A Profit Warning Knocks PayPal Down Like a Rock

PayPal Holdings Inc. (PYPL), one of 2020’s hottest stocks, is trading lower by more than 9% in Thursday’s pre-market after issuing downside profit guidance for the third quarter and full year. The digital payments juggernaut beat Q2 earnings-per share (EPS) estimates by just $0.03, posting a profit of $1.16, while revenue rose 18.6% year-over-year to $6.24 billion, just missing $6.27 billion consensus. Total payment volume during the quarter grew 40%, or 36% on a currency neutral basis.

Pandemic Hangover

The company boasts a 55.7 price-to-earnings ratio (P/E), higher than American Express Co. (AXP) but on par with Visa Inc. (V) and MasterCard Inc. (MA). The weak outlook exposes vulnerability to a pandemic ‘hangover’ that many 2020 beneficiaries have reported in their quarterly results. Simply stated, the rapid transition into digital payments, streaming services, and at-home food delivery yielded a one-time cash influx that’s now reverting to historical performance.

The selloff comes just three business days before PayPal raises rates for many merchant accounts. Originally announced in June, the news triggered a strong rally into July but Q3 and full year profit warnings suggest the company miscalculated and now expects to lose customers. It may also have underestimated the growing number of choices in the digital payment space, heralding an era in which it will need to compete more forcefully for market share.

Wall Street and Technical Outlook

Wall Street has been wildly bullish on PayPal for months, holding like glue to a ‘Buy’ rating now based upon 35 ‘Buy’, 5 ‘Overweight’, 6 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $250 to a Street-high $375 while the stock is set to open Thursday’s session more than $50 below the median $330 target. A quick uptick into the median price seems unlikely, given weak guidance, because it would require breaking out to a new high.

PayPal posted a phenomenal 219% return in 2020 and continued to book upside into the February 2021 high at 309.14. A decline into March found support in the 220s while the bounce into July mounted the first quarter peak by less than one point ahead of this morning’s selloff. The reversal reinforces resistance above 300 while setting up a test of 50-day moving average support at 285. A breakdown is possible given downside momentum, exposing an unpleasant trip to the March low.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Boeing Posts First Quarterly Profit Since 2019

Dow component Boeing Co. (BA) is trading at a two-week high in Wednesday’s pre-market after posting the first profit since the third quarter of 2019. The aerospace giant earned $0.40 per-share in Q2 2021, $1.12 higher than estimates, while $44 billion in revenue matched expectations, marking a 44.0% year-over-year increase. The total backlog at the end of the quarter stood at a respectable $363 billion while the company secured new orders for 234 737 airliners and 31 freighter aircraft.

Airline Industry Crosswinds

The 737 MAX is returning to the friendly skies at a rapid pace, with the delivery of more than 130 new aircraft and more than 190 previously grounded aircraft resuming service, translating into nearly 95,000 revenue flights and more than 218,000 flight hours. The company release said little about the potential impact of the Delta variant on the commercial airline industry but that’s likely to be discussed in the 10:30am Eastern conference call.

However, its isn’t all good news for Boeing, with China still withholding certification of the MAX and 787 production delays needed to address FAA mandated inspections and reworking. In addition, business travel is expected to recover at a much slower pace than leisure travel, with the Delta variant forcing many corporations to put off reintegration plans at the same time that international destinations rethink their customs requirements.

Wall Street and Technical Outlook

Wall Street consensus is mixed despite the return of the MAX 737, with an ‘Overweight’ rating based upon 11 ‘Buy’, 2 ‘Overweight’, 11 ‘Hold’, and 2 ‘Sell’ recommendations. Price targets currently range from a low of $200 to a Street-high $314 while the stock is set to open Wednesday’s session more than $40 below the median $272 target. This placement favors share gains in coming weeks, possibly dampened by continued pandemic headwinds.

Boeing posted an all-time high at 446 in 2019, just before the 737 MAX crashed in Ethiopia. The subsequent decline accelerated in the first quarter of 2020, dropping price to a 7-year low in double-digits, ahead of an uptick that ran into a buzzsaw of resistance above 200. Price action since December has tested the 200-day moving average repeatedly while accumulation has dropped to the lowest low since September 2020, when the stock was trading in the 160s. Given uncertain travel conditions, this sideways action could easily persist into 2022.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Quarterly Revenue Growth Lifts General Electric

General Electric Co. (GE) is trading at a 4-week high in Tuesday’s pre-market after beating Q2 2021 estimates by a few pennies and reaffirming fiscal year 2021 guidance. The struggling conglomerate posted a profit of $0.05 per-share, $0.02 better than consensus, while revenue rose a modest 3.1% year-over-year to $18.3 billion. GE raised its 2021 free cash flow outlook to the $3.5 billion to $5.0 billion range, about $1 billion higher than previous estimates.

Selling Unprofitable Divisions

The company is shedding unprofitable businesses after years of declining revenue, with a $30 billion sale of the aircraft leasing business to AerCap Holdings N.V. (AER) the latest divestiture. The pandemic threw a wrench in this multiyear pruning process but GE has survived supply disruptions and is now back on track. Even so, no one in their right mind believes this fossil from another era can grow enough revenue to restore its lost reputation as a capitalist powerhouse.

