Weekly Research Briefing: Hungry Fish

February 13, 2024

The S&P 500 moves through 5,000, the NASDAQ hits 16,000, and the Dow Jones Industrials is eyeing 40,000. Those are some landmark levels advertising that investors are hungry and want to be fed. What were the catalysts last week? Earnings were a big driver. Just look at the names across multiple different industries that surprised investors: Arm Holdings, Chipotle, Toyota, Wynn Resorts, Emerson Electric, Monolithic Power, GE Healthcare, and even Disney. These stock prices were not shy to respond to the good news and launched higher. Adding to investor appetites was a CEO confidence survey which finally turned positive after two years of pessimism and negativity. Welcome to the frenzy.

Now that we are back to all-time highs and everyone is feeling good in the corner office, what will happen next? Expect higher valuations for some companies to be used as currency value to make that next meaningful acquisition. Look for those CEO's jealous of other CEO's growth rates to shed slower growing units and reinvest or acquire faster growth. Large cap companies will have the best fishing rods for the road ahead as their balance sheets are in great shape and their interest costs are heavily fixed. If a small company is looking for a big brother, now is a good time. And of course, with stock investors' mouths open wide, the IPO markets will see a resurgence in activity for 2024. Last year's biggest IPO, Arm Holdings, is now up 200% from its September IPO price. And the all-important retail company Birkenstock is now through $50 per share. Bring the right company public right now and individual and institutional investors will swim on top of the water to buy it. Just watch.

As earnings begin to wind down for the biggest companies this week, the small and mid-caps will take over the tape. But for the macro junkies, it will be a big week for inflation readings with the CPI dropping Tuesday and the PPI on Friday. We also get Retail Sales, Homebuilder Sentiment, and the Univ. of Michigan Sentiment to give us readings on what the consumer is thinking. For business readings, we will see numbers for Industrial Production, the Empire State Fed and Philly Fed. Have a great week. Enjoy the east coast snow day today. And congrats to both the Chiefs and the Niners. What a great game.

Well look who finally turned that frown upside down...

New York, NY, February 8, 2024 … The Conference Board Measure of CEO Confidence™ in collaboration with The Business Council improved to 53 in Q1 2024, up from 46 in the fourth quarter of 2023. The Measure is now above 50, a reading that suggests CEOs have become optimistic about what’s ahead for the economy. Importantly, this is the first time optimism has prevailed in the Measure since Q1 2022. (A reading above 50 reflects more positive than negative responses.) A total of 138 CEOs participated in the Q1 survey, which was fielded from January 16 through 29.

CEOs’ views of current economic conditions improved markedly. In the Q1 survey, 32% of CEOs reported general economic conditions to be better than they were six months ago, up from just 18% in Q4 of last year. Just 22% said conditions were worse, down from 32% in Q4. Similarly, future expectations strengthened: 36% of CEOs in Q1 expect general economic conditions to improve over the next six months, up from 19% last quarter. Moreover, only 27% expect conditions to worsen, down significantly from 47%. CEO expectations for conditions in their own industry followed a similar upward trend.

Conference Board

BofA Global

Maybe helping CEO confidence is the downtrend in bankruptcy filings...

Always better to have your customers healthy and paying.

S&P Global

If CEOs are feeling better, then it is time to watch the ISM figures shoot higher which typically leads to faster earnings growth...

@TimmerFidelity: Confirmation of the improvement in earnings estimates is coming from last week’s rebound in the purchasing managers index (PMI). This bodes well for earnings, given the strong correlation to estimates. The ISM index (Institute for Supply Management) has rebounded to an almost expansionary 49.1, while new orders are now expanding again (above 50). A hopeful sign for the earnings cycle.

Now just look at these more positive earnings call comments across a multitude of industries...

