Weekly Watch | Welcome To 2021
Introduction:
It is no secret that the beginning of 2021 has been quite a hectic ride. In regards to the geopolitical landscape, we saw what many experts and lawmakers have called an act of “domestic terrorism” on the nation’s capital this past week. While I typically do not tend to share my political views, I do believe there is a momentous need to address many of the social and economic issues that our country is currently facing. I certainly support every person's right to a peaceful and lawful exercise of free speech, however, I do condemn all demonstrations that incite violence and racism. Considering that many of these issues relate to the disparities found in the socioeconomic foundation of America’s existence, I couldn’t begin this financial piece in any other way. With that being said, I am hoping to bring love, positivity, and moral strength as we continue to build something to call our own. Here at City Street Strategies, we are hoping to bring financial city knowledge to the streets of America so we can all make economic advancements in unison.
As we move into the New Year, President-Elect Joe Biden will be taking office on January 20th, 2021. In addition, Democrats won both Georgia runoff elections and control of the U.S. Senate, as Democrat Raphael Warnock defeated Republican Sen. Kelly Loeffler 50.8 percent to 49.2 percent in the special election, and Democrat Jon Ossoff defeated Republican David Perdue. Personally, it is hard for me to overstate how shocking this entire election cycle has been. Nevertheless, Biden will likely end up reaching across aisles, make deals, and implement a more moderate agenda than most believe for 2021 and 2022. We should expect additional stimulus under Biden. The majority of this welfare will be distributed to individuals, small businesses, states, and hospitals and will be passed rather quickly. Biden has also made public promises to implement a new infrastructure plan along with a version of the Green New Deal that would boost economic growth and create new jobs. Although these trillions will add to the overflowing excess liquidity in the financial system, I expect a continual melt-up in the equities market over the course of 2021 - or until the Fed wants to raise interest rate targets. Indisputably, the gap between main street and wall street has become more evident than ever. But change is on the way! As the weather warms and many decide to get the vaccine before the summer of 2021 we can expect positive headwinds moving forward. Still, while continuing to walk this volatility tight-rope we need to be vigilant if we hope to advance and make it to the other side where the economic outlook through 2022 will be well above-average.
Equities: $NVDA, $GME, $X, $STIC, $ICLN, $ACES, $ETSY
Nvidia: $NVDA
Back in September of 2018, I wrote a quick analysis on Nvidia Corporation which I am including here:
“Nvidia Corporation is an American based semiconductor company that specializes in the production of graphic processing units (GPUs). Nvidia continues to serve as the new generation pioneer in GPU computing and they have also made tremendous leaps in the fields of artificial intelligence, the internet of things, and 3D graphics cards for computer gaming. As demand for supercharged computing remains persistent, Nvidia is poised to reign supreme in the semiconductor space and transform our economy for decades to come.
This rationale comes from Nvidia’s new state-of-the-art Nvidia Turning graphics card series, which are already being regarded as some of the world’s most powerful graphics cards that the computer platform has ever seen. Nvidia’s high powered GPU architecture is set to release sometime in September 2018 and will continue to deliver various models throughout the end of the year. It seems inevitable that Nvidia’s innovative products will soon attempt to take hold of computer processing in the fields of the most demanding computer users such as science, design, art, and gaming.