General Electric will complete a one-for-eight reverse split after Friday’s closing bell, lifting the stock price above the psychological $100 level. This oddly-timed move will reduce outstanding shares to just over one billion but is likely to have little or no effect on price action. In fact, the transaction is sending the wrong signal to Wall Street because reverse splits are typically used by struggling companies that are worried about delisting or bankruptcy.

Wall Street and Technical Outlook

Wall Street consensus has modestly improved so far in 2021, lifting to an ‘Overweight’ rating based upon 12 ‘Buy’, 1 ‘Overweight’, and 8 ‘Hold’ recommendations. Price targets currently range from a low of $5 to a Street-high $21 while the stock is set to open Tuesday’s session about $1.50 below the median $15 target. Potential upside through the third quarter appears limited, given proximity to the median target and a ceiling of resistance at $14.50.

General Electric ended a four-year decline at a 28-year low in March 2020 and turned higher, mounting the February 2020 peak at 13.26 in February 2021. The breakout failed immediately, yielding months of sideways action that’s been crisscrossing the contested level repeatedly. The stock is trading at the dead center of this pattern on Tuesday, offering mixed messages to shareholders. A rally over 14.50 is needed to overcome this barrier while a decline through the July low at 11.82 could generate much greater downside.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Microsoft Overbought and Overloved

Dow component Microsoft Corp. (MSFT) reports fiscal Q4 2021 earnings after Tuesday’s closing bell, with analysts forecasting a profit of $1.92 per-share on $44.3 billion in revenue. If met, earnings-per-share (EPS) will mark a 31% profit increase compared to the same quarter last year. The stock sold off nearly 3% in April despite beating Q3 expectations by wide margins and raising Q4 guidance. Buyers returned in June, lifting the tech giant into a series of all-time highs.

Overbought Signals Abound

Microsoft should post exceptionally strong results, as usual, but the stock has gained nearly 19% in the last seven weeks, setting off technically overbought signals. In addition, Mr. Softee has been named as a target by Biden administration trust-busters, even though it has avoided the broad swath of political controversy, unlike Facebook Inc. (FB) and Amazon.com Inc. (AMZN). Even so, its huge footprint has made it nearly impossible for small companies to compete, especially in the cloud computing segment.

Citigroup analyst Tyler Radke raised the firm’s target to $378 last week, noting “We expect to see a strong finish to Microsoft’s FY21 with a combination of recovering IT budgets, an uptick in expected reseller growth, signs of reacceleration in consumption models and slightly higher PC numbers vs. 3 months ago. The general numbers set-up looks attractive with conservative guidance against easy compares. We continue to like MSFT best in mega-cap software, with multiple levers for sustained DD growth at scale and significant room to run”.

Wall Street and Technical Outlook

Wall Street consensus is pristine, now yielding a ‘Buy’ rating based upon 21 ‘Buy’, 3 ‘Overweight’, and 2 ‘Hold’ recommendations. No analysts are recommending that shareholders underweight or sell positions. Price targets currently range from a low of $256 to a Street-high $378 while the stock will open Monday’s session about $11 below the median $300 target. Upside after the report appears limited, given the proximity to the median target and strong gains since June.

Microsoft cleared 16-year resistance in 2016 and entered an historic trend advance that stalled at 190 in February 2020. It returned to that level in May after a 58-point decline, ahead of a breakout that ended at 233 in September. The stock cleared that barrier in January 2021 and eased into a rising channel that broke to the upside last week. While this marks impressive strength, it also highlights a one-sided market that’s unlikely to persist in coming weeks.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Bears In Control Ahead of Tesla Report

Tesla Inc. (TSLA) reports Q2 2021 earnings after Monday’s closing bell, with analysts looking for a profit of $0.98 per-share on $11.4 billion in revenue. If met, earnings-per-share (EPS) will mark a 55% profit decline compared to the same quarter last year. The stock fell more than 4% despite beating Q1 top and bottom line estimates in April and shed another 24% into mid-May.  It’s recovered just half of that loss into July, stuck like glue to the 50-day moving average.

Bearish Long-Term Price Pattern

The stock is taking a multi-month breather after posting an historic 839% return in 2021, closing out last Friday’s session with an 8% year-to-date loss. More importantly, price action has been carving the outline of a bearish descending triangle since November, with the pattern’s characteristic horizontal floor near 540 and lower highs at 781 and 698. Support has now aligned with the 200-day moving average, raising the stakes heading into this week’s confessional.

Fortunately for shareholders, there are good reasons to believe that Tesla will post another strong quarter. An industry publication just reported that “some U.S. deliveries of Model 3 cars were pushed back amid high demand”. Those vehicles are now manufactured at the Freemont facility but the Austin facility is scheduled to come online in coming months, supporting much higher production. Reuters also chimed in with a bullish piece, noting Q2 registrations in California increased 85% in the second quarter.

Wall Street and Technical Outlook

Wall Street consensus has grown cautious after historic share gains, with a ‘Hold’ rating based upon 15 ‘Buy’, 1 ‘Overweight’, 15 ‘Hold’, and 2 ‘Underweight’ recommendations. More importantly, six analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $67 to a Street-high $1,471 while the stock closed Friday’s session about $75 below the median $718 target.

