The Recovery Will Mean Some Interesting – and Difficult – Decisions

The Recovery Will Mean Some Interesting – and Difficult – Decisions But First We Have to Digest the Fallout of the Huge Share Dump

North American markets today, Monday, viewed several hours before opening at 9:30 a.m. EST look set to open negative as major indicators including the S&P 500, DOW and NASDAQ are all in the red. At time of writing the S&P and NASDAQ are improving and it is possible – though not a given – that they could continue improving during the morning. They improved slightly while I was assembling this column.

The markets are trying to digest the effect of the huge share dump by an American hedge fund, reportedly Archegos Capital Management which defaulted on margin calls. Nomura Holdings Inc. and Credit Suisse AG both warned that they faced large losses, according to a Reuters report. Nomura placed its potential loss at a heart-stopping US$2 billion while Credit Suisse referred to a fund that had defaulted on margin calls.

(A margin call becomes a problem when a lender asks a borrower to provide  more collateral if the share price of an equity holding financed in whole or in part with borrowed funds drops severely. If the borrower cannot come up with the collateral the result can be a forced sale of the securities.)

Unclear at time of writing is what went wrong, and which other institutions are affected. The share dump threatens to overhang the markets for at least as long as it takes to understand the total fallout and proves (again) that one event (albeit a major one) can rattle the markets.

The British pound and Euro are up at time of writing while the Canadian dollar is down. The safe havens of gold and silver are down at time of writing.

European markets are open at time of writing and are mixed as the CAC 40 and DAX are positive while the FTSE 100 is negative.

That follows Friday’s trading with rebounds in the S& P 500 and DOW as investors appeared to be focussed on equities poised to do well in the recovery which many expect to provide quick economic growth.

Amongst other indicators coming this week, the Consumer Confidence Index release scheduled for tomorrow is expected to show an increase while the initial jobless claims report for last week and scheduled for release on Thursday is expected to show an increase.

Amongst upcoming company results, Lululemon Athletic Inc. reports fourth quarter results tomorrow and may show a rise in sales for clothing such as yoga gear for exercising at home. The question that some investors will be asking is the potential impact of vaccines and whether the higher sales can be sustained in the recovery.

In fact, high on the list of recovery topics this week will be U. S. President Joe Biden’s economic plan, currently scheduled for unveiling in Pittsburgh on Wednesday. Biden has promised a major increase in investment and infrastructure spending that will strengthen the United States’ position against China.

The looming recovery has led to a category of investing loosely called recovery stocks. Expedia Group Inc rallied on Friday to close at $176.45, up $1.79 on the day. A Morningstar report says that Expedia has a dominant network effect and reduced costs, and that recent investments and acquisitions will add to the company’s advantage. The report says that Expedia should benefit from booking growth in China and vacation rental markets. At the same time, the report notes the potential for increased competition from Google, TripAdvisor, Alibaba and even Facebook. Analysts at Morgan Stanley, Piper Sandler, Bernstein and several other firms have it rated as a Hold while Argus Research, Wells Fargo, Barclays and other firms have it rated as a Buy.

The list of recovery stocks contains some surprises, including the iconic Coca-Cola which closed on Friday at $53.08, up $1.06 on the day. A Kiplinger report says that Coke revenues suffered during the pandemic due to reduced sales at restaurants, bars, theaters, sports and other events but that the recovery will bring what it terms a ‘spring-loaded’ increase in revenues. Analysts at RBC Capital, Barclays, Merrill Lynch and others have it rated as a Buy while analysts at Deutsche Bank, Morgan Stanley, J.P. Morgan and others have it rated as a Hold. Lauren Lieberman at Barclays has a target price of $62, something of a surprise given its earlier drop. In another surprise, Reuters has an Outperform rating on it.

Also, in the eating out category, Morgan Stanley views McDonald’s Corp as a strong recovery play and has a target price of $248 for it, substantially up from its Friday close of $2125.34. Not to be outdone, Oppenheimer has a $260 target price.

Recovery plays include electric vehicle or EV stocks according to Dan Ives, Managing Director of Research at Wedbush Securities. Ives says that President Biden’s Green Agenda will be a catalyst and that a doubling down of EV tax credits along with other consume incentives expected over the coming weeks are a long-term positive for the EV sector. Ives continues to have a $950 target price for TESLA while Alexander Potter at Piper Sandler has published a $1200 target for the same stock.

Clearly, the recovery and the hopes for it call for some serious consideration of stocks that otherwise might have previously seemed unappetizing.

(Notwithstanding analysts’ ratings noted here, it is always useful and most important that an investor check investment decisions with a trusted financial advisor.)

Related: How Confused Is the Stock Market?