Woozle’s primary research finds Hermes stores outperforming consensus forecasts - 59% of Store Managers interviewed in the last 90-days reported that they were beating revenue targets for the current quarter. Forecasts 17-20% Y/Y growth driven by strong performances across key markets in Asia and Europe. Customer spending is surging with higher UPT and uptrading trends as limited edition products and new collection ranges are proving to be particularly popular. Also noteworthy, they seem to be less impacted with inventory issues vs. the likes of Gucci (Kering) and Moncler.
The Walmart of the UK pub sector and Tim Martin is its Sam Walton - the power of JDW's financial model is being underestimated according to Andrew Hollingworth. In his latest report, Andrew sets out two scenarios with only one difference between them: the first rebuilds EBIT margins to 10% by the end of the seven-year forecast period. The second assumes no operational gearing at all. The forecasts they produce are for investor IRRs over the next 7 years of 25% p.a. or 16% p.a. JDW is set to offer investors great long-term compounding.
Signs of aggressive revenue recognition and potential EBITDA manipulation at this global construction company - Forensic Alpha highlights a growing receivables balance, despite the use of factoring, paired with declining quality of those receivables (a proportion of which are long-outstanding invoices to their own suppliers). Adding to their scepticism of management’s presentation of results is the reported €780m EBITDA - where the main source of profit is management’s inclusion of a “Gain From Bargain Purchase” amount of €548m. Dragonfly (Forensic Alpha’s machine intelligence system) assigns the stock a 10 out of 10 risk rating.
Bleak outlook for this small, family-owned, material lifting equipment specialist - profits to remain well below pre-Covid levels for the next two years (violent price / cost squeeze), but the biggest problem the company faces is that it is sub-scale with margins under constant pressure. Debt levels are also worryingly high. The best that shareholders can hope for is that a larger peer (e.g. Manitou) comes calling, but would the 78-year old President and his son be prepared to lose their power to create value?
Lars Goran Bäckvall (Non-Executive since 2010) purchases €520k of stock (between Nov 30th-Dec 6th), last paying SEK329 for the shares - Smart Insider had previously turned bullish on NP3 based on purchases Bäckvall made earlier this year at SEK213 and SEK115. He has a good record in the stock, consistently buying into strength. As Bäckvall continues to add at higher prices, Smart Insider are upgrading the stock further, from +N to +1 (highest rating).
Increased confidence in Q4 potential and driver supply - Northcoast’s channel work suggests a triple play of trends happening in the industry: 1) stable / declining incentives, 2) rate hikes (UBER pricing +2.9% in Oct & +4.9% in Nov; LYFT +2.6% in Oct & +4.6% Nov) which seem to be a plus to spreads / economics, and 3) improving levels of consumer engagement. Drivers are reporting record weekly income, pick-up pings within seconds of turning on the app, and consistent requests for drives 90+ miles when they had never seen such requests in the past. Preferred stock is Lyft - TP $65 (55% upside).
RIP - Brian McGough told clients back in Feb’21 (with the stock at $79.62) that SFIX would revisit its IPO price. This print was the nail in the coffin (share price tanked 20% as 2Q guidance massively disappoints). Brian’s view at the time was that the new Direct Buy initiative would turn the company from a niche subscription model to a typical retail model and have a dramatic negative impact on its financials and ultimately the multiple of the stock. The three growth pillars the company has just outlined will create more capex, more SG&A, more working capital, and more competition for customers and share. The stock is headed below $15.
At 3.1x P/E ratio, the stock is too cheap to ignore - poor results recently were due to supply chain issues and not a structural decline in the business. QRTEA boasts an attractive business model (including a misunderstood customer base) that generates high levels of profit (11% operating margin vs. median retail comp of ~7%) and strong levels of FCF (FCF yield of 26%). Jonathan Boyar forecasts QRTEA will retire 22% of shares outstanding by the end of 2023 and believes the firm is ripe for a takeover / going private. TP $18.81 (120% upside).
Trades at a ~5-turn multiple discount to Avis, with limited Sell-side coverage, and very attractive warrants ($13.80 strike price expiring 2051). This is a “classic bankruptcy re-listing” - strong new management team; B/S restructured with minimal debt; and renegotiated contracts on more favourable terms. Given the ongoing rental car shortage and robust industry backdrop, pricing will remain positive for at least another 18 months. HTZ’s recent order with Tesla for 100k EVs also gives it a first-mover advantage into electrification for rentals vs. peers. TP $35 (35% upside).
