Company & Sector Research
Europe
The Retail Tracker
The Retail Tracker has been negative on adidas with the price down 46% YTD, and 19% in the last month. Mark and Marni argue that this reflects ongoing issues in China due to COVID and backlash against the brand for sourcing cotton from the Xinjiang province, where there are humanitarian issues. Meanwhile fashion has also moved against them with consumers moving away from active and casual segments as the world opens up. On top of this the CEO has announced plans to step-down in 2023, and, the company continues to fight with Kanye West.
Arete Research
Arete has changed ASOS to a 'Sell' rating from 'Neutral' in the face of (i) Lack of seasoned management, (ii) Tough UK/EU retail environment, and (iii) Debt burden (net debt of £150m), leaving its lengthy to-do list on hold. The company will soon start waving the white flag trying to be an acquisition target. Huge shift in the sector as online fashion went from “overweight all” to selective stock-picking, sparking strategic M&A and requiring platform investments through the recession for those which can sustain them.
ResearchGreece
ResearchGreece reiterates their Own It 'OI' recommendation forecasting significant upside following the H1 results. As always the messages were contradictory on guidance, revenue and net income, but ultimately Jumbo has a successful business model, strong balance sheet, cash flow generation and dividend policy. All currently priced at 6.9x EPS (x-cash), 4.6x EBITDA and 8% FCFE yield 2023E. They were able to announce a special dvidend of E0.38/share (2.7% yield).
TT Equity Research
TT through a 150 page report shows how Abcam's management is fully incentivised by revenue growth and adjusted earnings. They are maximising personal rewards by adjusting earnings, capitalising costs and through expensive M&A deals. Recently management also engaged in a mysterious inventory write-up, meanwhile we have seen hardly any historic gross margin improvement since capital expensive strategy and no historic evidence of any opertaing leverage. The company has a capital-intensive business model in a high competitive market driven by pricing pressure which seems less temporary than management would have you believe.
Forensic Alpha
Industrials - Aerospace and Defence
Rolls-Royce has been a "frequent flyer" at the top of Forensic Alpha’s high-risk list. With the publication of H1 results last month, they picked up even more new working capital flags which has pushed the company back up to the maximum "10" risk rating. The increase in DSI (Days Sales Inventory) was one of the most striking movements, given it came off levels which were already elevated. The movement also appears to be much greater than observed for peers in the Aerospace and Defence sector.
the IDEA!
The IDEA! has published a 50 page report on PostNL and describes the difficult position that the company finds itself in for many reasons. Consumers are back on the streets, inflation sharply increasing costs for parcel logistics providers, yet the biggest challenge is the in-sourcing and re-channeling of parts of the last mile by its single largest client bol.com. Consensus estimates are still too high, investors should keep an eye on that dividend.
Iron Blue Financials
A score of 27/60 is top quartile overall (fertile ground for shorting) and joint highest (with WPP) in Ed Steele’s Media sector coverage. Accounting red flags include management discretion within revenue recognition, elevated levels of stripped out costs, possible net debt adjustments (restricted cash, earnouts, contingent liabilities), JV related party transactions and use of non-GAAP headline measures. Ed notes several areas where disclosure could be improved, including the segmental split, amortisation charge and contingent liabilities. He also highlights that eleven of management’s fifteen principal risks were deemed to have increased yoy.
New Street Research
UK assets are clearly out of favour, but it is at such a time when investors should be looking for opportunities. New Street believe that BT's share price could double from here on just 3.8x EBITDA, and with massive upside to consensus as Openreach’s pricing structure should support inflationary pricing; and with a longer-term hedge against rising rates from a higher allowed ROCE, this share price represents an opportune time to revisit the name.
North America
Quo Vadis Capital
This recent IPO is overvalued at $6B, and presents multiple near-term catalysts to correct. Quo Vadis see 50% downside to a still-generous valuation. Current profitability is derived mostly from the franchise revenue stream, which is not planned to grow much. The company-operated stores, which represent most of the growth, do not generate an attractive ROIC profile. Investors are fighting a unfavourable structure shift in the business and overpaying relative to the return-profile of the growth. However, the concept is differentiated & the growth story is real. BROS is probably a stock to own, but at a lower price and at the right time.
