Weekly Update: Pre-Election and Post-Earnings Volatility

Stocks are under pressure as we approach the election and earnings are reported, but the outlook remains positive. [TradeSmith Investment Report logo] [TradeSmith Investment Report logo] October 31, 2024 [Homepage]( / [Portfolio]( / [Special Reports]( Pre-Election and Post-Earnings Volatility This is one of our busiest weeks of the year with a slew of our companies reporting earnings results. We also have the election next week as well as the next Federal Reserve meeting. And Halloween today. So, we’ll get right to it so you can be ready to answer the door and greet your trick-or-treaters. (Or maybe you’re going trick or treating yourself.) Either way, we’re navigating a few tricks at the moment, but looking further ahead, we’re in for a lot of sweet treats. There’s no question pre-election anxiety is impacting stocks right now. That’s not unusual, but this particular election is unusually charged. Once we get a clearer picture of who will win the presidency and which part will control Congress, we can expect Big Money to flow back into stocks. In fact, we are going to push back our November issue until the week after the election, hoping we have a clearer picture by that point. My outlook hasn’t changed. I still expect a big lift into the end of the year that continues will into 2025 as interest rates fall and the economy strengthens. I just want to be able to better pinpoint where the opportunities will be and probably add a stock or two. I have some possibilities in mind, but we’re better off sitting tight for the moment and getting through the election before making any mores. We are also in the midst of earnings volatility. We expect this four times a year during quarterly reporting seasons, and we’re seeing a big earnings influence right now. In fact, the entire market is down today after earnings from Microsoft (MSFT) and Meta Platforms (META). Nasdaq is taking the brunt of it with a 2.4% decline. We’re seeing earnings and market volatility in our TradeSmith Investment Portfolio, which is down 1.8% since last Thursday’s update. We’re still in great shape, however. Our batting average for current stocks is 83%, with 20 of our 24 stocks in the green. Our average return is 20.4%. The current bumpiness is not out of character, nor is it cause for concern. It may not be the most fun, but with our success so far, we can manage a few bumps along the way – especially with the data still pointing to higher prices just around the corner. Here’s a look at the portfolio, and then we’ll jump into the latest on earnings with nearly 30% of our portfolio reporting this week. The Latest on Earnings: DHI, AMD, CB, AGCL, KLAC, LIN, CNQ D.R. Horton (DHI), the nation’s largest homebuilder and a stronger performer for us, missed expectations with its fiscal fourth quarter report Tuesday before the market opened. Earnings of $3.92 per share fell short of the Street’s estimate for $4.17. Revenue of $10 billion also underperformed expectations for $10.2 billion. Net sales orders increased slightly over last year to 19,035 homes, but the value of those orders slipped 2% to $7.1 billion. For the 2025 fiscal year, management guided for more homes sold with revenue in the range of $36.0 billion to $37.5 billion. That was also below estimates, though I am confident the company is being conservative. DHI increased its quarterly dividend payout from 30 cents per share to 40 cents, always a good sign of financial strength. It also repurchased 3.4 million shares in the quarter, another positive. Mortgage rates have been tricky lately, bumping back up after trending down since May. The company acknowledged that buyers anticipate lower rates in 2025, which is probably causing them to delay home purchases. There’s also talk that some buyers may be waiting for the election to be over. Despite this quarter’s disappointment, longer-term tailwinds remain in place. Rates are all but guaranteed to come down. Housing demand continues to exceed supply. And DHI can also offer incentives like rate buydowns that may lure potential buyers off the sidelines. Shares fell 7% on Tuesday after the release. We’re still up a strong 58%, and DHI’s fundamentals improved after the latest report to an outstanding 79.2 rating. Continue to hold for a return to higher prices. Advanced Micro Devices (AMD) released its results after Tuesday’s close and had a rough day Wednesday, falling 10.6% despite decent sales and profits. Growth was impressive. Earnings increased 31% to 92 cents per share, in line with estimates. Sales jumped 18% to $6.82 billion, topping analysts’ forecasts for $6.71 billion. Data center revenue more than doubled from this same quarter a year ago. However, investors didn’t love the guidance, which in truth wasn’t all that bad. Certainly not bad enough to take the stock down 10%. The midpoint of management’s sales guidance for the current quarter is $7.5 billion, which is just under the $7.55 billion consensus estimate. On the other hand, CEO Lisa Su said revenue from data center AI processors should exceed $ 5 billion, which is 11% higher than what she anticipated three months ago. She also said the company sees “significant growth opportunities across our data center, client and embedded businesses driven by the insatiable demand for more compute.” AMD has traded choppier than we would like since its highs earlier this year, which followed last year’s massive rally from November into March. It’s a great company that’s a leader in semiconductors, which are the foundation of our tech revolution, and its processors remain in high demand with AI. We’re up a solid 19.5%. I expect another run as the market and economy strengthen into the end of the year, but I am watching it closely. Continue to hold AMD for now. Chubb Limited (CB), one of our cash generating insurance