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Markets Become Logical Again

Readers might have noticed that our Monday’s “Top Things to Expect” newsletters have been oddly accurate of late:

• Oatley (NASDAQ:OTLY). “As food startups continue to struggle, even iron-stomached investors should avoid buying the dip.”
• CrowdStrike (NASDAQ:CRWD). “Investors should expect the firm to report increasingly bullish guidance in this increasingly uncertain world.”
• Rivian (NASDAQ:RIVN). “Investors should brace for volatility when Rivian announces earnings on March 10.”

In all three cases, the predictions would prove true. Oatley’s shares dropped 10% after it announced earnings, Crowdstrike rose 25% and implied volatility in Rivian’s shares would hit 140 — just shy of its 174 peak.

The reason is straightforward (and no, it isn’t that I’ve started consulting the Magic 8 Ball). Instead, markets have become more focused on price discovery. With retail-led swarm traders hiding away in blue-chip tech, smaller firms are moving to their fundamental prices faster than before.

It won’t always be this way. But let’s enjoy the logic while it lasts.

Five Things to Expect This Week: 1. Meme Favorite Reports Earnings

With few meme stocks announcing earnings this week, Redditors will be watching Exela Technologies (NASDAQ:XELA) closely.

This business outsourcing firm has become one of the cheapest stocks in the U.S. on a price-to-sales (P/S) basis. Its unprofitable business, paired with a management team seemingly stuck in a time loop, has left the firm with a 0.05x price-to-sales ratio.

Yet Exela could report reasonable earnings this quarter. Analysts are expecting the firm to lose just 13 cents per share, compared to a 76-cent loss in Q1 2021. Tightening U.S. labor markets tend to favor firms that can outsource work to foreign outposts.

But the performance of XELA shares will be another matter. The company’s $170 million market capitalization is a tiny stub next to its $1.5 billion of debt. Even if the firm misses expectations by a small amount, you can be sure a lot of money will suddenly change hands. This stock is as volatile as they come.

2. Chinese Firms Continue to Struggle

It’s been a rough quarter for Chinese ecommerce companies. Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD) are each down almost 30% since the start of the year, leaving many analysts writing 1-star reviews of the stock.

On Tuesday, Pinduoduo (NASDAQ:PDD) could add more downbeat news to the mix. The agriculture-focused ecommerce firm has already lost 80% of its market value over the past 12 months. A broad slowdown in Chinese tech growth could further weigh down shares.

PDD still trades at a premium. A forward price-to-sales ratio of 3.5x makes Pinduoduo the second-most expensive Chinese ecommerce firm by that metric (Only Meituan (OTCMKTS:MPNGY) trades for more).

With profits beginning to stagnate, Pinduoduo remains a company to avoid buying until the Chinese government ends its war on its tech giants.

3. Food Crisis Fears Mount

This week, people will start to realize that Ukraine and Russia not only produce more than a quarter of the world’s wheat exports. They’re also big generators of potash and other important agricultural goods.

Some governments have already begun panicking. On Thursday, Egypt banned all wheat, flour and lentil exports. They join Indonesia, Hungary and several other countries in quietly erecting barriers to trade.

These moves could quickly turn into a retaliatory tit-for-tat. Once you start getting in the way of Americans and their Oreo cookies (a product of Indonesian palm oil), who knows how far the food fight might go.

4. “Enter the Metaverse” Conference Begins

On Thursday, the “Enter the Metaverse” conference begins in Paris. The convention will host the latest developments in mixed reality, extended reality and holograms.

Onlookers might wonder why such a conference would need a real-world location. The Metaverse, after all, is supposed to eliminate the need for the inconvenience of meeting people in real life.

But the conference will highlight the need for better virtual reality hardware. Meta’s (NASDAQ:FB) Oculus VR headsets have come with plenty of complaints about eye strain and blurred vision. Even premium sets like the HTC Vive Pro 2 have reviewers calling it “the best of a bad situation.”

Bad enough, perhaps, that VR conferences still need to happen in real life.

5. GameStop Announces Earnings

Finally, when GameStop (NYSE:GME) publishes Q4 earnings on Wednesday, I honestly have no idea what will happen.

Analysts are already predicting a decline in profits, with EPS estimates down to 76 cents per share, compared with $1.34 a year ago. A lack of new gaming consoles will weigh on the firm’s results.

But retail investors tend to have a mind of their own. AMC Entertainment’s (NYSE:AMC) 42% earnings beat on March 1 sent shares falling 17%. And mom-and-pop buyers have consistently shown the ability to buy one asset like Shiba Inu (SHIB-USD) while ignoring a virtually identical one such as Akita Inu (AKITA-USD).

From a fundamental standpoint, GameStop’s current business is worth around $10 to $20 per share according to 2-stage discounted cash flow (DCF) models (Generating $40 million per year doesn’t get you far). When the firm announces earnings this week, the valuation of its “old” business will be the last thing on people’s minds.

Is America Heading Towards A Recession?

Last Friday, Goldman Sachs’ economists downgraded their Q1 U.S growth forecasts to near-zero. They now believe the probability of a U.S. recession is as high as 35%.

They’re not the only ones worried about the “R” word. Pictet, an asset manager, found that each time oil prices rose by more than 50% from their previous trend, a recession would soon follow (Oil prices have already been at that point for the past two weeks).

But as an insightful piece in The Economist explains, “the easily observed relationship between oil and the economy is no iron law. There have been times when crude prices soared and yet recessions were averted, including the peak of a global commodities boom in 2011.”

They’re correct. While oil supply shocks tend to drive economies into recession, demand-driven ones typically signal booming economies.

Today, Americans are faced with both. Russian sanctions are worsening OPEC+ production gaps, yet consumption is also significantly higher from relaxing Covid-19 restrictions. Only time will tell which factor prevails in the Western world.

The outlook for emerging economies is grimmer. Food prices play an outsized role in less wealthy countries, and removing a quarter of world wheat exports from the international markets will surely have knock-on effects.

That means safe-haven assets like the dollar and gold will perform well. And though the “R” word might get tossed around by pundits looking for air-time, it’s a risk that investors will increasingly realize.

P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at moonshots@investorplace.com or connect with me on LinkedIn and let me know what you’d like to see.

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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.