BEACONS OF THE WEEK
The two main purposes of a Lighthouse are to serve as a navigational aid and to warn ships (Investors) of dangerous areas. It is like a traffic sign on the sea.
Point Amour Lighthouse, Newfoundland and Labrador, Canada
This lighthouse is in southern Labrador and was constructed in 1857. The lighthouse has a nautical range of 46 meters and was automated in the 1960s. The lighthouse stands at 125 feet and has had 7 light-keepers in its history.
Grandique Point Lighthouse, Isle Madame, Nova Scotia
This lighthouse is an aid to navigation for the Lennox Passage. The tower is currently closed, and the site is open to visitors. The lighthouse was originally constructed in 1884 and was eventually automated in 1961. The lighthouse stands at 31 feet tall.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
Nvidia’s new threat
Despite Nvidia shares bouncing 4% on Monday, shares are down 15% over the last month. The company reports earnings later this month and many investors are betting that Nvidia will beat street estimates and send Nvidia shares and markets upward.
Nvidia will not only need to beat its $28.6 billion revenue estimate and $0.64 earnings per share estimate for the stock to accelerate. It will also need to beat whisper numbers moving forward.
Nvidia has capitalized on the AI play and is outrunning rivals in the U.S. and other global markets. However, the company is set to face tougher competition in China. Huawei is preparing to launch a new AI chip that compares to Nvidia’s H100 chip, according to The Wall Street Journal.
The chip Huawei is developing would be more powerful than anything Nvidia can sell in China under U.S. export controls. According to insiders, Huawei believes that orders will surpass 70,000 chips, valued at $2 billion with shipping to begin in 2 months.
This launch by Huawei will be a real test for Nvidia as demand in China could dry up for Nvidia chips. Despite being the technological leader in the space, Nvidia is handicapped by U.S. export controls which prevent the sale of high-end technology to Chinese buyers.
Nvidia has also begun developing a new AI chip for the Chinese market that meets U.S. export rules. Last year China represented 14% of Nvidia’s data center revenue in fiscal 2024, down from 19% in fiscal 2023. Nvidia has continued to reiterate that demand across the globe will continue to grow and will offset the forecasted hit to Chinese sales.
We continue to remain in the camp that Nvidia shares are overvalued and are too risky of a bet for our investors. As a conservative asset manager, we believe there is more risk than reward for Nvidia at current price levels.
Majors beat
Barrick Gold, the world’s second-largest public gold producer reported earnings on Monday morning and beat most street estimates.
The company reported earnings per share of $0.32 versus a street estimate of $0.27 and revenue of $3.16 billion versus a street estimate of $3.14 billion. Investors reacted positively to this release as shares jumped 9% on Monday for the company’s single-day largest gain since August 17th, 2020.
The price of gold soaring through this year has increased the profitability of Barrick and other major gold miners. The company had an average realized sale price of $2,344/oz during the quarter. Gold prices have moved up higher to record levels during the third quarter, so expect that number to potentially increase during Q3 reports.
Barrick’s cash flows from operating activities jumped 36% year-over-year and were up 53% from Q1 2024. Barrick’s Q2 free cash flow was $340 million, the company will pay a quarterly dividend of $0.1/share and continue to buyback shares during the quarter. The company repurchased 2.95 million shares during Q2 as a part of its $1 billion buyback program. The continued stock buyback and dividend continue to signal financial strength and Barrick’s commitment to shareholder value. On the company’s earnings call management announced they will continue to buy back stock when they view it as a more efficient use of capital than paying a performance dividend (above the $0.10 quarterly dividend).
On top of strong gold production growth, Barrick has forecasted cost improvements in the second half of this year. On the copper side, Barrick expects to meet their 2024 fiscal guidance. Barrick saw an increase in copper margins during Q2 driven by lower costs.
Barrick has under-performed its peer group this year as the stock is only up 9.7% year-to-date while the VanEck Gold Miners ETF is up 21% and the physical price of gold is up 20% (as of Tuesday’s close).
Barrick’s primary goal this year should be to beat estimates, for earnings they have for the first two quarters. Over the last few years, Barrick has missed its targets and street estimates a few times which has led to its underperformance relative to peers. We expect Barrick to have strong production to end the year which should lead to the company meeting 2024 production guidance. We also think Barrick is positioned well to play catch-up with its peers in terms of stock price performance in the latter half of 2024. We also expect the price of gold to remain elevated due to global economic and geopolitical uncertainty. We also think there is a medium to high probability that inflation will resurge within the next few years.
