Making sense of the markets this week: February 26, 2023

Groceries and electricity profits shine for investors—not so much for consumers

Canadian blue-chip companies reported a wide range of earnings results this week. 

While grocer earnings calls don’t usually make to leading news headlines, Loblaws was squarely in the media’s crosshairs this week, as a result of inflation on grocery bills.

Shareholders will no doubt welcome the $52-million fourth-quarter profit announcement, as revenues rose about 10% year over year (YOY). Despite the earnings beat, Loblaw chief financial officer Richard Dufresne said results were, “further evidence that retail prices are not growing faster than costs, and the company is not taking advantage of inflation to drive profits.” 

He went on to claim that gross margins on food retail peaked in mid-2021, and it’s been trending downward since. 

Good luck, Dufresne, on convincing the public of those assertions.

In the world of utilities and energy production, Emera posted a solid quarter. It appears to have gotten the green light to pass along cost increases to consumers. TransAlta didn’t fare so well. It posted an “on-paper loss” when a significant profit had been expected. The company explained the earnings result by stating: 

“The net loss in 2022 was impacted by higher depreciation and amortization expense due to the acceleration of useful lives on certain facilities in our gas segment, higher OM&A expenses and higher income tax expense, due to higher earnings before tax and current and prior period tax adjustments in the US to mitigate cash tax.” 

OM&A expenses include operations, maintenance and administrative costs.

In other words, that may mean: “We’re doing fine. Our revenues are way up, but we’re completing the bookkeeping this way in order to minimize taxes.” And, investors appeared largely to agree, as the stock price was down by about 3% on Thursday.

Teck Resources had a bad week, though, as negative earnings news drove its stock price down nearly 10% by Friday’s market open. The company cited lower copper and zinc prices as the main reasons for failing to meet revenue and profit expectations. Teck also announced it would be spinning off its coal-based steelmaking business. Check out how to invest in stocks at MillionDollarJourney.com.

So, you want to be a millionaire?

Nick Maggiulli wrote an interesting post about where millionaires keep their money.

Here’s a quick look at what investments the average millionaire is making:

Our first-glance takeaways were:

• Wow… millionaires keep a lot of cash.
• Interestingly, there was very little change in asset allocation during the five-year period.
• The average millionaire doesn’t have nearly as many “exotic” or alternative investments (think: hedge funds or private equity) as one might expect.

Maggiulli concludes that most millionaires don’t try to time the market. Instead they prioritize diversification when it comes to selecting securities within a given asset class. Also, young millionaires are driving a move towards passive investing and away from active investing. And ultra-high-net-worth investors (those with more than USD$30 million) tend to allocate more of their portfolios to alternative investors versus the merely high-net-worth (less than USD$30 million) investors.

Here’s one takeaway worth noting, too. He shows that access to alternative investments didn’t really help those rich investors:

We were initially surprised at the fairly conservative nature of the average American millionaire’s portfolio. The large cash allotment, for example, isn’t exactly optimized. Upon further thinking, when you consider the majority of millionaires are probably approaching—or are already in—retirement, given that assumption, their asset allocation starts to make a little more sense.

We agree with Maggiulli’s bottom line: Millionaires don’t generally get to that point by doing anything special in their investment accounts. Just prioritising portfolio diversity, having a healthy exposure to equities, and the obvious fact they have the income and savings to invest in the first place seems to be a solid recipe for long-term success.

Walmart and Home Depot see consumer storm on the horizon

It was another “good news, bad news” story for giant U.S. retailers this week as both Walmart and Home Depot reported strong quarterly earnings, but they both cautioned shareholders about what the rest of 2023 might look like on consumer demand. (Values in this section are in U.S. currency.)

Walmart’s noteworthy earnings beat was celebrated, but its chief financial officer John David Rainey was quick to point out increased fuel costs as a potential obstacle to growing profit margins.

“The consumer is still very pressured. And if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that’s why we take a pretty cautious outlook on the rest of the year.”

That said, the retailer continues to outperform its competitors, and has admirably grown U.S. same-store sales throughout the pandemic and post-pandemic periods.

While Walmart’s share price managed to tread water after releasing softened guidance, Home Depot wasn’t as fortunate. Despite a slight earnings beat, HD shares were down 7% on Tuesday after a statement from chief financial officer Richard McPhail: 

“During COVID, we saw a shift into goods. Over the last really almost two years, we’ve seen a gradual shift back away from goods into services, and we think our market has reflected that and we think that that dynamic could put some pressure on our market.”

Notably, it was the first time since 2019 Home Depot missed revenue expectations.

Bed Bath and Beyond (BBBY/NASDAQ) update: A month ago we wrote about why the rampant speculation on Bed Bath and Beyond scared us. And here’s what’s happened:

It’s official: Bed Bath and Beyond Canada is closing all of its 54 stores in Canada and is declaring insolvency. Meanwhile, the American side of the retailer is in default to its main lender, and is considering Chapter-11 bankruptcy.

To be honest, we didn’t even need to consult our special crystal ball on this one. Meme stocks aren’t immune to the gravity of market pricing: What goes up (with no underlying fundamental reason), must come down.

Intel swoons on dividend cuts while Nvidia soars on A.I. frenzy

It was also a mixed bag for semiconductor company earnings this week. On Wednesday, Intel (INTC/NASDAQ) cut its dividend by 65% from $0.37 to $0.13, weeks after announcing major cuts in executive compensation. That prompted Morgan Stanley to declare its stock looked better after the cut, and the stock rose a tad on Thursday. But that move was eclipsed by a big move in Nvidia (NVDA/NASDAQ), which soared 14% Thursday, on top of a jump after positive earnings news on Wednesday. Even before that, the stock was up 45% in 2023 over the firm’s strong position in the increasingly manic A.I. sector.

Inflation watch: Shipping containers

If you want a quick way to quantify just how dramatic the post-COVID consumer switch to services and away from goods has been, the cost of shipping containers is down 85% from its pandemic peak, and is now below pre-pandemic levels.

A huge part of the costs of manufactured goods in North America comes from transportation: moving raw materials to the manufacturers, and shipping the final products from overseas factories to our local retailers. Consequently, with lowered oil prices and shipping container rates being down 85%, it represents a massive cost reduction. And with 90% of goods reaching retailers via ships, and the quantity of goods demanded being down 5% year-over-year, the disinflationary pressures from the goods side of the CPI market basket should continue to help out consumers.

With the world’s biggest shipping companies using unprecedented massive earnings during the pandemic to upgrade and expand their capacity, we shouldn’t see shipping prices trend upward for a while.

Now if we could just get the services sector to follow a similar disinflationary pattern, central bankers around the world—and regular folk, too—could breathe a sigh of relief. Inflation headlines could then retreat back to the 6th page of the business section, as opposed to screaming in bold font “above the fold” each month.

Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.

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