Faulty Friday – Our First AI-Powered Pick is a Huge Miss

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Shel-BotHow annoying!  

After asking Shel-Bot (our Bing-based AI) to forecast hit’s and misses in the next day’s earnings reports, he’s been getting better and better – even going the past two days without a single wrong call so, yesterday, we asked him what would happen today and he said:  

    •  🤓 Catalent (CTLT): I expect this stock to miss expectations because it is a provider of drug delivery technologies and development solutions for the pharmaceutical and biotechnology industries, which has been facing challenges such as lower revenue from its biologics segment, higher operating costs, and currency fluctuations . The company has also reported negative earnings surprises in two of the past four quarters1.
    • Deere (DE): I expect this stock to beat expectations because it is a manufacturer and distributor of agricultural and construction equipment, which has been benefiting from the strong demand and pricing for its products amid the recovery of the global economy and the agricultural sector . The company has also delivered positive earnings surprises in four of the past four quarters2.
    • Foot Locker (FL): I expect this stock to beat expectations because it is a retailer of athletic footwear and apparel, which has been recovering from the pandemic-induced store closures and inventory issues . The company has been accelerating its digital transformation, optimizing its store fleet, and enhancing its product assortment and customer loyalty program . The company has also delivered positive earnings surprises in four of the past four quarters3.
    • RBC Bearings (RBC): I expect this stock to miss expectations because it is a manufacturer and marketer of engineered precision bearings and components, which has been negatively impacted by the slowdown in industrial activity and capital spending due to the pandemic . The company has also reported negative earnings surprises in two of the past four quarters.

Earnings were actually a 10% miss with a drastic cut in their forecast range to $2-$2.25 vs $3.35-$3.65 before this report.  The stock is down 20% pre-market.  Shel-Bot gives this summary of earnings:  

 🤓 Foot Locker Inc. (FL) is a retailer of athletic footwear and apparel. It operates more than 3,000 stores in 27 countries under various banners, such as Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay and Footaction. The company reported its earnings for the first quarter of 2023 on May 19, 2023. Here is a summary and analysis of the earnings report:

The earnings report shows that Foot Locker faced significant challenges in the first quarter of 2023 due to the pandemic and its long-term effects on consumer demand, store operations and supply chain. The company missed both earnings and revenue estimates by a wide margin and saw its profitability decline sharply. The company also did not offer any outlook for the future, indicating a lack of visibility and confidence in its recovery prospects.

However, the earnings report also reveals some positive aspects that could support the company’s long-term growth potential. The company continued to invest in its digital capabilities and omnichannel initiatives, which helped it drive online sales growth of 43% in the quarter1The company also maintained a strong balance sheet with ample liquidity and low leverage, which could enable it to weather the crisis and pursue strategic opportunities1The company also resumed its dividend payments and share repurchases in the quarter, signaling its commitment to returning value to shareholders1.

Overall, the earnings report suggests that Foot Locker is facing a tough environment due to the pandemic and its aftermath, but it is also taking steps to adapt and innovate in order to emerge stronger when conditions improve.

Mayor Adams Announces Shoplifting Crackdown | 77 WABCShrinkage (as we discussed yesterday) is also a problem at Foot Locker and for a retailer who only makes $342M (3.9%) in $8.75Bn in sales, even a 1% theft rate can destroy the profitability.  That plus the very discretionary nature of footwear with a challenged customer base were the two major factors that were missed in the analysis.  

FL is also behind the inflation curve, with the prices they are paying having risen before they’ve been able to pass them along to consumers who, for the most part, have shoes and simply wear them for another 6 months when times are tight before spending money on new shoes.  Eventually, they will get back to their normal 5% margins and $3Bn (at $30) for the company will be a bargain.    

We sold 10 of the FL 2025 $35 puts for $5.75 ($5,750) in the Short-Term Portfolio but, since we missed, the trade moves to our Long-Term Portfolio where we will add a bullish position of 15 (to start) 2025 $30 calls at $7 ($10,500) and we’ll wait a bit and see if there’s a bounce before selling any short calls.  That will put us in the 15 longs at net $4,750 so our break-even will be $33.16.  If we are able to sell 10 of the 2025 $45 calls for $4.75 on a bounce, then we will enjoy a free spread (with the obligation to buy 1,000 shares of FL for $35 down the road).  

