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- Harvest Returns | February 13th, 2024
Harvest Returns | February 13th, 2024
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Today’s report is brought to you by Harvest Returns. Grow your wealth with passive investments in farming and agribusiness.
[ good morning ]
Here’s everything you need to know today
Once again—the market is getting hammered by a hotter-than-expected CPI report.
The market had lofty expectations for January’s CPI numbers—analysts projected this would be the first time inflation fell back into the Fed’s preferred 2% range.
Instead, prices stayed firm by rising 3.1% YoY. Shelter prices are once again the main culprit here. While this is an improvement over December’s 3.4% boost—the market needs much lower inflation to justify how high valuations have run since October.
Meanwhile—oil prices are still holding onto higher prices as tensions around the Red Sea continue to escalate. Despite rollercoastering with every new move in 2024—prices are now hovering at 10% higher since January 1st. After all the Fed’s work to slow demand—supply-side pressures may be able to keep inflation going by themselves.
Before the CPI dropped—the major indices already looked pretty shaky in early trading after the market hit fresh highs to close yesterday. Basically, the market got mildly overbought and investors let them correct a little bit. We’re seeing this play out broadly for a lot of earnings in this part of the cycle too. Strong players got overbought during a strong Q4 that devolved into a euphoric buying spree. Now, those companies are offering more muted guidance for Q1 and that’s dragging their valuation back to reality.
This isn’t a full-blown ‘correction’ or anything—but it’s an important trend to keep an eye on as you make investing decisions. How many brands are running a little too hot before they post earnings—and how many are getting piled on after posting more optimistic guidance? We’re going to see a lot of competing narratives for the next month or so as the market tries to determine if it’s the more optimistic managers who have the right view here or if the more conservative teams are right to keep their projections close to the chest.
While all of that plays out, let’s explore the major headlines with long-term predictions and see if we can’t make better sense of the patterns facing this market.
Markets at a Glance
*Market data based on standard trading hours and calculated close to close
[ retail ]
Shopify Down Despite Earnings Beat
Another day, another hot stock that can’t fully justify their Q4 run-up
BREAKING NEWS
Shopify stock started the trading day falling hard after their earnings report crushed expectations. How does that happen? Once again—The Street just doesn’t like their growth path for 2024.
WHAT HAPPENED
Shopify smashed predictions by generating a stellar $0.51 adjusted EPS from $2.14 billion in revenue. Their profitability was the real highlight as gross margin jumped to 49.5% and free cash flow nearly 5x’d in the last year.
2024 ON THE FLOOR
However—Shopify stock is suffering because management didn’t offer a rosy enough outlook to justify how high their valuation has run in the past few months. While revenue jumped 30% in Q4—Shopify only expects growth in the lower 20% range. After gross margin jumped over 3 points in Q4, Shopify is hoping for just 1.5 points of growth in Q1.
This is an important dynamic to illustrate during this bull run. Shopify has soared over 90% since they bottomed in October. There are a lot of stronger mid-cap players like Shopify experiencing the same dynamic after they report earnings. In order to justify a 90% run-up, Shopify has to beat expectations and demonstrate their growth is still accelerating. Instead, Shopify has telegraphed that they are regressing to the mean a little and the stock is naturally cooling off.
WHY IT MATTERS
Shopify still looks great in 2024 after the E-commerce provider completely reset in 2023. The Street simply got a little too euphoric in the wake of this current rally. This is a big illustration of why it isn’t a strong move to jump into a stock right before they report earnings—just in case the market is running hotter than you expect. While Shopify stock dropped over 12% in early trading, there’s still a lot to like as they continue their reset.
