Manufacturing Organisms
In the next three years, Signum Intel see a series of engineered molecules being scaled into our environment including synthetic proteins, gene-edited microbes for cows, corn, programmed cells and antibodies for humans. It’s all part of a larger project that will play out over several decades - a project to remake ourselves and our habitats. Companies highlighted include Pivot Bio (created the first biological fertiliser for corn), Zymergen (created a thin film for electronics; ability to genetically programme light and sustainable materials at scale) and Genus (leader in animal genetics).
Equities still offer great value...if you look in the right places
Will Nutting continues to focus on contrarian and forgotten cyclical 'value'. Stocks featured recently in his widely read Nutstuff report include Lloyds, Avacta, Greggs and Glencore in the UK. In the US, Consol Energy (+64% in last 2 weeks) - investors are finally waking up to the world's need for coal. CNH Industrial - cycle is just beginning, farmers are feeling good and are increasing spending. ViacomCBS is another too cheap to ignore / misunderstood opportunity (60%+ upside), while Twitter is also back on the Nutstuff Buy radar…
Opportunities in a Busy Q2 Spinoff Calendar
With 2 Spins already completed for Q2, there are still 9 companies scheduled to break-up before the end of June (5 in the US, 3 in Europe and 1 in Australia) and the global Spinoff calendar has close to a record of 40 companies. The Edge increased its Model Portfolio stakes in IAC/InterActiveCorp (+32% upside) and Bausch Health Companies (+69% upside) ahead of their upcoming Spins. Click below for further insights and ideas that produce a return on your capital.
TI Fluid Systems (TIFS LN)
Charging Ahead - TIFS is set to see growth accelerate as the industry transitions from ICEs to EVs. StockViews expect Hybrid Vehicles (HEVs) to capture most of the share loss from ICEs over the coming decade. This dynamic is a critical driver of TIFS’ top-line since HEVs carry the highest value in fluid-carrying content (2.5x higher than traditional ICEs). They also discuss the company’s underappreciated competitive edge (incl. considerable expertise, scale and reputation). Current EV/EBIT of 7.5x FY22 is far too cheap. 85% upside.
Nestle (NESN SW)
Nutrition business is at risk of materially underperforming in the near term, while its infant nutrition business may actually be in secular decline (highlights fall in global birth rates and deteriorating performance in China). This is particularly concerning given that management has often cited infant nutrition as a core driver of growth. The firm’s other segments are not expected be able to fully offset this weakness. In addition to fundamental concerns, Gradient highlight several earnings quality issues including the overstatement of reported margins.
Sanofi (SAN FP)
Undervalued and underappreciated - SAN offers 6% CAGR sales growth and 11% EPS growth (2021-26) which is one of the fastest growing profiles in the sector yet trades at a 23% discount. Intron’s Buy thesis is predicated on the fact that they expect >700bps of group margin expansion to 2026 and profitability to soar driven by Dupixent (forecasts >€10bn sales) and ongoing strength in flu vaccines. TP €125 (45% upside).
AP Moller Maersk (MAERSKB DC)
Container shipping spot rates are still at stratospheric heights and show no signs of abatement. With sky-high contract rates locked in, another highly profitable year is virtually guaranteed. Drewry discuss the company’s remarkably impressive recent performance and management’s guidance (which includes substantial upgrades) for the rest of the year. A new, additional share buy-back programme (~DKK 31bn, or 10% of Mkt Cap over 2 years) highlights the strength of the group's FCF generation. Fair Value increased to DKK 18,000.
Nexans (NEX FP)
U-turn from generalist to ultra-focused cables producer specialised in electrification of wind and solar grids - with a leading market position and rapidly growing pipeline AIR expect the company's margins to increase significantly over the next few years. Proceeds from the planned disposal of its Telecom & Industry units can also be used to finance strategic acquisitions. Forecasts EBITDA of €450m in 2021 and €525m in 2022. TP increased to €120 (70% upside).
CarMax (KMX)
The next General Motors? If GM can compete with Tesla, why can’t KMX compete with Carvana and become the largest online auto retailer? Management has set a goal of delivering $33bn in annual sales in Fiscal 2026 (~2m cars) which Northcoast believe could result in earnings as high as $12 per share. Shares to rerate higher as the benefits of its omni-channel strategy become more fully appreciated.
Shake Shack (SHAK)
Over 50% downside as pre-Covid problems resurface - SHAK's strategy has been to try to outrun AUV declines and profit deterioration with very aggressive unit growth. However, eventually, the company will hit an inflection point where this is not possible - either the unit growth will be too difficult to execute or problems in the core business will become too big to paste-over. After Q1 results Quo Vadis believe we are close to this inflection point.
