RBC's Head of US Equity Strategy, Lori Calvasina, published an insightful report last week. They took a closer look at stock market performance and economic data around the recession of 1945, the only time since the Great Depression that the stock market didn’t fall as a recession took hold. In 1945, the index rose nearly 31%. That was the only time in the last 80 years that the stock market didn’t experience a meaningful decline as the recession was starting. Interestingly, the stock market did fall after the recession ended and declined nearly 12% in 1946. In 1946, GDP worsened while the labor backdrop stabilized. We continue to think that this period provides useful lessons for how to think about the current macro backdrop for US equities and helps to explain the resiliency of the S&P 500 this year. Coming out of World War 2, the US economy experienced a recession from February through October of 1945, but the S&P 500 continued to march higher. This data point has been a revelation for a number of the investors we’ve sat across the table from over the past month, with several acknowledging that “the COVID economy was basically a wartime economy.” With the realization that the stock market was able to look through the messy transition back to a normal economy in 1945, it becomes far less controversial to think that something similar could happen in 2023. This trip down the rabbit hole was fascinating to us.
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Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(-) ChargePoint Holdings (CHPT-US) fell after the EV charging-network company reported a quarterly loss around Wall Street expectations, but said it expected lower sales in its current quarter. The company lost $79.4 million, or 23 cents a share, in the fiscal 2024 first quarter, compared with a loss of $89.3 million, or 27 cents a share, in the year-ago quarter. The per-share loss met FactSet consensus. Revenue rose 59% to $130 million, the company said, slightly ahead of FactSet expectations for $128 million in revenue. As the only charging network to operate across all verticals in North America and Europe, they remain well-positioned to take advantage of the long-term growth opportunity. Earlier this week, analysts at BofA raised their rating on the company’s stock to the equivalent of buy, saying ChargePoint is the “best in class” to invest in the EV charging space. Owned in Opportunity Portfolio.
(~) CrowdStrike (CRWD-US) delivered good results. Shares were down on first reaction. We see this as noise and added at the opening pullback. The company is signing bigger clients which are harder to close. It now has more than 400 clients that pay them over $1 million a year. During the quarter they signed a deal with the US Department of Defence and 2 Fortune 100 companies. CrowdStrike was founded in 2011 with a mission of reinventing security for the cloud era. The company and its customers benefit from the network effect, as each additional endpoint added to the platform expands the crowd-sourced database, which in turn improves the quality of the algorithms. We view CrowdStrike as a prime land-and-expand model benefiting from SaaS delivery and ability to rapidly add more modules with no extra configuration or consulting needed. The long-term power of the install base should lead to strong net expansion rates as the company cross-sells additional seats (endpoints) and modules. Owned in Opportunity Portfolio.
(+) Enphase Energy (ENPH-US) Shares are up more than 10% over the last week. The company recently announced that it has furthered its relationship with Natec to distribute IQ Microinverters and IQ Batteries throughout Europe. Natec is a leading wholesaler of solar and battery products. IQ Microinverters utilize Enphase's distinctive software-defined architecture and semiconductor integration for fantastic reliability and economies of scale. Enphase began production shipments of microinverters from its contract manufacturer Flex in Romania earlier this year. The factory has allowed Enphase to improve delivery times to European customers while handling the region's speedy growth and demand for residential solar due to the increased global capacity of microinverters per quarter. Owned in Opportunity Portfolio.
(+) Eli Lilly (LLY-US) After a nearly 42% gain over the past 12 months, Eli Lilly has dethroned Johnson & Johnson as the world's most valuable drugmaker amid prospects for its experimental therapies targeted at Alzheimer's disease and obesity. According to Bloomberg data, Lilly shares rallied 9% in May to reach a record high, lifting its market capitalization to $408B, while JNJ's market cap came at $403B following a 5% decline. Lilly is participating in arguably the two areas of therapeutics that investors are kind of most interested in. Owned in US Portfolio
Spotlight: Uranium Uranium mining stocks surged in Thursday's trading after the U.S. Senate Environment and Public Works Committee voted to approve a sweeping bill that would fast-track the deployment of a new fleet of advanced nuclear reactors. If made law, the legislation would direct the U.S. Nuclear Regulatory Commission to examine its processes for licensing nuclear power plants and study whether the guidelines could be modified to quickly approve advanced nuclear reactors. In particular, the bill calls for hastening approvals of next-generation reactors to be built at former industrial of commercial facilities, and directs the NRC to coordinate efforts between the U.S. and other countries seeking to develop nuclear power and to help train nuclear safety regulators abroad. We own Cameco (CCO-T; CCJ-US) in the Core and Opportunity Portfolios. We own NuScale Power (SMR-US) in the Opportunity Portfolio.
