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🏖️ A Cabana Wear Cash Cow 🐄
Plus, luxury apparel is still in demand and why you should mark September 1 on your calendar.
Happy Sunday to everyone on The Street.
Here's a date to mark on your calendar, even if you're not drowning in student loan debt: September 1, 2023. This is when, after a three-year moratorium, federal student loans will resume accruing interest. Payments will be due in October.
From what I'm reading on the interwebs, a wave of $60-$80 billion of loan payments will come due. Meanwhile, total household debt climbed to $17.05 trillion in the first quarter of 2023.
I can only assume that a mountain of defaults is right around the corner. This isn't great for the economy overall, but as with every push and pull of the markets, there will be winners that benefit from this trend.
Since we have a few months, send some trade ideas my way and I'll highlight them here next week. What would you short? What would you buy? Let us know.
— Brooks
PRESENTED BY WORLD OPPORTUNITY INVESTOR
A Future Crisis Could Turn Into A Permanent Gold Mine
The world's population is booming, and so is the demand for food. With estimates projecting a staggering 9.7 billion people by 2050, we face a challenge: feeding 38% more individuals on the same amount of land. To meet this demand, food production must soar by 60%.
But here's the catch: unresolved food waste exacerbates the problem. In the United States alone, we discard a shocking 40 million tons of food annually, accounting for 30-40% of the food supply. And our Canadian neighbors toss out over 39 million tons. The consequences are dire, forcing us to produce excessive amounts of food and, subsequently, fertilizer. But, one company has a solution…
Introducing SusGlobal Energy Corp (SNRG), the game-changer addressing food waste and the fertilizer shortage. They ingeniously harness millions of tons of organic food waste to create highly effective fertilizers, rivaling or surpassing expensive alternatives.
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Review
US stocks finished lower Friday after the S&P 500 and Nasdaq reached intraday highs not seen since April 2022.
On the economic front, the Michigan consumer sentiment index increased to 63.9 in June, the highest level in four months and above forecasts of 60. The latest figure reflects greater optimism following easing inflation and the debt ceiling resolution. Consumer sentiment is now 28% above its historic low one year ago.
In company-specific news, Microsoft's stock hit a record high after executives predicted $10 billion in annual revenue from artificial intelligence. Microsoft has invested heavily in OpenAI, incorporating its tools into its Bing search engine and Windows operating system. The company also has an exclusive license on OpenAI's models, including the GPT-4 large language model.
Partly through this partnership, Microsoft expects year-over-year growth for Azure cloud of 26% to 27%, with 1% of that growth coming from AI services. So far this year, Microsoft's stock has risen 43%, recouping all its losses from 2022.
Meanwhile, DraftKings has made a $195 million offer to acquire PointsBet, a sports betting company, in an effort to boost its presence in the sports gambling industry. The CEO of Fanatics, one of DraftKings’ major competitors, expressed skepticism of the deal, viewing it as an attempt to slow down Fanatics' entry into the market by outbidding its $150 million offer a month prior.
Finally, Virgin Galactic is set to launch its first commercial space tourism flight, called Galactic 01, in late June. The flight is targeting a launch window that opens on June 27 and runs to June 30. The company plans for a second commercial flight to follow in early August, with monthly commercial flights after. The launch is a long-awaited milestone for the company to begin flying its backlog of about 800 passengers.
In total for the week, the Dow Jones Industrial Average jumped 422 points or 1.25%, while the S&P 500 added 2.58%. The Nasdaq Composite surged 3.25%.
Preview
Tomorrow, multiple housing reports will be released, including housing starts and building permits. In May, housing starts posted a surprise 2.2% increase month-over-month. But building permits showed a second-straight month of decline, speaking to still-subdued housing demand.
Tuesday will feature two Fed President speeches from Chicago’s Austan Goolsbee and Cleveland’s Loretta Mester, offering further insight into the central bank’s decision to place a pause on rate hikes for June. There will also be an update to the 30-year fixed-rate mortgage, which currently sits at 6.77%.
