What to watch for the week of 6/13/22
Get prepared to take on the market by checking out my watchlist. Here’s what I’m most interested in for the week beginning June 13th. These are just a few of the potential market catalysts to look out for in the coming days. Feel free to save this post for reference, share it on your social page (please @ me if you do) and follow me for more. Let me know what you’ll be watching in the market this week in the comment section. Good luck everyone!

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Irrationality at its Finest
When I find strong financial companies with a track record of stability, well managed, while trading at attractive valuations, I add them to a watchlist to keep tabs. When the market creates opportunities to buy these “like, not love” type of businesses, due to massive over reactions to short-term bad news, I take advantage of it. I’m not big on slim profit margins or businesses that are resource/capital intensive (think Honda & WalMart for example). So Target isn’t the normal type of company I add to my portfolio as a long-term hold; even though valuation, growth, and managerial efficiency are outstanding, and they’re a dividend king, with 54 consecutive years of dividend growth. These contrarian positions, betting against the crowd who thinks Target is only worth 75% of what it was the day before, has proven wildly effective in the past. As long as that drop offers a buying opportunity at fair value or with a margin of safety, and long-term prospects haven’t changed, it’s a go in my mind. On the rare occasion quality blue chips that meet these standards drop 25% in one session, I am taking advantage of the insanity, every single time. The more irrational, the stronger my reaction. These buys are usually meant to be shorter-term plays, 6-12 months, or until the market corrects its inefficiency. Initially I was buying good companies I planned to hold and thought I was getting rock bottom entry level prices. As quality standards have changed, I wouldn’t buy and hold what I once would, but I will take advantage of any opportunity in which I think I can make my money earn more money.

This is not a strategy I developed from any particular source, just accumulated knowledge of human behavior/overreaction in the markets and watching for easy swing trade opportunities. Still, as always, company has to be quality first. A crappy company dropping 25% overnight isn’t irrational, it may be well deserved. But a company like $FB & $TGT falling 25% overnight, due to short-term negatives (IMO meaningless, due to my long-term thesis) makes zero sense. This drop of ~25% left them at very attractive valuations and has created a high probability opportunity to outperform the market, with minimal risk of downside (it already dropped 25% from a price that represented close to fair value). It’s not a one size fits all rule, but after enough time in the market, “irrational” investor emotion/behavior really sticks out. Also helps grasp what is over and under valued and when. Currently, comparing Target to a few “quasi” comps, they look better than $DG, $DLTR, $WMT, $OLLI, $KR, and $BIG on almost every area of comparison. Ollie’s has SLIGHTLY higher growth rates & profitability margins, but falls so short in every other category, it’d be silly to go with them over Target. Of those retailers mentioned, only Big Lots is trading at cheaper valuations. Target looks the best to buy from that short list. I truly don’t understand when a company with 54 years of consecutive dividend increases, has superior 1, 3, & 5 year growth, ROE, ROA, and ROTC, similar or at least adequate profitability margins, and is trading at even cheaper valuations. I’ve always watched $WMT & $DG, due to Walmarts big city dominance and Dollar Generals growth and dominance in tiny rural communities too small for a Walmart. But I’m glad this drop exposed me to Target, seems like a great company to buy into at current valuations supporting P/S <1, EV/EBITDA ~8.5, with 3 year CAGR of 12%-24% in revenues, earnings, and net income. Was even more shocked to see ROE ~45%, ROA ~10%, and ROTC of ~17%. Favorable profits, average growth, exceptional price. Seeing margin of safety from 3 sources ranging from -5%, to -28%, all the way to -68%. These apps weight metrics differently depending on their propensity to favor growth/future prospects or value/past stability; all 3 rarely agree that there IS even a margin of safety.

Bottom line, it was a good company at a fair valuation and dropped 25% over irrational fears of short-term industry headwinds. If you don’t let short-term panic spook you, these opportunities present themselves relatively often.

It was a good company at a fair valuation, yes, based on trailing numbers.
The stock price cratered overnight and that doesn’t make sense, but Target also woke up one fine morning and completely changed their profitability numbers as a business. Both the earnings and stock took a huge shock overnight. So the reaction is justified.

Also, all the metrics you quoted, are projected metrics that we cannot assume to be “true” in the future. What $TGT just demonstrated was that those metrics CAN change overnight. Yes it’s cheap based on estimates, but the market is just saying we don’t like the trajectory you’re on, and we no longer believe in those old estimates. And it did the same thing with $FB and $NFLX.

You can bet on these management teams riding out the challenges and coming out stronger on the other end, but the market is right in holding these companies accountable for the risks they’re facing in the short term.
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The Most Important News in Special Situations This Week
  • It’s the season for annual general meetings and several high-profile proxy fights are ongoing. US Foods $USFD appointed two new directors to the board amid a fight with Sachem Head. Kohl’s $KSS criticized Macellum as its sale process with Goldman Sachs continues. Guess $GES is facing a fight with Legion Partners and Ventas $VTR with Land & Buildings.

  • Hasbro $HAS turned down a settlement offer from Alta Fox in their ongoing proxy contest. Alta Fox’s Connor Haley told Yahoo, "It would not surprise me at all if somebody came around and said look, we're gonna bid for the whole company in a hostile way.”

  • An increase in investor activism campaigns is perhaps best epitomized by Carl Icahn, who is waging simultaneous proxy contests at Kroger $KR, McDonald's $MCD and Southwest Gas $SWX. Previously in Q1, Icahn announced settlement agreements w/ Delek $DK and Dana $DAN.

