ARM IPO up 25% and US Retail Sales Beat Expectations!

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Market News and Short-Term Predictions

We had one of the largest IPOs this year with ARM raising roughly $5 billion. The chip designer had a market value of about $54.5 billion at the IPO price but had a nice first-day bump up 25% on its market debut.

Personally, I don't touch IPOs as history has shown they tend to be overvalued on their initial release. Their volatility in the first couple of months trades tends to be skewed to the upside, but with enough time, most IPOs start to see negative returns.

If I am looking to buy an IPO, I tend to try to value the stock and then buy only if it hits my targeted buy price versus jumping in and buying no matter what the price is at during the IPO.

Just hearing about an IPO though reminds me of the glory days of IPOs and SPACs in 2020 when they would go up 100% for no reason. But I don't think we are going back to that level of craziness until the next time we have the perfect storm of low interest rates and a hunger for risk-on assets from investors.

In terms of macro data coming out this past week, we had sales at U.S. retailers rose 0.6% in August despite a hangover for internet stores after the Amazon Prime Day event, but most of the increase was tied to higher gasoline prices.

Retail sales represent about one-third of all consumer spending and usually offer clues on the strength of the economy.

Higher interest rates and a slowdown in hiring are expected to restrain purchases in the months ahead. Forecasters predict the holiday shopping season could be the weakest in five years.

We also had CPI data come out which increased 3.7 percent for the 12 months ending August, a larger increase than the 3.2-percent increase for the 12 months ending in July.

If you are wondering what was the main driver in the reversal of disinflation, it was energy prices. That was the one category that had a larger month-over-month change. I am a believer that energy prices will come down over time and inflation will eventually break below the annual pace of 3%.

Lessons to Be Learned

If you look at one of my recent purchases, RTX you'll notice that it has gotten hammered over this past week due to some $3 billion in charges related to a parts problem on its geared turbofan, or GTF, aircraft engine. Investors knew a charge was coming after the company talked about the issue in July. Still, the stock went down almost 8% Monday.

The size of the problem is growing. In July, RTX believed about 1,200 engines would need additional inspection. Now the number is closer to 3,000. All this has unnerved investors. Shares are now down about 21% since the initial disclosure.

Now this was a known risk when I was buying the stock after it's earnings call as I see this as more of a short-term issue that the company is being punished for while in the long term, I believe the stock market will see the overall free cash flow generated by the rest of the business and the rebound in the engines business that the stock will recover.

The funny part is that now that the stock has gotten hit harder, analysts are coming out in droves downgrading the stock! But realistically analysts are retroactive, they upgrade when a stock is hot and downgrade when a stock is in a tough spot. I still believe in the long-term of this company, so I am not really bothered by this short-term downside.

As a long-term investor you will be faced with these scenarios in companies you own, it is up to you to decide if the problem is a systematic long-term drawdown or if the issue is most likely to be resolved and no one will remember this issue in 3-5 years.

Portfolio Update

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