After logging two positive weeks in a row, stocks slipped last week, extending 2022’s shaky start. The market took a hit after CPI data revealed that inflation accelerated at a 7.5% annual rate in January, exceeding expectations. That figure was the highest since 1982, above December’s 7% increase and well above the 1.8% annual rate for inflation in 2019, prior to the pandemic. Investors are concerned that such a substantial increase could push the Fed to hike interest rates more aggressively. The Dow lost 1%, the S&P 500 fell 1.8%, and the Nasdaq finished over 2% lower for the week.
Over the weekend, the Fed announced that it would hold an unscheduled meeting under “expedited procedures” on Monday at 11:30. According to the Fed’s public notice, interest rates are the only item on the agenda. The central bank’s unexpected notice sparked debate in the investing community over whether a rate hike will be announced – and if so, how high, and how many of them will there be this year?
Before earnings season begins to wind down, there are plenty of notable names slated for the week ahead with Walmart (WMT), NVIDIA (NVDA), Roku (ROKU), DraftKings (DKNG), and more expected to report. Investors can also expect several critical updates on the state of the U.S. housing market, as well as more inflation data. On Tuesday, the Bureau of Labor Statistics releases its Producer Price Index for January.
Volatility is likely to persist this week as investors work through concerns around rates, inflation and geopolitics. With all of this in mind, our team has a few recommendations of tickers to watch as the turbulent story continues.
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Energy is the best performing sector so far this year. Given today’s strong economic growth, many believe oil prices could move higher in 2022. In a report provided to clients, analysts at BCA research said they think prices will rise over the next decade in the face of increasing demand and declining supplies. Those threats to supplies include government action that curbs fossil fuel production as well as “climate activism at the board level at major energy suppliers and in the courtroom.”
When it comes to energy, Canada stands out with its expansion of fossil-fuel production. That’s why we’re starting our list with oil giant Canadian Natural Resources LTD (CNQ). The company has the largest undeveloped base in the Western Canadian Sedimentary Basin, is the largest independent producer of natural gas in Western Canada, and is the largest producer of heavy crude oil in Canada.
Higher oil and gas prices have substantially improved energy companies’ earnings in recent months. CNQ has utilized this excess cash to return to shareholders and improve its balance sheet. The company lowered its debt from around $35 billion in 202 to $18 billion at the end of Q3 2021. Canadian Natural could see more upside if energy commodities continue to trade strongly.
CNQ boasts a Buy rating and a 3.5% dividend. The company will release Q4 earnings in early March. Management’s commentary and the quarterly performance will be key factors influencing the stock.
Onsemi (ON) is an American semiconductor company engaged in disruptive innovations and also a supplier of power and analog semiconductors. The firm offers vehicle electrification and safety, sustainable energy grids, industrial automation, and 5G and cloud infrastructure, focusing on automotive and industrial end markets.
Onsemi dazzled market watchers with better than expected Q4 numbers. The company reported $1.09 earnings per share, indicating a positive growth rate of 197.1% from $0.35 EPS reported for Q4 2020. What’s more, EPS win surged past analysts’ consensus estimates of $0.94. The business had revenue of $1.85 billion for the quarter, compared to the consensus estimate of $1.79 billion.
“Our disciplined execution on transformation initiatives in 2021 resulted in record financial performance and achievement of our financial targets ahead of the stated timeline. Revenue for 2021 grew 28.3%. Operating income and free cash flow increased 6 times faster than the revenue as we focus our portfolio on secular megatrends of electric vehicles, ADAS, alternative energy, and industrial automation. We continue to expand gross margins as we shift our mix into these high-value strategic markets while ramping new products, rationalizing our manufacturing footprint, and improving our overall cost structure. Outlook for our business remains robust as evidenced by over 60% year-over-year growth in our design win funnel driven by our highly differentiated intelligent power and sensing portfolio,” said Hassane El-Khoury, president and CEO of onsemi.
The pros on Wall Street give ON a Buy rating along with a median price target of $73, representing a 15% increase from where the stock closed on Friday.
Last up, we’ve got a short-term play that allows shareholders to benefit from backslides in the market. This valuable tactic can be used as a hedge and also to generate quick profit when things take a turn. Unlike short-selling, the risk associated with this tactic is limited, in theory making it a safer option.
Traders who are looking to benefit from sliding stocks often turn to short-selling. The main risk of traditional short-selling is that while profit is capped (a stock can only fall to zero), the risk is theoretically unlimited. Of course, other tactics can be used to cover a position at any time, but with a short-selling position, inventors are at risk of receiving margin calls on their trading account if their short position moves against them.
Inverse or “short” ETFs are another option that allows you to profit when a particular investment class declines in value. Some investors use inverse ETFs to profit from market declines, while others use them to hedge their portfolios against falling prices.
Over short periods of time, you can expect that the inverse ETF will perform “the opposite” of the index, but a disconnect may develop over more extended periods of time. Inverse ETFs will decline as an asset appreciates over time. For that reason, inverse ETFs typically are not seen as good long-term investments. Furthermore, frequent trading often leads to an increase in fund expenses, and some inverse ETFs have expense ratios of 1% or more.
Inverse ETFs can be excellent day-trading candidates and highly effective short-term hedging tools when approached correctly. There are several inverse ETFs that can be used to profit from declines in broad market indexes, such as the Russell 2000 or the Nasdaq 100. Also, there are inverse ETFs that focus on specific sectors, such as financials, energy, or consumer staples.
With $4 billion in assets, the ProShares Short S&P 500 (SH) is the largest inverse fund by value. Commonly used by investors as a hedging vehicle, the fund strives to deliver the inverse performance of the S&P 500 (SPX). If you’re concerned about the stock market falling, then this fund that moves in the opposite direction of the largest 500 U.S. corporations is the simplest way to protect yourself.
It’s important to note that SH is designed to deliver inverse results over a single trading session, with exposure resetting monthly. Investors considering this ETF should understand how that nuance impacts the risk/return profile and realize the potential for “return erosion” in volatile markets. SH should definitely not be found in a long-term, buy-and-hold portfolio. The fund comes along with an expense ratio of 0.9%.
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