Stocks Under $10 Weekly Roundup

Last Week

With the Fed in its pre-policy-decision blackout period and with a light earnings week, we had warned that the focus would be on the macro. It was. Unfortunately, as bad as the macro was, earnings managed to work their way back into the picture, and the Fed? Well, the Fed is always front and center whether the key players are flapping their gums or not.

The ugliness began last Tuesday, with an August consumer price index report that showed both headline and core inflation for that month to be hotter than expected at both the headline and the core. In fact the core rate, on a year-over-year basis, came perilously close to matching the peak of the cycle, which came this past March. By Wednesday, it was producer prices for August that would print hotter than expected at the core on both a month-over-month and year-over-year basis. This sent futures markets, not to mention Treasury yields, trying to rejoice in the Fed Funds rate for the rest of the year and beyond into a frenzy. A frenzy that did quite a number on equities and commodities as well.

On Thursday, August retail sales would join the chorus and disappoint, while both the Philadelphia Fed and Empire State Manufacturing surveys printed in a state of contraction for September. By the time all was said and done for the week, the Atlanta Fed had revised the GDPNow real-time model for third-quarter economic growth from an already anemic 1.3% down to a paltry, but "still on the right side of the dirt" 0.5% (quarter-over-quarter, seasonally adjusted annual rate). Mind you that the U.S. economy, in real terms, has already contracted for quarters one and two in 2022. Now Q3 stands on very shaky ground.

On the corporate side, Oracle (ORCL) provided a downside outlook early in the week to be followed by a meltdown in Adobe (ADBE) . Adobe announced the acquisition of privately held Figma, and will likely have to weaken the balance sheet to do it. Oh, the firm also provided a weaker-than-hoped for outlook. Nothing however, prepared the markets for the pre-announcement of earnings and poor guidance that missed the mark in each case by a country mile at FedEx (FDX) . This caused a broad call for a global recession up and down Wall Street, as this firm is a leader in a business (parcel delivery) that can be taken as a proxy for economic health.

As of last Friday night's close, the Stocks Under $10 portfolio, meanwhile, is now down 15.69% year to date. Our benchmark, as readers know, and what we shoot against is the Russell 2000. That index is now down 19.91% for 2022. The S&P SmallCap 600, which is not our benchmark, but is also a small-cap focused equity index, is down 18.32% this year. The portfolio has held its own well in comparison to that benchmark as well as to that "near-benchmark."

Last week was not a terribly active week for the portfolio. The portfolio did add to its long positions in 22nd Century Group (XXII) on weakness. The portfolio also added 8x8 Inc (EGHT) to the bullpen, while removing BlackBerry Limited (BB) .

Few portfolios are beating their benchmarks in 2022. It may not be pretty, but we are indeed doing just that. We will continue to work toward reaching the break-even point, though of late this has been difficult. The effort never stops.

As for the broader market and economy, at last glance, I see futures trading in Chicago are currently pricing in an 80% probability for a three-quarter percentage point increase to be made to the Fed Funds rate target on Sept. 21 and a 73% chance for another hike of at least three-quarter percentage point on Nov. 2. Keep in mind that the Fed is also ramping up the liquidity vacuum (quantitative tightening program) this month. At this time future markets are pricing in a year end Fed Funds Rate of 4.25% to 4.5%. That would be up from today's 2.25% to 2.5%.

The Bounce

The S&P 500 gave up 0.72% last Friday to close down 4.77% for the week. The Nasdaq Composite, which is heavily exposed to tech, lost 0.9% on Friday to finish down 5.48% for the week. The Russell 2000 took a beating of 1.48% on Friday, and of 4.5% for the week. The Philadelphia Semiconductor Index, which we always keep an eye on as the engine of both the economy and the markets ... actually managed to gain 0.53% on Friday, and still took a beating of 5.83% for the week. There were no indexes on my screen that showed a weekly gain this week. In fact the only two indices on my screen that gave up less than 4% for the week were the Dow Jones Utility Average and the KBW Bank Index. Those two surrendered 3.57% and 3.78% respectively.

Nine of the 11 of the S&P sector-select SPDR ETFs shaded red on Friday and all 11 ended in the red for the week. All 11 gave up at least 2.34% with nine of the eleven losing at least 3.5%. Five of the eleven spit up at least 6%, led lower by Materials (XLB) and Industrials (XLI).

According to FactSet, the S&P 500 now trades at 16.4 times forward looking earnings. down from 16.8 times one week ago. This ratio is now well below the S&P 500's five year average of 18.6 times, and more than a tad below its ten year average of 17.0.

The Week Ahead

This week is all about the Fed. Sure, there will be some macro. August housing starts on Tuesday and August existing home sales on Wednesday to name a couple of this week's data-points. Sure, there will be some earnings, though not much. On Monday, we'll hear from AutoZone (AZO) . On Wednesday, we hear numbers from General Mills (GIS) and Lennar (LEN) . Then on Thursday, it will be the turn of both Costco (COST) and the already beleaguered FedEx to print their quarters.

