Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Wednesday, March 26. Today’s Stocks On The Contrarian Radar©️ segment features CART 0.00%↑ and starts at the bottom of this page.
State of Play
Stocks rose yesterday for the third day in a row, though it was a quiet session with marginal gains. As we eye our board of indicators for signs of direction at 0650, there is not an awful lot to go by:
Stock index futures are flat with no major US index moving more than 0.2% from the break-even point;
Commodities continue their ascent. We’ve been repeating this for days. Copper is up 1.3% to climb to fresh record highs again. WTI crude oil is up 0.8% to trade round $69.50/barrel;
Cryptos are showing a few signs of life with Bitcoin up 1% to trade north of $88,000;
Bonds are seeing a bit of selling. The 10-year yield is up 3 basis points to 4.34% (yields move inversely to prices).
Today’s Known Events
We start with earnings:
Dollar Tree (DLTR 0.00%↑) just reported earnings that fell short of estimates and initiated outlook at the lower end of the range. The bigger news was that the company is reportedly selling the Family Dollar business for $1 billion. The stock is rallying on this news;
Chewy (CHWY 0.00%↑) and Paychex (PAYX 0.00%↑) also report before the open at 0930.
Durable goods orders are out at 0830 ET. Economists who were surveyed expect a drop of 0.6% month-over-month, a significant decline from the +3.1% reported last month. Core durable goods, which exclude transportation items, are expected to increase by 0.4% after no change last month.
The Atlanta Fed GDPNow is out at 1130. That is expected to show a decline of 1.8% for the first quarter, same as at the last reading.
The Bottom Line
The big news yesterday appears to have been the consumer confidence report that had some pretty depressing things to say. The fact that the market failed to react tells you what investors think about these surveys. As we said yesterday, the public is divided along political lines on a lot of things including its perception of the economy. Seems this survey only polled members of a certain party.
That said, appearance can become reality very quickly. If a large portion of Americans say they are concerned about the direction of the economy, then they can and will pull back spending. The only problem is that none of the hard data matches these statements. Actual consumer spending is holding up well, jobs are plentiful, and industrial production remains healthy. For whatever reason the factories of the world are ordering more copper, leading to the surge in copper prices that we’ve seen.
Of course, the name of the game is to figure out where the economy is heading next and investors will use all the clues they can get. It just doesn’t look like this survey is scaring anybody. Maybe investors are making a mistake in looking past it? If so, and if the economy truly is grinding to a halt, then it makes sense to increase exposure to fixed income. Because the Fed has ample room to cut rates and if it has enough indication (again hard data) that the economy is slowing, then it can and will slash rates — probably more than it needs to, if past patterns are any guide. That will lead to a surge in bond prices.
Stocks On The Contrarian Radar©️
Maplebear, aka Instacart (CART 0.00%↑) is down multiple percent overnight. This stock attracted a ton of attention at its IPO but has since kind of disappeared from the radar. As you can see the last month has been particularly unkind:
If you zoom out on the chart and hold CART up against the S&P 500 (SPY 0.00%↑), you can see it has kind of tracked the index, albeit with a lot more volatility:
Cyclical + more volatility is normally not a good combination, or at least not what The Contrarian is going for in his quest for uncorrelated returns. Nevertheless, it’s worth checking in to the valuation.
CART trades at:
24x forward earnings
2.9x forward sales
15x forward cash flows
That’s not cheap, though not terrible for a growth stock. Question is: where could that growth materialize? Instacart is the leading online grocer in the US, a market that is estimated to grow to some $700 billion by 2040. Globally the total addressable market (“TAM”) is even bigger of course. CART apparently controls 85% of the US market already.
The company encouragingly has virtually no debt on its balance sheet and $1.3 billion in cash. Enough to fund expansion. It will need the balance sheet flexibility as competition can be expected to be fierce with Doordash (DASH 0.00%↑) and Uber Eats and individual grocery stores doing their own delivery service. That doesn’t give leeway to raise prices so would not expect much in the way of margin improvement going forward.
Competition is a major risk. It will be hard to see how these companies can differentiate themselves without major marketing spend. On that, maybe CART has an advantage with its balance sheet.
Another risk is that this may be a luxury item for most consumers. The Contrarian used Instacart once, during the pandemic, but the fees were so astronomical that he felt so violated he vowed to never do it again (and hasn’t). Yes, Americans are lazy, but one figures grocery delivery would be one thing they would cut back on if times get tough. Of course not everybody will have that luxury and there is a growing demographic of aging consumers who can and will happily pay for grocery delivery.
The Verdict
CART presents an interesting case. Who knows, it could be a buying opportunity. The Contrarian is encouraged by the company’s balance sheet but worried about competition and the discretionary nature of its service. Plus the stock just isn’t cheap enough. If it were to drop below $35 it would be much more compelling. For now, it’s on the watch list.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
Check out the new Fed Tracker here! You will have to request access but this is just a precaution as access will be granted if you are a premium subscriber;
Read this month’s portfolio update letter here. The Substack chat tracks The Contrarian’s trades in (almost) real time.
If this daily thing is drowning your inbox and/or you CBF to bother with it and prefer to just get the guest feature or actionable highlights — you can control these settings on your account page.
Finally, if you enjoy this and want others to experience it, please gift a subscription to your friends (or even your enemies).
Share this post