Renewable Energy Group (REGI)
Compressed stock not earnings - The Street has been infatuated with the rise of soybean oil without giving credit for REGI's ability to quickly switch between feedstocks (which has enabled them to achieve higher gross margins). Following better than expected 1Q results, Hamed Khorsand's bullish thesis remains intact. Having initiated coverage with the shares sub $25, they hit $120 earlier this year - the recent sell-off provides a highly attractive opportunity to purchase shares once again. 12-month TP $100 (80% upside).
Genworth Financial (GNW)
Catalyst for undervalued GNW with its Mortgage Insurance business IPO imminent - given the current exceptionally robust US housing market and Enact's market leading position, Robert Sassoon expects to see strong interest in its IPO. Even at the top end of the proposed $20-24 range, significant upside remains should Enact's value move towards peer valuations. With the limited float (GNW will still own over 80%) GNW will continue to be a more liquid investment alternative to leverage the recovering strength of this mortgage insurer. TP $6.39 (60% upside).
Signature Bank (SBNY)
Provides exposure to blockchain technology and has the potential to become one of the main banks of the digital asset ecosystem. Abacus Research's 38-page report focuses on SBNY’s key digital asset (Signet) and the massive upside potential in crypto lending. There is a network effect and its leading position in the crypto vertical has some facets that both protect it as well as foster adoption by new players. What would you pay for a bank that could grow EPS at a 40% CAGR? TP $421 (75% upside).
Upstart (UPST)
Fintech but trades like a Software company with valuation in “Lala Land” - sees near-term regulatory risk as this AI lending platform's focus on educational background data to predict creditworthiness potentially violates fair lending laws. UPST competes with banks but lacks capital. Overly reliant on Credit Karma (Intuit) to drive business. Also highlights poor unit economics and minimal operating leverage. Is UPST the next LendingClub? TP $15 (85% downside).
Equinix (EQIX)
When the market digests the fact that the company is not self-funding, the degree of dilution it is incurring to fund growth, and that the dividend is far outgrowing the organic growth rate, the stock price could be more than cut in half. While data centres might be a hot investment right now, BTN’s analysis underlines the importance of paying close attention to a company’s underlying performance in addition to highlighting several earnings quality concerns.
PTC (PTC)
PTC has been temporarily benefitting from the change to the new accounting revenue recognition rule 606 which has allowed it to recognise much more revenues up front compared to years past. This rule also allows the software company to spread sales commissions payments over a period of years lowering immediate costs. Calls to PTC's resellers last year revealed much lower sales levels to the resellers than PTC was getting itself. Results are overstated because of aggressive accounting manoeuvres. The truth will come out eventually.
Varonis (VRNS)
VRNS is a must have platform to protect data - companies will soon realise it since there is no way to stop hackers once they are inside the perimeter from stealing data. Summit Insights see no credible competition for the firm on the horizon. Despite having 99% of license revenue from subscriptions VRNS is yet to get a SaaS multiple. The stock will be driven higher as the group consistently beats and raises guidance over the coming quarters. TP $75 (70% upside).
Securities Filings Analysis: Pinterest (PINS), Pool Corp (POOL) & Prestige Consumer Healthcare (PBH)
280first is a technology powered service that rapidly extracts actionable insights from 10-Q / 10-K text discussions through quantitative and qualitative inputs. Recent alerts include:
PINS - user engagement concerns? Added a reference to its Q1 10Q re. ‘new content and new forms of content that may not have as much relevancy as prior content…Pinner engagement may decline...’
POOL - tough times ahead? No mention of ‘expectations to gain market share…’ that was present in its 2020 10K.
PBH - management increasingly bullish / shareholders to be rewarded? Removed the risk factor re. ‘no intention of paying dividends…’
Keep on top of the latest Asian Gaming trends
Niko Partners track streaming and viewing on China’s largest game platforms, DouYu, Huya and Bilibili. They provide analysis on daily, weekly and monthly market trends and game rankings based on key metrics such as streaming hours, streamers, heat index, fans and virtual gifting (tips). In addition to these regular updates, Niko’s also provide Country Reports (latest market developments, models, 5-yr forecasts...) which offer a deep dive into several of Asia’s key games markets including the three fastest growing - India, Indonesia and Thailand.
JD.com (9618 HK)
With lingering concerns around short-term margin expansion as JD invests more aggressively in group purchasing aimed at the fresh food segment, Wium Malan examines the potential for long-term margin expansion and what that implies for current valuation levels for China’s largest direct retailer. As a base case, he argues that JD could sustainably generate ~4% NOPAT margins (vs. just 1.5% in 2020) and calculates fair value to be HK$405/share (50% upside). Other companies mentioned in the report include Amazon, Alibaba and Walmart.
