VIDEO: Why We're Staying on the Sidelines for This Construction Holding

In today’s Daily Rundown video, Chris Versace explains why we’re staying on the sidelines with Builder FirstSource BLDR shares in the near term and gets us ready for more Big Tech earnings beginning after Tuesday's market close. 

That means discussing expectations for Alphabet’s GOOGL results and the key items we’ll be focusing on. Chris also discusses new research coverage on Trade Desk TTD shares and what Corning GLW said on Tuesday morning that brings another layer of support for our shares of Marvell MRVL.

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here, Tuesday, October 29. And if you've looked at the markets, you can see that they're mixed today. Investors are digesting a few things-- the latest wave of earnings, but also the tick higher in the 10-year Treasury yield. Folks are also waiting for what happens after the close today. I'm referring to how Alphabet is going to kick off the next big wave of earnings for big tech. And that, again, that happens after today's market close.

And just to lay the groundwork for it, we are starting to see a wider array of companies across different sectors report. And it's turning a little bit more into a mixed bag, not quite the across the board strength that we saw with financials a few weeks ago. So case in point, and we'll use the portfolio as an example, Waste Management put up some very good numbers last night, very thesis reaffirming with pricing, margin expansion, so much so that they lifted their expectations for the balance of the year. We have to continue to wait for the closing of the Stericycle acquisition, which I think will be very helpful for them widening out their end markets, also some other margin improvement opportunities over time.

We'll have more comments on that later. But offsetting the increase we're seeing in Waste Management is the pressure that is on our shares of Builders FirstSource. And I think there are really two things at play here. First, yes, there is the continued tick higher in the 10-year Treasury yield, but there is also the arguably weaker than expected outlook for the next 12 months issued by DR Horton, who's one of the largest home builders out there.

We had a note on this, but I just wanted to spend a few minutes on this because I suspect there might be some questions, folks saying Builders FirstSource, shares are under pressure. Should we be buying here? What should we do, Chris?

And in the Alert, I kind of tried to walk through that, yes, they're under pressure. It likely reflects the softer home delivery schedule put out by DR Horton. But that, in and of itself, also reflects the risk that we see out there for the Fed delivering fewer rate cuts over the next several quarters than what the market had been expecting. And in yesterday's video, we talked about how last week the expectation was for five 25-basis point rate cuts. Then, midweek, it was about 4 and 1/2. And coming into this week it was for four 25-basis point rate cuts between November and June.

Now, we have some data coming ahead of us, including the first print at September quarter GDP, the September PCE price index, the ISM manufacturing services, and PMI reports this week, next week, but also Friday's employment report. And as we've been discussing with you, there are reasons to think that the Fed does not need to move aggressively with rate cuts. In fact, in one of our Alerts this morning, we shared with you some findings from a survey from high ranking executives across Morgan Stanley, Apollo, State Street, and several others that they think the Fed could deliver maybe one rate cut between now and the end of the year. And the current consensus is for two.

So where I'm going with all of this is we want to let all of this wash over expectations for rate cuts, what that means for mortgage expectations, and interest rate sensitive areas like housing. Once all of that has been baked into the cake and we have the Fed's policy statement next week and Fed Chair Powell's comments, then we will start to revisit Builders FirstSource shares. So, but what's our medium to longer term thinking on Builders FirstSource?

We the Fed over time wants to get monetary policy back to a more neutral rate. Even after the 50-basis point rate cut, folks have said that it is still somewhat restrictive. So we know that there's going to be more rate cuts coming over time. The key here is that they may not happen just as quickly as the market has been hoping they would. So you know how we operate, folks.

We'll continue to stick to the data, let the data talk to us. And once we have more of it, and we've been able to digest it, then we will plot our move with Builders FirstSource shares. But we'll also take another look at some of the more interest rate sensitive names in the portfolio. That includes United Rentals, depending on where the shares line up, even Vulcan Materials, as well as potentially others out there that are indirectly impacted on the construction front. So that's kind of our thinking for those.

