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  • Week in Review: 1/16/22

Week in Review: 1/16/22

Everything worth commentating on regarding this past week in the markets.

Happy Sunday!

Hoping that all subscribers currently experiencing / in the path of winter storms are keeping safe! Here in Nashville, TN we’re expected 6-8 inches. Let’s jump into everything you should know from the past week in the economy and equity markets.

Remember, in case the contents of this email get “clipped’ by your email provider — you can always click the link at the bottom of the email or just use this one here.

Expected Read Time: ~17 minutes

ICYMI — Posts from The Past Week:

Week in Review - Too Long; Didn’t Read:

TPG raised a billi, Justworks got cold feet, Albertsons is coming for Kroger’s lunch, Delta Air Lines’ gross profits are still down -51% compared to pre-COVID, BlackRock hit $10 trillion in AUM, big banks are incurring more expenses than expected, my main takeaways from the ICR & JPM conferences, and economic data revealed more cause for concern.

IPO Updates:

TPG saw a +15% pop in stock price during intraday trading, and Justworks pulled the plug on their IPO stating undesirable “market conditions.”

  • TPG Inc. (TPG)

The Fort Worth, Texas and San Francisco-based company successfully raised $1 billion on Thursday, as shares hit the market trading at $33 / share — higher than the originally anticipated $29.50 / share pricing.

Shares closed Thursday trading up +15% after hitting a session high of $35 / share. The stock, however, ended the trading week at about $33 / share, implying a $10 billion market capitalization.

As you may recall from my large position in KKR, I’m generally bullish on these alternative asset investing companies. TPG has a proven track record as they were early investors in Uber, Airbnb, Spotify, Etsy and countless others.

What’s going to be interesting to me is how this company’s valuation will begin to shape up as we experience rising interest rates and therefore deteriorating valuations. Will the market treat TPG differently given the way they make money? No word from Wall Street yet on how they’re valuing the company.

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  • Justworks Inc. (JW)

Unfortunately, there’s not much to report here. Justworks decided to delay their market debut due to “market conditions” as stated in a post written by the Financial Times. I don’t blame them — tech stocks have taken a beating.

They intended to raise more than $200 million this week.

Key Earnings Announcements:

Tilray stock has lost -97% value in 3 years, Albertsons is coming for Kroger’s lunch, Jefferies confirmed their investment banking pipeline is robust, Delta Air Lines gross profits are still down -51% compared to pre-COVID, BlackRock hit $10 trillion in AUM, and big banks are incurring more expenses than expected.

  • Tilray Brands (TLRY):

Key Metrics

Revenue: $155 million, an increase of +20% YoY

Profits: $6 million, a +$150 million improvement YoY

Market Share: 20% of the Canadian cannabis market

Press Release Callout

“Looking at performance highlights across key markets, we maintained our #1 cannabis market share position in Canada — despite market saturation and related competitive challenges — on the strength of our brands and adept pricing and marketing adjustments.

In Germany — Europe’s largest and most profitable medical cannabis market — our nearly 20% share leads the market. We believe this, coupled with our infrastructure, will also allow us to capture the adult-use market as legalization accelerates under the new coalition government.

Turning to the U.S., SweetWater Brewing and Manitoba Harvest continued to invest in product innovation and acquisitions to enhance awareness and distribution.”

My Takeaway

Geez, do you all remember in 2018 when the cannabis craze was happening and this stock peaked at $300 / share? Now, at less than $7 / share, the stock has lost more than -97% of its value. With their $3 billion market capitalization, they’re trading at about 4X forward revenue, and 32X forward EBITDA.

You all know my stance on cannabis companies. Just like gasoline, I believe consumers will treat cannabis like a commodity in the sense that they all generally do the same thing. Forcing these companies to lower their prices to bring new customers in the door — essentially a race to zero.

I do not own any cannabis companies and have zero intentions in doing so. There’s just no “moat” or differentiator between them, in my opinion. If you have a different take, please use the comment section below to share it.

