Fed fails to stop market worries, Ackman goes big on Netflix, and Dr Martens gets the boot as growth slows

“Federal Reserve chair Jay Powell failed to stop the market rout with the central bank’s latest policy update, with US stocks falling further after the announcement and the equity sell-off extending to most of Asia and Europe on Thursday,” says Russ Mould, Investment Director at AJ Bell.

“It’s what he didn’t say that troubled investors. The key concerns are how aggressive the Fed will be with raising rates – will they go up at every meeting this year, and will they go up by more than 0.25 percentage points each time?

“Powell said the central bank would be guided by the data and so growing investor fears that the Fed might be quite aggressive in its efforts to curb inflation remain intact as there was no clarity on exactly what would happen and when.

“The only thing we can really take from the Fed’s latest meeting is that interest rates are almost certainly going to go up in March.

“Once again, the FTSE 100 was an outlier among global markets, with 2022 proving to be quite a year for the underdog. For the past decade the UK market has been like the last child to picked for a team in gym class, no-one having faith in its abilities for fear it wouldn’t perform well. But the FTSE 100 is now one of the best performing major markets this year on a relative basis.

“While the FTSE is down 0.4% year to date, that’s considerably better than the 9.3% decline from the S&P 500 in the US and 10.7% slump from the Nikkei 225 in Japan.

“For once, investors are eager to own the FTSE’s ‘old economy’ companies in banking, tobacco and oil, as these are value stocks which are once again in fashion.”

Netflix

“Billionaire stock picker Bill Ackman has made his investors a lot of money over the years, so the market always sits up and takes notice whenever he buys or sells a stock.

“A 40%+ share price decline in a month from Netflix has caught his attention and prompted a $1.1 billion investment in the streaming provider’s stock.

“Ackman has already done a lot of work in the streaming space thanks to his big investment in Universal Music so adding Netflix to his portfolio is a no-brainer given the similarities.

“It’s about people consuming films, TV, music and games digitally, and using a rich pool of intellectual property to generate an ongoing revenue stream. For Universal Music that’s through music product sales and royalties, and for Netflix it is all about subscriptions and merchandise.

“A key reason behind Netflix’s big share price slump is a fear that it will struggle to generate positive free cash flow. Streaming is very competitive so there is a push for Netflix to pay top dollar to attract big name stars and have fancy special effects in its TV and film productions. That suggests production costs will continue to go up.

“If it’s harder to attract more subscribers, Netflix becomes more reliant on pushing up its prices to drive revenue growth to help pay for the expensive productions.

“It really needs to find more ways to make money, which might be through carrying advertisements on its platform or milking its intellectual property even more through experiences, theatre and live shows.

“Ackman says Netflix has opportunities to expand margins, continue pushing up prices and enjoy economies of scale. He is taking a long-term view of the business, which is certainly not something the market is doing at present.

“This investment could either prove to be a masterstroke of timing, buying when the market really hates the stock, or Ackman could have egg on his face if it turns out the market was right all along to be cautious on the business. He is taking a big gamble, but that’s part of his style.”

Dr Martens

“On the face of it, Dr Martens’ third quarter update, covering its peak trading period, looks fairly robust thanks to record sales. However, look just a little bit closer and the stitching starts to fray.

“Dr Martens has been badly affected by supply chain issues and revenue growth has slowed from the first half.

“Management’s response has probably been quite sensible; it has prioritised its direct-to-consumer business over wholesale sales to third parties.

“This fits with the strategy pursued by other major brands and in the future might give the company greater control over its own destiny. The group has done a good job of boosting its e-commerce footprint too.

“However, Dr Martens has been hit hard by the Covid restrictions imposed in Australia and Asia and, with revenue growth slowing, the company is now heading into a typically quieter fourth quarter, raising the risk that it falls short of expectations in its first full year as a public company.

“The company has already had an unsteady start to life on the stock market and tripped over in early January as one of its private equity holders sold shares at a discount.

“The stock is now down by a quarter from the price at which it floated just under a year ago and nearly 40% from the price at which closed on an exuberant first day of trading.”

These articles are for information purposes only and are not a personal recommendation or advice.