Ticker Reports for July 14th
This Financial Stock's Earnings Signal a Buying Opportunity
Most investors would look at consumer staples stocks for protection against the whipsaws that the market can bring during cycles. While this theory tends to work over time and has worked over time, it is a widely accepted model. However, markets aren’t a simple model. They are dynamic, and each cycle is different, and today is no exception. This is why the financial sector might be a better place to be when trying to hedge away some of the cycle risk.
Banking stocks are in the spotlight this time. Investment banks like Goldman Sachs Group Inc. (NYSE: GS) are highly dependent on the business cycle and interest rates, which drive the volume of investment banking deals, sales, and trading volatility. That might be different from the place to be right now. On the other hand, other banks like Wells Fargo & Co. (NYSE: WFC) are more exposed to the commercial side of the industry, which is not as dependent on the business cycle.
Others stand in the middle of the spectrum, being exposed to investment banking and commercial banking activities to cushion the cycle. One such bank is Citigroup Inc. (NYSE: C), which will show investors this sort of diversification in its second quarter 2024 earnings results. Despite the stock trading lower by over 2% after the release, growing concerns will be cleared away by Wall Street expectations.
The Growth Engine Behind Citigroup Stock
Digging into the bank's quarterly earnings presentation, investors will notice a common trend: growth in every aspect of Citigroup stock's operations. Starting with the commercial side of the business, Citigroup saw a 6% revenue jump over the year.
Revenue increased due to higher net interest income (NII), a widely followed metric for banking earnings. The rising level of branded credit card usage is behind this profit metric, which is responsible for 8% of the revenue growth in that segment alone.
Most investors are aware of the rising trends in credit card usage now that most American consumers are feeling the choking effects of inflation. While that was the main driver on the commercial side, investors can take a look under the hood of the economy by dissecting Citigroup's investment banking side.
Investment banking revenues rose by 60% over the year, leading to higher bank profits. Now, investors need to understand that investment banking activities are highly dependent on the business cycle and interest rates. Low interest rates and flexible financing typically encourage more mergers and acquisitions (M&A) and other debt or equity issuance activity.
With the promise of interest rate cuts on the horizon, expected by September 2024, according to the CME's FedWatch tool, corporate activity may have been picking up, bringing Citigroup into the eye of the storm of potentially higher profits ahead.
This could be why Wall Street analysts felt comfortable with a forecast for up to 22% earnings per share (EPS) growth rate for the next 12 months. Of all these analysts, those at Oppenheimer are the positive outliers, as they slapped a valuation of $86 a share for Citigroup stock, daring it to rally by 33.5% from where it trades today.
More than that, rising profits across commercial and investment banking activities enabled Citigroup management to boost shareholder rewards. Dividend payouts are now up to $2.12 a share for shareholders, which at today's prices represent an annual dividend yield of 3.3%, which at least lets investors keep up with inflation rates.
What Citigroup Stock's Numbers Reveal About the Economy
Despite the growing revenue and profit numbers across the bank’s segments, there is one caveat. The Federal Reserve reports that current credit card delinquency rates are back to levels not seen since 2011, which is a huge warning sign.
This is a warning about the state of the U.S. consumer economy as consumers wait for a government bailout through interest rate cuts. In the meantime, banks like Citigroup are building up a war chest in case these rising credit card balances become delinquent.
Citigroup’s investor presentation shows that non-conforming loans rose to $2.3 billion this quarter, an annual jump of 59%. This means that loans at Citigroup that are considered delinquent jumped by 59% on the year, which says a lot about the consumer discretionary sector.
Investors can put a blaming finger on this statistic to understand why Nike Inc. (NYSE: NKE) and Starbucks Co. (NASDAQ: SBUX) took a dive recently to trade near their 52-week lows.
More than that, the allowance for further credit losses increased to $1.9 billion, showing worsening consumer expectations. While that may not affect Citigroup stock much, as investors know the bank can cushion the cycle, it is a robust data reference for making other investment decisions in different sectors.
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Social Platform Stock Hits New Highs: Is More Growth Ahead?
Reddit, Inc. (NYSE: RDDT) has been on an impressive run, recently achieving a new all-time high and up almost 40% YTD. The question now is whether this momentum and sector outperformance can continue after the stock pulled back nearly 10% from its recent highs and has a growing short interest.
So, let's take a closer look at some key metrics, technical analysis, upcoming earnings, and overall sentiment to understand the potential trajectory of Reddit's stock in the near-to-mid-term.
Bullish Momentum: Reddit Reaches All-Time High
Reddit's stock has soared nearly 40% year-to-date, with an outstanding 88% surge from its 52-week low set in April. More recently, the stock surpassed its previous post-IPO high of $74.90, reaching a new all-time high (ATH) last week of $76.74. This higher timeframe breakout and price reclaim signals strong bullish momentum.
From a technical analysis perspective, Reddit's chart displays an extremely bullish setup. Shares are consolidating above the previous resistance zone near $70, which has now turned into support. If the stock can continue to hold above this zone, alongside rising moving averages, a breakout above its recent highs might propel the stock above the $80 mark. This consolidation phase is crucial as it demonstrates the stock's ability to sustain its gains and potentially launch another upward move.