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  • Albertsons (ACI)

Key Metrics

Revenue: $16.7 billion, an increase of +8% YoY

Operating Income: $600 million, an increase of +133% YoY

Identical Sales: an increase of +5% YoY, and an increase of +18% on a 2-year basis

Digital Sales: an increase of +9% YoY, and an increase of +234% on a 2-year basis

Profits: $435 million, an increase of +245% YoY

Press Release Callout

“A favorable economic backdrop together with the heroic performance of our frontline retail, distribution, and manufacturing teams contributed to these better-than-expected results.

Also driving these results was our continued focus on in-store excellence, acceleration of our digital and omnichannel capabilities, and delivery of our productivity initiatives. During the quarter, we continued to gain market share in both units and dollars and saw ongoing improvement in both the in-store and online customer experience."

My Takeaway

Well damn! I never had this grocery store on my radar, but after seeing results like these there’s no reason to ignore them any longer. The company seems to be doing everything right — increasing revenue while increasing profits much faster.

I read through their earnings call transcript and it seems like an interesting “hack” they’re leaning into is digital and omnichannel sales.

“As omnichannel's households spend 3x more than in-store-only shoppers, we continue to increase our investments in digital omnichannel and loyalty, which drove increased identified households and higher customer engagement and retention.”

Wall Street is encouraged (obviously) and are assuming continued momentum throughout 2022 with support from positive customer traffic (2019 levels) as well as inflation driving prices higher. They recognize the headwinds of product cost inflation and a tight labor market, but believe Albertson’s productivity initiatives, lower COVID costs, and decentralized model will enable price optimization at the local level.

They’re trading at a discount to Kroger (KR), albeit they’re at an earlier stage than Kroger as it relates to loyalty programs, merchandising, and digital shopping. But as Albertson’s above-mentioned infrastructure catches up to their peers, so will their valuation.

WS PT: $38 / share, representing +27% upside.

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  • Jefferies (JEF)

Key Metrics

Revenue: $1.8 billion, an increase of +5% YoY

Investment Banking Revenue: $1.18 billion

Capital Markets Revenue: $438 million

Asset Management Revenue: $55 million

Profits: $325 million, an increase of +7% YoY

Press Release Callout

“We believe Jefferies' future growth will be fueled by the continued buildout of our Investment Banking effort, enhancing our Capital Markets businesses, and further developing our Leucadia Asset Management alternative asset management platform.

We will continue winding down our legacy Merchant Banking portfolio prudently and patiently, and are confident that, as we have proven in the past, there is value to be realized in excess of tangible book value.”

My Takeaway

I will happily admit that bank stocks are a sector of the market I’m not as well versed in as others. It’s obvious, however, that Jefferies’ stock price has underperformed the market substantially over the last decade.

It’s hard to form any sort of opinion on this. The only “upside / green light” I can reiterate to you all is that they stated their investment banking backlog is robust and consistent with levels from a year ago. Considering this is where more than 60% of their revenue is derived from — that’s a good thing.

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  • Delta Air Lines (DAL)

Key Metrics

Revenue: $9.5 billion, an increase of +138% YoY but still down -17% when compared to the same quarter of 2019 (pre-COVID)

Gross Profit: $1.5 billion, an increase of nearly +$2.4 billion YoY, but still down -51% when compared to the same quarter of 2019 (pre-COVID)

Liquidity: $14.2 billion in cash and cash equivalents

Press Release Callout

“While the rapidly spreading omicron variant has significantly impacted staffing levels and disrupted travel across the industry, Delta's operation has stabilized over the last week and returned to pre-holiday performance.

We ended December with revenues nearly 80 percent recovered to 2019 levels on strong demand and pricing during the holiday period, our premium products continued to perform well, we saw encouraging trends in business and international travel and our diverse revenue streams remained resilient.”

My Takeaway

You all know my stance on airlines — I stay away. Delta’s stock price is still trading -34% lower than it was pre-COVID, while the rest of the market is up +37% higher than the pre-COVID peak.

I highlighted their liquidity position because after incurring a net loss of over -$3 billion this year, with almost a billion dollars in cash leaving their bank accounts, Delta is going to need to need all the cash they can get.

That’s not to say this company isn’t a great one and couldn’t see some solid upside. I just would rather be a happy customer — not a shareholder.

