Last week the Hedgeye Macro Team presented its 4Q21 Themes call. There are two notable themes related to retail… USA: #Quad2 in Q4? and Global Inflation’s Acceleration.
The inflation factor is already being seen in retail. Freight costs are through the roof, input costs are up, and wages continue to march higher. Our Macro team expects continued acceleration in inflation both in the US and globally.
The USA #Quad2 theme is new. Quad2 is the macro scenario where both growth and inflation are accelerating at the same time. As noted above, inflation data continues to accelerate which has been the case since summer 2020. The rate of change of growth is the recent inflection. We’ve been in Quad3 (growth slowing with inflation accelerating) in 3Q21, which the market started to signal around the end of spring. The current forecast for 4Q is right on the line of Quad3&4 on known trailing data. However, our macro team has been highlighting that incoming data is taking growth forecasts higher, and there is a rising probability that we see an acceleration in real growth. With the Covid Delta variant seeming to have recorded a new caseload peak, and tailwinds to consumption like savings (chart below), government disbursements, and employment demand still to play out, our view is that consumption data will improve driving the growth acceleration.
Quad2 created the environment we had in fall 2020 to spring 2021 where retail/consumer stocks did very well. We won’t see quite as “deep” (such large accelerations in growth and inflation) a Quad2 move that we saw earlier this year, but historically Quad2s are a time where consumer discretionary has done very well. Higher beta, small cap, higher growth, and momentum are quality style factors for Quad2.
Down below are some quad charts for our best ideas and some considerations when observing the data.
Long side the top choices domestically are RH, CPRI, and PLBY. Hedgeye Macro is still bullish Europe’s quad setup which should be a tailwind for Dufry and Adidas.
Short side, purely on historical Quad and style factor analysis, the best short on our Best Ideas list would likely be BBY and W. However with the idiosyncratic risks for some of the growthy retail names (SFIX, ETSY) on our short list, we’re comfortable with being negative on those.
Here are the historical returns by Quad for our current best ideas over the last 20 years of data. We excluded those with less than 3 years of historical data (PLBY, CHWY, YETI). Keep in mind the low sample size of other relatively newly public companies (ETSY, W, SFIX). Also, recall that 2Q20 was a Quad4, yet due to the pandemic several ecommerce names saw huge positive returns that quarter (W, ETSY, SFIX), so average returns for Quad4 are skewed.