Once again, the team from Philly steps up and delivers a knock-out punch to the bear thesis - FIVE's 3Q print / 4Q guide should pave the way for the stock to regain its recent momentum. As the group's brand awareness continues to augment, so too should the number of transactions and therefore sales. Moreover, when you layer in: a) $5 Beyond (only in 30% of the chain today); b) flexible pricing throughout the model; c) the continued evolution of ACO (Self-Checkout); and d) eventually a loyalty / personalisation mechanism…this AUV improvement should only continue to gain momentum.
Has been benefitting from an unusual spike in the sales price of a key product line - however, PVC production along the Gulf Coast has now resumed and the supply chain is refilling. This will make it impossible for ATKR to maintain the margins that resulted from an 80%+ price increase in its core products. Asian prices are already collapsing on the decline in import demand, while European prices are only being held up due to planned maintenance downtime. The stock looks incredibly expensive and with margins set to collapse, Eric Fernandez sees substantial downside from here.
Market leader with asset light model - CHPT boasts a 70% share of networked L2 charging ports in North America (7x its competitors). It has a capital-light business model with a built-in Subscription business (100% initial attach rate and +95% resubscribe rate) which provides recurring (high-margin) revenue and a significantly clearer path to cash flow positivity than many of its early-stage peers. Michael Webber models revenue at a ~50% CAGR through 2025 and ~25% through 2030 with gross margins doubling by 2024. TP $31 (50% upside).
SEE’s 3Q EPS beat is an illusion and the fact that metric guidance changes should help 4Q and management didn’t boost the FY outlook indicates that too - the price hike in 3Q likely pulled demand from 4Q as volume comps get tough. Others are cutting guidance on recent FX gains reversing (FX has been a key to SEE’s recent EPS gains). 4Q’s $1.13 estimate is relying on 25-cents from 3Q’s one-time price hikes > 4Q cost inflation.
Major portfolio transformation underway, valuation rerating is imminent - since taking the helm in 2019, CEO Frank Bozich has been focused on boosting the company's overall profitability profile while reducing earnings cyclicality by assimilating not only high-margin and stable businesses but also businesses that are relatively asset light. The net impact of these acquisitions (and divestitures) will result in an EBITDA margin of 15.6% (vs. ~10% 2018-20). TSE shares currently trade at a consensus 2022 EV-to-EBITDA multiple of 2.7x and a highly attractive FCF yield of 27%. TP $70.00 (35% upside).
There is a lot to like regarding Capstone's proposed US$1.3bn merger with Mantos Copper - it delivers meaningful scale and makes the new group very much a Chilean-focussed copper producer (Mantos Blancos and Mantoverde projects add ~100kt/yr of copper). There are also clear district level synergies with Mantoverde and the Santo Domingo development project only ~30km apart. The deal appears accretive to NPV (+9%) and 2023E EPS (+19%) and CFPS (+25%). CS at 1.0x P/NPV is attractively priced vs. midcap peers.
Cloud-first strategy continues to resonate with customers but is yet to resonate with investors - SPLK is currently trading at less than half the multiple (4.9x) vs. peers, despite growing faster than its competitors. The increasing mix of cloud revenue is understating the company's overall growth rate. Srini Nandury expects enterprises to standardise on SPLK, given it has one of the best observability platforms in the industry combined with the best log management platform. The notion of competition with Datadog, Elastic and Dynatrace is overblown. TP $200 (70% upside).
The FTC drops the hammer as it announces that it will be suing NVDA (and SoftBank) to block the acquisition of Arm - this is a significantly stronger move than any other regulator has made so far and the scale of the remedies required could end up destroying the value of the deal for NVDA. The simplest solution to SoftBank’s ownership of Arm is to put it back where it found it on the LSE. The problem here is that this deal is now worth $80bn to SoftBank thanks to the blistering rally in NVDA’s share price. If Arm relists on the LSE (or even the Nasdaq), achieving a valuation of this magnitude will be almost impossible.
Homebuilders may be the best free-cash cows in Japan - Mike Churchill highlights two opportunities from his Classical Insights Portfolio:
Nisshin Group Holdings: ROE is low (5%), but P/B is low too (0.37x). 15% FCF yield, 4.6% dividend yield (3x covered by FCF) and negative adjusted EV. If Japan had more lenient takeover rules, this company would be snatched up in a heartbeat.
FJ Next: Reliable business model (builds apartment buildings near subway stations in big cities) and boasts a decade-long record of sales growth (+100% since 2015). P/B 0.59x, 18% FCF yield, 4.7% dividend, the stock is trading at 5.7x earnings and also has a negative adjusted EV.
Opportunity to leverage its acquired / self-developed technologies and evolve into a leading player in “flying vehicles” - an industry estimated to be worth USD 1.5trn by 2040. China Knowledge’s detailed 30-page report offers investors a longer-term perspective re. the company's huge growth opportunities. In addition to examining the development of Wanfeng’s eVTOL business, they expect strong demand for magnesium alloy from automakers and higher sales in the general aviation business to boost the group's financial performance.
