Wealth Accumulated

By D J Thomas, a large-cap stock market value investor and financial writer

Shell

The FTSE 100 hits 8000

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City of London

FTSE 8000

The London Stock Exchange has always been a mining/energy-centric exchange which has helped to boost the FTSE 100 over the historic and record-breaking 8000 mark. Putin’s invasion of Ukraine and the fallout from global supply chain issues resulting from the global coronavirus pandemic have helped energy companies listed in London (and around the world) to record profits. The likes of Shell and BP have already seen sharp increases in their share prices as a result. They’re expensive; don’t let their single-digit PE ratios fool you.

UK semiconductors scream for money

And so they should given the massive investment commitments the US government and the EU have made to secure their own supplies of chips. The threat to Taiwan from China has not gone away and they still covet Taiwan’s reunification with the mainland which threatens the global supply chain of chips. iPhones, cars, washing machines – a whole host of everyday electronic items have not been supplied to the market due to the lack of chips and last year’s lockdowns in China. Rishi Sunak needs to announce something soon or risk firms moving operations overseas. The UK’s largest exchange-listed stock, Oxford Instruments, with a high teens ROCE and PER of 26.54 is in growth stock territory. Its half-yearly report showed an almost 18% increase in revenue. Ian Barkshire, Chief Executive said ‘we anticipate higher production in the second half, combined with the positive impact of recent price increases as we convert our record order book. This provides good visibility for an expected improvement in trading in the second half’.

Biden’s bombs

Or tanks. Just keep an eye on Biden’s proposed record defense spending proposals rumoured to eclipse the $858 billion enacted in the 2023 fiscal year. It’s thought that the Pentagon wants to accumulate weapons to refill US stockpiles while continuing to send munitions to Ukraine. I’ll state the obvious: look at stocks in the defense industry that have growth plans beyond the Ukraine conflict and the recent Chinese Balloon shootings. Since a lot of defense relies heavily on tech, defence-orientated tech stocks including cyber security may not go amiss. For example, Lockheed Martin is the US government’s largest defence contractor.

Plus 500 just keeps on making money

The FTSE 250 firm describes itself as a ‘global multi-asset fintech group operating proprietary technology-based trading platforms’. It’s a stockbroker that also allows users to access derivative products such as futures, options, and contracts for difference. Net profit in FY 2022 increased by 19% to $ 370.4 m (FY 2021: $310.6m) and basic earnings per share increased by 25 % to $3.81 (FY 2021: $3.06). Plus 500 has an extremely strong balance sheet. David Zruia, Chief Executive Officer said ‘we are in an extremely exciting strategic and commercial position, with multiple potential growth opportunities available, particularly in the US futures market’.

UK inflation slows in January

10.1% for January versus 10.5% in December the third month in a row of lower CPI according to the Office of National Statistics. Milk and olive oil price increases are making my weekend morning ritual of pancake making even more expensive; as for the eggs required in the recipe, I treat them more like caviar now. Inflation is still at a 40-year high and the Bank of England has already raised interest rates 10 times in a row to 4% with the market expecting rates to rise again when The Bank meets on 23rd March. Remember when inflation was meant to be transitory?

US inflation rises in January

CPI rose 6.4% for the previous 12 months to January 2023 compared with the same period last year. It rose 0.5% for January alone. Shelter, food, natural gas, and filling up your tank were the standout categories influencing the numbers. As inflation stays high, so will interest rates. The market is expecting a 0.25% increase in interest rates at the next Fed meeting scheduled for the third week of March. Dallas Fed President Lorie Logan said ‘we must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions’.

How earnings from oil smash records whilst tech disappoints

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ExxonMobil gushes $56 billion in profits

It’s a record yearly profit for the company which previously stood at $45.2 billion in 2008. That was when oil hit $142 a barrel. The EU pre-empted Exxon’s swag with a $1.3 billion windfall tax in the fourth quarter. Shares finished the week at £112 also an all-time high for the firm. As noted two weeks ago, Putin’s invasion of Ukraine will prompt eye-watering earnings from the energy sector. Exxon’s Chief Financial Officer Kathryn Mikells said ‘strong markets, strong throughput, strong production, and really good cost control’ helped the firm to its record earnings.

