Japan Stocks for the Win | The Daily Peel | 5/30/2023

The Daily Peel...

May 30, 2023 | Peel #470

 

In this issue of the Peel:

  • We discuss the ongoing public feud between Presidential candidate Ron DeSantis and the House of Mouse
  • “Sleepy Joe” and House Speaker McCarthy seemed to have agreed in principle on a deal to increase the debt ceiling
  • While very few are paying attention, Japanese stocks are quietly hitting multi-decade highs
 
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Market Snapshot

Happy Tuesday, fellow primates.

Hopefully, the long weekend “scaries” didn’t hit too hard. Memorial Day weekend kicked off with a bang, as markets rallied again on Friday in response to a deluge of positive news.

After all the talk about a potential US default, the government stepped in at the eleventh hour and pulled one of their signature moves, kicking the can down the road. President Biden and House Speaker McCarthy seem to be moving closer to a deal to raise the debt ceiling for two years, which jolted equities markets. So, instead of getting a handle on all of this now, we’ll develop a temporary solution and mark our calendars for 2025 when we have this same argument again? Sure, what could possibly go wrong?

In addition to debt-ceiling headlines, the chip rally continued, with tech leading gains for the second day in a row while Treasury yields drifted. Apart from that, some stellar earnings reports from consumer companies Gap, Ford, and Workday did their part to boost sentiment.

Let’s get into it.

 

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Banana Bits

 

Macro Monkey Says

Topix Is the Topic

Something that hasn’t received much attention, unless you’ve really been looking, is the recent rally in Japanese equities. In fact, both the TOPIX and Nikkei indices surged to their highest levels since 1990.

This is a big deal, as Japan’s market has massively underperformed the rest of the developed world since the infamous burst of their property bubble over 30 years ago.

Now, as the rest of the world struggles with persistently high prices, Japan, with its low valuation and even lower inflation rate, is seen as one of the safest places for investors to put their money.

"While Japan traditionally dominated the electronics export market..."

 

Time for a history lesson. Japan was faced with an uncontrollable asset price bubble that lasted throughout the 1980s. After bursting in 1990, what followed was a period of sticky deflation and negative GDP growth.

This coincided with a decline in Japan’s birth rate and, ultimately, led to lower production. While Japan traditionally dominated the electronics export market, China’s entry into the World Trade Organization in 2001 was the final blow.

Enter Shinzo Abe, who rose to power as Prime Minister in 2006. Looking to combat Japan’s stagnant economy, he ushered in an era of “Abenomics.” These were a set of economic policies that involved increasing the nation’s money supply, boosting government spending, and enacting reforms to make the Japanese economy more competitive.

 

"One of the most widely discussed strategies was the Bank of Japan’s controversial practice of keeping interest rates negative for years in order to..."

One of the most widely discussed strategies was the Bank of Japan’s controversial practice of keeping interest rates negative for years in order to encourage spending over saving. The results of Abenomics have been mixed depending on who you ask.

While the Nikkei has never again reached its all-time high set in 1989, this is the closest it has come in years. The index is up 19% YTD, and it now sits just 20% below the all-time high.

Also, according to numbers crunched by the Japan Exchange Group, foreign investment in Japanese equities is ramping up, with over $15.6bn worth of dollars pouring in last month.

"...foreign investors feel encouraged by real, structural changes taking place in regard to corporate governance."

 

Japan’s market never took off during the bull run like the rest of the world, so right now, on a relative basis, its valuation is attractive. For example, 50% of stocks on the Nikkei trade at a price-to-book ratio of less than 1, whereas only 3% of US stocks trade that cheaply.

Japan is also benefiting from a long-awaited revival in inflation as well as a weakening of the Yuan. Additionally, foreign investors feel encouraged by real, structural changes taking place in regard to corporate governance.

Earlier this year, the government completely revamped oversight of listed companies by forcing them to clean up their balance sheets and improve returns for shareholders.

Japanese equities have had periods of growth that failed to stick throughout history. Today, the world is in a different place, as is the Japanese economy. Will Japan become the new safe-haven marketplace for investors?

 

What's Ripe

The Gap Inc. ($GPS) ↑ 12.26% ↑

  • The Gap is making a comeback! Well, kind of. The company reported better-than-expected earnings, but when we take a look under the hood, we can see that this was primarily driven by cost-cutting measures rather than a pickup in business.
  • Gross margin came in stronger than expected based on lower air freight expenses as well as offering fewer discounts and trimming headcount. This contributed to EPS of $0.01 versus analyst expectations for a loss of -$0.16.
  • Everyone loves a strong earnings print, but this doesn’t really point to strength in the company’s underlying business. Sales were down -3% year-over-year. So, while cost-cutting is great, it’s not like people are buying more Gap clothing.
  • Wall Street Analysts took an optimistically cautious tone. Overall, The Gap had a pretty low bar, which they crossed. The underlying fundamentals of the company still leave room for improvement.

C3.ai ($AI) ↑ 15.91% ↑

  • This move is surprisingly not earnings related, at least not for the company itself. C3.ai, which is already up almost 200% YTD, provides an AI application platform that allows customers to design and develop enterprise AI apps.
  • They are benefiting from strong macroeconomic tailwinds, namely the massive uptick in demand for generational chips that power AI processes and platforms. AI stocks and stocks in adjacent sectors have already seen a massive increase in market cap this year. Just the other day, Nvidia reported earnings and set a record for the largest 1-day market cap increase in the history of the stock market.
  • The company also announced that its C3.ai generative product suite is now available for public use on app stores, which was a catalyst for the stock.
 

