Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Thursday, March 13. Today’s Stocks On The Contrarian Radar©️ segment features KMPR 0.00%↑ and starts at the bottom of this page.
State of Play
Yesterday saw a rally in tech stocks as the rest of the market was left behind. Staples actually dropped with bond prices. As we eye our board of indicators for signs of direction at 0705, all is quiet:
Stock index futures are flat as a board, with no major US index moving at all from the break-even point;
Commodities aren’t doing anything either. Copper is unchanged. WTI crude oil down 0.5% to trade around $67/barrel;
Cryptos too are flat. Bitcoin unchanged to trade around $83.000;
Bonds are consolidating after yesterday’s sell-off. The 10-year yields 4.33%. It was in the low 4.2s as recently as a couple of days ago.
Today’s Known Events
We start with earnings:
Weibo (WB 0.00%↑), the Chinese social media platform, earlier beat analyst estimates even as its advertising revenues dropped. The stock is rising in the pre-market. More good news for China bulls, presumably;
Dollar General (DG 0.00%↑), a sizable position in The Contrarian’s portfolio, just reported mixed results but importantly had positive same-store-sales and the stock is moving a big higher in the pre-market;
After the close the highlights are DocuSign (DOCU 0.00%↑) and Ulta Beauty (ULTA 0.00%↑)
TransAct Technologies (TACT 0.00%↑), a company none of you have likely heard of but which occupies a small portion of The Contrarian’s portfolio, also reports after 1600 this afternoon.
Yesterday we had consumer prices, today it’s the turn of producers. The PPI is out at 0830. This will likely be completely ignored by the market even though it is the more leading indicator for inflation under the premise that producers pass higher costs off to consumers.
Anyway, the numbers we’re looking for according to a survey of economists:
0.3% month-over-month headline PPI (0.4% last month)
0.3% MoM core PPI (0.3%)
3.3% year-over-year headline PPI (3.5%)
3.6% YoY core PPI (3.6%)
Seeing how it’s Thursday we’ll also get initial jobless claims. The expectation here is for 226k new claims, up a bit from the 221k recorded last week and just north of the four-week average of 224k.
The Bottom Line
Yesterday’s rally was unconvincing. It certainly didn’t amount to the type of relief rally we have come to expect from soft inflation prints. As we previewed yesterday, that tells us there is something else vexing investors. That something else could be tariffs or it could be recession. Two strange things about yesterday’s market action:
Staples stocks sold off pretty dramatically
Bond yields moved higher, meaning investors sold bonds as well.
We have talked about how these have been two bright spots as tech sold off over the last couple of weeks. Yesterday that situation reversed. Seeing how little sense the move in yields makes after a soft inflation print, the only logical conclusion is that this was simple profit taking — at least in the bond market. The sell-off in staples is potentially more worrisome seeing how it could portend a broader move away from stocks.
If investors didn’t pile in to risk assets after yesterday’s soft CPI print, it’s hard to see how today’s PPI will do the trick either. Perhaps jobless claims will be more closely watched anyway. If recession really is the main concern here, then it stands to reason that investors will be watching the labor market more closely.
For now, yesterday’s action looks suspiciously like a dead cat bounce. This would indicate we are in no way out of the woods.
Stocks On The Contrarian Radar©️
Kemper Corp (KMPR 0.00%↑) a midcap insurance company, is down multiple percent overnight on no apparent news. Seeing how much Warren Buffett likes insurance companies, and given their non-cyclical nature, it behooves us to take a closer look:
The overnight move drops the stock below $64/share. It’s still up more than 10% over the last 12 months. Importantly this makes it a better performer than the S&P 500, however it does trail peers measured by the SPDR S&P Insurance ETF (KIE 0.00%↑).
Moving on to valuation, we can see KMPR trading at 10.5x forward earnings, which isn’t great for an insurance company (sector median is 10.8x). It trades at 1.3x price/book, which isn’t great either. According to Investopedia, cheap for an insurance company is 1x. The sector median is 1.1x.
Looking at the return-on-equity metric that is also vital to valuing insurance companies, KMPR sports a 12% figure here, which is much more positive (the sector median is 10.4%).
Turning to the balance sheet, KMPR has a debt load of ~$2 billion versus $4 billion in equity, which for an insurance company isn’t bad on the face of things. Unfortunately over $1 billion of its “assets” are in “goodwill. Almost 75% of the debt appears to be long term, which isn’t great.
Verdict: The sell-off is enticing and insurance companies might be a good place to be in the next couple of years if a recession does indeed come to pass. However, KMPR is not cheap enough yet to warrant an investment from The Contrarian. He will keep it on his watch list however.
PSA: Probably no briefing podcast tomorrow due to the dearth of known events on the calendar;
Housekeeping
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