The Insider Report - September 8th, 2024

Your Exclusive Benzinga Insider Report

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By analyst Gianni Di Poce
Volume 3.36

Market Overview (Member Only)

• It's a full-blown risk-off tape, with the Nasdaq leading the rout lower. It closed down 5.77% last week, while the S&P 500 fell 4.25% and the Dow Jones Industrial Average retreated 2.93%.
• Not only are we in a seasonally weak period, but all the risk-off sectors are outperforming.
• Economic slowdown risks are rising after mixed payroll reports last week.
• The yield curve also re-steepened… can the Fed come to the rescue?

Stocks I Like

1. Verizon (VZ) – 36% Return Potential

What's Happening

• Verizon (VZ) is a legacy telecom company that provides various technological services.
• The company brought in $133.97 billion in 2023 along with $11.61 billion in earnings.
• VZ has a very reasonable valuation. Its P/E at 15.71, its Price-to-Sales at 1.31, and its EV to EBITDA at 8.51.
• From a technical standpoint, VZ is starting to break out of a saucer formation, which could lead to an acceleration in upside momentum.

Why It's Happening

• Wireless service revenue, the meat of Verizon’s business and the bulk of its overall top line, saw an encouraging rise of 3.5% year-over-year to $19.8 billion. This was fueled by the company’s massive consumer user base, which responded well to “pricing actions,” and continued to opt in to the company’s wireless broadband internet. 
• Breaking down revenue by user category, Verizon managed to increase its take from the consumer segment: It was up by 1.5% year over year to $24.9 billion this year. 
• Verizon is the largest mobile carrier in the U.S. Since 2019, Verizon has pursued sweeping plans for 5G that include better customer service and new applications, such as for smart cities and factories employing robotics and wirelessly connected equipment. This puts Verizon at a unique position to capitalize on the upcoming 5G tailwind. 
• Verizon’s second quarter saw the company book $32.8 billion in revenue.
• Morgan Stanley anticipates a $0.05-per-share annual hike to the big telecom’s quarterly common stock payout, putting the next quarterly distribution at nearly $0.68 per share. If realized, this will make VZ an attractive target for dividend investors. 
• Verizon’s cash flow is thick and heavy, as it operates a business with millions of regularly paying subscribers. This means it has plenty of financial muscle helping it flex that high dividend. At the moment, its cash dividend payout ratio is under 80%, which indicates the distribution is well-funded and sustainable, barring any sudden catastrophe with the company.
• VZ has a free quarterly cash flow of $5.62 billion.

• Analyst Ratings:
• TD Cowen: Buy
• JP Morgan: Neutral
• RBC Capital: Sector Perform

My Action Plan (36% Return Potential)

• I am bullish on VZ above $37.00-$38.00. My upside target is $56.00-$58.00.

• Dole (DOLE) – 44% Return Potential

What's Happening

• Dole (DOLE) is a global producer and distributor of fruits and vegetables.
• The company made $8.25 billion in revenue in 2023 along with $124.06 million in earnings.
• In terms of valuation, DOLE is on-sale. Its P/E is at 8.17, its Price-to-Sales is at 0.18, and its enterprise value to EBITDA is 12.98.
• From a technical perspective, DOLE is in an uptrend within an ascending price channel, a continuation pattern. It looks strong as long as it remains within the formation.

Why It's Happening

• Many institutions and analysts favor DOLE for its unique positioning within consumer staples focusing on “fresh” fruits and produce, which is in contrast to the bigger side of the sector that specializes in packaged or processed foods. By this measure, DOLE can be seen as a pure play on several high-level themes including a consumer shift toward healthier food options, which should support a premium valuation that keeps expanding in the future.
• "Our strong start to the year positions us well to deliver another good result in 2024," executive chairman Carl McCann said in a statement. "For the full year, we are maintaining our target to deliver adjusted EBITDA in line with 2023 on a like-for-like basis."
• A strong point for Dole has been its EMEA Diversified Fresh Produce segment, with sales up 9% in 2023 and even 15% in Q4. Management explains that efforts to push pricing have been well-received with margins also benefiting from easing input cost pressures. Q4 segment adjusted EBITDA of $32.6 million was up by 44% y/y.
• A theme for Dole has been an effort to divest non-core assets in a strategy to drive further operational and financial efficiencies. The company raised $84 million in 2023 from asset sales with a plan to continue going forward. The upside here has been a steady decline in the company’s balance sheet debt position. Dole ended 2023 with a net leverage ratio of 2.1x, down from as high as 3.6x at the start of 2022.
• Revenue rose 6.6 per cent to $2.1 billion, driven by what the company called a "strong performance across all segments" as well as a $12.8 million gain on favorable foreign exchange rates.
• Earnings from continuing operations jumped to $71.5 million in the three months to the end of March, compared to $35 million a year ago.
• DOLE has $22.76 million in free quarterly cash flow.

