Value Is in Again

Value is in again... The trends in Walmart's first-quarter report... Buffett's moves make more sense today... Japan's new chip slush fund... A boost for one U.S. company... Your daily dose of 'Fedspeak'... Mailbag: Where the money comes from...

When Walmart execs talk, we listen...

Not because we're friends... and we definitely don't hang on every word. But if you listen just a little, you can often learn about the state of the entire U.S. economy. Walmart (WMT) is America's largest retailer, so the trends in its stores matter beyond its balance sheet.

This morning, the company shared its first-quarter earnings report... and while we typically don't get into quarterly financials a lot in the Digest, I (Corey McLaughlin) saw and heard enough notable things coming out of Walmart's report to pass along to you this evening...

The first line you'll likely see in mainstream financial-news stories about Walmart today is that the retailer raised its full-year "guidance" – or outlook – for the rest of the year. I'm less concerned about that because it has more to do with the silly earnings-estimates game played by companies and Wall Street analysts. Like Stansberry Research senior analyst Bryan Beach says, "It's the most pointless exercise in the modern markets."

Agreed.

Instead, we're more interested in how Walmart customers (and I know a few) are behaving, because 70% of the American economy is linked to consumer spending... and as we said earlier, Walmart is America's largest retailer. It also represents the largest grocery store in the nation, with 25% of market share. (This might shock some city slickers.)

If you look at these parts of Walmart's business, you can get a decent idea of what's really happening in large swaths of the economy today... which can help inform your investment, business, or spending decisions.

So here's what has been going on in Walmart stores...

In the first quarter of 2023, Walmart saw a huge shift in how people spend their money... from people buying discretionary or big-ticket items to using their money to buy groceries and essentials.

Walmart Chief Financial Officer John David Rainey said on the analyst call that sales of "general merchandise" in the U.S. declined in the mid-single digits. But people were still spending, just more on food, where spending increased by low double-digits. (That's good news for Walmart, as 60% of its revenue comes from groceries. Overall same-store sales increased more than 7%.)

This shows the impact of inflation, a slowing economy (with higher interest rates), and pandemic stimulus programs finally ending. Financial life for everyday Americans has gotten noticeably harder... and more people are increasingly spending money on what they feel they absolutely need, not what they want or think would be nice to have.

People who may have been shopping at other stores are also turning to Walmart in search of lower prices, and others are buying more Walmart-brand items. "Customers continue to seek value given the impact of inflation," Walmart CEO Doug McMillon said.

Take note. Value is popular again...

High-quality businesses that have the same sort of robust and efficient operations as Walmart, even if not at its scale, are going to weather an economic slowdown the best... and it's already happening – even though an "official" recession hasn't been called from on high.

As we shared in the March 30 Digest, when we said it was time to eye the best recession-proof stocks if you hadn't already, "consumer staples" fit the bill. These are companies that sell the essentials, like food, toilet paper, etc.

But you don't want to buy shares of just any consumer-staples exchange-traded fund ("ETF"). As our Stansberry's Investment Advisory team shared in the March issue, you want to find the best businesses, like Walmart.

Back in March, analysts Mike DiBiase and Bryan Beach looked at the last few recessions to find the stocks that performed the best within the consumer-staples sector. As they shared...

That winner was retail giant Walmart (WMT). Its stock rose 7% on average across those three recessions. Take a look...

That's massive outperformance versus the market. And we expect Walmart to outperform in the next recession, too.

Walmart shares were up big this morning, then pulled back a bit, but still finished up more than 1%. The stock is up more than 10% since its most recent low on March 10, but more upside could be ahead.

Our Stansberry's Investment Advisory team also made another recession-proof pick back in the March issue. Existing subscribers and Stansberry Alliance members can find that here and can take a look at the following issues for more recommendations for this environment.

Moving on to Warren Buffett...

I wrote yesterday that Warren Buffett recently decided to sell Berkshire Hathaway's (BRK-B) entire multibillion-dollar stake in Taiwan Semiconductor Manufacturing (TSM), the world's largest chipmaker, just a few months after purchasing shares.

