The Week, Month and Year Ahead
Good evening folks.
April was a challenging month. I was down 8.2% for the month versus the S&P 500 -8.80% and Nasdaq -13.37%. Considering I had a sizeable position in Netflix, it wasn’t all so bad. The short side of my book was profitable, but I was still net long and was too slow to turn defensive. Though I turned a lot of paper profits into cash at the beginning of April, I remained net-long the whole month.
In no particular order, my current shorts are HLF NOW SQ CRWD ULTA MAR INMD BRK.B GME CHK BA CPI.L KIE.L TPK.L KGF.L OCDO.L.
The ones that probably stick out the most are HLF and GME. I got short HLF at the end of March @ 32, and I got short GME more recently @ 150.
Gamestop is a dead company walking. Their last financial results were appalling, and their valuation remains ludicrous.
I don’t like Herbalife at all. It was nice to see the pyramid scheme miss both EPS and revenue in the February ER. I had been watching it for a while, and I finally bit the bullet and jumped in. I am proud to be short HLF; despite it currently trading 6x earnings, I believe it has the potential to see below 20 a share long term. There is vast competition in the nutrition/dietary business now, which creates much tastier, cheaper and healthier solutions to Herbalife’s products. Most people who diet fail, probably ~90%. Would I short more here? Probably not, but I am happy to hold.
Though I think the bull market is in its 9th inning of a tied baseball game, I think we enter the 10th and there is room to go higher. There is some evidence of demand destruction caused by inflation, which in turn is slowing the economy. Before the Ukraine-Russia war, energy, food, raw material shortages existed, supply chain problems, and inflation too. These have all been accelerated by the war. From a contrarian perspective, I believe these problems are already priced in. The Fed finally realised there is an inflation problem, and they are taking the appropriate measures to fight it without creating too much of a shock to the economy. One could argue that if the Fed was to try and tackle inflation quicker, they could tighten the same way they eased; in my opinion, this would create the shock to the economy I just mentioned. Inflation has consumers paying higher prices for rent, food, and petrol which leads to less discretionary spending (HLF, GME, MAR, ULTA shorts). The fact that there will be less discretionary expenditure for consumers as they are on the breadline is the reason why I am also trying to actively time a short on oil. Despite inventories shrinking, I believe demand destruction will happen, and the supposed “summer demand” for holidays will not happen. On a more positive note, inflationary-wise, the used car market is falling dramatically. This was a market that accelerated at 100mph during lockdowns and as a result of supply chain problems. Might I add that the inflation swap market is projecting ~5% over the next year with the following @ 3%.
It bemuses me that the S&P is still trading above 4000 when multiples have compressed, the possibility of a recession has increased, and interest rates increase. Long term, of course, I believe multiples will continue to compress, but I believe people will start to find attractive opportunities in the near future and start to buy some beaten down mega-caps - the likes of FB NFLX, and AMZN. I think in the month of May, we can see some sort of aggressive relief rally that could potentially lead to driving the S&P back to 4500-4600 or above. I believe everything will rally, mega-caps, value, and growth. I remain long China via KWEB and MCHI ETFs. I was glad to hear that the Chinese will be backing off with the regulation on big tech and seem to be doing a complete 180 and use Chinese tech to drive their economy in their uncertain times. Comments from Vice Premier Liu He were also encouraging. For the first part of the year, for sure, macro > micro and the short sellers + global macro guys have had a field day. The short sellers have most definitely enjoyed the multiples compressing in the growth names. Markets are not always this rewarding for these guys, and they know that their fun will soon end. From a top-down perspective, it might not seem all so attractive, but from a bottom-up perspective, they rarely impact and have helped make valuations more attractive.
A stock for you…
A company I like in the long term (5+ years) is DraftKings (DKNG) ($13.73); however, like many SPACs, I do not believe they will have meaningful revenues for a couple of years. Therefore this isn’t the stock I am going to write about; I don’t even know why I mentioned it. I don’t think the risk with a SPAC like DKNG is for everyone. I am looking to buy back into DKNG slowly. Another random one but a company I have recently short sold is ESTC @ 91 (now $76.39). Have a dig into ESTC, my research on ESTC is proprietary, and I do not wish to reword it.
Where were we? Diversification? A stock I like. Not the sexiest. But… has low leverage, attractive relative valuation, attractive intrinsic valuation and pays a 2.25% dividend yield. Buzzi Unicem (BZU.MI) (ISIN IT0001347308) (17.72 EUR). I paid 16.90 EUR a share. They are an Italian geographically diversified active in the production, distribution, and sale of cement, ready-mix concrete, and natural aggregates with large US exposure. They are unfortunately impacted by higher oil prices; however, it links in with my thesis that energy prices will soon decline. They have a near-net cash balance sheet and are currently trading at a 6x PE. The Company’s operations are located mainly in Italy, the United States, Germany, Luxembourg, the Netherlands, Poland, the Czech Republic, Slovakia, Ukraine, Russia, and Mexico. I hate to take an opportunity from a tragic event like a war; however, when the war does blow over, cement will be necessary, and Buzzi operates in Ukraine. Yes, cement is a small portion of the cost of construction projects; however, the need for it in Ukraine is a necessity. Global construction activity is a concern, will demand finally dip as a result of heightened material costs? In my opinion, not yet. The war has brought them some operative problems, but Buzzi said on Wednesday that its operations in Poland are running normally at the moment after Russia stopped gas flows to the country. Negative FY22 guidance isn’t the most attractive, but I take it with a pinch of salt. PE, EV/EBITDA, EV/Sales, P/B all are all below the industry average TTM. Its peers are HeidelbergCement AG, Holcim AG, Vicat SA, CRH PLC, Compagnie de Saint Gobain SA, Cementir Holding NV & Rockwool A/S. P/E is lower than the majority of those names but ROE higher than all of them.