On Thursday, Jerome Powell will give testimony on why the Fed decided not to raise rates in June. Powell’s remarks are sure to be dissected, as the Chair of the Federal Reserve typically offers hints as to the tenor of Fed policy moving forward. Investors will look for clues as to whether the central bank intends to hold the fed funds rate steady at 5%-5.25% for the rest of the year.
On Friday, in addition to a few more Fed speeches, the S&P Global (SPGI) US composite for June will be released. In May, this business activity metric signaled the fastest expansion seen in more than a year, mainly driven by the service sector.
Earnings Spotlight
Tuesday, Winnebago Industries (WGO) will provide its quarterly report. The legacy RV manufacturer may speak on its recent acquisition of the lithium-ion battery maker, Lithionics Battery. Intended to advance the company’s “overall electrical ecosystem,” the acquisition could foreshadow a similar pivot to VW’s (VWAPY) recently announced EV reboot of its iconic Minibus.
On Thursday, Olive Garden-owner Darden Restaurants (DRI) will keep the discussion of acquisitions going as it discusses its recently-completed acquisition of Ruth’s Chris Steak House owner, Ruth’s Hospitality Group. Additionally, consulting firm Accenture (ACN) will update investors on its plans to invest $3 billion into AI over the next three years.
On Friday, CarMax (KMX) will round out the week with an update on its business. Notably, the car reseller’s revenue decreased by 26% last quarter to $5.7 billion. However, following a frenzy of used car buying during the pandemic and historically high prices in the secondary market, it makes for a tough year-over-year comparison.
Time to Buy the Company that Makes Trader Joe’s & Costco Snacks?
Generic Food in Demand Amid Inflation
Inflation may be easing, but that hasn’t stopped consumers from looking for bargains at the grocery store. One way is by purchasing generic brands, the sweet spot for TreeHouse (THS), the only pure-play private-label food products company that’s publicly traded.
It's a major supplier to several stores, including Costco Wholesale (COST), Walmart (WMT), Amazon.com (AMZN), Aldi, and Trader Joe’s.
Business for TreeHouse was growing prior to the pandemic and has soared since then. Even with the spike in demand for its products, however, shares have languished over the past three years, gaining 3.3% compared to the 39% rise in the S&P 500.
JANA is Still a Fan
That may change thanks to actions TreeHouse has taken over the past year. It has made changes to management and unloaded assets, enabling it to be leaner and more focused on creating private-label food products that will drive sales. It's one of the reasons JANA Partners has high hopes for the company it acquired a stake in about two years ago.
“TreeHouse is one of the only ways to invest [in] two of the most powerful underlying megatrends in food,” says Scott Ostfeld, a managing partner and portfolio co-manager at JANA who sits on TreeHouse’s board of directors, in a recent interview with Barron’s.
“The first is the focus on expanding private-label store brands at the expense of national brands by large American retailers, as penetration of store brands is well below that in other countries. And second, is the search for value and affordability by consumers.”
Easing Inflation Poses a Risk
One of the biggest changes made by TreeHouse was the sale of its meal-prep business for $950 million. That boosted the company’s balance sheet and left it with a portfolio of snacks and beverages that have growth potential. So much so that analysts expect TreeHouse to more than double its EPS in 2023 and increase revenue close to 7%.
However, the biggest risk to the TreeHouse story is exactly what helped it: inflation. If food prices come down and the economy improves, consumers may switch back to name brands, which could hurt business. In the meantime, investors may want to snack on this down, but not out, generic food maker.
Are you bullish or bearish on TreeHouse (THS) over the next 12 months? |
Power Up With Net Power
Take the Emissions Out of Your Portfolio
Capturing carbon dioxide before it's released into the air is gaining traction as the world combats a climate that is constantly in flux. One way to play that trend is via NET Power (NPWR), the newly publicly traded company that made its debut via a SPAC deal with Rice Acquisition II. NET Power was able to raise over $675 million and is valued at around $3.1 billion. It has $650 million in cash and zero debt.
