Levi Strauss pitch at VALUEx; Goldilocks Economy Is a Fairy Tale Too Good to Be True; The Blurred Lines Between Goldman C.E.O.'s Day Job and His D.J. Gig; Trip to Texas
1) Continuing my coverage of the best ideas I heard last week at Guy Spier's VALUEx conference in Klosters, Switzerland, Lauren Templeton (niece of legendary investor John Templeton) and her husband Scott Phillips of Templeton and Phillips Capital Management pitched iconic jeans maker Levi Strauss (LEVI).
The company went public almost four years ago and the stock has had an up-and-down ride, currently trading lower than its IPO price:
Levi Strauss trades at an undemanding 1.4 times trailing revenues, 7.2 times EV/EBITDA, and 13.0 times earnings, and yields 2.6%.
You can see Lauren and Scott's slides right here, and below is their summary:
The company's annualized sales growth since 2016 has been 5.2%, over time it is a mid-to-high single digit grower, with some cyclicality. 2023 sales growth expectations are low at 1.8%. The Levi's brand supports relatively premium pricing in the mass market channel, as evidenced by its gross margin at 57.6% compared with its near competitor Kontoor Brands (Wrangler and Lee) at an average of 41.4%. The current operating margin is 11.6% and management's goal is to increase it to 15% by 2027...
The bottom line on the valuation is that expectations today are relatively low (but not rock bottom as in October), and the market is not giving the company any credit for future growth including a cyclical rebound in the international markets, i.e., Europe and Asia or its ability to hit its five-year goals and targets.
Here's a picture of Lauren and me:
2) I thought this Wall Street Journal article did a good job of capturing the many conflicting signals in the economy and the stock market: Goldilocks Economy Is a Fairy Tale Too Good to Be True. Excerpt:
What investors really liked in the 1990s was a Goldilocks economy – not too hot, not too cold, just like the porridge she eats in the fairy tale. To the delight of investors, Goldilocks seems to be back, in spite of full employment that ought to push up wages fast.
Perhaps the Federal Reserve has it all wrong, and investors are right to be pricing in both lower rates later this year and a decent economy, as wage growth moderates and inflation falls. At the very least, those of us who worried that the market was ahead of itself in preparing for a soft landing need to revisit our assumptions.
The puzzle comes from the mix of three lots of data. Last month's payrolls figures showed strong job creation, even stripping out the end of some public-sector strikes. The unemployment rate was last lower in 1953. Inflation is down, with the Fed's preferred measure running at an annualized three-month rate of 2.9% in December, from 6.7% in June. And wages are rising more slowly, with private-sector wage costs up an annualized 4.2% in the final quarter of last year, sharply below a 6.5% increase in the second quarter and not much above the 3%-4% compatible with the Fed's inflation target.
The bull case is that inflation was, after all, transitory. The Fed will realize that it doesn't need to be hawkish and rates will come down without unemployment needing to rise much, if at all. Goldilocks says to go ahead and buy stocks...
The bear case is that much of this is just noise in the data.
Sure, some of the prices that soared amid pandemic shortages, such as used cars, will fall back to earth, but overall demand in the economy is running ahead of supply. That means underlying prices will keep rising too fast, and the Fed won't risk cutting rates – unless there is a recession. On this bearish view, a stronger economy means higher rates for longer, which is bad for stocks. A weaker economy might mean lower rates, but only if it brings recession and falling profits – also bad for stocks.
3) Goldman Sachs (GS) CEO David Solomon has a hobby as an amateur DJ.
This New York Times article tries very hard to make it seem like this is a problem, which I think is so ridiculous that I had to check to make sure this wasn't a spoof article from The Onion. Let him DJ in peace! The Blurred Lines Between Goldman C.E.O.'s Day Job and His D.J. Gig. Excerpt:
Mr. Solomon has long maintained that his D.J.ing passion has nothing to do with Goldman. And many bank insiders also say that the D.J. gig is little more than a minor headache for Goldman, even if its highly visible and unusual nature – Instagram posts, Spotify playlists and a live performance that broke COVID protocols – risks drawing unwelcome attention at a time when the bank is struggling with its performance.
Goldman recently laid off 3,200 workers and announced a $3 billion loss tied to a misbegotten foray into consumer banking. The bank's board also cut Mr. Solomon's pay.
But Mr. Solomon's hobby occasionally brushes up against his day job in ways that could pose potential conflicts of interest, according to interviews with securities law experts and four people who have worked with Mr. Solomon who were not authorized to speak publicly. Company executives and public officials typically try to minimize even minor conflicts because even the slightest hint of one can bring unwanted scrutiny and bad publicity.
Mr. Solomon has told senior Goldman executives that he donates any profits he makes as a D.J. to charity. But Goldman employees have sometimes helped him manage his D.J. schedule and his donations, three people who have worked with him said.
Through Goldman's work in the music business, he has also made at least one industry connection that helped him pursue his hobby, raising questions about whether his opportunities have come about because of his talent or his position as the leader of Wall Street's most elite investment bank.
"The question is: What is best for Goldman Sachs?," said Jonathan Macey, a professor of corporate and securities law at Yale Law School. "Does Goldman Sachs deserve this guy's undivided attention?"
4) I flew down to Texas on Tuesday to do some boots-on-the-ground research about the energy industry, which I'm really bullish on...
I flew into Houston and drove two hours to Port Arthur, which is right on the Louisiana state line. This area is one of the major energy import and, increasingly, export hubs in the world. It features enormous, dystopian-looking refineries, liquified natural gas facilities, ship terminals, etc. as far as the eye can see.
I also saw someone catch a big redfish and I ate some authentic Texas barbecue for lunch. Here are some pictures:
I posted more pictures on Facebook here.
I had to chuckle/marvel at modern travel... as this is where I was, in St. Moritz, Switzerland, just one day earlier!
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.