Morning Watchlist: Thursday Edition
A quick note from Behind the Markets
The week's set pieces are arriving on schedule. Nvidia's earnings landed after Wednesday's closing bell. Burlington, our Watch from Monday, reports this morning. And tomorrow, new Fed Chair Kevin Warsh finally takes the stage at Jackson Hole.
While the crowd rehearsed for all that, Tuesday quietly delivered three stories built exactly the way we like them: loud pain in the headline, quiet opportunity one step behind it. A retailer lost nearly a third of its value in a day. A software giant admitted its customers are leaving over price. And American home buyers went on strike.
Three stories this morning. Three pairings. Let's get into it.
1) The Market Graded the Whole Store on One Aisle
On Tuesday, Dick's Sporting Goods had the worst day in its history as a public company. The stock fell 30.7%, closing around $124 and erasing roughly $5 billion of market value before lunch.
Here's what makes that fascinating. The core Dick's business is fine. Better than fine — comparable sales grew 4.9% last quarter, and management says the banner picked up about two percentage points of market share. The problem is Foot Locker, the struggling mall chain Dick's acquired last year. Foot Locker's comparable sales fell 3.6%, and its expected contribution swung from as much as $150 million of operating profit to a loss of up to $80 million. Full-year earnings guidance dropped from $13.50–$14.50 a share to $11–$12.
Executive Chairman Ed Stack pointed at an industry-wide discounting wave. His exact words: "A number of brands got very promotional on their sites, and those promotions spilled into the broader marketplace." He added that he doesn't believe "this is a demand issue going forward." Nike and Lululemon fell in sympathy anyway.
Picture a thriving supermarket that bought the struggling corner store across town. This week, the market priced the supermarket as if the corner store were the whole business.
The pairing: Dick's Sporting Goods (DKS) — Watch
After the crash, Dick's is an $11 billion company trading at under 10 times next year's expected earnings — the S&P 500 costs about 21 — with a dividend yield above 4% and a consensus analyst rating that is still, even now, a Buy.
So why Watch and not Buy? Discipline. We don't buy the first bounce after a one-day collapse, and management itself flagged the current quarter as the ugliest stretch for margins, with the promotional wave still burning. Our entrance: evidence the discounting fever is breaking — watch what Nike says when it reports next month — while the stock holds these levels. A 31% markdown on a share-gaining retailer is worth stalking patiently. What kills the setup: Foot Locker's slide steepening, or Stack being wrong and this turning out to be a demand problem after all.
2) The Tax Man's Confession
Intuit — the owner of TurboTax and QuickBooks — reported Tuesday evening, and buried in a decent quarter was a remarkable admission. CEO Sasan Goodarzi, on why the company is resetting its strategy: "Price is now the number one reason customers leave TurboTax."
The numbers back him up. Intuit guided next year's TurboTax growth to just 2–3%, down from 7%, and total revenue growth to 9–10% after years of mid-teens. Paying online tax customers grew only 3%. The stock — already down some 47% from its peak — dropped more than 7% in early Wednesday trading.
Think about what's actually being said. The premium tax brand raised prices year after year, and its customers finally started walking. So where do price-sensitive tax filers walk to?
The fancy salon kept raising prices. The reliable barber next door is about to get busy.
The pairing: H&R Block (HRB) — Buy
H&R Block is a $6.6 billion company at about $53, and it just closed a fiscal year with revenue up 4.9% and adjusted earnings per share up 13.9%. Guidance calls for more of the same. It raised its dividend 10% — the ninth increase in a row — yields about 3.5%, and returned over $700 million to shareholders last year through dividends and buybacks.
Now the punchline: it trades at roughly 8.7 times next year's expected earnings. The S&P 500: 21 times.
Full disclosure — Wall Street rates it a Hold, with an average target slightly below the current price. Analysts see a tortoise. We see a tortoise too; we just note that the hare next door has started limping. The honest risks: Intuit is now cutting prices to win customers back, which could squeeze everyone, and somewhere out there an AI tax tool wants to shrink the whole industry. At under nine times earnings, we think a lot of that fear is already paid for.
3) The Buyers' Strike
Tuesday's housing data was ugly in a very specific way. New home sales fell 10.5% in July to a six-month low. Unsold new-home inventory swelled to 9.6 months of supply. The median new-home price actually slipped from a year ago, and consumer confidence fell too.
Nobody wants to buy a house at these prices and these mortgage rates. But here's the thing about a buyers' strike: every striker still needs somewhere to sleep tonight. Renting is the "meanwhile" business — and the meanwhile keeps getting longer. Dallas Tanner, CEO of Invitation Homes, put a number on it recently, citing John Burns research: leasing a home now costs an average of over $1,000 less per month than owning one.
The pairing: Invitation Homes (INVH) — Buy
Invitation Homes is America's largest single-family landlord, an $18 billion real estate investment trust renting houses across the Sunbelt at about $30 a share. Last quarter: revenue up 9.7%, occupancy at 97.1%, renewal rents up 3.3%, and guidance raised. It pays a dividend near 4%.
And we love what management is doing with the disconnect between two markets. Individual buyers keep paying more for houses, one at a time, than the stock market will pay for the same houses in bulk through INVH shares. So the company has been selling homes — many to owner-occupants — and using the cash to buy back $600 million of its own stock. Selling houses at retail to buy them back at wholesale. At about 15.5 times this year's expected funds from operations (FFO — a REIT's version of earnings, the cash the properties actually throw off), you're paying a below-market multiple for a business whose customers, by the math above, can't afford to leave.
The honest risks? A hawkish Warsh speech tomorrow that spikes long-term yields — rate jumps are REIT kryptonite — and new-lease rent growth is already soft at just 1.1%, so a flood of rental supply in the Sunbelt would pinch. If mortgage rates plunged and buying suddenly got cheap again, the meanwhile ends. We're not holding our breath.
Before You Go
A crashed retailer we're stalking but not chasing, a tax-season tortoise priced for decline the day its rival admitted a price problem, and a landlord collecting rent from a buyers' strike.
The set pieces roll on — Nvidia's number is out, Burlington reports this morning, and Warsh speaks tomorrow. The theme never changes: the best opportunities stand one step behind the headline.
See you tomorrow.
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Written by Behind the Markets