Disclaimer: MacNicol & Associates Asset Management owns shares of Barrick Gold Corporation (ABX: TSE) in various client accounts.
Starbucks gets its bounce
On Tuesday, Starbucks made a leadership change that investors had been calling for months. Starbucks unexpectedly announced that they would be firing the current CEO immediately and hiring Chipotle’s CEO Brian Niccol as of September 9th to lead the coffee giant moving forward. Starbucks’s current CFO will serve as interim CEO for 3 weeks until Niccol starts his tenure. The old Starbucks CEO had only been leading the company for a year and a half.
This announcement sent Starbucks shares soaring. Starbucks shares gained 22% on Tuesday for the company’s best single-day performance ever. The company which had lost 20% of its market capitalization as of Monday’s close year-to-date, regained all its 2024 losses in one trading day.
In the meantime, Chipotle appointed its current COO as interim CEO. Chipotle shares dropped 8% on this news.
Starbucks most recently missed on earnings and revenue estimates sending shares lower. The company cited a cautious consumer environment as the reason for their major quarterly miss. The beat down of Starbucks shares has even drawn the interest of activist investors who see tremendous value in Starbucks stock price and see potential upside for the company moving forward if the right changes are made. Elliot Management and Starboard Value, two activist investors reportedly own stakes in the coffee chain, although exact share counts remain unknown. We presume that these activists as well as other investors who have been vocal about Starbucks’s underperformance over the last 2 years were major reasons the board finally decided to make a leadership change at the coffee giant. After all, if this continued the board could have been the ones eventually pushed out.
While Starbucks shares have struggled this year, Chipotle shares were up 22% this year before this announcement. Shares had pulled back in recent weeks due to rising expenses related to investments in growth, technology, and food sourcing as well as concerns over same-store sales decelerating through this summer. However, even with the pullback, Chipotle shares were still outpacing the S&P 500 as of August 12th.
Niccol has previously led Taco Bell as CEO, worked at Pizza Hut on the leadership team, and at Procter & Gamble in brand management. Niccol successfully led Chipotle since 2018 when Chipotle saw their revenue grow from $4.4 billion in 2017 to $9.87 billion in 2023 and grew the number of Chipotle locations from 2,408 to 3,437 over the same period. Niccol brought a centralized focus to Chipotle where the company focused on select menu items and only expanded the menu through customer feedback. Chipotle’s recent offerings have been uber-successful but have not impacted the company’s core offerings. For example, Chipotle’s new chicken option “chicken al-pastor” has become a favorite at many locations. On the other hand, Starbucks has tried to diversify its sales tremendously in recent years in stores and has launched numerous products that have failed or do not fit on the Starbucks menu.
Numerous sell-side analysts changed their rating on Starbucks from neutral to buy on Tuesday after this announcement. The analysts highlighted Niccol’s innovation in developing new and creative ideas at Chipotle and Taco Bell as reasons to be optimistic about Starbucks. Some of the latest offerings that have been credited to Niccol and his team at Chipotle include quesadillas, numerous new proteins, and digital-only bowls.
We will have to see if Niccol can operationally improve Starbucks as well as narrow the company’s focus while successfully launching new products. Some analysts believe a major part of Starbucks’s poor stock price performance in recent quarters has been due to increased competition as well as the failure of new product offerings. We do not hold Starbucks shares but will be watching closely.
Inflation update
The Bureau of Labor Statistics released July’s inflation data on Wednesday morning and the FED is probably happy. The FED has been looking for more data to justify an interest rate cut and this did that (we will see what happens next month). Investors, media pundits, politicians, and even business executives have been calling for rate cuts due to an uncertain economic environment, citing that interest rates are way too high and increases were overdone. This has put the FED in a difficult position. They have resisted this pressure so far and have remained unbiased. We even had media pundits calling for an emergency 75 basis point cut after equity markets dropped by 5-7% last week. Society’s impatience continues to shine.
Back to inflation.
The CPI came in at 2.9% year over year versus a consensus estimate of 3%. The softer-than-expected annual inflation was fueled by a 1.6% decrease in airfare price month over month, and numerous consumer goods prices dropping month over month. The biggest price increases in July were auto insurance which rose 1.8% (18.6% year over year), the services index which rose 0.3%, videogame rentals and subscriptions which rose 7.6%, and eggs which rose 5.5%. Energy prices for the most part were flat in July, while housing costs accelerated.
