Shares of the S&P 500 rose almost 2% on Wednesday after the U.S. Labor Department revealed that the consumer price index (CPI) rose less than expected in May. Prices rose only 3.3% from a year ago, driven by a 2% drop in energy and just a 0.1% increase in food costs.
Markets had good reason to cheer. Low inflation theoretically allows the U.S. Federal Reserve to cut interest rates, which would increase demand for everything from mortgages to car loans. The effect will theoretically then pass to homebuilders… car manufacturers… and the rest of the economy.
However, this positive announcement coincided with some downbeat news from the Federal Reserve. The same day, the Fed released economic projections that forecast only one rate cut in 2024 – well below the three cuts markets were expecting/hoping for.
That creates a problem for investors. How can they benefit from falling inflation while protecting themselves from higher-for-longer rates?
When it comes to investing, one of the best defenses is a good offense. It’s one thing for strong companies to survive in a “winter” of high interest rates. It’s entirely another to be like polar bears and thrive in it.
This week, our writers at our free news and analysis site – InvestorPlace.com – examine three of these “Polar Bear” stocks that should benefit from this frosty outlook. These “higher-for-longer” firms come in three flavors:
Those that earn money from high rates. Banks, insurers, and other lenders benefit from high rates because they tend to widen net interest margins (NIMs) and increase profits. When interest rates go up, banks are able to lend money at higher rates, even as deposit rates stay near zero.
Those with indebted competitors. High interest rates make it more expensive for companies to borrow cash and reinvest in their business, which helps companies with fewer debts.
Those with blue-chip statuses. Louis Navellier has long observed that the smart money will pivot to certain stocks depending on the economic environment. If investors are greedy, speculative stocks will often benefit from the buying pressure. And if they suddenly become fearful, then blue-chips should do well.
[JPM]’s already benefiting from the Federal Reserve’s higher-for-longer interest rate policies. Higher rates boost JPMorgan’s net interest income (NII), which surged 19% last year to $24.2 billion as the Fed raised rates an unprecedented 11 times between 2022 and 2023. NII was up another 11% in the first quarter of 2024.
Fed bank presidents, however, recently expressed doubts about any rate cuts coming soon. They want sustained progress on inflation, not just a one-quarter improvement. The May jobs report showed that 272,000 new jobs were created, well ahead of expectations of 180,000 new jobs. That puts the prospects for a rate cut even more in doubt.
Duprey is so bullish about JPMorgan’s prospects that he’s forecasting a $1 trillion valuation by the next decade.
He has a good point. JPMorgan is the best-run large-cap bank in the United States, with steady growth being driven by a combination of diversification, scale, and extremely good risk management. It’s hard to overstate how difficult these three factors are to maintain. Even Goldman Sachs Group Inc. (GS) has struggled to gain scale in businesses like consumer banking.
Yet, JPMorgan has managed to survive multiple financial crises by taking a methodical approach to growth. It only acquires firms it knows it can digest, and does so only when it can gain the necessary scale to make the economics work. For instance, its expansion into Brazil is being done through a growing partnership with C6 Bank, a retail-focused local player, rather than through a splashy acquisition. JPMorgan also acquired bankrupt First Republic for pennies on the dollar in a government-led auction in 2023.
Of course, there are some risks to this strategy. Managing across so many business lines increases complexity and raises the chance of a blowup somewhere . Diversification also doesn’t fully protect the firm from falling rates, because fee-only businesses are still too small to offset declining net interest income.
Still, JPMorgan has managed to sidestep these issues with superior management and a keen eye for risk. It remains a company that will benefit handsomely from higher-for-longer rates.
Indebted Competitors: Southwest
Shares of Southwest Airlines Co. (LUV) surged this week after activist investor Elliott Management disclosed a $2 billion stake in the firm. Dana Blankenhorn writes for InvestorPlace.com how the airline is under increasing pressure to increase profitability by ending its open-seat program and charging for premium seats.
Elliott Management itself has a strong record. The investment firm has beaten the S&P 500 by almost 200 basis points annually since 1977 and has suffered only two down years, according to Barron’s . Even without the prospect of “higher-for-longer” rates, Southwest would be a “buy” for its turnaround potential by this activist investor.
However, the airline also has an important “ace” up its sleeve:
Its lack of financial leverage.
Southwest has a long history of sound financial management. The firm had the best balance sheet of all U.S. airlines going into the 2020 Covid-19 pandemic, and used its return to profitability in 2021 to emerge even further ahead in relative terms. It is now the only major U.S. carrier to have more cash than debt on its balance sheet.
That gives Southwest an enormous financial advantage over its rivals. Cash that would have gone to interest payments can now be funneled into more efficient aircraft, system upgrades, and other investments that will further improve long-term profitability.
Meanwhile, analysts expect other mainline carriers to spend significant sums on interest payments this year. Delta Air Lines Inc. (DAL) will spend roughly 20% of its net income on interest payments this year. United Airlines Holdings Inc. (UAL) will spend 45%.
The situation at smaller carriers like JetBlue Airways Corp. (JBLU) and Spirit Airlines Inc. (SAVE) is even more dire. These two firms are expected to spend almost $350 million on interest payments, bringing total losses to $730 million combined.
One of the most reliable stocks, Costco is a high-quality business that benefits from consumer loyalty. It reported a 6.6% rise in same-store sales even in an inflationary period. Its membership model, with 74.5 million member households, ensures steady annual fee income. The company has not increased membership prices since 2017, which has worked in its favor.
