🤠 Wall Street Loves … Cowboy Boots?

Plus, Goldman adds 3 stocks to its conviction list.

Happy Sunday to everyone on The Street.

This Silicon Valley Bank situation is quite the fiasco, no? I'll be honest, I have no idea what to say or think about it. Some people think the contagion risk is minimal, others think we could be on the verge of a systemic collapse if SVB doesn't find a buyer by tomorrow morning.

Bill Ackman, the hedge fund manager, pulled the fire alarm on his Twitter account this weekend. This is the same guy that went on CNBC at the beginning of the pandemic and told Donald Trump to shut the economy down because "hell is coming". We later learned, however, that he netted $2 billion on a trade against the market. The point being, there is a lot of noise right now, and not much signal. It's difficult to know who to trust.   

While we wait for the SVB debacle to unfold, it's important to zoom out because we're right in the middle of two pretty important economic releases: the non-farm payrolls report, which was released on Friday, and the February Consumer price index which will be released on Tuesday. Both impact the Fed's rate hike campaign, and thus everything else in our lives from mortgages to auto loans.  

As for the payrolls report the economy added 311,000 jobs last month. This is down from January’s 517,000 number, but still stronger than initial estimates of 205,000 - 225,000. This alone might seal the deal for a 50-basis point rate increase at this month's Fed meeting. For what it's worth, Wall Street is pricing in a 76% chance of a half-point hike.

We talk a lot about stocks in this letter, but one way to position your portfolio might be to keep it simple with bills and bonds. The 3 Month Treasury Bill Rate topped 5% this week and the 6-month is hovering around 5.1%. A liquid investment backed by the full faith and credit of Uncle Sam yielding 5%? Not too shabby. 

While we have you, I'd love to hear what you think of this newsletter. My direct question is do you want more? We're tinkering around with designs for a daily edition that will be similar in voice and content coverage, but much shorter. We know you're busy during the week so right now our goal would be to create something you can read in 2-3 minutes or less.

But, before we do that, I want to take a pulse from the crowd. Does this sound interesting? Let us know with a quick vote in the poll below.



US stocks finished lower Friday after the release of stronger-than-expected jobs numbers. The Non-Farm Payroll report showed that the US added 311,000 new jobs in the month of February compared to estimates ranging from 205,000 - 225,000.

Despite the Federal Reserve’s tightening efforts, the latest reading points to a still-tight labor market adding an average of 343,000 jobs per month. That said, the unemployment rate jumped to 3.6% in February from its 50-year low of 3.4% the month prior.

On the earnings front, DocuSign saw its shares drop double digits despite reporting a beat on earnings and revenue estimates. However, the company also cited deteriorating demand trends and competition concerns from Microsoft.

Elsewhere, Allbirds shares plunged after failing to post year-over-year sales growth for the first time. The footwear retailer missed estimates on the top and bottom lines, attributing its poor performance to a series of missteps disconnecting it from its core consumer.

In more company-specific news, Silicon Valley Bank Financial is attempting to sell itself after failing to raise more than $2 billion in capital. The company is a major bank for venture-backed businesses and has struggled with increased client cash burn drawing down its deposits. 

Meanwhile, Meta is exploring a new social network to compete with Twitter. The platform, codenamed P92, would be a decentralized, text-based app users would log into using their Instagram credentials.

In total for the week, the Dow Jones Industrial Average finished 4.4% lower, its worst week since June of 2022, while the S&P 500 declined 4.5%. The Nasdaq Composite was down 4.7%.


Tuesday, the highly-anticipated year-over-year inflation rate will be released for February. In January, inflation slowed just slightly to 6.4% from 6.5% in December. However, it’s been stubbornly high for the past year or so. The Fed has already committed to raising interest rates as high as needed until inflation is back in control. 

On Wednesday, producer price inflation will be published. This metric increased 0.7% on a monthly basis in January which was the highest jump in seven months. Investors will also get information on retail sales as well as a weekly update for the 30-year fixed mortgage rate, which is currently sitting at 6.79%.

Thursday will be an incredibly busy day with the release of major reports like building permits, jobless claims, housing starts, and monthly import and export prices.

On Friday, investors will get a look into industrial production in the United States. In January, industrial production increased 0.8% on an annual basis. This was the smallest increase since the COVID-19 recovery began halfway through 2020.

Earnings Spotlight

The earnings week will start off with a report from the media and entertainment company, Buzzfeed (BZFD). Normally, Buzzfeed’s earnings wouldn’t be particularly noteworthy news. However, Buzzfeed is one of the few publishers that is already leaning heavily on ChatGPT to help create content that’s powered by AI. Investors will be interested in hearing how that has been going so far.

Tuesday Blade Air Mobility (BLDE) will give investors an update on its short-distance flight business. Notably, Blade is pivoting to “electric vertical aircraft” which could help provide an in-between option for travelers.