When assessing the valuation of a company and its stock price, there are a plethora of factors that must come into play. As we compare the financials of Nvidia to some of its peers like Advanced Micro Devices and Intel, some of the key data points to contrast are Market Capitalization, Net Income, Price-Earnings Ratio (P/E), Return on Equity (ROE), Return on Assets (ROA), and Price-Earnings Growth (PEG). Nvidia has a current market cap of about $166.0b with a top line of $9.71b in annual revenue and a bottom line of $3.05b of net income. This data goes to show how profitable the company has been in the last few years and gives a sense of how healthy the growth has been while minimizing debt. Nvidia has a higher ROA (54.18%) and ROE percentage (39.19%) than both Intel (15.17%, 27.33%) and AMD (9.61%, 52.84%). Expectations for the last two quarters of the 2019 fiscal year have Nvidia’s revenue growing from $9.71b to $13b, which goes to show the great retention of stock growth; as well as earnings per share looking to hit around $8 before the end of the year. Additionally, it is essential to note Nvidia’s price-earnings growth ratio (PEG) which is currently valued at 0.58. Typically, when a company has a PEG under 1 they are considered undervalued. With my personal assessment of Nvidia, currently trading around $270-275 per share, I feel that the stock is still undervalued based on investors’ expectations and could easily see the stock price hitting the $330 mark by this time next year. All things considered, I would consider NVDA a strong and long-term buy.“
Not only was the assessment fairly spot on, but Nvidia has increased over 100% since that period. Today, Nvidia’s current valuation stands roughly around $330 billion and has a P/E of 86x and a beta of 1.4, which exceeds all peers. However, this is backed up by Nvidia’s ridiculous 47% revenue growth. Although this valuation may seem high at the moment, Nvidia gained partnerships with NIO($NIO) and Qualcomm($QCOM). Knowing their developments in new generation electrical vehicle technology, we see them as a serious competitor to challenge Tesla. Nvidia will be a hot name to watch this week and I have a swing target of $640 by Q2-Q3 2021.
GameStop: $GME
As many of my colleagues and close friends know, I have been following and advocating for GameStop very intensively over the past year and a half. At the time, GameStop stock was below $5 and I found the stock compelling since I spent so much time in the store growing up. Name recognition is important in the gaming industry. Since the company was so beaten down, derivative options were pretty cheap, volatility was extremely low, it was frankly an easy way for me to practice trading. However, the story quickly began to grow into something worth more than just the measly trade-in value you would get from arriving with an old PS2 game at their stores. In September of 2020, I drafted a rough review of GameStop Corporation expressing that the irrational build-up of short interest accumulated over the past number of years was due to high bankruptcy fears, and consumers were holding out onto the latest software in anticipation for the next generation of video game hardware.
GameStop ($GME), is the world’s largest physical video game retailer, offering an inventory of new and used video games, consoles, and various other consumer-related electronics. Yet, when it all comes down to it, GameStop’s business has been operating in a declining end market with video game sales increasingly shifting towards digital downloads. Subsequently, the company has closed hundreds of unprofitable stores in an effort to remain afloat and competitive in the digital marketplace. As a result, GameStop has endured scrutiny over the years regarding poor management, bad customer service, questionable business practices, an unwillingness to adapt to changes in consumer behavior, and even failing to address their static business model. It comes as no surprise to see the fundamentals on both the top and bottom line steadily falling over the past few years and short-sellers have taken advantage of this opportunity; virtually betting the video game retailer would eventually go bankrupt. However, with the speculation of Ryan Cohen taking over and acquiring more than 13% of the company, GameStop is finally preparing to make a historic move.
In the case of GameStop, short interest is extremely high which means overall investors have a very negative outlook. This metric had been growing for years as competitors have emerged; GameStop as a result took some of the biggest hits from the likes of Amazon, Target, Best Buy, and Walmart who have all seemingly taken some of the Total Addressable Market (TAM) for video game electronics. Unfortunately, short-sellers may have made a horribly wrong gamble here. Back in June, GameStop announced its successful debt exchange which allowed the company to extend its bonds maturing until the year 2023. This essentially gives GameStop time to pay back their debt at an increased rate, but more importantly, it now signals little to no bankruptcy risk in the short term. Therefore, the downside had become limited and the share price for GameStop is now seen as undervalued, whereas a year ago many investors saw the company going to zero. This is bad news for shorts as they now don’t have too much time to cover their positions. According to my thesis, a short-squeeze will eventually occur for GameStop, however, the exact time and date is in limbo.
