Countdown to Retail Earnings Season, and the Ultimate Game of “Would You Rather…?” 2/16/24

0:01Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast money. Here's what's on tap tonight. Big box blowout. Walmart set to kick off retail earnings season next week. The stock at an all time high. Will results push it in the sector higher or is a pullback on the horizon? We'll debate that. Plus, a high flyers edition of Would You Rather from burgers to chips to streaming and beyond. The traders are set to choose their winners. And later, the options action on Nvidia by one Wall Street firm thinks Eli Lilly will join the trillionaires club the supersized friday fade for super micro oh and and this oh puppies playing in the snow so cute right we'll tell you why this could be a potentially scary new turn in ai's evolution i'm melissa lee coming to you live from studio b at the nasdaq on the desk tonight carter worth guy dami julie beal and mike co and we start off with a countdown to retail earnings kickoff walmart home depot get things started on tuesday with target lows and more coming in The weeks that follow, the reports come as Walmart stock is trading at record highs.

1:04The stock is up more than 8 % this year, outperforming the S &P by more than 300 basis points. But it wasn't all good news on the retail front. Shares of Nike dropping as much as 4 % today after announcing it would cut about 2 % of its workforce as part of an effort to reduce costs by$2 billion. So how would you gauge the strength of the consumer heading into these retail reports? Guy. First of all, you scared me at the top of the show. That was an excellent job by you, like character acting. or you channeled your inner... Natural. Naturally scary. Well done by you. I think, listen, we say it all the time.

1:35The U.S. consumer will always spend money, whether or not they should be is another question, but they clearly have been. Just look at the data from MasterCard and Visa. I mean, transactions continue to go higher, suggest people are spending. The real issue is, should they be? Who wins, though? That's the real question. And obviously you mentioned Walmart. You know what? Quite frankly, Walmart at 23 and a half times next year's numbers, which may seem rich to the broader market, I think in terms of Walmart, It's very reasonable. And in the early game of would you rather, I'd much rather Walmart than Target at 16 and a half times.

2:04The one you have to be concerned about here, I think, is Costco now close to 43 times that reports the week after next. That's the one that I would really be focused on in terms of valuation. What do you think of this Walmart strength? Well, just remember, Walmart's last quarterly result, good, bad or indifferent, it dropped substantially. And the thing about drops and gaps or gaps up, they don't come in isolated moments. You typically get two or three. I'll bet you Walmart's a little bit light. What do you want to hear from Walmart, Julie? We've heard some interesting, you know, various trends from Walmart in the past in terms of getting higher income consumers who are trading down.

2:40Consumables will be interesting with food inflation down this time. What are you listening for? Yeah, I think that's the place I'm the most interested is understanding what the mix and what people are most interested in buying right now. if there's also happening, if we're seeing more of the trade down into private label, that is always an interesting comment on where the consumer is trying to find value. Because I think that's really been clear is that consumers are willing to pay, but they want value now. They're not just going to buy any old thing. And I think Walmart's really well positioned for that.

3:07Yeah. Mike, your take? Yeah. I mean, we're long Walmart. We're actually long Target, too. You know, kind of to Carter's point, you know, Walmart obviously had that 8 % drop after they reported the last time. It's a little bit rich. It's not a big grower. I'd like to see how they're doing on the digital front. Target had had some inventory issues and other things going on last year. They seem to have worked their way through that, that 16 and a half times. I think we could potentially see a little bit more follow through coming out of their earnings. Now, the interesting thing is that Target usually reports before Walmart except for this quarter each year.

3:41Last year, this time, Target actually got a big move off of Walmart's results. And I think there is a possibility that we see that next week, too. That's an interesting dynamic in terms of the timing of things and how you set up going to the next one. You know, it's also interesting. About a week or so ago, it was reported that Target is considering this membership program similar to Amazon, which is fine. And Walmart. And Walmart. But the question you have to ask yourself, why they can say I understand it makes sense. And you can get a recurring revenue stream and you get visibility. It should help your multiple.