Tesla broke out above 2017 resistance in the 70s in January 2020 and bounced at new support in March. It completed another breakout in June, entering a powerful trend advance that posted an all-time high at 900.40 on Jan. 25. The bearish pattern since that time has dropped accumulation to late 2020 levels while monthly and weekly Stochastics are grinding through sell cycles. This action warns investors to reduce risk if the stock drops to support near 540 after earnings.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Low Expectations Ahead of Intel Report

Dow component Intel Corp. (INTC) reports Q2 2021 earnings after Thursday’s closing bell, with analysts expecting a profit of $1.07 per-share on $17.8 billion in revenue. If met, earnings-per-share (EPS) will mark an 18% profit decline compared to the same quarter in 2020. The stock sold off more than 5% in April after beating Q1 2021 estimates and lowering Q2 guidance. The 6.2% year-over-year revenue decline noted in that release stoked longstanding fears of market share losses to more nimble rivals.

Competition Grabbing Market Share

The semiconductor shortage is expected to have an adverse impact on Q2 earnings at the same time that Intel is committing major capital to foundry construction and expansion in the United States and overseas. Those plans now include more than $20 billion in investments for two plants in Arizona. The company is also engaged in talks to buy New York-based GlobalFoundries for an estimated $30 billion, in an attempt to add even more capacity as China redirects its vast chip resources into local production.

Competition has grown exponentially in the last two years while production and innovation have faltered, yielding market share losses that have contributed to poor stock performance. Advanced Micro Devices Inc. (AMD) and NVIDIA Corp (NVDA) processing chips have grown popular with formerly loyal customers while Taiwan Semiconductor Manufacturing Co. LTD (TSM) and Samsung Electronics Co. are spending a combined $216 billion to grow manufacturing capacity. None of these developments bode well for Intel in coming years.

Wall Street and Technical Outlook

Wall Street consensus has deteriorated from modestly bearish levels so far in 2021, with a ‘Hold’ rating now based upon 12 ‘Buy’, 1 ‘Overweight’, 17 ‘Hold’, and 3 ‘Underweight’ recommendations. More importantly, 8 analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $40 to a Street-high $85 while the stock is set to open Thursday’s session about $11 below the median $67 target.

Intel sold off from 76 in 2000 to 12 in 2009 and remains within those boundaries, more than 12 years later. The long-term recovery mounted the .786 Fibonacci selloff retracement level in January 2020 and failed the breakout during the pandemic decline. Bounces above this harmonic barrier in June 2020 and April 2021 also failed, reinforcing a nearly impenetrable barrier above 60. The stock is now trading at the dead center of the 18-month trading range, unlikely to reward longs or short sellers with a sustained trend.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Johnson & Johnson Completes Breakout Pattern

Dow component Johnson & Johnson (JNJ) is trading higher by 1% in Wednesday’s pre-market session after beating Q2 2021 top and bottom line estimates and raising fiscal year 2021 guidance. The pharmaceutical and home health care giant earned $2.48 per-share during the quarter, $0.19 better than expectations, while revenue rose an impressive 27.1% year-over-year to $23.31 billion, nearly $800 million higher than consensus.

Fighting Off Bad Press

The company dealt with a wave of misinformation about the Janssen vaccine and potential for side effects in the first half of the year. The negative news flow has damped sales, with just 13 million doses administered to date, compared to around 330 million for Pfizer Inc. (PFE) and Moderna Corp. (MRNA).  Even so, quarterly product sales grew 10% and these controversies aren’t the tipping point for the $447 billion mega cap with 2.63 billion shares outstanding.

Johnson & Johnson faces a bigger challenge with ongoing talcum powder and opiate litigation.  It’s just finalized a $26 billion opioid settlement with more than 40 states and may attempt to “rope off” potential talc exposure into a separate entity that can be taken through bankruptcy proceedings. However, that could be a hard sell for U.S. courts flipping through the balance sheet of the 12th largest publicly traded corporation.

Wall Street and Technical Outlook

Wall Street consensus hasn’t budged in 2021 despite front page headlines, with an ‘Overweight’ rating based upon 12 ‘Buy’, 3 ‘Overweight’, 4 ‘Hold’, and 1 ‘Underweight’ recommendation. Price targets currently range from a low of $160 to a Street-high $203 while the stock is set to open Wednesday’s session about $18 below the median $188 target. Strong price action so far in 2021 suggests that gains will stretch into the median target by year’s end.

Johnson & Johnson broke out above February 2020 resistance near 150 in January 2021, entering a strong uptrend that posted an all-time high at 173.65 a few weeks later. Price action since that time has carved the outline of a bullish ascending triangle pattern that forecasts a measured move target in the 190s following a breakout. However, that event could take time to unfold because selling pressure in the last seven weeks has weakened an otherwise solid technical outlook.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

IBM Unlikely to Break Multiyear Resistance

International Business Machines Corp. (IBM) is trading higher by 3% in Tuesday’s pre-market after posting the strongest quarterly growth in three years. The old school tech behemoth reported a Q2 2021 profit of $2.33 per-share, $0.04 higher than estimates, while revenue rose a modest 3.4% year-over-year to $18.75 billion, $400 million higher than consensus. The company issued inline fiscal year guidance, expecting adjusted free cash flow of $11 – $12 billion based in July exchange rates.

What’s Happening with Spin-Off?

Cloud and Cognitive Software division income rose 6% year-over-year while Global Business services added 12%. IBM reported $27 billion in total cloud revenue in the last 12 months, marking a 15% year-to-year improvement. It posted less spectacular results in the most recent quarter, with $7 billion yielding a 13% gain. Red Hat revenue grew a respectable 20% in the sixth full quarter since the company was acquired in a $34 billion transaction.