companies, grew earnings 16% last quarter to $5.72 per share, easily topping the Street at $4.93. Revenue increased a solid 6.6% to $15.01 billion, which came in just shy of estimates. Through the first three quarters of the year, net income and core operating income both hit records of $6.7 billion and $6.75 billion. Net premiums written, the bread and butter of the business, grew 5.5% (6.6% in constant dollars). Pre-tax catastrophe losses were higher than last year but would have been lower were it not for the $250 million paid out after the tragic Hurricane Helene. Management didn’t provide guidance, and shares didn’t react much after earnings. That’s fine. The numbers are trending in the right direction, and CB’s Quantum Score of 72.4 remains in our buy zone. CB is up about 7% for us in less than two months. Shares are above their buy limit at the moment, but CB remains a buy if it pulls back under $276.75 in any broader weakness. Arch Capital Group (ACGL), our other insurance carrier, checked in yesterday after the close. Earnings of $1.99 per share beat estimates for $1.96, and revenue of $4.05 billion topped forecasts for around $3.8 billion. Once again, catastrophic losses were higher in the quarter because of Hurricane Helene’s devastation, but there were a lot of positive as well. Net premiums written increased 20.6% over last year to $4 billion. Pre-tax net investment income increased 48.3%, and operating revenues jumped 24.6%. The insurer also ended the quarter with cash of $1.03 billion, 11.8% higher than a year ago. As I’ve mentioned, the endless flow of premiums insurance companies collect make it a great business model. There is always cash to invest, which is one of the keys to Warren Buffett’s legendary success. Growth was solid, and ACGL continues to rate well with a 72.4 Quantum Score. I also see six Big Money buy signals (green bars below) in my system over the last three months, including one in earlier October. ACGL remains a buy up to $105.46. Source: MAPsignals.com KLA Corp. (KLAC) also reported late yesterday, and while the results were good, shares were pressured today amid general tech weakness after Microsoft’s guidance disappointed investors and Meta Platforms didn’t add as many users as expected. For KLAC, earnings of $7.33 per share exceeded the $7.05 estimate and were 28% higher than a year ago. Sales grew 5.6% to $2.84 billion, ahead of the analysts at $2.76 billion and also besting the company’s own guidance. Management raised its earnings forecast to the range of $7.75 per share, which would represent 26% growth and easily beat current estimates for $7.41. Sales guidance for around $2.95 billion also outpaced the Street, which is currently at $2.85 billion. CEO Rick Wallace said the company is “optimistic” about semiconductor growth to finish out this year and into 2025. Count me in on that, too. Shares rose last evening in after-hours trading before Microsoft and Meta’s news sparked today’s weakness. KLAC remains and nice winner for us and is a leader in an important industry. Continue to hold your shares. Linde (LIN) reported results this morning before trading began. The industrial gasses company grew earnings 9% to $3.94 per share, beating estimates for $3.89. Sales increased 2% to $8.36 billion, edging estimates. Linde signed its largest ever gas sale project in the quarter, boosting the project backlog 25% to $10 billion. Guidance wasn’t quite as robust. Management expects full-year earnings of $15.40 to $15.50 per share, which would be solid 10% growth. That’s under current estimates for $15.52, and management cited softness in its industrial end markets. LIN has been a solid stock for us. We’re currently up just under 30%, and even with the recent pullback, shares remain in an uptrend. Continue to own LIN, and I’ll keep an eye on its growth and industrial end markets. Canadian Natural Resources (CNQ) also reported this morning, beating estimates on both earnings and sales, but shares have dipped the last couple of weeks as oil prices have fallen back under $70 per barrel. The company said oil prices in the third quarter averaged $75.16, about 9% lower than last year. Natural gas prices were also down, and management said it would drill fewer gas wells than originally planned. It maintained natural gas production guidance for the year. That said, CNQ still managed an earnings beat. The bottom line of 71 cents per share was down from last year but ahead of estimates for 67 cents. Sales of $6.52 billion also fell year over year but surpassed estimates by roughly 2%. Oil production in the Canadian oil sands hit a monthly record in August, and CNQ announced it will acquire Chevron Canada Limited’s 20% in the Athabasca Oil Sands Project. CNQ will now own 90% of the project. The company also returned $1.9 billion to shareholders through dividends and buybacks. Management also raised the quarterly dividend by 7%. CNQ’s rating have slipped on lower energy prices, but it’s worth noting that we saw two Big Money buy signals earlier this month. Continue to hold CNQ while we monitor energy prices and money flows. That’s a lot of earnings reports, and we’re not done yet. At least four more companies are on the schedule for next week: Arista Networks (ANET), Vertex Pharmaceuticals (VRTX), Novo Nordisk (NOVO), and The Trade Desk (TTD). Remember, our November issue and new post-election stock recommendation will come out the week after next to give us time to get the results (hopefully), analyze them, and find a strong new stock to add that’s primed to benefit. Talk soon, [Jason Bodner signature] [Jason Bodner signature] Jason Bodner Editor, TradeSmith Investment Report ©2024 TradeSmith, LLC. All Rights Reserved. 1125 N. Charles Street, Baltimore, MD 21201 To unsubscribe or change your email preferences, please [click here](. [Terms of Use]( | [Privacy Policy](