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China’s Monkey Wrench

Hello, bankruptcy’s waited here for you … Evergrande.

Today, the market’s torn itself in two. Deep in the red. Deep in the red, we trade.

And Wall Street wonders if everything will ever be this real forever. If anything could ever be as good as the past 10 years again…

The only thing I’ll ever ask of you, Great Ones, you gotta promise not to panic when the market sees red.

What am I talking about amid the Foo Fighters’ lyrics? I’m talking about Evergrande — China’s own little slice of the 2008 financial disaster. After all, they make everything there. Why not financial crises, too?

So, here’s the skinny: Evergrande is China’s second-largest real estate developer. During China’s real estate boom, Evergrande racked up mountains of debt to rapidly expand housing developments.

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The company owns more than 1,300 real estate projects in more than 280 Chinese cities. Evergrande also services or manages some 2,800 real estate projects in roughly 310 Chinese cities.

But that’s not all it does, of course … otherwise, investors might not be panicking so much. No, Evergrande’s divisions make electric vehicles, provide health care services, make consumer products and operate video and television production studios.

Heck, Evergrande even operates a theme park! (Watch out for the first hill on those coasters … I hear they’re a doozy!)

So, how much trouble is Evergrande in? Oh, about $300 billion worth.

In the past two weeks, Evergrande has warned investors that it could default on its debts. The company’s problems partially originate from China’s new borrowing rules that cap a company’s debt in relation to its cash flow, assets and on-hand capital.

Because of these new borrowing rules — which seem pretty reasonable if you ask me — Evergrande has been unable to take on new debt to fund its real estate projects. The debt situation is so bad that both HSBC and Standard Chartered even declined to offer loans to new buyers in two of Evergrande’s residential projects.

Now, you might think this is just contained to China. After all, Evergrande is a Chinese real estate developer — the fallout should be limited to China, right? Well … if you looked at Wall Street today, you’d immediately realize that just isn’t true.

$300 billion in debt goes a long way around the planet. You have banks that could be hit by Evergrande’s default, but you also have banks connected to those banks. It’s what’s called a “cross-default” situation … and we saw a really nasty version of this back in 2008 with Bear Stearns.

But it’s not just banks: You have global parts and materials suppliers that might not get paid. In fact, Evergrande reportedly has more than $37.2 billion in bills and contracts to pay back, with about $15.5 billion of that due this year.

You also have investors — both private and public — that might not get their initial investments back, let alone any form of return.

I know that I’m prone to hyperbole and exaggeration at times — mostly to make a point or to be funny.

No… You exaggerate to make a joke? Never!

But believe me when I say that this is one of the biggest tests the Chinese government has ever faced. It must do something to stem the default contagion, or it faces triggering a collapse very similar to the U.S.’s 2008 financial meltdown.

Now, you can all but guarantee that Chinese President Xi Jinping will bail out Evergrande. However, that bailout will heavily favor customers over investors. In a research note last week, TS Lombard said the following:

The company’s guarantee to deliver all pre-sold projects is likely to lead to overseas stakeholders seeing little, if anything, from the ultimate sale of a developer’s assets in the event of a bailout.
Hence the prospect of an unequal swap, where the interests of on-shore lenders — households and banks — are protected at the expense of equity and off-shore bondholders.

In other words, China will take care of its own … and screw everyone else.

If you expected different results, you haven’t been paying attention to how things work in China. I certainly hope there aren’t any Great Ones out there tied up in the Chinese real estate market. You guys are in for a bad time.

The rest of us? We’re subject to how diligently China deals with the Evergrande situation. I personally believe that Xi will do everything in his power to save face for China — and himself. In doing so, he’ll likely avert the worst fears that Wall Street dredged up today as reasons for the sell-off.

So, what does this mean for you?

Keep holding your solid investments. You know … your Great Stuff Picks portfolio? Yeah. Keep holding those Picks. And, most importantly, follow the advice of your Banyan Hill gurus. You paid for them. You believe in them. You should follow them.

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Over six months of testing, Adam O’Dell’s team has beat the market by 51X with this strategy.

