Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Wednesday, Feb. 12. Today’s Stocks On The Contrarian Radar©️ section featuring WMG 0.00%↑ starts at the bottom of this page.
State of Play
Yesterday was a blah day in markets with little movement. We did get positive earnings from Supermicro (SMCI 0.00%↑) after the close. SoftBank was less impressive. All is quiet as we eye our board of indicators for signs of direction at 0615:
Stock index futures are flat as a board ahead of the CPI, with no major US index moving from the break-even point;
Commodities remain volatile. WTI crude oil is down 1.3% to trade around $72/barrel. Gold and silver are retreating as well, gold by almost 1%. Copper is unchanged;
Cryptos are dropping a bit, with Bitcoin down 2% to trade around $96,000;
Bonds are unchanged. The 10-year yields 4.55%
Today’s Known Events
The CPI is the main event, out at 0830. Been talking about this all week. The numbers we’re looking for, as anticipated by a survey of economists:
Monthly headline CPI of 0.3% versus 0.4% recorded last month;
Annualized headline CPI of 2.9%, the same as last month;
Monthly core CPI of 0.3% (0.2%);
Annualized core CPI of 3.1% (3.2%).
Some earnings to tell you about as well:
Vertiv Holdings (VRT 0.00%↑), which supplies power management tools like switchgear boxes, beat analyst estimates and is rising in the pre-market, up 3% at the time of this writing;
CVS (CVS 0.00%↑) is due intermittently;
So is Camtek (CAMT 0.00%↑) one of our ‘undiscovered’ AI chip stocks and a portfolio holding;
Kraft Heinz (KHC 0.00%↑) and Restaurant Brands International (QSR 0.00%↑), owner of Burger King restaurants, are also due out before the open at 0930;
After the close at 1600 we’ll hear from Cisco (CSCO 0.00%↑) and Trade Desk (TTD 0.00%↑), among others.
Fed Chair Jerome Powell returns to Capitol Hill, this time to testify in front of the House Financial Services Committee where he’ll probably just repeat his exact comments from yesterday’s testimony in the Senate.
The Bottom Line
The CPI very rarely misses economist estimates by very much and when it does that is usually due to exogenous shocks like Covid, Covid stimulus, or Russia invading one of its neighbors.
The set-up for today is very simple:
Lower-than-anticipated CPI (literally anything below 0.3% MoM) and we get a relief rally;
Higher-than-anticipated CPI (0.4% MoM or above) and we’ll get a sell-off in stocks and bonds;
If the CPI meets expectations right on the nose, as it is wont to do, then the market will revert to whatever broader forces of greed or fear are driving it — in this case greed is still boss, seeing how we’re very much still in a bull market.
Stocks On The Contrarian Radar©️
Warner Music Group (WMG 0.00%↑) has gone nowhere in years and is one of the biggest losers among S&P 400 Midcap stocks overnight, down 3%. That move returns most of its gains after reporting earnings last week:
(The overnight move is not reflected in the above chart. It drops the stock back into the mid-$32 range)
WMG has trailed peers Universal Music Group (UMGNF) and the Global Music Industry ETF (MUSQ 0.00%↑) over the past year:
This all begs the question if the stock might be due for a reversal. There were some positive signs from earnings, which caused the stock to jump: not only did WMG beat analyst estimates but it also announced a deal with Spotify (SPOT 0.00%↑) and Amazon (AMZN 0.00%↑).
WMG’s valuation does leave quite a bit to be desired:
22x forward earnings (above the sector median of 20.5x)
15x EV/EBITDA (8x)
2.7x forward sales (1.4x)
20x forward cashflows (8.8x)
By those metrics the stock looks expensive.
However: Margins are healthy (15% EBIT versus a sector median of 10%) and the company’s return on capital is excellent at 12% versus a sector median of just 4%. The balance sheet is in good shape, with just $4 billion in debt versus a $17 billion market cap, though almost all the debt is long-term. Keep in mind this is after just announcing the acquisition of Tempo Music, which gives it rights to Bruno Mars and Adele songs. At $450 million that doesn’t sound like a huge price to pay (unless of course nobody listens to Bruno Mars and Adele anymore).
WMG is held up to Spotify and Live Nation (LYV 0.00%↑), which unfair. One is a technology company, the other focuses on live events. Different businesses.
The Contrarian is encouraged by WMG’s impressive returns on capital, which speak to management’s ability especially when it comes to acquisitions. Record labels may not be the most exciting businesses anymore, but there is probably something universal about them. While it’s true that AI could put a lot of recording artists out of business, this could also play into record labels’ hands if they play it smart and make the right investments. Not having to shell out millions of dollars to acquire song catalogues makes for better margins. But intellectual property will need to be established to get an edge over anybody else with a laptop and an internet connection.
That is one wild card that would need to be investigated further. What is WMG doing on that end? Anything? If so, it would make potential investors a lot more confident in its future.
Bottom Line: Right now the stock is probably still too expensive to be considered an investment opportunity. If it drops further, below $30 say, that could change. So The Contrarian is on the sidelines for now, but adding the stock to his watch list.
Not investment advice. Do your own research. Make your own decisions.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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