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  • Taiwan Semiconductor (TSM)

Key Metrics

Revenue: $15.7 billion, an increase of +24% YoY

Gross Profit: $8.3 billion (52.7% margin)

Operating Income: $6.6 billion (41.7% margin)

Profits: $6.0 billion (37.9% margin)

2022 Guidance: 54% gross profit margins, 43% operating margins

Press Release Callout

“Our fourth quarter business was supported by strong demand for our industry-leading 5-nanometer technology. Moving into first quarter 2022, we expect our business to be supported by HPC-related demand, continued recovery in the automotive segment, and a milder smartphone seasonality than in recent years.”

My Takeaway

As you all know from this post, I just doubled my position in two semiconductor companies — AMD and AMAT. Really excited about it too because AMAT is up +10% since that was posted.

TSM’s stock traded up +14% this last week, driven higher because of this release. The main reason the market was beyond thrilled about the quarterly report was not just their earnings, but their CEO’s comments regarding capital expenditure spending. TSM will spend $40-44 billion toward increasing production capacity in efforts to help ease the chip shortage facing the globe as well as capitalize on the increased demand.

Certainly not a bad idea to add this one to the portfolio. Likely will take a position before the end of the month.

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  • BlackRock (BLK)

Key Metrics

Revenue: $5.1 billion, an increase of +14% YoY

Long-term Asset Inflows: $169 billion

Assets Under Management: $10.0 trillion (with a ‘T’)

Press Release Callout

“BlackRock delivered the strongest organic growth in our history, even as our assets under management reached new highs. We generated $540 billion of net inflows in 2021, including an industry leading $267 billion of active net inflows.

Our business is more diversified than ever before – active strategies, including alternatives, contributed over 60% of 2021 organic base fee growth. “As the world continues to navigate uncertainty and profound shifts in economies and societies at large, BlackRock remains focused on helping our clients meet their investment goals. Every dollar that is entrusted to us, by every client, is treated with the same care and responsibility.

BlackRock enters 2022 better positioned than ever – we remain confident in our ability to continue generating differentiated organic growth over the long-term and helping more and more people experience financial wellbeing.”

My Takeaway

After reporting record inflows, the stock price dropped nearly -5% this week — sort of weird to me. The company even increased their dividend payment by +18%, something they’ve been paying consistently for the last 12 years. To put this +18% increase in perspective, the company has been increasing their dividend, on average, by +12.5% compounded annually throughout the last 5 years.

BlackRock has seen an incredible rally throughout the last 2 years, up more than +165% from pandemic lows. Considering $10 trillion in assets are entrusted with this company to manage, I think it’s only fair I entrust them with a 1% weighting (about $3,000) in my portfolio.

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  • Citigroup (C)

Key Metrics

Revenue: $17.0 billion, an increase of +1% YoY

Operating Expenses: $13.5 billion, an increase of +18% YoY

Profits: $3.2 billion, a decrease of -26% YoY

Earnings Call Callout

“As the probability of higher rates has increased over the last few quarters, let me make a few comments regarding the potential impact from higher rates. In our 10-Q, we disclosed interest rate sensitivity assuming a parallel shift and a runoff balance sheet. This is different from our peers' methodology, which tends to assume a static balance sheet.

Assuming a static balance sheet and a 100 basis point parallel shift, we would expect Citi's total net interest income across all currencies to increase by over 3x more than what was disclosed in our third quarter 10-Q, or roughly $2.5 billion to $3 billion of net interest income.”

My Takeaway

Well, the market wasn’t very happy with these results — especially the massive uptick in expenses. Turns out they incurred a -$1.2 billion hit from an Asian divesture. It’s could be a pretty messy year for Citigroup.

During the call, they disclosed that they’re exiting the consumer, small business, and middle-market banking operations of Citibanamex after operating in Mexico for more than 100 years.

According to Wall Street, the 3-5 year game plan laid out by their CEO is still in play. Become a top tier corporate and investment bank, grow their global wealth management business, and force inorganic expansion of their US consumer bank.

Citigroup is trading at only 0.8X TBV, compared to Bank of America’s 2.2X and JP Morgan’s 2.4X — many analysts are optimistic they’ll begin to close the gap (stock price increasing) in the coming 12-18 months given these recent monumental decisions.