Delisting - relisting + US$20bn lockup expiry = big mess. Didi is unlikely to be able to list in Hong Kong before mid-2022 (at the earliest) and even then it is not a given that HKEX will be very welcoming. Theoretically, it could go private, but this will not happen anywhere near the IPO price and so would not be well received. To make matters worse at the time of listing over 90% of Didi’s shareholders had entered into a 180-day lockup. The lock-up will expire on 26th December. On the subject of China ADR's delisting, Sumeet Singh believes it makes sense to go long the stocks that have already undertaken a HK listing while being short the ones that have yet to do so.
Offshore wind power is taking off in China’s south coastal region opening up a market space of hundreds of billions of Yuan for Orient Cables. As offshore wind power develops from the intertidal zone to the further offshore zone, the increasing installation distance will drive demand for subsea cables. Product upgrades are expected to boost gross margins. Horizon Insights also highlights the relatively stable competitive landscape (high barriers to entry) and new opportunities for the group's export business.
Everything is connected
Global liquidity is fading, EM is a mess, China growth is softening, and bonds are flashing a powerful deflationary message, yet DM equities have barely reacted and memories of 2007/8 remain strong. In the second half of 2022, worried central bankers will panic about growth and backtrack on tightening – don’t rule out negative interest rates. Only when yield curves start to steepen will EM get a break, but expect this to take a while.
Omicron’s impact
Data is inconsistent but some trends are clear: a significant wave will come in January, hospitals will be stretched and vaccines offer weak protection. The US will let the virus rip, but lockdowns are possible in the UK and Europe. The biggest macro risk comes from China, with “Covid-zero” approach costs mounting by the day. Expect Chinese port disruptions to cause supply chain headaches next year.
The Transitory storyline needs to be abandoned
The outlook for inflation moderation is too optimistic, according to Neil Dutta. Gasoline future price drops and a stronger USD will not stop rising prices. Housing inflation is on the horizon. Talks about fiscal drag slowing growth/inflation seem reasonable at first, but in reality cash-rich local governments and a strong labour market will offset the fiscal squeeze. Powell torpedoed transitory for a reason, it’s time for others to follow suit.
UK: Lower interest rates are needed
Carl Weinberg argues that the BoE made the wrong decision to keep rates steady. Prices are rising since supply has yet to recover, and low rates are needed to spur on investment. Instead, the BoE is placing itself into a position where, if rates were to rise too fast, they will be forced to induce a recession through monetary tightening.
US: Decision time for bond yields
Eric Fill mentions that a more hawkish Fed and the heightened probability of a faster taper have combined with a strong USD, and recent drop in energy prices, to accelerate the flattening of the yield curve. US breakevens have dropped with oil, and the TIPS market has come off the boil. So far 10-year yields are holding, but 30-year yields have seen a significant break. What happens now will have big ramifications for everything from currencies and commodities to equity sector rotation.
The US stock market is extremely oversold
Ed Pennock reiterates his call for a transition from an early-cycle to mid-cycle market marked by more choppiness. Investment-oriented accounts should de-risk portfolios by reducing equity weights and adding fixed income positions. Focus on a barbell portfolio of FANG+ growth and small-cap value stocks to mitigate risk. Small caps are washed out and could prove a worthwhile speculative buy. Traders should buy the dip in anticipation of gains over the coming weeks.
USD prospects dull in 2022, time to bet against the crowd?
There is a tight consensus of a strong USD in 2022, but Michael Howell questions the narrative. Currencies are dominated by capital flows - liquidity phenomena that largely rest on US Fed policy, global economic strength and safe asset demand. The Fed is already playing catch-up and may fall behind the curve, and the past decade has already seen huge inflows into US safe assets. This perfect storm into USD may be abating, after all.
Japan: The perils of price targets
The BoJ has opted for a nominal yield target in the JGB market to assist the banking system (close to zero at short-end, 20bp at long-end). Unfortunately, explains Andrew Hunt, this implies that when global yields fall, the BoJ has to defend its target by tightening in a quantity sense. Despite slowing money and credit growth, and data appearing deflationary, as well as China’s slowdown, QE has in effect come to an end. What comes next?
Commodity economies to face significant headwinds
Expectations of cyclical improvements in commodity economies will be met with disappointment. Frank Shostak finds that the tailwinds of 2020/21 are now headwinds, and the economies are now in slowdown phases. Stock markets have invariably moved from expansive to defensive in terms of their sector allocation. Recommendations for asset allocation include switches to Brazilian govt bonds and healthcare, Canadian utilities and consumer staples, Russian consumer discretionary and commodity-related sectors.
