Let’s take a look at some of the hottest topics around the markets.
By Kris Rosemann
Financial stocks (XLF) rallied during the trading session September 19 as the 10-year US Treasury yield crossed the 3% threshold for the first time since late May 2018 and investors anticipated rising net interest margins for banks. Strong levels of consumer confidence are likely helping the banking sector as well, but we’re watching closely as the Fed continues on its hawkish path with two more rate hikes expected in 2018 after completing seven hikes since December 2015. The potential for an inverted yield curve cannot be ruled out, but some observers are expecting a continued rise in the 10-year Treasury yield through the end of this decade and into the beginning of the next with some estimates coming in the 5%-6% range.
While interest rates in the US are on the rise amid tightening credit markets, wages in the US are on the rise amid a tightening labor market. Darden Restaurants (DRI) noted on its recent quarterly conference call that it expects 5% wage inflation in its fiscal 2019 (ends May 2019) as the pool from which its workforce draws from continues to shrink. Simulated Dividend Growth Newsletter portfolio idea Cracker Barrel (CBRL) expects wage inflation to be roughly 3%-3.5% on a constant mix basis, and operating margin compression is expected as a result. The resulting wage pressure has the potential to be most notable heading into the holiday season as the retail holiday season hiring cycle picks up once again, further constraining labor supply.
Investors in Tilray (TLRY), a company that engages in the research, cultivation, production, and distribution of medical cannabis and cannabinoids, have been on a wild rate of late after the company’s CEO made an appearance on CNBC’s “Mad Money.” Brendan Kenendy claimed his Canadian cannabis company was a smart hedge for big pharma, “Cannabis is a substitute for prescription painkillers, prescription opioids, and so if you’re an investor in a pharmaceutical company or you’re a pharmaceutical company, you have to hedge the offset from cannabis substitution.” The massive rise shares experienced were interrupted by several halts throughout the session, and the move highlights the potential for investors to throw rational thinking out the window and drive massive price changes on no fundamental change.
On the other end of the spectrum we have a positive development driven entirely by rock-solid fundamentals as simulated Dividend Growth Newsletter portfolio idea Microsoft (MSFT) announced a 9.5% increase in its quarterly dividend. As of the end of fiscal 2018 (ended June 30), Microsoft boasted a net cash position of $57.5 billion, and it averaged $29.5 billion in free cash flow over the past three fiscal years (2016-2018), which is significantly higher than its $12.7 billion in annual run rate cash dividend obligations. Over that three year period, Microsoft’s free cash flow generation has steadily expanded from just under $25 billion to nearly $32.3 billion, and the company remains one of our favorite dividend growth ideas. Shares yield just over 1.6% on a forward-looking basis as of this writing.
Restaurants – Fast Food & Coffee/Snack: ARCO, DPZ, DNKN, JACK, MCD, PZZA, SONC, SBUX, WEN, YUM
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.