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  • JPMorgan Chase (JPM)

Key Metrics

Net Interest Income: $13.6 billion, an increase of +3% YoY

Non-Interest Income: $15.7 billion, a decrease of -2% YoY

Total Revenue: $30.5 billion, a decrease of -2% YoY

Earnings Call Callout

“Looking at the key drivers of that for 2022, there are a few major factors. Rates. With the market suggesting approximately 3 hikes later this year and the recent steepening of the yield curve, we would expect to see about $2.5 billion more NII from that effect.

Then balance sheet growth and mix, where we are expecting higher spend and new originations to drive revolving balances back to 2019 levels, and also benefiting from securities deployment towards the end of 2021 and into 2022.

As we look ahead, we will continue to invest and innovate to build and strengthen this franchise for the long term. And while there may be headwinds in the near term as we continue to work through the consequences of the pandemic, we've never felt better about the company and our position in this very competitive dynamic landscape.”

My Takeaway

After releasing these results, JP Morgan’s stock dropped -6.5% — it’s biggest single-day drop since June 2020. This was catalyzed by their guidance for higher than expected expenses in 2022, similar to that of other banks. The company guided to a 17% return on tangible common equity, but Wall Street analysts just aren’t able to back into the number. The closest they’re coming in at is only 15%.

When asked, CEO Jamie Dimon said “It’s very possible .. we’ll have a 17% ROTCE. It depends on how we deploy our capital.”

I’m on the sidelines.

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  • Wells Fargo (WFC)

Key Metrics

Revenue: $20.9 billion, an increase of +13% YoY

Profits: $5.8 billion, an increase of +86% YoY

Average Deposit Size: increased +7% YoY

Press Release Callout

“In 2021, we improved our financial returns, including reducing our expenses and returning a significant amount of excess capital to our shareholders by increasing our dividend and repurchasing $14.5 billion of common stock. We also had strong deposit growth and while loan demand was weak early in the year, loans grew 5% in the second half with growth in both our consumer and commercial portfolios.

As the economy continued to recover we saw increased consumer spending, higher investment banking fees, higher asset-based fees in our Wealth and Investment Management business, and strong equity gains in our affiliated venture capital and private equity businesses.

We continued to manage credit well and the strong economic environment helped reduce charge-offs to historical lows and our results benefitted from reductions in our allowance for credit losses.”

My Takeaway

Wells Fargo has been on the move this year — their stock is up over +20% in the last 2 weeks, and for good reason! The company increased revenue and increased profits. This quarter was an incredible ending to the year for the bank, showing clear efforts to reduce expenses and keep deposits / lending high.

Wells Fargo was the sole ‘winner’ of the banking results last week, and certainly deserves a deeper look as a potential future play.

Investor Events:

The ICR Conference featured valuable insights from over 200 companies in the consumer goods and retail space, while JPMorgan’s Healthcare Conference revealed the tech-driven future of the industry.

  • ICR Virtual Conference (24th Annual)

The ICR Conference was created to provide private and public companies with a platform for understanding consumer trends and broader retail prospects as each new year begins.

Here are my top 3 takeaways from the events:

My Biggest Takeaway — Bookmark Dutch Bros Coffee (BROS)

Our West Coast subscribers are likely familiar with Dutch Bros coffee shops — the drive-thru chain that’s gained national attention. The company currently has a presence in only 11 states, and revealed expectations of serious geographic expansion over the coming years.

During the last few weeks, BROS has received attention for being remarkably volatile. The stock got a sizable surge after CNBC’s Josh Brown made a buy recommendation on television last week — even resulting in some WallStreetBets interest given the company’s short interest of 18% of total float (and the ‘BROS’ ticker doesn’t hurt).

Trading more than -40% below its post-IPO high of $81.39, some stock snipers have called for Dutch Bros to be a reputable competitor for Starbucks over the coming years — one even expecting it to grow in a similar fashion to Chipotle Mexican Grill (CMG).

It’s also worth noting that Dutch Bros does not intend to beat the industry incumbents at their own game.

They plan to de-emphasize beverage variety innovation and put less focus on digital experience. Dutch Bros is keeping it simple — let’s have a lightning fast drive-thru experience and grow across the country before overcomplicating things.

I like it.

