Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Wednesday, Aug. 21. The Bottom Line segment of today’s podcast starts at (3:27) and Stocks on the Contrarian Radar at (5:02) for listeners who want to skip ahead.
State of Play
Yesterday was a quiet session as anticipated but the S&P 500 and Nasdaq did drop for the first time in nine trading days. As we look at our board of indicators at 0645, things are pretty quiet:
Stock index futures are flat with the exception of small caps, with the Russell 2000 pointing to a gain of 0.5% at the open;
Commodities are moving a bit higher. WTI crude oil is up 0.3% to trade around $73.50/barrel and copper is up 0.7%;
Cryptos are taking a bit of a breather with Bitcoin down 2.5% to drop below $60,000 again — actually closer to $59,000;
Bonds are unchanged. The 2-year yields an even 4% whilst the 10-year yields 3.81%.
Today’s Known Events
Retailer earnings are again the story. Target (TGT 0.00%↑) just beat estimates and raised guidance and the market likes that very much, sending TGT up 14% at the time of this writing.
Macy’s (M 0.00%↑) is due at the top of the hour. Another retailer, TJX (TJX 0.00%↑), which owns TJ Maxx and Marshall’s stores, is due at 0730.
After the close we’ll hear from Snowflake (SNOW 0.00%↑) and Zoom Video Communications (ZM 0.00%↑), among others.
FOMC Meeting Minutes are out this afternoon at 1400. The market sometimes cares about this even though it captures the FOMC’s view from several weeks ago and before the latest economic data points.
The Bottom Line
Target earnings reinforce the narrative provided by retail sales and Walmart (WMT 0.00%↑) earnings last week, that consumers — especially the crucial American consumer — are still out there spending their money. This should only help the narrative in the market, that the US can avoid a hard landing. Of course consumer spending can fall of a cliff pretty quickly if the job market softens, but for now that is not likely to affect the outlook because the latest jobless claims haven’t been a cause for concern.
US consumers may not be slowing their spending, but they are certainly shifting it. That brings us to…
Stocks on the Contrarian Radar©️
Sherwin Williams (SHW 0.00%↑) is down close to 5% overnight. The assumption is that this is tied to the home improvement trend, with Lowe’s (LOW 0.00%↑) yesterday being to speak of slowing sales in that area. As you can see, SHW does track LOW and of course Home Depot (HD 0.00%↑), though it has outpaced both over the last year:
This all begs the question if SHW is due for a return to earth? Gains of 31% over the last 12 months are better than not just HD and LOW, but the S&P 500 as a whole, which is up just 27%. The spread between SHW and HD/LOW is at its largest of the last year.
By almost all accounts, SHW is expensive:
31x forward earnings
~4x forward sales
23x forward book
28x forward cash flows
HD and LOW are trading at pretty rich multiples as well, but not as much as SHW. So for all you relative value arbs, this could be an opportunity to bet on convergence between these three stocks.
If you’re hunting for value, SHW is not compelling even after the overnight sell-off. Maybe once interest rates come down and the housing/home improvement market picks up that will change. But chances are that may have to wait until the start of the next business cycle — whenever that is.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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