And along the way, they’ve posted some of the most thrilling trades in the history of the markets, with top-performing gains like 519% in two days … 440% in two days … and 400% in two days.

I’ve secured an invitation to his upcoming live event — just for you, Great Ones! And you’ll definitely want to be there when Adam reveals all the details of this simple two-day trade…

To accept your invite, go here.

Great Stuff, The Good, The Bad and The Ugly

The Good: DoorDash Delivers

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Investors raised their glasses to DoorDash (NYSE: DASH) morning after the company announced that it will start delivering alcohol in 20 new states and the District of Columbia, Canada and Australia.

Customers in eligible areas can now order beer, wine and spirits — including a variety of craft cocktails right from their favorite restaurants — within DoorDash’s app, under its new “Alcohol” tab.

For all you Great Ones still living in dry zones who can’t check out this latest feature, you have my deepest apologies. I’ll be conducting field research in the matter … strictly for investing purposes.

Now, DoorDash isn’t the first food-delivery company to add alcohol to its menu. Uber Eats started delivering alcohol shortly after the COVID-19 pandemic shifted happy hours from bars and restaurants to people’s living rooms and beds (no judgment).

DoorDash execs hope the latest move puts pressure on Uber (NYSE: UBER) and helps grow its already-dominant food-delivery market share while simultaneously raising DoorDash’s expected revenue. According to the company, alcohol delivery could increase restaurant and grocers’ average order values by 30% and convenience stores by more than 50%.

More importantly, it could prevent some ill-advised beer runs from people who have no business getting behind the wheel of a car. In fact, DoorDash also announced its partnership with Responsibility.org this morning — a nonprofit focused on eliminating drunk driving and underage drinking.

Uber Eats, take note.

The Bad: Mattress Metamorphosed?

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You can tell the stock market has a case of the Mondays when a sleepy company like Mattress Firm makes headline news … but that’s just where we’re at today.

Rumor has it that the Houston-based mattress manifold has filed to take its business public via a traditional IPO, which would mark the second time Mattress Firm has traded as a public company.

While there’s no real info on when Mattress Firm might IPO — or at what price — all I really want to know is how the company’s business model rationalizes putting three Mattress Firms in the same shopping plaza … and how it plans to make money amid a flood of online foam mattresses that sell for literally a quarter of the price.

Case in point: I bought my last three mattresses off Amazon, and I didn’t pay more than $400 for any of them … even though the last mattress was a king size. Compare that to a company like Mattress Firm, where the going rate for one of these oversized sofa cushions averages $1,500 — at least for a mattress you can actually catch some ZZZs on.

I’ll tell you one thing: I’m never going back to those stupidly high-priced mattresses when I can order something as good or better from the comfort of my own home. And I bet you plenty of other people feel the same way.

Between stiff online competition and dying physical locations, Mattress Firm’s got some ‘splaining to do when it comes to long-term profitability … or even near-term profitability, for that matter.

What about you, Great Ones? Do you still buy mattresses in person at a store like Mattress Firm? Or do you prefer to order your mattresses from the onlines? Let us know at GreatStuffToday@BanyanHill.com.

The Ugly: Canna Have Some Profits, Sir?

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One of these days, Canopy Growth (Nasdaq: CGC) will land in another spot besides “ugly.” But that day is not today!

Cantor Fitzgerald Analyst Pablo Zuanic lowered his price target on CGC from C$30.50 to C$21 and reiterated his neutral outlook, citing lower sales outlooks and price pressures among pot purveyors.

See, I really want to like Canopy, but it more and more follows the typical cannabis Cinderella story. The market’s first big pot stock darling, Canopy expanded too quickly for its own good, overpromising its reach and underdelivering with production. Canopy thought it finally found its Prince Charming, partnering with booze-biz big shot Constellation Brands (NYSE: STZ).

The bud, the brews and the buzz were all there. Canopy + Constellation = drinkable weed, dude! What’s not to love? Well, the constant losses and dismal revenue, for starters… Canopy mollified investors with a C-suite sea change — new CEO, new me. Right?

