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.
Two Lights Lighthouse, Cape Elizabeth, Maine
Cape Elizabeth Lighthouse was built in 1828, originally the light station had two towers. The western tower was discontinued in 1924 when officials deemed it redundant. The light station is not open to the public as it is still active and is now privately owned.
Portland Breakwater Light, South Portland, Maine
This light station was established in 1855, the existing lighthouse was built 20 years later in 1875. The lighthouse was automated in 1934 and is on the National Register of Historic 
Places.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
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Earnings reduction
Despite politicians’ falsehoods, corporate profits are not rapidly increasing. According to Bank of America and FactSet, corporate earnings (for the S&P 493) saw no growth last quarter.
It has been a tough few quarters for the non-Magnificent 7, S&P 500 components. Earnings have only grown once over the last six quarters for the S&P 493. That growth in earnings came in the 2nd quarter of 2024, other than that numbers have been relatively stagnant. When you compare that to the earnings growth of the Magnificent 7, it paints a stark picture. It’s a tale of two groups where this small group of tech companies have formed their monopolies and have real moats that are thriving and expanding earnings. In the other group, the average company is struggling and treading water currently. They have felt the economic hardship many consumers have felt over the last 2-3 years.
We will not dive any deeper into the Magnificent 7 as the companies have seen their stock prices and valuations pullback in recent months. For once we see some value in a few of the group’s members.
The one thing we noticed on the chart above is earnings growth is expected to heavily slow in the coming quarters for the Magnificent 7. The triple-digit growth rates that some of these companies have seen will disappear and these companies will see growth rates more in line with historical averages. We think these slower earnings growth rates are being driven by Wall Street analysts revising their overall expectations of artificial intelligence (in terms of market size, consumer demand, and earnings).
We will continue to watch this trend moving forward and will potentially mention a few Magnificent 7 companies that we see value in over the next few months.
Semiconductor leak
ASML, a leader in the semiconductor industry was scheduled to release earnings on Wednesday. Unfortunately for them, an employee jumped the gun, screwed up, and posted the company’s results on Tuesday morning. This sent ASML shares down 16% on Tuesday. The move took other semiconductors with it including Nvidia which was down 5% as of midday Tuesday.
ASML is a Dutch company that makes extreme ultraviolet (EUV) lithography machines critical for manufacturing advanced semiconductors. Its customers include Taiwan Semiconductor Manufacturing, Samsung Electronics, and Intel.
The content of the leaked earnings report disappointed investors and analysts. According to FactSet’s summary of the leak, ASML forecasted revenue in 2025 to be between $30 and $35 billion, and Wall Street’s estimate was $35.8 billion going into earnings. The company also widely missed Wall Street estimates for third-quarter net bookings. In the leaked report, ASML’s CEO commented on the cautious approach some ASML customers are taking moving forward which is impacting their growth, and forecasts. The CEO also highlighted the increased recovery time that some ASML market segments are continuing to undergo, however, he highlighted the strong developments and upside potential in AI that ASML is seeing. Despite these weak forecasts, ASML beat Q3 earnings estimates, driven by growth in AI.
Many link this weak forecast by ASML to its customer Intel which has severely underperformed in recent years and is undergoing a strategic change. Some analysts in the industry believe this weak report by ASML will not have a direct correlation to Nvidia’s future earnings.
On top of ASML’s weak forecast, the semiconductor industry was negatively impacted on Tuesday by reports that U.S. officials have discussed capping sales of advanced AI chips on a country-specific basis. This restriction could impact sales to the Middle East for firms such as Nvidia, and AMD.
Regardless of how you feel about the industry and its actual applications, its an exciting industry to follow, and one that we have some skin in the game for.
Disclaimer: MacNicol & Associates Asset Management does not hold shares of Nvidia, AMD, ASML, or Intel in client accounts, but do hold shares of company’s that operate in the AI industry.
Another tech giant goes nuclear
Another week, and another technology giant is turning to nuclear energy. This week, Alphabet announced a deal with Kairos Power which will provide Alphabet with nuclear energy produced from small nuclear reactors. The nuclear energy will help power Alphabet’s AI data centers. The deal will put the first reactor online by the end of this decade and will bring more online by 2035.
Neither company gave details (financials, or locations of the reactors) on this agreement in the deal announcement.
Technology companies are increasingly turning to nuclear energy to supply the electricity they demand through their huge data centers that drive AI. Nuclear energy plants can operate continuously, something AI data centers require.
Alphabet highlighted the increased demand for electricity moving forward, and how nuclear energy can provide this in a safe, clean, and reliable way.
Kairos Power is an energy company that was founded in 2016 and is based in California. Kairos Power is backed by the U.S. Department of Energy.
For our ESG believers, we warn you, that nuclear is your path forward. Tech companies know this and are rushing to secure deals that will provide clean and reliable power moving forward. Earlier this year, Google said its emissions have grown nearly 50% relative to 2019 thanks in part to an increase in data center power consumption. These tech companies cannot afford to fall behind by committing to wind and solar, they need something reliable that will assist them in their AI developments.
Alphabet was not the only company in the technology industry that went nuclear this week. On Wednesday, Amazon announced it will make a downpayment on a set of new nuclear reactors in Washington State that can power data centers and homes in the area. They also announced that they will be exploring a potential equity investment in an upstart nuclear company in Virginia.
