Critical information for the U.S. trading day
Markets are looking a little uneasy ahead of Thursday’s open. Credit Suisse shares have shot higher on plans to borrow billions, a day after collapsing and upending already fragile markets. But a European Central Bank meeting and data are looming, as investors remain on the lookout for more stress in the financial sector.
Onto our call of the day, which comes from the manager of the Plumb Balanced Fund (PLIBX), Tom Plumb, who has three stock ideas to share. But first, some timely advice from the manager’s three decades of experience.
“The market is really going to be volatile here, but if you look at 1981 to 1982, it was a significant amount of pressure on the stock market, but the fourth quarter of 1982…the S&P 500 (SPX) was up 40%,” Plumb told MarketWatch in a recent interview.
“I think people still have to look at what their comfort with risk is…for the first time in 15 years, they have a reasonable expectation that a balanced portfolio will modify the volatility because they’re earning 4% to 7% on their higher quality fixed income investments,” he said.
“You just have to make sure the companies you own aren’t overleveraged, they’re not dependent on capital and that they’re not standing, as we say, on the railroad tracks for different trends that are really going to be developing,” said Plumb.
That brings us to his first pick, microcontroller maker Microchip Technology (MCHP), which he has owned at different periods over 20 years and sits in a sector he likes — chips.
The first microcontroller was put on a car to regulate the fuel injection system in 1987 and the average car now has about 400 of those, controlling everything from temperature, to safety, he notes. Microchip trades at about 14 times forward earnings, and likes the fact they’re normally conservative on the guidance front.
“They focus on industrial aerospace, defense, auto and auto centers. They have almost no exposure to PCs and cellphone markets,” return free cash to shareholders, with regular dividends over the past 15 years. While not as sexy as AI, Microchip delivers on the basis of a “good, solid company,” he said.
His next pick is down to the Ukraine war’s causation of a rethink of energy independence, capacity and companies that can produce commodities such as liquid natural gas. With that Philips 66 (PSX) is “probably the best company in the mid market,” trading at about 7 times earnings, with a 4% dividend yield meaning investors are paid as they wait, he said.
“Earnings obviously are pretty volatile, but their main thing is capacity utilization rates on the refineries. Refineries are only a quarter of their revenues, but it’s 60% of their profits, and then they transport the LNG,” he said. LNG exports will be significant as countries try to diversify energy inputs, and “carbon-based energy is gonna still have a significant place in the world for a long time,” he adds.
His last pick is an old favorite for the manager — Latin America’s answer to Amazon.com (AMZN) — MercadoLibre (MX:MELIN) (MELI), whose shares have been on the recovery road after coming off COVID-19 pandemic-era highs. The company is now “getting to scale and you’re seeing a tremendous increase in not only their revenues, but their profit margins are expanding,” he said.
“So it looks like you’re going to have 28% revenue growth maybe for the next four years at least, and get 50% plus growth in their reported earnings,” he said, noting increasing benefits of electronic transactions and digital advertising.
“So you’ve got three legs: you’ve got the financial, you’ve got the Amazon type, online retailer and the third is the advertising. All of these things are putting them in a spot that’s unique in Latin America, Mexico and South America,” said Plumb.
Last word from Plumb? Like many others, he’s worried that the Fed has moved too fast with rate hikes and that those delayed effects are playing out. He worries about risk to insurance companies and long-term lenders of commercial real estate, which he thinks will be “an area of significant potential risk over the next couple of years.”
Stock futures (ES00) (YM00) (NQ00) are mixed, while bond yields (BX:TMUBMUSD10Y) (BX:TMUBMUSD02Y) moving higher, and the dollar (DXY) lower. Asian stocks (HK:HSI) (JP:NIK) fell, while European equities (XX:SXXP) are bouncing . German 2-year bund yields (BX:TMBMKDE-02Y) are also rebounding following a big plunge.
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“Everything is fine,” with Credit Suisse, said the head of top shareholder Saudi National Bank on Thursday, a day after he effectively blew up markets by saying the Middle Eastern bank wouldn’t boost its stake. Credit Suisse shares (CS) (CH:CSGN) are surging after a pledge to borrow money from the Swiss National Bank and repay debt.
The next big event is the European Central Bank meeting, where markets now see a 50-50 chance of a promised 50 basis-point rate hike on Thursday, given fresh banking stress.
Shares of Snap (SNAP) and Facebook parent Meta (META) were rising in premarket, following a report that the Biden administration has told its Chinese owners to sell their TikTok stakes or face U.S. ban.
Goldman Sachs is lifting its odds of a U.S. recession in the next 12 months by 10 percentage points to 35%, over worries about the economic effects of small bank stress.
Weekly jobless claims, import prices, housing starts and the Philly Fed manufacturing survey are all due at 8:30 a.m.
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