JPMorgan shows concerns regarding Robinhood stock
The stock trading app went public in July, and shares closed 17.4 percent higher than their initial price on Tuesday. However, JPMorgan warned that the stock could fall as shares are gradually unlocked following an initial public offering.
“With more shares unlocking in the coming months and the greatest lockup expiration on December 1, we see the risk that Robinhood shares will face more meaningful selling pressure and underperform,” JPMorgan’s Kenneth Worthington wrote in a note.
Following the initial lockup expiration of shares on August 31, Robinhood shares have already underperformed. The increased share supply may weigh even more heavily on the stock.
Furthermore, data suggests that Robinhood is experiencing a more pronounced seasonal slowdown in trading activity than its financial services peers.
“This slowdown is especially important for Robinhood because its earnings are far more transaction-based than peers, and we see a higher valuation driven and dependent on account/revenue growth metrics,” Worthington said.
According to data provided to JPMorgan by Apptopia, new Robinhood app downloads were down 78 percent in the third quarter compared to the second quarter, and daily active users were down 40 percent.
Apptopia discovered that when compared to crypto peers like Coinbase and Binance, as well as traditional brokerages like Schwab, both metrics show a sharper slowdown in account openings and activity levels.
To be sure, JPMorgan stated that the additional Robinhood shares available for trading may benefit institutional investors.
“We see the incremental float as a positive because it limits the ability of less sophisticated investors to move the stock beyond fundamentals, influence that many institutional investors are concerned about,” Worthington said.
Bed Bath & Beyond plunged
Bed Bath & Beyond was once one of a slew of heavily shorted stocks, including GameStop and AMC, that were targeted by small-time investors who coordinated trades on the online chatroom WallStreetBets. The phenomenon sent shockwaves through Wall Street as the prices of these stocks skyrocketed, causing enormous pain for short-selling hedge funds scrambling to cover their negative bets.
These short sellers may have been vindicated now that Bed Bath & Beyond shares have erased their Reddit-fueled rally and turned negative for the year. According to FactSet, the retailer’s short interest remains high, with 21.8 percent of its float shares sold short. A typical U.S. stock has about 5% of its available shares sold short.
“The shorts were correct,” Jim Chanos, founder of Kynikos Associates and Twitter user “Wallstcynic,” said. He attributed the sharp reversal to deteriorating fundamentals.
Other popular meme stocks, such as GameStop and AMC, could follow in the footsteps of Bed Bath & Beyond if they fail to use the new capital raised this year to turn around their failing businesses in time to satisfy the new meme-inspired shareholders.
Short sellers are largely sticking with their bearish bets on GameStop and AMC, and Wall Street analysts predict significant losses for shareholders.
According to FactSet, AMC has approximately 19% of its float shares sold short, while GameStop has approximately 12% short interest. AMC and GameStop are down 25% and 20%, respectively, month to date.
According to the consensus estimate of four analysts polled by FactSet, GME stock will fall more than 50% to $71 per share. AMC is expected to fall more than 80% to less than $10 per share.
“Inflation and supply chain issues will make it more difficult for retailers in the near term,” Seth Basham, retail analyst at Wedbush, said. “You will see consumer prices rise, which will impact demand; second, there may be additional out-of-stocks as we approach the peak holiday shopping season due to manufacturing challenges in some countries. It paints a bleak picture for the broader home goods and retail sector.”
Shares of the big-box retailer plummeted by 25% after the company reported a significant drop in traffic in August. Bed Bath & Beyond experienced steeper inflation costs escalating over the summer months, particularly near the end of its second quarter in August, corroding profits.
Bed Bath & Beyond reported quarterly results with adjusted earnings of 4 cents on $1.99 billion in revenue. According to Refinitiv, Wall Street expected earnings of 52 cents on revenue of $2.06 billion. The home goods retailer cut its revenue and earnings forecast for the year, and its third-quarter guidance is bleak.
According to Brian Nagel, managing director at Oppenheimer, Bed Bath & Beyond reports on a February year-end, so its results on Thursday included the month of August. The majority of retailers have only reported their June or July quarters.
“Is Bed Bath & Beyond telegraphing a worsening of conditions, either on the demand side or the supply chain side?” Nagel, who does not cover Bed Bath & Beyond but has in the past, asked. “I believe Bed Bath & Beyond is emphasizing increased pressures in the marketplace.”
According to Basham, Bed Bath & Beyond’s problems are likely widespread and will affect similar retailers such as Kohl’s, Macy’s, and TJX Companies. Kohl’s stock dropped more than 13% on Thursday, as investors feared it would follow in the footsteps of its home goods counterpart. Macy’s and Gap both fell 8% and 6%, respectively.
“It will be a hit for everyone, but there will be varying degrees of hit, so there will be winners and losers,” Basham added. “Those retailers who have done the best job securing capacity in ocean freight and optimizing port flow will have better in-stocks, which will lead to higher sales. Similarly, those who excel at dynamic pricing will most likely be able to control margins more effectively than others.”
Notably, on its earnings call, Bed Bath & Beyond stated that the Covid Delta variant was preventing customers from entering the stores. According to Nagel, no other retailers have mentioned Delta as a major overhang.
“Bed Bath & Beyond, like other home retailed retailers, benefited from the Covid crisis because people spent more time at home,” Nagel explained. Consumers are now spending money on clothing, dining out, travel, sporting events, and other forms of entertainment, according to him.