The week will, however, belong to the Fed. On Wednesday, the Fed will likely increase short-term rates by at least 75-basis points while releasing the quarterly update to their (nearly always incorrect) economic projections. The tone for November and the rest of the year will be set in the press conference.

There are a couple of other events you probably need to be cognizant of. First there is the Nvidia (NVDA) GTC Technology Conference to be held Monday through Thursday. Then there will be the Wells Fargo (WFC) Consumer Conference this Thursday and Friday that will include appearances by Walmart (WMT) , Dollar Tree (DLTR) , Target (TGT) , Chewy (CHWY) and Sysco (SYY) .

Monday:

Economics (All Times Eastern)

10:00 - NAHB Housing Market Index (Sep): Expecting 47, Last 49.

The Fed (All Times Eastern)

Fed Blackout Period.

Earnings Highlights (Consensus EPS Expectations)

Before the Open: AZO (38.62)

Tuesday:

Economics (All Times Eastern)

08:30 - Housing Starts (Aug): Expecting 1.445M, Last 1.446M SAAR.

08:30 - Building Permits (Aug): Expecting 1.614M, Last 1.685M SAAR.

08:55 - Redbook (Weekly):

Last 11.4% y/y.

1:00 p.m. - Twenty Year Bond Auction: 12B.

4:30 - API Oil Inventories (Weekly): Last +6.035M.

The Fed (All Times Eastern)

Fed Blackout Period.

Earnings Highlights (Consensus EPS Expectations)

Before the Open: APOG (.83)

After the Close: SFIX (-.63)

Wednesday:

Economics (All Times Eastern)

7:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.01%.

7:00 - MBA Mortgage Applications (Weekly): Last -1.2% w/w.

10:00 - Existing Home Sales (Aug): Expecting 4.7M, Last 4.81M SAAR.

10:30 - Oil Inventories (Weekly): Last +2,442M.

10:30 - Gasoline Stocks (Weekly): Last -1.767M.

The Fed (All Times Eastern)

2:00 p.m. - FOMC Policy Decision.

2:00 - FOMC Economic Projections.

2:30 - FOMC Press Conference.

Earnings Highlights (Consensus EPS Expectations)

Before The Open: GIS (1.00)

After the Close: LEN (4.87), TCOM (.16)

Thursday:

Economics (All Times Eastern)

8:30 - Initial Jobless Claims (Weekly): Expecting 219K, Last 213K.

8:30 - Continuing Claims (Weekly): Last 1.403M.

10:00 - CB Leading Indicators (February): Expecting -0.1% m/m, Last -0.4% m/m.

10:30 - Natural Gas Inventories (Weekly): Last +77B cf.

11:00 - Kansas City Manufacturing Index (Sep): Last -9.

The Fed (All Times Eastern)

No public appearances scheduled.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: ACN (2.58), CCL (-.15), DRI (1.57), FDS (3.21)

After the Close: COST (4.17), FDX (2.75)

Friday:

Economics (All Times Eastern)

09:45 - S&P Global Manufacturing PMI (Sep-Flash): Expecting 51.3, Last 51.5.

09:45 - S&P Services PMI (Sep-Flash):

Expecting 45.0, Last 43.7.

1:00 p.m. - Baker Hughes Total Rig Count (Weekly): Last 763.

1:00 - Baker Hughes Oil Rig Count (Weekly): Last 599.

The Fed (All Times Eastern)

2:00 - Speaker: Federal Reserve Chair Jerome Powell.

Today's Earnings Highlights (Consensus EPS Expectations)

There are no significant domestic quarterly earnings scheduled.

The Stocks Under $10 Portfolio

Below is a rundown of our current positions. Figures in parentheses are each stock's Friday closing price and percentage weighting in the model portfolio. For the current portfolio, please click here.

ONEs

None

TWOs

22nd Century Group (XXII:NYSE American; $1.23; 6.37%)

1- Wk. Price Change: -12.8%

WEEKLY UPDATE: The stock of 22nd Century Group reacted well as first when the firm shook up the c-suite the week prior to last. This past week was different, as XXII suffered right along with equity markets in general. Regardless of the stock's recent to semi-recent performance, this remains a high conviction trade for the portfolio and we continue to hold at a 6% allocation. The portfolio added to this position again on weakness last week.

INVESTMENT THESIS: This stock is basically a play on the idea that the Biden administration moves toward an agenda targeting less dangerous and less addictive forms of tobacco as a replacement for what is currently available to US (and global) consumers. The idea here is for the firm's VLN (very low nicotine) cigarettes to get regulatory approval and move toward commercialization.

Price Target: $7

AXT Inc. (AXTI:NYSE; $7.78, 5.54%)

1-Wk. Price Change: -10.1%

WEEKLY UPDATE: This position had been where the portfolio had been making profitable sales of late. That is until the stock weakened to the point where the idea became less enticing. There has still been no firm specific news released since earnings were posted in late July.

