What happened
Broader-market indexes were mixed on Thursday, as the Federal Reserve's ongoing mission to rein in rampant inflation appeared to be making progress. The latest U.S. government data revealed that prices moderated last month, which could influence how the Fed proceeds with its long-running campaign of interest rate hikes, which are intended to bring inflation under control.
With that as a backdrop, shares of Amazon (AMZN -1.64%) edged 0.7% lower, Chewy (CHWY -3.27%) slipped 2.1%, and Roku (ROKU 0.15%) fell 3.7%, as of 11:30 a.m. ET.
A check of all the usual sources -- press releases, earnings reports, and regulatory filings -- found very little in the way of company-specific news driving the rally (more on that in a minute). This suggests investors were primarily focused on the improving economic situation.
Image source: Getty Images.
So what
The U.S. Bureau of Labor Statistics released its monthly inflation report for December, and the data provided some much-needed relief for businesses and consumers alike. The most widely followed gauge of inflation -- the Consumer Price Index (CPI) -- rose 6.5% year over year in December, while edging down 0.1% sequentially.
The biggest contributor to the sequential improvement was a steep drop in gasoline prices, which declined 9.4% compared with November and were down 1.5% compared with the year-ago period. This more than offset an increase in housing.
While the numbers are still historically high, inflation actually improved versus November's rate of 7.1%, while also coming in at its lowest rate since April 2020 and in line with economists' forecasts. The "core" data, which excludes highly volatile food and energy prices, rose 0.3% last month, while climbing 5.7% year over year, also lower than the 6.1% predicted by economists.
Interest rates are the central bank's principal tool for cooling rising interest rates. How, you ask? When rates are higher, borrowing becomes more expensive, and as a result, consumers and businesses tend to cut back on spending. This in turn slows demand, which causes prices to fall. It's important to note that the economy is a highly complex mechanism and there is no exact formula for bringing rising prices down. Furthermore, if the Fed increases rates too quickly, it could ultimately push the economy into recession.
Now what
This marked the second successive month of moderating inflation, so you'd expect that data to receive a warm reception, but the market's reaction to the news was mixed. Some saw the overall improvement as a sign the Fed may be able to slow the pace and tenor of interest rates sooner than planned, while others worried that sufficient progress may not happen soon enough to prevent a recession.
Furthermore, the overall macroeconomic environment still presents challenges for our trio of consumer-facing companies:
- Amazon suffered a significant slowdown in e-commerce spending last year, fueled by tough comps and the reopening of the economy. Rising inflation and the resulting higher prices will likely result in fewer discretionary purchases on the company's online sales platform.
- While Chewy's pet-centric digital retail platform may be somewhat insulated from the macro issues -- as people will continue to buy food for their furry friends -- consumers may trade down to less costly products, resulting in slower growth.
- Roku makes the lion's share of its revenue from the digital advertising that appears on its platform. Marketers are reining in ad spending because when prices are higher, consumers are less receptive to the lure of advertising. This will continue to weigh on Roku's results for the foreseeable future.
There was one bit of company-specific news that likely contributed to Roku's greater decline. Jefferies analyst Andrew Uerkwitz downgraded the stock to underperform (sell) from hold, while simultaneously lowering his price target of $30, down from $45, according to The Fly. Uerkwitz noted the "significantly slower" digital advertising market is not reflected in analysts' short-term consensus estimates for Roku. Fortunately for investors, they can take a longer view than analysts, which has proven to be a much more lucrative path.
There's more good news. Bear markets don't discriminate, taking down quality and inferior businesses alike. As a result, each of these stocks has been ravaged over the past year and is now selling for a bargain-basement price.
Roku, Amazon, and Chewy are currently selling for roughly 2 times sales, within the guidelines of a reasonable price-to-sales ratio of between 1 and 2. These valuations are also near all-time lows. For astute investors with a three-to-five-year outlook, this represents an opportunity to buy these solid businesses for a song.
