It's May 16, 2016. I have been up since 5:15 am. I put up a pot of Sumatra and began to think about the day ahead. What I am going to write about? What was going to happen to the market, I thought? Would they buy the crude move after Nigerian outages were announced? It is an adventure every morning. But I'm also aware that (1) I can't win every day (Basic Tenet #20 from May 3); and, (2) today in many ways is just a continuation of yesterday.
A slew of notes and news alerts are distributed into your inbox. I do some pushups and sit-ups. I head to my desk. I'm constantly banking story ideas in my Rhodia Dot Pad. I jot down a couple of ideas. I shoot a text to my Mom to see how she is feeling. It is just an ordinary day.
The news starts picking up around 7:00 a.m. Companies are reporting earnings, and the prognosticators are creating the noise of the day. I check out my budding portfolio -- I have been limited from personal trading for about 10 years. But I'm not in any rush to broadly reallocate capital at the moment. Instead, I have been organizing risk/rewards for individual stocks on my wish list and getting up to speed on current fundamentals.
The morning progresses and I decide to write a small piece from this morning about consumer multiples continuing to compress into strengthening oil prices and weaker retail fundamentals. I think of an encore but come up empty. And today is just not a day for an educational piece.
So I pull up the Anixter International (AXE) 10-Q from first-quarter 2016 and update my numbers. I like Anixter. It is a lightly followed, largely domestic distributor of electrical equipment, including wire and cable. The company has a strong history of smart acquisitions and capital allocation. Sam Zell is a large shareholder, and his been for many, many years.
I like Anixter's business, despite its low margins, because this company converts inventory into cash quickly. It is a very well-run company and has a unique culture. CEO Bob Eck receives most phone calls from employees who offer suggestions, criticisms or complements. That is very special. I will buy a little stock this morning (and I did) around the open. I hope to add to my position over time and think it is worth around $85 to $90 per share. I can go into more specific numbers, but to summarize, the company can earn $500 million in EBITDA or so, run rate, into 2017. At these levels, the stock is at the low end of valuation parameters. 9x EBITDA equals about $87 a share. I will add ratably to my position in time.
The afternoon comes and volume is light. The market continues to broaden -- really just a continuation of yesterday. There are no fires to put out, which is nice. So, I meander into a Japanese bookstore in Midtown Manhattan and I peruse the shelves and tables.
I stumble across this book:
My 9-year-old daughter and I sit in her room before bedtime with this book. We have two copies, one for me and one for her. We lay on our stomachs on the rug in her bedroom and we write a few stories. It's a highly recommended activity and only takes 20 minutes or so. I love what she comes up with, so much fun!
I look over to the left of this book and find:
This came highly recommended from one of the smartest guys on the planet, and friend of mine, Jim Stewart. He writes Common Sense for The New York Times. We also share a yoga instructor who has changed each of our fitness lives. I finally buy a copy and will add it to my nightstand queue. It's autographed!
Finally, since I'm a columnist for Jim Cramer's Real Money, I check the business section for one or more of Jim Cramer's books:
To no avail in the "C" section, Sir. My favorite, though, is "Confessions of a Street Addict."
This is my first installment of "Walk Around in the Afternoon." Stay tuned for more!
MAY 16, 2016 | 10:05 AM ET
Crude's March Higher Compresses Consumer Stocks' Multiples
- Consumer discretionary is reversing its two-year old trend.
This morning, crude is up more than 2% on Goldman's bullish stance that supply and demand imbalances neutralized in May. This is going to be the way of the world in the intermediate-term, as supply and demand dynamics find their natural footing. It is above my pay grade to speculate on a sustainable move higher or a return to February lows -- I'll just observe and follow the trend.
But with certainty, I can suggest one idea: Consumer Discretionary equity multiples will likely continue compressing.
Back in 2014, after oil (and other industrial commodities) began corrective action, areas like restaurants, consumer discretionary and "growth-y" retail added some serious market capitalization, on the notion that lower oil prices will boost consumer spending.
It was a terrific macro thesis at the time, and one that many fundamental and quantitative investors followed.
After two years, oil and other commodities seem to have started to stabilize. Any economic benefit that the consumer was able to garner from lower oil prices is now being lapped. So we sit looking at flat-lining, or even declining, traffic themes and the start of earnings degradation and multiple compression.
We've seen weakening trends reflected in stocks like Buffalo Wild Wings (BWLD), Red Robin Gourmet Burgers (RRGB) and the bloodbath from last week led by Gap (GPS) and Nordstrom (JWN).
Look to Dave & Busters Entertainment (PLAY), Ulta Salon, Cosmetics and Fragrance (ULTA), Acuity Brands (AYI), Lululemon Athletica (LULU) for areas where multiple compression could still be yielded on potentially slower consumer activity.