GRUB GrubHub Inc

By Paul Vigna 

For weeks, skeptical market observers have been asking: Why are stocks rising? The rally seemed particularly at odds with the backdrop of a global pandemic and the worst economy in decades.

Enter reality. It is becoming clearer that the economy isn't going to come roaring back quickly, and investors are catching on. The Dow lost 4.5% from Monday to Wednesday, its largest three-day drop since hitting bottom in March. Economically sensitive sectors such as energy and industrials were hit hardest, down 7.4% and 5.6% through Thursday, respectively.

Let's look at this week's winners and losers.

Winner: Grubhub

Some companies sell computers, some sell services, some sell dishwashers. The one thing that every company sells is its story.

On the surface, ride-share company Uber Technologies Inc.'s bid to buy home-delivery service Grubhub Inc. is a good story. Uber has staked a lot on its Uber Eats division, home delivery is hot right now and Grubhub is actually an attractive business.

Until last year, Grubhub was consistently profitable. It has little debt on its balance sheet. Those are good numbers to acquire. The plan for Uber is obvious: combine two of the bigger players in the space, dominate, profit.

That story sold well. Grubhub shares were up 17% this week through Thursday, and even Uber shares were roughly flat at $32.79. The problem, though, isn't the Grubhub story. It's the Uber story.

Assume Uber can mollify regulators, a big question on its own. For all the hype around the company, it remains a money pit. Uber lost more than $8 billion last year and has lost money in three of the past four years. That was all before the coronavirus pandemic hit.

Now it wants to dominate home delivery, but that industry is suffering its own profitability crisis. The merger might lower overhead costs, BTIG analyst Peter Saleh said, but added, "We are unsure that it would be enough to reach profitability per order."

Uber is absolutely great at selling its story, raising $24 billion in the private and public markets. It is less good at creating profits. That is a story investors should care about.

Loser: The V-Shaped Meme

Another story that has been floating around Wall Street is the "V-shaped recovery" -- the idea that the market and economy fell fast and are due to recover at a similar pace.

The crux of the argument for a V-shaped recovery is the narrative that the government and the central bank are going to throw enough money at the problem to make it go away.

That sentiment lasted until this week. Sectors including energy, industrials and financials started falling back to earth, dragged by the weight of economic reality. Hedge-fund manager David Tepper said the market is seriously overvalued. Peer Stanley Druckenmiller said the risk-reward proposition is the worst he has ever seen.

"While risk-asset markets and the economy are sometimes disconnected, they often suddenly and dramatically reconnect when emotion exits and reality enters," Cantor Fitzgerald strategist Peter Cecchini warned. "Market participants will eventually catch on to the fact that there are no free lunches over the long term."

Next Week: Retail Earnings

Retailers, whose fiscal years end a month later than the calendar on your wall, start reporting first-quarter earnings next week.

On Tuesday, Walmart Inc., Home Depot Inc. and Kohl's Corp. report. Wednesday brings Lowe's Cos. and Target Corp. On Thursday, it is TJX Cos. and BJ's Wholesale Club Holdings Inc., while Macy's Inc. will present preliminary results and a "fireside chat" with Chief Executive Jeff Gennette and Chief Financial Officer Paula Price.

We already know most retailers have been severely hurt by the pandemic. The hunt here is for relative strength. Are consumers sprucing up their abodes while sheltering at home? Which retailers are gaining share in grocery sales? Also, pay careful attention to talk about cash flow and debt. Servicing debt is going to be critical for retailers on edge.

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Write to Paul Vigna at paul.vigna@wsj.com

(END) Dow Jones Newswires

May 15, 2020 05:44 ET (09:44 GMT)

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