Curiously, the release provided no update on the spin-off announced in October 2020. IBM is scheduled to segregate the slow-growing Managed Infrastructure Services division into an entity called ‘Kyndryl’ by year’s end, in order to focus on faster-growing cloud and software operations. While the new slimmed-down business should command a higher multiple, the lack of updates may indicate internal issues that could impact the rollout.

Wall Street and Technical Outlook

Wall Street consensus is mixed despite a morning upgrade from Societe Generale, with a ‘Hold’ rating based upon 5 ‘Buy’, 11 ‘Hold’, 1 ‘Underweight’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $115 to a Street-high $185 while the stock is set to open Tuesday’s session about $7 below the median $150 target. This humble placement suggests high levels of Main Street skepticism after years of sub-par performance

IBM topped out at 215.80 in 2013 and entered a brutal decline that posted an 11-year low in March 2020.  The subsequent uptick reached an 8-year trendline of declining highs in June 2021, yielding a quick rally, followed by a failed breakout that reinforces the secular downtrend. A buying spike above 153 is now needed to mount this substantial barrier but that seems unlikely because the stock has been under active distribution for the last 18 months.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Political Firestorm Drops Facebook to Four-Week Low

Facebook Inc. (FB) is trading at a four-week low in Monday’s pre-market after pushing back on White House accusations that COVID-19 misinformation on the platform is “killing people”. The allegation set off a political firestorm in the United States last week, with conservatives accusing President Biden of seeking control of the online service in order to silence critics. Meanwhile, liberals are backing the President, frustrated by a long-standing contentious relationship with CEO Marc Zuckerberg.

Pouring Gasoline on the Political Fire

White House press secretary Jen Psaki ignited the political controversy on Thursday, alleging that Facebook is “not doing enough to stop the spread of misinformation about the virus and the COVID-19 vaccine”. Biden poured gasoline on the incendiary criticism ahead of the weekend, insisting “They’re killing people. I mean, it really – look, the only pandemic we have is among the unvaccinated and they’re killing people.”

Facebook fired back this morning, insisting it “was not the reason the 70% vaccination goal was missed”. The release noted that “data shows that 85% of Facebook users in the US have been or want to be vaccinated against COVID-19. President Biden’s goal was for 70% of Americans to be vaccinated by July 4. Facebook is not the reason this goal was missed. Since the pandemic began, more than 2 billion people have viewed authoritative information about COVID-19 and vaccines on Facebook”.

Wall Street and Technical Outlook

Wall Street consensus hasn’t reacted to recent political events, maintaining a ‘Buy’ rating based upon 40 ‘Buy’, 3 ‘Overweight’, 8 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $275 to a Street-high $460 while the stock is set to open Monday’s session more than $55 below the median $395 target. This humble placement suggests the pullback will offer a low risk buying opportunity in coming weeks.

Facebook broke out above the August 2020 high at 304.67 in April, entering a strong trend advance that stalled above 355 in June. Two breakout attempts since that time have failed, giving way to a decline that’s now testing short-term support near 337. The selloff could stretch into the 50-day moving average at 334 while the risk of even lower prices will remain high through next week’s Q2 earnings report, which has the power to trigger a larger-scale decline.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Twitter Could Miss Second Quarter Expectations

Twitter Inc. (TWTR) reports Q2 2021 earnings after Thursday’s closing bell, with analysts looking for a profit of just $0.07 per-share on $1.06 billion in revenue. If met, earnings-per-share (EPS) will mark a turnaround from the $0.16 loss posted in the same quarter last year, which included the exit from the first pandemic lockdown The stock fell nearly 10% in April after reporting weaker-than-expected Q1 user growth and providing weak Q2 revenue guidance.

Betting on Twitter Blue

The social media outlet hopes the Twitter Blue subscription service will improve its tepid bottom line in coming quarters. It rolled out the premium program in Australia and Canada in June but there’s no U.S. release date. According to the press release “we’ve heard from the people that use Twitter a lot, and we mean a lot, that we don’t always build power features that meet their needs. Well, that’s about to change. We took this feedback to heart, and are developing and iterating upon a solution that will give the people who use Twitter the most what they are looking for.”

U.S. media outlets that booked massive subscription gains during the Trump years are reporting sharp readership declines as we enter the second half of 2021, reflecting disengagement generated by the pandemic and the less-bombastic governing style of President Joe Biden. Twitter and rival Facebook Inc. (FB) are vulnerable to the same forces of political exhaustion and mean reversion, raising odds that daily average user (DAU) growth will miss Q2 expectations.

Wall Street and Technical Outlook

Wall Street consensus has deteriorated since April despite the new offering, with a ‘Hold’ rating based upon 9 ‘Buy’, 1 ‘Overweight’, 26 ‘Hold’, and 1 ‘Underweight’ recommendation. In addition, three analysts recommend that shareholders close positions move to the sidelines. Price targets currently range from a low of $30 to a Street-high $83 while the stock closed Friday’s session just $1 above the median $65 target. This placement suggests that Twitter is fully-valued at this time.