The producer price index also came in lower than consensus estimates.
After this report, traders put the odds of a 50-basis point cut at September’s FED meeting at 41%, down from 53% the day before. However, traders are overwhelmingly predicting at minimum a 25-basis point cut to interest rates by the FED in September. Many economists and market strategists believe the bar would have to be very high for the FED to change its road forward. As the FED is on the road to cut rates, many believe one single inflation report will not deter the FED from rate cuts, it would need to be a consistent acceleration in the CPI. That is because unemployment has hit a multi-year high and the labor market is no longer taking a backseat to inflation when it comes to the FED’s rate discussions.
Got gold?
Gold closed Tuesday at an all-time high, above $2,500 per ounce. We hope you had some exposure. We know our investors did (both miners and physical gold).
Are we moving on from the sector? No, we believe there is more upside in the physical price of gold from here and believe the miners are still trading at highly attractive levels. We still think many of them are trading inexpensively and their margins increase every day while gold prices remain elevated.
Valuations are cheap relative to historical averages and other sectors. The physical price of gold is at a nominal all-time high but nowhere near the inflation-adjusted all-time high. We think investors will continue to pile into the asset and it will push physical prices higher and create more demand for miners. Expect boosted M&A activity in the space like we have seen in recent months, and earnings to consistently beat expectations. Own quality and be patient. During times of volatility and uncertainty people flock to the physical safety that gold offers. There are also major arguments for inflation to accelerate in the U.S. under both presidential candidates with Trump tariffs and Harris spending policies. We also think both candidates will be bad for the U.S. Dollar. Position your portfolio accordingly.
Where is the growth?
Without explanation, we present to you the International Monetary Fund’s latest economic growth rates for major economies across the world. The image was created by Visual Capitalist.
U.S. growth was reduced in the most recent revision by the IMF by 0.1% for this year while China’s growth rate was increased by 0.4% for 2024. China’s boost came from private consumption and strong exports. However, China’s momentum could be sputtering as certain numbers have slowed and it seems like the Chinese property crisis is beginning to impact private consumption.
Canada’s economy is expected to grow by the largest amount in terms of advanced economies next year. This growth as well as the recent growth the Canadian economy has seen has been from sky-high immigration which is masking the Canadian productivity issue. On the emerging market front, India is expected to see the largest growth this year as well as in 2025. We expect the Indian economic growth rate to remain high for years to come as the economy makes a major transition to industrialize. The Indian government continues to focus on growth and is spending on critical infrastructure projects while supporting private enterprises.
The emission fallacy
The West wants to decrease global emissions to slow the warming of the Earth and prevent climate change. This has led to activists raising billions to fight climate change, politicians running on and passing climate change policies, corporations making commitments to cutting emissions, governments joining climate acts like the Paris Accords, and billionaires making us all feel bad for our emission usage despite their blatant hypocrisy in flying private jets around the world. We are not denying climate change, we simply ask them, why are the rules for all of us, but none for them?
Ironic that celebrities and politicians fly private to a climate conference.
Here is a flight radar map of the COP conference from 2022:
The rising ocean levels are not deterring environmentalist celebrities from purchasing oceanfront homes across the U.S.
On the corporation front, numerous companies have pulled back on their climate pledges as the initiatives have impacted earnings, or they have increased their emissions due to increased power consumption due to new data centers and AI technology.
We bring this all up this week with a point. Regardless of how these individuals or corporations feel deep down. They are not being serious. The world will not solve climate change if only Western nations pull back their emissions. The G7, South Korea, and other Western allies cannot alone solve this issue. The world’s biggest emitter by a longshot is China and they have increased emissions in recent years, with no slowdown in sight. The country with the fastest-growing total emissions is India and that number is expected to grow and accelerate as India develops economically.
Despite the U.S. and EU decreasing their emissions in recent years, global emissions are up 6% over the last decade. We can do all we want to cut down emissions, but it will not make a huge impact unless the entire world or a majority of the world commits. After all China and India are actively building coal plants, the dirtiest fossil fuel in the world, and are expected to continue to build new plants for years to come.
The world’s energy needs are also expected to increase for years to come which will increase emissions. Do not expect oil or natural gas to disappear if countries are still expanding their coal capacity.
MacNicol & Associates Asset Management
August 16, 2024