"Looking ahead, 2024 appears to have a more stable outlook than may have been expected just a few months ago, with a reasonable probability of seeing the much-discussed soft landing. As Leon mentioned in his opening remarks, the U.S. economy appears relatively healthy with inflation and unemployment metrics continuing to trend favorably" - Nucor CFO Stephen Laxton

"While we expect softness in industrial and durable goods demand to continue in the first quarter, we are encouraged by early positive signals in areas including construction, automotive, and consumer electronics." - Dow CEO Jim Fitterling

"I'm more positive about our outlook than I was this time last year. Today, as compared to a year ago, we have more clarity about the outlook for interest rates with downward movement likely later in the year. More REITs associated with material economic slowdown or recession are dissipating. Inflation pressures on operating expenses are declining" - Mid-America Apartment Communities CEO H. Eric Bolton

"Recently, we observed some relatively positive indications that favor cautious optimism, including the expectation for lower interest rates, improving consumer sentiment, and unexpectedly strong GDP growth." - MasterCraft Boat CEO Frederick Brightbill

"We then saw buyer sentiment and demand improved, as mortgage rates finally rolled over, ultimately dropping more than 100 basis points as we moved through November and December…We had a great December, the highest month in the quarter in terms of absolute sales and absorptions per community. So, that was certainly an anomaly for typical December seasonal patterns. And the strength has really continued into January, Carl. So, we’re feeling pretty good about how the year is starting" - PulteGroup CEO Ryan Marshall

"The number of drivers we have on the platform was up 30% year-on-year…And as long as we've got drivers who are earning as they are, for example, in the US $33 per utilized hour and staying on the platform for longer that platform stays healthy." - Uber Technologies CEO Dara Khosrowshahi

The Transcript

Hats off to this analyst for saying they got their call wrong on Hybrid cars...

Now time to find the hybrid auto winners as the technology sees a resurgence.

Global Auto Monitor: We Were Wrong on Hybrids
I owe Toyota an apology. From 2019 through 2021 we predicted the demise of hybrids given changes in regulations, EV adoption and consumer tastes. We were wrong. Hybrids are proving to be a viable transition tech defining share winners/losers in 2024.

Morgan Stanley

Nate Silver does a deep dive into the differences of the major consumer confidence surveys...

Univ. of Michigan numbers drop this week. Let's see how much the below jaw can close on Friday.

Why the divergence? The Michigan survey’s questions are highly sensitive to inflation, whereas the Conference Board’s are not. And spring 2021 is when inflation really began to ramp up, as a white-hot-recovery summer ran headlong into supply chain disruptions, the Delta variant and an injection of stimulus cash that led people to splurge on everything from revenge travel to meme stocks. It was a deeply strange economy — good for businesses and good for job seekers but sometimes awful for consumers.

So while the Conference Board numbers have consistently been above average, at roughly a score of 120 on my normalized scale, the Michigan ones took longer to recover. However, they have rebounded recently, reflecting a deceleration of inflation since roughly mid-2023, perking up to 82 on my adjusted scale in the January 2024 reading after having bottomed out at 41 in June 2022.

NY Times

A big help to Friday's UoM Consumer Confidence numbers should be the continued plunge in grocery store basket price inflation...

BofA Global

It was difficult to miss the surge in processing power demand comments last week...

Some extremely big numbers were being thrown around regarding current demand as well as future capex needs. Now is a very exciting time to be a participant and an investor in this very fast-moving space. But is $7 trillion in capex needed? Sam, that seems like a stretch.

$AMD CEO on strong GPU demand... "our prior guidance was for Data Center GPU revenue to be flattish from Q4 to Q1 & exceed $2B for 2024. Based on the strong customer pool & expanded engagements, we now expect it to grow sequentially in Q1 and exceed $3.5B in 2024"

[NVDA] NVIDIA CEO: Expects AI data centers doubling in scale over five years; Sees advances in computing over the next few years will keep the cost of developing AI well below the $7T that OpenAI's Altman said to be fundraising - There's about $1T worth of installed base of data centers around the world; Over the course of the next 4-5 years we will have $2T worth of data centers - Source TradeTheNews

"What we are seeing is more and more AI demands in the data center, whether that's around training or inference. And because the Arm solution in the data center, in particular, is extremely good in terms of performance per watt and the constraints that are on today's data center is relative to running these AI workloads puts a huge demand on power, that's a great tailwind for Arm." - ARM CEO Rene Haas

The Transcript

The largest IPO of 2023 is now up 200% from its pricing...

