Today we have a mixed bag of topics to start including Amazon.com Inc. (AMZN:NASD) providing us with an excellent example of technological substitution, Canada’s decision to leave interest rates steady, and a bit of hypocrisy in an economic appointment by U.S. president elect-Trump. In our Stars and Dogs of the week we review the most well-known investment bank in North America, Goldman Sachs Group Inc. (GS:NYSE) and what remains of the best known retail names in Canada, the Hudson’s Bay Company (HBC:TSX).
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Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man by who was so inspired by Snoop Dog’s new cooking show with Martha Stewart, that he has proposed his own fishing show on the outdoor life network with guest host Hillary Clinton, Mr. Aaron Dunn.
Technological Substitution — or the huge issue of automation – the mass replacement of workers by technology
This week Amazon announced it is testing a grocery store in downtown Seattle that lets customers walk in, grab food from the shelves and walk out again, without ever having to stand in a checkout line.
Customers tap their cellphones on a turnstile as they walk into the store, which logs them into the store’s network and connects to their Amazon account through an app.
The service is called Amazon Go. It uses machine learning, sensors and artificial intelligence to track items customers pick up. These are then added to the virtual cart on their app. If they pick up an item they later decide they don’t want, putting it back on the shelf removes it from their cart.
When the customer leaves, the app adds up everything the customer has taken and charges their Amazon account.
While Amazon has denied this – the reports are the company wants to open 20 brick-and-mortar grocery stores over the next two years, and the online retailer believes the US market has room for up to 2,000 of its Amazon Fresh-branded grocery stores over the next decade, Business Insider has learned.
Amazon is planning to operate a 20-location pilot program for its grocery stores by the end of 2018, in places like Seattle, Las Vegas, New York, Miami, and the Bay Area, according to documents viewed by Business Insider.
Like a Costco model, the store will be for members only – likely Amazon Prime members with the annual fee attached.
Story 2 – Bank of Canada Holds Rates
This week, the Bank of Canada kept its benchmark interest rate unchanged at 0.5 per cent on Wednesday and reduced its growth outlook for the economy, citing cited slower short-term activity in the resale housing market coupled with soft Canadian exports.
The central bank trimmed its outlook for growth this year to 1.1 per cent, from the 1.3 per cent it had forecast in July.
No pending hike seen.
Many economists said the latest economic outlook put the Bank of Canada in a more “dovish” position on interest rates, meaning it appeared less inclined to nudge up borrowing costs.
Most analysts continue to look for the bank to keep rates unchanged through next year, with the earliest possible move up not until 2018.
Meanwhile South of the Border
The U.S. is looking at a rising rate environment for 2017 and, unlike 2016, those expected rate hikes might even turn out to be for real. Or will they?
Already we’re seeing a push toward higher mortgage rates in anticipation of more government spending, faster economic growth and ultimately higher inflation, if President-elect Donald Trump follows through on a pro-growth agenda.
If the Fed raises rates as expected this week, it would be the second rate hike since December 2015. Last year’s rate hike was the first time the Federal Reserve raised rates since 2006.
While we expect a rate hike this week, we do not that rates remain at historic levels. Entering each of the past 3-years market pundits have generally expected a rising rate environment – this has yet to occur despite hugely accommodating monetary policy that has been designed to produce growth.
Story 3 – Trump Hypocrisy?
This past week, President-elect Donald Trump announced the new director of the National Economic Council, one his top economic advisors will be none other than Gary Cohn.
Cohn is currently the president and COO of investment banking and securities firm Goldman Sachs. Go figure – another Goldman Sachs executive becomes a top presidential advisor. The more things change, the more they stay the same. Did we also mention former Goldman partner Steven Mnuchin is Trump’s pick for treasury secretary?
In the run-up to his inauguration, Trump focused on retaining and creating manufacturing jobs in the US through sheer force of will. Given the combined forces of automation, lower wages elsewhere, and US companies’ commitment to sell and produce in foreign markets, that may be both unrealistic and impractical. But the idea of bringing back jobs to America gets you votes…whether you can do it or not is another story.
The irony is, at Goldman, Trump’s new economic advisor Gary Cohn was well known for outsourcing thousands of US jobs to India.
