Is it finally time to buy Cyclicals?
At a time when economists are slashing year-end targets for major equity indices, star asset managers are forecasting the dollar’s demise, the collapse of the US economy and gold prices surging further, the real story has already begun and it’s the exact opposite. Recent sector rotation suggests markets are anticipating a brief global GDP contraction, followed by a rapid and robust rebound. Q1 results in Europe are strong. Companies are quickly adjusting supply chains to outmanoeuvre Trump’s tariffs. By early Jun, the tariff story will be old news and business will be almost back to normal. Stop overthinking and trust corporate agility. The real opportunity is in quality cyclicals - cash-rich, order-heavy, sector-dominating companies with rock-solid fundamentals. AIR’s top picks include Airbus, ASM International, Renault, Rexel, Schneider and Vestas Wind.
Following publication of its FY24 annual report, Iron Blue increases their WPP score by 3pts to 30/60 (now top decile; fertile grounds for shorting). This reflects: 1) Higher stripped out costs (41% of PBT adj vs. 30% in FY23). 2) Re-expansion of the gap between accrued income and deferred income after narrowing the previous two years. 3) Another fall in balance sheet bad debtor impairment provisions. 4) Compression of trade receivables. 5) Reduced disclosures in several areas following change of auditor. 6) Moderated CEO LTIP ROCE and FCF targets.
Fighting Financials reinitiates coverage of BG with a Buy rating, after first recommending the bank at €66 in Jul 24 and removing it from their active buy list at €98 in Mar 25. They highlight a supportive macro backdrop for NIM-sensitive banks, with sticky inflation and low unemployment in Europe. While BG stands out for the fundamental quality of its business and undemanding consensus expectations. Key risks include potential Austrian bank taxes and legal challenges over retail processing fees. Nevertheless, BG is one of the best positioned names to navigate said challenges given its high level of profitability and substantial excess capital (>6% of the group’s m/cap is available for M&A or special dividends / buybacks).
Activist investor Jeff Ubben, founder of Inclusive Capital, has urged CRBN’s board to hire external advisors to reassess its strategy, suggesting a split of its health and nutrition division. Analysts at the IDEA! reiterate their positive stance on the stock, with CRBN having made a strong start to 2025 and they believe the company is entering a period of solid growth with improved profitability. In combination with limited capital investments, a considerable improvement in FCF is anticipated. Tariffs are factored into 2025 guidance and are expected to have a relatively small, direct net-impact.
“Baby With The Bathwater” Idea Forum
Given the sharp shift toward macro dynamics, MYST hosted a generalist idea event to identify companies that have been overly penalised amid the recent downturn. All but one of the participants felt the market may hit new lows (S&P 500 ~4,500) as consensus earnings estimates are likely too high. While most of the stocks presented were not far from their 52-week (or much longer) lows, participants highlighted companies with underappreciated earnings resilience (Byrna Technologies, CCC Intelligent Solutions, Six Flags, IMAX, Nvidia) and businesses misperceived as Trump tariff / DOGE losers (Aptiv, KBR, SharkNinja). However, the stock offering the biggest upside (100%+) was Chart Industries (LNG export policy beneficiary with rising recurring revenue / improving leverage profile).
“Hidden” Balance Sheet Shorts
High and volatile inflation, historically, means wider swings in corporate profit margins. Uncertainty rises, companies stockpile more inventory, COGS is more volatile and difficult to manage. We saw this in the 1970s “stagflation”. US corporates are sitting on historically high profit margins today. Will that last? If it doesn’t, one potential source of short ideas are companies that have levered up their balance sheets against unsustainably high profit margins. These stocks wouldn’t look highly levered on a ND/EBITDA basis, but if profit margins start to revert lower, “normalised” leverage might be much higher than investors realise. Names of potential interest using OWS's short screener tool include Constellation Brands, Lincoln Electric, Parker-Hannifin, TransDigm and Union Pacific.
AI driven 10Q / 10K text analysis
Since there are always reasons when companies change the wording in their financial filings, being alerted to these changes allows investors to realise potential risk factors and opportunities before they are reflected in the market. Recent alerts include: 1) AZZ - extension of credit to larger customers. 2) Constellation Brands - competitive pricing pressure. 3) DR Horton - changing long term expectation on debt to total capital ratio. 4) Moog - changing order demand in simulation and test products. 5) T-Mobile US - acquisitions of business with international exposure. 6) TriNet - change in stock repurchase expectations.
