Roses Are Red and Stocks Are Back – Barron's

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Never mind. So much for those inflation worries. The Dow Jones Industrial Average soared 253 points today even after a much-awaited report on the consumer price index showed prices were accelerating a bit faster than expected. As Yogi Berra might say, the expectations were worse.

Consumer prices rose 2.1% from a year ago, but wage inflation wasn’t a big factor in the rise. That’s the detail investors had panicked about last week.

Bond yields, though, still rose today. The 10-Year Treasury now yields 2.91%, the highest level in four years and a sign that the bond market is taking a promise of Fed rate hikes more seriously. Ordinarily, a rise in bonds yields is a problem for stocks, but maybe not in a market where stocks remain cheap relative to bonds.

After today’s rally, all the major stock indices are back in positive territory for the year.

DJIA: +1.03% to 24,893.49
S&P 500: +1.34% to 2698.63
Nasdaq: +1.86% to 7143.62

The Hot Stock: Chipotle Mexican Grill +15.4%
The Biggest Loser: Biogen -6.6%

Best Sector: Financials +2.6%
Worst Sector: Utilities -1.0%



The Doritos Rally

Chipotle was founded by a chef who hoped to scale naturally raised meats into a nationwide burrito chain. It was a spectacular success until a wave of food-safety issues undermined the concept. Founder and CEO Steve Ells tried to fix the problems over the last year, but reports of food-borne illness continued, and customers never really returned. The stock is down 60% from its 2015 high.

Now, Chipotle is going in a very different direction. Last night, the company announced it was hiring Brian Niccol, the CEO of Taco Bell and the executive responsible for making taco shells from Doritos. The best thing I can say about the cheesy chips is they never gave me a stomach virus. That may be all that matters to Chipotle investors. Shares soared 15% on the announcement, to $290.

Niccol is probably not personally invested in fake orange flavoring. He identified an opportunity for Taco Bell and used marketing savvy to go after it. At Chipotle, he might exchange kale for romaine and convert the soda fountains into seltzer machines. He’ll also be asked to improve Chipotle’s digital ordering systems.

A year ago, Jack Hough was skeptical about Chipotle’s future in a cover story for Barron’s. That was prescient, since the stock was over $400 at the time. I asked Jack for his updated view today, and he sounded slightly more optimistic given the management change: “Show us that you’re scaling back store growth and have solved the food safety issues for good, and you’ve got a turnaround in the stock.”



Back to Tech

As investors moved on from their inflation fears, tech stocks have been the prime beneficiary. The Nasdaq Composite is now up 3.5% on the year, compared with 0.7% for the relatively tech-light Dow. Ask most tech investors at the start of the year, and they would likely have been thrilled with that Nasdaq gain.

Barron’s Reshma Kapadia offers a note of caution today, though. Tech’s strength has been driven in large part by Nvidia and Microsoft, which are up 25% and 6% this year, respectively. That could be masking other weakness in the tech sector.

The key quote in her story comes from DataTrek strategist Nicholas Colas who wrote to clients Wednesday: “To hang your performance hat on two stocks feels a bit thin.”



What We’re Reading

Volatility Is Back. Get Used to It Barron’s
Apple: Who Will Be the Next CEO? Barron’s Next
Can the Nordstrom Family Outrun Retail’s Woes? WSJ
Siri, Already Bumbling, Just Got Less Intelligent on the HomePod WashPost


The Calendar

Cisco shares are up 6.5% in after hours trading, after a better-than-expected report this afternoon. Barron’s Tiernan Ray spoke with Cisco’s CFO tonight and got some new thoughts on the company’s buyback and dividend strategy. Meanwhile, there are still notable reports to come this week from CBS (tomorrow) and Deere (on Friday). Next week, we’ll learn more about retail happenings when Home Depot and Wal-Mart post their fourth-quarter numbers.


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