Twitter sold off from 74 in 2013 to 14 in 2016, turning higher into the 2018 high at 48. It posted a higher low during the pandemic decline, ahead of renewed upside that reached multi-year resistance in October 2020. A February 2021 breakout failed, yielding more than four months of mixed action between resistance in the mid-70s and support in the upper 40s. The tape has shown little accumulation since May despite a persistent uptick, predicting rangebound action well into the fourth quarter.

For a look at all of this week’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

UnitedHealth Set to Post New Highs

Dow component UnitedHealth Group Inc. (UNH) is trading lower by nearly 1% in Thursday’s pre-market despite beating Q2 2021 top and bottom line estimates. America’s largest publicly-held health plan provider posted a profit of $4.70 per-share, beating expectations by $0.25, while revenue surged 14.8% year-over-year to $71.32 billion, nearly $2 billion higher than consensus. The company issued in-line fiscal year 2021 guidance, which includes a $1.80 per-share charge for COVID-19 impacts.

Looking Past the Pandemic

The pandemic sword cut both ways for insurance providers, skewing historical results. On the one hand, spiking infections and government mandates forced payments beyond what insurers had prognosticated on their actuarial tables. However, millions of folks deferred medical treatment at the same time, avoiding the waiting rooms that could expose them to the virus. These imbalances are now working out of the system, forcing carriers to readjust loss reserves.

UnitedHealth made headlines a few years ago when it pulled out of the U.S. Affordable Care Act a.k.a. Obamacare, subsequently avoiding volatility suffered by many rivals when President Donald Trump attempted to repeal the popular program. However, the company is now sitting at ground zero in the political debate over expanded Medicare and Medicare-for-all, with executives using media interviews to criticize government run health care programs.

Wall Street and Technical Outlook

Wall Street has been wildly bullish on UnitedHealth’s long-term outlook for years, maintaining a ‘Buy’ rating now based upon 21 ‘Buy’, 1 ‘Overweight’, 3 ‘Hold’, and 1 ‘Underweight’ recommendation. Price targets currently range from a low of $360 to a Street-high $522 while the stock is set to open Thursday’s session about $35 below the median $440 target. This placement suggests some investors are avoiding exposure due to continued pandemic anxiety.

UnitedHealth posted a new high at 306.71 in February 2020 and fell nearly 40% into March’s two-year low. The subsequent recovery wave reached the prior high in June, ahead of a November breakout that hit an all-time high at 425.98 in May. Buyers returned in June after a pullback to the 50-day moving average, yielding an uptick that’s now reached within 12 points of the 2021 peak. Accumulation has surged to a new high at the same time, setting the stage for a trend advance toward 470.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Wells Fargo Unlikely to Reward New Shareholders

Wells Fargo and Co. (WFC) is trading higher by less than 1% in Wednesday’s pre-market after beating Q2 2021 top and bottom line estimates by wide margins. America’s third-largest bank earned $1.38 per-share during the quarter, $0.47 higher than expectations, while revenue rose a modest 10.8% year-over-year to $20.27 billion, more than $2.50 billion better than consensus. Net interest income fell 11% in reaction to lower interest rates, despite the near-panic about spiking bond yields earlier this year.

Fallout from Account Fraud Scandal

Rapid improvement in the U.S. economic landscape allowed the company to reduce credit loss reserves by $10.8 billion, compared to an $8.4 billion increase in the same quarter last year. Home lending revenue shined during the quarter, with the ultra-hot housing market generating a 40% increase in mortgage servicing income. However, those increases were partially offset by lower gains on loan portfolio sales and lower correspondent origination volume.

Well Fargo has underperformed other U.S. commercial banks in recent years, with its reputation destroyed by a 2016 account fraud scandal that forced major operational changes. In reaction, the Federal Reserve issued a 2018 directive forbidding the company from growing its balance sheet until the central bank is “satisfied” that compliance issues had been rectified. That prohibition remains in force three years later, translating into billions in lost income.

Wall Street and Technical Outlook

Wall Street consensus is mixed compared to other commercial banks, with an ‘Overweight’ rating based upon 13 ‘Buy’, 3 ‘Overweight’, and 11 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $40 to a Street-high $65 while the stock is set to open Wednesday’s session more than $5 below the median $49 target.

Wells Fargo posted an all-time high at 66.31 in 2018 and sold off, entering a decline that accelerated to an 11-year low during 2020’s pandemic decline. It hit an even lower low in November and turned higher, stalling less than a point below the .618 Fibonacci selloff retracement level in May. Heavy price action since that time has flipped long-term relative strength readings into sell cycles, predicting downside that could test the 200-day moving average in the upper 30s.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Pepsico Surges to All-Time High After Earnings

Pepsico Inc. (PEP) is trading at an all-time high in Tuesday’s pre-market session after handily beating Q2 2021 top and bottom line estimates and raising fiscal year 2021 earnings-per-share (EPS) guidance. The snack and beverage giant posted a $1.72 per-share profit during the quarter, $0.19 better than expectations, while revenue rose a healthy 20.5% year-over-year to $19.22 billion, beating consensus by more than $1.25 billion.

Managing Food Inflation

The bullish results eased shareholder worries that food inflation will lower margins going forward. The company has done an excellent job so far raising prices and instituting cost saving programs to make up the shortfall, which has forced rivals that include General Mills Inc. (GIS) to post cautionary guidance.  Better yet, Pepsico now expects to “deliver 6 percent organic revenue growth (versus previous guidance of mid-single-digit growth)”.