JJK Research Associates
Janet Kloppenburg outlines that management is working diligently to better align its expense infrastructure with a lower revenue outlook, reflecting internal merchandising missteps and leadership changes, along with today’s challenging Marco-economic outlook. On the merchandising front, higher levels of dress-up and wear to work inventory at ON and Gap are beginning to restore each brand’s relevancy.
Woozle Research
The product development program for footwear and accessories failed to make material changes to Canada Goose’s customer mix. Promotional activity increased in North America in response to bloated inventories while foot traffic targets were also missed with warm weather In August across Europe. Instead, customers have down traded to basic accessories and mid-tier jacket ranges. In North America and Europe LFL sales increased by 18% & 8% respectively, missing QTD LFL sales targets.
280First
LSFT's executive employment agreements contained severance and change in control policies. It seems that the new policy contains more benefits under Change in Control. Executive employment agreements were last amended in May and June of 2020. The new policy does not seem to be a routine update. As there are always reasons why companies elect to take any action, is this new policy prompted by external takeover interests? Other key findings from 280first's Q2 22 10Q and 10K filings analysis included Altice USA (ATUS), Microstrategy Incorporated (MSTR) and Enphase Energy (ENPH).
Inferential Focus
During each of the first two weeks of the NFL season, DirecTV’s NFL Sunday Ticket streaming service went dark at numerous times. On top of this, some customers were unable to log in and numerous users complained that the Sunday Ticket app blacked out certain games even though they were available locally. After this football season, NFL Sunday Ticket will likely have a new home because DirecTV’s rights are set to expire this year. Google (GOOG) and Apple (AAPL) are reportedly in the running to secure the rights.
Smart Insider
David Ricks, a Non Executive since 2018, purchased $337,000 of stock on the 27th September at $280.56, increasing his holding by 30%. His only previous trades in the company were both for less than $20,000. He has been an extremely rare buyer across his roles. As Chair and CEO at Eli Lilly his only buy was for $500,000 in October 2019, a purchase that was very well timed, and currently Adobe do not have a requirement for directors to buy shares to meet ownership requirements.
Gradient Analytics
Limited capacity has hindered the company's ability to capitalise on demand. Whilst they were able to secure upside foundry capacity, it was in 200mm rather than 300mm wafers. This caused PI to transition some customers back to older products. Sales have been artificially inflated as customers have been overbuying wafers in response to capacity constraints. Anomalous insider activity appears concerning; Declining accrued compensation may boost earnings; TTM stock-based compensation exceeds 20% of sales; PI trades at a premium relative to historical norms as well as to peers.
Radio Free Mobile
Telecommunications - Semiconductor Devices
Showing signs of executing on its automotive ambitions with a 57% increase in its design win pipeline in the last 3 months, as well as a clear view of exactly how it is addressing the vehicle opportunity. The flagship automotive product is referred to as the Snapdragon Digital Chassis which, at its heart, is a semiconductor and software offering that will power driver assistance all the way to full autonomy, the vehicle cockpit and infotainment. This goes alongside all of the usual connectivity chips that Qualcomm has been dominating for years and is so far the biggest expansion outside of its historical core competence.
Japan
LightStream Research
Shiseido acquisition of online US Skincare & Cosmetics brand Drunk Elephant in 2019 for a valuation of $845m was perceived positively at the time. Rather than emulating Drunk Elephant like digital marketing to the company’s other brands, Shiseido has been trying to incorporate all its brands into a hybrid marketing strategy. This seems to have killed Drunk Elephant’s appeal to its customers and means a massive $845m write-off over the next few years is coming. LightStream Research fear that this acquisition could end up being yet another failure for Japanese companies in cross-border acquisitions.
