This week’s report covers a few hot topics on the macro front, a few trading ideas for the week, including SMCI, U, SQ, RIG, and UEC, and concludes with updates to ThePeachPit Model Portfolio.
PPI came in hotter than expected with food prices and energy costs advancing 1% and 4.4%, respectively. This may be an early sign of the reemergence of higher inflationary pressures on the consumer as companies may be facing tighter margins for the foreseeable future. Jim Bianco brought up an interesting point on the MacroVoices podcast a few weeks back, that the Fed is running into a tight spot in terms of rates adjustments during an election year. Timing is everything, and each side of the aisle may pose bias depending on the timing of a cut if one were to occur. I remain in the camp for higher for longer and do not anticipate a cut until early 2025. This viewpoint may change throughout the year, so don’t set it in stone.
CPI came in strong as well, being driven by higher energy prices (+2.3%). Food & beverage inflation remains relatively high as businesses pass their high costs along to consumers. It’s challenging to not read too much into this and presume that there will be a breaking point in which not even the most loyal restaurant patron returns due to high costs. Who will falter first, the consumer or the restaurant?
I published a bearish report on HPE over the weekend, suggesting that the company may face significant headwinds resulting from bottlenecks in sourcing Nvidia chips & customer stocking. One of the biggest challenges they face is the lack of urgency for projects across corporate IT departments as CIOs keep budgets on a tight leash.
Hewlett Packard Enterprise (NYSE: HPE) – 3/16/2024
Investment Thesis For GenAI
Overall, I see a tale of two cities for the wave of GenAI and associated enabling technologies. My high-level viewpoint is that there will be a broad corporate adoption of GenAI as firms seek to cut costs and enhance operational efficiencies. On the flip side, I anticipate consumer GenAI adoption to be relatively lackluster as consumers are faced with high levels of inflationary costs that may supersede any budget for AI-enabled laptops and smartphones. I find it hard building a case with the ever-increasing cost of living across food & beverage and housing. If it means stretching the refresh cycle for your laptop an extra year so you can cover rent expenses, so be it.
Model Portfolio Update
US Steel (NYSE: X)
US Steel (NYSE: X) kicked the can as virtually every US politician is now opposing the acquisition of US Steel by Japanese steelmaker Nippon Steel Corp. Since the recent public verbiage by the Biden administration relating to the deal, shares are off by -19%. Readers of ThePeachPit will know that I have been skeptical of this deal since day one. Mr. Goncalves, CEO of Cleveland Cliffs, reiterated his new lowball offer if he were to decide to come back to the table, which I believe will be very likely. Congrats to those that have traded on this recommendation. I’m planning to frame my favorite reader comments and the comments from a US Steel representative that reached out to me.
Transocean (NYSE: RIG)
RIG has been going through an interesting trading pattern that can be explained with a feature I rarely use. It appears that shares are melting up towards the hypothetical ceiling denoted in yellow on the chart below. Contingent of shares not breaking through this ceiling, I believe we can pull off a solid short position in RIG through ~$4.94-5.20/share.
On the uranium front
Uranium continues to spill over into a corrective wave with the spot price falling to $90/lb. CME uranium futures suggests sub-$90 for the duration of the year and into 2025. I’d like to reiterate that net of UEC, uranium spot is most commonly used by financial institutions and not as a benchmark for physical uranium mining, refining, and use. Though it can act as a market force when pricing new contracts, the long-term sale/purchase agreements do not benchmark to spot.
Trades worth considering
Uranium Energy Corp. (NYSE: UEC)
As discussed in my report covering UEC, Uranium Energy Corp: A Different Uranium Playbook, UEC is heavily tied to spot uranium as the firm has historically not sold uranium through long-term sales/purchase agreements. These economics are somewhat changing with their partnership with the DoE, who will purchase uranium reserves at a 1.20x premium to spot. Given the retracement of spot uranium prices, I believe UEC’s share price will trend directionally with spot uranium.
Target scenario:
· Shares may continue trending down towards my forecasted near-term price target of $5.27/share before experiencing the next upcycle.
· As the two trendlines converge, I believe this may be the paradigm shift for the new bull cycle.
· The new upcycle PT will be $6.50/share.
Unity Software (NYSE: U)
Unity Software (NYSE: U) is making its waves downward as it funnels to the 0.382 retracement. I believe there may be a continuation if the shares break through this hypothetical pricing floor. As I had reported on January 22, Unity’s restructuring has the potential to disrupt future operations in the sense that cutting various software features can and will lead to long-lasting ripple effects that may alienate some customers and push them to competing software platforms. I’m expecting shares to retrace to that $22/share mark where the two lines triangulate. This spot just so happens to be the new 0.382 retracement point if a continuation occurs.
Bearish scenario:
· Stock price debases and falls to $15.32/share. This would be the ultimate bearish trend and not a likely scenario. I’d give this a 22.125% chance. As the broader market turns over, Unity has a 24-month beta of 2.92x, suggesting that shares will deteriorate 2.92x the broader index.
Target scenario:
· Share price continues its trajectory and hits $22/share. Given their high beta and market deterioration, shares find their floor and stick within the range.
Super Micro Computer (NASDAQ: SMCI)
SMCI appears to be rolling over after shares appreciated 56% since the release of my report. Shares appear to be reaching an inflection point in which one can actively manage this position.
Target scenario:
· Shares route to $976/share and bounce back to $1,000 before trending downward.
· This assumes the broader market turns over, which all things considered, is a very plausible scenario.
Bullish scenario:
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