Thoughts from Cowen analyst Andrew Charles: "We were pleased with BROS's better than expected 4Q comps performance & updated 2022 store development guidance. BROS's streamlined playbook positions the company to continue executing on the path to 4,000 U.S. locations. With fundamentals strengthening, BROS is near the top of our “smid” cap (small & mid cap) shopping list for those looking to deploy capital in the current backdrop."

While I would not go as far as saying that this is the next Chipotle, the hype surrounding Dutch Bros is certainly warranted.

In the first 9 months of 2021, BROS generated: $358 million in revenue, an increase of +51%. The company was on track to rake in more than $100 million in FCF during calendar year 2021.

The company is one of the many pandemic success stories. During the worst month of Covid lockdowns, April 2020, Dutch Bros experienced only a -11.4% drop in site visits. Starbucks (SBUX) and Dunkin’ (DNKN) had a drop-off of more than -60% during the same month. As the spring and summer of 2020 arrived, Dutch Bros saw its traffic surge by more than +50% while its massive competitors remained well below pre-pandemic levels.

I need to do more due diligence on the company, but I wanted to make this the longest takeaway of the ICR Conferences for a reason — I’m very interested in building a speculative position. Will definitely report back on this one.

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Mall Stocks Saw Relief from the ICR Conference

For the most part, companies that updated guidance ahead of or during the conference experienced collective stock price appreciation. Executives of the companies suggested that strong pricing trends in the apparel sector, heightened promotional activity, and lessening concerns over the omicron variant are all positives for the retail industry.

According to a source from SeekingAlpha, the most notable movers early in the conference were: Torrid Holdings (CURV +12.0%), Destination XL Group (DXLG +6.7%), Abercrombie & Fitch (ANF +6.5%), On Holdings (ONON +5.6%), Express (EXPR +5.7%), Victoria's Secret (VSCO +3.9%), Urban Outfitters (URBN +3.2%), Dillard's (DDS +5.4%), Kohl's (KSS +3.2%), Macy's (M +2.8%) and Gap (GPS +2.6%).

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Domino’s Pizza (DPZ) is Growing Like a Weed

In case you weren’t aware, Domino’s has been one of the best stocks to own over the past two decades — their stock has 65X’d since 2004. With trailing-12 month returns of +27%, appreciation of +183% over the last 5 years, and a whopping +1,414% over the last 10 years… this stock is simply beautiful.

Domino’s used the ICR Conference as a chance to release its new Investor Presentation. Funny enough — the most talked-about takeaway from Domino’s ICR presentation is that they will be changing the iconic $7.99 carryout deal from 10 wings to 8 wings due to inflation and increased food costs.

I encourage all of you this year to be observant investors and pay attention to who is making these types of moves. As a consumer, it can piss you off. As an investor, small moves like these can lead to millions of dollars in saved expenses.

The company has reached a mind-numbing 18,380 total stores and gave additional color around their strong network of international franchisees that make scaling so seamless. The company updated its guidance to +6-8% global net unit growth and +6-10% global retail sales growth over the coming 2-3 years.

I missed the train on DPZ and never built a position, but if the market sees some serious red days in 2022 — I may consider it.

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  • JPMorgan (JPM) Healthcare Virtual Conference (40th Annual)

The National Law Review released extensive notes from the JPM Healthcare Conference. Below are my biggest callouts:

Virtual-First Healthcare Plans

2021 featured the launch of numerous virtual-first health plans — with the goal of promoting broader patient access and reduce in-person visits when not needed. An example is Cigna (CI) launching its virtual-first health plan for employers. Highlights include a $0 co-pay and virtual primary care services for millions of the company’s customers through MDLIVE (acquired in April 2021).

One of my favorite stocks, United Healthcare (UNH) also launched a virtual care planned called NavigateNOW. Similar to Cigna, the plan has a $0 co-pay, with unlimited chat and same-day appointment booking.

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Covid Policies Remain Up in the Air

Leadership of the Canadian province of Quebec recently announced financial penalties for unvaccinated adults, joining Austria and Greece as countries that deploy fines or taxes on those that won’t get the jab. Singapore also took a similar approach in 2021, determining that hospitalized, unvaccinated Covid patients must pay their own hospital bills instead of the government.