New CEO Spencer Rascoff is a high-capacity multi-tasker primed to rebuild consumer trust and female engagement. He served as CEO of Zillow from 2010-2020, scaling the business into the leading US online real estate platform. While not a product visionary himself, he is a detail oriented entrepreneurial risk taker who will inculcate a faster paced culture of innovation at MTCH. Rascoff has a knack for emphasising authentic user experience over monetisation (short-term) with an eye towards building a more trusted relationship with customers. Paragon’s analysis includes interviews with 7 former senior executives who worked with Rascoff for more than 85 years combined.
Meta is doubling down on AI infrastructure, raising its 2025 capex forecast to $64–72bn as it accelerates data centre construction amid rising costs. CEO Mark Zuckerberg is committed to making Meta a leading AI platform and insists on building in-house capacity to avoid reliance on others. While the AI strategy (centred on open source) is progressing well, it comes with a steep price tag, notably the ongoing $4bn+ quarterly burn at Reality Labs. Richard Windsor sees a growing risk of AI infrastructure overbuild, with Meta, Google, Microsoft and Amazon all ramping up spend - setting the stage for a painful correction. Despite this, Meta’s core business remains solid, with strong Q1 performance and improved operational efficiency via AI. At 23.5x FY25 PER, Meta is reasonably valued, but Richard prefers Google, where AI disruption risks from players like OpenAI are, in his view, overstated.
AutoZone accelerates, Advance Auto stalls
Northcoast’s latest Auto Parts Price Tracker shows that AZO has taken significantly more aggressive pricing actions than its competitors. By raising prices earlier, AZO may be positioning itself to absorb future tariff-related costs more effectively, limiting the impact on its margins over time. In contrast, AAP does not appear to be taking full advantage of this pricing environment. Not only has it refrained from meaningfully increasing prices, but it has also decreased prices in some categories, despite macro conditions that would typically encourage companies to maintain or raise prices. Northcoast believes this reflects the company’s ongoing struggle to better align its purchasing and pricing strategies. This cautious approach may be limiting its ability to expand margins at a time when passing through higher costs could be both justified and beneficial to the bottom line.
Scott Mushkin upgrades UNFI to Buy with a $38 target (40% upside), citing its strong position in the healthy eating trend. He expects revenue to outperform management’s conservative guidance, fuelled by robust store growth at Amazon’s Whole Foods banner, UNFI’s largest customer. Margin expansion should come from the group's adoption of Lean Operation Management - boosting FCF, reducing debt and enabling future buybacks. Assuming a 55% natural/organic sales mix by FY28, EBITDA margins could surpass 2.3%, with earnings exceeding $4 per share. The stock currently trades at a ~12x PE, 5.5x EV/EBITDA on FY26 estimates. If Scott’s projections around growth and margins verify, not only will the company see better than estimated earnings growth, but valuation multiples will increase.
Canadian Banks: Preparing for higher PCLs
Shalabh Garg attempts to quantify the performing loan provisions that Canadian banks might build over the coming quarters. He uses the banks' response to macroeconomic uncertainty in the early days of the pandemic as a reference point for provisioning built through the reclassification of some Stage 1 loans to Stage 2 under IFRS 9 and an increase in the allowances for credit losses ratio for both Stage 1 and 2 loans. Shalabh believes RBC and TD, followed by Scotiabank and CIBC, will likely undertake substantial performing provisions for credit losses over the coming quarters if trade policy uncertainty persists. He does not expect impaired PCLs to spike in the near term, unless economic conditions deteriorate materially and drive the unemployment rate higher. He believes valuations will come under further pressure only when impaired PCLs ramp up.
A factor model mystery!
Major Pharma and Biotech are surprising inclusions in the top 5 ranked sectors in YWR’s Global Factor Model, which ranks 3,000+ stocks on earnings momentum, valuation and price momentum. In his latest piece, Erik@YWR looks at why these two sectors have started scoring well this year. While valuation and FDA reform explain some sentiment shifts, the real driver appears to be surging prescription volumes in mid-cap firms targeting rare diseases. Deeper analysis links this to a little-discussed Medicare change under the Inflation Reduction Act: a $2,000 annual cap on out-of-pocket drug costs starting in 2025. This structural policy shift has quietly boosted earnings estimates across the space. And the good part is nobody has picked up on this, so the trend will likely continue.