China’s Silk Road runs through Ukraine
Carl Weinberg discusses how Ukraine is the sole hope for China to have a straight rail shot to the EU for Silk Road trade without being beholden to Russia, a crucial element of the Belt and Road strategy. The recent troop build-up on Ukraine’s border puts that at risk, and China won’t sit still. Should an invasion occur, they will have to commit to Russia as a long-term ally, or we could see a military stand-off by the two superpowers on Ukrainian soil!
China’s monetary policy cycle officially heading in the opposite direction to US
Although onshore corporate FX deposits remain flush, an official easing bias may qualify as a shift in consensus expectations for China’s currency. The start to a destocking cycle and more RRR and LPR rate cuts will be positive for longer-dated Chinese Government Bonds (CGBs), but negative for cyclical commodities. 10Y CGB rates have fallen below the 1Y MLF rate, indicative of significant interbank leverage which could unwind. That said, William Hess believes the evolving policy stance will favour speculation in onshore bond markets.
The origins of Covid-19: A video call with Viral author Matt Ridley
Three Chinese laboratories in Wuhan have been experimenting with coronaviruses since a 2012 lethal outbreak in Yunnan. Animal origin can be ruled out because none from the "wet market" blocks away from the China CDC lab have ever tested positive, yet the first human cases clustered there. The Wuhan Institute of Virology has a published record of experimenting with modifications to the furin cleft, which determines the virus's ability to infect human cells, being conducted under low levels of bio-security. Click here
India: Priced for perfection
India’s equity market is unwinding, just as Ron William and Robin Griffiths predicted, and analysis indicates the market is now “priced for perfection”. This derivative of the secular bull-run is complete; however, investors should expect SENSEX to undergo a tactical mean-reversion to 54k, with risk of a deeper drop to 47k. This is an optimal time to take profit and look to buy at more attractive levels in the future.
Will Russia invade Ukraine?
Forefront Advisors explores how a Russian invasion, or lack thereof, will transform the geopolitical landscape. Russia is on course to achieve most of its short-term objectives just by credibly threatening an invasion. An attack could see Nord Stream 2 killed, US and EU sanctions and the cementing of Belarus as a hostile state to the EU. An invasion is paramount to Russia’s strategic interests and the conditions for an attack are better than ever.
South Africa: Disappointing Q3 GDP prompts cuts to 2021/22 forecasts
Q3 GDP surprised to the downside at -1.5% q.o.q vs -1.0% consensus expectations. Peter Montalto mentions that the loss in momentum, particularly in retail and manufacturing, indicates a broader confidence shock from the July unrest, destabilising the underlying recovery. Peter revises down 2021 full year growth from 5.3% to 4.8%, 2022 growth from 2.8% to 2.1%. 2023 growth will be at 2.3% before falling to 1.7% in 2024.
EU ETS carbon permits could bring massive returns
EU ETS carbon permits remind Raoul Pal of a cryptocurrency: limited supply and relentless demand driven by external factors. It represents an incredible opportunity with potential spectacular returns of 300-400% whilst also contributing to a greener planet. Expect prices to rise from €73/t to €100/t in coming months, but act quickly, analysis on this embryonic market is picking up and others will take heed!
Agricultural tech offers a promising ESG investments
Investors should not miss the exciting opportunities emerging in agritech, according to Dan Waterman. The growing $300bn market, with its 7% CAGR offering and attractive long-term returns, will be pushed higher and higher as regulatory and consumer pressure heats up. Recommendations include Deere, Genus, SalMar, Schouw, Darling Ingredients and Verbio.
Russian log and lumber export changes to impact China suppliers in 2022
Russia confirms it will implement a ban on softwood and high-value hardwood log exports from January 1st, 2022 - this will have a meaningful impact on global markets, particularly China, given that China remains heavily leveraged to solid-wood imports from Russia. Analysts at ERA explain why they believe US log exporters will be the biggest beneficiaries, highlighting the potential for price and volume gains for both Rayonier and Weyerhaeuser next year.
Collapse of the forward curve in crude oil
John Karle has observed the compression of the spread between front-month crude and the forward strip – it has been extremely indicative and speaks to lower economic demand an increased volatility. Reversals like this usually precede a further collapse and significant losses in stocks over the short-term. Sharp declines in the forward curve have preceded the three last major unwinds in crude oil, and the subsequent capital destruction with massive implications for all investors.
Precious metals outlook
Metals Focus has published its annual flagship report on gold, silver, platinum and palladium, with comprehensive historical statistics and a 2021/22 forecast. Key takeaways include gold and silver prices rising 1% and 2% respectively in 2022 as H1 strength gives way to H2 weakness, whilst palladium prices will drop 10% due to a softer recovery from losses stemming from the chip shortage. Platinum will slowly recover and outperform gold in the process.