4:12With that said, are they seeing something that's forcing them to sort of move, change course a little bit? So I would look at that more a negative than a positive. I would understand a lot of people say, you know what, guy, you're wrong. They're just sort of going where the flow is. They're skating where the puck is. I would say maybe they see something in their core business that they don't quite like, and they have to shift gears here a bit. I mean, if you want recurring membership, too, you have to think about what a recurring consumer would purchase. And it would be less throw pillows, mirrors, and table lamps, Julie.

4:41It would be more sort of the staples of your everyday life. Yeah, exactly. I think that's what Amazon has really benefited from, is that kind of regular core staples business. And I think Target really only works when they're doing well with their throw pillows and mirrors and whatever. That's really so central to that story working, and it's where they execute the best. Tim buys mirrors. Well, I'm laughing because Tim's not watching. I think he's flying. But, I mean, the one thing he thinks of, I mean, Tim buys mirrors. I mean, does that come as a surprise? I had mentioned the general merchandise that one could buy a Target, and Tim immediately said mirrors, which, you know, it's perfect.

5:18You have mirrors. That makes the highlight reel. I mean, we're in January, February. It already made the year highlight reel. Mike, you own both. But if you had to choose, which one do you think sets up better into this report, to this cycle? I like Target better this time just because of the multiple and also because I think that they are sort of reversing off of some of those negative trends that they saw last year. they were underperforming while we're pretty considerably. One other quick thing about subscription-based services, there are some regular staples types goods, things like coffee.

5:48I actually subscribe now via Amazon in this case, so we just get our coffee delivered. This is something you buy all the time. It is not that perishable. I think you're going to increasingly see some of that type of thing. And I could actually see why some of these other guys, when you're looking both at digital and some of those types of items, why subscription services and a subscription membership could start to make some sense. You've got to be careful, though, because they can jack that price up and you have no idea because it's just automatic subscription. It comes every month. Which chart looks better?

6:18Well, they're completely different, right? Just as Mike said, this is a reversal. This is a stock that lost 60 % of its value and is basing and bottoming and has all the look of a bearish to bullish reversal buy versus Walmart, which was steep, uncorrected, drops in gaps on last quarterly results and now has recovered right back to the scene of the crime from which it dropped before. I would go with Target over Walmart. In terms of the read on the consumer specifically, Guy, what are you listening? I mean, we heard something interesting from McDonald's, and that was a lower-income consumer was trading down, was not going there as much because eating in was more affordable.

6:53First time in the 17 years we've been doing this show, we've never heard that from McDonald's before, which should be concerning. That comes a year and a half after the CEO of DollarGen talked about people trading down from them. So this is now a bit of a theme. So to answer your question, it's not Target. Walmart, I think, has their finger on the pulse much better than any of these other retailers. I want to hear what they have to say in terms of what does their consumer look like. Remember, I think it was two or so quarters ago that the average income of a Walmart customer was$100 ,000 or more.

7:22Right. It went up. Think about that. So I'm really fascinated to hear what they have to say. The question is, is it idiosyncratic? McDonald's, let's take Wingstop. I mean, that can't be exactly the most high-end operation. The stock has doubled. It was 150 in October. It's over 300. So it's very case by case. The two big ones that are heavy, it's Starbucks and it's McDonald's. Heavy meaning like not good. Yeah, they're just not participating. Yeah. Mike, how about you in terms of the read-throughs to the rest of – because obviously these two giants set up for the next round after that. So what are the read-throughs?

7:57Yeah, I mean, some of the other sort of retail-y type of earnings that I'm kind of looking for are things like Home Depot and Lowe's, which obviously don't correlate that closely. I mean, we're dealing more with the home builder sort of trade. And of course, that's a little bit hard hit. We also have something that affects Home Depot's and Lowe's and the Walmarts and Targets, not quite as much. And we're talking about sort of the durables, appliances and things like that. We definitely see some softness in that area. And I think that's a bit of a concern. And also Home Depot, although their valuation has come down a bit.

8:29I think they're trading around 23 times, which is low for them historically. I'm not really expecting really good numbers when I'm looking at those two. All right. We got a news alert we're going to get to on new additions to JetBlue's board. I guess it's official. Phil LeBeau's got the details. Phil. It is official, Melissa. We just got a release from JetBlue saying that two members of Icon Enterprises will be joining the board of JetBlue following the Company's annual meeting later this spring. The two new members will be the Icon Enterprises General Counsel, Jesse Lin, as well as Portfolio Manager, Stephen Miller.

