Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Wednesday, May 22. The Bottom Line segment of today’s podcast starts at (4:17) for listeners who want to skip ahead. Read about the ‘undiscovered’ AI chip stocks and be sure to check out the new ‘One Year Ago Today’ segment at the bottom of this page.
State of Play
Stocks rallied again yesterday, to close at fresh record highs (again). After the close earnings from Urban Outfitters (URBN 0.00%↑) and Toll Brothers (TOL 0.00%↑) kept the party going. As we look at our board of indicators at 0640, it looks like markets are taking a bit of a breath:
Stock index futures are down a bit led by small caps. The Russell 2000 is down 0.3% with Nasdaq and S&P 500 (SPY 0.00%↑) down 0.2% each;
Commodities are dropping with copper down 2% and WTI crude oil down 0.5% to trade around $78/barrel;
Cryptos aren’t doing much. Bitcoin is changing hands around $70,000;
Bonds are dropping a bit. The 2-year yield is up 3 basis points to 4.87% whilst the 10-year is up 3bps to 4.44% (yields move inversely to prices).
Earnings
The main event of course is Nvidia (NVDA 0.00%↑). The chipmaker reports earnings today but not until after the close.
In the meantime we just had Target (TGT 0.00%↑) miss estimates and that stock is moving lower in the pre-market by about 8% at the time of this writing;
Pinduoduo (PDD 0.00%↑) had better results, beating top- and bottom-line estimates and that stock is moving a bit higher (+2%);
TJX Companies (TJX 0.00%↑), Williams-Sonoma (WSM 0.00%↑) and Analog Devices (ADI 0.00%↑) also report before the open at 0930.
After the close at 1600 we’ll also get Snowflake (SNOW 0.00%↑) and e.l.f. Beauty (ELF 0.00%↑).
Economy
Existing home sales are out at 1000. Economists who were surveyed expect 4.21 million sales for April, effectively identical to the previous month’s 4.19 million.
Minutes from the Fed’s last meeting are out at 1400. These often move markets. Fed Governor Chris Waller has been making the rounds repeating the mantra that further interest rate hikes are unnecessary and more progress is needed on inflation to cut rates. Presumably anything that deviates from this party line — or shows discussions of deviation — could be enough to throw markets. Whether that will last beyond Nvidia earnings is another question.
The Bottom Line©️
The bull market is still in effect. That means pullbacks may be buying opportunities. Could Target (TGT 0.00%↑) be one such example? It’s worth a look. The company cited lower sales in discretionary items, which is the same issue they’ve been complaining about for at least a year. The stock is up 3% over that period, which isn’t great compared to the S&P. Yet it reaffirmed full-year outlook and at ~16x forward earnings is at least not expensive.
Full disclosure: The Contrarian holds some TGT in a retirement account but is unlikely to add unless it drops below $135/share (currently $144).
‘Undiscovered’ AI Chip Stocks
The Contrarian has been looking into his ‘Undiscovered’ AI chip names a little closer. As discussed yesterday, there are eight of these:
ACM Research (ACMR -0.21%↓)
Camtek (CAMT 1.07%↑)
FormFactor (FORM 1.32%↑)
Ichor Holdings (ICHR 0.05%↑)
Kulicke and Soffa Industries (KLIC -0.38%↓)
Photronics (PLAB -2.35%↓)
Ultra Clean Holdings (UCTT -0.77%↓)
Veeco Instruments (VECO -0.02%↓).
Looking at these stocks’ performance over the last year makes for an interesting exercise:
CAMT is a major outlier. That stock has had a great month. ACMR has also bucked the trend recently, in the opposite direction. Then there’s KLIC, which has had a rough time and is actually down over the last year. Maybe that is the buying opportunity? It appears the company recently lowered their outlook so maybe not…
Taken as a whole, the ‘Undiscovered AI Index’ (UNAI for short) does track Nvidia, even if its returns over the past year are still dwarfed by NVDA, as the below chart illustrates:
Still, there is less volatility in these eight stocks collectively than there is in Nvidia (which makes perfect sense seeing how it’s a basket of eight stocks and Nvidia is just one stock). There may be other names to be added to the list. Maybe readers have some ideas?
One Year Ago Today…
Fears over the debt ceiling negotiations in Washington were front and center. It looked suspiciously like a lot of noise over nothing and possibly a buying opportunity (Daily Contrarian, May 22, 2023).
…and What Happened:
Indeed the debt ceiling discussion was kicked down the road for another day and the whole thing was quickly forgotten. Markets rallied a bit then entered a summer doldrum and sold off most of the autumn. The bull market returned in force in November. Nasdaq and S&P 500 have since rallied to new all-time highs.
Housekeeping
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Nvidia Earnings