Wrong. While I love browser-window-shopping at all the cool edible/drinkable THC products Canopy made with Constellation … where are the earnings to show for it? The joke that “hur dur, pot stocks aren’t profitable!” isn’t just beaten to death — it’s plain sad reality now.

And think about it: Where can you really cut costs with the cannabis cash crop before you’re hurting consumers?

The company’s shutting down facilities to save on overhead which, surprise, surprise, doesn’t help the fact that Canopy can’t deliver enough dank to dispensaries to outdo black market supply. And what Canopy is delivering is low-quality, lower-priced product … that no one’s buying. Why would you?

OK, weed snob, simmer down. We get the gist.

It’s true, though: When an analyst tells you that your “pivot away from value-price cannabis” is facing mixed results, it’s not the THC talking. It’s the same old story that’s plagued Canopy all its young life. The company, like every other canna-company, needs U.S. legalization to truly straddle the U.S./Canadian market fence.

Canopy has its drinkables deal and its tiny U.S. foothold, but it all hinges on the U.S. market where other U.S. players are better entrenched. And until that fully robust market is open and federally legal, Canopy has to make due and settle for skimming pennies off of dime bags.

Great Stuff Chart of the Week

Ahhh yeah, it’s time once again for a dose of that real greatness … some earnings excitement to kick off the week. I know y’all have missed our romp through earnings season, and our Chart of the Week is just the ticket to wet the whistle.

There’s just a slight trickle of earnings reports a-comin’ this week, but what a sweet, sweet trickle it is … like the golden nectar of Cracker Barrel’s mac & cheese.

Check out this week’s lineup, straight from EarningsWhispers on Twitter:

Much like its bright beaming welcome sign, high above the interstate interchange, Cracker Barrel (Nasdaq: CBRL) is the first thing my eyes are drawn to … mostly because I wrote on an empty stomach again. Those baked apples, that pure maple ambrosia — oof! I’m poring over Cracker Barrel’s report like the back of a super sticky menu.

Mainly what we’re looking for here is a status check on the restaurant-going crowd … well, the crowd that Cracker Barrel attracts, at least. Sunday diners, highway drivers … and frankly, all y’all who write in to say “oh, sonny, you’re too young to reference Frankie Valli!” Sorry, but if you know, you know.

Where there’s a Cracker Barrel, there’s almost always an Olive Garden right next door. No surprise, Darden Restaurants (NYSE: DRI) also reports this week.

Anyway, in non-food-related news … how about those real estate crises? Forget China’s everlong Evergrande problem. The housing market stateside is all hunky-dory. Right? Anyone…?

We shall see: It’s time once again for the homebuilders to sound off on the gory or glorious state of housing. Lennar (NYSE: LEN) reports today, while KB Home (NYSE: KBH) is slated for Wednesday. Supply chain costs, new-home demand, new-home supply — all that is up in the air, and I’m sure Wall Street just can’t wait to hear more about housing this week.

Last time we checked in on FedEx (NYSE: FDX), the shipper was far from ship-shape — stuck between the madness of online shopping during the pandemic and the crushing costs that come with said shipping boom.

If FedEx was able to control costs this past quarter, it might be able to convince skittish FDX investors that earnings growth can keep up with its insane revenue growth. If not? Then watch for FDX to sink below support at $235 and keep selling off.

Other than this illustrious lineup, your one oddball to watch this week is AutoZone (NYSE: AZO). DIY auto parts stores like AutoZone and O’Reilly’s (Nasdaq: ORLY) were huge all throughout the pandemic, as people looked to save a buck and fix simple car stuff at home … and also as the used-car market was picked clean.

Now I’m interested to see where the DIY car crew is at amid the not-so-Great Reopening.

You have some remote workers commuting back into the office … then going back to remote life as COVID-19 cases rise. Still, other workers never left home or simply don’t work remotely, while others are driving more just to get out of the house.

Lots of tailwinds, lots of headwinds … same as it ever was. But which reports are you looking forward to most this week?

Tell me in the inbox: GreatStuffToday@BanyanHill.com. We’d love to hear from you! In the meantime, here’s where else you can find us:

Until next time, stay Great!

Joseph Hargett

Editor, Great Stuff