Storm Research
Visional Inc had previously assumed a substantial slowing in BizReach sales growth over the FY as pent-up hiring demand after the COVID-19 state of emergency gradually petered out. In reality, whilst there was a small degree of quarterly deceleration, the rate of growth remained above plan and Visional ultimately concluded COVID-19 & demographic pressures had caused a structural shift in the recruitment market, with employers remaining increasingly likely to consider lateral hiring. On 38x FY 7/23 earnings, following a -19% decline from its Dec 2021 peak, Storm believe Visional’s long-term growth prospects have improved significantly but have not yet been discounted, so keep the 'Positive' rating.
Emerging Markets
Silk Road Research
Li Auto updates Third Quarter Delivery Outlook, now expecting to deliver approximately 25,500 vehicles for the third quarter of 2022, revised from the previous vehicle delivery outlook of between 27,000 and 29,000 units. The revision is a direct consequence of supply chain constraints, while the underlying demand for the company’s vehicles remains robust. The company will continue to closely collaborate with its supply chain partners to resolve the bottleneck and accelerate production.
Galliano's Financials Research
Itausa SA has acquired a 10.3% stake in toll road company CCR in a diversification move away from its core financial holdings which still account for 90%+. Itausa’s stated NAV discount is over 26%, and Victor Galliano believes this discount is under-estimated. Itausa’s indirect XP stake adds to the NAV, implying a discount of close to 28%. Reinvesting the proceeds of disposals in CCR makes good diversification sense; aside from the historically high NAV discount, Itausa has an attractive LTM dividend yield of over 5%.
RedTech Advisors
China’s top leadership is stoking hopes for better property policies, and BEKE is an asset-light bet on the eventual rebound. In a recent meeting, Premier Li Keqiang signaled a further relaxation of housing policies on a city-by-city basis. In the days before the meeting, rumors swirled about the government ending all property restrictions outside of Tier 1 cities, which would be as much a sign of desperation as a real boost for housing in lower tiers. This would also benefit an online real estate broker like Beike, which does about half of its business in Tier 2 and smaller cities.
Propitious Research
Signs look good for near-term earnings for Alibaba. Following a contraction between March and May this year, China’s retail sales growth has returned since June, continuing through July and accelerating in August. Alibaba’s next reported quarter’s annualised growth will be on an extremely depressed base. Propitious' earnings monitor shows the company has turned the corner following a prolonged downgrade cycle between March '21 and July '22. With $25bn and a further $39bn in short term investments means Alibaba currently trades on 8.5x NTM PE, an extremely low level.
Aequitas Research
Multiple new agencies have been reporting that Tencent plans to trim its investment portfolio over the remainder of the year. The company has been duly denying these rumours. Although, after it distributed over US$16bn worth of JD.com shares at the end of 2021, and then sold US$3bn worth of SEA stock in early Jan 2022, it clearly showed that the tide for Tencent investments had turned. The company is becoming a seller after having been on a voracious investment spree over the past few years.
Macro Research
Developed Markets
Blonde Money
BOE Gilt Intervention: Systemic Risk is Now a Clear and Present Danger
Helen Thomas believes that the BoE taking the significant step of intervening in the Gilt market is a sign that systemic risk is now a present danger. They admitted as much in their statement, referring to a meeting of the Financial Policy Committee who “welcomed the Bank’s plans for temporary and targeted purchases on financial stability grounds”. Given that bond purchases are coming at the long end of the yield curve gives credence to the claim that the problem lies within the pension system – specifically, liability managers.
Llewellyn Consulting
UK: Short term ‘Growthmanship – Parallels with a Not so Bygone Era'
Russell Jones finds the UK government's unashamed commitment to raise the rate of real GDP growth from its post-Brexit referendum trend of around 1.5% a year to 2.5% to be both troubling and misguided. It is the circumstances of the 'Barber boom' of the early 1970s that seem to resemble the current situation most closely where boom turned to bust in the form of the first major recession of the post-war era. The Conservatives were ejected from power leaving a minority Labour government led by Harold Wilson to pick up the pieces. Is history repeating itself!?
