“And there’s a hand, my trusty friend, And give us a hand o’ thine; And we’ll take a right goodwill draft, For auld lang syne.”
– Robert Burns (translated)
We are so excited to be hosting clients in our Stamford offices for the first time this weekend for our first annual subscriber conference, Hedgeye Live!
Like most analysts here at Hedgeye, I have been stopped and treated like an old friend by many clients I have never met before, simply because they watched our webcasts on HedgeyeTV. As someone who was voted “Most Shy” by his high school classmates, it makes it much easier to meet people. We already know each other—at least one of us does!
Like many of you, I first knew of Keith McCullough without ever meeting him in person. Back in the day (20 years ago), we didn’t have webcasts, so I only “knew” Keith from a handful of conference calls between his portfolio manager and mine.
I can usually tell a lot about your investment style simply based on the positions you hold. Taking a look at your book is a lot like looking at your social media accounts and photos on your phone. I can make assumptions about how you do your research, your investment process, your bandwidth, what you expect in the future, your demeanor, your hopes, and your fears.
Needless to say, having the opportunity to hear the thesis behind Keith’s ideas, made me feel like I knew him well. That said, I didn’t meet Keith until years later, after I had already signed up my son for ice hockey lessons (after years of hearing Keith glorify hockey).
I must have had a strange, definitely not shy, smile on my face when we first met. Because to me, he was an old friend. He just didn’t know it yet.
We are looking forward to meeting all our “new, old” friends in-person today at #HedgeyeLive. Let’s make today great!
Back to the Consumables Grind…
We are starting to see signs of change in consumer spending behavior through the lens of a consumer staples analyst. It’s about time. Food at home inflation hit 4.5% in September and has accelerated every month since, hitting 10.8% in April. That is higher than the majority of investors have seen in their entire careers.
Simply looking at the base effects, it’s easy to project at least one to two more months of accelerating food inflation. But then what? Slowing to +HSD% in the summer would be great from a rate of change perspective (and we like rate of change at Hedgeye), but it’s not much comfort for consumers looking to put food in the pantry.
Spending will have to come out of something, mostly likely most categories some just more than others. CPG companies are not done with price increases either. Their margins have been under enormous pressure and until recently, elasticity was well below their expectations. Most companies are in their second round of price increases. Plans for a third are already underway.
Surveys have shown that consumers are more aware of price increases for food than other categories including gasoline. That makes sense to me in that food is purchased frequently and gasoline prices are volatile. How consumers respond to the significant price increases is somewhat unknown given that few investors have experienced it. We can make some predictions.
That brand strength matters, that consumers will trade down, and that consumers will look to offset increases in a variety of ways.
Sprouts Farmers Market (SFM) said it is seeing consumers remove items from their basket to compensate for food prices up double digits. Grocery Outlet (GO), a discount grocer where consumers can save on average 40% relative to conventional grocery stores, has begun to see an increase in store visits. Conventional grocers are seeing shopping trips being consolidated again. This habit started out of pandemic concerns and reversed as the concerns ebbed, but has now reversed again due to higher gasoline prices.
Consumers generally do not like to change spending behavior. It takes outside forces like a pandemic to cause brand switches or shopping at new stores. Once started, habits become sticky. Companies do not have the same pricing power or cost pressures. There will be winners and losers.
What am I recommending in #Quad4? Consumer Staples companies with pricing power like Constellation Brands (STZ), PepsiCo (PEP), General Mills (GIS), and Pilgrim’s Pride (PPC).
I really look forward to meeting some of you at Hedgeye Live this weekend. I hope you find me and tell me about yourselves so we can be two way old friends…
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 2.92-3.254% (bullish)
UST 10yr Yield 2.80-3.13% (bullish)
UST 2yr Yield 2.53-2.79% (bullish)
High Yield (HYG) 75.71-77.97 (bearish)
SPX 3 (bearish)
NASDAQ 10,980-12,169 (bearish)
RUT 1 (bearish)
Tech (XLK) 127-139 (bearish)
Utilities (XLU) 69.61-72.97 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 25,604-26,944 (bearish)
DAX 13,308-14,122 (bearish)
VIX 27.11-37.22 (bullish)
USD 102.40-105.11 (bullish)
EUR/USD 1.036-1.063 (bearish)
Oil (WTI) 99.10-111.12 (bullish)
Nat Gas 6.76-8.91 (bullish)
Gold 1 (neutral)
Copper 4.01-4.37 (bearish)
Bitcoin 26,650-33,998 (bearish)
Have a great weekend,
Daniel Biolsi
Consumables analyst