That was our backup plan in the first place and the net of the sale of the $35 puts was $29.25 (actually $5.40 as $5.60 was the final price for the puts) – which is where we felt safe as an initial entry should they miss – and here we are already so why would we not follow through with our plan?  

I like Foot Locker because shoes are not something that’s very successful on-line as you really have to try them on to be sure.  While they may be in a down cycle, old shoes do eventually wear out and people have to get new pairs at some point.  CROX is another one of our favorites but holding up much better than FL.  

As we restart our Short-Term and Long-Term Portfolios, we do have a free window to play these short-puts in the STP because, if it goes against us, we can just flip them to the much larger LTP, which will then start with a highly discounted position (assuming we still have overall faith).  

As to Shel-Bots other picks for the morning:  CTLT announced it’s report would be delayed and they lowered guidance – that’s a win for our bot.  DE had a considerable beat and raised guidance – winner for Shel-Bot and we’re still waiting on RBC to report.  

Using what we’ve learned from this week’s predictions, I’ve tweaked Shel-Bot’s analysis for future predictions so let’s see what he thinks Monday’s Earnings Reports will look like:  

 🤓 Here are my predictions for the companies that will report earnings on Monday, May 22, 2023 and the reasons behind them:

Covid Lingers.jpg
Covid Lingers.jpg

By the way, I said to Shel-Bot: “You mention Covid a lot but it’s May 19, 2023 and the US has declared the emergency over. Why do you still consider it to be such a factor in your earnings forecasts?” and his response was:  

 🤓 I mention COVID-19 a lot because it is still a factor in the earnings forecasts of many companies, especially those that operate in or depend on international markets. Even though the US has declared the emergency over, the COVID-19 situation is not the same in other parts of the world. 

According to the WHO1, as of May 10, 2023, there have been over 765 million confirmed cases and over 6.9 million deaths globally. Some regions and countries are still experiencing high levels of transmission, hospitalizations and deaths due to COVID-19 variants, low vaccination rates, limited health system capacity and public health measures2

For example, Puerto Rico reported a COVID-19 positivity rate of 17% as of May 17, 20233, while Metro Manila’s COVID-19 positivity rate was 26% as of May 17, 20234Sabah, Malaysia also reported a surge in COVID-19 cases in May 20235. These are some of the markets where the companies that I mentioned operate or sell their products or services. Therefore, COVID-19 is still a relevant and important factor to consider in the earnings forecasts of these companies.

The COVID-19 positivity rate is defined as the percentage of people who test positive for COVID-19 out of all the people who are tested. It is an indicator of how widespread the infection is in a population and how adequate the testing is. A high positivity rate means that there are more undetected cases and that the testing is not sufficient to capture the true extent of the outbreak. A low positivity rate means that there are fewer undetected cases and that the testing is more comprehensive and reliable.

According to Worldometer1, as of May 18, 2023, some of the countries with the highest positivity rates in the world are:

Country Positivity Rate (%)
Seychelles 57.7
Mongolia 43.8
Maldives 40.9
Botswana 38.9
India 36.5
Nepal 35.8
Suriname 34.6
Trinidad and Tobago 33.2
Bahrain 32.4
Argentina 31.9

 

These are some of the parts of the world where COVID-19 is still a serious public health threat and where more testing and preventive measures are needed to contain the spread of the virus.

So actually, it’s more like:

Covid Lingers.jpg
Covid Lingers.jpg

Have a great weekend, 

    • Phil

Don’t mis-serve your own needs
Speed it up a notch, speed, grunt, no, strength
The ladder starts to clatter
With a fear of height, down, height
Wire in a fire, represent the seven games
And a government for hire and a combat site

“It’s the end of the world as we know it
It’s the end of the world as we know it
It’s the end of the world as we know it and I feel fine” – REM

 

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