Stocks rallied on Friday, but it was not enough to make up for losses from earlier in the week as the market processed another aggressive Fed rate hike. The Dow broke a four-week winning streak with a loss of 1.4%, while the S&P and the Nasdaq lost 3.3% and 5.6%, respectively.
Investors looking for hints of Fed dovishness were disappointed on Wednesday to find no indication that the Fed may be poised to pause its tightening campaign. Fed Chair Jerome Powell said that the central bank still has “some ways to go” before the current rate hike cycle is over, noting that “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”
Labor data released on Friday further fueled concerns that the Fed will push the economy into a recession with its aggressive stance in the battle against inflation. This morning’s payrolls release showed 261,000 jobs were added in October, surpassing the expectations of 205,000 additions.
Market watchers will be focused on inflation in the days ahead and how it has been affecting consumer confidence. The October CPI inflation report is due on Thursday, followed by the preliminary November reading of the University of Michigan’s Consumer Sentiment Index (MCSI) on Friday.
This week will be quiet on the earnings front, as nearly 85% of S&P 500 companies have already reported earnings. Companies scheduled to report include AstraZeneca, BioNTech, The Walt Disney Company, Activision Blizzard, DuPont, and Norwegian Cruise Line. According to FactSet data, leaving the 139% jump in energy earnings, companies across the S&P 500 would be reporting a year-over-year 5% decline in profits.
Last week, the average rate on a 30-year fixed-rate mortgage surged to 7.23% – the highest level since 2002. Mortgage rates have more than doubled since the start of the year when the average 30-year mortgage stood at 3.11%. Our first recommendation will appeal to anyone looking to benefit from astronomical borrowing rates.
As the Fed’s hawkish monetary policy has caused short-term borrowing rates to soar, things couldn’t get much worse for mortgage REITs. However, for those with longer-term sights, AGNC Investment (AGNC) seems appealing. The REIT should benefit from higher interest rates over time. While Fed policy has raised short-term borrowing costs, it’s also boosting the yields on the mortgage-backed securities AGNC is stocking up on.
AGNC boasts a robust and well-safeguarded portfolio. Based on preliminary third-quarter results from the company, it ended September with an investment portfolio totaling $61.5 billion, of which only $1.7 billion was credit-risk transfer assets. Almost the entire portfolio is composed of agency assets, which the federal government protects in the event of default. There’s quite a bit of safety built into AGNC’s supercharged 18% yield. AGNC pays its dividend monthly and has averaged double a digit yield in 12 of the past 13 years.
The consensus expects the REIT to post quarterly earnings of $0.71 per share in its October 24th report, representing a year-over-year decline of 5.3%. The consensus EPS estimate has increased by 12% over the past month leading up to the call. Revenues are expected to be $289.1 million, down 34.7% from the year-ago quarter.
The decline in tech may be offering investors what many would consider a once-in-a-lifetime opportunity in some notable names. Our first recommendation for this week is one such company with many positive attributes, including a deep economic moat, high operating margins, and a strong balance sheet to boot.
Google parent Alphabet (GOOG, GOOGL) recently dipped below $100 after its recent 20-for-1 stock split. At its lowest level in over a decade, the stock is more accessible for investors, which should help when enthusiasm for big tech stocks re-accelerates.
Over the last five years, GOOGL is up 101%, crushing the Nasdaq’s 64% gain and the Internet Services Market’s 72% gain over the same period. The company posted earnings per share of $1.21 on revenue that grew by 12.6% year-over-year to $69.69 billion. The consensus sees earnings dropping 7% in 2022 but rising in 2023 at $5.80 a share. Top-line growth is expected, with 2022 sales expected to climb 11% and another 10% in 2023 to $260.44 billion.
Key catalysts to watch out for include its artificial intelligence tools that help users search in new ways, such as Google Lens, which is currently being used over 8 billion times a month. Google also recently introduced a new multi-search feature to help users search with both words and images simultaneously. Shares also have a strong rebound potential once the digital ad market recovers.
At 19 times forward earnings, Alphabet shares are trading in line with the S&P 500. Still, the current earnings multiple may underestimate the company’s potential to re-accelerate earnings once its many growth catalysts start to play out.
For advertising to make an impact, ads must be seen, by a real person, in the intended geography, in a brand-safe environment. Challenges like the latest fraud schemes have led to increasingly stringent criteria for ads and heightened risk to the company’s brand reputation. Our first recommendation is an industry leader in digital advertising solutions that’s gaining attention on Wall Street.
Advertisers seeking stability and clarity in an increasingly unstable and opaque marketing environment are turning to DoubleVerify (DV) for its industry-leading quality and performance solutions. DV’s products automatically analyze the effectiveness of digital ads. Among the metrics evaluated by the software are “brand safety, viewability, and geography,” along with “exposure and engagement” potential, giving customers clarity and confidence in their digital investments, ultimately driving better outcomes and ROI.
The company’s impressive customer base includes Meta (META), Amazon’s (AMZN), Twitch Ads, and Microsoft (MSFT). There have also been recent rumblings on Wall Street that Double Verify has partnered up with Netflix (NFLX) for its upcoming ad offering.
Total advertiser revenue grew by 43% YOY in the second quarter to $110 million. It generated a net income of $10.3 million primarily due to a 24% increase in Media Transactions Measured and a 10% increase in Measured Transaction Fees. The Gross Revenue Retention rate was over 95%. “We delivered an outstanding second quarter and surpassed our expectations for growth and profitability fueled by record Activation revenue and continued momentum on Social and CTV platforms,” said CEO Mark Zagorski.
DoubleVerify anticipates third-quarter revenue of $108 to $110 million, representing a year-over-year increase of 31%, and Adjusted EBITDA in the range of $32 to $34 million, representing a 30% margin. Full Year 2022 Revenue of $448 to $450 million represents a year-over-year increase of 35%. We’ll find out if the company has sustained its impressive growth momentum during its November 11th earnings call.
