Company / Analytics

Analytics, 04 March 2023

The Troublesome Waters of the Stock Market

Global stock markets rebounded on Thursday, after initial losses, as investors assessed indicators of economic strength against rising bond market costs and expectations of further interest rate hikes. European shares rose 0.5% as eurozone inflation figures eased slightly to 8.5% in February from 8.6% in January, above expectations of 8.2%, indicating a further 50 basis-point hike in the European Central Bank’s already decade-high rates.

Meanwhile, Wall Street stocks surged after falling in early trading, with the Dow Jones Industrial Average getting a boost from Salesforce, whose shares surged about 12% after doubling its share repurchase program and giving an upbeat full-year profit forecast. The S&P 500 rose nearly 0.5% and Nasdaq Composite gained about 0.4%, while MSCI’s broadest index of world shares gained 0.2%, just off seven-week lows.

Tesla’s Investor’s Day Disappointment

Tesla’s stock dropped by 5.9% following the company’s investor day event, which lacked specific details on new products. Elon Musk presented an ambitious “Master Plan 3” that aims to transition all transportation to electric vehicles and create a sustainable energy future with $10 trillion in spending. The plan includes a reduction in costs by 50% to make vehicles more affordable and the creation of a “Robo Taxi” variant of its next-generation platform. Tesla confirmed it is building a manufacturing plant in Monterrey, Mexico, and announced a “Tesla Electric” program in Texas that offers unlimited overnight home charging for Tesla vehicle owners.

The Tesla stock was trading at 190.90 U.S. Dollars as of the time of writing after experiencing a 5.85% drop today. The stock, however, is still recovering from last year’s drop which has left it with a 31.76% drop for the past 12 months. This is not the whole story though, given the same stock has had an year-to-date spike of 76.60% after February’s 0.48% shoot.

Dividend Troubles

Investors are turning to dividend-paying stocks to counteract portfolio declines caused by inflation and market volatility. However, rising interest rates and economic uncertainty could worsen conditions for dividend investors. Companies with short-term bonds may be forced to refinance at higher rates, reducing their ability for capital expenditures and leading to dividend cuts. Investors should focus on companies with strong dividend metrics and review dividend safety grades to avoid such risks.

Intel Corporation’s recent dividend cut by 65.8% caused the stock’s shares to fall nearly 2.5% in one day, following a more than 20% drop in the six months prior to the cut. This pattern has also occurred with Hanesbrands, Kingstone, and American Eagle Outfitters, which lost more than their yields in the six months before a dividend cut. Investors should assess a stock’s dividend safety grades and relevant metrics before investing to avoid this scenario.

Financial futures contracts suggest the market anticipates a rate increase to 5.37%, which could impact companies with short-term bonds that must be refinanced at higher rates. This reduces their interest coverage and profitability, hindering their ability to make capital expenditures, reinvest, or pursue acquisitions. Companies with cash flow concerns, slower growth, or recession fears may be driven to slash dividends.

Alibaba’s Rocky market Environment

Alibaba, the Chinese e-commerce giant, has had a turbulent ride in the stock market, with its share price plummeting more than 70% from its peak due to a combination of pandemic lockdowns and a crackdown on the tech sector by the Chinese government. Moreover, increased competition from, China’s largest online retailer, poses a threat to Alibaba’s profitability.

While the stock may look cheap, the market has lost confidence in Chinese stocks, With investors getting better and safer investment options. Though the reopening of the country’s economy may provide a boost, there are still significant geopolitical risks associated with investing in Chinese stocks.

Alibaba’s impressive business metrics, including a compound annual growth rate of 45.5% over the last decade and an operating profit margin averaging 28.9%, have been achieved despite the challenges of COVID lockdowns. However, recent revenue growth has been tepid due to softer demand and supply chain disruptions.

The company’s leading e-commerce marketplace business in China, as well as its cloud infrastructure business and other subsidiaries, provide competitive advantages, but the regulatory crackdown and divestment of investments in other companies, along with founder Jack Ma’s stained reputation, have made the stock too risky for many investors.

The price of the Alibaba stock was 88 HongKong Dollars as of the time of writing after today’s drop of -0.46%. The stock lost by -14.73% in February alone and -11.11% in the past 12 months. Its year-to-date drop stands at -0.73%

Investor’s Note

The stock market remains volatile, with investors assessing economic indicators, rising bond market costs, and expectations of further interest rate hikes. Tesla’s stock dropped after its recent investor day event lacked specific details on new products.

Dividend investors should focus on companies with strong dividend metrics and safety grades to avoid dividend cuts. As interest rates rise and economic conditions worsen, investors should be wary of the risks associated with high-yielding stocks and the false sense of security that long-term dividend payments may provide.

Meanwhile, Alibaba’s share price has plummeted despite its impressive business metrics, the regulatory crackdown and geopolitical risks associated with investing in Chinese stocks have made it too risky for many investors.

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