Finimize - 🤩 How to spot market stars

👀 What just happened?

US

• ChatGPT’s creator OpenAI was reported to be planning a sale of existing shares, a move that could triple the $30 billion valuation it earned earlier this year.
• Target took dramatic action against the organized crime rings it says are stealing from its business, with the retailer announcing it’ll shutter stores in dangerous locations.

Europe

• Data showed that activity in Europe’s services and manufacturing sectors slipped again, reinvigorating fears for the region’s economy.
• American beauty firm Coty announced a secondary listing in Paris, an effort to raise fresh funds.

Asia

• Trading in shares of troubled Chinese property developer Evergrande was suspended in Hong Kong.

✍️ What does all this mean?

ChatGPT’s creator OpenAI is already raking in cash from the paid version of its famed chatbot and business licensing, but the firm recently disclosed that it’s planning to sell existing shares to fund its world-changing mission. According to reports, the share sale could value the private firm at around $90 billion, roughly triple its $30 billion valuation from back in January when Microsoft bought its giant stake. A long leap, for sure, but that’s the tech world for you.

Target will sure be jealous of all that cash. The retail giant’s been plagued by mass-level stealing, known in the industry as “shrinkage”. Now, Target’s closing nine stores in what it describes as particularly dangerous districts. The retailer has said that organized crime is the culprit, and that the issue disrupts the industry as a whole. But Target’s rivals seem to be getting by without shutting up shop, so the closures could be a sign of self-contained issues bubbling under the surface. Investors, keep watch.

If The Devil Wears Prada taught us anything (and it did), it’s the history of cerulean blue. Besides that, though, the film highlighted that Paris is the place to be for fashion and beauty brands. Just look at American beauty firm Coty: the owner of brands like Rimmel and CoverGirl announced it’ll be selling shares on the Paris stock exchange, in an effort to pay down debt and raise funds for an image makeover. The listing will place Coty in the company of luxury and beauty royalty including L'Oréal, LVMH, and Hermès, so the American rival may be hoping to cozy up to the region’s luxury investor base. Time will tell if those investors are willing to diverge from their beloved European style, though.

That said, it’s looking like Europe’s economy may be the first to buckle under the weight of higher interest rates. Recent data showed a fourth-straight month of slowing activity in the services and manufacturing sectors, with readings now under the danger-zone mark of 50, meaning the economy could be in outright decline. Official economic growth data hasn’t confirmed that just yet, but the market's sure expecting it to: the Eurostoxx 50 index has hit a six-month low.

Over in China, it’s the infamous property market – which makes up about a quarter of the country’s economy – hogging the headlines. Developer Evergrande has become the poster child for the sector’s turmoil, and this week, the company’s shares were suspended in Hong Kong after news that its chairman has been placed under police watch. That could very well influence whether the government lets Evergrande fail or rides to its rescue.

🔍 This week’s focus: Investing when rates are high

Ever since the most recent Federal Reserve meeting, investors have been focused on what higher-for-longer interest rates might mean for stock prices. After all, higher rates will most likely drag on the economy: consumer spending will probably slow down as folk tighten their budgets and companies will keep a tight reign on their cash. Stock valuations will be weighed down too, as bulkier rates reduce the value of future cash flows today. The good news, though, is that because everyone knows roughly what to expect, that should all be baked into stock prices already.

That means you can turn your attention to spotting future winners while rates are high. And for optimistic long-term thinkers, falling markets can be exciting. Now, we’re nowhere near the depths of December 2008 or March 2020, when it was very bleak and markets were at record lows. But if you’d bought bargains at those points, you’d have celebrated eye-popping returns. Let’s hope we don’t go that low, but the sentiment’s the same. And if you’re up for donning a pair of rose-tinted glasses, a couple of smart ploys could help you tilt your odds.

First, look for firms with more cash than debt on their books, because higher interest rates could mean they may earn more on that spare cash than they spend servicing debt. Some of the S&P 500’s biggest names are in that fortunate position: Apple, Microsoft, and Nvidia to name a few. Second, focus on firms with track records of spending shareholders’ cash wisely. When interest rates were near zero, any CEO could borrow cheaply and spend that cash in a way that made a positive return. But with higher interest rates taking hold, it’s harder to find projects lucrative enough to make money despite the increased cost of borrowing cash. The magic stat here is the “return on invested capital”, or ROIC. Firms that boast a figure higher than, say, 20% have been skilled at allocating and prioritizing spending.

📅 The week ahead

• Monday: US ISM Manufacturing Purchasing Managers' Index (PMI) (September).
• Tuesday: Nothing major.
• Wednesday: US ISM Services PMI (September).
• Thursday: Nothing major.
• Friday: US Nonfarm Payrolls (September). Canadian unemployment (September).