We guess Trump will try to skate around this issue by saying these are “service jobs” versus the “manufacturing “ jobs he wants to bring back…but jobs are jobs.
Goldman Sachs was one of the pioneers of the offshoring process in the banking industry. The bank opened an office in Bangalore in 2004, to “provide critical support and service functions for Goldman Sachs around the world,” according to an emailed statement from a bank spokesperson in India.
The bank’s neighbors on campus include real-estate giant Cushman & Wakefield, IBM, Yahoo, and Microsoft—a total of 43,000 employees now work on that one campus alone. The Embassy Golf Links park is so renowned that it provides the opening scene for Thomas Friedman’s 2005 book that made outsourcing an international phenomenon, “The World Is Flat:”
Hypocrisy – it appears so.
This Week’s Dog
Hudson’s Bay Co (HBC; Price: $13.81)
• The dog of the week is Hudson’s Bay Com, symbol HBC.
• This has got to be the oldest company in Canada; it was originally founded in 1670 so more than 346 years ago.
• Anyone who knows they’re Canadian history will know that Hudson’s Bay Company played a very important role throughout the settlement of this country.
• But I think it is safe to say that its best days are well behind it.
• The stock which went public in 2012 is trading at an all-time low of $13.80.
• It’s down 35% over the last year and dropped 13% in one day this week after the release on their Q3 results.
• Retail sales were up 29% to $3.3 billion from $2.6 billion a year ago.
• But the company reported a net loss of $125 million which was larger than expected and the third straight quarter of losses.
• The debt levels as well are very high. Two metrics we use to evaluate the debt level are the debt-to-EBITDA ratio which is over 5 times and the interest coverage ratio which is 3.8 times.
• Most people have heard a lot about the secular decline of ‘brick and mortar’ retail.
• Some ‘brick and mortar’ stores are going doing great and will continue to grow because they offer something of value to consumers that can’t be replicated by online shopping or by giants like Walmart.
• I think this is really the underlying issue with Hudson’s Bay Company is that they have no unique proposition to offer consumers.
• They are trying to grow with an expansion into the US and some repositioning to a higher net worth consumer.
• But it is incredibly difficult to value a company that is losing money from quarter to quarter and underperforming expectations.
• They do own a lot of their own real estate and could unlock some value their but that alone is not a reason to own the stock.
• Best of luck to them in turning the company back to profitability but I doubt I will be a customer and I certainly won’t be a shareholder.
This Week’s Star
Goldman Sachs Group Inc (GS:NYSE)
Last Month – up 26%
Year-to-date – 35%
The Dow Jones industrial average has gained over 1,200 points over the past month. And interestingly, nearly half of that advance has been produced by just three stocks.
Leading the field by a wide margin is, this week’s star, Goldman Sachs Group Inc (GS:NYSE): The stock’s 26.5 per cent rally over the past month has added about 320 points to the Dow. Year-to-date, the stock is now up 35 percent.
Goldman is a bank holding company and a financial holding company. The company is an investment banking, securities and investment management company that provides a range of financial services to a diversified client base that includes corporations, financial institutions, governments and individuals.
What is driving the rally in the stock – higher earnings you say? Perhaps down the road. But today it is really the fact that there is a new Sherriff in town.
Sherriff Trump has promised huge tax cuts, a friendly regulatory environment and repatriation of billions of US dollars in company accounts abroad.
Specifically for financials – Trump will repeal Dodd Frank (or fully known as the Dodd-Frank Wall Street Reform and Consumer Protection Act). Dodd Frank is a United States federal law that places regulation of the financial industry in the hands of the government – signed into federal law by President Barack Obama on July 21, 2010 – with this act repealed, the thought is the banking industry will go back to a wild west scenario. While this might be overstating thing a bit, at the very least, less regulation will equate to higher profits in the near term for banks and investment banks such as Goldman.
From a valuation basis, the stock is trading at 15.5 times this year’s expected earnings and 13.3 times the consensus 2017 figure. These are not unreasonable levels, but at the high end of its range over the past number of years.
While the company is likely a decent choice for further exposure to U.S. financials, the optimism is baked into the price to a large degree – so further gains may be muted. However, the 26% gains in its shares do give it give it the coveted status of star of the week.