AM Brew, Jun 17, 2022
Revlon stock rose on a rumor that Reliance Industries was considering an offer. Our view is that this is not going to happen as vultures will buy the bonds and just gain control through the bankruptcy process, its a lot cheaper that way.
BTH & ETH continue to drop and are again threatening to breach the psychological $20k & $1k levels. This morning, risk equities are strong across the board. The Stoxx Europe 600 is up 1.2% and US equity futures are up in the 1% range.
For those bullish on equities, its helpful to think how the market has "trained" us to think over the last decade. Mr. Market trained us to buy dips. You could buy dips because equities were the only game in town. Bonds made no sense. There was $16 trillion in negative rate bonds. US bonds earned 2% to 3% - which means there was no chance to earn any real returns. Equities were the only game in town, but now they are not. Look at the yield advantage chart below - it shows that the yield advantage of stocks has been decimated in the USA and weakend by half in Europe:
The BOE made hawkish comments, stopping the crash of the British Pound. We suspect that the dollar's recent bull run is close to over, although not versus the Yen.
Today is triple witching: trick or treat! The S&P500 is approaching its 200 day moving average:
This is not that meaningful. It just means that a lot of the over-valuation is out of the market. It doesn't imply a "buy" and it doesn't imply anything is cheap. You need invest stock by stock and look for either accelerating fundamentals or cheapness accompanied by stable fundamentals. Weak fundamentals imply more downside.
For those interested in cheapness, there are things that merit more research:
NLY mortgage REIT with dividend yield of approximately 15%
PMT mortgage REIT with dividend yield approximately 14%
Homebuilders: PHM at $37 earning $11 ? TOL at $42 earning $11 ? These merit more research.
Banks: GS trading below book value, trading at $288 and earning $37? There are lots of banks that got a lot cheaper recently.
MU trading at $56 and earning $9 ?
HIBB trading at $46 & earning $9 or is it $11 ?
GSK: $42 earning $3 with a 4.7% dividend yield
PHG: $21 trading at its 1997 price with a 4.4% yield while you wait. They make ventilation devices, which should have a tailwind in the aging world. PHG's March 2009 price was $14 and it was $50 to $60 not long ago.
Hedge fund Octahedron wrote that they estimate that GOOG is trading at 11x 2023 earnings ex Google Cloud and 9x ex-GCP & ex-cash. We disagree, GOOG is probably trading closer to 16x forward earnings but its still not insane for a very solid franchise. Remember, rumors are saying that Google's AI is sentient :-)
What is NOT cheap? A lot. Take a look at CCL (Carnival Cruise). An argument can be made that cruise lines are semi-permanently impaired, as a lot of older people are not going to take the risk of covid. Comparing CCL to 2018 & 2019 is instructive:
Lets say that CCL can get back to $5 billion in EBITDA (note that they have been negative operating cash flow for 8 quarters and are likely to be negative for another 4 or 6 more). Thus they need the $7 billion in cash to fund their burn, so its current enterprise value is closer to $45 billion. Back in 2018 & 2019, CCl traded between 7.5X and 10X EBITDA. Assuming that CCL can get to $5 billion in EBITDA and trade at 10X, the stock should have a $10 billion market cap after subtracting $40 billion in debt. Since the market cap with the stock here in the $9 range is approximately that level, CCL is not cheap. In fact, at $9 CCL Stock is pricing in a lot of good performance. The stock dropping from $25 to $9 doesn't make it cheap - its heavily indebted and rates are higher. It uses a lot of petrol at a time when its difficult to pass on those costs.
WWE said Vince McMahon will step back during the misconduct probe. Shouldn't wresting be exempt from misconduct :-) Happy Investing !