Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Wednesday, Nov. 20. The Bottom Line segment of today’s podcast starts at (4:38), followed by Stocks on the Contrarian Radar©️ featuring TGT 0.00%↑ and BORR 0.00%↑ at (6:22) for listeners who want to skip ahead.
State of Play
Stocks advanced yesterday with tech the leader. As we eye our board of indicators for signs of direction at 0700, things are pretty quiet:
Stock index futures are flat with no major US index moving more than 0.2% from the break-even point;
Cryptos continue their ascent. Bitcoin is up another 2% to move north of $93,000 again;
Not much going on in commodities land. WTI crude oil is up 0.5% to trade around $69.50. Copper is up 0.3%. Silver is down 1%. Gold unchanged;
Bonds are selling off a tiny bit. The 2-year yield is up 3 basis points to 4.30% whilst the 10-year is up 5bps to 4.42% (yields move inversely to prices.
Today’s Known Events
More earnings!
Target (TGT 0.00%↑) just posted a major miss on analyst estimates and cut full-year guidance. The stock is down 16% (!) in the pre-market to drop to its lowest level of the year.
Nio (NIO 0.00%↑), the Chinese EV manufacturer earlier beat on top- and bottom-line estimates but investors still didn’t like what they see as the stock is dropping in the pre-market;
Two other retailers TJX Companies (TJX 0.00%↑) and Williams-Sonoma (WSM 0.00%↑) are also due to report before the open at 0930.
After the close comes the main event with Nvidia (NVDA 0.00%↑).
Snowflake (SNOW 0.00%↑), Palo Alto Networks (PANW 0.00%↑), and Jack in the Box (JACK 0.00%↑) also report after the close.
(NVDA earnings on Watch’ by author via Grok AI)
The Bottom Line
Retailers are suddenly in the spotlight after that Target miss. What’s weird is at their last earnings report management raised profit guidance. That was now slashed and same-store sales are expected to be flat this quarter. Apparently the port strike affected things. So this very much appears to be a company-specific issue, especially after Walmart (WMT 0.00%↑) blew away earnings yesterday.
But yeah TJX and Williams-Sonoma will now be closely scrutinized, even though neither is really a fair comparison to TGT.
We’ll see if this translates into any lingering skittishness for investors. Judging by cryptos, the answer would appear to be ‘no’ so far…
Stocks on the Contrarian Radar©️
This morning’s sell-off in Target (TGT 0.00%↑) makes The Contrarian wonder if this is a buying opportunity. The drop was brutal and is not captured in the following chart that only goes through yesterday’s close:
The ‘Pre’ sign isn’t accurate either as TGT finds itself trading around $125/share at the time of this writing!
You have to go back to the middle of last year to see it that low. That was when the company was reeling from the trans-swimsuit issue. As you can see it eventually rebounded but never recaptured its lofty post-pandemic heights.
The valuation looks pretty promising: TGT was trading at 16x forward earnings coming into today, 0.7x sales, and 10x cash flows, all well below the sector median. Today’s numbers will make the stock look even cheaper. Unfortunately the company does rely on discretionary spending to drive a lot of its sales. That’s one advantage Walmart has here.
So from a cyclical perspective this is maybe not the right time to be getting long TGT. But if the economic expansion can continue for another year or two, then it certainly makes a lot more sense. Surely Trump tariffs will hurt margins some, but if Americans keep spending money you figure the valuation will adjust…
Full disclosure: The Contrarian is long TGT and is looking to add more at these levels. Indeed he just bought in at $126/share.
Borr Drilling (BORR 0.00%↑) comes to us via reader/listener request. The closest ETF appears to be the iShares U.S. Oil & Gas Exploration & Production ETF (IEO 0.00%↑) but that isn’t a perfectly fair comparison as it mostly contains large caps. So let’s add in the Invesco S&P SmallCap Energy ETF (PSCE 0.00%↑). As you can see, BORR has trailed the two benchmarks this year:
Indeed BORR has diverged pretty widely from IEO and PSCE. This warrants a closer look at valuation.
BORR trades at:
13x forward earnings (in line with the sector median);
1x forward sales versus 1.5x for the sector at large.
That doesn’t really tell us much. When it comes to oil drillers, there are other things that determine the stock’s performance anyway. One of these is the number, age, and status of its oil rigs.
BORR will have 24 rigs in operation next year with no plans for expansion, according to its latest earnings. That latter point is important as it will cut down on next year’s capex (capital expenditures). Importantly, its fleet is the youngest in the industry at an average age of seven years, according to a company presentation from September.
So much for its equipment. What about demand? BORR was hurt by Saudi Aramco’s decision in January to halt production increases. It has since booked other contracts and apparently has 73% of its 2025 capacity contracted at a competitive rate, according to its Q2 earnings.
That’s nice, but what’s to keep clients from canceling projects like Aramco did? Presumably that work was technically ‘paused’ but it still hit BORR’s bottom line. The fact is that this company is likely very dependent on oil demand. If there is demand for oil, then companies will have incentive to drill for it, largely because nation-owned oil companies will make decisions to accelerate these efforts.
For now, BORR can certainly be an attractive hold due to its 9% dividend yield. That would appear to be safe as the balance sheet is in good shape with $200 million in cash and little short-term debt.
Still, there is a lot about this business that The Contrarian does not understand and therefore he will be sitting this one out.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
Read this month’s portfolio update letter here. The Substack chat tracks The Contrarian’s trades in (almost) real time.
If this daily thing is drowning your inbox and/or you CBF to bother with it and prefer to just get the guest feature or actionable highlights — you can control these settings on your account page.
Finally, if you enjoy this and want others to experience it, please gift a subscription to your friends (or even your enemies).
Share this post