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Stock Market Today: Dow Dashes to Best Gain Since November 2020
News about the conflict in Eastern Europe was contradictory as the trading week came to a close, but markets surged as Wall Street grasped for good news.
On Friday, Russian troops reportedly were closing in on the Ukrainian capital of Kyiv. Yet on the same day, the Kremlin said Russian President Vladimir Putin had agreed to send a delegation to the Belarusian capital of Minsk to negotiate with Ukraine.
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Chinese President Xi Jinping reportedly also gave a nod toward a peaceful resolution, saying “China supports Russia and Ukraine to resolve issues through negotiations” after a conversation with Putin, according to state-owned CCTV.
But some of Friday’s bullishness might also have come from changing expectations for Federal Reserve action this year.
“Wall Street anticipates central bank reluctance to go overly aggressive with tightening monetary policy, so they could provide a cushion for a growth hit that will stem the Russia-Ukraine developments,” says Edward Moya, senior market strategist at currency data provider OANDA.
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Back on the homefront, America’s core personal consumption expenditures price index showed consumer spending up 5.2% in January, according to the Commerce Department. That was slightly better than expectations for 5.1%.
“The strong consumer numbers come at a time when many economists were worried about an economy that was weaning itself of government stimulus in the latter part of 2021, and whether the consumer would be able to carry the torch in 2022,” says Peter Essele, head of portfolio management for Commonwealth Financial Network.
The Dow Jones Industrial Average â led by advances in Johnson & Johnson (JNJ, +5.0%), 3M (MMM, +4.7%) and Procter & Gamble (PG, +4.3%) â jumped 2.5% to 34,058, its best performance since a roughly 3% gain on Nov. 9, 2020. The S&P 500 (+2.2% to 4,384) and Nasdaq Composite (+1.6% to 13,694) also posted sizable gains, putting both indexes into positive territory for the week.
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Still, the impressive market comeback of the past couple of days doesn’t mean the market is out of the woods yet.
Yesterday, the CBOE Volatility Index, or VIX, crossed above 30 amid Russiaâs invasion of Ukraine. âVIX above 30 indicates that investors are unusually anxious about what comes next, and that they are hedging stock portfolios to protect against further declines,â say Michael Oyster and Steven Sears of asset-management firm Options Solutions. âMarket fears have abated somewhat, with the CBOE VIX below 30, but as it remains near the highest 10% level of all time, the options market is hardly signaling an all-clear.â
YCharts
Other news in the stock market today:
- The small-cap Russell 2000Â popped 2.3% to 2,040.
- U.S. crude oil futures slumped 1.3% to finish at $91.59 per barrel, but still ended the week up 1.5%.
Gold futures shed 2% to settle at $1,887.60 an ounce, bringing its weekly decline to 0.6%. - Bitcoin continued clawing its way back to $40,000, rising 1.7% to $39,130.32. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
- Etsy (ETSY) stock soared 16.2% after the online marketplace reported top- and bottom-line beats in its fourth-quarter. For the three-month period, ETSY brought in earnings of $1.11 per share on $717 million. While the company did offer lower-than-expected current-quarter revenue and gross merchandise sales guidance, Chief Financial Officer Rachel Glaser said this was due to tough year-over-year pandemic-related comparisons. “ETSY is one of few names surviving the pandemic online bubble with initiatives to drive top line at core brand and the subs,” says Needham analyst Anna Andreeva, who reiterated a Buy rating on the retail stock.
Foot Locker (FL) sat out today’s broad-market rally, shedding 29.8% after earnings. In its fiscal third-quarter, the athletic apparel retailer reported adjusted earnings of $1.67 per share on $2.34 billion in revenue, higher than the $1.44 per share and $2.33 billion expected by analysts. However, FL also warned that revenue will likely be down between 4% and 6% and same-store sales will contract 8% to 10% in fiscal 2022. This is due in part to the company selling less products from Nike (NKE). “In Q4 ’21 Nike represented 65% of vendor spend which FL plans to reduce to 55% moving forward,” says CFRA Research analyst Zachary Warring (Hold). “We do not like the positioning of FL as companies shift to direct-to-consumer and they continue to have higher exposure to malls but see limited downside as FL currently trades at 6.0x 2023 EPS and a clean balance sheet.”
