- Year-end rally, rate cut bets, and core PCE inflation data will be in focus this week.
- FedEx stock is a buy with explosive profit growth, guidance on deck.
- Nike shares are a sell amid weak earnings and sales growth.
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Stocks on Wall Street finished higher on Friday to notch another winning week amid growing expectations the Federal Reserve is done with raising interest rates and could start cutting them next year.
The blue-chip Dow Jones Industrial Average closed at a new record peak, while the benchmark S&P 500 and the tech-heavy Nasdaq Composite both ended at their best levels since January 2020.
For the week, the Dow rose 2.9%, the S&P 500 jumped 2.5%, and the Nasdaq rallied about 2.9%. It marked the seventh straight week of gains for the major averages, the longest such winning streak for the S&P since 2017.
The week ahead - which will be the last full trading week of 2023 - is expected to be another eventful one as markets continue to weigh the Fed’s rate plans for the months ahead.
Most important on the economic calendar will be the core personal consumption expenditures (PCE) price index, due on Friday. This is a key reading to watch as it is the Fed's preferred inflation metric. If the core PCE number comes in below expectations, the buzz over lower interest rates may continue.
Elsewhere, on the earnings docket, there are just a handful of corporate results due, including Nike, FedEx, Micron Technology (NASDAQ:MU), Carnival (NYSE:CCL), and General Mills (NYSE:GIS).
Regardless of which direction the market goes, below I highlight one stock likely to be in demand and another that could see fresh downside.
Remember though, my timeframe is just for the week ahead, Monday, December 18 - Friday, December 22.
Stock to Buy: FedEx
After ending at a fresh 52-week high on Friday, I expect another strong performance for FedEx (NYSE:FDX) this week as the package delivery giant’s latest financial results will surpass profit estimates thanks to ongoing cost-cutting measures and a favorable fundamental outlook.
The shipping company - which is best known for its FedEx Express air delivery service - is widely viewed as a barometer of the global economy, and it is highly sensitive to shifting monetary conditions.
FedEx is scheduled to deliver fiscal second quarter earnings after the closing bell on Tuesday at 4:05PM EST, with both analysts and investors growing increasingly bullish on the freight & logistics company’s prospects.
According to the options market, traders are pricing in a swing of around 5% in either direction for FDX stock following the report. Shares jumped 4.7% after the company’s last earnings report in mid-September.
FedEx is seen earning $4.20 per share, up 24.3% from EPS of $3.18 in the year-ago period as it continues to reap the benefits of its ongoing operational restructuring actions, cost-cutting measures, and portfolio adjustments.
Not surprisingly, profit estimates have been revised upward 18 times in the last 90 days, according to an InvestingPro survey, compared to four downward revisions.
Meanwhile, revenue is forecast to slip 1.7% annually to $22.4 billion amid lighter shipping volumes.
Despite the modest decline in sales, I believe FedEx is on track to provide solid guidance for its all-important fiscal Q3 amid the positive impact of strategic cost-saving initiatives to trim expenses and boost efficiency as it aims to cut $4 billion in annual costs by the end of its 2025 fiscal year.
FDX stock ended Friday’s session at $281.06, its highest closing price since July 28, 2021. Shares are up 62.4% year-to-date, reflecting the package delivery company’s solid fundamentals and long-term growth prospects.
At its current valuation, Memphis, Tennessee-based FedEx has a market cap of roughly $71 billion, making it the second most valuable integrated freight & logistics company in the world, trailing only United Parcel Service (NYSE:UPS).
It its worth mentioning that FedEx appears to be undervalued heading into its earnings print according to a number of valuation models on InvestingPro, which point to potential upside of 9% from the current market value to $306.62/share.
Stock to Sell: Nike
I foresee a weak performance for Nike's (NYSE:NKE) stock in the coming week, as the sneaker giant’s fiscal second quarter financial results will underwhelm investors due to the challenging economic environment.
Nike’s fiscal Q2 update is scheduled to come out after the close on Thursday at 4:15PM ET and results are likely to take a hit from slowing consumer demand for athletic apparel and equipment in the face of still-high inflation.
Underscoring several near-term headwinds Nike faces, 20 out of 22 analysts surveyed by InvestingPro slashed their EPS estimates in the past three months.
Market participants expect a sizable swing in NKE stock following the print, with an implied move of about 6% in either direction as per the options market.
Consensus calls for the Beaverton, Oregon-based sneaker company to report fiscal Q2 earnings per share of $0.85, the same as in the year-ago period.
Meanwhile, revenue is forecast to grow just 0.8% year-over-year to $13.41 billion, as the sportswear retailer faces a difficult economic climate that is seeing Americans cut back spending on discretionary items.
Like other retailers, Nike has had to increase promotions to appeal to price-sensitive consumers amid the current macro backdrop.
As such, it is my belief that Nike executives will disappoint investors in their full-year outlook and strike a cautious tone amid soft consumer spending and declining operating margins associated with inventory shrink, or retail theft.
NKE stock - which fell to a 2023 low of $88.66 on September 28 - ended Friday’s session at $121.47, the highest level since May 11.
After a downbeat start to the year, the athletic apparel and footwear giant has surged higher in recent weeks, which saw it wipe out its losses for the year. With just about two weeks left in 2023, shares are up 3.9% year-to-date.
Nike stock appears to be overvalued heading into the earnings print according to a number of valuation models on InvestingPro: the average ‘Fair Value’ for NKE stands at $110.54, a potential downside of 9% from current levels.
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Disclosure: At the time of writing, I am long on the S&P 500, and the Nasdaq 100 via the SPDR S&P 500 ETF (SPY), and the Invesco QQQ Trust ETF (QQQ). I am also long on the Technology Select Sector SPDR ETF (NYSE:XLK). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.