Despite Friday’s sell-off, markets kicked off the new quarter on an upbeat note, ending the week higher for the first time in four weeks. Stocks bounced off nearly two-year lows on Monday and Tuesday, with the S&P 500 adding 5.6%, its most significant two-day rise since April 2020 and the third-best start to an October since 1930. However, early week gains were partially erased on Friday after a stronger-than-expected jobs report raised concerns about ongoing aggressive Fed policy tightening. For the week, the Dow gained 2%, the S&P 500 rose 1.5%, and the Nasdaq climbed 0.75%.
September’s jobs gain of 263,000 was down from the prior month’s 315,000 figure. Nevertheless, it surpassed economists’ expectations. The unemployment rate slipped to 3.5% from 3.7%, raising expectations that the Federal Reserve will approve a 0.75 percentage point interest-rate increase for the fourth meeting in a row next month.
Corporate earnings season officially begins next week with big banks JPMorgan Chase, Morgan Stanley, BlackRock, and Citigroup, set to report. Other major firms, such as Delta Air Lines, PepsiCo, and UnitedHealth, are also on the docket. According to FactSet, the number of companies that raised their earnings forecasts ahead of this earnings season exceeded the totals that lifted their outlooks before the previous two quarters. Nevertheless, companies in the S&P 500 are expected to report the lowest year-over-year earnings growth since the third quarter of 2020.
The decline in tech may be offering investors what many would consider a once-in-a-lifetime opportunity in some notable names. Our first recommendation for this week is one such company that has several positive catalysts in the wings.
Google parent Alphabet (GOOG, GOOGL) recently dipped below $100 after its 20-for-1 stock split. At its lowest level in over a decade, the stock is more accessible for investors, which should help when enthusiasm for big tech stocks re-accelerates.
Over the last five years, GOOGL is up 101%, to crush the Nasdaq’s 64% gain and the Internet Services Markets 72% gain over the same period. The company posted earnings per share of $1.21 on revenue that grew by 12.6% year-over-year to $69.69 billion. The consensus sees earnings dropping 7% in 2022 but rising in 2023 at $5.80 a share. Top-line growth is expected, with 2022 sales expected to climb 11% and another 10% in 2023 to $260.44 billion.
Key catalysts to watch out for include its artificial intelligence tools that help users search in new ways, such as Google Lens, which is currently being used over 8 billion times a month. Alphabet also recently introduced a new multi-search feature to help users search with both words and images simultaneously. Shares also have a strong rebound potential once the digital ad market recovers.
At 19 times forward earnings, Alphabet shares are trading in line with the S&P 500. Still, the current earnings multiple may underestimate the company’s potential to re-accelerate earnings once its many growth catalysts start to play out.
A significant development for the cannabis industry came last Thursday when the White House issued a statement from President Biden of three executive actions surrounding cannabis pardons and initiating a review on cannabis scheduling, potentially setting the stage for federal-level legalization of marijuana. “As I often said during my campaign for President, no one should be in jail just for using or possessing marijuana. Sending people to prison for possessing marijuana has upended too many lives and incarcerated people for conduct that many states no longer prohibit. It’s time that we right these wrongs,” said president Biden.
As a result, many of the pros on Wall Street are upping their expectations for cannabis businesses in 2023. “We could be on the cusp of a secular cannabis bull market,” said Stifel analyst Andrew Partheniou.
The potential legalization of cannabis is likely to be a major positive catalyst for the leader in net cannabis revenue, Tilray (TLRY). The company has a presence in all key markets, with a focus on recreational and medicinal cannabis; the addressable market is significant and expanding.
Following last week’s Whitehouse announcement, TLRY surged 22% but gave back some of those gains when the company reported Q1 2023 revenue and EPS miss, finishing the week 14% higher. The company has its sights set on revenue of $4 billion by 2024, a realistic target if regulatory hurdles wane. At $3.17 per share, TLRY currently trades at -8.5x forward earnings. The stock remains deeply oversold and is worth considering even after the recent uptick.
Since the U.S. government officially introduced the first-ever tax credit for energy storage projects, the industry has had remarkable positive business developments. Stem Inc (STEM) is a pure play on the smart energy storage space that’s set to gain market share as companies and governments around the globe move closer to carbon neutrality.
Stem’s primary offerings are its artificial intelligence-driven clean energy storage systems, like its advanced energy storage solutions with Athena(TM). This artificial intelligence-powered analytics platform enables customers and partners to optimize energy use by automatically switching between battery power, onsite generation, and grid power.
The company has already built up considerable infrastructure with established names, and Stem’s Athena Software seems likely to become mission-critical for many electric utilities because of the rapidly increasing supply and demand for renewable energy.
For the second quarter, which ended June 30th, Stem reported a record-breaking backlog of $727 million, up 191% from $250 million at the end of Q2 2021. Bookings were up 402% from $45 million to $226 million, and the 12-month pipeline increased 8% from the previous quarter to $5.2 billion. Revenue grew a whopping 246% year-over-year and came in 5% above the high end of guidance at $67 million.
We are encouraged by Congressional support for the Inflation Reduction Act of 2022. The climate provisions in the Act would drive continued investment in America’s aging power grid, support customer adoption of renewable energy, and improve energy security by incentivizing development of our domestic supply chain. Importantly, a stand-alone Investment Tax Credit (ITC) for energy storage, and the extension of the solar ITC, would improve the economic returns for our customers.”
“Supply chain constraints, permitting and interconnection delays, and certain regulatory actions continue to pose challenges, but we believe we remain well-positioned to manage these risks and continue with our strong execution through the rest of 2022,” commented John Carrington, Chief Executive Officer of Stem.
STEM has high growth potential and looks like an ideal long-term investment. Athena looks like an industry-changing platform with wide-ranging applications. STEM’s infrastructure is far ahead of its competitors and will prove to be a crucial piece of the investment thesis moving forward.
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