  • Global M&A fell to the tune of double digits in the first quarter, but 90% of the drop in domestic deal volume was attributable to a decrease in SPAC merger activity (see graph below). Evolving dynamics have created pockets of high activity, like in community banks, UK-based companies, real estate, and gaming.

  • Nielsen $NLSN announced its sale to Elliott Management (Evergreen Coast Capital) & Brookfield Business Partners $BBU in a $16bn transaction ($28 / share). Nielsen had previously rejected a $25.40 / share offer and announced a share buyback.

  • M&A is active in the UK: Ted Baker $TED.L rejected two takeover bids by Sycamore (Sycamore has until April 15th to submit a revised proposal) and a second activist investor has emerged in their stock. Pearson $PSO rejected a third proposal from Apollo $APO, ending the private equity firm’s pursuit.

  • Schweitzer-Mauduit $SWM announced an all-stock merger of equals with Neenah $NP, creating a leader in specialty materials. Interestingly, both companies first emerged as public companies by spin-offs from Kimberly-Clark $KMB.

  • UnitedHealth $UNH announced the acquisition of LHC Group $LHCG for $6.4bn. The deal comes amid regulatory concerns regarding UnitedHealth’s pending acquisition of Change Healthcare $CHNG.

  • Busy week in community bank M&A activity with 4 deals: Apollo / Seacoast $SBCF, Bank of Jackson Hole / National Bank Holdings $NBHC, Charter Bankshares / Nicolet $NCBS and Randolph Bancorp $RNDB / Hometown Financial.

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The $HAS stuff is really interesting. I have a smaller, slightly more speculative, position in $HAS. I believe that despite the board snuffing the proposal (which was shocking), the investor base is going to be woken up and question that decision.

Adirondack Retirement Specialists, a Meaningful Shareholder of Hasbro, had the following statement:

"We were dismayed to see media reports indicating that the current Board of Directors rejected what appears to be a step forward toward adding value for Hasbro shareholders via a very reasonable settlement proposal from Alta Fox. If true, it is troubling to us that the current directors would reject a well-researched 2.5% shareholder’s input and candidates who have records of adding value at a time when Hasbro seems to have lost the market’s confidence. The Company’s shares are at a new 52-week low point, and it has a strategy that has led the business to lag the overall market and its major competitor over the past five years. For shareholders, we insist on a strategy that prioritizes the highest and best long-term allocation of capital and resources. In our view, Alta Fox’s proposal takes shareholders toward that goal. We intend to support the entire dissident slate as we believe that would be in the best long-term interests of shareholders if a contested vote is held at the 2022 Annual Meeting of Shareholders."
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All-Weather Dividend Growth
I wrote about two of my favorite (but boring) dividend growth stocks -- $KR and $UNP -- and highlighted why their inflation-resistant operations and shareholder returns are a perfect pair.

Both fit my Dividends500 mold to perfection with 15+ years of dividend increases and payout ratios below 50%, leaving room for future raises and extra cash to fund growth.

Kroger is particularly unique as its dividend yield of 1.8% and a payout ratio of 22% mean it could theoretically boost its dividend to nearly 7% and still fund it from earnings.

I do not own either yet, but I am considering them both for my parent's retirement accounts.

Paul Cerro's avatar
$27.2m follower assets
Food inflation. Stocks who benefit
At-home food costs climbed 8.6% and out-of-home costs rose 6.8% in February from a year ago.

The producer price index for food was up 13.4% in the year ended in February, with grains and the beef and veal category rising 20% or more.

So, who can benefit? Let's take a look

Reacting to the surge in food costs, Wall Street has stuck with its usual playbook. Businesses like restaurants and packaged-food companies that are absorbing price increases have been hit, while farm-equipment makers, supermarkets, and food processors are seen as beneficiaries.

Investors have warmed to supermarket chains Kroger and Albertsons in the past year: $KR is up 54% while $ACI is up 83%. Their margins tend to widen in periods of inflation as they raise prices more than costs rise and consumers trade down to more-profitable private-label products

Neither stock is expensive. $ACI trades for 12x proj. earnings in its current FY and $KR for 15x

The knock on them is that they are relatively high-cost retailers because of their heavily unionized workforces and over time they will be market-share losers to $WMT, $TGT and $COST

Either way, if inflation continues, you're not not going to eat and be more price conscious at the food isle.

Food for thought...
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$KR reports its quarterly earnings tomorrow before the open.
1-day performance in the past 12 quarters:
Average returns = -0.5% 🔴
Average price move = + / - 4.8%
% of positive returns = 42% 🔴

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$KR an example of a stock that comes to mind when recession fears are in the air and people begin to discuss more risk-off consumer discretionaries, utility sector allocation, and "recession proof" avenues. Other names that come into play for me are $WMT $DG $MCD $PG & $COST
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Upcoming Earnings Calendar (Feb 28th - Mar 4th)
Hey guys! Here's the upcoming earnings calendar! Two of my holdings, $SE and $SOFI report next week, so I'll be paying significant attention to both. Other than that, I'm also interested in seeing what retailers like $TGT $BBY and $COST have to say about supply chain issues and inflation.

Good luck to everyone!

If you'd like an easier way to track earnings dates, you can automatically sync your portfolio's earning dates to your personal calendar with just a couple of clicks here.





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Store Brands
After visiting the grocery store I’ve noticed that prestigious brands are delaying compared to store brands. Big retailers like Walmart, Target and Kroger have better logistics compared to the other brands they carry and may benefit from always having store brands available. I’ve never traded the retail sector but I’m definitely giving the sector another look now that their shelves are looking empty. Earnings are going to look ugly for $WMT $TGT $KR
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