On Wednesday, Adobe Inc (ADBE) and Five Below (FIVE) will both report earnings. Five Below expects its full-year sales to come in towards the higher end of its guidance after a successful holiday season.

Thursday Dollar General (DG) will expand on its preliminary report which showed that its earnings came in just short of expectations. Meanwhile, FedEx (FDX) is dealing with a potential strike from its workforce of pilots and Blue Apron (APRN) will offer insight into the struggling meal delivery market.

On Friday, Xpeng (XPEV) will report earnings and let investors know how the EV industry is faring in China.

Track Inflections in Finance and Tech

Finance and tech are very meta industries, like layers over the rest of the economy. They're rich with insights into how a lot of the world and economy works.

The Diff is a newsletter that explores those meta industries—posts range from in-depth company profiles, to applied financial theory, strategy breakdowns, and macroeconomics.

That’s why the newsletter is read by founders, VCs, hedge fund managers, and more.

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Wall Street Loves ... Cowboy Boots?

Cowboy Boots and Snap Shirts Are Trending Again

Western wear is back in vogue with consumers clamoring for shearling-collar coats and snap-button shirts thanks to shows like Yellowstone. It's not the first time cowboy chic has been in fashion nor is it the first time Boot Barn (BOOT), the Western-wear retailer, has benefited from the change in taste.

Boot Barn is the leading retailer in the Western and workwear space which, by some estimates, is worth $40 billion. It has over three times as many stores as its closest competitor and has been able to expand since the pandemic, which forced smaller players out of the market. It currently operates 333 stores and plans to open 43 more in fiscal 2023 which ends in April. It's also making inroads in the Northeast, a region that traditionally hasn’t been a cowboy chic hotspot in the past.

“Right now, Boot Barn is one of the most attractive names in retail,” David Swank, co-manager of the Hood River Small-Cap Growth fund (HRSRX) said in a recent interview with Barron’s.

Profitability Expanding

Behind a lot of the optimism is improving profitability at Boot Barn. A decade ago a new 10,000-square-foot store would generate around $1.7 million in revenue, according to Gary Bradshaw, a portfolio manager at Hodges Capital Management. Today a 12,000-square-foot store brings in $3.5 million in sales. The return on the investment is about 1.4 years thanks to merchandising and store locations that attract a wider audience of shoppers.

As a result, Boot Barn can expand easier without increasing its debt load, something investors like to see. It's one of the reasons Bradshaw is a fan of the stock, telling Barron’s it is among the best growth stories in the retail space.

It doesn’t hurt that Boot Barn’s exclusive brands are becoming a larger part of its business, representing more than a third of sales in the most recent quarter. They have higher margins and were part of the reason gross margins increased to 38.6% in fiscal 2022 from about 32% prior to the pandemic.

That strong showing was on display in its fiscal third quarter results reported in January. Comparable sales were better than expected. Declining inventory means the retailer doesn’t have to cut prices to move older products, which could help its stock rise more.

Thoughts on the Stock

But by how much? JPMorgan analyst Matthew Boss has a $100 price target on shares. For context, the stock closed at $74.50 on Friday. The analyst thinks same-store sales will continue to grow in the low-to-mid-single digit range, which will translate into EPS growth of 20% by the second half of next year.

The stock may appear pricey since it's up around 20% since the start of 2023 but it's trading at just 13 times 12-month forward earnings. Dollar General (DG) and Ulta Beauty (ULTA), two other retailers, are trading at 19 and 21 times forward earnings, respectively.

Western wear is trendy again and it’s likely to remain in vogue as more consumers don cowboy boots and snap button shirts. Boot Barn might be poised to benefit. Investors may want to try it on for size.

It's Okay to Like Insurance

Leader in Property & Casualty Insurance Has Chance to Pop

Insurance isn’t sexy but sometimes the best way to make money is from boring businesses. That’s where Chubb (CB) comes in. The leader in property and casualty insurance has made a name for itself by covering affluent homeowners’ properties and valuables. Chubb has even worked with private firefighters to protect homes on the West Coast during some of the summer blazes.

It also has a $100 billion bond portfolio that is benefiting from higher interest rates and a CEO in Evan Greenberg who is expanding the company into Asian markets. Greenberg is taking a page from his dad's book. Maurice ``Hank” Greenberg was the former CEO of American International Group (AIG).  

Much of that has been lost on investors. The stock is trading at less than 12 times 2023 earnings, a relatively fair valuation given Chubb’s leadership position. 

“Considering its quality and the operating environment, Chubb is very attractively valued,” KBW analyst Meyer Shields told Barron’s in a recent interview. “There are opportunities for Chubb to grow organically and through acquisitions.” The analyst rates Chubb an outperform and has a $266 price target on the stock. The stock closed the week trading at $198.40.