BofA Securities analyst Bryan Spillane examined the food industry’s pricing challenges this week, noting the macro focus on “inflation as the market bifurcates food and beverage stocks into two camps a) those who are already realizing price increases to cover inflation and protect margins, seen as “the winners” and b) those who have pricing coming through later in 2021 and may experience gaps in earnings/margins over the next few quarters, i.e. “the underperformers”.

Wall Street and Technical Outlook

Wall Street consensus has eased to an ‘Overweight’ rating in the last three months, based upon 11 ‘Buy’, 1 ‘Overweight’, 10 ‘Hold’, and 1 ‘Underweight’ recommendation. Price targets currently range from a low of $135 to a Street-high $167 while the stock is set to open Tuesday’s session about $5 below the median $156 target. This humble placement should support a rapid advance into the mid-$150s, given strong results and guidance.

Pepsico topped out above 147 in February 2020 and plunged to a two-year low during the pandemic decline. The subsequent uptick completed a round trip into the prior high in November, yielding a pullback and bounce that completed a bullish cup and handle pattern in April. Buying interest has surged during the slow advance since that time, signaling a breakout that could gather steam in coming weeks. Better yet, the pattern forecasts a long-term target in the 190s.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held Pepsico in a family account at the time of publication. 

Citigroup Could Sell off Into the 50s

Citigroup Inc. (C) reports Q2 2021 earnings in Wednesday’s pre-market, with analysts looking for a profit of $1.91 per-share on $17.3 billion in revenue. If met, earnings-per-share (EPS) will mark a nearly 400% profit increase compared to the same quarter last year, which featured a temporary respite from the COVID-19 pandemic. The stock sold off about 9% in the week following April’s Q1 release, despite beating top and bottom line estimates.

Fails to Raise Dividend

Bank stocks took off in strong uptrends in the first quarter after bond yields escalated in reaction to inflationary data that would generate stronger industry profits. However, the bond tide has turned since April, lifting iShares 20+ Year Treasury Bond ETF to the highest high since February. Taken together with fears that COVID variants will weigh on worldwide economic growth into 2022, many investors have taken sector profits and moved to the sidelines.

The company fared poorly compared to rivals in the latest Fed Stress Test results released in June and was forced to raise its Stress Capital Buffer Requirement from 2.5% to 3%. It also had to forego a dividend increase, unlike most rivals, making shares less attractive. As a result, it’s no surprise that selling pressure has escalated in recent weeks, dropping the stock to a 4-month low while accumulation has slumped to an 8-month low.

Wall Street and Technical Outlook

Wall Street consensus is modestly bullish, with an ‘Overweight’ rating based upon 16 ‘Buy’, 1 ‘Overweight’, and 8 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $66 to a Street-high $114 while the stock is set to open Monday’s session just $2 above the low target. This poor placement reflects a decline in bullishness about the trajectory of interest rates.

Citigroup rallied to a 10-year high near 80 in January 2018 and turned lower into year’s end. It failed a breakout in January 2020 and rolled over, dropping to a 7-year low in March. The subsequent uptick reversed three points below the prior high in June 2021, ahead of a decline that’s testing long-term support for the first time since November. Aggressive distribution in the last six weeks predicts that bears will eventually win this battle, dumping the stock into the 50s.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

General Motors Turns Higher After Tough Week

General Motors Corp. (GM) posted strong gains on Friday, rising nearly 5% in reaction to bullish analyst comments. The uptick recouped all but 20 cents of a post-holiday slide that dropped the auto manufacturer to the lowest low since May 20th. Even so, accumulation hovered near a 6-month low as the week drew to a close, highlighting aggressive profit-taking after the 247% advance off the 2020 low and chip shortages that continue to impact short-term revenue.

Aggressive Transition into Electric Vehicles

The company has outlined an aggressive transition into electric vehicles, with billions committed to projects and production between now and 2025. However, sidelined investors worry that manufacturers will need to navigate a minefield of obstacles to achieve critical mass for EV sales. For starters, the crazy-quilt of incompatible charging stations scattered across the United States could dampen sales well into the second half of the decade, despite plunging costs for batteries.

Wedbush analyst Dan Ives outlined the bull case on Friday, noting the “laser focus on EV has given new energy and strategic focus to GM which the Street has clearly started to take notice. Going forward GM continues to be a re-rating story as the Street treats the Detroit automaker no longer as a traditional auto company trading based on book value, but a broader disruptive technology play that can start to trade at multiples similar to the likes of Tesla and other pure-play electric vehicle companies.”

Wall Street and Technical Outlook

Wall Street consensus is wildly bullish, standing at a ‘Buy’ rating based upon 19 ‘Buy’, 1 ‘Overweight’ and 3 ‘Hold ‘recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $64 to a Street-high $90 while the stock ended Friday’s session nearly $6 below the low target. This weak placement highlights anxiety about chip shortages and other pandemic-driven headwinds.

