We've got re-ratings all over the place and all for different reasons. Re-ratings happen when an event occurs that forces us to rethink what we are paying for various stocks.
Classic example? The hotel and time-share stocks. This morning a very smart buyer, Apollo Global Management (APO), announced a definitive agreement to buy Diamond Resorts International (DRII), a giant time-share company, for $30.25 per 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's up almost 24%.
So what's happening because of that? 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.
That's right, even though the quarter was subpar, the stock's going higher: classic re-rating. Similarly, Marriott Vacations Worldwide (VAC), which has been in a terrible bear market for ages, is coming back, rallying almost 4% today alone. Marriott (MAR) spun off Vacations as a separate time-share entity and initially it did well only to find itself caught up in what can be called a fantastic fear of Airbnb. Judging by how the stock acts now, the fears might be overblown even as I think the world of Airbnb and am not suspicious of its $30 billion valuation that the company is attempting to seal with a current round of funding.
These are welcome moves given that so many feared that travel has been curbed both because of terrorism and the strong dollar.
Next re-rating? The food business. General Mills (GIS) this morning reported a good quarter, not a barn burner, but a good one with a small level of organic growth and a fantastic dividend boost from 60 to 66 cents per share. That boost keeps its yield at almost 3% despite the run.
Here the re-rating's aggressive. Mills is a consumer packaged-goods stock with nil growth that is now trading at 23x earnings. That gives cover for Kraft Heinz (KHC), which was already valued highly on the strength of its cost-cutting efforts, to get still one more boost as it closes in on its 52-week high. Kellogg (K), which reported a quarter that was even less robust than General Mills, is rallying nicely, too, even as it sells at the already inflated 21x earnings number.
Many naysayers would pronounce the valuations foolhardy. That's something that I leave to market participants. The fact is that worldwide turmoil, whether it be from Brexit or terrorism, or a fear of a recession, allows us to pay more for these stocks when they continue to deliver consistent earnings with phenomenal cost takeout, as was the case with General Mills, which manages to hack its way to a more than 400-basis-point improvement in gross margin.
Finally, we are seeing a bid underneath in the apparel group, which has been so beleaguered because Nike (NKE) told us that inventories have been worked off in America. Excess inventories have been the bane of this group's existence ever since Sports Authority announced it was closing up shop. Nike has made a nice comeback from its post-market lows but I like the action in Under Armour (UA), Skechers (SKX) and Lululemon (LULU) now that we know Nike has said the inventory's clean. Of these, I really still believe we are in the early innings of the turn at Lululemon, given that the new team put into place by Advent International has just gotten its bearings. Hmm, maybe the pressure will be off Rhoda Pitcher, the director that Fill or Kill team member Anders Keitz has waxed so eloquently about. (Under Armour is part of TheStreet's Growth Seeker portfolio.)
I know there's been tremendous anxiety in the retail group in part because of inventories, and you can argue that the whole sector is being re-rated upward by Nike's call. I think that's premature and I only like the discounters, namely Dollar Tree (DLTR), Dollar General (DG), Costco (COST), Ross Stores (ROST) and TJX (TJX). Oh, and never forget Ulta (ULTA), that potential member of the new FANG with the G dropped off for savings. But every dog has its day, and today's retail's day. (Kraft Heinz and Costco are part of TheStreet's Action Alerts PLUS portfolio.)
