Update 497: Interest Rates & Company Profits, Richelieu Hardware, Deep Purple Scoring, Storms
4Feb23 Transcript included. $META on NASDAQ, $RCH on TSX
Dear Friends of Purple Chips,
On Thursday the Dow was around 34,000, up about 500 pts from two weeks ago. The Fed raised rates by 1/4% and the market rallied on the news. In this weekend's video, we look at the following:
We discuss the relationship between interest rates and company profits;
Our position change in Richelieu Hardware;
Deep Purple scoring and how to read it;
Storms at Brier island;
Next video is February 21st.
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Transcript
Welcome to Purple Chips update number 497 for February 4, 2023. I'm John Schwinghammer, the author of Purple Chips.
So on Thursday, the market was pretty strange. The Dow was down about a 100 points and the S&P was up. Tech stocks did well and blue chips came down. The Dow was around 34,000, which was about 500 points higher than it was two weeks ago. The big news today was Meta, Facebook, reported better than expected profits. So the stock gained about 25%. The rally and Meta carried over into the whole tech sector. Yet I'm skeptical that this rally in the tech sector will hold. The Fed raised rates by a quarter percent this week and the market had a relief rally after the news. Now personally, I see this latest action as a rally within a bear market. It's hard for me to get excited about bad news that's not as bad as expected. Interest rates are a major driver behind company profits and stock market direction. When the government stimulates the economy by lowering interest rates, it has a profound effect on company profits and is usually reflected by appreciating stock values. When the government raises rates, it's the opposite. It's like someone taking the punchbowl away at the party - the party is going to wind down. I could be wrong, but usually it's rates up, market down, and rates down, market up.
Now here are the stocks that are trading at low valuations. And you can see that there's almost nothing on the list except for TC energy. In fact, a lot of earnings forecasts are expected to go down and so a lot of the stocks appear to be in the mid-range of their valuations. There were no changes in any of our satellite or US positions. However, we did reduce our position in Richelieu Hardware to underweight at $38.99. And in this chart, you can see where we originally bought and reduced Richelieu Hardware. And there was a pretty sizable increase in earnings due to COVID. And based on what I've seen with many companies, I wouldn't be surprised if earnings go back to their normal trend, which would be closer to the $1.50 a share range. This table shows that earnings are expected to decline over the next year. And earnings are expected based on analysts’ forecasts to go from about $3 a share to around $2.40. So maybe based on what we've seen, this is a little bit better than or more optimistic than normal.
This week, I wanted to talk about our methodology in deep purple. Initially, we thought we would really focus on the top 20 Deep Purple stocks. But we quickly discovered that valuation is a much more important metric than the Deep Purple score. Our conclusion is that it's best to choose from the top 100 Deep Purple stocks and focus on the valuation of each company. The philosophy of being valuation-focused carries over from the methodology that we had and used in Purple Chips. Our bias towards these deep purple stocks is based on the expectation that they should appreciate faster than other stocks because institutional funds will favor the companies that score well.
Now one question that I've been getting about Deep Purple is how to read the scores. In this slide, you'll see a snapshot of some of the top 20 Deep Purple stocks. And here you see that Home Depot has a score of 40.07 that's circled in red, and it's higher on the list than Visa which has a score of 74.71. This is where the confusion lies. When reading the scores. It's important to compare the score to other companies that are in the same sector. Otherwise, it's like comparing apples to oranges. The rankings reflect the best stocks in the sector. So Home Depot is the highest-scoring consumer discretionary stock and it ranks higher than Amazon which is in the same sector. The bottom line is to favor these companies that are at attractive valuations and are the best in their sectors.
Our next video will be on February 21st and we have two more videos before we reach number 500. I just can't believe that we've been doing the videos for over 10 years now. Our plan is to go to a blog-style/interview that promises to be more flexible and more interactive. So stay tuned on that. And as always, if you have any questions about this video or about Purple Chips, please contact me at info@ purplechips.com.
Storms don't only happen in the stock market. Out here, in the Bay of Fundy, Mother Mature shows her power and the storms can be very impressive. These videos were taken on January 26th when the lunar cycle caused extreme tides and wind.
So that's all for this week. I'm John Schwinghammer. And thank you for listening. Have a great weekend.
Transcribed by https://otter.ai