The beauty behind the theory of GameStop’s potential short squeeze is not only reliant on the amount of short interest in the stock, but there is already tangible reason to believe the company will naturally rally into the new console cycle. Personally, it seems like perfect timing. The consolidation of stores is to free up dead weight and many shorts may have seen that to be a “Blockbustering” decision by corporate. With the recent and more unforeseen actions taken by former Chewy.com Co-Founder, Ryan Cohen, I believe the fate of GameStop will be poised for long-term growth if Cohen is able to get his hands on the reigns. All of this is in preparation for the larger narrative change beginning to occur, which is that GME is no longer a pure brick & mortar retailer. Additionally, the COVID-19 pandemic has increased demand for electronics, toys, gaming, and other forms of entertainment while there is a huge “stay at home theme” (people spent more on video games last quarter than ever before). The rise of 4k gaming aligns with the macro trend of ‘nesting’ upgrades to home and console gaming that will be integrated into hundreds of millions of these homes. GameStop’s sheer TAM presence among the world, the addition of same-day delivery, a new robust digital application and a website that allows consumers to interact and even the introduction of a new “buy now pay later” service for incremental payments are key advantages that will separate GameStop this coming year.
Today, GameStop’s current valuation stands roughly around $1.2 billion and the stock has increased over 200% in the past 52-week period. On Monday, shares of GameStop soared more than 12% after the video game retailer announced an agreement with Ryan Cohen’s RC Ventures LLC, which includes immediately adding three members to the board of directors - including himself. Ryan Cohen is currently GameStop’s second-largest shareholder, however, I predict the new board member will acquire nearly 20% of the company in the near future and eventually become CEO after Q4 earnings. My conviction on GameStop remains as strong as ever as shareholder value starts getting replenished and I have a long-share position with a price target of $60+ by Q1 of FY21.
U.S. Steel: $X
A couple of years ago, I wrote about the company, U.S. Steel, as an example of how an economic or political issue can affect a specific sector of the equity market. At the time, President Trump announced a stiff plan to set in new tariffs on all steel and aluminum imports. Trump confirmed his disclosure in May that all imports of steel would be taxed at 25% and aluminum at 10%. After the initial news was released, the Dow Jones Industrial, Nasdaq, and S&P 500 index’s all took a steep hit-making investors wary of a looming trade war. Fortunately, they managed to bounce back quickly, but with higher costs on domestic-made products companies may be forced to cut U.S. jobs to accommodate for these taxes. In 2017, the United States accounted for more than 75% of all steel imports worldwide making this a huge issue for foreign steel exporters to address. Additionally, I had stated:
“Over the course of the next few years, U.S steel companies should see a clear financial gain, although many economists are concerned if foreign retaliation will have a heavier negative drawl on U.S. companies rather than benefiting them. President Trump has specifically honed in on the cutting the marginal trade deficit, but it should be interesting to see how additional policies will affect not only the U.S economy but the global economy as well.”
I had only recently begun tracking the United States Steel Corporation again a number of months ago, under the potential of a Biden administration (lone and behold we now have a Democrat-controlled Congress too). My prediction is that in April, Biden will roll out his Build Back Better plan of more than 3 trillion dollars which will subsequently boost the materials sector. The price of $X has been suppressed for more than a year and has a similar technical setup to $GME in terms of price action, TA, short-interest (kinda), etc. Look at historical steel prices compared to today. Domestic steel prices are at an all-time high and $X is poised to make an epic comeback. I also like Cleveland-Cliffs ($CLF) and the two stocks move very much in tandem. About a month ago on CNBC, I was watching the CEO of $X being interviewed after they acquired the rest of Big River Steel for about 800 million, which is pretty much just an advanced technology mill. It will be interesting to see how the Biden administration approaches the domestic steel industry, as many of the steel unions (who supported Biden) want him to maintain the current tariffs in place. It is now clear to those who know the industry that the Trump administration’s steel tariffs have generated a boom in steel inventory as the shift to newer technology is creating thousands of new higher-paying jobs. This past Friday, U.S. Steel rose 9% after Deutsche Bank upgraded $X to a buy from a sell and announced a price target of $28. Although $X is slightly overheated at the moment, there is plenty of momentum moving forward and would most likely recommend to add leaps below $25 or buy long shares.
