Welcome back to another week with Wide Moat Research. Today, I’ll share the stories I’m tracking and the news that should be on your radar.
Last week was quite volatile for stocks. But today, that’s old news since Nvidia (NVDA) is reporting after the bell.
By the time you read this, you might have already seen its quarterly results. But since I’m writing this Monday morning, I’ll only point out the obvious – that the graphic-chipmaker’s stock can move the market all on its own.
Investors and the investment media are obsessed with it. So much so, that, as The Wall Street Journal writes:
Nvidia’s earnings day has become a major event on Wall Street, drawing comparisons with Federal Reserve meetings and key economic reports for their influence over the broader market. “Nvidia Day” has inspired memes, watch parties, and large, risky bets on the stock’s next moves.
Nvidia is an important company to the market, no doubt. But it’s risky to put any asset on such a pedestal. As I always say, don’t fall in love with an investment because it’s not going to do the same back.
But the markets will do what the markets will do. So let them.
But it might interest readers to know that I recently advised my subscribers to steer clear of Nvidia. Here’s what I said:
Nvidia is clearly the best-in-breed player in the semiconductor space. Those are generally the companies we like to own at Wide Moat Research. But Nvidia’s current valuation is based on expectations of future cash flows that we aren’t sure will come to fruition. Buying NVDA shares near all-time highs involves more speculation than we feel comfortable with.
Right now, it’s unclear as to whether or not the Big Tech spenders are going to generate attractive ROIs on their massive AI budgets. And if they don’t, their investors will force them to pull back on spending. If that happens, Nvidia’s sales are going to slump, resulting in significant multiple compression… and falling share prices.
Subscribers to The Wide Moat Letter can read the full report right here. And if you’d like to join us, go right here.
Warren Buffett Just Bought Domino’s
While everyone else fawns over big tech and the artificial intelligence (“AI”) wave, Warren Buffett bought up a pizza chain.
After recently reducing shares in Apple (AAPL), the Oracle of Omaha purchased Domino’s Pizza (DPZ) instead. Yahoo Finance wasn’t alone in calling it “the biggest surprise” to come out of Berkshire Hathaway’s (BRK-A)(BRK-B) quarterly 13-F filing. And it left many scratching their heads in confusion.
Not me though.
I ran eight Papa John’s (PZZA) shops back in the day. So I know a little something about pizza. Perhaps more than I’d like to. It can be an exhausting business to be in, dealing with mostly young and foolish employees. The larger public doesn’t realize this, but I had to pay premium car insurance for my delivery drivers – an additional cost I couldn’t blame them for.
Regardless, whenever I opened a new franchise, I would always research surrounding competitors first. And let me tell you… Domino’s was always a solid contender. I’ll even admit that today, I prefer it over Papa John’s. It just has a better taste with competitive prices, in my opinion.
From an investment perspective, DPZ has been a good stock to own, rising some 3,000% over the last 20 years. And its price-to-earnings (P/E) and price-to-book (P/B) ratios are running on the low end of their 10-year ranges. So, basically, Buffett saw the deal and went for it.
The Nvidia-obsessed can shrug the story off. But I respect Buffett for knowing the value of a “boring” business like Dominoes.
1. Not Quite the Company I Built for Back in the Day
Advance Auto Parts (AAP) was supposed to report a third-quarter profit of $0.52 per share last week. That’s what analysts expected. Yet it shocked the markets instead with a $0.10 loss, with net sales falling from $2.2 billion to $2.1 billion year-over-year… when analysts were looking for $2.67 billion.
As many of you know, I used to build for Advance Auto Parts back when it was a young, ambitious company in the ‘80s and ‘90s.
But it seems that growth is harder to come by these days, with same-store sales falling 2.3% from Q3-23. Moreover, the company revised its full-year guidance from $11.15 billion to $11.25 billion in net sales down to $9 billion.
CEO Shane O’Kelly said AAP will be following “a clear path forward and introducing a new three-year financial plan with a focus on executing core retail fundamentals to improve the productivity of all our assets and to create shareholder value.” This apparently includes shutting down 523 corporate stores, leaving another 204 independent locations, and closing four distribution centers.
I hate to say it, but the company is definitely struggling. I’m still bullish on the sector. However, I expect some mergers and acquisitions to happen over the next year or two. I wouldn’t be surprised if AAP gets scooped up by a competitor before all is said and done.