• Analyst Ratings:
• B of A Securities: Underperform
• Deutsche Bank: Buy
• Goldman Sachs: Buy

My Action Plan (44% Return Potential)

• I am bullish on DOLEabove $14.00-$15.00. My upside target is $23.00-$24.00.

• Box (BOX) – 36% Return Potential

What's Happening

• Box (BOX) is a cloud content management platform.
• The company hauled in $1.04 billion in revenue in its 2024 fiscal year along with $129.03 million in earnings.
• BOX's valuation is rather elevated. Its P/E is at 41.27, its Price-to-Sales is at 4.5, and its EV to EBITDA is at 48.50.
• From a charting standpoint, BOX just exploded out of a saucer formation. Look for some back-fill followed by a move to new highs.

Why It's Happening

• Beginning in enterprise storage and content management, the company has done a good job of infusing more intelligence and capabilities into its software, acquiring AI-related start-up Crooze earlier this year for application-building automation tool and announcing the acquisition of Alphamoon more recently for intelligent document processing. It is another step in Box’s journey from a data storage company to an automation powerhouse. 
• Box only trades for about 20 times this year’s adjusted earnings-per-share estimates, which is a pretty reasonable valuation for an enterprise software stock. With growth seemingly set to reaccelerate, management achieving nice margin expansion, and repurchases lowering Box’s share count, Box looks like a solid value here.
• Box’s board authorized another $100 million in repurchases on Aug. 25, which indicated a high level of confidence of the management and executive team in the company’s future growth prospects.  
• In the second quarter, Box delivered 3% revenue growth to $270 million, with adjusted (non-GAAP) earnings per share of $0.44, which was up an impressive 22.2%. Both figures were ahead of analyst expectations.
• While 3% revenue growth may seem paltry for an enterprise software company, Box’s underlying metrics were actually better. First, a lot of Box’s international revenue comes from Japan, and due to the weakening Yen, revenue was affected by 3%, so constant-currency revenue was up a better-looking 6%. Moreover, billings, which encompass revenue growth plus the change in deferred revenue and speaks toward future growth, grew an even higher 10%, though just 9% in constant currency.
• Adjusted gross margins increased 4.7% over just the past year to 81.6%, and adjusted operating margins expanded 3.6 % to 28.4%. Those are massive margin increases over just the span of just one year, which appears to show Box has either pricing power or operating leverage over fixed costs inherent in its business model.

• Analyst Ratings:
• UBS: Buy
• Citigroup: Buy
• RBC Capital: Underperform

My Action Plan (36% Return Potential)

• I am bullish on BOXabove $28.00-$29.00. My upside target is $44.00-$45.00.

Market-Moving Catalysts for the Week Ahead

Labor Market Recap

Well, that's a wrap for the latest jobs reports last week. Both the ADP employment and nonfarm payroll reports came in lower than expected, highlighting some lingering weakness in the background of the labor market.

The unemployment rate, however, ticked down to 4.2%. Overall, I would characterize the report as mixed, although there are concerns. The job market in the tech sector, which is known for good-paying jobs continues to struggle, and there was a lot more job creation in the part-time than full-time category.

In order to stave off a full-blown recession, the labor market must retain its general resilience. The U.S. economy runs on consumption, and if people don't have jobs, they won't be able to spend, which could lead to even more cuts down the line. It turns into a vicious cycle.

Back to Inflation Now

Every once in a while I see an economist or market pundit say that the Phillips Curve is dead. Obviously, it's an economic theory with its own flaws and erroneous assumptions, but throughout this year, it provided an excellent framework in which to navigate monetary policy.

The Phillips Curve posits an inverse yet stable relationship between unemployment and inflation. That is, when inflation is low, unemployment is higher, but when unemployment is low, inflation is higher. Its focus is primarily on the demand side of economics.

Right now, the market is trying to figure out whether the Fed is going to cut 25-basis points or 50-basis points at the next FOMC meeting. If the inflation reports come in below estimates this week, it would further the probability that a 50-basis point cut is on its way.

Macro Forecast

With the Fed's rate cuts just around the corner, it's imperative to understand that the macroeconomic regime is about to change. Granted, the market is already making its moves, as it loves to discount future events.

For almost a year now, long-term rates have been dropping. This means that the market's expectation of lower inflation, but also lower economic growth, has already been priced in. Now we're about to enter a scenario where short-term rates are dropping too.

The Dollar has been weakening notably as of late. A weak Dollar and low-rate environment has historically been very bullish for precious metals. A weak Dollar may also put a floor on stocks in the near-term, but if we see the Dollar rebound higher with rates falling, it would signal a major flight-to-safety is taking place, and that it's time to head for the hills.

Yield Curve Re-Steepened

We've just entered a critical moment for capital markets. The yield curve between the 2-year and the 10-year Treasuries is finally re-steepened. That is, the 10-year yield is finally back above the 2-year yield, which is what a healthy curve looks like.