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In times of market crisis, some people look for protection, while others scout out opportunities.
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Rhys Williams â chief strategist at Spouting Rock Asset Management and a former journalist at the Moscow office of The Sunday Times â has a dour outlook on the geopolitical situation:
“Putin seems to have made his choice, and it looks like he has settled on regime change,” Williams said, adding that in the medium-term, he’s not quite sure how business gets back to usual.
But there are some market implications for investors looking to buy on this dip.
“I think Big Tech will get a bid after a significant correction, as they have a lot of cash and consumer staples-like qualities. They also don’t lose much business in Russia and the Ukraine relative to overall revenues,” he says. These 12 stocks represent some of our best ideas in the broader sector, though specific industries such as cybersecurity are becoming a trendy pick.
Rhys also likes higher-dividend-yielding stocks, “as perhaps this caps interest rates for a while.”
You can start with this nine-pack of stocks dishing out 5% or more in annual income â though more importantly, they haven’t been selected only for their large headline yields. These picks broadly feature conservative payout ratios, stronger balance sheets and business models that generate predictable cash flow, meaning their dividends aren’t just generous ⦠they’re sustainable over the long haul.
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How to Win With Game Stocks
In one of the most volatile episodes in stock market history, investors early last year took the shares of a company called GameStop (GME) on a wild ride that few would have expected for a business that’s mostly a brick-and-mortar antique, the gaming version of a chain of video stores. Its shares went on an adventure that echoed the characteristics of the video games on its shelves: fantasy, violence and a romantic quest for justice and vengeance.
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In real life, however, GameStop has had a lousy year, losing money once again. But the rest of the gaming sector has taken up the mantle. It’s booming, becoming the backbone of the metaverse, a three-dimensional online environment that is likely the “next big thing” in consumer technology.
In 2020, partly because the pandemic kept Americans indoors, gaming revenues exceeded those of movies and sports events combined. Global gaming sales in 2021 are estimated at $178 billion and projected to rise to $269 billion by 2025. According to the consulting firm Accenture, one out of every three people in the world is a gamer.Â
No wonder so many big tech players are investing in the business. In 2000, Microsoft (MSFT, $306) launched the game-playing console Xbox, and in 2014 the company bought Minecraft, a survival-themed game, for $2.5 billion; Minecraft now has 131 million active monthly users. In January, Microsoft announced that, pending regulatory approval, it will spend $69 billion to purchase ActivisionBlizzard (ATVI), which has 400 million gamers a month playing such popular titles as Call of Duty and World of Warcraft.
Trying to stay abreast, Sony Group, maker of the wildly popular PlayStation console, announced Jan. 31 that it was buying Bungie, the private developer of the Halo and Destiny franchises, for $3.6 billion. (Stocks I like are in bold; share data are as of Feb. 4.)Â
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Amazon (AMZN, $3,153) entered the market in 2014 with the purchase of Twitch Interactive for $970 million. Twitch lets gamers livestream themselves to viewers, who can watch and comment. Twitch has about 8 million active users. It dominates the market, but competition is growing from such big players as Microsoft, with its entry Mixer; Alphabet (GOOGL, $2,866), with YouTube Live; and Meta Platforms (FB, $237), the former Facebook.Â
Facebook, walloped by a disappointing revenue projection for the first quarter of 2022, has thrown in its lot with the metaverse. Itâs an idea with roots in Second Life, a computer game Facebook created in 2003. When I was a State Department official, my avatar gave an interactive speech in 2008 with the avatars of pro-democracy Egyptian students. In the metaverse, you can go to concerts, hold business meetings where you are immersed in, say, a construction site or restaurant, or drop down onto a virtual football field and run a few plays. The key for investors is that the metaverse depends on technology developed for video games.