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Sectors at a Glance
| Sector | Day | Month | Year |
|---|---|---|---|
| Communications | 0.32% | 8.05% | 43.80% |
| Consumer Disc. | -0.08% | 3.96% | 21.34% |
| Consumer Stap. | 0.71% | 1.13% | 0.60% |
| Energy | 1.10% | 2.10% | -6.15% |
| Financials | 0.46% | 5.31% | 7.65% |
| Health Care | 0.13% | 2.88% | 8.82% |
| Industrials | 0.15% | 4.99% | 14.44% |
| Materials | 0.79% | 1.04% | 1.98% |
| Real Estate | -0.31% | -2.69% | -4.92% |
| Technology | -0.76% | 7.43% | 46.36% |
| Utilities | 1.16% | -3.24% | -9.99% |
*Market data based on standard trading hours and calculated close to close
[ discount retail ]
Discount Retailer Wish Gets Sold at 99% Discount
Wish got marked down harder than their own products
BREAKING NEWS
After a 2020 IPO valued at $14 billion—the online discount shop Wish.com was just sold for $173 million. Sure, the irony here is great—but there’s a lot more to this story:
WHAT HAPPENED
Wish seemed like a brilliant success story at the time—going public right in the middle of the post-lockdown mania at the end of 2020. Wish is a discount shop that bet big on selling ultracheap goods to Western customers directly from Chinese manufacturers.
After effectively lighting tens of billions of dollars on fire trying to attract a critical mass of customers—Wish’s parent company fired their CEO in November and finalized a bargain-barrel sale of the brand to Singaporean e-commerce magnate Qoo10. The buyer here is really interesting—and sets up some wild strategic futures for Wish.
BARGAIN BATTLE
In short: Qoo10 is trying to take on other discount shops in the region like Temu and Shein. While Wish wasn’t particularly effective on their own—they still have a valuable customer-enough customer list and supply chain that can make them useful in the new online discount wars.
There’s a lot of buzz surrounding Temu and Shein—particularly now that Temu made a massive push to get in front of U.S. consumers during a very expensive multi-ad Super Bowl campaign on Sunday. Shein also has a lot of buzz thanks to their impending IPO. Qoo10 is part of a robust commerce group in East Asia—so Wish is joining a strong system that actually has a decent shot of making their mark on the discount market. Should Temu’s Super Bowl gambit pay off and help the shop gain traction in the West—that may also pave a road Wish can use to become competitive again.
WHY IT MATTERS
With consumer budgets getting compressed worldwide, we’re going to see increased competition and investment in the discount retail space. While Wish tried to establish this market during the cheap-money madness of the 2010s—it took the organizational efficiency at China’s PDD Holdings to prove the model. PDD has soared as their Chinese storefront—Pinduoduo—has logged massive revenue and earnings improvement. PDD is trying to make the same magic happen in the U.S. with their Temu shop, but it’s hard to know if that model can be proven.
Wish joining the infrastructure surrounding Qoo10 is a brilliant move despite the near-embarrassment of the company getting dropped at a 99% markdown. Wish may have gotten wish’d—but there may be a compelling comeback story brewing here.
[ consumer goods ]
Coca-Cola Beats the Odds With Strong Q4
Higher prices won’t kill demand
BREAKING NEWS
Coca-Cola stock showed strength this morning after a strong earnings report showed that the brand beat revenue expectations. Let’s break down the details:
WHAT HAPPENED
Coca-Cola nailed profit expectations by driving a $0.49 EPS from $10.85 billion in revenue. Coke managed to drive a solid 12% revenue boost for the year—showing that price hikes haven’t dented demand enough.
JUST BEAT THE COMPETITION
Coca-Cola’s showing was strong here because their results simply weren’t as weak as Pepsi’s. Earlier, PepsiCo reported a 6% decline in volume for their North American sales. Coke ‘only’ reported a 1% decline driven mainly by their sports drink and water verticals. That’s enough to demonstrate that Coke will win through this difficult period as consumers adjust to inflated prices.
WHY IT MATTERS
With concerns about logistics and headwinds from the GLP-1 revolution, this result is a strong showing for Coca-Cola as they demonstrate revenue growth can maintain acceptable levels. Coca-Cola’s rise was mainly fueled by the stock being a little undervalued, but this also makes for a decent path to growth in 2024. Coca-Cola stock managed net single-digit gains in early trading despite all the CPI headwinds.
Extra Moby Snacks
Jet Blue is on the rise thanks to a new massive stake taken in the company by Carl Icahn. Despite a bruised reputation—Icahn’s vote of confidence here was enough to boost the stock over 15% in early trading.
Restaurant Brands International also showed a lot of strength in early trading thanks to huge gains netted by Canada’s Tim Horton’s brand. When in doubt, you can always rely on Canadian growth.
TOGETHER WITH
Today’s report is brought to you by Harvest Returns. Grow your wealth with passive investments in farming and agribusiness.
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