Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Wednesday, March 5. Today’s Stock On The Contrarian Radar©️ APTV 0.00%↑ can be read at the bottom of this page.
Be sure to read this month’s Contrarian Portfolio update letter.
State of Play
Stocks dropped again yesterday but finished off the lows due to news of Trump tariffs apparently being scaled back already. The president also gave a long speech to Congress last night that was long on style but short on substance and importantly didn’t dial back any of the trade war rhetoric — and may have actually increased it.
As we eye our board of indicators for signs of direction at 0650, it does look like risk appetite is emerging:
Stock index futures are pointing to a higher open, led by small caps. The Russell 2000 is up over 1%. Nasdaq futures +0.7% and S&P 500 +0.6%;
In commodities land, a major rally in copper, up 4.5%. This is surely due to trade wars with China. WTI crude oil is down 1.5% to trade around $67/barrel;
Cryptos are gaining as well, with Bitcoin up 7% to trade close to $90,000;
Bonds are seeing a bit of selling with the 10-year yield up 3 basis points to 4.24% (yields move inversely to prices).
Today’s Known Events
We start once again with earnings:
In Germany, Adidas and Bayer AG reported earnings that appear to have impressed investors as those stocks are moving higher in Frankfurt trading;
Foot Locker (FL 0.00%↑) just reported mixed results but the stock is rising in the pre-market, to the tune of 3% at the time of this writing. This comes right after FL dropped to a 52-week low yesterday;
Abercrombie & Fitch (ANF 0.00%↑) and Campbell Soup (CPB 0.00%↑) also report before the open at 0930;
After the close at 1600 the big name is semiconductor manufacturer Marvell Technology Group (MRVL 0.00%↑)
Some economic data to tell you about as well:
ADP Nonfarm Payrolls are out at 0815. This is separate and appears in no way related to Friday’s non-farm payrolls from the Bureau of Labor Statistics. As a result, it rarely (ever?) gets a reaction from markets. But it’s an important economic data point nonetheless. The expectation is for 144,000 new jobs in February, a bit below the $183,000 number the previous month.
Non-manufacturing PMIs are out at 1000. The expectation here is for a reading of 53.0, a bit above the 52.8 recorded last month and still comfortably above the 50 level that separates expansion from contraction. This could move markets because the services sector is such a crucial source of high-paying jobs. As we’ve been saying for some time, if the job market takes a turn for the worse economic growth will soon follow.
Factory orders are also out at 1000. Economists who were surveyed expect an increase of 1.5% month-over-month, an improvement over the -0.9% print recorded the previous month.
The Fed’s beige book is out at 1400. This a report on economic conditions in each of the Fed’s 12 districts. It only happens eight times a year. Unfortunately there is no number attached to it but it’s worth paying attention to nonetheless and does sometimes move markets.
(Cover art by author via Flux Dev AI)
The Bottom Line
Stock index futures have not been a good indicator of price movement. We’ve seen this pattern before and the price gains quickly evaporate once regular trading commences. Copper prices have been a much better gauge, but the relationship is tenuous and it’s not clear how much longer this will hold up — at least as long as tariffs are the catalyst for copper moving higher.
These are volatile times, with risk appetite waxing and waning with tariff news. That should change on Friday when we get non-farm payrolls.
Stocks On The Contrarian Radar©️
Aptiv (APTV 0.00%↑), a Swiss manufacturer of automotive parts, tumbled overnight on no apparent news. The stock has gone nowhere for years, and declined by 20% over the last 12 months:
Automotive parts seems like a pretty straightforward business. APTV’s technology is supposedly at the leading edge of the connected car and driverless technology. Its main business appears to be supplying electrical components for driver assistance (cameras and sensors and the like). It supplies all the largest OEMs. Its business is global, pretty much evenly split between North America, Europe/Middle East/Africa, and Asia-Pacific.
The valuation seems to check out. APTV trades at:
11x forward earnings
0.7x forward sales
7x forward cash flows
The balance sheet is a little more worrisome as its $15 billion of total assets contains $5 billion of goodwill and $2 billion of ‘other intangibles.’ So almost half of its asset base is, well, nonsense. That’s not great. Encouragingly there is very little long-term debt on the balance sheet.
This sounds like a well-established company in a major growth industry trading at compelling valuations. Oh yeah, management is also buying back shares. Why has the stock done so poorly?
Several reasons, including:
Slowing electric vehicle adoption, including Tesla (TSLA 0.00%↑), a major customer;
Concerns about demand out of China;
Tariffs of course.
The Verdict
APTV is cheap. While there are certainly concerns about electric vehicle adoption, this is ultimately not a very large part of the company’s business. Its main segment (driver assistance technology) is not going anywhere. Tariffs may hurt a bit in the short term, but ultimately there should be buyers of its products.
The Contrarian does not know enough about this technology to assess whether APTV can be easily displaced by cheaper competition. It doesn’t sound like the kind of thing that can happen quickly, but more research is required.
Automobile sales are of course very cyclical and it makes sense that Aptiv’s business ebbs and flows with this. This does not appear to be a great point in that cycle. If automobile stocks haven’t peaked yet, it’s hard to see how there will be much more growth before the consumer cycle commences a downturn.
Another worrisome point is all the ‘goodwill’ and ‘intangible assets.’ This is normally a red flag. But the absence of long-term debt balances this out. Call this one a wash.
Add it all up and The Contrarian as a hater of cyclical businesses is stuck on the sidelines. He will add this name to his watch list however. If it gets a lot cheaper he may just have to buy some. Assuming the aforementioned research checks out, that is.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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