Friday Morning Reads

New momentum

Are value stocks turning into their tech-based momentum rivals? Bernstein thinks so, and believes a rotational shift could accelerate in coming weeks to give the sector a fresh boost.

Quote: "There is a significant overlap emerging between deep value stocks and momentum stocks - there are a number of autos, banks, materials, and energy stocks which are screening as both value and momentum," wrote strategists led by Sarah McCarthy. "This is the holy grail of quant and value investing."

To back up the outlook, Bernstein points to market movement around the time of the $1.9T coronavirus stimulus package, which sent investors rushing to buy stocks exposed to an accelerating economy and rising inflation. That resulted in a portfolio changeover to financials, energy and industrials and away from tech, which had dominated momentum investing for much of the last decade.

Go deeper: The catalyst for this value rotation "is very different to any period in history," Bernstein continued. "It is being driven by the re-opening trade, and improving macro outlook, and is directly linked to continuously increasing nominal yields, a steepening yield curve and increasing inflation expectations. We are in a very different policy environment and possibly are at the start of a much bigger change in the inflation regime. We are tactically long Value and think there is further to go."

'Just Do It'

Emerging as an e-commerce powerhouse during the pandemic, Nike's (NKE) traction suffered a setback last quarter due to supply chain issues. Widespread port congestion in the U.S. kept products from reaching North America, its biggest market, while it was also stung by ongoing store closures in Europe. Nike fell as much as 5.7% in after-hours trading on Thursday, before paring losses by around 4% to $137/share.

By the numbers: Sales totaled $10.4B in FQ3, far below the $11B expected by analysts, though net income of $1.45B, or $0.90 per share, topped the $0.76 per share predicted by consensus estimates. North America revenue declined 11% on a currency-neutral basis, largely driven by the shipping challenges, which delayed the flow of inventory in the quarter by more than three weeks. Meanwhile, sales in China (where the coronavirus has largely receded) jumped 51% during the quarter, while gross margins increased 130 basis points to 45.6%. The sneaker giant also forecast fiscal 2021 revenue to rise by a low-to-mid-teens percentage from the prior year vs. analyst estimates of 15.9% revenue growth.

A bright spot for the company has been e-commerce, which has helped Nike weather the disruption from COVID-19. Digital sales of its Nike brand skyrocketed 59% last quarter, with strong growth in every region. "We continue to see the value of a more direct, digitally enabled strategy, fueling even greater potential for Nike over the long term," Nike CFO Matt Friend said in a statement.

Analyst commentary: "Even though the stock is not oversold, it's kind of in a neutral area, maybe slightly above, but it's not overbought and certainly not as overbought as it has been at recent highs in the last couple of years," said Matt Maley, chief market strategist at Miller Tabak. "It's kind of at a key technical juncture right now. A break above $147 and it’ll run, but wait, just wait for that." (7 comments)

Business Roundtable talks Dream Act

Lawmakers in the House of Representatives passed two bills on Thursday that would establish paths to citizenship or legal status for millions of undocumented migrants. The American Dream and Promise Act and the Farm Workforce Modernization Act were approved largely along partisan lines, with Democrats in favor and Republicans opposed. While the bills are narrower than the comprehensive immigration package introduced in February, they face an uphill path to passage in the evenly split Senate, where the chamber's 50 Democrats will need at least 10 Republican supporters to break GOP filibusters.

What's in the bills? The Dreamer Act would grant conditional legal status to many migrants up to the age of 18 who were brought into the U.S. illegally before 2021. To obtain a green card, they'd have to acquire a higher education degree, serve in the military or be employed for at least three years (they could then apply for citizenship after five years). The second measure would permit migrant farm workers who have worked in the country illegally over the past two years to get certified agriculture worker status. To earn green cards, they'd have to pay a $1,000 fine and work up to an additional eight years.

"As we work to reinvigorate the U.S. economy, we need their continued contributions as equal partners in the American story, and we urge Members on both sides of the aisle to vote in support of the American Dream and Promise Act to help make that possible," Apple (AAPL) CEO Tim Cook said in a statement on behalf of the Business Roundtable. "The American Dream and Promise Act is a promise fulfilled for the over 450 Dreamers at Apple and those across this country."

Outlook: The U.S. has been overwhelmed at the Mexico border in recent months, with the number of migrants attempting to enter the country tracking toward a 20-year high. The 100,441 encountered last month was the highest tally since March 2019. Republicans are opposed to any immigration policy that won't simultaneously bolster border security, while Biden has suspended work on Trump's wall along the Mexican border. "It's going to be really hard to get a bipartisan bill put together on anything that has a legalization component until you stop the flow," said Sen. Lindsey Graham (R-S.C.), a leader on immigration policy in the Senate.

ESG investing landscape

The world's largest asset manager is looking to push more companies on sustainability efforts, including protecting the environment from deforestation, biodiversity loss and the pollution of water supplies. In newly published guidelines, BlackRock (NYSE:BLK) announced it was ready to vote against the re-election of directors if companies had not effectively managed or disclosed risks related to the depletion of the world's natural resources. It could also vote in favor of shareholder proposals that highlight natural capital risks.

Backdrop: In 2020, CEO Larry Fink promised to put environmental stewardship at the heart of how BlackRock invests its nearly $9T in assets after becoming one of the industry's most prominent supporters of sustainable investing. The company even voted against 62 board directors over the course of the year that it felt weren't taking climate change seriously enough. BlackRock also said it would vote for shareholder resolutions on climate change, double the number of ESG index offerings and provide more transparency on how it votes at annual meetings.

There has still been quite a bit of criticism. Some say the asset manager is still way behind its peers in Europe, which are being much harder on companies around climate change issues and stewardship. BlackRock has also been accused of "greenwashing" in the past and has pledged to integrate ESG into all of its actively managed portfolios, though more than half of its assets are managed passively. It has further promised to divest from companies that generate a quarter of their revenues from coal - and it has done that - but that metric doesn't take in some of the biggest coal producers in the world.

Is BlackRock having an impact on ESG? While the firm did make big progress on its goals last year, it could be too early to say how things will play out. Under scrutiny is whether BlackRock's strategy will spread to passively managed funds or if it will use its huge industry position to change the corporate response to climate change. Critics have argued that the investment titan has not used its immense influence effectively, particularly when exercising its voting power on sensitive ESG issues. (8 comments)

What else is happening...

Europe is ready to resume use of AstraZeneca's (NASDAQ:AZN) coronavirus vaccine.

Volkswagen (OTCPK:VLKAF) plunges as trading frenzy draws regulatory attention.

Insurance giant Chubb (NYSE:CB) offers to buy rival Hartford (NYSE:HIG) for $23B.

Amazon (NASDAQ:AMZN) gets exclusive Thursday Night rights in NFL deal.

Dollar General (NYSE:DG) will open more than 1,000 stores this year.

Peloton (NASDAQ:PTON) CEO says child died in treadmill accident.

Biden considering new sanctions to block Nord Stream 2 pipeline.

Boeing (NYSE:BA) moon rocket passes critical NASA engine test firing.

Chip shortage prompts Ford (NYSE:F) to cancel shifts, partially assemble vehicles.

Plug Power (NASDAQ:PLUG) gets 'expected' Nasdaq non-compliance notice.