General Motors rallied above a 10-year trendline in February 2021 and topped out in the low 60s in March. It failed two breakout attempts into June, triggering a decline that tested four-month support in the mid-50s last week. Weekly and monthly Stochastics oscillators have now flipped into sell cycles, predicting mixed price action into the fourth quarter. A breakout at either end of the four-month trading range should dictate the next large-scale trend move, higher or lower.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Delta Air Lines Shareholders Hit the Exits

Delta Air Lines Inc. (DAL) reports Q2 2021 earnings next week, with analysts expecting the carrier to post a loss of $1.43 per-share on $6.19 billion in revenue. If met, the loss-per-share would mark less than one-third of the red ink posted in the same quarter last year, which included the exit from the first lockdown. The stock dropped more than 10% in the week following April’s Q1 release, fueled by much-worse than expected earnings.

Business Travel Still Weak

The U.S. Transportation Security Administration screened 2,196,411 travelers on Friday July 2nd, higher than the 2,088,760 passing through those gates on the same day in 2019. Even so, Delta and other airlines sold off when they started the new trading week because leisure travelers comprised the vast majority of those bookings rather than business travel, which United Airline Holdings Inc. (UAL) recently reported as 60% lower than pre-pandemic levels.

Airlines are highly dependent on business travel and are waiting patiently for their return.  However, many analysts believe this segment will remain depressed for several years due to the lower cost of Zoom and other virtual meeting spaces. Not everyone agrees with this somber analysis, as evidenced by a recent industry-wide Wolfe Research upgrade, who is forecasting additional upside driven by a late summer business travel surge.

Wall Street and Technical Outlook

Wall Street consensus has grown more bullish in the last three months, posting an ‘Overweight’ rating based upon 12 ‘Buy’, 1 ‘Overweight’, and 9 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions. Price targets currently range from a low of $44 to a Street-high $73 while the stock is set to open Wednesday’s session on top of the low target. This humble placement suggests high levels of skepticism about Delta’s long-term outlook.

Delta topped out above 60 in January 2018 and failed four breakout attempts into 2020. It fell to a 7-year low during the pandemic decline and bounced in a rising channel that lost steam after mounting the 200-day moving average and reaching the .786 Fibonacci selloff retracement level in March 2021. The pullback into July has bounced along a trading floor at 43 while accumulation has dropped to a 9-month low. Sellers could easily take control in this bearish scenario, filling the Nov. 6 gap between 32 and 35.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

3M Under Pressure After Downgrade

3M Company (MMM) is trading lower on Tuesday after Credit Suisse downgraded the Dow component to ‘Neutral’. The downtick ended a weeklong advance that reached within 9 points of May’s 2-year high at 208.95 while triggering a failure at the 50-day moving average, which was remounted last week. More importantly, the turnaround is taking place at the lower edge of an unfilled April 2019 gap between 199 and 220, keeping the long-term downtrend intact.

Respirators and Post-It Notes

The conglomerate makes many of the respirators and N95 masks used by hospital staff and patients during the COVID-19 pandemic. The sales spike underpinned 2020 revenue but comprised just a small portion of the $115.9 billion market cap, yielding a zero annual return for frustrated shareholders. However, their participation in the crisis made headlines, introducing a new supply of investors who knew nothing about 3M products beyond Post-It Notes and Scotch-Brite Dobie Pads.

Credit Suisse analyst John Walsh pulled no punches about ongoing litigation, noting “we do not expect to see significant multiple expansion given: 1) where we are in the cycle, 2) the difficulty in quantifying PFAS <legal exposure>, and 3) the CS/investor debate around the Combat Arms earplug lawsuits. Said another way, despite fundamental potential upside from a cyclical upturn in global IP, and potential inventory restocking, we think it will be difficult for 3M to regain its premium multiple.”

Wall Street and Technical Outlook

Wall Street consensus is stuck like glue to a ‘Hold’ rating, based upon 3 ‘Buy’, 1 ‘Overweight’, 14 ‘Hold’, 1 ‘Underweight’, and 2 ‘Sell’ recommendations. Price targets currently range from a low of $181 to a Street-high $237 while the stock is trading more than $3 below the median $200 target 25-minutes after the opening bell. This mid-range placement suggests that 3M is fairly-valued and unlikely to reward bulls or bears in coming months.

3M posted a two-year high at 259.77 in January 2018 and turned sharply lower, carving a series of lower highs and lower lows into March 2020’s 7-year low at 114.04. It bounced in a slow-motion uptick, finally reaching the January 2020 swing high at the start of 2021. The stock added more than 25 points into May and reversed into a range that’s crisscrossing the .786 Fibonacci retracement of the 2019 – 2020 selling wave and .618 retracement of the three-year downtrend. These harmonic barriers are likely to limit progress into 2022.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Has Walt Disney Topped Out?

Dow component Walt Disney Co. (DIS) topped out just above 200 in March following a historic 257% advance off March 2020’s 6-year low. The stock has lost altitude since that time, despite the reopening of California Disneyland, moviegoers flocking back to multiplexes, and the success of highly-touted Disney+ entries “Loki” and “WandaVision”. Q2 2021 earnings in May failed to stop the slide, missing revenue expectations with a 13.4% year-over-year decline.

Slowing Disney+ Subscriber Growth

The entertainment giant’s cruise ships remain landlocked until at least Aug. 6 despite relaunching by Floridian rivals, further impacting 2021 income. “Black Widow” and other Disney films should do relatively well, as evidenced by the solid “F9” box office in the last two weeks. However, the slate of entries includes the next generation of Marvel films that could fall flat with an audience seeking raw entertainment, rather than Hollywood’s usual dose of heavy-handed political messaging.