After Hotpot, Sauerkraut Fish draws investors’ appetite
In the 4 trillion Chinese catering industry, the subcategory ‘sauerkraut fish’ is growing rapidly. While it is currently a highly fragmented market (CR3 less than 5%), Horizon Insights expect to see further consolidation especially given the growing trend in Chinese consumers preference to eat at brand/chain restaurants. They highlight Jiumaojiu’s Taier brand as a clear winner given its competitive advantages in areas such as quality control, store management and brand marketing. While revenue and store numbers have been growing rapidly, the room for further expansion is huge.
LatAm Financials: Focus on the value opportunities
Victor Galliano identifies the most attractive stocks based on value and GARP metrics. In Brazil, he highlights Banco do Brasil and Bradesco, but has recently turned cautious on Banco Inter. He continues to see further upside in Banorte (Mexico). Credicorp (Peru) is one to watch closely - most attractive PEG ratio among LatAm banks; plus investors have begun to cover short positions. Amongst the payment companies, Victor sees strong growth potential at PagSeguro. Within the wealth management sector he remains cautious re. XP's prospects due to eroding take rate and rising IFA costs.
Global inflation – The threat is getting worse
Michael Taylor anticipates US CPI rates above 4% for the coming year, which is incompatible with 10yr yields remaining at 1.6%. This is the biggest gap between current 10yr yields and likely 12mth inflation trajectories since Michael set up his models. The negative yield gap is even bigger in the Eurozone than in the US. By contrast, substantial down revisions are being made in Japan resulting in JGB yields of 0.1% looking reasonable, believe it or not!
Does this global liquidity boom end with a whimper or a bang?
Michael Howell describes how investors are looking stage left, reassured by the slow approach of faster high street inflation. However, they are missing the more sudden and threatening stage-right appearance of booming home prices and a skidding US dollar. These two misbehaving financial prices cannot be ignored by policymakers or investors for too long. The Global Liquidity Cycle has already peaked and is falling: the debate now concerns how hard it falls? Will taper talk hasten the drop? Be prepared!
Risk of another 1987 crash
The investment cycle is decisively ahead of the economic cycle, with many signs of frothy conditions, at a point when consumer price inflation is rising, bonds have entered a durable bear market and the U.S. dollar is vulnerable. Indeed, there are some eerie similarities with 1987, albeit another crash is not MRB Partners’ base-case outlook. Rather, a digestion phase for equities is more likely in the current macro and policy backdrop. Nonetheless, a deep, near-term setback cannot be ruled out. Their latest report focuses on the possibility of such a tail risk outcome.
CAPEX: The UK's missing ingredient
The UK should be on the cusp of a period of rapid PCE growth, leading to inflationary pressures. This will be transitory, given the large negative output gap and labour market slack. However, Andrew Hunt is concerned that the UK’s CAPEX performance may constrain growth over the medium term. He advocates a radical re-think of education and planning policies, and for a less austere Treasury; if the Treasury prevents the output gap from closing via a higher tax regime, the deficit will remain stubborn.
Germany: The rise and rise of the Greens
Germany is heading into the most uncertain election since 1949, with Laschet of the CDU and Baerbock of the Green Party battling it out to succeed Chancellor Merkel. Niall Ferguson sees Laschet becoming head of the Black-Green coalition, but in a path paved with difficulties. Therefore, a high likelihood remains of a “traffic light” coalition between the Greens, the SPD and the FDP.
The slippery path to Italy’s presidential palace
In a bold move, Matteo Salvini has stated that the League will support Mario Draghi in the next presidential elections, should he throw his hat into the ring. Draghi’s popularity ratings are climbing, the result of the first tangible improvements in the vaccine plan rollout. Francesco Galietti claims that he does not see Draghi being able to carry on as PM until 2023, unless Sergio Mattarella is re-elected; if Mattarella’s election is taken off the table, it’s an up or out trade-off for Draghi.
Welcome to the subscription economy
We are living in a new world… one that is increasingly based on services instead of goods. One-time purchases are out of the window and long-term relationships are here to stay, the change driven by demographic drivers and a slowdown in new household formation by millennials. From Netflix to Peloton, subscription services are here to stay.
US: Current S&P market phase should deliver positive returns
It is true that the artificial lift to growth will fade in coming months because the year-ago levels will not be so weak. This is the “peak growth” theory and some postulate that risk assets will stop performing at this point – Jeffrey Young doesn’t buy this theory, markets don’t usually fall when peak growth is reached. Deep Macro’s models show that the US economy is in expansion state and the S&P market phase is in one of the positive return phases.
The inflation chicken has come home to roost
Craig Ferguson believes that this new bout of inflation is not transitory, and the issue of sustained inflation pressure will now exert significant influence over all financial assets and central bank policy throughout 2021 and beyond. We will see an uncertain Fed continue to try to stem the rise in bond yields, keeping real yields heavily negative which could prove USD negative over time and commodity and gold price supportive. Right now, inflation pricing in bonds has a very long way to go to catch up to reality, expect 2.5-3% targets for US & AU 10yr bond yields by 2021’s end.