Retail investors strategies
“Don’t ever let anyone tell you that only professional golfers can make a par or a birdie,” Terranova said Dominic Chu, who moderated the session.
Here are four pointers from Terranova for retail investors:
- Combine passive and active investment strategies.
Terranova advocated for a “passively active” approach to investing, which combines the consistent and rules-based discipline of a passive strategy with the dynamisms of stock picking.
“If you invest passively, you are essentially agnostic to a balance sheet,” Terranova explained.
Investors, he added, should “take advantage of the flexibility, the optionality that comes with active management.”
- Locate high-quality stocks
Terranova advised investors to first focus on fundamental investing principles, such as finding high-quality companies to invest in.
“The strength of a balance sheet is timeless. “Quality never goes out of style,” Terramara asserted.
Quality stocks are defined as having low volatility, a high return on capital, and strong balance sheets.
“Find me a long-term portfolio comprised of the least qualitative assets, and I will show you significant underperformance,” the investor stated.
- Employ quantitative models.
Investors should also use quantitative models to manage their portfolios, according to Terranova.
The money manager emphasized the importance of looking back in time to forecast what markets might face in the future.
“History, as it relates to capital markets and investing, has a very profound way of repeating itself,” Terranova said.
- Make portfolio diversification a priority.
Terranova believes that investing should be viewed as a “open ended essay,” rather than a “multiple choice question.”
According to Terranova, investors should ensure that their holdings are not overly concentrated in any one area.
“What I don’t want to do is focus in any one direction and expose myself to idiosyncratic single event risk or a single asset type of risk,” the manager explained.
Starbucks stocks get downgraded
“We remain concerned that business momentum may be slowing faster than the market anticipated, with [comparable sales] set to return to negative territory in China and rising labor cost inflation weighing on US growth,” Atlantic Equities’ Edward Lewis wrote in a note Thursday.
Starbucks has been downgraded from outperform to neutral by Atlantic Equities. The firm also reduced its price target for the stock to $105, a 6.4 percent decrease from Wednesday’s close.
Retailers are increasing pay in order to compete in a tight labor market. Furthermore, Starbucks stated earlier in 2021 that it expects all retail employees to earn $15 per hour within three years.
“We believe that persistently high wage inflation will continue to weigh on US profit growth,” Lewis said.
Covid is also squeezing Starbucks’ key market of China, as regions within the country impose restrictions to prevent the spread of the delta variant, according to Atlantic Equities.
“In light of the new challenges confronting the Chinese economy, Starbucks may find it difficult to avoid consecutive quarters of negative [comparable sales], even with sequential improvement in the 2-year stack,” Lewis said.
Starbucks shares have underperformed the market in 2021, rising 4.9 percent this year versus 16.1 percent for the Dow Jones.
Amazon gets downgraded
“AMZN’s expanding logistics workforce is poised to enable greater e-commerce share gains, faster ship speeds (1-day and same-day), and new business opportunities (such as third-party logistics)…. “However, labor costs are rising,” Morgan Stanley’s Brian Nowak wrote in a note to investors.
Amazon announced plans this month to hire an additional 125,000 fulfillment and transportation workers and raise its average starting wage in the United States to more than $18 per hour — the company’s third announcement of higher base pay in the United States in 2021.
According to Morgan Stanley, labor costs per US unit will rise by 50% year on year in the fourth quarter.
“Rising wages affect all businesses…including AMZN competitors,” Nowak said. “However, even AMZN’s scale cannot ‘absorb’ this in the near term.”
Despite the $200 reduction in target price, Morgan Stanley’s new projection represents nearly 20% upside from the stock’s closing price of $3,425.52 on Friday.
Amazon is universally adored on Wall Street, so any negative commentary on the stock is unusual. According to TipRanks.com, the stock has 31 buy ratings and no sell ratings.
While Morgan Stanley anticipates that wage inflation will put pressure on Amazon, the firm believes that smaller retailers will be hit even harder.
“As a result, it will become increasingly important to monitor the growing retail partnerships with third-party logistics players (such as UBER/DASH…) as they seek economically viable ways to continue to drive/benefit from growing e-commerce,” Nowak said.
Morgan Stanley downgrades Wells Fargo
After the bank’s fake account scandal, in which it opened millions of bank accounts in real people’s names without their knowledge or consent, the Federal Reserve imposed a $1.95 trillion asset cap on Wells Fargo in 2018.
Last week, Fed Chair Jerome Powell stated that the asset cap “will remain in place until the firm has comprehensively resolved its problems.”
Morgan Stanley predicts that Wells Fargo’s expenses will rise as the bank’s management attempts to resolve its regulatory issues.
“Getting out of the consent orders, and eventually the Fed asset cap, is the top priority of Wells Fargo’s new C-suite and business heads. This poses an expense risk because the analysts believe Wells will be willing to spend more money to get out of consent orders rather than less.
Morgan Stanley did not downgrade Wells Fargo to underweight because it expects interest rates to rise when the Fed ends its pandemic-era easy money policy. Higher interest rates imply that banks charge higher interest rates on loans, which typically boosts profits.
Analysts also believe Wells Fargo management will launch expense-cutting initiatives in 2022, which will result in lower costs than expected.