“Hidden” Balance Sheet Shorts
High and volatile inflation, historically, means wider swings in corporate profit margins. Uncertainty rises, companies stockpile more inventory, COGS is more volatile and difficult to manage. We saw this in the 1970s “stagflation”. US corporates are sitting on historically high profit margins today. Will that last? If it doesn’t, one potential source of short ideas are companies that have levered up their balance sheets against unsustainably high profit margins. These stocks wouldn’t look highly levered on a ND/EBITDA basis, but if profit margins start to revert lower, “normalised” leverage might be much higher than investors realise. Names of potential interest using OWS's short screener tool include Constellation Brands, Lincoln Electric, Parker-Hannifin, TransDigm and Union Pacific.
Edition: 210
- 02 May, 2025
AI driven 10Q / 10K text analysis
Since there are always reasons when companies change the wording in their financial filings, being alerted to these changes allows investors to realise potential risk factors and opportunities before they are reflected in the market. Recent alerts include: 1) AZZ - extension of credit to larger customers. 2) Constellation Brands - competitive pricing pressure. 3) DR Horton - changing long term expectation on debt to total capital ratio. 4) Moog - changing order demand in simulation and test products. 5) T-Mobile US - acquisitions of business with international exposure. 6) TriNet - change in stock repurchase expectations.
Edition: 210
- 02 May, 2025
Consumer Staples
Current valuation fails to recognise the operational transformation STZ has undergone over the past several years - its portfolio shift to growing beer brands such as Corona, Modelo, and Pacifico, and its focus on premiumisation, have propelled profitability to new heights. While markets seem concerned about the potential of new growth opportunities, the firm seems particularly well-positioned to weather inflationary and pandemic-driven concerns given its close alignment with broader alcohol consumption trends.
Edition: 134
- 29 April, 2022