SRVR - 4 Key Sectors To Consider Now
2023-08-01 05:15:00 ET
Summary
- It’s Q2 earnings season, and many of our stocks are already exhibiting relative strength, which is a sign that money is gravitating to companies that will post the strongest quarterly results and the best future guidance.
- We’re finally seeing some upward pressure on oil prices. Energy stocks are benefitting from rising global demand for fossil fuels in emerging markets, as well as strong seasonal demand in the U.S.
- The preliminary estimate for US Q2 GDP growth was an annual pace of +2.4%, up from a 2% annual pace in Q1.
- The eurozone is still facing big headwinds though, in the wake of the ECB’s recent rate hike.
We are now in the midst of second-quarter earnings announcement season. Many of our stocks are already exhibiting relative strength, which is a sign that money is gravitating to those companies that will post the strongest quarterly results and the best future guidance. We are in the midst of what our favorite economist, Ed Yardeni, calls a “rolling recovery,” industry by industry, and there are now essentially four improving industry sectors where we can find stocks on the rise, namely (1) semiconductors and cloud computing, (2) oil refining and integrated energy, (3) consumer discretionary, and (4) homebuilding.
Here is a capsule summary of the latest news in each sector:
#1: This year’s big AI craze is still viable in the wake of Nvidia’s ( NVDA ) and Super Micro Computer’s ( SMCI ) positive guidance. The only glitch is that the Biden Administration wants to restrict China’s access to AI via cloud computing, but we suspect that will fail, since China is pretty good at outsmarting its trading partners.
#2: The recent boom in energy stocks is due largely to margin expansion. Refiners are benefitting from high seasonal demand and wide crack spreads. In the meantime, integrated energy companies have boosted production and no longer need high crude oil prices to boost earnings. Russia remains a wild card in the global energy market. It is widely perceived that their production will systematically decline when winter arrives. Russia’s seaborne crude oil exports have fallen substantially in recent weeks and are now running at the lowest level this year. (I’ll have more to say about energy stocks in the next segment.)
#3: As far as the consumer is concerned, we like to follow where consumers are spending their hoard of cash, which lately seems to be in home improvement, restaurants, travel, and entertainment. The service sector is responsible for virtually all of the economic growth in the U.S., since the manufacturing sector is still sputtering. The latest good news is that the Conference Board announced Tuesday that its consumer confidence index surged to 117 in July, up from 110.1 in June. Both the Conference Board’s expectations and present situation components rose in July, which is a very good sign. Overall, consumer confidence is now at its highest level in over two years (since July 2021), which bodes well for strong retail sales.
#4: Finally, the homebuilding sector remains strong due to the fact that the inventory of existing homes remains suppressed, since homeowners with low mortgage rates are reluctant to sell. As a result, homebuilders have to build more homes to meet the demand in growing areas. I should add that due to cooling inflation, mortgage rates are anticipated to continue declining in the upcoming weeks.
I should add that low market volatility is apparently hindering some logarithmic trading firms. Last week, Virtu ( VIRT ) announced a 23% drop in net trading income last quarter, so its earnings declined 49.3% to 37 cents per share, down from 73 cents per share in the same quarter a year ago. Also, Citadel Securities , which is a private company, announced that trading revenues declined by 29% in the second quarter, according to the Financial Times. Both Citadel and Virtu are active in option trading. Even though there are now daily as well as weekly options, these new options are not boosting the bottom line for Citadel and Virtu.
More Details on the Energy Sector
We’re finally seeing some upward pressure on oil prices, as crude rose from under $70 per barrel at the start of July to over $80 last Friday, up 14% in the last month, as we enter the peak of summer driving season. Most of the world realizes they can’t function without fossil fuels. John Kerry’s main goal during his recent visit to China was to convince Beijing to transition away from coal for electricity generation, but he had virtually no success. Also, India is pro-coal, like China, and has no intention of complying with any green agenda. India’s minister of power, R.K. Singh, acknowledged that the reduction of fossil fuels production was a “sticking point.” Japan is also reluctant to shut down its coal plants that generate approximately one-third of its electricity. With a coming G20 meeting seeking a consensus on green energy policies, there will likely be no green energy mandate coming out of any upcoming G20 meeting.
Obviously, our energy stocks are benefitting from rising global demand for fossil fuels in emerging markets, as well as strong seasonal demand in the U.S. Furthermore, the chaos in Russia makes them an unreliable source for crude oil, despite the fact that Russia is currently producing more crude oil than Saudi Arabia after its two million barrel per day cut. If Russia’s war against Ukraine continues, however, Western sanctions and harsh winter weather could begin to curtail Russia’s crude oil production.