Reddit's Earnings as a Stock Catalyst
With earnings on the horizon, it's essential to consider this as a significant factor influencing the stock's momentum. Reddit last posted its earnings data on May 7, 2024. The company reported a loss of $8.19 per share for the quarter, missing analysts' consensus estimates of a $2.34 loss by a substantial margin. However, the business generated $243 million in revenue, surpassing the consensus estimate of $213.99 million and reflecting a 48.4% increase compared to the same quarter last year.
Steve Huffman, Co-Founder and CEO of Reddit commented, "It was a strong start to the year and a milestone quarter for Reddit and our communities as we debuted as a public company. We see this as the beginning of a new chapter as we work towards building the next generation of Reddit."
For the upcoming second quarter, Reddit estimates revenue between $240 million and $255 million and adjusted EBITDA between $0 and $15 million. These figures are well ahead of Wall Street's consensus of $227.5 million, suggesting a positive outlook that could further boost investor confidence.
Analyst Upgrades Reflect Confidence in Reddit's Growth Potential
Analyst sentiment towards Reddit remains bullish, with a Moderate Buy rating based on 16 analyst ratings. Recent actions include Loop Capital boosting its target from $60 to $75 on July 3, Needham & Company LLC raising its target from $63 to $75 in June, and Citigroup increasing its target from $65 to $70 in May while maintaining a buy rating.
While the bullish momentum and positive analyst actions paint a promising picture, it's important to note the growing bearish sentiment. Short interest in Reddit's stock has increased significantly, with 27.6% of the stock's float, or 8.43 million shares, sold short. This high short interest could catalyze a substantial short squeeze, potentially driving the stock higher if momentum continues and shorts are forced to cover their positions.
Watching Reddit's Momentum: Key Factors to Monitor
Reddit's stock has shown remarkable performance and technical strength, positioning itself for potential further gains. The upcoming earnings report will be a critical factor, with positive expectations potentially driving the stock higher.
While analysts' upgrades and strong revenue forecasts support the bullish sentiment, the high short interest adds an element of volatility that could amplify any upward movement. Investors should watch closely as earnings season approaches, as it may determine whether Reddit's momentum will continue or if the stock might face new challenges.
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A Rising Wedge Pattern Signals Reversal for This Stock
JPMorgan Chase & Co. (NYSE: JPM) shows a Rising Wedge Pattern. Like all technical patterns, it is never 100% correct but often signals a bearish reversal in the underlying market. A rising wedge occurs at the end of an uptrend and consists of two rising but converging trend lines that end at a peak.
The question is which way the market will break; today, it is to the downside. The Q2 results are solid, and the outlook is steady, but risks are mounting, and this market is extended. JPM shares are up more than 100% from the 2022 lows and 55% from the 2023 lows, with divergence and bearish signals in the charts. The takeaway is that this financial stock is set up for a significant correction and could fall 10% to 15% by fall.
JPMorgan Stock Falls on Rising Costs and Inflation Outlook
JPMorgan had a solid quarter, with revenue growing 21.5% to over $50 billion. However, the strength is offset by numerous one-offs that sap much of it. The leading cause is JPM’s investment in Visa, which paid off a net $7.9 billion or about $2.04 in EPS. That aside, the company exhibited strengths in most areas of its business, driving robust cash flow and earnings. In investment banking, fees rose by 50% on increased activity and market share gains. In community banking, average deposits are down, but client assets are up, partly driven by first-time investors. Card loans also drive business up 12%, as its asset management with fees up 13%.
Margin is good but, again, offset by one-offs that sap its strength. The company reported increased charge-offs and a net build of credit reserves to compound the losses of $546 million in net investment securities. The takeaway is that the $4.40 in adjusted earnings is sufficient to keep the company well-capitalized, almost too capitalized. However, it fell $0.11 short of the MarketBeat.com reported consensus, and the outlook is for growth to slow and inflation to remain sticky.
JPMorgan doesn’t provide much guidance, but CEO Jamie Dimon has much to say that impacts the outlook. The most pertinent is his view on inflation, which suggests that inflation will remain sticky and interest rates will be high. Drivers of this problem include high sovereign debt levels, government spending on infrastructure projects, infrastructure needs, and remilitarization. Additionally, Basel III is still in play and comes with unknown ramifications once completed.
The upshot for investors is that JPM is still in a solid position. A correction today will likely result in a buying opportunity later this year due to the company’s financial position. The business was mixed regarding analysts' expectations and concerns related to consumer health and credit levels, but the balance sheet is still a fortress. The Tier 1 capital ratio improved to 15.3%, well above requirements, and the loss-absorbing capacity exceeds the need.
Analysts Consensus Says JPM Stock is Fairly Valued
The analyst sentiment has supported the JPM market all year, but the upside is limited without fresh upgrades and price target revisions. As it is, the twenty analysts covering the stock rate it as a Moderate Buy but see it moving about 5% lower at their consensus estimate. Recent updates have the stock trading at the high end of the range, but that only gives a 10% to 15% upside, which isn’t attractive enough given the potential for a decline in the share price.
JPMorgan Chase stock is set up to fall, but inventors should take this news with a grain of salt. The correction will likely be a healthy bull-market selloff rather than a precursor for a bear market and will set up a buying opportunity. The question is how long the correction will last and when the buying signal will be fired. Based on the results, cash flow, capital return, business outlook, and analysts' support, the answers will likely not be too long and reasonably soon unless there is a significant change in the economic fundamentals. The only expected change is an interest rate cut that should help sustain the business, if not help it grow.
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