Essentially, Costco is a company that does well in both good times and bad. During strong economic periods, existing customers buy higher-margin items, which drives Costco’s profits. Between 2012 through 2017, Costco saw gross margins rise from 12.4% to 13.3%, helping the firm notch a record $4 billion in annual earnings. During bad times, new penny-pinching customers sign up to save money. The firm saw revenues rise almost 50% during the Covid-19 pandemic.
Rising uncertainty is now causing Wall Street to raise its targets for this blue-chip retailer. Since February, analysts have upgraded their 2025 earnings per share targets by another 3% – a historic sign of greater gains to come. And Costco itself has been reporting strong sales figures. On June 5, the firm noted that net sales growth had accelerated in the U.S. from roughly 4.6% to 5.7%, and that worldwide sales (which includes e-commerce) grew at 6.5%.
These same forces are now brining smart money back to the table. Louis Navellier’s Portfolio Graderawards Costco an “A” for its quantitative grade – a strong sign of institutional purchasing. Though economic data is giving mixed messages about potential rate cuts, Costco’s shares are seeing buying pressure and should do well regardless of what the Fed eventually does.
And now, here’s Eddie Pan with a look at this week’s trades by insiders and other notables…
Notable Trades of the Week
Snowflake Director Conveys Confidence Amid Data Breach – Snowflake Inc. (SNOW) has shed more than 30% year-to-date, and a recent data breach at the Montana-based data cloud company hasn’t exactly reassured investors.
According to cybersecurity firm Mandiant, the breach exposed the data of as many as 165 of Snowflake’s customers. Snowflake notes that the attack was targeted toward customers with single-factor authentication instead of the more secure multifactor authentication (MFA). Moving forward, Snowflake will require all of its customers to use MFA.
However, one insider believes that the breach is immaterial to Snowflake’s long-term prospects.
On June 7, as I noted at InvestorPlace.com, director Michael Speiser bought 76,200 shares worth nearly $10 million. The transaction was eye-catching, as it was Speiser’s first ever insider purchase of SNOW.
Snowflake also has a major supporter in the form of Warren Buffett. Berkshire Hathaway Inc. (BRK.A, B) owned 6.12 million shares as of the end of Q1.
Warren Buffett Continues to Load the Tank with Occidental Petroleum – Buffett hasn’t disclosed any SNOW buys recently, as his focus has been on another company: Occidental Petroleum Corp. (OXY).
As I reported on Thursday, Berkshire Hathaway picked up 1.75 million shares of OXY worth $105.55 million between June 10 and June 12. Before that, Buffett’s conglomerate purchased $153.29 million worth of shares between June 5 and June 7.
Berkshire’s stake in the energy company now stands at 252.33 million shares, equivalent to a 28.46% ownership stake. Many investors have wondered if Buffett is preparing to take over the company, although he made it clear in Berkshire’s 2023 shareholder letter that his position is a bet on CEO Vicki Hollub and domestic oil production.
“No one knows what oil prices will do over the next month, year, or decade. ,” Buffett wrote. “But Vicki does know how to separate oil from rock, and that’s an uncommon talent, valuable to her shareholders and to her country.”
Roaring Kitty Takes a 2-0 Lead Over Citron Research – The return of meme-stock king Roaring Kitty has put GameStop Corp. (GME) back into the mainstream spotlight.
Citron Research’s Andrew Left certainly took notice, as he disclosed a short position on June 4. However, just eight days later, Left announced that he had closed his short amid a Roaring Kitty-led rally. Back in 2021, Left shorted GameStop as Roaring Kitty helped the stock squeeze to historic highs, resulting in a 100% loss.
Left attributed GameStop’s $4 billion cash pile and the company’s cultlike retail support as reasons for his recent short covering.
“Despite Wedbush setting an $11 target today, we respect the market’s irrationality,” Left said in an X post on June 12. GME currently trades in the $30 range.
As of June 13, Roaring Kitty owned 9 million shares of GameStop worth $262.1 million.
There’s a unique situation in the stock market, right now, that gives you the opportunity to take advantage of AI in a way that many folks overlook entirely.
It’s your chance to tap into the “brain” of AI in order to siphon a steady stream of sizable payouts from the success of 10,000+ companies.
From a technical standpoint, the U.S. Federal Reserve controls a surprisingly small portion of the American financial system. Its primary market tool is the interest rate it pays on reserve balances, which is only available to a small number of eligible institutions. A secondary tool involves overnight rates paid to banks.
In truth, the vast majority of the Fed’s power comes from the expectations that it sets for these rates. In the 1990s, Fed Chair Alan Greenspan perfected the image of the Fed as a “maestro” of the economy by overseeing an extended period of low inflation and high growth. Subsequent Fed leaders wielded this power – influencing market expectations simply by adding the word “likely” or “strongly” to a sentence. The outsized price reactions to these press conferences gave the impression that the Fed was an all-powerful entity that could change the course of the economy with a blink of an eye.
However, stubbornly high inflation rates over the past several years have once again revealed the limits to the Fed’s power. The Fed has been unable to bring inflation back to its target 2%, despite hiking benchmark rates 11 times in two years. In other words, people are beginning to realize that the Fed is fighting fire with a water pistol.
That’s why Charles Sizemore, chief investment strategist at The Freeport Society, is calling 2024 an Age of Chaos. He believes that the real wave of distress is only beginning.
