Top 10 US Stocks for Q4 2022 – Part 2

Adverse Conditions

The US Federal Reserve has embarked upon a front-loaded and aggressive tightening cycle since March, in an attempt to bring down inflation. Despite summer optimism for a peak in prices and a potential slower pace of hikes, such hopes proved false and officials have recently reiterated their pledge to fight inflation.

Meanwhile, the US economy has contracted during the first two quarters of the year, creating recession fears, although the Fed has largely dismissed them by pointing mainly to the strong labor market.

The tightening monetary environment, high inflation, elevated energy and commodity prices, economic contraction, continuing trade disruptions and other factors, are having a detrimental effect on the US stock markets.

Wall Street managed to start the third quarter with a notable rebound, on encouraging earnings and optimism for a pause by the Fed, but as this did not materialize, the last couple of months have been predominantly negative.

The technology sector and growth stocks are more vulnerable to the current high interest rates/elevated inflation environment. The NAS100 remains deeply in bear territory, currently down well beyond 20% of its November record highs.

Against this backdrop and as the last quarter of a tumultuous year gets underway, we take a look at some US stocks that will be in our radar in the fourth quarter. In this Part 2, we examine big corporations from the growing Buy Now Pay Later (BNPL) market, the increasingly competitive streaming arena, the auto industry and more. You can read Part 1 here.

Disney

The Walt Disney Company is a leading diversified international family entertainment and media enterprise, which was founded in the 1920s and bears the name of its iconic creator. Its activities span from theme parks, to entertainment studios, broadcast networks and more. ^[1]

The entertainment giant's recent top and bottom line was rather impressive, since Revenues grew 26% year-over-year to $21.5 billion in Q3 FY2022 (period ended July 2), while its Operating and Net Incomes increased by around 50%. Furthermore, the Parks, Experiences and Products (DPEP) segment continued its post-pandemic recovery, having registered its sixth consecutive profitable quarter, with Operating Income in excess of $2 billion. ^[2]

The streaming services though, is probably where the whole ballgame is, with viewership on this medium having surpassed cable TV in June and July in the US, according to Nielsen ^[3]. Disney's latest metrics were stellar, having dethroned Netflix (NFLX), with the 221.1 million users it reported as July 2 for its Disney+, ESPN+ and Hulu platforms.

The Walt Disney Company is pushing the envelope with its summer expansion into more countries and the announcement of an ad-supported tier ^[4], expected to launch towards the end of the year. The firm has nearly 4 billion in advertising commitments as per Reuters ^[5], whereas rival Netflix has also decided to go down this road, after this year's disappointing results.

Despite the underwhelming 26 awards in September's 2022 Emmy Awards ^[6], which were dominated by HBO/HBO Max, Disney has an impressive line-up of fan-loved and critically acclaimed movies and TV show. These include Star Wars and Marvel content – two of the most important franchises in the entertainment industry.

The California-based company showcased its upcoming content in September's D23 Expo, while CEO Bob Chapek offered some more insights in the firm's future intentions, during the Goldman Sachs 2022 Communacopia + Technology Conference. ^[7].

He clarified that the ESPN sports network is best positioned within Disney, after recent speculation around a spinoff and said that he would like to own all of Hulu - which is partly owned by Comcast - as early as possible. Mr Chapek also talked about a broader vision for Disney+ and how this could be combined with physical data from Parks visits for a more customized experience.

Despite the company's impressive results, DIS.us is having a bad year, trading well below its EMA100. During the third quarter, it has managed to stage a rebound, although September was disappointing.

Apple

Apple (AAPL) is one of the most valuable companies in the world and one of the largest smartphone makers, known for a seamless and design-savvy ecosystem of hardware, operating systems and services.

The tech giant's results for Q3 FY2022 (period ended June 25) were not bad, since the $83 billion of Revenue constituted a record June quarter, but this was a challenging period and its Net Income dropped to roughly $19.5 billion. ^[8].

Apple did not offer forward guidance, but according to CFO Luca Maestri's comments in the earnings call, year-over-year revenue growth is expected to accelerate in the soon-to-be-reported Q4 FY2023. ^[9].

Sales of the firm's main revenue generator, the iPhone, grew on a yearly basis, but were lower compared to the previous quarter, as global smartphone shipments dropped in Q2 over Q1. Apple had lost the top spot to Samsung in the first quarter and stayed below its rival during the second quarter, according to Canalys. ^[10]

September was rather eventful for the company since it unveiled the new iPhone 14 lineup along with new hardware, during its Far Out event ^[11] and rolled out the latest iOS 16 as well. The new software version represents Apple's entry into the Buy Now Pay Later (BNPL) arena, with the "Apple Pay Later" service ^[12].

Earlier in the year, Apple TV+ which launched in 2019, had made history as the first streaming platform to win the Best Picture Oscar for CODA ^[13]. Success continued in September's Emmy ceremony, with seven awards, including for Outstanding Best Comedy Series with "Ted Lasso". ^[14]

AAPL.us had started the year with record highs, but things quickly changed, leading a disappointing first half. The second quarter started very strong however, with the stock exiting out of the depths of the bear market.