You could have bought all the ARM that you wanted in October when it broke its $51 IPO price. Thanks to the massive ramp in high-speed processing demand (as seen in the blowout numbers at TSM and communicated by every AI player in their quarterly earnings), the investing world has re-awakened to how good a position that Arm Holdings is in. Here is a snip of the other large cap semi/tech names hitting all-time new highs which are benefitting from the growth of AI and more advanced processing demand.


With ARM running through $150 and BIRK walking over $50, let's check in on the IPO barometer...

Hopefully your firm just sabbatical'd their bankers and lawyers in 2023. If not, the M&A oriented headhunters are going to be getting busy.

Goldman Sachs

A look at the individual components of the IPO barometer should suggest that it is only going much higher...

Our baseline macro forecasts suggest that the environment for IPO activity will continue to improve in 2024. We expect the US economy will continue to grow, the nominal 2-year UST yield will decline modestly, and valuations will remain elevated relative to history. If soft data improve to match the hard economic data and equity investor pricing of economic growth, it could lead to a further increase in our IPO Issuance Barometer in coming months.

Goldman Sachs

And when IPO activity comes back from a lull, it doesn't meow. It roars...

@carlquintanilla: MORGAN STANLEY: “.. 2024-25 Could See a 95-165% Recovery in IPO Proceeds from the 2022-23 Trough ..” [Huberty]

Meanwhile, CFO's are reading their balance sheets for everything thrown at them...

@tracyalloway: A month to remember in credit markets. Per JPMorgan, January saw record monthly supply for the high-grade, high-yield, and loan markets with a combined $361 billion issued (vs. previous record of $353 billion in June 2020)

As the forward S&P 500 multiple flirts with 20x, the study shows that future public market returns are a bit more of a challenge...

J.P. Morgan

Speaking of M&A, it was another busy week with some nice premiums paid to the sellers...

[FANG] Diamondback Energy and Endeavor Energy Resources confirm to merge in $26B cash-stock (about 30%-70%) deal; The transaction consideration will consist of approximately 117.3 million shares of Diamondback common stock and $8 billion of cash, subject to customary adjustments. As result of the transaction, the Company’s existing stockholders are expected to own approximately 60.5% of the combined company and Endeavor’s equity holders are expected to own approximately 39.5% of the combined company.

[CBAY] CymaBay to be acquired by Gilead at $32.50/shr in cash at EV of $4.3B; Expected to be neutral to EPS in 2025 and significantly accretive thereafter. - Announced today a definitive agreement under which Gilead will acquire CymaBay for $32.50 per share in cash or a total equity value of $4.3 billion. The addition of CymaBay’s investigational lead product candidate, seladelpar for the treatment of primary biliary cholangitis (PBC) including pruritus, complements Gilead’s existing liver portfolio and aligns with its long-standing commitment to bringing transformational medicines to patients.

[MLM] Martin Marietta Materials entered into a definitive agreement to acquire 20 active aggregates operations in Alabama, South Carolina, South Florida, Tennessee, and Virginia from affiliates of Blue Water Industries LLC (BWI Southeast) for $2.05 billion in cash.


A public mid-cap buys public small cap in the building products sector for a 38% premium to its market trading price...

Owens Corning is known for its pink insulation. Masonite makes doors. Both sell into the residential construction marketplace.

Post deal, Owens Corning will have sales of about $12.6 billion, with adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, of about $2.9 billion including expected annual synergies of some $125 million.

That leaves the combined company trading for about 6.6 times the estimated Ebitda, including synergies. Owens Corning today trades for about 7.5 times. Masonite trades for about 7 times Ebitda. The deal, excluding synergies, values the company at about 9 times synergies.


A French digital music company prefers the sound of being a private company...

A consortium of investors including private-equity company EQT have agreed to make a 1.52 billion euros ($1.64 billion) takeover bid for French digital music company Believe.

The consortium, which also includes investment firm TCV and Believe’s founder and chief executive, said Monday that they will pay EUR15 a share and have already agreed to buy 71.92% of the company from certain existing shareholders.

