Welcome to Weekly Briefing #3 from the Unexpected Value newsletter.
In this section I provide a recap of some of the best investment ideas that I’ve come across and give some thoughts on the overall market.
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Time To Taper?
The S&P 500 advanced to a record high last week, gaining 1.6%. Meanwhile the Nasdaq moved up by 0.3% and the Dow Jones slipped 1%. The theme for the week was low volatility with the CBOE volatility index moving to it’s lowest level since the start of the pandemic.
In commodities, copper and silver consolidated and WTI crude oil pushed past the $71 mark. Lumber continued to pull back from it’s breathtaking rally and finished the week just above $1000.
As we move into a new week, all eyes will be on the FOMC beginning on Wednesday afternoon. Markets are not expecting the Fed to make any changes but could signal a timeline for tapering off it’s $120 million bond purchases.
According to Wells Fargo analyst Mike Schumacher, there is potential for markets to get a scare.
“Let’s say for some reason Powell intimates tapering could happen late this year, not just talk about it but do it, that would spook the market, or if we get a big increase in inflation projections that would get the markets a little spooked.”
A Good Time To Buy A House?
A chart that caught my attention this week is the Home Purchase Sentiment Index (HPSI) from Fannie Mae.
Although general consumer confidence is high, you can see that consumers have become significantly more pessimistic when it comes to buying a house. Only 35% of respondents believe it is a good time to buy a home, down from 53% in March. This looks to be a real dip in sentiment and comes at a time when house prices are hitting new highs.
Our View
It’s becoming hard to find interesting opportunities in the market with many companies trading at record valuations. This over valuation is widely spread across most areas of the market.
Stock markets typically drop 5% three times a year and they typically drop 10% once a year. We have now gone over seven months without a 5% correction so the odds suggest that we will get one fairly soon.
Corrections, however, are nothing to fear and provide investors with better entry points. We will continue our process of monthly investing in quality stocks. However, we will do so at a slower pace and keep some cash on hand to take advantage of a market correction.
In case you missed it, we recently took a new position in Finch Therapeutics.
I will now turn to some of the other interesting ideas I’ve come across in the past week.
Trex Company Inc. (TREX)
Chris Camillo from the Dumb Money YouTube channel highlighted a trade on Trex Company.
As a maker of alternative-wood decking, Trex stands to benefit from the skyrocketing price of lumber. The price of lumber dropped to $1,059 last week but still sits 200% higher than one year ago.
Not only does Trex manufacture composite decking but they also manufacture furniture, cladding, railings, tables, planters and lighting. While the price of lumber stays elevated, more and more consumers are likely to reach for the option of composite alternative decking.
Google trends data and online channel checks indicate that there has been a surge in demand for Trex products in recent months. Furthermore, a boom in the demand for swimming pools supports the idea that Trex decking products could be in for a strong couple of quarters.
Camillo also highlighted Azec Company (AZEK) as another composite decking stock. Azek and Trex operate a would-be duopoly in the artificial decking market. Artificial wood products are set to dominate natural wood over the next ten years according to Dumb Money.
Source: Trex.com
Wuling Motors (WLMTF)
The Financial Times highlighted an interesting opportunity last week in electric vehicle manufacturer Wuling Motors.
The Wuling Mini EV is a small 4-seater with a top speed of only 100 kmph and a range of 170km. Despite it’s weak stats, the micro EV recently overtook Tesla’s model 3 to be the best selling electric vehicle in China.
source: carscoops.com
A big reason for the popularity is the $4,500 price tag. Narrow and congested city streets are another reason the car has been popular among Chinese consumers. The car is is produced out of a joint venture of Wuling Motors, state backed SAIC and General Motors. SAIC and Wuling own a joint 56 per cent while General Motors makes up the other 44 per cent.
According to the Financial Times, SAIC trades at just 9 times earnings and is good value compared to other EV carmakers. SAIC is the largest auto manufacturer in China with over 5 million sales in 2020. Gaining exposure to the stock may take some hunting, however. It currently trades on the Shanghai Stock Exchange under code 600104.
Lordstown Motors (RIDE)
Another EV stock, Lordstown Motors, took a tumble of 9% last week after the company said it is short of cash and may not stay in business.
Despite the bleak outlook Lordstown still trades with a market cap of $1.87 billion and the stock is more than 50% above its May low.
A short sellers report from Hindenburg Research warned in March that the company was overvalued and misleading investors with no revenue and no sellable product. According to Hindenburg:
“The company has consistently pointed to its book of 100,000 pre-orders as proof of deep demand for its proposed EV truck. Our conversations with former employees, business partners and an extensive document review show that the company’s orders are largely fictitious and used as a prop to raise capital and confer legitimacy.”
The recent rally in the stock has left many analysts scratching their heads. The only conceivable reason that the stock hasn’t cratered further is that it could be popular among Robinhood and Reddit traders. The stock has a short float over 30% and being a target of Hindenburg Research may be another reason for the popularity.
However, the recent 'going concern’ warning could be the news that tips the balance back into the bears favour.
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Disclosure: Long FNCH. No positions in any other stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst and does not purport to tell or suggest which securities customers should buy or sell for themselves. The reader agrees to assume all risk resulting from the application of any of the information provided. We strive to provide accurate data and analysis, however, mistakes and errors do occur. Financial investing is risky and not for everyone. You should not bet more than you can afford to lose. Past performance is not indicative of future results.