The Ultimate “Sleep Well at Night” Signal

By TradeSmith Research Team

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Own stocks that do this and you’ll sleep like a baby… A new consumer finance titan is born… 6% chance of a “wild card” Fed move… A 4% mortgage (just move to China)…

By Michael Salvatore, Editor, TradeSmith Daily

Two of the biggest names in consumer retail — Walmart (WMT) and Home Depot (HD) — reported earnings Tuesday.

What I saw led me to add to both my positions as soon as the market opened… even though the stocks went opposite directions at the open.

I’ll tell you why in a moment. First, the highlights…

For Walmart:
  • Earnings surprised to the upside by more than 9%, while revenue beat by 1.5%.
  • WMT saw especially strong ecommerce growth, which was up 23% year-over-year and generated more than $100 billion in revenue
  • The company also announced the acquisition of smart TV maker Vizio for $2.3 billion, giving WMT a huge future boost to its ad business
All great signs… and strong reasons to buy on their own.

Now Home Depot:
  • A slight beat on earnings (1.86%) and revenue (0.41%)
  • A forward sales expectation miss — HD expects sales to grow at 1% while the Street was looking for 1.6%
  • Comments from Chief Financial Officer Richard McPhail that falling lumber prices, rising interest rates, and waning consumer demand all hurt the company.
Not so great.

So why did I buy both stocks — one that surged, one that sunk — in equal weight Tuesday morning?

The almighty dividend raise.

Walmart raised its annual dividend by 9%, from $0.57 to $0.83 — the largest raise in more than 10 years. And Home Depot, despite the weak report, raised its dividend by 7.7%, from $2.09 to $2.25 per share.

This is exactly the news long-term shareholders in stalwart, capital efficient, high-quality businesses want to hear. They’re getting paid more for owning these incredible companies, which means more dividend income or share repurchases over time.

Own businesses like these as the cornerstones of your portfolio, and you’ll sleep like a baby.

❖ This merger will crown the new consumer finance king…

With the proposed $35 billion merger of Capital One Financial Corp (COF) and Discover Financial Services (DFS), we’d see a new giant of consumer credit.

Capital One is already the No. 3 credit card lender by loan balance. With Discover’s portfolio, it would eclipse the largest credit issuer, JPMorgan, by more than $40 billion.

The deal is somewhat opportunistic on Capital One’s part. Discover’s share price tanked in mid-January after its fourth-quarter earnings report revealed a 62% annual profit decline. That took it more than 20% below its all-time high.

But Capital One’s offer represents a 26.6% premium on DFS’ share price. That means it’s buying a struggling credit business at roughly its highest-ever public valuation.

Is being the biggest credit card company in the U.S. (by loan balance) worth that? Capital One clearly thinks so. But shareholders, thus far, aren’t so sure.

We’ll have to see how this merger shakes out. With how trigger-happy the Federal Trade Commission (FTC) has acted the past couple years, it’s possible this sees a challenge.

Regardless, as we’ve shown before in TradeSmith Daily, credit card companies and financial stocks overall are set to do well after the last Federal Reserve rate hike is in.

That means the bigger, bolder Capital One — which, we can’t forget, is a favorite of Warren Buffett — is one to watch…

Especially as a value play, with it currently trading at just 11 times earnings and offering a dividend yield of 1.77%.

❖ Fed watchers are growing more pessimistic by the day…

A handful of them even expect a “wild card” move in the coming months.

If you have a string of pearls nearby, go ahead and clutch them.

Because traders in the Secured Overnight Financing Rate (SOFR) options market think there’s small, but not zero odds we’ll see the federal funds rate higher by December.

Options prices suggest a 6% chance of a higher rate, 7% chance of no change, and the majority opinion being anywhere from one to four cuts in 2024, at 22% each. Here’s a chart from Bloomberg…

It’s hardly the first time we’ve heard this idea floated. Former U.S. Treasury Secretary Larry Summers said last Friday there’s a “meaningful chance” the next move is up, not down.

And this is all, of course, in response to last week’s slightly-hotter-than-anticipated inflation readings on the Consumer and Producer price indexes… which sent yields on two-year, three-year, and five-year Treasuries to their highest level since December.

Our take here in TradeSmith Daily? Let ‘er rip — higher, longer, whatever.

Because if you’re buying high-quality stocks, especially in the Financial sector… and locking in risk-free, inflation-beating yield… you shouldn’t much care what happens with interest rates.

If they go higher, it just means the underlying economy is doing so well, they’re warranted. That’s a reason to cheer, not to fear.

As 2024 began, one top-of-mind question was the ultimate destination of $6 trillion in money market balances once the Fed starts to cut interest rates.

Fast forward to now, with at least some traders expecting not just no cuts, but an interest rate hike in 2024, and we might have yet another great year for cash-hoarders ahead.

We should bear in mind, though, that the odds of this are slim. Fed Chair Jerome Powell himself has indicated the likelihood of a rate cut toward the middle of this year.

Whenever it happens, the cash trade will slowly but surely unwind… and provide another reason for folks to get back into stocks.

Jason Bodner has been all over this story for months, and he’s been slowly preparing members of TradeSmith Investment Report with an armada of high-quality stocks set to enjoy a big chunk of that $6 trillion windfall.

As a TradeSmith Platinum member, you already have unlimited access to Jason’s elite portfolio that he’s designing for the first rate cuts later this year. Go right here to catch up on his newest research, and click here to check out the model portfolio.

Meanwhile, the world’s second-biggest economy continues to struggle…

❖ Here’s how to get a 4% mortgage…

Just move to a communist country!

Not interested? Can’t blame you. Even free real estate would be far from enough to put China on my expat radar.

But this is what the world’s second-largest economy is up to in order to heave up the weight of its collapsing real estate market.

The People’s Bank of China slashed its five-year mortgage reference rate to 3.95%, its biggest-ever cut to the rate’s lowest point since 2019.

It’s just the latest in a series of steps China has taken to boost its economy… though none of them seem to be working.

Chinese banks cut their deposit rates last year — in an attempt to raise their rapidly shrinking profit margins. And just last month, the central bank unleashed $139 billion into the banking system to stave off further losses.

Still, investors are shrugging. The Shanghai Composite Index has been falling for the better part of a year, and the latest gasp for breath doesn’t scream encouraging to me.

China is a tricky trade to nail, even in good times. In times like these, the best move is to steer far clear of the country entirely.

That wraps us up for today. But make sure you tune in tomorrow for a special study from Lucas Downey showing why dividend growers, like we talked about today, are stocks you should always buy on the dip…

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily