When will the punishment in stocks be over? Those who are in the bullish camp are eagerly waiting for that question to be answered. After painfully watching the effect rising inflation and bond yields have had on the overall market, investors are scrambling for any sign of optimism. This week revealed more of the same.
Thanks to rising bond yields in the wake of the Federal Reserve’s interest rate hike on Wednesday, stocks declined to new 52-week lows and sending the major benchmarks for another weekly loss. On Friday, The Dow Jones Industrial Average fell 486.27 points, or 1.62%, to close at 29,590.41. Declines in Apple (AAPL), IBM (IBM), Nike (NKE), Salesforce (CRM) and Microsoft (MSFT) sent the blue chip index lower than its levels in June which was thought to be the bottom. The S&P 500 Index dropped 64.76 points, or 1.72%, to close at 3,693.23, while the tech-heavy Nasdaq Composite tumbled 198.88 points, or 1.8%, to end the session at 10,867.93.
On a weekly basis, the Dow has fallen 4.6%, while the S&P 500 has lost 5%. With a weekly decline of 5.6%, the Nasdaq suffered the largest decline. The sharp declines and surging volatility are in response to the Fed’s action on Wednesday to raise interest rates by three-quarters of a point, marking the third straight time it has taken such steep measures to battle rising inflation. Fears of the recession is also on the rise which has prompted investors to exit risk assets.
In the wake of Wednesday’s rate increase, the market appears to dismiss the so-called “soft landing” that continues to describe the anticipated outcome of the Fed’s actions towards the economy. Amid the massive decline, it’s hard to look for a “bright side” within this scenario. But stocks certainly appear oversold. What’s more, it’s hard to imagine that all of the good news is not priced into the valuations. That said, the main question on the minds of investors is whether a recession can be avoided? The market does not like being in a cycle of endless rate hikes.
Surprisingly, investors are already betting on the Fed to start cutting interest rates within a year, according to the CME’s FedWatch tool. It remains to be seen whether the decline in stocks continue. However, increasing exposure to the most beaten-down segments of the market such as technology and consumer discretionary stocks may soon pay off. The major indexes will now be closely watched for when they will regain their 50-day and 200-day moving averages, which is typically a strong indication that stocks have bottomed. The question is, which trend will prevail? Here are this week’s stocks I’ll be watching.
BlackBerry (BB) – Reports after the close, Tuesday, Sep. 27.
Wall Street expects BlackBerry to lose 7 cents per share on revenue of $165.8 million. This compares to the year-ago quarter when it lost 6 cents per share on revenue of $175 million.
What to watch: BlackBerry shares have plunged more than 45% year-to-date and almost 50% over the past twelve months. And if you’ve bought and held the stock in the past three and five years, you’re likely down 30% and 42% in both spans, respectively. Growth in the company’s Enterprise Software Services segment (its largest business) has been the major cause of the punishment and it doesn’t appear as if things will immediately improve. The company believes it has an enormous opportunity to service customers in need of device security as the number of connected devices continue to grow, especially given the rate at which cyberattacks on mobile and traditional devices have grown recently. The management aims to hit revenue of $1.2 billion in fiscal 2027. Although that goal, which implies annual revenue growth of 13%, would be phenomenal if achieved, the company has not shown it can make significant cybersecurity strides to capture that sort of market share. Nevertheless, with BlackBerry stock still down so much this year, the market will want to see whether its fundamentals can justify a higher price.
Nike (NKE) – Reports after the close, Thursday, Sep. 29.
Wall Street expects Nike to earn 93 cents per share on revenue of $12.29 billion. This compares to the year-ago quarter when earnings came to $1.16 per share on revenue of $12.25 billion.
What to watch: With the stock down 41% year to date and 37% over the past twelve months, it’s hard to argue that Nike might be the most undervalued name in retail apparel, especially when compared to the company’s long-term potential with its Direct-to-Consumer (DTC) business. That segment is not only more profitable business than the wholesale, but it also gives Nike more pricing power while allowing the company to affect the consumer buying experience. In fiscal 2022, the DTC business generated $18.7 billion, rising 14% year over year, thanks to increases in digital sales. As it stands, DTC now accounts for 43% of the company’s total revenue, compared to 27.5% six years ago. This suggests that the decline in Nike’s stock does not reflect the operational excellence the company has displayed over the past several years. Some analysts fear, as interest rates continue to rise, that the company could suffer higher commodities prices in the near term which could impact revenue in regions like Europe and China. The latter is the company second-largest market. With these challenges notwithstanding, RBC Capital Markets analyst Piral Dadhania just rated the stock a “Buy” ahead of Thursday earnings with a $125 price target. Dadhania believes the company can continue to assert itself as one of the better-performing names within the retail sector.
Micron (MU) – Reports after the close, Thursday, Sep. 29.
Wall Street expects Micron to earn $1.30 per share on revenue of $6.69 billion. This compares to the year-ago quarter when earnings came to $2.42 per share on revenue of $8.27 billion.
What to watch: Driven by the sharp and sustained decline of DRAM prices, shares of Micron have been in a steady downtrend over the past year, falling some 33% in twelve months, while plunging almost 50% year-to-date. Aside from DRAM weakness, the company has also dealt with supply chain headwinds in a memory market which were already highly volatile to begin with and it adjusts to commodity-like prices to match fluctuations in demand. The company is also dealing with rising interest rates which has likely pressured demand for consumer PCs — a market that Micron relies on. Given that products for consumer devices accounts for some 55% of Micron’s revenue (memory and solid-state storage drives), rate increases still pose a significant risk to Micron’s business. However, in order to maintain profitability, Micron Technology is expected to slash operating expenses by up to 40%, according to Citigroup analyst Atif Malik who cited weak growth from the smartphone and PC markets. It remains to be seen whether the costs cuts meet the profitability goals Micron expects. While Micron is working to offset revenue risk by growing its datacenter business, the company will need to issue strong guidance that instills confidence that memory pricing can rebound in the quarters ahead.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.