9:04They're going to be observers to the board for the next several weeks until that meeting this spring, and then they will join the board of JetBlue. So Carl Icon, less than a week after announcing that he has taken a 9.91 percent stake in JetBlue now has two representatives on the board of JetBlue. This is something he has been in discussions with with the company as he started to amass his position starting in January. Now we'll have to see what happens over the next several weeks and board meetings in terms of what changes they can affect at JetBlue. We already know what's happening with regard to the proposed merger with Spirit.

9:42That's on an expedited appeal. Separate from that, what will they be pushing for? I suspect, Melissa, that a lot of the things they're going to be pushing for have already been put in place in motion by Joanna Garrity, the new CEO of JetBlue. Nonetheless, they have two seats on the board to further emphasize the importance of changes in the way this company is run. Phil, thanks. Phil LeBeau. That was fast. Yeah, well, you knew that was coming. You stay the course. They reported February 2nd, 4th quarter, which was ish, right? But their guidance was not particularly good. I think the stock had a five and three quarters or so price target associated with it.

10:19Since then, obviously, it's rallied pretty significantly percentage wise. Now Carl's involved, got some board seats. You could say maybe that's going to be a trough quarter. And with him in your corner, I think you can continue to own the stock and play it from the long side. Stock is up one percent after hours on the back of this news. Mike, I'm curious what you think the icon playbook would be at this point, since, you know, the options for the airline is they're fairly, fairly limited. aside from just sort of internal improvements, expense controls, etc.? Well, I mean, that's going to be really important, right?

10:51Because the forecast for the full year free cash flow was negative$1.1 billion, and they've only got about$1.5 billion in cash. So, obviously, managing those expenses fairly carefully is going to be key. I mean, I will say, you know, one potential benefit is that, you know, we do have some control on the fuel side. That's always a big input cost, operational cost for the airlines. I think that's important. I think they kind of got a little bit shortchanged the industry that I should say, you know, in terms of the anti-compete sort of assessment by FTC and others. But I think it's all about going to be all about cost controls.

11:26They're going to have to keep that under control because obviously the cost of capital has gone up quite considerably. Yep. Let's get back to retail earnings now. Bring in Joe Feldman, Senior Managing Director and Assistant Director of Research at Telsey Advisory Group. Joe, great to see you. Thanks. Thanks for having me. In terms of Walmart, I think a lot of people are expecting a pretty solid holiday season, but we will be getting some commentary potentially on, you know, the month, the weeks after the holidays. What are you looking for? Yeah, we're hoping to see that the consumer has stayed resilient.

11:57Walmart has described a consumer that's been trading down. They've seen more high income individuals shopping at their stores. And then the lower income shopper that they have has been trading down within categories. So we're curious to see if that's still the case. We're curious to see if traffic has sustained itself. They've been generating pretty good traffic relative to the rest of retail. And we think they were one of the winners for the holiday season. Now we just need to see them continue that into this year. Joe, we're seeing layoffs across a swath of industries. It's not manifesting itself in the unemployment rate.

12:27I think it's a matter of time. But let's just say this is becoming a trend. Who wins? I think obviously Walmart wins this. But at Costco, for example, which theoretically should, makes sense, except that it's trading at close to 43 times next year's numbers. This stock trades rich, but is it too rich, I guess is my question. Well, I've covered that stock for over 20 years, and it's always expensive from a valuation standpoint. And yet that stock looks like the perfect stock chart you'd want to own for the long term. We still like Costco very much. The more affluent consumer shops there, the middle-income consumer shops there, they offer the best value.

13:05And you really do get tremendous good deals for the membership price that you're paying there. So I think Costco is still one of the winners, even in that type of an environment where we do start to see, and we have seen some of these layoffs. I'm curious, this is Julie. I'm curious what your thoughts are in terms of the importance of execution in this environment versus just being in a certain income segment? Which is more important to you right now? Well, I do think execution is key. And the best retailers out there, the big guys like Walmart, Costco, Home Depot, we see very good execution from these retailers.