What makes it attractive to some is its ability to create a natural gas power plant that doesn’t wreck the environment. NET Power’s carbon capture method enables it to only produce CO2 and water emissions. The resulting liquefied CO2s are used to make electricity, and then the leftover CO2 is buried.
Show-Me Stage
It's worth noting NET Power is still in the show-me stage. It has little in sales, operates a demo plant in Texas, and its first full-scale plant won’t be ready until 2026. Its tech is also unproven on a large scale, and its plants cost a lot more to construct than traditional natural gas plants.
Still, bulls aren’t too concerned. They point to NET Power’s backers which include Danny Rice, an energy executive, and member of the Rice family, who is well-steeped in energy. Rice’s previous energy company has been gobbled up by a large player.
Royalties the End Game
Even though NET Power’s plants cost more to construct, it may not be an issue since the company plans to license its tech and collect royalties. Operating costs for the plants are also expected to be low due to carbon credits. The aim is to license 30 plants per year by 2030. Five years after a plant is online, NET Power thinks it could have more than $1 billion annually in EBITDA.
It's something Paul Sankey of Sankey Research believes is possible. He has a $100 price target on the stock and likened it to Nvidia (NVDA), the graphics chip maker.
NET Power “as a natural-gas-fired, steady-state emissionless provider of baseload power could be a tailor-made solution to the growing challenges across the U.S. power grid,” wrote the analyst in a recent report. For context, shares of the company closed Friday at $11.93. If Sankey’s target proves to be correct, that could provide some major upside for investors who are looking to power up their portfolio.
Are you bullish or bearish on NET Power (NPWR) over the next 12 months? |
Street Sheet Start-Up Spotlight
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A Cabana Wear Cashcow
Deals on Tommy Bahama
Vacation wear is trending, and so are sales of Tommy Bahama’s parent Oxford Industries (OXM). You wouldn’t know it from the stock’s performance though. Shares trade at just 8.4 times fiscal 2023 earnings expectations which is lower than other luxury brands such as Ralph Lauren (RL) and Lululemon Athletica (LULU). Bulls think its value is undeservedly low.
“Oxford Industries overall is a better business, with return on invested capital above 20%, growing faster and with higher margins than pretty much all peers,” says Eric DeLamarter, founder and portfolio manager of Half Moon Capital, which owns the stock. “[But its valuation] is nearly the lowest of the peer set.”
Reliable Sales Growth
Oxford’s secret sauce is Tommy Bahama, which makes up two-thirds of its sales. It’s a powerhouse in the warm-weather men’s and women’s apparel category with a loyal base of middle-aged, wealthy customers. That group is more likely to continue to spend in down economic times. That’s evident in its results. Sales at Tommy Bahama have grown annually since 2010. In fiscal 2023, revenue was 30% higher than prepandemic fiscal year 2020.
That performance alone, argues DeLamarter, is worth more than where the stock is currently trading. He thinks that a unit should be valued at about 20% more than the current price. With a $1.6 billion market cap, the investor says Oxford may someday become a takeover target because of Tommy Bahama.
Timing is Everything
There is one wrinkle in the Oxford story, which has pressured shares: earnings guidance for full fiscal 2023 is below the consensus. That spooked investors, but it wasn’t due to a slowdown. Rather, the company’s plans are to invest more in its businesses to the tune of $90 million this year.
Oxford thinks it will further boost growth, but with consumer spending questionable in the face of a potential economic slowdown, some investors aren’t so sure. They think now may be the time to hunker down. Bulls aren’t concerned and say now may be a good time to try it on.
Are you bullish or bearish on Oxford Industries (OXM) over the next 12 months? |
Last Week's Poll Results
Are you bullish or bearish on Steris (STE)?
🟩🟩🟩🟩🟩🟩 🐂 Bullish
🟨🟨🟨🟨⬜️⬜️ 🐻 Bearish
Are you bullish or bearish on Copper over the next 24 months?
🟩🟩🟩🟩🟩🟩 🐂 Bullish
🟨🟨🟨⬜️⬜️⬜️ 🐻 Bearish
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