Google earnings drop in Q4

Alphabet’s earnings came in at $1.05 per share, revenue came in at $76.05 billion continuing a downtrend trend in quarterly revenue growth since Q2 of 2021. In November 2021, shares reached an all-time high of $148 and have since fallen 29% to $105. The company also warned of a $2.3 billion charge it will sustain in Q1 of 2023 related to the 12,000 employees it fired in January. Further charges related to real estate – specifically its reduced office space, will start at $500 million in Q1 and further real-state charges are likely moving forward. Headcount growth cost it an extra 10% in operating expenses but CEO Sundar Pichai reiterated its focus on AI. With Google’s current legal proceedings in the US, there’s a lot for the executive team to be working on and shareholders to be mindful of.

Apple earnings growth slides

CEO Tim Cook blamed the macroeconomic environment and the lockdowns in China for not producing enough iPhones and iPads to sell for the latest quarterly earnings decline. Apple posted EPS of $1.88, down 10.9% YOY, revenue was down 5.49% YOY. Apple’s quarterly earnings have been declining in growth since the beginning of 2021, albeit from lofty heights (54.1% in Q1). The firm said that production levels of the iPad and iPhone are back to ‘acceptable levels’. The number of Apple active devices increased from 1.8 billion to 2 billion, including first-time buyers of the Apple Watch. Cook mentioned costs are being cut and hiring has slowed but did not see a need to slash headcount like others in the tech space. Despite the negative decline in earnings growth, Apple has faired much better than its tech peers due to prudent management of its hiring process, innovative product expansion (Apple Pay, Card, Music), and bringing new customers on board its product range despite the macro headwinds of the last few years: resilience.

Amazon issues guidance for Q1

Amazon expects YOY growth of revenue of between 4% – 8%, and online store sales declined 2% YOY. Consumers are slowly switching from e-commerce to high-street shopping since the end of the pandemic. CEO Andy Jassy, on top of announcing an 18,000 headcount cull last month, has frozen hiring, halted warehouse build, and is ‘… working really hard to streamline our costs and trying to do so at the same time that we don’t give up on the long-term strategic investments that we believe can meaningfully change broad customer experiences and change Amazon over the long term’. Amazon Web Services – its cloud business – declined in growth for the fourth quarter from 27.5% in the third, to 20%. Amazon earned 3 cents per share and operating income declined YOY due to $2.7 billion of charges, some of which related to severance payments. Shares are trading at $103, down from $183 in November 2021.

Meta shares explode 23% after results

Meta shares rocketed 23% in after-hours trading when the firm announced a $40 billion stock buyback, and beating revenue expectations for the fourth quarter. CEO Mark Zuckerberg said Meta’s “management theme for 2023 is the year of efficiency and we’re focused on becoming a stronger and more nimble organization.” Meta announced 11,000 layoffs last November. There’s also less expenditure expected in the future due to a switch to more cost-effective data centres. The Reality Labs unit responsible for the development of the Metaverse is expected to increase operating losses in 2023 ‘significantly’. Shares are currently trading at $186, down from $378 in September 2021. Without the share buyback, the value of Meta is in decline due to weak advertising demand and Tik Tok dominating ad revenue growth. Meta’s ad revenue declined 4% in the quarter and continues to be ‘impacted by the uncertain and volatile macroeconomic landscape’ according to Meta CFO Susan Li. Ad revenue represented 97% of Meta’s total revenue in the quarter.

Shell’s 115-year profit record

$39.9bn (£32.2bn) in 2022, the highest in its 115-year history. The price of Brent crude oil went to almost $128 a barrel after Putin’s invasion of Ukraine last year. It’s currently trading at $83. Shell said was due to pay $134m in a UK windfall tax for 2022 and more than $500m in 2023. Shell had paid $13bn in taxes globally in 2022 and only derives around 5% of its revenue from the UK.

US raises interest rates by 0.25%

The market expected it and The Fed delivered. A rise of 25 basis points from Jerome Powell and his team this week, the highest since October 2007. Inflation is still at its highest levels since the 1980s. Powell noted that inflation “has eased somewhat but remains elevated… inflation data received over the past three months show a welcome reduction in the monthly pace of increases… while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”

UK interest rates highest for 14 years

The Bank of England raised interest rates by 0.5% to 4%. The market is expecting rates to peak at 4.5% in the summer before heading back down. The Bank has a 2% inflation target but prices are rising at 10.5%, a 40-year high. The market believes inflation reached its peak in the UK last October at 11.1%. Both the Bank of England and The Fed are in lockstep both with inflation and rate rises, but not on the upcoming recession – the IMF stated this week that the UK will be the only major economy to shrink in 2023, forecasted to be -0.6%.