Other countries / jurisdictions (such as NYC and West Virginia) have taken the approach of paying people to get vaccinated. The main takeaway from the conference is that after what feels like an eternity into this Covid madness, there is still no perfect answer to vaccinations and the debate seems like it will never end.

Obviously, most conference participants agree with mandates of some kind because they’re a lay-up for driving revenue. I just wish there would have been more earnest dialogue on this massive elephant in the room.

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Mental Health is a Pandemic Too

Acadia Healthcare (ACHC) estimates that 22 million US adults need substance abuse treatment, but only 10% of them actually receive care. The company also noted a +33% increase in depression in 2021 when compared to pre-pandemic levels. There was a +30% increase in overdose deaths in the 12-months ended April 2021 — the largest increase ever recorded.

According to Headspace Health (the result of a merger with Ginger), wait times for mental health provider visits range from 5-6 weeks, and 50% of US counties don’t have access to a single mental health provider. The CDC notes that one out of every six children has a mental health disorder, yet only ~50% of them receive treatment of any kind.

It’s clear that virtual healthcare, in a variety of shapes and sizes, will be a big part of this industry’s future. I just wish we had a better idea of the exact ways in which affordability and insurance implications are going to affect this tech growth. Companies like Acadia and Talkspace (TALK) operate on a fee-for-service (FFS) model, which means more bookings lead to more direct revenue filling up their pockets. Mental health is something I take very seriously, so I’d like to see ‘checks and balances’ put in place to make sure that the care is priced fairly and not just a way for companies to profit off of this massive mental health pandemic itself.

Major Economic Updates:

Inflation data is just depressing at this point, new jobless claims came in above expectations, and the retail industry seems to be at an inflection point.

  • Consumer Price Index (CPI)

According to the Bureau of Labor Statistics (BLS), the US annual inflation rate soared to +7% in the last month of 2021 — the highest mark since 1982 and an increase from +6.8% in November. Used vehicles continued to record the largest gains (+37.3%), followed by energy (+29.3%), food (+6.3%), apparel (+5.8%), and shelter (+4.1%).

It’s called ‘runaway’ inflation for a reason. The sad fact-of-the-matter is that the dollars sitting in our bank accounts are losing their purchasing power with each month that passes. I’ll be interested to see if Fed Chair Powell’s pledge to do what’s necessary to contain an inflation surge will result in any changes to this growth trend. Increased interest rates may help, but a few marginal ones likely will not be enough to counteract all of our money printing and the continued supply chain issues (which result in passed-through costs to consumers).

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  • Initial Jobless Claims

According to the Department of Labor (DOL), the number of Americans filing new unemployment benefit claims rose by some 23K individuals, to a total of 230K in the week ended January 8th.

Coming in above market expectations of 200K, economists place a lot of the blame on the omicron variant disrupting airlines and schools. Claims still remain below pre-pandemic levels and suggest that the labor market continues to tighten as the US economy expands at a solid pace and labor market demand is increasingly strong.

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  • Retail Sales

According to the Census Bureau, retail sales plummeted -1.9% month-over-month in December — the largest decline since February of 2021. This ended four consecutive months of decent growth. Economists attribute this bad news to rising Covid infections, uncontrollable inflation, and some holiday shopping being pushed to earlier months due to proactive concern surrounding shipping times.

The largest declines were seen in non-store retailers (-8.7%), furniture stores (-5.5%), sporting goods (-4.3%), clothing (-3.1%), electronics (-2.9%) and general merchandise stores (-1.5%).

After taking in a lot of the positive info from the ICR Conference, with the negative info above — I’m torn on the US retail outlook. I’d think that as we approach spring and there’s less winter weather — things will begin to look up. However, you may have noticed the Social Media Spotlight callout on China’s potential “Mother of All Supply Chain Crises” that’s going on now.

Whether we like it or not, China is critical to the global supply chain and there is great cause for concern. If you’ve taken a look at my portfolio, there’s a reason why the vast majority of it is not in retail. There’s significant uncertainty surrounding transportation costs and ultimately free cash flow. This doesn’t mean that I think the retail industry will get crushed — it just means that I really don’t know. Let’s keep an eye on the retail sales data over the coming months and I’ll be sure to include the earnings reports of various retail plays in the weeks to come.

Have a great start to your week!

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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