Buffett still thinks the business is one of the best-managed and most important companies in the world, but he sold because of geopolitical risks. Tensions are rising between China and the U.S., with the island nation of Taiwan squarely in the middle.

At the same time, Buffett has gotten bullish on Japan, specifically on financial companies in the country, which is the biggest U.S. ally in Asia. Still, people wondered... Why?

It's all coming together now...

Japan is going in on chips...

Tomorrow marks the start of the Group of Seven ("G7") summit in Japan, a meeting of the leaders of the U.S., U.K., Japan, Canada, France, Germany, and Italy.

But today, Japanese government officials made some news, disclosing they will spend roughly $10 billion of the "supplementary budget from the last fiscal year," to boost the nation's chip industry, according to news service Reuters. (Wait, there's a government that actually has some leftover money to put to work?! Yes, but the country also had a sideways stock market for decades.)

It sounds like part of Japan's chip slush-fund money will be going directly to U.S.-based chipmaker Micron Technology (MU). According to Bloomberg, Micron is expected to land about $1.5 billion in financial incentives from the Japanese government to help it make next-generation memory chips in the country.

Expect more developments as battle lines in Asia continue to be drawn or reinforced. Buffett is certainly taking the U.S. side. And our colleague Dave Lashmet recently recommended his Stansberry Venture Technology subscribers buy shares of another chipmaker set to benefit from this chip war, calling it "The Great Taiwan War Hedge."

Finally, because we must...

Following up on what we talked about in yesterday's mailbag, some "Fedspeak" roiled the markets for a brief period this morning... before positive debt-ceiling "debate" news – with the suggestion of a final deal coming next week – overshadowed it.

Dallas Federal Reserve President Lorie Logan, who is a voting member of the Federal Open Market Committee that sets monetary policy, said that she doesn't think today's economic data supports pausing rate hikes at the Fed's next meeting in June.

In a speech to bankers in San Antonio, she said...

The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren't there yet.

She's talking about more employment and inflation data coming out in the weeks ahead. So it's worth noting that at least one voting member of the Fed still sees more rate hikes on the table – and certainly not cuts as a lot of people expect by later this year.

New 52-week highs (as of 5/17/23): Applied Materials (AMAT), Broadcom (AVGO), Copart (CPRT), Salesforce (CRM), Enstar (ESGR), iShares U.S. Home Construction Fund (ITB), Eli Lilly (LLY), Microsoft (MSFT), Invesco S&P 500 BuyWrite Fund (PBP), PulteGroup (PHM), and Verisk Analytics (VRSK).

In today's mailbag, we cover a question about U.S. government debt and guaranteed income programs... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Several years ago you discussed universal income. As a CPA I said, sure, where does the money come from? But here we are today, with universal income being rolled out across the country.

"Maybe someday, you could discuss, where the money comes from. As I look at things, until there is growth, no new money should be available. Yes, borrowing can make up the difference. But does this cover it, or is there something I'm missing?" – Paid-up subscriber Alan T.

Corey McLaughlin comment: I don't think you're missing much except a few charitable donations, as I'll explain. But you bring up a great idea to explore.

Dozens of cities across the country are "testing" guaranteed income programs right now. I'll tell you about one of these pilot programs that started here in Baltimore nine months ago. It's paying $1,000 per month to 130 people – mostly single moms, according to the program's demographic data, with previous household incomes 300% below the federal poverty line. The program is funded by dollars originally allocated to the city in Congress' $1.9 trillion American Rescue Plan of 2021 – and some charitable donations.

That's one short answer about one income program, but there's a lot more to talk about "where the money comes from." We know Uncle Sam needs "We the Taxpayer" and to borrow increasingly larger amounts of money every year as it runs trillion-dollar deficits to pay its bills. That's what the whole debt-ceiling "debate" is about. The influences and impact of debt are everywhere around us, including with these income programs, which we'll look to talk more about soon.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 18, 2023