This deal comes months after Amazon was already going nuclear when they made a deal with Talen Energy to buy power directly from a Pennsylvania nuclear plant.
As a part of this new deal, Amazon will have the right to buy the power from the reactors, but the reactors will be owned and operated by Energy Northwest. The deal could reportedly lead to eight more small reactors on the site. The reactors will be built by X-energy, a privately held Maryland company that is working on advanced reactors, meant to be cheaper and more efficient than current models.
The financial terms of Amazon’s investment have not been released but X-Energy’s CEO said the simple upfront commitment to buy the power (from Amazon) is a very big deal.
Amazon will lead this equity investment in X-energy which also includes Ken Griffin, Ares Management, and the University of Michigan’s endowment.
Nuclear energy will continue to dominate the news and investors in the space will be rewarded handsomely.
Disclaimer: MacNicol & Associates Asset Management holds physical uranium equities, and uranium miners across numerous client accounts.
Time for take-off
United Airlines Holdings (UAL) reported their third-quarter earnings after hours on Tuesday. Results beat investor expectations on multiple fronts, sending shares upward on Wednesday.
UAL reported adjusted earnings per share of $3.33 in Q3 versus a consensus estimate of $3.17. Revenue also beat estimates and was up year over year for Q3 by 2.5%. The company also reported a strong forecast for the fourth quarter of this year. The CEO of UAL said there had been an inflection point in revenue and demand during Q3 as unprofitable capacity exited the market. Over the summer, many airlines slashed prices to fill seats but UAL saw revenue climb in September as they reduced flights and raised their prices.
The company has generated $3.4 billion in free cash flow this year and authorized a $1.5 billion share repurchase plan as a part of its Q3 earnings release. This is the company’s first stock buyback since they suspended their repurchase program when Covid-19 began.
Numerous analysts remain bullish on UAL moving forward, as cash flows should increase, profitability should remain stable, and the valuation of the stock remains very attractive. UAL’s positive earnings report comes days after Delta missed its earnings target by a slim margin. Delta is seen as a bellwether in the industry, so this positive beat by UAL caught many off guard.
It has not been sunshine for all major airline carriers in the U.S. this year. UAL shares are up 55% in 2024 (as of Tuesday’s close), Delta shares are up 31%, and American Airlines shares are down 12%. American shares are down due to concerns from investors over debt and its aggressive discounting strategy.
The positive beat for UAL and its strong outlook paints a nice picture for this industry. The industry has been beaten to a pulp over the last few years and stocks are trading at very attractive valuations. However, we will warn our readers that many operators are highly leveraged and have poor management. We would recommend extensive research on several names before purchasing any of these operators.
Presidential betting odds
We told our readers a few weeks back that we would update them on the Election as we head closer and closer to Election Day. Obviously, this year’s election is extremely polarizing. It is tough to read or even find unbiased news. We have tried to cut out the noise and look for the facts which will help us position accounts in the best way possible. This includes reading information from media outlets on both sides of the aisle.
Into our update….
This year you can bet on who will win the election. Several betting sites have odds on the race as do numerous financial brokerages. Everybody is all in on betting, so why not bet on the world’s most anticipated event this year? It makes sense.
The odds paint a different picture than what polls have said in recent months. Trump has taken a large lead on betting sites. Currently, according to Polymarket (an odds maker), Trump has a 59.7% probability of winning the election versus a 40.2% probability for Harris. Less than 2 weeks ago, Harris was the odds-on favorite to win the election. Quite the change in a matter of two weeks.
If you compare the odds above to the current strategy of the Harris campaign, it makes sense why she is doing so many more interviews and appearances after a quiet summer where she did not do any interviews. The Harris campaign is in full-court press and is making as many appearances as possible. We will have to see if this last-minute pivot from the campaign can sway some voters and move these odds.
We will continue to watch these odds as we head closer to election day. For now, it seems Trump will win, and he will increase tariffs, promote American companies, decrease immigration, reduce taxes, and go all in on Crypto.
Contrarian signal
According to Bank of America Securities, energy ETFs saw their largest weekly outflow in 7 years last week.
The beaten-down sector has completely fallen out of favor and is a contrarian investor’s dream. The geopolitical premium from Israel and Iran has disappeared over the last week. Global tensions are at multi-year highs, yet oil is trading lower. Investors cite a slowdown in demand and economic issues as driving forces for this. However, when they talk about every other sector, it’s sunshine and rainbows. We continue to like our quality energy names, specifically major oil producers. We are going to sit in place on this trade and wait to see what happens over the next few months before we make a rash decision.
Home unaffordability
U.S. housing has reached its most unaffordable level since the mid-1980s according to the National Association of Realtors.
It is more unaffordable to buy a home than it was before the financial crisis. We do not think there will be a bubble that bursts like in 2008 as most homeowners hold mortgages with low rates, and the housing supply has lagged demand by a wide margin.
We share this chart because something must change so young people can afford homes like previous generations have been able to do. The supply of homes will not accelerate overnight, it will be a long-drawn-out process. The real winners could be land bankers surrounding major cities across the U.S. who have been sitting and waiting on their land. Homebuilders could also be winners when this trend pivots.
The MacNicol 360 Degree Realty Income Fund is exposed to various real estate asset classes across the U.S. including land banking and residential.
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MacNicol & Associates Asset Management                                                            Â
October 18, 2024
click here for the PDF: The Weekly Beacon -October 18 2024
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