Independent Strategy
Global Strategy – UK: In Truss no trust
David Roche isadding to their short gilts position. The UK current account is now running at a deficit of nearly 8% of GDP while UK sovereign debt/GDP is 100%. These figures are not quite at crisis level but the reckless policy could force us there. The impact of Truss’ fiscal policy will be of long duration and will hit investment and productivity. What this policy is doing wrong is to add demand to a supply-constrained, low-productivity economy, while creating destabilising social inequality. Rising inflation and recession with the BoE bound to raise its policy rate is a policy cocktail in hell.
Ollari Consulting
The Graph Of The Day – UK: Waiting While Burning
Christophe Ollari argues that between a BoE keen to wait for the next MPC (November 3rd) in order to make some decisions and assess, a Government determined to wait for November 23rd to explain how unfunded their fiscal package is, and a DMO announcing a 2.5 Bln of 2061 nominals' supply next week, you end up with the following: UK 2s, 10s, 30s in freefall, back to two decades plus lows.
Greenmantle
Europe Update – Italy: Meloni and Mussolini
As Niall Ferguson's Greenmantle correctly predicted, Italian elections yielded a majority for the right-wing coalition with Giorgia Meloni, leader of Fratelli d’Italia (FdI) and set to be Prime Minister. FdI’s political predecessors are Italy’s post-World War II fascist successor parties, and Meloni herself has previously (and publicly) defended Mussolini. Yet it is important to note that post-fascist parties have entered government before but have a track record of moderating once in power. Meloni wants to turn the FdI in to a governing party for the long haul, as the lynchpin of the centre-right. In doing so she needs to be wary of internal challengers.
Andrew Hunt Economics
Euro Money Watch - EZ to face another Existential Crisis
Andrew Hunt points out that, in real inflation-adjusted terms, aggregate Euro Zone money growth is now close to record lows. In aggregate, household sector credit trends are stable at a relatively modest nominal rate. However, Andrew notes that within the detail of the data there are marked divergences occurring within the different countries of the EZ. Some countries have booming rates of credit growth (Ireland) while others are witnessing a collapse in credit (Greece). This, perhaps more than anything else, reveals the fallacy of the ECB’s one-size-fits-all rate strategy. Stagflation and this fallacy seem likely to push the EZ into another existential crisis that the ECB is ill-suited to addressing.
Eurointelligence
Is Russia About to Blow Up More Pipelines?
Wolfgang Munchau discusses Germany's warnings from the CIA of imminent military-grade attacks on pipeline infrastructure. He saw a report that Russia had a large presence of ships and submarines in the area where the explosions of the Nord Stream 1 and 2 occurred. There is concern that Russia may be preparing attacks on live pipelines in the Baltic and North Seas - A grade one security risk for Europe.
Ineichen Research and Management
BBQ at the End of the Road
Alex Ineichen infers with "felt" correlation 1.0, that the "everything bubble" is finally deflating. For decades financial professionals have been arguing that the proverbial can cannot be kicked down the road forever, and that the chicken must come home to roost. It's just that the barbecue at the end of the road was impossible to predict. But 2022 is the year where misallocations of capital are corrected. Some of Ineichen's economic health checks over the past months waved more red flags than they did in December 2007.
Emerging Markets
Trivium China
New La La: Exports are Slowing and Beijing is Worried
The commerce ministry (MofCom) issued new measures to boost foreign trade including providing funds to help small firms explore the international market and participate in trade fairs, extending the online portion of the Canton Import and Export Fair from 10 days to 5 months and allow more regions to export used cars. MofCom is also looking to e-commerce by approving new cross-border pilot zones, introducing tax policies for goods sold via cross-border, and rolling out measures supporting the development of overseas warehouses. All are worthy efforts, but they will only have a marginal impact. Chinese exports are weakening because demand from developed economies is declining.
Alberdi Partners
Argentine Weekly – Say Goodbye to the PASO?
