Weekly Briefing #1
A round up of the best ideas and thoughts for the days ahead.
Welcome to the first Weekly Briefing 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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Inflation Still A Talking Point
Last week was a relatively quiet week for US equity markets with the S&P 500, Nasdaq and Dow Jones all registering mild gains.
Even though there has been volatility in frothy parts of the market, such as high growth stocks and SPACs, the fact is that US equity indices sit just a whisker points away from all-time highs.
European stocks are also moving higher with the Euro Stoxx 50 and DAX both showing strength. Meanwhile, crude oil sits just below important resistance at $70 a barrel.
As we move forward into June, inflation is still a talking point with the latest US CPI numbers showing a spike up to 4.2%. This is the highest number we have had for some time and has led calls for the Federal Reserve to reduce stimulus.
The key question is whether the uptick in inflation is transitory or something more permanent.
Some commentators (including Ark’s Cathie Wood and the Fed) believe the surge in inflation is a temporary consequence of disrupted supply chains from the pandemic. They believe that once supply chains work themselves out deflationary forces will return.
Others, such as Stanley Druckenmiller, are pushing for the Fed to reduce stimulus now or risk even greater inflation down the road.
Right now it’s difficult to know whether the inflation we are seeing is permanent. Once pandemic cheques are all spent, it’s possible that inflationary forces will pare back.
At Unexpected Value we continue to believe the market is elevated on a long-term horizon. However, we do not see any reason to halt our investing strategy.
We contine to think that some areas of the market (particularly rebound stocks like travel) represent better opportunities than others. Biden’s economic stimulus plans are going to push a lot of money to these areas this summer.
That said, the recent drop in some growth stocks means that this area of the market is starting to look interesting too.
Overall, financial conditions are still stable and markets are still in their up trends. We therefore maintain a medium-risk outlook and will continue our strategy of monthly investing in quality stocks.
I will now turn to some of the more interesting ideas I’ve come across in the past week.
Seres Therapeutics (MCRB)
An interesting article in the Financial Times last week highlighted the opportunity in Boston-based Seres Therapeutics (MCRB). Seres is a pure play on the microbiome industry which is expected to grow at a rate of 21.3% to 2028.
Research has shown that human gut microbiomes may be used to treat illnesses such as autism and Parkinsons. However, not a lot is known about this pioneering approach and no drugs have yet been approved.
Seres has teamed up with Nestle and has a number of pending products including a treatment to combat superbug C.difficile. According to the company, C. difficule is a leading cause of hospital-acquired infection that kills over 20,000 patients a year. Analyst Chris Howerton, of Jefferies, thinks the stock could double if Seres treatments are approved.
We think the microbiome industry is an exciting area to look into but more due diligence is needed on MCRB.
Toll Brothers (TOL)
Invesment firm Evercore says it is bullish on homebuilder Toll Brothers after the company reported earnings that beat expectations and forecast optimistic revenue despite supply disruptions.
Evercore analysts pointed to rising earnings estimates amid a tailwind of sector growth and raised their price target to $85, implying an upside of 31%.
"Unprecedented housing strength has provided homebuilding investors the equivalent of a glorious day at sea, with azure blue skies and a rising tide raising all boats. But smooth seas don’t make skillful sailors,' sniff the skeptics, as they tighten their life jackets and slather on the sunscreen."
LVMH Moët Hennessy Louis Vuitton (LVMUY)
A video from the Dumb Money channel spoke of an opportunity in LVMH, the company behind the Louis Vutton and Moet Hennessy brands.
The video highlights a number of bullish factors including LVMH’s dominance of the luxury goods sector, high R&D investment and strong social media presence. The company has embarked on a number of promising partnerships such as with actress Emma Stone, Sophie Turner and boyband BTS.
Key to the bull case is a 3-year long partnership with the NBA, exposure to a European economic recovery and expansion into the hospitality industry. There are also positive signs of growth in Asia with 83% year-on-year revenue growth coming from the region (most notably China).
The company which also owns Hublot watches, Tiffany jewellery and Christian Dior is worth roughly $400 billion and has seen its stock almost double over the past year. The thesis looks strong but the company is already huge and more due diligence is needed for me.
Wall Street Journal columnist Aaron Back suggested that makers of cleaning and disinfectant products such as Clorox and Reckitt Benckiser could face a hard time post-pandemic.
While Clorox was a gainer during the early days of the pandemic the stock is currently down -13% YTD. Meanwhile Reckitt is down -3%.
Back suggests that while consumer hygiene will remain important post-pandemic, authorities have adjusted their messaging in recent months putting a higher emphasis on the dangers of airborne transmission, not contamination from surfaces. Furthermore, products like hand sanitizer are now in chronic oversupply.
While demand may remain elevated in some areas, particularly overseas, there are likely better investment opportunities outside of this crowded trade.
AMC Entertainment Holdings (AMC)
This weeks most talked about Reddit stock is cinema chain AMC Entertainment Holdings according to Swaggy Stocks. The stock has been on a parabolic surge over the last few days, gaining 481% over the past six months.
The company now has an enterprise value of $23 billion which seems far removed from the firm’s TTM revenue of only $338 million. The company also possesses a huge amound of debt. The stock is likely to see (another) pullback to reality soon. However, finding a way to profit from a move lower could be difficult given the level of premium priced into the options chain. Naked shorting the stock is too risky.
However, what this move does show is that the Wall Street Bets crowd is still alive and moving markets. This is something to bear in mind going forward. Other Wall Street Bets stocks gaining in sentiment include BB, TLRY and LMND.
That’s it for this week’s review. I’ll be back with more ideas soon.
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Disclosure: I am/we have no positions in any stock 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.