Day: October 4, 2024

(Bloomberg) — Mohamed El-Erian says the Federal Reserve needs to renew its focus on its fight against rising prices after September’s surprisingly hot jobs report served as a reminder that “inflation is not dead.”

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His comments came after Friday’s numbers blew away estimates, triggering a jump in US stocks and bond yields. Nonfarm payrolls rose by 254,000 in September, the most in six months.

“This is not just a solid labor market, but if you take these numbers at face value, it’s a strong labor market late in the cycle,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television on Friday.

“For the Fed, it means push back much harder against pressure from the markets to put you in the single mandate box,” he added. “Enough talk about, ‘The Fed should only be concerned about maximum employment.’”

Investors rapidly slashed wagers on sharper Fed policy easing in November and December after the release. The data also showed the unemployment rate unexpectedly fell to 4.1%, while annual wage growth picked up to 4%.

Swaps traders are now factoring in a little over 50 basis points of interest-rate cuts from the US central bank before the end of the year, down from more than 60 on Thursday. They’ve become so skeptical of further easing that they are no longer fully pricing in a quarter-point move in November. Yields on the policy-sensitive two-year Treasury surged after the release, trading more than 18 basis points higher at 3.89%.

“For markets, this is pushing back on overly aggressive expectations of rate cuts by the Fed,” said El-Erian, who’s also a Bloomberg Opinion columnist. “This will get the market closer to what’s likely.”

Fed official Austan Goolsbee had a different take after the data. He said the jobs readout supported a case for lower rates in the months ahead while acknowledging that the central bank’s focus should remain on longer-term trends in inflation and the labor market.

“That we got a superb number, I’m extremely happy with, but let’s not lose sight of what’s the longer thread,” Goolsbee, president of the Federal Reserve Bank of Chicago, told Bloomberg Television.

“A large majority of the committee feels that conditions are going to improve on inflation, that we’re going to keep getting closer to the 2% target, that the unemployment rate is going to stabilize at full employment, and that rates are going to come down a lot over the next year, 12 to 18 months,” Goolsbee said.

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–With assistance from Jonathan Ferro, Lisa Abramowicz, Annmarie Hordern and Michael McKee.

(Updates market pricing, adds comments from Goolsbee.)

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For income investors, sometimes the best combination is finding stocks that are oversold and that also offer dividends. Not only are dividends a fantastic way to grow wealth long-term, the reliable income can aid investors while they wait for the stock to rebound. Here are two stocks that have largely trailed the S&P 500 over the past three years, but that offer long-term stable businesses and respectable dividend yields.

Spice up your portfolio

McCormick (NYSE: MKC) is a global leader in flavor, spices, and seasoning, in two segments that generate over $6.5 billion in annual sales across 150 countries and territories. It has a long list of name brands that boast leading share positions in many markets.

Just this week, McCormick declared a quarterly dividend of $0.42 per share, marking the 100th year of consecutive dividend payments by the spice company. The dividend yield currently sits at a respectable 2%.

One of the growth drivers in the business comes from management’s Comprehensive Continuous Improvement (CCI) savings program, which helped drive a 60-basis-point improvement in gross margins during the second quarter, compared to the prior year. Management expects the trend to continue with higher gross margins during the second half of 2024, compared to the first half.

Management is also focusing innovation on specific higher-growth product opportunities, which should help reverse slowing sales volume overall. It’s also true that McCormick’s divestment of a small canning business is currently weighing on sales results.

As management focuses on higher growth opportunities while improving gross margins with its CCI program, the company has proven it will continue to return value to shareholders while they wait for the stock price to gain traction in the future.

Household name

While investors might not recognize or follow Stanley Black & Decker (NYSE: SWK) stock, chances are it’s still a household name for you. The company is a global leader in tools and outdoor products, and operates manufacturing facilities globally. Stanley Black & Decker owns an impressive list of other brands that include DeWalt and Craftsman, among others.

Stanley Black & Decker finds itself in a similar position to McCormick as it works diligently to reduce its cost structure and expand margins. The good news is that it’s seen significant progress, with Q2 gross margins jumping 28.4%, or up 600 basis points compared to the prior year.

As Stanley Black & Decker uses these cost-cutting savings to further growth in its powerful brands, it’s also reducing debt. The company’s cost cutting and strong cash generation during Q2 supported $1.2 billion in debt reduction. Investors shouldn’t forget its respectable dividend yield of 3%.