The current laws establish a clear-cut electoral calendar for 2023, with primaries (PASO) on 12 August and the general election on 22 October. But Marcos Buscaglia believes the PASO is at risk as the autocrat-wannabes use electoral laws at their ease, and the Kirchners are no different. The government coalition has no chance of winning the 2023 elections unless it can splinter the opposition vote. The elimination of the PASO is innocuous for the government coalition and detrimental for the opposition coalition.
Teneo
Myanmar – More Sound and Fury from ASEAN, but Little Else
Indonesia will assume the one-year rotating chair of the Association of Southeast Asian Nations (ASEAN) in November. There will be an increase in noise about the possibility of the organisation acting more strongly against the junta in Myanmar. Malaysia is now pushing the organisation to engage with the parallel National Unity Government (NUG) with the goal of forcing the junta to agree to a political settlement. However, the lack of consensus within ASEAN limits Malaysia's proposal from gaining traction. Myanmar’s relations with Russia and China continue to provide the junta with alternatives for diplomatic support and much-needed resources.
High Frequency Economics
China’s EM Lending
Should we be concerned about China’s huge portfolio of loans to low income nations and to EM economies? After the World Bank, China’s government and its State-owned banks are the largest creditors to these countries. That is largely because of the Silk Route projects: the Belt and Road Initiative (BRI). To build a comprehensive global trade network linking China to the less developed and emerging world, China has loaned money to governments for BRI-related infrastructure projects. Of the 100-or-so countries that fall into this group, an estimated one quarter owe more than 10% of their GDP to China. No one knows for sure what the risks are associated with this lending.
Horizon Insights
Chinese Consumer Spending Recovery
Chinese households have been saving more and holding back from investment activity in past two years. However, consumer willingness managed to remain stable at the same time and with the labour market improvement, households' pessimistic outlook on income situations will turn around in the second of 2022. The Chinese central bank has reinstated risk reserves for derivatives to rein in Yuan depreciation expectations. Against a strong dollar the Yuan depreciation expectation in the offshore market has risen to 2% in the past week. The PBoC's move, together with the stronger parity rate fixings lately, indicates that the central bank wants to stabilize market expectations.
Commodities
J Ganes Consulting
Global Economic Outlook Casts Dark Shadow over Softs Markets
Judith Ganes is bearishly biased Soft Ags for the balance of this year, absent new weather issues, with the expectation that above average prices don’t persist on a combination of sluggish demand and improving production prospects. Cotton production outside the US is expanding at a faster rate than the domestic crop is shrinking. Brazilian sugar mills are utilising more of the current harvest - now in its final quarter for sugar, over ethanol, and conditions are better for 2023/24 growth with ample rains anticipated in the months leading up to the next harvest. This will also benefit Brazilian citrus growers.
Queen Anne's Gate Capital
Commodities This Week – Recession fears now outrank inflation concerns
You name it, we got it over the past week: central bank policy decisions, geopolitical ructions, financial market drama. Kathleen Kelley notes that the commonality behind all these developments is a reduction of risk appetite. Recession fears now outrank inflation concerns on the list of “what could go wrong.” …There are a lot of shorts out there in the commodity space, with markets like natural gas, copper, wheat, gold and platinum all having net managed money short positions, with most of these at one year extremes in positioning and shorts are still growing. Many aspirational targets for USD strength have been hit: Par for EUR, 7.0 for CNY. The moves have been fast, and the fallout across asset classes is still being digested.
Oxford Analytica
Ethereum Upgrade Boosts US Push to Green Cryptos
Ethereum has become the first major blockchain to switch from the most energy-intensive method of validating data, 'proof-of-work' (PoW), to the less energy-consuming 'proof-of-stake' (PoS). The changeover, dubbed "The Merge", comes as crypto faces growing criticism for its environmental costs. ETH underpins the second-largest cryptocurrency, Ether, and most Web 3.0 applications, such as decentralised finance (DeFi) and non-fungible tokens (NFTs). What next? Rapidly expanding crypto activity threatens Biden's decarbonisation goals. To align the sector with his plans for green electrification of US industry, the administration will develop standards for low energy intensity and renewable energy usage.