US: Higher tax rates lead to lower equity returns
While some argue that tax increases have no impact on equity returns, John Karle demonstrates quite clearly that returns are in fact lower on average in the two-year period following an increase in the tax rate for both personal income and capital gains. In other words, upside returns are likely lower all things being equal when tax rates increase. Just look at 1968-78: an extended period of increasing capital gains rate, higher interest rates and weak equity returns.
EM selector: Market signals favour Argentina, Peru and Turkey
David Ranson’s latest report summarises the outlook for EMs on a country specific basis using “market signals” of world economic growth, inflation, relative valuation, and currency surprise. David’s most strongly favoured emerging markets are Argentina, Peru and Turkey, while the most strongly out of favour are China, India and Israel.
EMs outlook – Which ones are emerging?
The outlook for EMs remains positive – that said, EM’s are not a homogenous group and growth prospects will vary. Economies with healthy external balances and sound fiscal positions are far better positioned to bounce back than those saddled with deficits. However, if David Rosenberg’s Strategizer model is correct about a US dollar rebound, EM stocks could be in for a wild ride over the near-term.
Colombia: Government seeks to calm international concerns
The country’s foreign minister has sought to defuse international tensions over the repression of anti-government protests, arguing that authorities respected the right to protest and criticising “vandals” that had hijacked the protests. It is clear that President Duque’s government is subjecting itself to further scrutiny for its response to a now withdrawn tax reform bill, which has seen security forces involved in killings, rapes and forced disappearances.
Israel/Palestine: Violence will intensify, to Netanyahu’s benefit
With Netanyahu in jeopardy over failed government formation and a criminal corruption case, Hani Sabra explains that a Gaza invasion could breathe life into his attempts to stay in power. Increased tensions are stemming from Palestinian activism, bolstering Netanyahu’s vow to crack down on violence. A lack of authority in Palestine will only boost Netanyahu’s efforts as countries seek to nurture ties with Israel, meanwhile Biden’s call for Palestinian Authority President Mahmoud Abbas to de-escalate highlights the US’ disinterest or ignorance of the situation at hand.
Pakistan seeks to reset Saudi ties
PM Imran Khan’s three-day Saudi trip ended this week. The intensive diplomacy of recent days underscores that both nations are eager to reset bilateral relations after a deterioration in 2020 over the Kashmir dispute. For Islamabad, the immediate priority will be to ensure that its long-standing partner helps rather than hinders its efforts to get the economy onto a surer footing.
A Russian venn diagram of joy
Right now, Russia is right in the middle of a venn diagram of everything bullish in the world, as a commodity-geared, USD-sensitive country in an inflationary environment benefiting enormously from the value rotation currently underway. Whitney Baker believes we are seeing the most reflationary domestic setup seen in a long time. Its balance sheet and govt-sponsored housing boom will provide a boon for the economy. With a steep curve, abundant carry, and a historically cheap currency, ensure Ruble exposure through an unhedged long bond position and get bullish Russian bank equities.
Turkey: Erdogan’s dead end
Erdogan’s government is quickly trying to solve problems in the advent of a new Covid-19 wave, ongoing macroeconomic challenges, and diplomatic isolation, but it’s methods will worsen the situation. Rumours are rife that Erdogan may fire yet another central bank governor in coming months, and he may also try to boost bank lending via a new government loan guarantee programme. Short the Lira.
Lithium demand to double inside a decade
We will see lithium demand soar with the only headwind being the temporary semi-conductor shortages. Don’t worry about near-term recycling or alternative graphene/solid-state batteries affecting demand; the former is un-economical, and the latter is far away from development. We will see the vast majority of capacity increases originate from existing producers - Orocobre Ltd, Galaxy Resources Ltd and Sociedad Quimica y Minera are Strong Buys. For unconventional suppliers with potential strong returns, look towards e3 Metals Corp or Vulcan Energy.
Commodity assets under management hit an all-time high
Kathleen Kelley comments that commodities are enjoying their time in the spotlight, with assets under management hitting an all-time high on the back of passive buying and ETF inflows. Inflows are broad based, but there are still outflows from the precious’ sector, which are more than offset by flows into agricultural & energy commodities. Many commodities curves are backwardated, leading to strong demand for index products which have a positive roll yield. Clearly sentiment in the complex is very bullish.
Copper and the clean energy transition
If major economies meet their renewable energy targets, we will see copper demand increase by 2.5m tonnes by 2030. This is in addition to an extra 12m tonnes from increased EV takeup. Global demand will therefore increase 6.4% YoY until 2030. Concerns over substitutes for the metal emerging can be alleviated; copper will reign supreme for use in wires, batteries, grid lines and equipment.