Welcome to Weekly Briefing #5 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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The Rally Continues

The rally in US stock markets continued last week with the S&P 500 and Nasdaq both finishing near all-time highs. The Dow, which has underperformed over recent weeks, put in a strong performance gaining almost 4%. European stocks, natural gas and oil also saw gains with WTI crude hitting a high of $74.18 a barrel on Friday.

However, it was a different story for cryptocurrencies like bitcoin which remain subdued after the -40% falls we saw in May. News out of the UK this morning - that the FSA is to ban crypto exchange Binance - could add further price pressure. Lumber prices also continued to slide and are back under $800.

The Week Ahead

As we move into the week ahead, attention will be paid to Friday’s non-farm payrolls data with about 700,000 new jobs expected. That is up from 559,000 in May and further evidence that the economy is heating up.

Investors will also be watching average hourly earnings data to see if increased employment is affecting wages. Higher hourly wages adds to inflation expectations and could put additional pressure on the Federal Reserve to taper bond purchases.

The week will also see a range of earnings reports from the likes of Herman Miller (MLHR), National Beverage Corp (FIZZ), Bed Bath & Beyond (BBBY) and Wallgreens (WBA).

An Interesting Chart

As we head further into the summer, the reopening trade continues to gather pace. Travel, hospitality and retail continue to impress. This was emphasised by Nike’s blockbuster earnings last week. It will be interesting to see how the airlines fare when they report earnings next month.

One interesting chart I came across from Goldman Sachs shows how airline debt and enterprise value has evolved since COVID. You can see while UAL, AAL and DAL have taken on significant new debt, LUV is looking in much better shape. It managed to reduce debt by over $2 billion according to this graphic:

Our View

Our own view is essentially unchanged from what we wrote last week. We continue to believe that stock market valuations are stretched in many areas. This means we need to be more careful and exercise our monthly investing program at a slower pace than usual. We would be happy to see a correction that would allow us to put money to work at lower prices.

I will now turn to some of the more interesting ideas I came across last week.

Vaccitech Plc (VACC)

If you didn’t see it, we published a deep dive analysis on Vaccitech plc that was sent out on Friday morning. Vaccitech is a spin-out from the University of Oxford and is the company behind the AstraZeneca COVID-19 vaccine.

The company won’t receive royalty payments from the vaccine until the pandemic is over but the real story is its additional pipeline of vaccine candidates. Potential vaccines for Hepatitis B, HPV, herpes, lung cancer, prostate cancer and MERS provide multiple shots on goal. Click the button below to read our full report:

Read More about VACC

Home Depot (HD)

The slide in lumber prices over the last few weeks is being viewed as an early warning sign for home improvement and DIY retailers like Home Depot and Lowe’s. The argument is that as the economy reopens, consumers are going to spend more money going out and less doing up their homes.

A report in the Financial Times, however, challenges this view, suggesting that DIY retailers like Home Depot still offer reasonable value trading at around 22 times future earnings.

According to the article, the pandemic has caused a major backlog for builders across the country which should leave a steady stream of business for months to come. Low mortgage rates, high house prices and lack of housing supply means DIY retailers should continue to thrive.

Wise (Formerly TransferWise Ltd)

One company that I have got my eye on is Wise which was formerly known as TransferWise Ltd. This UK-based company enables cross border payments via its TransferWise app and handles $2 trillion in global payments per year. The app undercuts traditional banks and its low overheads provide an attractive business model.

The company announced it will list directly on the London Stock Exchange, foregoing an IPO, and is tipped to be valued at around $6 billion. That would put the valuation at around 55 times EBITDA. This is an expensive multiple and there are a lot of competitors. However, there is a huge amount of growth in this space and Wise appears to be growing a loyal customer base.

NIO Inc. (NIO)

Seeking Alpha contributor Samuel Smith made the case for NIO Inc. saying the company has a path to a $1 trillion valuation. Smith says NIO has many of the same advantages as Tesla in terms of battery technology and autonomous driving software. Chinese government support and an aspirational brand are other reasons the company could further cement its position. According to Smith, if the company is able to capture 7.5% of EV sales by 2040 then the company might be worth in excess of $800 billion.

Zillow Group Inc. (ZG)

Zillow CEO and cofounder Rich Barton said recently that the company’s stock price rise does not accurately reflect the reality of his business.

Speaking on the How I Built This podcast, Barton said that:

“Obviously the company isn’t in reality that much more valuable in the space of one year, which just highlights how the stock price is just not the business… Investors are more than willing to take, you know, not much profit in the short term for a chance at a much bigger business in the long term.”

As well as being the CEO of Zillow, Barton founded Expedia. Barton’s comments are refreshingly honest and support the sentiment that many stock prices are just not reflecting reality at the current time.

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Disclosure/Disclaimer: The Unexpected Value newsletter is NOT financial advice. Of the stocks mentioned we own VACC, MLHR, NKE. You can see our portfolio here. 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.