Hank Skatoff ‘25 and Johnny Blazakis ‘25 delivered this week’s market update. The S&P 500 and NASDAQ are still on an upwards trajectory from the lows of mid-March 2023. Inflation however is still above the target rate with additional upwards pressure from the Labor market, and the FED is hinting at a recession. Based on a full year GDP forecast, the FED is implying a mild recession for the back half of 2023. The Federal Funds rate is between 4.75-5% and another 25bp hike is expected for the next meeting on May 3rd. Inflation has cooled to 5% YoY with the target at 2%, and jobless claims have risen to 239k, but still remain at historically low levels.
Earnings calls occurred on Friday of this week for several large banks including JPMorgan, Citi, Wells Fargo, and PNC. JPM reported record profit up 52%, and the other three banks all beat expectations. These are hopeful insights into the banking sector amidst warnings of a recession. In other news, Firehouse Subs, a subsidiary of a major restaurant conglomerate, filed for Ch 11 bankruptcy listing over $1M in debts. Finally, the U.S debt ceiling is becoming a more urgent topic of discussion between the White House and Congressional Republicans. U.S. debt surpassed GDP in 2020 by 18% and national debt currently stands around $28.4 trillion. As a result, credit default swaps, or insurance on debt, hit the highest price since 2012.
Patrick Luongo ‘25 and Max Oeser ‘25 delivered a LVMH sell pitch. Louis Vuitton is a multinational luxury goods conglomerate based in Paris, France. The company owns over 70 luxury brands over a wide range of sectors and is up 22% year to date, currently trading around $181.
The risks to investing in LVMH start with the brand exposure to being counterfeited, resulting in a loss in revenue and increased prevention costs. LVMH also operates in a highly competitive market where they must constantly improve and innovate to maintain their market share. Third, LVMH operates worldwide, subjecting them to currency fluctuations, government regulations, and tourism shifts. Finally, LVMH brands are critical to company success and any negative press/reputational risks associated with its products could impact the company.
The reason to sell comes through the impact of FED hikes and recession. Patrick and Max believe that the market has not yet adjusted to past rate hikes which could lead to a hard landing. In recessionary environments, consumer spending on luxury goods may decline and could lead to decreased consumer confidence. Referencing a discount cash flow calculation that assumes a discount rate of 10%, they shared that LVMH must grow 13% annually for the next 10 years followed by 6% growth until perpetuity to be fairly valued. However large consulting firms predict the luxury goods market to increase with a CAGR of 6% over the next 7 years.
Summing up, the pitch foresaw a major reduction of consumer spending into the next year as well as a letdown in LVMH’s earnings in the near future. The pitch saw LVMH to be currently at its highest trading price and presented the opinion that consumer spending stocks are not a buy and hold market. The club voted in favor of the pitch and sold 67 shares at $196.05 on April 14th.
Head Analyst Alex Hunter ‘24 and Financials Analyst Aykut Ugurlar ‘24 then delivered a materials buy pitch. The materials sector includes chemicals, metals, construction materials and wood products. Some unique aspects of this sector include its cyclical nature to both the economy and seasons, the fact that materials live at the bottom of the supply chain, the global prices on materials, and material’s connection to commodities and firms. The club currently holds zero materials due to having to sell Southern Copper Core because of the club’s commitment to ESG.
This pitch focused on copper due to the consistent demand growth expectations seen by Alex and Aykut, which stand at 1.5 – 2.5% yearly. Additionally, EV’s require 2.4x more copper than ordinary vehicles, there is an expected 23% price increase on copper, and green energy production also contributes to increased demand.
BHP Group is a mineral mining and refining company with a market cap of $158B, 8.48% dividend yield, 0.99 beta, and a P/E of 8.7. Some recent and upcoming catalysts of BHP include looking to boost output of copper for EV’s, turbines and solar farms, looking to produce more nickel by entering a nickel-supply deal with Tesla, and suspending their plans to exit steelmaking coal operations. Additionally, the company is looking to increase institutional and hedge fund investments, was given an outperform rating by the CSLA, and will extend their Antamina mine in Peru for the next 8 years, one of the most sought-after copper-zinc mines on the planet.
The potential risks the pitch highlighted started with the cyclical nature amongst uncertainty and recession risks in the economy. The dividend coverage ratio is 1.22x meaning that BHP may not be able to sustain high dividends for a long time. The base metal and coal prices also tend to be volatile and China’s potential stall to fully reopening may cause issues. However, Bank of America Analysts see copper prices rising strongly from current levels with strong seasonal demand and a strengthening Chinese economy.
The club voted in favor of this buy pitch and purchased 200 shares of BHP at $61.25 on April 14th.
To close, ESG Analyst Julia Daly ‘24 and Vice President Alexandra Borik ‘23 presented an Auto-Sell ESG Presentation of two stocks, Expedia and Sea Limited. The ESG mandate for the club uses the MSCI EGS ratings and requires the club to automatically sell B/CCC ratings and to not buy BB ratings or below, with an exception of being allowed to continue holding BB ratings.
Expedia Group is the world’s leading online travel service and 8th largest travel agency in the world, however stock performance is down -49.56% over the past year. The club has held EXPE since 2013 and the stock has seen a 56% price increase since first entering the club’s portfolio. Expedia’s Laggard ESG rating comes from the categories of scarce human capital, greenhouse gas emissions and biodiversity.
Sea Limited started as a gaming business, but in 2015 started operating Southeast Asia’s largest ecommerce company, Shopee. The club has held SE for approximately one year, and since then, its performance has been down -25.8%. Sea Limited’s Laggard ESG rating comes from the categories of human capital, data privacy and security, and business ethics.
The club automatically sold 67 shares of SE at $80.08 and 150 shares of EXPE at $90.875.