“There are all sorts of cute puppy dogs, but it doesn’t stop people from going out and buying Dobermans.”
-Angus Young
AC/DC is of course an Australian rock band formed in Sydney in 1973 by brothers Malcolm and Angus Young. For over 40 years, they have rocked the world’s stages and produced chart topping records. To say this iconic band has stood the test of time would be an understatement. Their album Back in Black is the top selling album of all time by any group.
The band has often been criticized for producing albums that sound the same. In response, its lead guitarist Angus Young once quipped: “It’s not true that we’ve made 11 albums that sound the same. In fact, we’ve made 12 albums.”
With more than 250 million albums sold, the joke is on AC/DC’s critics.
Young’s quote at the outset of this note is also relevant to stock market operating. There are plenty of great companies and assets to invest in, albeit not always at bargain prices. Despite these favorable investing options, it doesn’t stop people from buying “Dobermans”. While Dobermans are good looking animals, you never know when they might bite you in the . . . !
Case in point: investors who piled into cryptocurrencies after their year-end ramp. I suspect they wish they bought a nice puppy instead. The “benchmark” cryptocurrency Bitcoin is down over 50% in just the last month. Our Cartoon of the Day below captures our current thoughts on the space.
It’s obviously premature to assume that the massive correction we’ve witnessed in cryptocurrencies in the last 30 days will have an impact on the real economy. For starters, adoption is likely not widespread enough yet to impact consumer spending on a meaningful level, as would happen normally when a major asset class devalues so rapidly.
It is currently estimated that 4% of Bitcoin owners own 95% of all Bitcoin. So, even if estimates are true that 1 in 20 Americans have exposure to Bitcoin, the asset getting cut from a $400 billion to $200 billion in market capitalization is unlikely to have any real systemic risk associated with it.
As luck would have it, the crypto sector is enjoying a massive rally this morning. So for those that bought “the damn dip” yesterday, we salute you! In practicality for most rational investors, it is difficult to double down on an asset with no intrinsic value.
No doubt, it is a “dirty deed” playing cryptocurrency roulette!
Back to the Global Macro Grind…
Our house view on the U.S. economy is no secret. We remain bullish on U.S. growth. There is certainly more corroborating evidence of this in the last 24 hours with Industrial Production coming in at a 37-month high and up 3.7% y-o-y.
We also continue to see follow through on the corporate level with SP500 earnings up +13% so far this earnings season. Meanwhile, the 9 companies of the Nasdaq 100 that have reported have shown aggregate EPS growth of a mind boggling +84% y-o-y.
The derivative of being U.S. growth bulls is to be bullish of U.S. equities, at a price. No surprise that with such a strong equity year in the rear view mirror and 2018 off to a great start, the masses are also starting to get bullish. The “WSJ” (one of the better proxies for consensus thinking we know) noted this morning that:
- 60% of individual investors think the market will go higher in the next six months, which is the most since 2010; and
- A majority of institutional investors now think the equity market will peak in 2019 or beyond.
Now just because everyone bullish of U.S. equities and the Nasdaq is nearing our overbought level near 7,316, doesn’t mean there aren’t opportunities, especially at the specific security level. In fact, the research team at Hedgeye has had a banner week in terms of research production.
On the long side, our Retail team, led by the incomparable veteran Brian McGough, launched on the Autoparts Sector. Overall, the industry is much more defensible than investors realize. It is literally the best subsector when looking at valuation versus return-on-assets of any sector within consumer retail. The industry is also less prone to the Amazon threat since roughly 2/3s of the market is “Do It For Me” and non-discretionary.
Without opening or buying stores, Amazon simply can’t compete here.
His top idea from the group is O’Reilly Autoparts (ORLY). The thesis on ORLY is threefold:
- Best in class - Combo of best in class organic DIFM/DIY networks, store growth, and store maturation curve provide the best outlook for TREND/TAIL sales growth. Customer exposure to ‘AMZN threat’ is the lowest of the group;
- Margin expansion - With even moderate comp reacceleration in 2018 ORLY should see 28-30% incremental margin over a TAIL duration while currently running at 18%. If we’re right on a 20-21% margin, then we get EBIT accelerating from 1% in 2017 to 11% growth for 2018;
- 50% upside - Street is at 2.9% industry growth in 2018, and our work takes the over on that one. We’re looking for 300bp acceleration in revs in the year that started two weeks ago. $15 EPS in ’18 (6% beat) with $20 over a TAIL duration. If we are right on the $20 earnings power, we think this is a $400 stock on a reasonable multiple, which is 50% upside from here.
It may not be the worst time to hedge your crypto "assets" with a little bit of long old economy auto supply retailers!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.47-2.62% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7190-7316 (bullish)
Biotech (IBB) 109-113 (bullish)
XOP 37.99-39.98 (bullish)
Nikkei 23156-24319 (bullish)
DAX 13130-13410 (bullish)
VIX 8.50-12.21 (bearish)
USD 90.00-92.25 (bearish)
YEN 109.90-112.33 (neutral)
Oil (WTI) 61.00-65.03 (bullish)
Gold 1 (bullish)
Copper 3.18-3.26 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
