Sometimes, as silly as it sounds, we simply want to pay more for stocks than we did the day before. There could be events that make certain stocks more valuable, such as takeovers or restructurings that increase the worth of an enterprise. But today, we have another phenomenon at work. It's called re-rating, where we decide that because one company gives us a newfound positive about its business, we re-rate the entire group. We are basically upgrading a slew of stocks from hold to buy because of good news wholly separate from the overall market.
Yep, in this incredibly robust session we have not one, not two, but a whole host of re-ratings, more than I can recall in ages, and it's coloring the entire tape, so to speak.
Now it is true that we can't just go poof or voila or eureka about stocks and have them increase in value. You need a constructive backdrop to make the magic -- some would say the alchemy -- happen. After all, nothing has occurred at the company's shares you are paying up for. It's all correlative or done by analogy and it's all about willingness to buy something at a higher price because you think yesterday's price was just plain too low.
Amazingly, a few days after what we were told might be the end of the financial world as we know it, we have that exact constructive backdrop necessary for us to feel confident to re-rate. That's right. We are now beginning to realize that perhaps we were a little bit too precipitous and headstrong about dumping stocks wholesale here as a consequence of Brexit, there.
Sure, the United Kingdom has chosen a slower growth path that will have a higher likelihood of recession, but the prospect of wholesale bank failures for the moment has become less likely despite the declines in the big bank stocks, because you can't just look at the bank stocks as indicators. You need to look at the whole panoply, including a banking company's bonds and preferred stocks, and they have held up remarkably well. It doesn't mean the stocks are wrong; it does mean that things are less dire than we thought.
In fact, in one way, in this country we are back to where we were before this U.K. vote except we can be even more bullish on one particular score. First, we find ourselves once again in a stock market that takes its cue from the price of oil. If oil goes higher, then we like stocks, and if oil goes lower, we dislike them. Remember that correlation? Oil once again bounced off the $46 level where it was sent because of the U.K.'s vote to leave, and now it has shot back to $49 on lower inventory numbers, back to where it was before Brexit. That reflects some genuine strength in the economy and is very positive for stocks.
The big additional change since last time, though? When oil was here six days ago we were worried about a couple of Federal Reserve hikes. But because of Brexit and the chaos in Europe, those hikes seem to be off the table. In their place is our own weird version of stock nirvana: higher oil and less of a likelihood of higher interest rates, no matter the reason why. That's the fertile ground for the kind of re-ratings I am talking about.
And what's collectively going from hold to buy?
The first and most classic example? The travel, leisure, hotel and timeshare stocks. This morning a very smart buyer, Apollo Global Management, announced a definitive agreement to buy Diamond Resorts International (DRII), a giant timeshare company, for $30.25 a share in cash. While Diamond Resorts had been for sale for a while, and therefore had a bit of a takeover premium in it, the stock is up almost 24%.
So what's happening because of that? The re-rating of everything in the space. Wyndham (WYN), with a somewhat similar model and rumored to be a potential buyer of Diamond, has popped 4% on a belief that perhaps we simply weren't paying enough for its assets before this deal.
Marriott Vacations Worldwide (VAC), the giant Marriott timeshare spinoff is having its best day in years, jumping 4.5%. Hyatt (H), a traditional hotel, is up almost 5%. Suddenly, this nasty and quite disappointing group, which has been rated very negatively, is back in favor.
If these stocks are valued more highly, what else is? How about Priceline (PCLN), Expedia (EXPE) and TripAdvisor (TRIP), the online travel cohort. If Apollo likes Diamond, we have to think they believe in an increased travel thesis and they aren't concerned about the long-term impact of an AirBnB, which has been the psychological bane of the group's existence.
This travel move is so big it's got American Airlines (AAL), United Continental (UAL), Delta (DAL) and Southwest (LUV) going higher. It's been ages since this group has seen buyers. Diamond/Apollo has restored some faith, however fleeting, to the worst group in the book.
What else is being re-rated? Consider the slow-growing food stocks. General Mills (GIS) reported a quarter that was ever so slightly better than expected and gave you a dividend boost from 60 cents to 66 cents, keeping the yield around 3%. A little bit better is translating into a 2% move up and a halo for Kellogg (K) and Kraft Heinz (KHC), which is part of our Action Alerts PLUS portfolio. We pay more for General Mills because of its ability to cut costs and improve sales, we pay more for the rest, especially when consistency is so highly valued.
Then there's Nike (NKE). So many people got this one wrong last night; it's painful selling it down 5% in after hours, putting it down 20% peak to trough. They were worried about some futures orders. Wrong call. They should have been worried about inventories. The whole apparel business has had too much inventory in it, particularly sports apparel, in large part because of the bankruptcy of the 400-store Sports Authority chain. But Nike said on its call that North American inventory is now clean. There's no more backlog. Bingo. That was the signal for Under Armour (UA), Foot Locker (FL) and Lululemon (LULU) to rally. It was a clarion call missed by those who traded off the headlines because you didn't find that piece of data until you were deep into the conference call.
Note that there were a host of other stocks that went higher today. The banks because we stopped extrapolating European bank disasters. Health care because of some positive comments about a couple of biotechs. The oils, of course, rallied because of the price of oil. The market returned to the tech stocks that had been doing well before Brexit, betting that nothing wrong could have happened all that swiftly.
But to me, it's the re-ratings that took center stage because, with the possible exception of the food group, these were precisely the worst stocks in this market both before and after Brexit.
We didn't like the travel and leisure stocks and the airlines, and that put a damper on so many areas that are needed to create a rally, especially the transports, which hadn't participated at all in any move up this entire year.
We despised everything retail, so to get a bellwether such as Nike to give us hope is a very big deal. And the fact that a mall-based company such as Foot Locker could go higher, especially after its subpar previous quarter, and that Under Armour could be sprung from the house of pain just dazzled.
So here's how I look at it: Yesterday was just a relief rally. Today was something more permanent, a re-rating of previously despised stocks. It's a welcome change and it may lead to more positive thinking. After all, if the hated can move, who knows what can happen to those companies that are alive and well and making real good money?