INVESTMENT THESIS: AXT, Inc. is a materials science company that develops and produces high-performance compound and single element semiconductor substrates, also known as wafers. InP is a high-performance semiconductor substrate used in broadband and fiber optic applications, 5G infrastructure and data center connectivity. InP substrates are also used in biometric wearables and other health monitoring applications. Semi-conducting GaAs substrates are used to create opto-electronic products, including high brightness light emitting diodes that are often used to backlight wireless handsets and liquid crystal display TVs and also used for automotive panels, signage, display and lighting applications. A new application for semi-conducting GaAs substrates is 3-D sensing chips using vertical cavity surface emitting lasers as an array of lasers on a single chip that can be used in cell phones and other devices. The company manufactures all of its products in the People's Republic of China.

Price Target: $13

Cantaloupe, Inc. (CTLP:Nasdaq; $4.22; 4.55%)

1-Wk. Price Change: -16.9%

WEEKLY UPDATE: Cantaloupe took an even more severe beating this past week than it did the week prior when finally reporting second-quarter earnings. The firm was, like so many others, a victim of margin compression this spring and summer, and investors took their chunk of flesh. The stock did appear to stabilize going into the weekend.

INVESTMENT THESIS: Cantaloupe is a digital payments and software services company that provides end-to-end technology solutions for the unattended retail market. Its enterprise- wide platform is designed to increase consumer engagement and sales revenue through digital payments, digital advertising and customer loyalty programs, while providing retailers with control and visibility over their operations and inventory. The bulk of its revenue is derived from its enterprise-wide platform is designed to increase consumer engagement and sales revenue through digital payments, digital advertising and customer loyalty programs, while providing retailers with control and visibility over their operations and inventory. We see the company as a beneficiary of both mobile payment growth as well as the adoption of B2B fintech solutions.

Price Target: $9

Pixelworks, Inc. (PXLW:Nasdaq; $1.71; 4.94%)

1- Wk. Price Change: -8.1%

WEEKLY UPDATE: Other than adding Dr. John Liu to the board, news flow was quiet for Pixelworks last week. There has been no new firm-specific news of consequence since an agreement was reached to sell a minority stake in the firm's Shanghai-based subsidiary weeks ago. The portfolio has struggled to maintain this position at a 6% weighting, and has intentionally held back from making recent adds, allowing for a 5% portfolio allocation.

INVESTMENT THESIS: Pixelworks is a provider of visual processing solutions, and is a purveyor of both software and semiconductors designed toward those ends. The belief is that Pixelworks will bebeter positioned in 2022 to secure incrementally increased capacity from supplier Taiwan Semiconductor (TSM), which should ease logistics issues and provide for the firm pricing power at home.

Price Target: $5

SoFi Technologies (SOFI:Nasdaq; $6.05; 5.48%)

1-Wk. Price Change: -4.4%

WEEKLY UPDATE: This stock was one of the few that actually closed well above its mid-week low, despite still closing down for the week. This is a name that the portfolio would like to see move closer to a 6% allocation, as interest rates move higher, and student loans eventually move toward an end to the ongoing moratorium.

INVESTMENT THESIS: There are a number of reasons to be involved in this troubled name. No, SOFI is not yet profitable, but it is a bank trading under $10 that has plenty of potential as a one-stop financial services shop as interest rates rise and the yield curve normalizes. Ending the moratorium on student loans where SOFI has plenty of exposure would be an upside catalyst.

Price Target: $12

Southwestern Energy Company (SWN:NYSE; $7.21; 6.22%)

1-Wk. Price Change: -5.8%

WEEKLY UPDATE: This stock has been as volatile of late as has the market price for U.S. natural gas. I do not think that changes anytime soon. There has been no firm-specific news in quite some time. We remain impressed with the way this stock has really hung in there as the commodity has faced serious pressure on and off.

INVESTMENT THESIS: The portfolio's intent here is to gain exposure not just to the energy space, but more specifically to the domestic US energy space with a focus on natural gas over oil as the war in Europe continues to skew those markets.

Price Target: $15

Transocean Ltd. (RIG:NYSE; $3.03; 3.60%)

1-Wk. Price Change: -19.2%

WEEKLY UPDATE: As crude oil has been slapped around of late, so has this stock. RIG gave up ground every day last week. The portfolio will look to return RIG's weighting upon the book to 4%+ as opportunity presents. There has been no recent firm-specific news release.

INVESTMENT THESIS: The portfolio's reason for being in this name is its exposure to deep sea drilling and exploration and the sudden global need for such operations amid a severe shortage in energy commodities. That and the low share price, despite some shaky fundamentals. This helps the portfolio broaden its exposure to the energy sector going forward at limited expense. The plan is to grow the position to something in between a 2% to 3% weighting.

Price Target: $5

Vera Bradley Inc. (VRA:Nasdaq; $3.33; 1.80%)

1-Wk. Price Change: -5.4%

WEEKLY UPDATE: There has been no news in this stock since earnings were released in late August. The stock really traded sideways from Wednesday on into the week's end. The portfolio held its fire last week, but this is a candidate for another add at these levels.

INVESTMENT THESIS: This name is a bit of a project for the portfolio. The execution has been poor in terms of assortment, margin, and outright sales. But the firm runs a tight ship when it comes to the balance sheet, and should be able to withstand the correction now obviously necessary. They may need to burn some of that balance sheet to get there from here, and they have the quality on paper to do it.

Price Target: $6

THREEs

None

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