How to Get in on Game Stocks
The metaverse, with its promise of interconnected worlds, may be the next frontier for gaming, but for investors, gaming poses challenges. You could buy the tech giants because gaming is a growing part of their businesses, but recognize that it is dwarfed by, say, online retailing, cloud computing and advertising. And many of the best developers of video games are private firms, so you can’t invest in them. So, what are the best pure plays to take advantage of a craze that could still be in its infancy?Â
Look first to the companies that make the games. Many games today are so sophisticated that they can cost as much to make as the most dazzling Hollywood films. Grand Theft Auto 5 required 250 programmers and other employees of Rockstar working for five years at a total expense of $265 million. That’s more than the films “Titanic” or “The Dark Knight Rises.” The investment paid off. GTA5 has grossed more than any movie ever made.Â
Take-Two Interactive Software (TTWO, $175) owns the Rockstar label and has been gobbling up smaller developer firms, including Zynga (maker of FarmVille, a huge hit that was introduced as an app in 2009). Take-Two, with a market value of $18 billion, is solidly profitable, but shares have dropped about 20% in the past two years. With a market cap of $37 billion, well-managed, independent developer Electronic Arts (EA, $138), makes such games as Battlefield, The Sims and Madden NFL. It trades at a reasonable price-earnings ratio of 18.Â
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Nvidia (NVDA, $243) makes semiconductors for a variety of sectors, but, as the world’s largest designer of graphic processing units, its chips are popular in video games, including those that create virtual environments for immersion in the metaverse. In its latest quarterly report, Nvidia reported that gaming revenues rose 42% and are approaching half of the company’s total sales. Still, shares fell by nearly one-third in the first three weeks of 2022, creating a buying opportunity.Â
Other metaverse stocks were also caught in the undertow of fears of higher interest rates and falling valuations. With a market cap of $30 billion, Unity Software (U, $109), which operates a development platform for the software that powers complex games, fell in price by about half from November to January, despite a surge in revenues. Over the same period, Matterport (MTTR, $8), which captures the feel of interior space with its 3D cameras, dropped by two-thirds, even though analysts see revenues rising in 2022 from $109 million to $160 million. The company is still unprofitable, and its $2.6 billion valuation is lofty, but if you can tolerate risk, Matterport could be a good long-term investment.Â
A few exchange-traded funds focus on gaming stocks. Global X Video Games and Esports (HERO, $27), with an expense ratio of 0.50%, was launched in 2019. Among the top holdings are NetEase (NTES, $101), a large Chinese developer, and Ubisoft (UBSFY, $12), a mid-cap French maker of such games as Rainbow Six Extraction and Just Dance.Â
With expenses of 0.55%, Van Eck Video Gaming and eSports (ESPO, $63) dates from 2018, with a small portfolio similar to that of the Global X ETF. Both funds lean toward high-profile stocks such as Nvidia and Electronic Arts, but one notable highlight of the Van Eck ETF is NEXON (NEXOY, $20), a Japanese firm with an emphasis on the fast-growing Asian market. Unlike many other gaming companies, Nexon’s shares have been rising since last fall. Van Eck’s top asset is Tencent Holdings (TCEHY, $62), the giant Chinese social media company that is, by some calculations, the largest gaming business in the world through its online offerings. Tencent has suffered from Chinese government intervention, so there’s political risk to consider.Â
Game stocks carry the likelihood of substantial returns â perhaps, if regulators allow, through acquisitions by giants such as Alphabet, Microsoft and Sony. And their prospects, unlike the plotlines of many of their products, are built on a real-life foundation.Â
These stocks and funds stand to gain from the virtual-reality world known as the metaverse.
James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. Of the stocks mentioned here, he owns Amazon, Microsoft and Nvidia. Reach him at [email protected].
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