Worse yet, The Information reported last week that Disney+ U.S. growth slowed sharply in the first half of 2021, following a similar shortfall at Netflix Inc. (NFLX). Its common knowledge the pandemic pulled future demand forward due to endless lockdowns, reducing 2021’s pool of available subscribers. As that publication notes “The slowdown in growth at Disney+ reinforces long-standing questions about Disney’s ability to expand the streaming service to its target of 230 million to 260 million subscribers globally by the end of the 2024 fiscal year.”

Wall Street and Technical Outlook

Wall Street consensus now stands at an ‘Overweight’ rating based upon 21 ‘Buy’, 2 ‘Overweight’, 6 ‘Hold’, and 1 ‘Underweight’ recommendation. Price targets currently range from a low of $147 to a Street-high $230 while the stock closed Friday’s session more than $30 below the median $212 target. This humble placement supports higher prices if recently-reported metrics are inaccurate and the company reports higher-than-expected subscriber growth in the Aug. 12 release.

Disney failed a breakout above the 2015 high at 122 during the pandemic decline and rallied to a new high in December. The subsequent uptick stalled after mounting 200 in March, giving way to a persistent slide that broke 50-day moving average support in April. The failure to remount that barrier in the last three months raises a red flag, highlighting continued weakness. In addition, the pullback has flipped long-term relative strength readings into an active sell cycle that project continued weakness into the fourth quarter.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in the aforementioned securities at the time of publication. 

Bank of America Pulling Back from Multi-Decade Resistance

Bank of America Corp. (BAC) reports Q2 2021 earnings in two weeks, with analysts looking for a profit of $0.76 per-share on $21.85 billion in revenue. If met, earnings-per-share (EPS) will mark a doubling in profit compared to the same quarter last year, which included the first exit from pandemic lockdowns. The stock rose modestly in April after beating Q1 top and bottom line estimates but has gained little ground since that uptick.

 Bond Market Reversal

Commercial bank stocks rolled over in June when the bond market reversed, dropping interest rates across the yield curve by a few basis points. Right now, the decline looks like a countertrend impulse, suggesting that yields will go much higher in coming months. That would be good news for the banking industry because the widening spread between overnight lending rates and the prices paid by borrowers will increase profits.

In addition, Bank of America got good scores on the latest Fed stress test, released on June 28, renewing the current 2.5% stress test buffer while allowing them to increase quarterly dividends by 17%. Unfortunately, the market has responded poorly to the news so far, dropping the stock a few cents. The weak reaction suggests that Bank of America remains overbought after the 15-month 242% advance off March 2020’s pandemic low.

Wall Street consensus has weakened to an ‘Overweight’ rating, based upon 15 ‘Buy’, 2 ‘Overweight’, 6 ‘Hold’, and 1 ‘Underweight’ recommendation. In addition, two analysts recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $35 to a Street-high $52 while the stock will open Thursday’s session about $3 below the median $44 target. This mid-range placement suggests that investors believe Bank of America is fairly-valued.

Wall Street and Technical Outlook

Bank of America sold off from 54 to single digits between 2006 and 2009 and has spent the past 12 years retracing that decline. It completed a breakout above the 2018 high at 33.05 in February 2021 and continued to post gains into June’s 13-year high at 42.49. The subsequent decline sliced through the 50-day moving average while a bounce into July is attempting to reinstate support. Meanwhile, a weekly sell cycle predicts mixed action through July.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Snap Strength Bodes Well for 3rd Quarter Breakout

Snap Inc. (SNAP) is well-positioned to break out after Q2 2021 earnings on Jul. 20, even though the messaging app provider isn’t expected to post a profit. Price action in the last quarter has been extremely productive, shaking off a 20% decline into the upper 40s in May and carving a steady advance that’s now stretched within five points of February’s all-time high in the low 70s. Accumulation readings have followed suit, lifting to an all-time high.

Management Forecasting 50% Growth

There’s no argument that Snap needs to do a better job keeping users engaged in upgraded features that analysts believe will increase revenue through targeted advertising. Even so, management is forecasting 50% sustained growth in the next several years, raising high expectations ahead of the report. They’ll need to deliver on all fronts to make that happen, but a flurry of Q2 initiatives and updates seem to support that lofty prediction.

Stifel’s John Egbert posted a bullish note after Snap’s Partner Summit in May, noting “a number of product and business updates including an expanded set of augmented reality creation tools, new content monetization opportunities, more capabilities for developers via Snap Kit APIs/Games/Minis, and the company’s next generation Spectacles hardware. He also remarked that Snap now has “more than 500mm monthly active users globally, which compares to 280mm DAUs reported as of 1Q:21 and implies at least 56% daily engagement”.

Wall Street and Technical Outlook

Wall Street consensus now stands at an ‘Overweight’ rating based upon 26 ‘Buy’, 2 ‘Overweight’, 9 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $42 to a Street-high $100 while the stock is set to open Wednesday’s U.S. session about $12 below the median $80 target. Given strong second quarter accumulation, this looks like a perfect set-up for a strong advance into the low 80s.

Snap rallied more than 300% in 2020 before topping out at an all-time high in the low 70s in February 2021. It sold off into the upper 40s in March, rounding out a trading range that has contained second quarter price action. A successful test at range support in May has stroked buying interest, lifting price into a test of the first quarter peak. At this point, all that’s needed for a breakout is a modestly bullish catalyst.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.