“Nothing so undermines your financial judgement as the sight of your neighbor getting rich.”
- J. P. Morgan
When I first heard the Chinese expression “May we live in interesting times” in college, I wrote it on the white board in my dorm room. Back then, I’m not sure I really appreciated it.
Having a career that has spanned the Internet bubble, the attacks of 9/11, and the Great Financial Crisis, I’ve certainly gained a better appreciation for the expression.
That said, I never expected anything as “interesting” as a global pandemic, the worst GDP decline in modern history, mass protests across America, and the sharpest sell-off and quickest recovery in U.S. stock market history.
But now what? Personally, when I look around I see the signs of rampant speculation and investing complacency everywhere:
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Bankrupt companies are routinely the highest gainers in the stock market;
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The Put - Call ratio is at an absolutely extreme level near ten year lows (a sign of complacency);
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In the last 10 weeks every single stock in the SP500 is up (not a great environment to be a short seller, though we’ve “batted” a lot better than 0 for 500);
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Every taxi cab driver from Stamford to Wichita has a Robin Hood account and is minting it;
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And the CEO of Barstool Sports (who has created a ton of value with his company) is doing end zone celebrations daily due to his trading prowess!
Time will tell how the story ends, but the signs are there. And as Warren Buffet famously said:
“In the short run the stock market is a voting machine and in the long run it’s a weighing machine.”
When my colleague Neil Howe wrote in 1991 about the Crisis of 2020 and said it “could rival the greatest trials our ancestors have known” and serve as “the next great hinge of history” . . . boy was he right!
Back to the Global Macro Grind…
This morning I’m going to throw you a curve ball and focus more on some of our “picks”. Since no one cares about the economic gravity (for now), let’s get into some “picks”, eh? (Incidentally, our Sector Head for Technology Ami Joseph will be on the Macro Call with me this morning at 9am to discuss his current ideas and themes if you are able to tune in.)
As Director of Research at Hedgeye, I have the unique position of being on top of all of research daily. Now of course I have my biases as well. I tend to like value-oriented stocks with real business and potential catalysts (sounds crazy I know), but without further-adieu here are some of my favorite “picks” from our research team.
First up is Fed-Ex (FDX), which is one of my colleague Jay Van Sciver’s Best Ideas. I know, I know FDX isn’t that sexy and it’s not going bankrupt, so doesn’t really fit current investing screens, but the risk-reward is compelling. FDX is trading close to its lowest relative valuation to the SP500 ever and we think it could double over roughly a year.
In the short term, the tail winds of lower fuel costs, very profitable air cargo routes, box shipments (volume) that are up despite the economic contraction, and an increasing ability to take price should all benefit earnings.
Second on deck is a short, namely Credit Acceptance Corp (CACC). On the topic of irrational CACC is approaching all-time highs, which is interesting for a company whose business is subprime auto loans. In fact, they are the largest subprime lender in the auto market.
By in effect becoming the market, they have a limited path of future growth. The key catalysts on the negative side for CACC are expiration of enhanced unemployment payments and consumer debt forbearance. As these run out, bad debt and legal costs are likely to increase for CACC, which will negatively impact earnings.
Finally, let’s talk about a bull market that no one is thinking about ... Frozen Food!
Based on the most recent data out Consumer Staples Team is tracking, Frozen Food sell through is up near 30% in the last four weeks in both Europe and the U.S. and this is post pantry stocking!
One of the top beneficiaries of this trend is Nomad Foods (NOMD). We think the story here is a combination of better than expected earnings growth and multiple expansion. Even in a more moderate frozen food sales environment, there are a lot of ways to win with NOMD.
Lastly today, I wanted to highlight one economic data point that likely not many in the U.S. are focused on . . . namely Japanese Machine tool orders.
They came in at -52.8% year-over-year in May, which was the worst reading since September 2009. This fresh cycle-low print is confirming of our view that the US economy, in particular, has a near-full inventory cycle to contend with over at least the next couple of quarters.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.55-0.92% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 9 (bullish)
Healthcare (XLV) 99.60-104.33 (bullish)
Tech (XLK) 95.62-102.33 (bullish)
Utilities (XLU) 57.07-63.32 (bullish)
Financials (XLF) 22.31-26.93 (bearish)
REITS (XLRE) 33.50-37.98 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 210 (bullish)
VIX 24.06-33.38 (bearish)
USD 96.06-99.20 (bearish)
Oil (WTI) 31.59-40.40 (bearish)
Nat Gas 1.71-1.95 (bearish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
