Ticker Reports for August 18th
Warren Buffett's Recent Stock Moves: Top Buys and Sells to Watch
As the second quarter comes to a wrap-up for the stock market, so do the required 13-F filings for some of Wall Street’s biggest investors. This time around, Warren Buffett’s report card came in due to a shift in markets in one view and direction. Investors would greatly benefit from not blindly following Buffett’s moves but trying to understand his reasoning.
After some controversy in selling out of the technology sector, as up to 50% of Apple Inc. (NASDAQ: AAPL) was cut out of Buffett’s portfolio, and now that he seems to be doubling down on the energy sector through a 29% ownership stake in Occidental Petroleum Co. (NYSE: OXY), the writing is on the wall for what might be in store for the rest of the market in the coming quarters. However, there were two other selections that investors should take into account.
Consumer discretionary names weren’t of preference for Buffett this past quarter, as he sold out of his position in Capital One Financial Co. (NYSE: COF), probably because of the deteriorating state of the consumer credit market today. More than that, Buffett bought into Chubb Limited (NYSE: CB) for additional insurance exposure, a sector known to do well during inflationary times like today’s economy.
All Moves Point to a Single Strategy in Buffett's Latest Bets, Starting with Occidental Petroleum
A bullish view on Occidental Petroleum is also a bullish view on oil prices. Considering that the price per barrel is quoted in dollars, investors could also assume that Buffett is knowingly preparing for a potential weaker dollar ahead, which would make sense considering his other picks.
But, before investors dig deeper for a meaning behind Chubb and Capital One Financial, here’s what Wall Street analysts had to say about Occidental Petroleum stock.
A 33.3% earnings per share (EPS) growth forecast to begin with, justifying Buffett’s pick as a replacement for his reduction in Chevron Co. (NYSE: CVX) only expects 23.9% EPS growth.
More than that, analysts at Scotiabank felt confident enough to place a valuation of up to $80 a share for Occidental Petroleum stock, daring it to rally by as much as 38.6% from where it trades today. This new target would also call for a new 52-week high on the stock, reiterating the bullish outlook for the energy sector.
Tying it all together, analysts at Goldman Sachs reiterated their view for oil prices this year, pushing for as high as $100 a barrel for 2024. Keeping in mind that other dollar-quoted commodities like gold are hitting new all-time highs, it wouldn’t be far from reality to expect similar price action from oil.
Chubb Limited: The Ultimate Inflation-Proof Insurance Stock
Inflation helps businesses like insurance providers, as they can keep up their premiums with the inflation rate plus a margin of gain. Knowing Buffett's view that a weaker dollar is ahead, an insurance pick shouldn't be that surprising.
Besides its inflation coverage, this business is a classic Buffett play, with steadily increasing and predictable cash flows. While it may not be as exciting as an oil name such as Occidental Petroleum, it does show some bullish signs from Wall Street analysts.
Forecasting 8.7% EPS growth is one of many exciting features of this insurance provider. Still, price targets Keefe, Bruyette & Woods set started to point in a better direction.
A $305 a share valuation would call for a net upside of 11.8% from where the stock trades today, meaning a new 52-week high for additional confidence.
Buffett was one of many willing to invest in this stock. As of August 2024, Ameriprise Financial (Chubb's largest shareholder) had boosted its stake in the company by 1.3%. The asset manager's latest move brought its net investment up to $1.3 billion.
Capital One Financial Stock: Buffett's Final Move on the Dollar and Consumer Strength
With a weaker dollar, which can potentially be here, as investors have noticed in Buffett’s latest moves, comes weaker consumer demand. Also, inflation does erode the underlying financials of credit businesses like Capital One Financial. Because dollars are lent out and then repaid later with inflated currency, creditors take a loss on their loans during inflation.
By selling out of this company, Buffett’s view on the dollar couldn’t be more precise. Investors who aren’t yet clear about the potential adverse effects this company will experience during inflation can look to insider trades, notably the CEO’s.
Selling up to 61,532 shares as of August 2024 doesn’t spell confidence for the markets and investors.
