals, Vulcan Materials, and to some extent Waste Management, odds are we're going to hear something very similar.

Our plan is we're going to let this wash over these particular shares when they report if their guidance is a little weaker than expected or if they have strong quarters, just not as strong as the market was expecting, because these factors are known and we are accounting for them. However, we know that the medium to longer term outlook with these stocks remains very favorable. How do we know this? Well, obviously, there's the confluence of ongoing infrastructure spending, the Fed moving further down the rate cut curve.

Granted, it may not be as fast as some people are thinking, but they will continue to move toward a neutral rate over the next 12 to 18 months, and that will continue to foster an improving housing market. We continue to think that the sweet spot likely to emerge late in 2025, really in 2026. So we can say the medium to longer term outlook, given all these factors, is very positive.

But we also had that type of confirmation from Construction Partners yesterday. Remember their core business, they guided it up 10% to 15% in 2025 before the impact of any acquisitions that are pending. Also too this morning, rental equipment company Herc Holdings, they lifted their 2024 outlook due in part to rebuilding efforts. And all of that is very positive for when United Rentals reports after Wednesday's market close. Again, they might disappoint a little bit, but the medium to longer term outlook is positive. Same goes for Vulcan Materials, same goes for Builders FirstSource, same is going to go for Waste Management.

Now, let's switch gears a little bit and think about SAP, because they reported last night, and we said we would be paying attention to what they have to say. Yes, about software demand, but more about cloud and cloud and AI. And what they said was that about 30% of their cloud orders in the quarter were due to AI.

Now, those comments really, really help signal and affirm other signals that we've been sharing with you on the weekends about AI adoption accelerating across a widening array of sectors. Our thinking is that SAP's earnings and those signals bode extremely well for ServiceNow's earnings later this week. I believe the date is Wednesday after the market close. It also bodes well for our newest position in the portfolio, Elastic or ESTC shares as well. Continue to those. If you haven't picked up a position, they have traded off a little bit since we've been building ours. We still have room to go, but the risk reward here is favorable.

And then finally, I want to close out today's video just really talking quickly about Lockheed Martin. Yeah, the revenue's missed a little bit. Not exactly a big deal. The bottom line was very favorable relative to expectations, showing the earnings leverage as the F-35 starts to ramp. Did we see anything significantly wrong in the report or do we have any beef, if you will, with the company's guidance? No, not at all.

If you look through it all, I think the key takeaway is they raised their revenue and profit guidance, raised their cash flow guidance. All in all, pretty good. The only disappointment that we would really share is not much was really said about 2025. We will scrub the earnings call a couple times to make sure we didn't miss anything.

And we, of course, will report back. But when it comes to revisiting our Lockheed Martin price target, we want to see the multi-year delivery schedule and what it shows for 2025 and 2026 to account for the ramping, especially in F-35 deliveries. Through the first half of the year, Lockheed delivered no F-35s. In the fourth, sorry, in the September quarter, they delivered around 48. So we want to get a better handle on what the delivery expectation is for the December quarter, all of 2025 and all of 2026. As that comes into focus, we will look to revisit our Lockheed Martin price target.

So that's some of the earnings that have kind of unfolded today. We have more coming after the close. We have a lot more in the balance of the week, including results for ServiceNow, as I just mentioned, for United Reynolds, and Labcorp. And we will also be watching, as I like to say, competitors, customers, and suppliers for all of our holdings. We'll also be keeping our eyes out for any pre-announcements that might happen.

So I would ask that as the earnings pace accelerates, please be sure to check your emails, your alerts. We want to make sure you're getting our latest thoughts. And if we have to make any prudent moves with the portfolio or if a position kind of falls into that sweet spot that we think we can pick up more shares at a very favorable risk to reward trade off, we want you right there with us. So again, please continue to check your emails, your alerts.

And with that, I will see you all this afternoon at office hours, 4:00 to 5:00 in the portfolio forum. And of course, we'll be back with regular comments throughout the day today, tomorrow, and back with another fresh video to share with you tomorrow. Thanks for watching.

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