13:43And I think that that is something that people are focused on. Expectations for 2024, I think, have come down quite a bit in the past few weeks. I mean, we saw the stocks skyrocket once the Fed sort of indicated a pivot. And now, as they've pulled back on the timing of that, these stocks have started to level off and even pull back a little. So, I think execution is going to be a big driver, combined with their commentary about how they see the year shaping up, which I think they're going to talk a lot about it being a back half-weighted year from a consumer's perspective. How does Home Depot look to you, Joe?

14:19You're saying that you think the first half of this year is going to be kind of challenging. Yeah, no, I think it's going to be much of the same that we've seen the past several months for Home Depot, for Lowe's, floor and decor, that whole home improvement side of the market. You know, everybody wants to see the housing market ease up and get a little better. I know home values are high, which is generally a good indicator for Home Depot and Lowe's, but the spending has been challenged. And I think it's because people aren't able to borrow against their homes. They're taking on, they did a lot of big projects during the pandemic that you don't have to do right now.

14:52And so they're being more cautious with how they've been spending. And so we're probably going to see similar trends first half of this year. And second half, hopefully, that starts to ease up a little bit. And that feels like those stocks got a little bit ahead of themselves again with that, you know, since that move from December till today, you know, I feel like they feel a little pricey for where they are at the moment. Joe, thanks. Great to see you. Thank you very much. Joe Feldman, Telsey Advisory. Well, Mike, there you are, Home Depot. Do you think the second half gets any better? I mean, theoretically, rates should come down, start to come down?

15:30Yeah, I mean, so take a look at how Home Depot and Lowe's, what their growth rates were before the pandemic, because obviously, as Joe was just talking about, that's kind of an unusual circumstance. And actually, if you just sort of draw a longer term trend, you get up to about that 150,$155 billion revenue number, throw a 10 % margin on that. So that actually isn't too far off the consensus numbers and that 23 handle that is on. So I think it's kind of fairly valued here. We do own it, but I'm not really looking forward to the earnings numbers that much because I think they're going to be a little bit disappointing.

16:05You know, I think around 23 times it's about fair and it's on trend for its long term growth rate. Joe was talking about how good the Costco chart was. I immediately thought of car. So there is such a thing as so good it's bad, which, of course, we've all discussed at this. So at 47 times, something that I think, Guy, you raised, this is a SAS multiple because it is. They're getting their membership fees. But it's steep, uncorrected. It's loved. Take some profits. Oh, so bad it's good. I mean, there's a whole segment around Carter Braxton Worth. There is. We need an animation. Well, we do it all the time.

16:38March 7th is when they report. I would say you probably can continue to own this into earnings. If I'm long the stock, though, ahead of that release, which is, I think, after the close on the 7th, you've got to take profits, to Carter's point. And strangely, the street, if you look at the 25 analysts that cover, their 12-month price target, meaning out the next is below where the stock's trading now. So on the fundamental side, the people who are responsible for studying it and getting it right and predicting where it will be, they believe it will be lower 12 months hence. Julie, I feel like this is the prime example of you mentioned execution versus just being in the right income bracket.

17:13Costco on the execution side versus, you know, Walmart being in the right income. Well, maybe Walmart's also execution, but, you know, Walmart being the right demographic right now. Yeah, the level of execution that we see out of Costco is it's just so consistent. And it speaks not just to the fact that they have a great management team in place, but there are structural protections around their business that make it hard to copy it. We've seen lots of off-price companies try to do this Costco model, and it's just it's really difficult. So I think there's something pretty special to that. At this valuation, though, it's tough to say, yeah, I want to buy more.

17:46All right. Coming up is Eli Lilly set to hit the trillion dollar market cap mark. That's what Morgan Stanley is wondering as the name just keeps going higher and higher. We'll debate what's next for this one next. Plus, Supermicro takes a super breather. The tech stock dropping 20 percent today after hitting a record early in the session. We'll dive into the options pits for a look at where traders believe this wild ride is going next. This is Fast Money with Melissa Lee right here on CNBC.

