Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Monday, May 12. Today’s briefing is delayed a bit due to Walmart earnings. The Stocks On The Contrarian Radar©️ segment features UNH 0.00%↑ and starts at the bottom of this page.
State of Play
Stocks gained more ground yesterday, led by tech again as the Nasdaq put in its sixth straight day of gains. As we eye or board of indicators for signs of direction at 0715 ET things are pretty quiet:
Stock index futures are taking a bit of a breather. The Nasdaq is down 0.6% with S&P 500 futures off 0.5%;
Commodities are dropping. WTI crude oil is down 3% to drop below $61/barrel. Copper is down 0.3%;
Cryptos are also taking on a little water. Bitcoin is down 2% to trade around $101,700;
Bonds are unchanged. The 10-year yields 4.51%, which is around its highest level of the year.
Today’s Known Events
We’ll start with earnings again:
Walmart (WMT 0.00%↑) was the one we’ve been waiting for. All week really. Results were mixed but management importantly reaffirmed full-year guidance. The initial move in the stock is higher as a result;
Alibaba (BABA 0.00%↑) missed expectations and is dropping in the pre-market, down 5% at the time of this writing;
Deere & Co (DE 0.00%↑) earnings appear to have impressed investors as that stock is up 3% in the pre-market;
Birkenstock (BIRK 0.00%↑) raised guidance and is rallying in the pre-market, up 5%;
After the close at 1600 we’ll hear from Applied Materials (AMAT 0.00%↑) and Take-Two Interactive (TTWO 0.00%↑), among others.
We have a bunch of economic data out today as well:
Retail sales are out at 0830. Economists who were surveyed expect the headline figure to be flat month-over-month after a 1.4% increase last month. Core retail sales, which exclude automobiles, are expected to increase by 0.3% after rising 0.5% last month.
We’ll also get producer prices at 0830. These are a good leading indicator for consumer prices under the premise that producers pass higher costs off to consumers. Especially with tariffs, one would expect this to be the case. The expectation here is for an increase of 0.2% MoM after a decline of 0.4% last month. That would leave the annualized figure at 2.5% after coming in at 2.7% last month. Core PPI, which excludes food and energy is expected to increase by 0.3% MoM after dropping by 0.1% last month. That would leave annualized Core PPI at 3.1% after printing at 3.3% last month.
Seeing how it’s Thursday we’ll get initial jobless claims, also at 0830. The expectation is for 229,000 new claims, effectively unchanged from last week’s 228k and basically in line with the four-week average of 227k.
Industrial production is out at 0915. This is expected to increase by 0.2% MoM after declining by 0.3% last month.
The Bottom Line
So welcome news from Walmart. That is certainly a relief after what happened last quarter. The caution on tariff’s impact to consumer prices is certainly ominous but then if tariffs are canceled then we’re all good, right?
Retail sales could move sentiment, though it’s worth keeping in mind that this will likely be a tariff-driven outlier. Plus retail sales tend to track employment and that is continuing to hold up fine. M&A markets appear to be fine as well, judging by this FootLocker (FL 0.00%↑) deal, which can be viewed as a healthy indicator of corporate risk taking — and the financial industry’s willingness to bankroll this risk-taking.
Stocks on the Contrarian Radar©️
Safe to say it’s been a very bad stretch for United Health (UNH 0.00%↑). First its CEO gets assassinated, then it missed earnings. Earlier this week its CEO quit. Now comes news the company is being investigated for possible Medicare fraud. The stock has fallen off a cliff as a result, giving up more than half its value over the last month:
This kind of ‘blood in the streets’ sentiment has The Contrarian naturally looking into the possibility of whether UNH may just present a buying opportunity. A look into the valuation shows the stock trading at:
13x forward earnings
0.6x forward sales
2.7x forward cash flows
That is cheap. The balance sheet seems to check out okay at first glance, with $81 billion in debt and $34 billion in cash versus a market cap of $279 billion (and shrinking). But looking through the assets, more than a third ($107 billion of its $309 billion) was in the dreaded ‘goodwill’ category last quarter with an additional $30 billion of ‘other’. That’s not good.
At issue are not just these scandals. The company is apparently also hit with increased insurance usage and costs, particularly in Medicare Advantage. This caused it to suspend guidance, which is going to throw some of its valuation into question. And of course that creates more uncertainty and investors hate uncertainty more than they hate bad news.
Verdict: UNH is cheap for a reason. The Justice Department probe has to be treated seriously because this is Trump’s Justice Department we are talking about. The President has spoken of his desire to lower prescription drug costs, but to disrupt such a big company like this — especially one that has attracted the vitriol of liberal media — has got to mean something. For this reason one suspects that there could be more bad news coming in the days and weeks ahead. It also unleashes a bunch more uncertainty, including the possibility the company could be broken up.
Health insurance companies can boast a ‘sticky’ stream of cash flows — until they can’t. All this uncertainty has the potential to upend this equation. That’s too much uncertainty even for a contrarian, and your author is going to stay away from UNH, at least for now.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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