Not Without Headwinds

Chubb has been providing insurance coverage for 141 years and has operations in 54 countries. It covers everything from property to malpractice. Its Masterpiece insurance, which is targeted at wealthy individuals is often bundled with coverage for pricey cars, jewelry, and art. 

Its personal-lines business has been profitable even in the wake of hurricanes and wildfires. Investors haven’t appreciated Chubb in recent months, however. The stock is down about 10% so far this year. 

One big reason is that property and casualty insurance price hikes are beginning to slow. In the fourth quarter, commercial pricing in North America was 6.5% higher compared to last year. In the same period in 2021, pricing was up 14%. 

Claims costs at Chubb are also increasing at a rate of 6.5% due to higher labor and material expenses. That’s been enough to keep investors out of the stock, but Greenberg isn’t worried. 

“I have never been more optimistic about Chubb than I am today,” he told Barron’s. The CEO pointed to the company’s earnings power, position in the marketplace, balance sheet, management experience, and underwriting prowess as reasons for optimism. 

More Growth to Come

Another potential driver for the stock: acquisitions. Back in 2021 Chubb bought the Asian health and accident business of Cigna (CI) and plans to increase its stake in a Chinese life insurer to over 80%. As it stands, 20% of its business comes from Asia. Chubb has plans to increase that figure in the coming years.

The insurer is also benefiting from the rising rate environment, given close to 90% of its investment portfolio is held in bonds. Of that, less than 20% is junk grade. With rates rising, new fixed-income investments are yielding an average of 5.6%, higher than the typical 3.6%. That helped increase fourth-quarter investment income by 25%, to over $1 billion. 

It's also making Chubb more shareholder-friendly as it’s gearing up to raise its quarterly dividend payout by 36% to $0.86 per share, yielding 1.6%. That’s lower than some of Chubbs' rivals but it wants to hold on to cash to pursue growth. 

Sure, insurance may not be an exciting topic at dinner parties or on the golf course but making money is, which is why investors might want to give Chubb a second look. 

Track Inflections in Finance and Tech

Finance and tech are very meta industries, like layers over the rest of the economy. They're rich with insights into how a lot of the world and economy works.

The Diff is a newsletter that explores those meta industries—posts range from in-depth company profiles, to applied financial theory, strategy breakdowns, and macroeconomics.

That’s why the newsletter is read by founders, VCs, hedge fund managers, and more.

Join 49k+ other readers by subscribing here for free!

Goldman Adds 3 Stocks to its Conviction List

Rio Tinto, Sea, Alibaba

Landing a spot on Goldman Sachs’ Conviction List isn’t an easy feat but three stocks, Rio Tinto (RTNTF), Sea (SE), and Alibaba (BABA), were able to do exactly that. All three play in different areas of the global marketplace but they share a common characteristic: Goldman Sachs thinks they will soar this year on the back of a recovery in China. 

Let’s start with Sea, the Southeast Asian tech giant. The Wall Street firm has a 12-month price target of $132 per share on the stock. On Friday the stock closed at $73.45. In its most bullish case, Goldman thinks the stock can hit $219 per share. 

So what’s behind Goldman’s optimism? Better-than-expected profitability in 2023 and a return to growth mode. Goldman pointed to Shopee, its online shopping platform, and Garena, its gaming business as the two big growth drivers for the company. The Wall Street firm said there is a “visible path towards sustained share price recovery.”

Iron Ore Prices Recovering 

Then there’s Rio Tinto, the Australian miner. Goldman added the stock to its Conviction List because it's bullish on iron ore and other commodities as China’s economy recovers. 

The Wall Street firm expects iron ore prices to jump to $120 per metric ton from $100. It also expects Chinese steel volumes to recover as well. Part of this may have to do with a recovering property sales market in the country. 

“Generally property sales lead starts which drives higher steel demand,” Goldman Sachs analysts wrote in a recent research report. “Furthermore, these dynamics are playing out while iron ore inventories at Chinese steel mills are at their lowest levels since 2016 with mills starting to restock in recent weeks.”

Goldman pointed to Rio Tinto’s “compelling” valuation when compared to rivals, strong free cash flow, dividend yield, and its bullish stance on commodity prices for adding the stock to its Conviction List. It has a $140 per share price target on Rio Tinto. On Friday Rio Tinto closed at $67.54.

Alibaba for the Internet Recovery 

The third addition to Goldman’s Conviction list is Chinese e-commerce giant Alibaba. This stock got added at the start of the year thanks to optimism surrounding Chinas’ reopening in 2023. Goldman thinks Alibaba is a top way to play a recovery in the internet in China. 

“We see further earnings upside and expect more room to go for China internet sector performance on China’s faster-than-expected reopening, macro recovery from 2Q, and normalizing internet regulations,” Goldman Sachs said in the January research report. The Wall Street firm has a $138 per share price target on the stock. On Friday, Alibaba closed at $82.96.

Last Week's Poll Results

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