If the first week of October was any indication, equity investors are in for a volatile fourth quarter.
Last week, the major U.S. indices sprinted out of the gates only to limp back to the starting line by Friday. Good news on the labor market front was perceived as bad news for U.S. stocks as strong September jobs data all but clinched a continuation of the Fed’s hawkish stance.
So as the market giveth and taketh away, recent headlines have unfortunately been skewed to the negative side. Yet in this whipsaw environment, the biggest losers often turn into the biggest winners as investor sentiment improves.
Keep an eye on these three downtrodden names for snapback potential.
What Are the Challenges Facing Nike?
To say the least, NIKE, Inc. (NYSE: NKE) did not get off on the right foot in its new fiscal year. The company recently reported first-quarter earnings that beat the analyst consensus but were down 20% year-over-year. It was an ominous sign that showed even a sneaker giant with purchasing power isn’t immune to the current inflationary environment.
Yet it was a different i-word that caused the most panic—inventory. Nike’s inventory level jumped 44% during the period. This suggests retailers are struggling to move Nike products and ordering less ahead of the key holiday shopping season. It also means Nike will have to reduce prices to decrease the inventory glut, a less than ideal situation that could weigh on near-term profitability.
The need to cut prices comes at an especially bad time. Nike is also saddled with higher transportation costs and foreign exchange headwinds that are already pressuring margins. Soft sales in the all-important China market are yet another challenge.
With several issues to work through, investors chose to dump Nike like it is going out of style. The stock gapped lower in heavy volume and is at its lowest level in two and half years. The next couple quarters could be rough but in the long run, Nike will maintain its global dominance in the athletic footwear and apparel space.
Why Did Royal Caribbean Stock Have a Good Week?
Royal Caribbean Cruises Ltd. (NYSE: RCL) has attracted buyers since sinking back below $40. The elevated trading activity came in response to rival cruise line operator Carnival Corporation’s dreadful third-quarter report. Carnival recorded a $0.58 per share net loss that was far worse than the Street’s $0.11 loss per share estimate. With Royal Caribbean slated to report its third quarter results at the end of October, investors braced for similarly bad news.
Last quarter Royal Caribbean posted another steep loss, although it was a stark improvement from the prior year period and a tad better than analysts feared. Still, escalating costs caused management to issue weak third quarter guidance in the $0.05 to $0.25 EPS range. The current consensus forecast of $0.19 is at the high end of the range.
Like its peers, Royal Caribbean is in a bit of a catch-22. It is experiencing a strong recovery in demand as evidenced by Q2’s better than expected 82% occupancy rate. In response, it is relaunching ships and expanding its fleet capacity to keep pace with pent-up travel demand. This unfortunately is an expensive endeavor and, when combined with increased fuel expenses, makes it tough to gain traction in the profit column.
Just how much the demand tailwind offsets the higher cost profile remains to be seen. But after Royal Caribbean stock climbed 10.7% last week in a down market, investors appear to be positioning for smoother waters ahead.
Why is AGNC Stock So Low?
AGNC Investment Corp. (NASDAQ: AGNC) fell to its lowest level since March 2020 last week in volume which was about double the 90-day average. The real estate investment trust (REIT) has exemplified what has been a rough year for an asset class that was a star performer in 2021.
This year’s culprit? Interest rate hikes—and expectations of more of the same. Since REITs typically take on a lot of debt to finance their property investment activity, rising rates are perceived to be detrimental to profits and therefore company value. AGNC is particularly exposed to this theory.
A REIT focused on residential housing, AGNC holds a portfolio of agency mortgage-backed securities (MBS) that contains a significant amount of leverage. The company’s overall debt-to-capital ratio is around 85%. It also employs a hedging strategy designed to mitigate the effects of unfavorable interest rates, but this aspect of the portfolio has largely been ignored by investors.
AGNC’s ability to navigate
the rising rate environment was on display last quarter when it handily beat consensus earnings estimates. When the company reports Q3 performance on October 25th, the bar will be set extremely low with REIT pessimism snowballing in recent weeks. But with technical oversold conditions setting in and the stock boasting an 18% forward dividend yield, it’s a name for bargain hunting income investors to put on the watchlist.
Before you consider NIKE, you'll want to hear this.
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