AAL reported a disappointing Q1, with modest improvements in unit revenue and load factor offset by poor cost control (especially relative to Delta and United). Despite benefitting from lower fuel prices, AAL failed to retain related savings. Cash conversion deteriorated and over the last 12 months, adjusted OCF is ~33% below 2019 levels (the weakest among the Big Three). Leverage also remains substantially higher than peers. Reno Bianchi forecasts Q2 EBITDA of ~$1.6bn, below consensus estimates. Given increasing macro risk, he believes AAL's credit profile is looking increasingly fragile. Reno continues to recommend avoiding the group's equity and unsecured debt, while the current spread premium among AAL’s long-dated secured obligations is too tight. Investors should focus exclusively among some of the airline’s short-dated, well secured structures.
Frank Mitsch applauds the action to delay the Ft. Saskatchewan Path2Zero project, which is resulting in an additional $600m in capex savings during 2025. And combined with the Macquarie infrastructure sale(s) and anticipated NOVA litigation proceeds, suggests concerns over dividend sustainability in 2025/26 should diminish. Despite weak sentiment, heavy short interest and near-term pressures (up to $1bn FCF outflow in 1H25), he expects improvement in 2H25 as working capital normalises, maintenance spending falls and new projects ramp up. Trading at ~9.4x EBITDA with a ~9.5% dividend yield and shares back at Covid lows, Frank sees an attractive mid- to long-term risk/reward and upgrades the stock to Buy.
Kinngai Chan believes STX's HAMR technology HDD will drive further upside to its gross margin into 2H25. Industry checks indicate the current favourable pricing environment and product mix will continue. The company’s HAMR technology will not only allow it to increase its HDD capacity points but will also drive higher ASP and serve as a cost reduction for its mid-to-lower capacity HDDs. While Kinngai understands investor concerns about possible customer pull-ins and the future impact of tariffs on industry demand, he thinks any demand slowdown would be manageable for the storage market and STX. He expects STX will drive its corporate margin to the high-30% range as its HAMR-based HDD ramps through 2H25 and into 2026.
NIC released a strong activity report for 1Q25, with robust operational performance and solid earnings despite lower nickel prices. The deferral of scheduled payments for Excelsior Nickel Cobalt is also positive from a credit perspective. Lucror’s Credit Bias on NIC is "Stable", given the positive demand outlook for nickel pig iron. The company has a modest financial risk profile, with low leverage and adequate liquidity. That said, they are concerned about NIC's dependence on sole customer Tsingshan. They maintain their "Buy" recommendation on the NICAU 11.25 '28s at 100.6/11%/2.8Y. The notes have corrected from their peak of 109.6, given proposed changes to royalties and the ongoing tariff war. Lucror believes the correction has been overdone and that the bonds currently present attractive risk-adjusted value.
Victor Galliano upgrades Kyoto Financial to Buy, following what appears to be a sea change in management’s view on equity holdings disposals as well as the president’s opinion regarding Japanese regional bank consolidation. Nobuhiro Doi suggested that the target of JPY100bn disposals by Mar 29 could be increased to JPY200-300bn (up to 30% of total equity holdings; equivalent to 42% of Kyoto’s current m/cap). Such disposals would act as significant catalysts for large share buybacks going forward. In the longer term, Kyoto could be in a strong position to lead a regional bank merger or acquisition, with a look to improving efficiencies. An important factor in determining Kyoto’s “bargaining power” in the consolidation process will be to what extent its shares trade at a premium valuation; it currently trades at a premium in terms of PE multiple, but at a discount in terms of PBV ratio.
China E-commerce Survey: Platform differentiation now taking shape
E-commerce platform growth in 1Q25 remained broadly stable Q/Q, but strategic divergence is now clearly underway. While overall momentum held steady, platform-specific execution and monetisation efficiency began to separate winners from laggards. All major platforms are pushing algorithm and AI-tool enhancements, with mixed results in conversion and traffic ROI. Stocks discussed include: 1) Alibaba - improved monetisation; subsidy efficiency gains allowed BABA to protect margins while growing share; expect better profitability this quarter as the platform leans into smarter traffic and brand segmentation. 2) Pinduoduo - is doubling down on volume and SKU expansion. Efficiency gains in ad/subsidy tools suggest a scalable ROI model is emerging - though monetisation remains back-end loaded.
Discrepancies have emerged during RMKF’s annual physical verification of inventory. While the company has appointed independent external agencies to investigate, management’s admission that 4-5% of net worth could be eroded has raised serious concerns. Beyond accounting and governance issues, the situation highlights a critical audit blind spot - the 10% inventory discrepancy threshold, which Iii argues is too high. Having previously flagged forensic issues at RMKF, including rising inventories, Iii’s latest report includes a list of companies under FNO category where inventory exceeds 40% of net worth. While this doesn't signal immediate alarm, the aim is to identify businesses where even moderate mismatches could significantly impact shareholder value.