2. Jay Powell, Party Pooper
The stock market closed in the red on Friday, as I’m sure you know. The S&P 500 lost 1.3%, the Dow Jones 0.7%, and the Nasdaq 2.2%. Meanwhile, the Russell 2000 fell 1.4% – not the biggest loser but still a clear victim of the Federal Reserve’s newly found hawkishness. Or, at the very least, America’s central bank has not been sufficiently dovish for the market’s liking.
The slide was enough for the S&P to give up a good third of its post-election gains, while the Nasdaq closed out the week in the red altogether.
That’s because the Federal Reserve decided inflation might not be leveling off as intended after all.
On Thursday, Fed Chair Jerome Powell said, “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” Yet that cautious tone comes just one week after cutting rates by a quarter point… after cutting them by a whole half point two months prior.
Talk about an about-face.
It’s all based on Wednesday’s report that core Consumer Price Index rose 3.3% in October – its third month in a row. And Thursday’s bad news was that the core Producer Price Index jumped 3.1% after only increasing 2.8% in September. Plus, retail sales climbed 0.4% month over month instead of the expected 0.3%… after September’s figure was hiked from 0.4% to 0.8%.
I have to wonder if Powell’s record will have another black mark when this is all over. He was way too late acknowledging inflation in 2021. And now he may have been way too early saying the battle was won.
3. Layoffs Galore
Last week was not a great one for employees at General Motors (GM), Boeing (BA), Marriott International (MAR), CNN, and chipmaker Advanced Micro Devices (AMD).
GM, it turns out, is struggling to stay competitive these days. It gave layoff notices to about 1,000 most white-collar workers on Friday, stressing the “need to optimize for speed and excellence.” This follows Jeep announcing some 1,100 cuts back on November 6 thanks to high inventory levels and lower earnings for too many years in a row.
Moving over to Boeing, we already knew it planned to slash its workforce by 10%, or about 17,000 positions. The strike might have ended after dragging on for nearly two months. But the damage done in lost production on top of its repeated scandals in 2024 has taken its toll. As such, 438 professional aerospace workers were just given their official pink slips.
Marriott, meanwhile, has been looking into culling its payroll even longer. A spokesperson told Hotel Dive that it “began a strategic review of all aspects of Marriott International’s business across geographies to enhance our enterprise-wide effectiveness” earlier this year. The result, as we now know, is hundreds of jobs lost… so far.
Then there’s CNN, which performed poorly on election night compared to Fox News and MSNBC. Chris Wallace already found out he wouldn’t be asked to renew his contract. But reports indicate there are hundreds more such notifications to follow – including, perhaps, for other top anchors.
Last but not least among big-name layoff announcements is AMD, which broke its bad news on Wednesday. “As a part of aligning our resources with our largest growth opportunities, we are taking a number of targeted steps that will unfortunately result in reducing our global workforce by approximately 4%,” the company said.
I guess it’s hard playing second-fiddle to Nvidia (NVDA).
4. The Fight Everyone Wanted to See (for Some Reason)
Many of you know me as a basketball guy. Having played the game through college, that’s my sports passion. But I know it’s not everyone’s. Some people pay much more attention to football… to baseball… to golf…
Or to boxing.
In which case, Netflix (NFLX) tapped into something massive on Friday night.
I almost tuned in, but I guess I’m happy I didn’t considering the “insider” information I got from a former boxer friend of mine over the weekend. Apparently, the 58-year-old Mike Tyson was contractually forbidden to use his signature punch against 27-year-old Jake Paul. In which case, the whole thing was pretty much rigged, if you ask me.
On top of that, the Netflix stream was apparently very glitchy. Many of my fellow subscribers reported buffering and/or low-resolution issues. And the resulting outrage was, it seems, intense. Even so, I don’t think it’s going to cost Netflix in the long run. Like it or not, the company is still king of streaming… even with the rise of new competitors.
Netflix reported that 60 million people watched the fight through its platform. And considering that 50 million tuned in for the Katie Taylor vs. Amanda Serrano fight, it seems safe to say this Big Tech player is onto a good thing.
Those are the kinds of moves that have it growing and growing despite the 2022 panic that sent its shares tanking. At the time, the market was convinced Netflix had reached its peak growth years. Yet it’s still proving its relevance, earning $5.40 a share last quarter – up 45% year over year. And sales rose 15% to $9.77 billion.
I guess there’s just something to be said for convenient, in-home-streaming… something that will keep being said for a while to come, I expect.
Regards,
Brad Thomas
Editor, Wide Moat Daily