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As the company continues to cut costs and reinvest in high-opportunity products and brands, it remains a solid long-term hold for income investors. Just look at how consistently Stanley Black & Decker has dished out dividends over time.

Buy now

Both of these companies have trailed the broader S&P 500 for the past three years, but they are working diligently to improve operating efficiencies and cut costs. Both companies own a list of stellar brands that can and will power growth again with innovation and reinvestment. It will take time for their stocks to regain traction in the market, but they’re positioned to rebound in the years ahead — and offer respectable dividend yields while investors wait.

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(Bloomberg) — Humana Inc. investors haven’t struggled through anything this bad since the global financial crisis 15 years ago.

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The health insurer’s stock price plunged 22% on Tuesday and Wednesday alone, something it last did in February 2009. And they kept falling, with shares suffering their worst week since 2020 and putting them at a level last seen in March of that year.

It all started on Tuesday, when speculation rippled through the stock market that Humana was going to lose high quality ratings on some of the major plans it manages for the US Medicare program. By early Wednesday morning, a week before the government is due to release its official Medicare ratings, the company confirmed the rumors were true. As a result, only about a quarter of its members will be in highly rated plans that generate extra revenue, down from 94% previously, Humana said.

The news sent its shares into a tailspin, falling as much as 24% within the first five minutes of Wednesday’s trading, its biggest intraday decline since Feb. 23, 2009. At the peak of the selloff on Wednesday morning, Humana had lost a third of its market value in just two sessions. It regained some of that decline by the end of the day.

All in all, it was a “worst case scenario” come to fruition, according to UBS analyst AJ Rice.

Quality ratings, also referred to as “star ratings,” range from one to five and help to drive billions of dollars in revenue for Medicare Advantage insurers. More stars allow plans to receive lucrative government bonus payments, while fewer stars can make it harder to attract new customers.

For Humana, a reduced rating would be catastrophic since its business is primarily focused on Medicare. The future hit to profits could reach as much as $23 per share in 2026, “which would almost eliminate 2026 earnings,” according to Bank of America analysts led by Joanna Gajuk. It also could push the firm’s margin recovery further out, according to Gajuk, who has a sell-equivalent rating on the stock.

Wall Street responded to Humana’s confirmation of Medicare’s decision by slashing price targets on the stock, and at least four analysts downgraded their ratings on the shares. Still, the Street consensus is for them to hit $342 in the next 12 months, a 42% jump from current levels. And of the 27 analysts covering Humana, 10 have buy ratings, 15 have holds and only two have sells.

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The insurer has already seen surprise jumps in medical costs and tighter reimbursements from the government this year. Perhaps not surprisingly, investors are fleeing the troubled insurer, leading to a loss of nearly half of its market value, which has tumbled from around $56 billion at the start of 2024 to roughly $29 billion now.

Rippling Fear

Fears about falling star ratings, which are crucial for Medicare Advantage plans, are rippling across the health insurance industry. While the government hasn’t released its official star ratings, some are visible on Medicare’s plan finder tool that helps consumers shop for coverage.

That led to a jump in Clover Health Investments Corp. on Wednesday, as some of the health insurer’s Medicare Advantage plans for 2025 appear to have received higher quality ratings. And two large plans from CVS Health Corp. appeared to retain four-star ratings on the website, Evercore ISI analyst Elizabeth Anderson wrote in a note on Wednesday. Shares of the pharmacy chain gained afterward.

On the flip side, UnitedHealth Group Inc. sued the US government this week, claiming that its quality rating was unreasonably downgraded after one customer service phone call.

Regulators are expected to announce official results on or about Oct. 10.

Meanwhile, the cloud over Humana is spreading to other related companies. Shares of agilon health inc., which runs a platform for primary-care physicians treating Medicare patients, lost 20% on Tuesday, Wednesday and Thursday, its worst three-day streak in six months. The firm counts Humana among its key payer partners.

“We were surprised by the sharp decline in stars ratings,” BTIG analyst David Larsen, who holds a neutral rating on agilon, wrote in a research note Thursday. “We worry that if Humana saw such a large decline in ratings, and bonus payments, other payers may face even more pressure.”

–With assistance from John Tozzi and Brandon Harden.

(Updates details on stock and analyst data, and chart.)

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