Today, United States Steel Corporation’s current valuation stands roughly around $5 billion and the stock has increased over 105% in the past 52-week period. $X will be a hot stock in the weeks to come as steel prices continue to reach all-time highs and the company looks to become profitable. From a technical analysis perspective, I would remain patient and wait for short-sellers to have their turn before loading. I’ve attached a weekly chart from January 6th where $X was testing the 200SMA and pretty much where I entered my trade. For these reasons, I would consider $X and $CLF both buys with a price-target of $40 each respectively.
Northern Star Acquisition: $STIC
I don’t usually play SPAC’s, but this one may be a no-brainer. Northern Star Acquisition Corporation ($STIC) is going to reverse merger with BarkBox sometime between Q1 and Q2 of 2021. The emerging dog supplies start-up company will be going public in a merger with the blank check company in a $1.6 billion deal. According to the Wall Street Journal, “The deal seeks to capitalize on a pandemic-fueled rise in pet adoptions and pet-related spending that led Petco Animal Supplies Inc. to file for an initial public offering, and pushed online pet-supply store Chewy Inc.’s latest quarterly sales up 45% year-over-year.” Here is a quick rundown of what they actually have going on:
$369 million in revenue for the fiscal year ending March 31, 2021 (nice)
1.1M active subscriptions up 58% y/y
95% monthly retention with INCREASING gross profit and DECREASING acquisition costs
65% y/y net revenue growth
60% gross margin
The CEO of Northern Star, Joanna Coles, is on the board of both $SNAP and $SONOS. The woman knows how millennials love to spend their money. I also believe Petco going public in 2021 will have a halo effect on $BARK once the merger is completed with $STIC. Honestly, pet owners are suckers for their animals and I guarantee if you go to the dog park and ask some people about BarBox they will be familiar. Everyone has been throwing their money at their pandemic-pups and the subscription service is a perfect fit (until the dog dies..that’s for later). BarkBox’s social media presence is double that of Chewy.com and look at the revenues that tank is pulling in. I even went onto Amazon to read some reviews and look at some of the products: there are a lot. Their products are also being sold in some of the big-name box stores such as Costco, Target, and Petco. I’ve attached the investor presentation and their website if you want to get a better idea. It is fairly impressive in my opinion.
Unfortunately, you are unable to trade options on this stock (until after the merger most likely), but if warrants are issued to the public it may be worth a look at snagging some. SPAC plays aren’t for everyone but I see this taking some of Chewy’s market and see it as a potential 5-bagger in the long-term. BarkBox will also be participating in the annual ICR conference this upcoming Monday. From a technical perspective, it appears the initial wave of buyers have come and the stock has been beaten down for about a week or so. I will be looking to start a tiny core position and reassess as I go. I would consider $STIC a medium-risk buy with a medium-term price target of $30 by the time the merger rolls around.
Here is the affordable Chewy.com competitor:
iShares Global Clean Energy ETF: $ICLN
BlackRock’s iShares Global Clean Energy ETF ($ICLN) gives investors exposure to global firms who are producing clean energy from renewable resources which include: solar, wind and water. The active fund also invests in alternative energy technology companies that manufacture the equipment such as: biofuel, hydro-electric turbines, photovoltaic and fuel cell producers. It is my personal belief that climate change, and issues concerning resource scarcity, need to be brought to the forefront of the political landscape in order for solutions to be implemented into our American businesses. When looking at the effect the pandemic has attributed to more discourse on avoiding future global crises regarding the environment.
This fund offers a way to invest in the global clean energy index, including both domestic and international stocks in its portfolio. Given the narrow focus, $ICLN likely doesn't deserve a huge weighting in a long-term portfolio, but can be useful as a satellite holding to cover a corner of the market that is often overlooked by broad-based funds. For investors who maintain a long-term bullish outlook on the alternative energy space, this fund can be a nice way to achieve broad-based exposure; $ICLN includes companies engaged in various sub-sectors, such as wind power, solar power, and other renewable sources. Those seeking more targeted exposure within the clean energy space have multiple options available for betting on solar power (such as $TAN or $KWT), nuclear power ($URA or $NLR), or wind power ($FAN or $PWND). Throughout 2021 we will likely see a continuation of commercially viable renewable energy projects, products and services. With a new Washington administration as of Jan. 20, we expect to see further growth in the alternative energy space in the US, followed by increased global adoptions. Over the past year, $ICLN is up close to 165% and hit a record high on Jan. 6. Respective trailing P/E and P/B ratios are 42.32 and 4.79. A potential price decline toward $25 would make the fund more attractive for long-term investors.
