The Weekend Edition #8

Welcome to the eighth issue of the Weekend Edition. 

Again, thank you to all who’ve read and subscribed to the newsletter this week!

Now, let’s grab a cup of coffee ☕️, while we take a look at what happened in the markets this week. 

Here’s what we cover:

• Market Recap - a look at the major indices - September rears it’s ugly head

• Economic Indicator in Focus - The Beige Book

• Earnings of Week - $LULU; $RH; $AFRM

• Around the Market - Apple again!; Crypto; The Debt Ceiling

• The Week Ahead

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - 07 Sep 2021 to 10 Sep 2021

The US markets had a shorter trading week with the Labor Day holiday on Monday, but boy, what a week!

Here’s the 5-day performance heat map from Finviz for the S&P:

The worst performing sector for the week was Real Estate (down 3.93%) and the best performing was Consumer Cyclicals (still down 0.85% though).

Apple ($AAPL) hit yet another ATH on the 7th reaching $157.26 but took quite the tumble on Friday with the news of the ruling on App Store Policies. We go into this below. Here’s a look at the rest of the market:

Every index declined for the week. It would seem that September being the worst month for stocks is coming true, yet again. The NASDAQ still remains of better footing because of Big Tech. The Vix spiked and US10Y rates are moving up.

Natural Gas advanced 7% over the week, hitting 5.05, just before market open before closing at 4.97 for the week. Brent increased on news of China’s demand for imports, while Gold still hovers below the 1800 mark.

Economic Indicator in Focus - The Beige Book

What is the Beige Book?

The Beige Book is a compilation of anecdotal information from the 12 Federal Reserve districts. It is based on interviews with local businesspeople and academics who describe the economic climate in their region. It is published 8 times a year in line with the scheduled FOMC meetings.

How Does It Fit into the Picture?

The Beige Book is one of 2 books that are delivered to the FOMC members prior to the next meeting. The second book, the Tealbook, has a part A & B which were previously two separate books and merged in June 2010. The Tealbooks is made public after 5 years.

• The Beige Book comes out 2 weeks before the meeting and is made public. 

• The Tealbook A (previously the Green Book) contains views of the current and future economic conditions - both domestic and international. It is made available on the Thursday before the meeting.

• The Tealbook B (previously the Blue Book) offers a set of interest rate policy alternatives and their likely consequences. It is made available on the Friday before the meeting to FOMC members.

Why does it Matter?

The Beige Book is timely data that influences the FOMC meeting decision. 

If economic growth is too rapid at a time when labor and material resources are scarce, it will heighten concerns that the Fed may soon hike rates, which often causes stocks to decline. 

What did the Beige Book say this time?

• “Economic growth downshifted slightly to a moderate pace in early July through August”

• Deceleration in economic activity due to the rise of the Delta variant. 

• There were “supply disruptions and labor shortages” 

• A number of Districts reported an acceleration in wages, and most characterized wage growth as strong.

• Inflation was reported to be steady at an elevated pace

• There has been substantial escalation in the cost of metals and metal based products, freight and transportation services, and construction materials.

• Businesses are finding it easier to pass along more cost increases through higher prices & anticipate significant hikes in their selling prices in the months ahead.  

This reports comes at a time when the PPI also showed a remarkable increase in Friday’s release. The PPI which measures the changes in prices received by domestic producers, was up 0.7% in August compared to the expected 0.6%, but down from the 1% increase in July. However, on a rolling 12-month basis, PPI was up 8.3%, the highest increase since 2010. This corroborates the increase in prices across the supply chain.

Earnings of the Week

Lululemon Athletica ($LULU)

Lululemon beat earnings estimate by 39% delivering a fantastic quarter. A company that most people thought was a pandemic play, continues to increase revenue with a 61% YoY growth to $1.45B. Operating Income increased by 134% YoY to $291M, while delivering a +7% improvement in operating margins.

These numbers are compared to their achievements in 2020, at the height of the pandemic, which makes it even more impressive!

The Company

• raised FY21 adjusted EPS view to $7.38-$7.48 from $6.73-$6.86, consensus $6.91.

• raised FY21 revenue view to $6.19B-$6.26B from $5.825B-$5.905B, consensus $5.94B

The Stock soared almost $50 to reach an all time high of $434.

Not surprisingly, LULU got 11 price target raises from analysts, some citing that the forward guidance may even seem conservative. As Morgan Stanley analyst, Greenberger rightly said the stock “may have permanently re-rated from pre-Covid levels”.

Restoration Hardware ($RH)

Another set of earnings that sent the stock soaring by $50+ to reach $733 was none other than RH. The Company’s stock price is +110% from it’s 52-week low, delivering 55% of that increase this year.

What started out as a furniture store, has quickly transformed into a “destination”. RH doesn’t sell furniture, it sells a concept, it sells luxury. And the numbers have morphed to support that. Take a look at the RH website …. you won’t be disappointed.

