“A compelling narrative fosters an illusion of inevitability.” -Daniel Kahneman, Thinking, Fast and Slow
Years ago, I got on the wrong elevator and ended up serving on a jury for a week-long criminal case. It was not because the elevator took me to the jury room by mistake. As I reported to jury duty, I rode the elevator next to the defendant and did not have any physical reaction when others probably would have.
I learned more about how trials work serving on that jury than watching seasons of Matlock, Law & Order, and My Cousin Vinny. I quickly learned that legal dramas are never shown from the jury's perspective because the jury misses out on so many critical debates. What evidence is admissible, what questions can be asked of the witnesses, and what the judge says to the lawyers. Jurors miss it all.
I am no longer surprised that courtroom outcomes are just as difficult to predict as sporting events and why most parties to a case try to avoid them. In that jury room, I learned the importance of being more believable.
The stock market’s narratives are not entirely dissimilar.
Back to the Grind…
As readers of the Early Look know, our Risk-Manager-In-Chief Keith McCullough and our Macro team see a Quad 4 environment for the next four quarters. Historically, Consumer Staples (my area of focus) is one of the best performing sectors in Quad 4.
Perrigo (PRGO), a top long investment idea of mine, has recently seen its shares under pressure due to Zantac lawsuits. Zantac, at one point, was one of the top-selling drugs in the U.S. Two years ago, the FDA pulled Zantac from the market because of potential links to a probable carcinogen, NDMA. NDMA is found in many foods and beverages like whisky, beer, cheese, and bacon. (Believe me, I do not know why God would do that either.)
Bloomberg reported that Perrigo and other generic drug manufacturers settled the first Zantac lawsuit on the eve of the hearing. Since Perrigo was dismissed from the case earlier, investors reacted negatively to a report that it still settled. The settlement is a distraction because what should matter is that Perrigo continues to be dismissed from many of the cases, including the multi-district federal case consolidating hundreds of plaintiffs. Perrigo’s primary defense is the Hatch Waxman Act written by Congress establishing the generic drug industry.
The lawsuits are also a distraction because the Supreme Court has twice ruled in favor of generic drug manufacturers in similar drug liability cases.
Perrigo, the largest manufacturer of OTC products in the U.S., is benefiting from consumers trading down to store brands during this period of high inflation. It has several tailwinds over the next year, including the benefit of implementing price increases to offset inflation, the infant formula shortage, new OTC product launches, accretion from a recent acquisition, and a return to a typical cold/flu season.
You probably haven't paid much attention to the influenza season in Australia. It's suggesting we could be in for a big one, after largely avoiding viruses (and each other!) over the past two years. Earlier in the flu season, Australian retailers had to limit tissue purchases due to extraordinary demand.
Going long Perrigo (PRGO) in your portfolio and tissue boxes in your pantry is my narrative this fall.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.02-3.29% (bullish)
UST 10yr Yield 2.71-3.08% (neutral)
UST 2yr Yield 3.16-3.35% (bullish)
High Yield (HYG) 75.40-78.51 (bearish)
SPX 4073-4299 (bearish)
NASDAQ 12,103-13,133 (bearish)
RUT 1 (bearish)
Tech (XLK) 141-151 (bearish)
Utilities (XLU) 74.34-78.55 (bullish)
Healthcare (PINK) 25.35-26.62 (bullish) `
Shanghai Comp 3 (bearish)
Nikkei 27,950-29,481 (bullish)
DAX 13,076-13,906 (bearish)
VIX 19.45-24.93 (bullish)
USD 105.11-109.60 (bullish)
EUR/USD 0.991-1.018 (bearish)
USD/YEN 132.50-138.52 (bullish)
GBP/USD 1.170-1.208 (bearish)
CAD/USD 0.763-0.778 (bearish)
Oil (WTI) 85.80-95.41 (bearish)
Nat Gas 8.24-10.04 (bullish)
Gold 1 (bullish)
Copper 3.48-3.73 (bearish)
Good luck out there today.
Daniel Biolsi
Consumer Staples Analyst
