20 May 20th May 2024
Weekly Index Movement
| S&P500 | +1.6% |
| Nasdaq | +2.1% |
| Aussie All Ords | +1.4% |
My oh my. The Dow Jones Industrials just closed above 40,000 for the first time ever. The S&P500 and Nasdaq also hit new records last week.
“This achievement is a testament to the powers of capital formation, innovation, profit growth and economic resilience,” said John Lynch, chief investment officer at Comerica Wealth Management.
I couldn’t agree more.
On the macro level, in the US we got CPI inflation where the headline came in at +0.3% verses expectations of +0.4%. That allowed traders to stop hovering over the sell button because it lowers the risk of a Fed rate rise. It means CPI inflation is at 3.4% in April down from the 3.5% in March. Wow. How can 0.1% matter to anyone? But apparently it does, as stocks rallied on the news.
The big news in Australia was the budget. Which is inflationary. Don’t listen to the Treasurer who says it is not. Tax cuts coming in July will lower Federal income and put more money into the hands of the spenders.
Personally, I’m going to get an extra $450 or so a month. What will I do with that? If I was your typical battler I’d be spending it on eating out. Or the pokies. But I am a bit different and I’ll be using mine to buy more shares.
And now we are all going to get $300 off our electricity bill. So your battler will be spending that on uber eats too. I know this because the CFO of Walmart confirmed it after Walmart hit a new all-time high on Thursday with expectation beating earnings.
“It’s roughly 4.3 times more expensive to eat out than it is to eat at home,” he said. “And that’s benefiting our business.”
Then there is the infrastructure spending. All those materials and jobs. All this cash works it way into the system and results in inflation.
Labour are always fiscally irresponsible. How would you react if one of your stock holdings said “We made a profit of $9billion this year but we are forecasting to lose $71 billion over the next two years because we want to spend a lot of money on things that will generate no cash flow for us after that. Don’t worry we are just going to borrow this money and all we will have to do is pay interest on it, likely FOREVER”
What does this mean for us?
Well, the obvious thing I can see is more interest rate rises. The RBA statement said they are worried they might need to raise rates and the Treasurer came out and said “nah, don’t worry my financially irresponsible budget will not add to to inflation. But hey, look we are giving you $300 so make sure you vote for us again.” Mind you, I suppose he didn’t have a choice. If he said “we are trying to buy votes so need to spend money in the hope it convinces you to keep me in my job but it will add to inflation so the RBA will increase rates and you will struggle to make ends meet even more than you do now”.
Anyway, it could mean the AUD rallies. On balance of probabilities I would say that it does. The little Aussie Battler has come up from 0.64 in mid April to 0.6650 now, so I think I am not the only one who thinks this.
Might be an idea to get a currency hedge on using futures again.
Call me if you want me to explain how to do this.
Meme Stocks are back baby!
I can’t quite believe what I am going to write about here. Maybe I’m too old and need to get with the times. I should be getting Jimmy to explain this to you as I am sure he understands more.
Here is the history. Back during COVID the world was locked inside their houses with nothing to do. A Netflix library only goes for so long. The government then sent everyone some cash to keep them happy and Robinhood offered fee free trading. (If you think you are getting a good deal here, please contact me as I have a wonderful used car for sale that is a bargain)
About the same time a guy pops up on Twitter (now X) with the handle Roaring Kitty. He used to just post pictures of cats. But in Covid he started recommending to buy stocks with the biggest short interest.
If you are short a stock that is up 47 percent at the open (as GME was one morning last week), your only choice is to close out the position regardless of the price. Prudent risk management demands it. The most a stock can drop is 100 percent, but it can go up multiples of that.
(Sidenote – never, ever, ever, short a stock. Why do something that has unlimited downside but limited upside?)
Here’s the bit I don’t understand. Why did anyone listen to Roaring Kitty about which stocks to buy? But they did. And the meme stock craze was born. Maybe this is where I am going wrong. Spending the better part of 3 decades learning and trying to improve my craft was the mistake. I should have been looking for pictures of cats instead.
One of these stocks was Gamestop (GME). Back then it went from $5 to $120 on sheer volume of $100 trades.
Once the lockdowns passed and everyone had to go back to work Roaring Kitty faded into history and he has not posted on X for 3 years.
I know, I was as disappointed by his demise as you
But, the good news is – HE’S BACK!
He posted a picture of a guy leaning forward in a chair and intensely playing a video game.
And GME stock took off. As did the other Meme stock darling AMC.
Last week the stock went from $17.50 to $65 and then promptly back to $27. Exciting stuff.
Anyone who listens to pictures of cats deserves to lose their money in my opinion. I’m quite happy about it. After all, where does the extra cash in your bank come from when trading shares? The share market does not make anything, In fact, it extracts from the pool of investment cash available. The money comes from someone else’s bank account. And we need these people for us to profit. After all, if everyone did the right thing, it would be very hard to make a profit.
I will toast to Roaring Kitty continuing to roar for a long time to come.
AAP Undervalued?
Here is something that I came across that looks interesting as a turnaround play.
Advance Auto Parts, Inc. provides automotive replacement parts, accessories, batteries, and maintenance items for domestic and imported vehicles in the US.
This is what the stock price has done in the last 5 years
As you can see, all is not well with the company. Or rather, all was not well with the company.
In the past, AAP has grown by a considerable number of acquisitions and operates under three brands: Advanced Auto, Worldpac and Carquest. There are 4,786 company-owned stores, mostly under the Advanced Auto brand, 321 Worldpac, and 1,245 independently-owned Carquest locations that the company services.
This is where things get interesting. In an attempt to halt the stock price fall and turn the company around they have recently put in place a new management team and board members, and it is selling its Worldpac and Canadian operations to improve profitability and reduce debt.
It hired Shane O’Kelly from Home Depot Supply in September of 2023. Ryan Grimsland joined as CFO in November 2023. I read the recent quarter conference call transcript and these guys portray an air of confidence and competence of where they see problems and how to fix them.
Third Point Capital is an activist hedge fund run by Dan Loeb. They recently took a decent sized stake in AAP and are drivers of the management shake up. One of the guys they wanted appointed has spent thirty years at O’Reilly (a competitor and very successful) and another has deep experience in the auto parts aftermarket.
When I compare AAP to its two biggest competitors, O’Reily (ORLY) and Autozone (AZN), AAP is definitely lagging. 1.6% revenue growth vs 8.6% and 5.9%. EPS growth of -93% vs +14% and +22%. But this is before the recent changes
If you take the company valuation and divide it by the number of stores you get a per store value. For ORLY and AZN this is about $10million. For AAP it is just $2million. That implies a potential 5X return if the new management can get AAP on par with its competition. Based on the current $75 share price that would give a target of $375. Maybe we give a discount and say it will only ever be 75% of what its competitors are. That makes the target $280. The stock was at $240 in 2021 before the trouble began so this is not out of the question.
However, this won’t happen overnight. This is a turn around play that will likely take years to play out. But a 4X result over the course of 4 years or so is still an outstanding investment.
To summarise, if you go for this you are basically trusting in the new managements ability to change the company. It won’t happen fast, but the upside is way more than the downside. You just need to give the guys time to implement their changes.
Next Week
The biggest thing to watch next week will be NVidia Earnings on Wednesday. The way this stock moves, things could get exciting.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.