What's Rotten

Ulta Beauty ($ULTA) ↓ 13.37% ↓

  • Consumer-facing companies have painted a split picture of consumer health through their earnings reports. While some have beat expectations, others, like Ulta, are exposing cracks in the economy.
  • They lowered full-year guidance and will continue to see massive inventory shrinkage, primarily as a result of theft organized by retail crime rings, according to the company.
  • Growth in the beauty segment took off in recent years due to the rise of social media, along with the return to office wave after the pandemic, leading to a stricter beauty regimen. The company grew its loyalty program to 41 million customers and saw its sales expand during that time period.
  • Now, theft and inventory shrinkage pose a structural problem to the industry across the board. Ulta’s management is working with law enforcement to mitigate issues and training staff to better handle situations of theft in the future.

PagSeguro Digital ($PAGS) ↓ 13.66% ↓

  • The Brazilian digital payments and banking company slid almost 14% on Friday due to—that’s right—earnings.
  • The good news: PAGS increased revenue by 9% on a year-over-year basis. However, the market seemed to react harshly to the 5% drop in sales from Q4 ‘22 to Q1 ‘23. Management said it changed its key performance indicators to align with its marketing campaign. The company converged its brands into one called “PagBank.”
  • The report shows a company that is strong in some areas and struggling in others. For example, total banking volume increased in the first quarter along with financial services EBITDA, which edged up. Payments volume, on the other hand, took a $ 7bn hit. Ouch.
 

Data Peel

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Source

 

Thought Banana

Disney vs. DeSantis

Presidential candidate Ron DeSantis has had beef with the House of Mouse for a while. Now, that beef is shifting from being contained in the political arena to having real impacts on the economy.

Disney’s recent decision to scrap a $900mn, 60-acre campus could create a glut of residential and multifamily developments in Orlando, which had largely been built based on the premise that Disney would be moving there. The move marks the latest blow from the drama-filled political battle.

How did we get here? Grab your popcorn because this saga has all the drama and pettiness that Succession’s writers could only dream of.

 

"...DeSantis has had no qualms airing his grievances..."

Since the passing of the controversial “Parents Rights in Education” legislation in Florida, which Disney publicly denounced, DeSantis has had no qualms airing his grievances about it.

Accusing the company of being a “woke corporation, lining their pockets with their relationship with the Communist Party of China,” DeSantis moved to strip Disney of the self-governing status it has held since 1967.

During the initial buildout of Disney’s theme park in Orlando, the Florida legislature created the Reedy Creek Improvement District (RCID). This district granted special tax status and jurisdiction over facilities. It essentially allowed Disney to act with the same authority over that land as a state government would have.

"...allowing Disney to keep its special status..."

 

DeSantis moved to revoke Disney’s control of the RCID in April of last year, to which Disney demanded the state pay out almost $1bn of outstanding debt within the district.

After a very public back-and-forth between the two parties, the Florida legislature ultimately landed on allowing Disney to keep its special status in the region while giving DeSantis power to appoint the board that governs it.

Here’s the twist. Right before Disney’s old board was ousted, they concocted a devious plan that transferred basically all of the power from the board back to the company. When Desantis’ hand-picked board showed up for work, they realized they effectively had no power.

On top of all this, Disney went retro and pulled out an old-school legal tactic called a “King Charles Clause,” which states that Disney’s control can be terminated “two decades after the death of the last survivor of the descendants of King Charles III.” So a really long time. Told you this is much better than whatever show you’re binging at the moment.

Currently, Disney is suing DeSantis, and as legal and other costs mount up, the company decided to scrap its Lake Nona Investment. Backing away has huge implications for the housing market and economic development of the area.

 

"More than 2,100 homes were created within that time period, with another 1,000 in the pipeline."

They bought the land in 2021 for $46mn, and it included 1.8 million square feet across 8 buildings. This immediately sparked the construction of several residential developments in anticipation of an economic upswing.

More than 2,100 homes were created within that time period, with another 1,000 in the pipeline. Now that Disney has pulled out, developers are on edge. This will likely lead to an increase in vacancies in the Lake Nona region.

Will private developers force Disney’s hand after backing away? I’m just ready for the next episode of the Disney DeSantis show.

 

Banana Brain Teaser

Friday — Two missiles are heading toward each other on a collision course. One missile is traveling at 9,000 miles per hour, and the other is traveling at 21,000 miles per hour. They are 1,317 miles apart at the moment. Without using pencil and paper, can you calculate how far apart the two missiles will be exactly one minute before they collide?

The two missiles are heading towards each other with a combined speed of 30,000 miles per hour which works out to 500 miles per minute. Working backward, one minute before the collision, they are exactly 500 miles apart!

Today — It’s 150 bananas off the PE Master Package for the first 3 correct respondents. LFG!

What is the angle between the hour-hand and minute-hand of a clock at 3:15?

Shoot us your guesses at [email protected] with the subject line Banana Brain Teaser or simply click here to reply!

 

Wise Investor Says

“One of the biggest mistakes investors make is to look at the last few years and assume that’s the new norm” — Francois Rochon

 

How would you rate today’s Peel?

All the bananas

 

Decent

 

Rotten AF

 

Happy Investing,

Patrick & The Daily Peel Team

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