Faced with the rise in credit card delinquency rates and collapsing personal savings rates, short sellers have been flocking to Capital One Financial stock during the past quarter, with an increase in short interest of 1.6% in the past month alone.
Considering that markets sent the stock into a discount on a price-to-book (P/B) basis is another confirmation for investors. Trading at a 0.9x versus the finance sector’s average 2.4x valuation signals that markets aren’t willing to pay for this stock, and there must be a reason for that.
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Sea Limited's E-Commerce and Fintech Strength Fuel Stock Surge
Singapore-based e-commerce, gaming, and financial services company Sea Limited (NYSE: SE) added to its ongoing stock rally following an earnings beat on Tuesday, with shares almost doubling in the last year heading into the end of the week. All three of the firm's major businesses experienced sales growth and strong profitability, though the cost of revenue remains a factor impacting net income. With continued signs that subsidiary SeaMoney is gaining a foothold in the competitive digital finance space, Sea is a company to watch closely going forward.
Company-wide, revenue for the second quarter was $3.8 billion, a 23% improvement year-over-year, with gross profit up 9% to $1.6 billion. Adjusted EBITDA across all three business lines was $448.5 million, down slightly from $510 million in the prior-year quarter and shy of analyst estimates. Total net income fell to $79.9 million from $331 million this time last year.
E-Commerce Wing Dominates, Driving Revenue Performance
Shopee, Sea's e-commerce subsidiary serving the broader Southeast Asian market, posted revenue growth of 34% to $2.8 billion for the second quarter, beating estimates of $2.68 billion. This impressive growth was a healthy combination of core marketplace revenue, consisting of transaction-based fees, ad revenues, and sales of value-added logistics services.
The good news for Shopee doesn't stop there. Gross orders increased sharply by over 40% year-over-year, and gross merchandise value (GMV) climbed 29% to $23.3 billion.
Chairman and CEO Forrest Li said Sea expects Shopee to continue to thrive going forward. The company has upgraded its GMV forecast to mid-20% growth, up from the high teens. Li mentioned that Shopee is expected to achieve adjusted EBITDA positivity starting this quarter, following a reported EBITDA of negative $9.2 million in the second quarter, a significant change from $150.3 million a year earlier.
To be sure, Sea can take none of this success for granted. The Asian e-commerce space remains highly competitive, particularly after rival PDD Holdings Inc. (NASDAQ: PDD) recently posted strong results for its e-commerce platform Temu, and JD.com Inc. (NASDAQ: JD) also beat analyst expectations.
Sea also continues to face an issue with high revenue costs for its e-commerce business. For the second quarter, cost of revenue was $1.8 billion, up from $1.3 billion the year prior, due to increased logistics costs alongside higher order volumes. This contributed to the company-wide cost of revenue of $2.2 billion compared with $1.6 billion last year. Higher cost of revenue was among the primary factors impacting net income last quarter.
SeaMoney Growing Fast
While Sea's e-commerce wing is well-established, its financial services division is less so. The latest results should help to drive investor optimism in this area. Revenue surged by more than 21% to $519 million, and adjusted EBITDA climbed by 20.2% to $164.7 million.
Like Shopee, SeaMoney faces fierce competition. But Sea has prioritized growing this portion of its business, particularly when faltering post-pandemic e-commerce demand prompted the firm to make significant cuts to its headcount. With the most recent quarter's results, it seems SeaMoney has found a customer base and built some stability.
Gaming Division Remains Solid, Despite Lackluster Revenue Performance
Sea's digital entertainment and gaming platform, Garena, noted impressive bookings and user data for the second quarter. Bookings of almost $537 million were up 21% year-over-year, while quarterly active users climbed by 19%. More importantly, quarterly paying users increased by almost 22% over this period. The gaming arm is led by Free Fire, a popular mobile game that saw over 100 million active players every day in the quarter.
Sea Limited's issue in this space is translating the above interest into consistent revenue performance. Revenue for digital entertainment fell to $435.6 million from $529.4 million the year before despite increased user engagement. Sea attributed this to lower recognition of accumulated deferred revenue from prior quarters.
