The 2 Critical Sectors I’m Watching This Earnings Season…
It’s earnings season, and we are getting an idea of how 2022 finished for most companies and, perhaps more importantly, what they are seeing in our economy today and moving forward.
Of all the earnings releases in every sector of the market, there are two sectors I’ve particularly got my eye on — the financials and the homebuilders.
These two sectors are critical to the overall economy. And as I’ll explain in a moment, both are sort of in flux right now — which is why investors will need to pay attention. If there is any sign of a broader downturn in the overall economy, chances are we’ll see it here first.
Let’s dive in.
1) Financials Are Sending Mixed Signals
From what we’ve seen from many of the major bank earnings releases, it doesn’t look promising…
One of my favorite stories so far from earnings season comes from the iconic bank JPMorgan Chase (NYSE: JPM). JPMorgan announced it would be shutting down (and essentially writing off) its $175 million acquisition of Frank — a college financial planning website.
It turns out, Frank didn’t quite have the customer base it claimed it did. Frank claimed it had 1,048,576 users… which also happens to be the maximum number of rows allowed by Microsoft Excel.
Most of those users were fake. And Frank fleeced the country’s biggest bank for $175 million. Of course, JPMorgan is suing Frank’s founder Charlie Javice over the fake accounts, but it’s astonishing that this wasn’t uncovered during JPMorgan’s due diligence process.
Regardless of how this shakes out, it isn’t a good look for JPMorgan Chase.
Outside of JPMorgan Chase’s blunder, most of the major banks topped earnings estimates. But most did note that they were setting aside larger reserves for future possible loan losses. As of now, however, actual delinquencies and credit trends haven’t shown any warning signs. Yet.
We don’t hold any banks in our portfolio over at Capital Wealth Letter, but we do have American Express (NYSE: AXP), which carries consumer loans on its balance sheet. This is in unlike Visa (NYSE: V), which simply takes a cut of each transaction and passes the loan burden onto financial institutions. So far, our stake in AXP has panned out well since adding it in late 2016 — we’re up by 193% compared to the S&P 500’s 86%.
Historically, customers of American Express have higher credit scores and, thus, lower delinquencies. But shares of American Express took a slight hit as its peer, Discover Financial Services (NYSE: DFS), reported on January 19 that its charge-off rate on cards rose to 2.37%, up from 1.92% at the end of the third quarter.
Discover and Capital One Financial (NYSE: COF) typically cater to a lower credit-worthy clientele than American Express.
But when AXP reported quarterly earnings on January 27, it struck a different tone. Revenue rose 17% to $14.2 billion in the fourth quarter. The company did report an earnings miss due to rising credit loss provisions, but the company said, “Credit metrics remained strong throughout the year and below pre-pandemic levels.”
And in a strong vote of confidence for the higher-end consumer, AXP issued guidance for a 15-17% increase in revenue, and a 12-16% increase in earnings per share. The stock surged by about 10.5% on the news.
2) Housing Market In Flux
The housing market, and more specifically home builders, are in an interesting position right now.
Higher mortgage rates have taken all the air out of buying a home, especially after the massive spike in home prices that we witnessed in the last couple of years. Mortgage applications have dried up and are near historic lows. Wells Fargo Bank (NYSE: WFC) has decided to severely scale back its home mortgage business. This is coming from the No. 1 mortgage lender in the country.
Homebuilder KB Home (NYSE: KBH) announced on January 11 during its quarterly call that it had a 68% cancel rate. That means over two-thirds of homebuyers walked away from their contracts in the quarter. For reference, the year prior (Q4 2021), its cancellation rate was just 13%.
Over at Capital Wealth Letter, our homebuilder — Lennar (NYSE: LEN) — reported earnings on December 14. The company said it expected a slowdown in new home sales. The stock initially slid on the news but has since climbed higher.
So, the million-dollar question is, what’s ahead for housing and homebuilders?
If I had a crystal ball, I’d tell you. But the truth is, I don’t know.
What I do know is that shares of Lennar are trading for dirt cheap. It also operates more of a “land light” model than other builders like KBH. This means it doesn’t have as much capital tied up into land costs. The company essentially uses option-like contracts with large parcels of land.
If everything lines up right, they’ll move ahead with their housing projects or subdivision. But if things aren’t looking good, they can walk away from the land contract after paying a small premium. It’s a smart business model and one of the main reasons I selected Lennar over other homebuilders. We are up roughly 91% on this investment in just under three years — more than double the S&P 500.
I will be keeping a close eye on the financial sector and the housing market, particularly AXP and Lennar. If things start to look sour, it may not bode well for the broader market and economy. And in that case, I’ll book my gains and step aside. (Of course, my premium subscribers will be the first to know if that happens.)
In the meantime my team and I have just released a report of “shocking” predictions for 2023 (and beyond)…
This report is easily one of the most hotly-anticipated pieces of research we release each year. And if history is any guide, it could be one of the most profitable things you read all year…
From the U.S. dollar to driverless trucks to breakthrough cancer treatments and more… If you’re looking for ideas that could turn a modest investment into a small fortune, this is where you’ll find it.