In Monday's column I highlighted the extreme challenges the retail sector now faces. We have received more confirmation about the negative impact of the current economic environment on profit margins in the retail space since that piece ran.
The shares of outdoor grill maker Weber Inc. (WEBR) got taken to the woodshed in Monday's trading after the company withdrew its guidance for fiscal 2022 sales and jettisoned its CEO. If there is a canary in the coal mine as it relates to discretionary spending, Weber might be it. Weber also continues to be burdened with the supply chain issues that have plagued the retail industry. Then after the closing bell on Monday, retail giant Walmart (WMT) slashed its profit guidance, both for the quarter and the fiscal year. The stock sold off nearly 8% in trading Tuesday.
There also were more signs that a recession is growing more imminent as on Tuesday the June home sales report showed sales fell more than expected, the reading of July Consumer Confidence missed the consensus and the two-year and 10-year Treasury yields inverted more than at any time since 2006. The fact that the Treasury secretary is out making the rounds saying she doesn't see a recession on the horizon and the administration is trying to redefine what a recession is gives me even greater confidence that we either are in an economic contraction already or soon will be. The expected 75-basis-point rate hike by the Federal Reserve here on Wednesday sure isn't going to do anything to improve growth prospects.
Over the next few weeks investors will be treated to myriad downward price target revisions across a broad number of industries as analysts factor recent earnings reports, company guidance and a decaying economy into their outlooks. I could see these actions triggering the next leg down in the market. That is why I remain cautious and am keeping a significantly higher allocation of cash than usual in my portfolio. Whatever dry powder I am deploying is going toward names that still would be cheap if earnings expectations dropped by a quarter or more, such as some home builders, Toll Brothers (TOL) among them.
I am also increasing my allocation to the healthcare sector, the profits of which should hold up much better than the rest of the market within a recession. One new healthcare concern in my portfolio is Fulgent Genetics (FLGT) , which I open an initial position in via covered calls this week as options against the equity are both lucrative and cheap.
Fulgent was a huge beneficiary of the pandemic as its revenue boomed thanks to the Covid-19 tests this diagnostic firm supplies. However, the stock is down nearly two-thirds from its all-time highs made in January 2021 during the height of coronavirus worries. It is true that Covid testing sales will continue to ebb as we move past this historic outbreak. However, Fulgent is well-positioned to survive that drop as management has built a huge cash hoard that it has deployed in scarfing up a couple bolt-on acquisitions over the past year. I expect Fulgent to continue to be active in on the acquisition front as it builds its comprehensive diagnostic platform.
At less than 10x this year's profits -- half of that if equating for the net cash on the balance sheet -- the shares seem more than cheap even as I am not sanguine on the overall market.