Clearly, my take on this company is biased. But, let’s look at the numbers. RH delivered a 30% beat on earnings estimates and 59% beat on revenue forecasts. The Company’s revenue increase 39% YoY for the quarter with an operating margin improvement of 31% and Net Income margin improvement of 65%.

The Company provided improved guidance for FY2021 stating increase in revenues of 31%-33% from a previous guidance of 25%-30% and improved ROIC outlook to 70% vs. 60% previously.

RH continues to deal with supply chain challenges, however - increasing material and freight costs, and factory closures around the world like Vietnam. They’ve delayed their launch of RH Contemporary by a year, to Spring 2022 and the opening of RH England, which in itself will be a landmark destination. The gallery will be at Aynhoe Park, a 73-acre estate designed in 1615 by the legendary English architect, Sir John Soane.

RH is also launching guesthouses - luxury spaces for travelers with a need for privacy. They propose 9 or 10 rooms per guesthouse.

RH believes that their global market opportunity, even at 1% of the total market, could be $70B to $100B of which $15-$20B is in Europe. They have a clear line of sight to achieve at least $5B to $6B in the next few years, just in N. America.

RH got 6 Price Target raises post earnings and have an average PT of $764.79.

Around the Markets

Apple in the News…again!

Apple ($AAPL) received their ruling on their Epic Games (Fortnite) Case on Friday and the stock dropped over 3% before close after reaching yet another all time high, earlier in the week. This comes ahead of Apple’s launch event on Sep 14, 2021.

Epic Games had alleged violations of federal and state antitrust laws and California's unfair competition law based upon Apple's operation of its App Store and collection of fees. Apple made almost $6.3B from App Store fees last year and even a reduction in the revenue will not make a big dent in the company that’s estimating $360B in revenue for FY2021.

While the judge ruled that Apple’s policies are anti-competitive, they are not in violation of the antitrust law. On the counterclaim, the judge found in favor of Apple for breach of contract and ordered Epic Games to pay almost $4M in restitution.

What seemed like a loss for Apple, really was not. While Apple can't prohibit developers from offering payment options outside of the App Store anymore, many developers may still find it easier to stick with Apple’s payment options.

Rough Tides for Crypto

I’m not even going to pretend to know what drives the price of Bitcoin or any other Crypto currency for that matter. At one point, we assumed that it was the lack of supply but who knows anymore, since a tweet from a celebrity is often enough to send the price soaring or crashing, as the case may be.

This week, El Salvador announced that Bitcoin would be accepted as legal tender there now and soon thereafter, prices dropped 17% to a monthly low. According to Bloomberg, “technical glitches around the rollout and demonstrations against crypto adoption spoiled the debut and sent other digital currencies lower in sympathy.”

And then there was a bit of a fuss, with the Coinbase CEO, Brian Armstrong, who wrote a 21-tweet thread, complaining how the SEC wouldn’t let him start a lending program for Crypto. Apparently, the SEC has threatened to sue Coinbase claiming this is a security offering and Armstrong seems to suggest he has no idea why, this would be regulated as such. Needless to say there was an outpour of tweets, pointing Armstrong to the Securities Act. The problem is all of this is unchartered territory and it’s likely a way for the SEC to have some sort of oversight and regulation for Crypto by categorizing the crypto lending program as a security.

The Debt Ceiling

Treasury Secretary Yellen cautioned that extraordinary measures are likely to be exhausted in October. One of those measures includes reducing Treasury issuance. The bills have been trimmed in recent weeks. And though policymakers have pushed the limit to the brink on occasion, it's always been passed to prevent the U.S. from going into default.

The Week Ahead

There’s not much in the way of earnings next week, except Oracle reporting on Monday, September 13.

We also have reports on the Inflation Rate coming out on Tuesday, Sep 14, Retails Sales and Jobless Claims data on Thursday, Sep 16, and finally Consumer Sentiment data on Friday, Sep 17. This is the last set of data that will influence the FOMC meeting that takes place the following week, Sep 20-22.

Closing Thoughts

When I’m considering a stock purchase, the first thing I’ll do is look up the latest 10Q and 10K and then everything else. I’m not too bothered when a stock price falls because someone whispered interest rate hike since the company’s long term growth plans don’t change much. So why then do I have a Macro section in my newsletter?

For one thing, it’s really interesting and fun to track how the macro factors move and see what possible effects it has on short-term market behavior.

And secondly, we don’t invest in a vacuum. While I may not care too much about interest rates in terms of DCF valuations, I do for example, care that it may possibly put pressure on cash flows of the company, if they have large amounts of floating debt.

Finally, I don’t write for myself. I write with the hope that this newsletter is useful to people. So a small summary of macro events, even for investors who don’t care too much, may provide value. It also makes for good conversation. 😊

Here’s wishing you a happy weekend and safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $AAPL, $RH, $FB, $COOK as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.