I will say, though, that we do have some big things happening after the close. I already alluded to Alphabet reporting. First of the big tech companies we'll get. First of five this week. Arguably, it is going to set the stage for what we hear. But let's remember, too, that each of these big tech companies are a little different than the other.

I mean, Alphabet's not exactly the same as Meta, not the same as Amazon or Apple or even Microsoft. There's some overlapping businesses. So I think when it comes to Alphabet, folks are going to want to focus on some of the things that they usually do. What is the growth in search and advertising? What is the growth rate at Google Cloud? Are the margins improving there? Those sorts of things.

But I also think the market is going to want to hear what is Google seeing in terms of AI adoption, what are their plans to disrupt their own search capabilities with AI, how are they using AI to improve their advertising business? But outside of the internal use of AI, AI adoption in the enterprise and other markets, are they starting to see monetization happen? And what is the outlook for capital spending?

Is it going higher because demand is growing so much that they need to invest more as this AI arms race, as I call it, continues? So there's a lot going on there and we'll do our best to navigate all of it and bring some clear, concise thoughts to you afterwards. If the market likes what it hears, we could see the S&P 500, the NASDAQ trade higher. But remember, we're going to have additional big tech earnings this week.

So the days could be volatile. We're going to want to take it one day, one step at a time. But in my comments about Alphabet and what we're likely to hear tonight, obviously advertising revenue is going to be key. And I mentioned that in part because it's important for Google, but it's going to be important for not only Meta and Amazon, but also for Trade Desk. And today, we actually had Wells Fargo initiate coverage on Trade Desk shares with an outperform rating and $150 price target, which is a little higher than ours.

The catalyst behind their initiating coverage ahead of the company reporting and in the midst of a week of big tech earnings, it's a catalyst that we've called out quite a while ago. And it's the increasing advertising on streaming platforms. And Wells is focusing a little more on Amazon and what it's doing with Prime Video. We've talked about this. We know that they are increasing the use of that and we'll double-check that with the thinking that we see and the findings that we see in Amazon's advertising line item revenue when it reports on Thursday.

But we would go one step further. It's not just Prime Video. It's what they're doing with overall digital advertising across an array of streaming services. That's right, they have Prime Video, but they also have Freevee and others. So while Trade Desk won't report for several days, the comments that we get from Alphabet, Meta and Amazon on digital advertising, particularly video, that should set the table for what we're likely to hear from Trade Desk. But remember too, what happens next week, presidential election. That means that when we listen to comments and more importantly, guidance from Alphabet, Amazon, and Meta regarding their digital advertising businesses, we'll want to pay close attention to what they say about post-election advertising volume expectations.

And finally, just one other tidbit to talk about Corning, which is obviously not in the portfolio, but it is a company that we do pay attention to had some very nice support for our thinking on digital infrastructure in general and especially carrier infrastructure. Those are two words that when you hear them, you should think of Marvell, because that is one of their core businesses. On the earnings call, Corning talked about its relationships with Verizon and AT&T and what they're doing to build out the fiber side, with Corning sharing that they see further plans for carrier spending to rebound. To us, that's another layer of support for the carrier infrastructure business at Marvell.

Remember, our thinking has been that would start to rebound in the second half of this year and gain steam, especially as AI adoption takes hold. But certainly those carrier spending comments on fiber are very supportive for that thinking. So that's a lot to cover in today's video. But remember, because things are heating up, we want to make sure that you continue to check your emails, your Alerts, so you get our latest thinking on the positions that we have in the portfolio, other things that we're watching, and how they can influence the market.

Should we make any moves with the portfolio, we want you to be right there with us move for move. And let's remember, too, that while this is today's video, we do have office hours later today from 4:00 PM to 5:00 PM in the forum. I hope to see you there. We'll have about an hour together or so. I'll take as many questions as I can. And with that, my friends, thanks for watching and I'll see you back here tomorrow with another video breaking it all down.

At the time of publication, TheStreet Pro Portfolio was long BLDR, GOOGL, TTD and MRVL.