Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Monday, Feb. 10. Today’s Stocks On The Contrarian Radar©️ section featuring NWL 0.00%↑ starts at the bottom of this page.
State of Play
Fresh news from tariff land, with President Trump saying he will impose 25% charges on steel and aluminum tariffs. As we eye our board of indicators for signs of direction at 0700 that has impacted commodity markets:
Commodities are gaining ground. Not just steel and aluminum, but gold and silver, which are up over 1%. WTI crude oil is up 1.3% to trade close to $72/barrel and copper prices up another 0.7%;
Stock index futures are showing some signs of life. The Nasdaq is up 0.7% with S&P 500 futures 0.5% to the good;
Cryptos aren’t doing much. Bitcoin is up 1% to trade around $97,700;
Bonds aren’t doing anything. The 10-year yields 4.49%.
Today’s Known Events
We start with earnings:
McDonald’s (MCD 0.00%↑) just missed on top- and bottom-line estimates but stock is weirdly up so far in the pre-market;
onsemi (ON 0.00%↑) reports later this morning;
That’s pretty much it for today. But don’t get too comfortable because the rest of the week is packed with action: Fed Chair Powell testifies to Congress tomorrow, CPI is Wednesday, producer prices on Thursday, and retail sales on Friday. Several earnings throughout.
Inflation returns to the menu this week, by author via OpenArt.ai
The Bottom Line
The tariff news raises the stakes on the inflation gambit. Gold’s rally this morning, to fresh record highs, is the logical result. So is the move in Fed fund futures, which are now no longer pricing in a rate cut for June. Bonds haven’t moved (yet).
The stock market so far seems unaffected. After all, tech companies aren’t impacted by steel and aluminum tariffs. Indeed some of these companies may even be good hedges of inflationary pressures. With investors still flush with cash, it makes sense for them to put some of it to work in this part of the market.
If the CPI prints hot on Wednesday that could change things and potentially bring real inflationary fears to the fore. Worth watching.
Stocks On The Contrarian Radar©️
Newell Brands (NWL 0.00%↑), a portfolio holding, got beaten to a pulp after reporting earnings on Friday. It was in fact the worst one-day drop in the history of the Rubbermaid and Sharpie pens maker as a public company. Guidance was the issue, with management predicting a loss for the first quarter. The damage to the stock is apparent when looking at the chart:
NWL had been making such progress too! Almost doubling from its lows last July. That is all out the window now.
Buying Opportunity?
These kind of headlines (“worst drop in history”) for a staples stock leaves The Contrarian wondering if this might just be a buying opportunity.
A valuation check indicates NWL is cheap by most popular metrics:
10x forward earnings
1x EV/forward sales
0.4x forward sales
6x trailing 12-month cashflows
Okay, so what’s the catch? The pesky balance sheet!
NWL has $5 billion in total debt versus a market cap of just $3 billion and just $200 million of cash on hand. Almost all the debt ($4.5 billion of $5 billion, or 90 percent) is long term.
Almost $5 billion of the $11 billion assets are a combination of “goodwill” and “other intangibles”. Never a good sign.
Bottom Line: Pass
This exercise reveals why it is so important to look past the traditional valuation metrics used by many armchair (and indeed professional) analysts. The stock could be screaming cheap but if the company has massive debt loads to deal with it will prevent them from allocating capital to productive uses. While that may not be the end of the world for a staples company, it certainly doesn’t leave one bullish about the future.
The stock still pays a generous dividend of almost 4% at current prices. One would think that could be at grave risk of being cut or perhaps eliminated outright with the debt loads at their current levels. That would provide another negative catalyst for the stock (but weirdly might prevent a better opportunity to buy for the long term).
So The Contrarian will sit this one out. He is not confident his holdings of NWL will produce much in the way of returns. When and if the dividend is cut and the balance sheet starts to look a little better it will warrant a revisiting of that stance.
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.
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