Completion of the stake buy is expected to take place during the second quarter, and the consortium will then launch a tender offer for the remaining shares.

The offer represents a 21% premium to Believe’s closing price on Friday of EUR12.40.

“Since being a public company, Believe has systematically outperformed its objectives, delivering its IPO plan two years ahead of schedule,” Believe CEO Denis Ladegaillerie said in a statement. “However the strength of its operational performance has not been reflected in the share price evolution. Believe has a significant opportunity ahead to consolidate the independent music market.”


The Bay Area may have lost Super Bowl LVIII, but they might win the housing market in 2024...

Riches from the AI boom are reigniting the housing market in California’s Silicon Valley.

Open houses in the San Jose area are packed, million-dollar-plus starter homes often sell for hundreds of thousands over asking, and listings are flying off the market at the fastest rate in the US.

Buyers are rushing to take advantage of a recent dip in mortgage rates, and they’re flush from a yearlong rally in Big Tech stocks fueled by AI exuberance. Many people taking the plunge now have never purchased a house before...

Among the 50 biggest US metro areas, San Jose is in the lead with the fastest home-sales pace. There, 61% of new listings went under contract in less than 14 days, according to Redfin Corp. data measuring the four weeks through Feb 4. In second place was the Seattle market — home to Amazon.com Inc. and Microsoft Corp. — where 59% of listings disappeared that quickly.

Properties in the San Jose area sold at an average of 2% over the list price, Redfin said. That could translate to a significant premium in a place where sellers asked a median of $1.3 million.

Company stocks often make up a big chunk of compensation for software engineers and other tech employees, which explains how they can afford such pricey houses.


And finally, the business community is getting more involved in turning back the pendulum in San Francisco...

For years, the tech industry largely stayed away from San Francisco politics. Not anymore. Silicon Valley investors, executives and CEOs are banding together to host fundraising events for local candidates, pouring money into city ballot initiatives and using their influence to try to sway public opinion.

Tech money backed a campaign to oust San Francisco’s district attorney. It funded the recall of some school board members. And it is seeking residents’ support to elect a spate of moderate Democrats gunning for local elections this year.

Silicon Valley leaders say they want to make the city a safer and more hospitable place to raise families and run businesses. They also want to halt the exodus of some of tech’s most talented workers and reverse the doom loop narrative that has haunted downtown since Covid-19.

The industry says San Francisco’s problems stem from its current establishment having swung too far left on the political spectrum. They believe progressive Democrats are too soft on drugs and street crime, and too woke on issues like public education.

The fight in San Francisco pits Democrats against Democrats. Progressive Democrats say that the policies the tech executives are pushing would disproportionately impact minorities and the poor.

Tech’s big goal is to elect a less liberal slate of candidates to San Francisco’s Board of Supervisors, over half of whom are up for re-election in November. The board controls the city’s budget and can block policy proposals by Mayor London Breed, who has the backing of the industry.


And deep value investors are getting more active in the real estate market of the City by the Bay...

Most investors are running away from San Francisco’s downtown real-estate market, but Ian Jacobs is heading in. Call it a family tradition.

Jacobs is an heir of the Toronto-based Reichmann real-estate dynasty, which made a fortune buying properties in nearly bankrupt New York City during the 1970s. A bargain-seeking stock investor who once apprenticed himself to Warren Buffett, Jacobs has mostly avoided the family business—until now.

The 47-year-old spent much of the past year getting financial commitments from relatives and other wealthy families to snap up San Francisco office buildings, people familiar with the matter said. Now Jacobs has to prove wrong the prevailing wisdom that downtown offices, especially those in San Francisco, will never fill up again...

Jacobs has lined up commitments of $75 million for his first few deals, the people familiar with the matter said. Ultimately, he hopes to buy 3 million square feet of office space for prices about 70% below what it would cost to build the properties, according to marketing materials for the project viewed by The Wall Street Journal. Recent building sales in San Francisco averaged between $200 and $300 a square foot, implying total purchases of $600 million to $900 million.


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