Sea's second quarter strengthened Shopee's position in the highly saturated Asian e-commerce space and helped buoy its rapidly growing financial services business. Still, the cost of revenue weighed heavily on net income for the quarter. To best capitalize on the increased attention from customers and appeal to investors, the firm will need to address this concern in future quarters.
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Lockheed Martin's Sky-High Surge: Buy Now or Wait for a Landing?
Lockheed Martin (NYSE: LMT) has experienced a significant surge this year, climbing nearly 24% year-to-date and an impressive 20% this quarter alone, despite the broader market's recent pullback. This extraordinary rally has positioned LMT as a standout performer amidst ongoing market turbulence and uncertainty, even considering the market's recent rally, driven by escalating geopolitical tensions and the company's successful digital transformation efforts.
As a result, investors are left wondering whether now is the right time to gain exposure to LMT or if the stock's rapid ascent has pushed it too far, too soon.
With a current RSI of 82.68, the stock is in overbought territory, suggesting a potential short-term correction is on the horizon. However, LMT's valuation metrics, including a P/E ratio of 20.33 and a forward P/E of 19.8, combined with a dividend yield of 2.2%, still make a compelling case for the stock as a value-oriented investment.
These factors highlight LMT's ability to outperform the market and provide income, making it an attractive option for long-term investors despite concerns about a possible near-term pullback. However, while it might appear appealing at a glance, let's take a closer look underneath the hood to assess further whether LMT could be a solid addition to an investor's portfolio.
Lockheed's Recent Outperformance and Major Growth
Lockheed Martin's digital transformation is a crucial driver of its growth. It is anchored by its "21st Century Security" initiative, which focuses on integrating cutting-edge technologies across its product lineup. This approach is particularly crucial in the defense sector, where updates to designs and software often face rigorous approval processes. By investing in areas like artificial intelligence and bolstering cybersecurity, Lockheed aims to diversify its growth while enhancing profitability.
The strategy is yielding results. In the most recent quarter, ending June 30, Lockheed reported earnings per share (EPS) of $7.11, an increase from $6.63 in the same period last year. Revenue reached $18.1 billion, up 8.6% year-over-year and nearly $1 billion above expectations. Free cash flow also significantly boosted, doubling to $1.5 billion from $777 million in Q2 2023.
Key contributors to this success include the rotary and mission systems segment, which saw a 17% sales increase driven by critical helicopter, radar, and intelligence control programs. The missiles and fire control division also performed well, with a 13% rise in sales this quarter.
A significant milestone for Lockheed this year has been the resumption of F-35 jet deliveries to the U.S. Department of Defense after a year-long hiatus due to necessary hardware and software upgrades. This production ramp-up is expected to further strengthen the company's core Aeronautics segment as part of its broader digital transformation.
Reflecting this momentum, Lockheed Martin has raised its full-year guidance, now anticipating 2024 EPS between $26.10 and $26.60, up from the previous midpoint estimate of $26. Sales are projected to be between $70.5 billion and $71.5 billion, marking a 6% increase from 2023.
Despite Impressive Growth, Sentiment Remains Mixed
Despite Lockheed Martin's impressive growth and recent outperformance, sentiment among institutions and analysts remains mixed. Based on ratings from 13 analysts, the company maintains a consensus Hold rating, which has been consistent with its stance for over a year. However, in a shift from previous trends, the consensus price target now forecasts a potential downside of 3.2%, marking the first time in over a year that such a decline has been predicted.
Adding to the cautious outlook, insider activity over the past 12 months has shown four instances of stock sales, amounting to $9.3 million, with no insider buying during the same period. Institutional flows also reflect this ambivalence, with total inflows reaching $5.63 billion but being slightly outpaced by outflows of $5.94 billion. This data suggests that while Lockheed Martin continues to deliver strong performance, some stakeholders are exercising caution, possibly due to concerns about the stock's recent rapid ascent.
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