I have a long-position of 4/16/21 $35c’s with a $1.35 avg and will most likely be holding to expiry or wait until my contracts are in the money.
ALPS Clean Energy ETF: $ACES
ALPS Clean Energy ETF has emerged as one of this year’s best-performing exchange-traded funds, regardless of the asset class. That’s saying something when you consider that many other renewable energy funds more than doubled this year as well. $ACES follows the CIBC Atlas Clean Energy Index. That benchmark is comprised of U.S, Canada-based companies that primarily operate in the clean energy sector. Constituents are companies focused on renewables and other clean technologies that enable the evolution of a more sustainable energy sector. Another important factor in the $ACES equation is that its components have international exposure, which is meaningful at a time when so many market observers are discussing sliding energy investment. That may be the case when it comes to fossil fuels, but plenty of ex-US markets are bolstering renewable allocations. (North-American Exposure).
ETSY: $ETSY
Etsy, Inc. ($ETSY) operates a marketplace where people around the world connect, both online and offline, to make, sell, and buy goods. The Company offers a range of seller services and tools that help entrepreneurs start, grow, and manage their businesses. The Company's community includes Etsy sellers, Etsy buyers, Etsy employees, its partners, and investors. As of December 31, 2016, its platform connected 1.7 million active Etsy sellers and 28.6 million active Etsy buyers. Etsy sellers join its community to participate in its markets to express their creativity. Etsy sellers range from hobbyists to professional merchants and have a range of personal and professional goals. It supports a group of artists, makers, designers, and collectors from around the world. Its service platform includes seller services, seller tools, and education. In the investor presentation released back in October of 2020, Etsy laid out the future framework of the company while expressing the significant early-stage opportunities to own “special” and seeking to capture a greater share of the growing TAM. Not only do I see a swing opportunity arising from $ETSY, the company’s e-commerce business model is naturally built for long-term growth. As long as Etsy can leverage their strong brand awareness and maintain a high customer retention rate, we should expect to see buyer frequency benefit the financial performance on both the top and bottom line.
From a technical perspective, $ETSY has broken out of a bullish pennant in what looks like a potential cup and handle forming on the daily chart. We can see $ETSY hit the natural $200 resistance level right before the new year. Although the return of brick and mortar may slow down e-commerce growth in some way heading into the summer, I fully expect investors to take advantage of a dip opportunity in this range. However, if selling pressure manages to increase I could see a scenario where $ETSY retraces to the 50SMA around $155 which would present an amazing buying opportunity. I believe Etsy will be a beneficiary of holiday sales as individuals usually seek more personalized gifts for their loved ones. On the expanding e-commerce site, which features shops of handmade goods, crafts, and other unique items, there has been a 156% increase in searches for custom or personalized gifts in the past three months compared to the same time a year ago.
Today, Etsy’s current valuation stands roughly around $22 billion and the stock has increased over 278% in the past 52-week period. $ETSY will be a hot stock in the few weeks before leading up to their earnings report, scheduled to release after-hours on February 24th, 2021. According to Investors.com, “When it reported third-quarter results on Oct. 28, Etsy reported a 128% leap in revenue to $451 million, well above Wall Street estimates of $412.7 million. Adjusted earnings came in at 70 cents, vs. estimates of 57 cents. In addition, gross merchandise sales jumped 119% to $2.6 billion.” These strong financials give me confidence moving forward as I look to start a position in $ETSY with a six-month price target of $225 conservatively.
Disclosure: Investing in securities products involves risk, including possible loss of principal.
I am/we are long on the equities listed above. I wrote this article myself, and it expresses my own opinions. We have no business relationship with any company whose stock is mentioned in this article.