18:21Welcome back to Fast Money. A big day for Supermicro. Shares of the tech company hitting a record high close to$1 ,100 and then falling 20 % to close back near$800. That's after Wells Fargo initiated coverage of the company with an equal weight rating saying Supermicro will continue to capitalize on AI, but shares are already discounting solid upside. The stock is still up 182 % to start the year. So is this just one bad day? Mike, you know, the reversal is really interesting. What do the options market say? Yeah, you know, when I was on the floor of the NYMEX trading natural gas, the kind of reversal we saw where you gap higher and then close substantially lower was really a very, very bearish signal.

19:04We saw a lot of activity in the options. It traded almost a million contracts. And when you consider that this is an$800 stock, that makes it pretty much the busiest single stock option in terms of its notional value that traded today. Right now, the options market is implying that the stock could still move 16.5 % higher or lower just by the end of next week. And the most active contracts that traded were the 1 ,000 strike calls that expire next week and the 700 strike puts. The 6 ,600 you have here actually was just before the close. It actually ended up trading about 7 ,500 of those Feb 23rd, 700 strike puts for a little over 15 bucks apiece.

19:41One quick point I would make is that there's a real short squeeze risk in here. And I think that, you know, whether you're trying to bet one way or the other, that explains why we see these very, very high options premiums. Has there been damage to this uptrend today? You know, it's like it's how you want to tell your story. So, friends, we could have a whole article that says SMCI collapses down 30 percent from its peak. We could change the story and say SMCI, another big week, up eight and a half percent for the week, up seven weeks in a row, which is the story, which is there. There are people that bought on the high today and are already down 30 percent.

20:13There are people who were long last week and despite the volatility are up another 8 percent. At the end of the day, it seems all very parabolic to me. Let's look at this chart. This is a stock that was sitting here at the same price of$42 in 2015 as it was in 2021. $42 and now it's$1 ,000. Sometimes you're loved, but you don't stay loved forever. So I would. OK, this sort of underscores, though, Julie, the fear maybe about the space in terms of the other big moves higher that we've seen that they could just go, you know, goodbye at any moment on any little piece of news. And we're saying this ahead of NVIDIA earnings next week.

20:55Yeah. I mean, I think this is a function of, you know, these are still semiconductor companies. They're still capital intensive. They're still probably pretty cyclical. And we still don't really know exactly how AI is going to permeate through the enterprise. We know there's a lot of opportunity there. And we know that it takes a certain amount of leadership and IP in order to attack that market. But it's still really not clear to me what the size of the market is and what the profitability of that market is. When Supermicro reported, they talked about taking making pricing so that they can gain market share.

21:29That's not usually what you're doing in a leadership position. Usually you're able to raise pricing. So I think that part of the reason why we're seeing a lot of this volatility is that it's really not clear what the earnings power of this business is. And so it's really hard to value. Bank of America initiated Supermicro, $1 ,040 price target, which made them the high on the street. I think it was yesterday. The low on the street is$250. Think about that range for a second. To Carter's earlier point about fundamentals and analysts getting paid to do this. The odd thing about this is, valuation-wise, it's not as absurd as we've seen with some other companies, but the parabolic move clearly is.

22:07And when you see six times normal volume on a reversal like this, yesterday with an RSI north of 95, which you never see, and we never even talk about that, only when you have those types of extremes, the setup to me is not particularly good. Right. I mean, just for instance, Wall Street's target to start the year, just hours ago, right? We were only into this year for a few hours. It was 375. Now Wall Street has a target of 700. Like, guys, how could you think it was going to be worth 375 in 12 months? Now you think it's worth 700. They're just making it up. But what we do know is intraday reversals like this are not good.

22:41And that's really Guy's point, where you draw in a lot more people. It goes expansion in volume that's dramatic, and then it reverses. It's like slipping off the chin-up bar and falling. You're out of gas. Don't go anywhere. We've got more options action coming up later. All eyes on NVIDIA ahead of the tech titans' hotly anticipated earnings. Mike will be laying out a trade. There's a lot more fast money to come. Here's what's coming up next. Is Eli Lilly about to become the first pharma stock to join the trillion dollar club? That's where Morgan Stanley thinks this name's market cap is heading.