Our energy stocks have also been aided by the tension in the Middle East as Iran continues to hijack U.S. ships. As a result, the U.S. Navy dispatched two amphibious warships and thousands of Marines to the Middle East to counter these Iranian threats. China has imported 11.4 million barrels per day of crude oil in the first six months this year, which is 11.7% higher than a year ago. Interestingly, 2.13 million barrels per day of that crude oil came from Russia as China took advantage of cheaper Russian crude oil; so, due to China stockpiling crude oil and the new tensions in Iran, oil prices may continue to meander higher.
Brent crude oil traded above its 200-day moving average last week. China’s rising demand plus its recent pledge to stimulate its economy remain primary forces behind crude oil’s recent rise. Additionally, big fires on the Pemex offshore oil platform are raising concerns that Mexico’s production may fall due to neglect. There is plenty of oil to come from Mexico if they use U.S. oil service companies. Exxon Mobil ( XOM ) curtailed production at one of its refineries, so the inventory of refined products remains tight.
The green agenda and the chaos in Ukraine are causing global food prices to rise. Energy prices are expected to remain firm, simply because there are too many global uncertainties. In the U.S., we are fortunate to be food and energy independent, but many workers are upset that their wages are not keeping pace with inflation. The UAW is worried about losing their jobs due to the transition to EVs as GM and Ford ( F ) move their EV production to Mexico, so they are not endorsing President Biden’s re-election yet.
Speaking of EVs, GM said its second-quarter results were hindered by a $792 million extraordinary charge related to the recall of its Bolt EV to replace its LG battery packs. Excluding this extraordinary charge, GM posted strong sales and operating earnings. The average vehicle that GM sells now trades at around $52,000, up 3% for the first quarter, so GM is moving increasingly upscale with its vehicles. Due to GM’s strong earnings, I suspect the UAW will play hardball and strike if its demands are not met.
U.S. Economic Statistics Remain Strong - Especially Compared to Europe
The Commerce Department on Thursday announced that its preliminary estimate for second-quarter GDP growth was an annual pace of +2.4%, up from a 2% annual pace in the first quarter. Consumer spending grew at a 1.6% rate. Overall, GDP and consumer spending were all better than economists expected.
By contrast, Germany’s GDP was flat in the second quarter after contracting in the previous two quarters. France reported 0.5% GDP growth in the second quarter, so it is possible that the eurozone recession may be ending. However, in the wake of the ECB’s recent rate hike, the eurozone is still facing big headwinds.
The European Central Bank (ECB) raised its key interest rate 0.25% last week, despite the fact that many countries in the European Union ((EU)) are mired in recession. Inflation is worse in the EU, since their agriculture sector is less efficient and many nations struggle to protect their farmers. Furthermore, the EU is dependent on foreign energy imports. Rising oil and natural gas prices are problematic for the EU, since energy inflation remains high, so the EU may remain in a recession for the foreseeable future.
The other big news on Thursday was that durable goods orders surged 4.7% in June, due largely to a 69% surge in commercial aircraft orders. May’s durable goods orders were revised up to a 2% increase from 1.8% previously reported. Excluding transportation, durable goods orders rose 0.6%. Excluding defense, durable goods orders rose an impressive 6.2%, led by a 12% rise in transportation orders. Core capital goods, indicative of business orders, rose 0.2% and have risen 1.9% in the past 12 months. Since all major categories increased in June, the durable goods report was certainly indicative of strong GDP growth.
Also, the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, rose 0.2% in June and 3% in the past 12 months, the slowest annual pace of PCE inflation in over two years (since March 2021). The core PCE, excluding food and energy, rose 0.2% in June and 4.1% in the past 12 months, so the PCE remains above the Fed’s inflation target of 2% but is trending in the right direction.
Navellier & Associates owns Nvidia Corp. ((NVDA)), Exxon Mobil Corp. ((XOM)), Ford Motors ((F)), and Super Micro Computer, Inc. ((SMCI)) in managed accounts. We do not own General Motors ((GM)). Louis Navellier and his family personally own Super Micro Computer, Inc. ((SMCI)), Exxon Mobil Corp. ((XOM)), and Nvidia Corp. ((NVDA)) via a Navellier managed account. They do not own Ford Motors ((F)) or General Motors Inc. ((GM)) .
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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4 Key Sectors To Consider Now