But unfortunately, this update isn't all rainbows and butterflies. In fact, the re-steepening has historically corresponded to recessions, although as I've explained before, we can't rule out that 2022 was the recession associated with the inversion, even though it would have been very soon by historical metrics.

The only reason why things might be different this time around is because we are no longer in a secular bull market for bonds. Most of the previously cited instances of inversions corresponding to recession occurred during a bull market in bonds. Now that the long-term trend has turned bearish, we can't rule out that the rules have changed.

Sector & Industry Strength (Member Only)

I'll just be very blunt about the sector leadership rankings – this is not a risk-on tape at the moment. First and foremost, the last thing bulls want to see is utilities (XLU) as the top-performing sector year-to-date.

Moreover, we now have consumer staples (XLP) sitting in fourth place in the sector rankings, which is hardly a risk-on signal either. Then there's technology (XLK) sitting all the way down in 7^th place now. Not what the bulls want to see.

Energy (XLE) is in last place, which shows that economic demand is weak. Financials (XLF) and communications (XLC) being in second and third place give bulls a little bit of hope, but this tape continues to suggest caution going into next week.

1 week	3 Weeks	13 Weeks	26 Weeks
Consumer Staples	Real Estate	Real Estate	Utilities

Editor's Note:

Classical risk-off tape. Prepare accordingly.

Defensive Battle (Sector ETF: XLP/XLRE) 

This past week saw the market's defensive sectors show notable strength. So, the prudent thing to do at this point would be to compare which of those are most likely to offer better returns in this volatile market environment.

This chart looks at the ratio between consumer staples (XLP) and real estate (XLRE). Over the past few years, the trend has generally favored XLP over XLRE. High interest rates are likely the culprit to this too, as it slowed the real estate market notably.

The ratio has consolidated into a symmetrical triangle formation. It looks like another higher-low of significance was just completed too, but it could still go either way. Watch for the directional break from this triangle to see which of these sectors is more likely to outperform in the coming months.

Banks Versus Real Estate (Sector ETF: XLF/XLRE) 

I was a big real estate bull earlier this year, and looking ahead into the next 12 months, I think it remains a good position to have. One area of the market that blindsided me in the past several months was financials – it's been one of the strongest performing sectors in the entire market.

Let's have a look at the ratio between financials (XLF) and the real estate market (XLRE). These sectors are inexorably linked. Even though there are a lot of cash transactions taking place from institutions in real estate, most of them are still based on mortgages and lending.

XLF has outperformed XLRE for the past couple of years. This isn't surprising. But since April, XLRE has done better, and it's threatening a breakdown from the ascending price channel, which would mean the slop of the rise is no longer in effect. We're still quite the distance from printing a lower-low or a lower-high, but I still think real estate could be a nice bargain in the coming months with rates dropping.

Duration Sending the Signal (Sector ETF: BIL/TLT)

The ratio between short-term T-Bills (BIL) and long-term Treasuries (TLT) has been one we've been watching for some time now. The macroeconomic regime shift we've seen over the past 18-months is encapsulated by the relationship between these bonds perfectly.

When inflation was running rampant, it was no surprise to see BIL outperforming TLT. That is, the ratio was rising in a steady uptrend. But ever since October 2023, we've seen long-term Treasuries outperforming.

Note how the upward sloping trendline already broke to the downside. It then rallied back up and retested the trendline, forming a secondary lower-high in the process. Now it's on the precipice of forming a lower-low, which would all but confirm a downtrend is in effect.

Editor's Take:

The long-end of the yield curve is most sensitive to fluctuations in inflation expectations, but it's also most sensitive to shifts in growth expectations. I think this is the bigger story right now as the bond market raises the alarm bells surrounding economic growth.

It's not all doom-and-gloom, however. Elements of the economy that have suffered under high interest rates are finally seeing some reprieve, and I'm looking at those regional banks especially. All those mark-to-market losses will decrease, but also all those loans issued in 2021 and 2022 will see their values increase. This could neutralize the overall situation.

The key will be whether inflation starts back up once the Fed actually begins cutting rates. It's not going to be immediate, however. I think it will take several months, but by this time next year, it will probably be apparent that inflation is a problem again.

Cryptocurrency 

Ethereum's woes continued over the past couple of weeks as it consolidated its losses following the apparent capitulation on August 5. As a rule, consolidation of losses is bearish price action, especially when it's below a former-support-turned-resistance zone.

Ethereum is likely to continue having technical issues as long as prices remain below $2,600-$2,900. Above there, bulls may have some ground to stand on, but at this point, a final drop into the $2,100-$2,300 zone cannot be ruled out.

Historically, cryptocurrencies have done well in macro environments where the Dollar is weak and interest rates are low. We're just starting to head into that environment now which means crypto could have a strong year in 2025, but near-term downside pressures are still present until it reclaims $2,600-$2,900.

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