(+) Constellation Brands (STZ-US) Recently, Constellation management told Wells Fargo that it has seen no noticeable shift from people drinking less Bud Light. Without spending too much time on the inadvertent marketing blunder by Bud Light, we believe the fallout from this controversy means incremental share gains for Constellation’s Corona and Modelo. Recent data from the publication Beer Business Daily showed sales volumes of Bud Light for the week ending May 13 fell 28.4%. That’s worse than 27.7% decline from the week before. While we don’t know how long some of the Bud Light boycotts will last, what it means for the time being is more share gains at other beer stocks. Molson Coors may have more direct substitutes with Miller Light and Coors Light, but Constellation will benefit, too, with its presence in the light beer category through Corona Light and Modelo Oro. As the industry data around Constellation’s volume trends improve, we think STZ will trade higher. Owned in Core Portfolio.
(+) TransDigm (TDG-US) The rebound in commercial air travel has TransDigm’s stock price soaring. This issue has broken out to new all-time highs, and is up 33% over the past six months, versus a 6% gain for the S&P 500. The company has topped Wall Street’s consensus earnings estimate for five consecutive quarters now. In fiscal 2024, we’re looking for 12% top-line growth to drive share earnings up nearly 30%. TransDigm has high financial and operating leverage, with a relatively low share count. Dramatic bottom-line gains can be driven by solid revenue growth. Very strong free-cash flows should cut the debt burden going forward and exceptional pricing power will likely keep margins on the rise. Notably, the company is the sole producer of much of its proprietary, niche offerings. Owned in Core Portfolio.
(+) The Trade Desk (TTD-US) Shares popped following positive analyst coverage from RBC Capital. RBC Capital analyst Matthew Hedberg maintained shares with an Outperform and raised the price target from $77 to $85, citing optimism surrounding the company's new CFO Laura Schenkein. Schenkein has played an integral role in forecasts and guidance (which the company has met 26 out of 27 quarters) since TTD went public, the analyst said. Additionally, she has worked a number of roles during her time at the company, which gives her an operational advantage. Moving forward, the company is focused on its international business, forward market products and small and medium sized businesses. Increasing interest in joint business plans aligns with themes we've heard around ad spend optimization but also creates more revenue visibility. Owned in Opportunity Portfolio.
Weekend Reading
RBC MacroMemo May 30 - June 12, 2023 Debt ceiling / S&L crisis / Murky data / Productivity / Recession / Inflation attribution / U.S. infrastructure RBC
Real estate is China's economic Achilles heel It's the country's biggest engine of growth an employment, financial asset, and source of government revenue. NOAH OPINION
Resetting the score Sometimes, an entire industry gets reset to zero, and all the entrenched advantages and parameters go away. The iPhone had that effect, and so did HMS Dreadnought. BEN EVANS
The Spectrum of Financial Dependence and Independence Level 10: The ability to say no to banks, whose debt you don’t need, including mortgages. COLLAB FUND
Visualizing the Uranium Mining Industry in 3 Charts When uranium was discovered in 1789 by Martin Heinrich Klaproth, it’s likely the German chemist didn’t know how important the element would become to human life. VISUAL CAPITALIST
Foresight: The mental talent that shaped the world When humanity acquired the ability to imagine the future, it changed the trajectory of our species. BBC
The First Rule of Dunning Kruger… It’s useful to think of Dunning Kruger in terms of metacognition: One’s ability to self-evaluate a particular skill set. BARRY RITHLOTZ