Ford

Ford is a company founded by Henry Ford and incorporated as the Ford Motor Company in 1903. Only a few years later, in 1908, it introduced the Model T, which sold 15 million units by the time production stopped in 1927. It is headquartered in Dearborn, Michigan and became a publicly traded company in 1956. ^[15]

The automaker comes from a blowout second quarter, as it returned to profits with a Net Income of nearly 700 million, whereas its Revenues ballooned to $40.2 billion - driven by the popularity of its line-up and the electrification push. ^[16]

The highly anticipated electric variant of its F-Series truck, the F-150 Lightning, started rolling out of its factories in late April, having sold 6,842 units as of the end of August ^[17]. Furthermore, the Ford Motor Company recently announced that it is on track to achieve 600,000 EV deliveries/year by late 2023 and aims to achieve a 2 million+ run rate by 2026. ^[18]

Ford seems to be ahead of other legacy US automakers on electrification, but rivals are making progress as well. Chevrolet of General Motors is also entering the EV truck arena with the electric version of its Silverado. It is expected in 2023 with around 150,000 reservations according to the July 26 earnings release, while a Mustang Mach-E competitor - the Blazer EV - is set for release later next year. ^[19]

Ford however is not solely focused on EVs, as it keeps producing highly desirable internal combustion vehicles. In July, it showcased its most powerful F-150 Raptor with 700 horsepower ^[20], whereas in September, it unveiled the new iteration of its top selling Mustang muscle car. ^[21]

Despite Ford's impressive initiatives and progress on multiple fronts, it is not immune to the challenges that the auto industry currently faces, which include supply chains disruptions, high inflation and rapidly increasing interest rates in the US and abroad.

In mid-September, the company warned of an extra 1 billion inflation-related supply costs in the soon-to-be-reported third quarter, although it reaffirmed its full-year guidance for Adjusted Earnings (EBIT) of $1.4 - $1.7 billion ^[22]. It has already taken action to mitigate the issues, with a plan to restructure its supply chain ^[23].

After hitting the highest level in two decades at the start of 2022, F.us plunged during the first half. The current quarter is profitable at the time of writing, but September is negative, weighed by the recent cost warning.

Affirm

Affirm Holdings Inc (AFRM.us) is a fintech company that was founded in 2012 and went public in early 2021, which enables consumers to pay for their purchases in biweekly or monthly installments.

As such, it operates in the increasingly popular Buy Now, Pay Later (BNPL) sector, which reached $120 billion in 2021, with a compound annual growth rate (CAGR) of more than 85% from 2019 to 2021, according GlobalData's research. ^[24]

The industry includes firms such as ZIP Co Ltd (Z1P.au), Klarna and Afterpay, which was bought by Jack Dorsey's Block, while Apple (AAPL) - as discussed aove- also stepped in to the BNPL arena.

Along with its expanding popularity, the sector has also come under regulatory scrutiny in the United States and elsewhere. The US Consumer Financial Protection Bureau has opened an inquiry into BNPL firms ^[25], whereas the UK Financial Conduct Authority issued a warning regarding the promotion of such services ^[26].

Stricter regulation may not be a bad thing for big firms like Affirm, but the current high interest rates environment creates headwinds, as they mainly offer interest-free installments to consumers.

Affirm generated Total Net Revenue of $1.349 billion and Gross Merchandise Value (GMV) of $15.5 billion for Fiscal Year 2022 (period ended in June 30) in its latest report, while projecting higher figures for Fiscal 2023 despite a potentially tougher operating environment. ^[27]

AFRM.us had a largely mixed 2021 (the first year of trading), while the current year is negative. In May, it hit record lows, has a shot at a profitable Q3, thanks to July's surge.

Walmart

Walmart is a US-based multinational retail company, which opened its first store in 1962. It has since grown to around 10,500 stores and clubs, under 46 banners in 24 countries and eCommerce websites. ^[28]

US retailers have taken a big hit in their bottom lines this year, as surging inflation and high interest rates create an unfavorable backdrop, although providing a tailwind for Revenues. Rival Target (TGT.us) saw its profit slump to just $183 million in Q2, as Revenues grew to around $26 billion. ^[29]

Walmart managed to post better than expected results in Q2 FY2023 (period ended July 31), but this was a low bar to pass, since it had significantly slashed its projections. ^[30]

In particular, Operating Income dropped almost 7% compared to the year-ago period (against 13-14% drop forecast) and upgraded its forward guidance for the full year, now seeing a decline of 9.0% to 11.0% (from 11-13% previously).

The retail giant recently said that it plans to hire 40,000 workers for the important holiday season ^[31], which does not sound inspiring. Rival Target announced the hiring of up to 100,000 seasonal team members. ^[32]

Walmart has been pushing on the e-commerce frontier, leveraging its vast brick-and-mortar footprint to support the digital segment, a combination that can give it an edge against purely online retailers. In this vein, it recently acquired omni-channel specialist Volt Systems, which can help to provide an improved omni-shopping experience. ^[33]

It also signed an agreement with Canoo for the purchase of 4,500 all-electric vehicles, to deliver anything from groceries to general merchandise, expanding its last mile delivery fleet. ^[34]

WMT.us collapsed in May after a disappointing earnings report, which had dragged the broader market lower, but is having a profitable third quarter.