Jim Cramer on CNBC’s Halftime Report.
Scott Mlyn | CNBC
Markets ended the week lower as investors tried to “value” (find an appropriate valuation level against higher rates) the potential of up to four Federal Reserve interest rate hikes at the end of the year.
Last week, we discussed what this means for those investors who use discounted cash flow models, possibly the most diligent way to determine a company’s intrinsic value, so this week, let’s take a look at valuation multiples, which are also used to determine the “terminal value”. value” in a discounted cash flow (DCF) model.
In general, investors looking more at the medium term (6 to 18 months) will look at a company’s price over earnings multiple, and the multiple is placed on a company’s short-term earnings. For example, Apple (AAPL) is expected to earn $5.76 per share this fiscal year, so at a price of $172, the stock is trading just under 30 times earnings.
However, just like reassessing the discount rate in a DCF model when rates rise, investors should also reassess valuation multiples. That is exactly what we saw this week, especially in the big flyers and particularly in the names that don’t even make a profit and therefore trade on sales-based multiples.
This is what is meant when investors mention “multiple contraction”, when interest rates go up (or are expected to go up), investors value companies using a lower multiple valuation. This is also crucial to understand because when a downgrade occurs we often cannot look back to recent highs, especially the high flying ones, as the environment has changed and the market may simply not be willing to look back at the multiples applied in the lower ones. rate environment. It’s also why value (lower multiple names) tends to gain popularity as rates go up. Value stocks typically already have low multiples, making downside risk less of an issue.
Lastly, one more term you will hear frequently in this market is GARP or growth at a reasonable price. This is the term used for those names that achieve a good mix of growth and value and are therefore better able to hold up when sales hit highs, while also providing exposure to underlying business growth.
That in mind, while we certainly like GARP type names and indeed mega-cap tech names like Microsoft (MSFT), parent of Google alphabet (GOOGL) and father of Facebook Metaplatforms (FB) arguably all fall into this category due to their P/E multiples in their 20s and 30s combined with high expected growth rates among teens and low 20%, we reiterate once again that, above all, we want the shares of companies. than “doing stuff and doing stuff” because in this market earnings and cash flow are the most attractive attributes of any company, not sales growth as was the case in 2020 and early 2021 when the Fed showed as accommodating as possible.
Here’s a quick look at some of the broader market measures we like to watch: The US Dollar Index pulled back slightly to just above the 95 level. Gold was flat for the week, trading around the $1,800 level . WTI crude oil prices strengthened to the low $80 per barrel area. The 10-year Treasury bond yield was hovering around 1.76%.
Within the portfolio, we receive earnings from fargo wells (WFC) on Friday before the opening bell. In addition to earnings, we received several key macro updates this week.
- Consumer’s price index for December (Head CPI MoM: +0.5% vs. +0.4% Estimate; Core CPI YoY: +5.5% vs. 5.4% Estimate)
- Weekly unemployment claims: estimate of 230,000 vs. 200,000; 4-week moving average of claims: 210,750 (+6,250 vs. previous week)
- Producer Price Index for December (Total PPI MoM: +0.2% vs. +0.4% Estimate; Core PPI YoY: +6.9% vs. 6.9% Estimate)
- retail sales for December (total MoM sales: -1.9% vs -0.1% estimate; retail sales ex-Auto & Gas MoM: -2.5% vs -0.2% estimate)
- Industrial Production and Capacity Utilization for December (Production MoM: -0.1% vs. +0.2% Estimated; Capacity: 76.5% MoM vs. 77.0% Estimated
Fourth quarter earnings rise next week. Within the portfolio, we will hear from Morgan Stanley (MS) on the Wednesday before the opening bell, and Pacific Union (UNP) on Thursday before the bell. As a reminder, we will provide our full analysis of each earnings report from the companies in the portfolio. Here are some other reports we’ll be looking at. The stock market is closed on Monday in observance of Martin Luther King Jr. Day.
- Open: Goldman Sachs (GS), Truist (TFC), PNC (PNC), Charles Schwab (SCHW), BNY Mellon (BK), Signature Bank (SBNY), Old National Bancorp (ONB), Silvergate Capital (SI)
- Closing: JB Hunt (JBHT), Interactive Brokers (IBKR), Pinnacle Finl (PNFP), Hancock Whitney (HWC), Fulton Fincl (FULT)
- Open: United Health (UNH), Bank of America (BAC), Procter & Gamble (PG), US Bancorp (USB), ASML (ASML), State Street (STT), Citizens Financial Group (CFG), Fastenal (FAST) , Prologis (PLD), Comerica (CMA)
- Settlement: United Airlines (UAL), Kinder Morgan (KMI), Alcoa (AA), Discover Financial (DFS), HB Fuller (FUL), Wintrust Fin (WTFC)
- Open: American Airlines (AAL), Travelers (TRV), Baker Hughes (BKR), Fifth Third (FITB), KeyCorp (KEY), Northern Turst (NTRS), Regions Fincl (RF), M&T Bank (MTB), First Horizon (FHN)
- Closing: Netflix (NFLX), PPG Industries (PPG), CSX (CSX), Intuitive Surgical (ISRG), SVB Financial Group (SIVB), Bank OZK (OZK)
- Open: Schlumberger (SLB), Ally Financial (ALLY), Huntington Banc (HBAN), HIS Markit (INFO), First Hawaiian (FHB)
On the macro front, we’ll be keeping an eye on the geopolitical sphere, as well as upcoming releases (all times ET).
- 8:30 a.m. Empire State index
- 10 in the NAHB Housing Market Index
- 8:30 a.m. Start of housing
- 8:30 a.m. Building permits
- 8:30 am Weekly Unemployment Claims
- 8:30 am Philadelphia Fed Index
- 10 a.m. Existing Home Sales
- 10 on leading indicators
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(Jim Cramer’s Charitable Trust is long AAPL, MSFT, GOOGL, FB and WFC).