Household Disorder, Stay On Target & The MedMen Machine
Disorder In The House
Did you see the July housing starts report this morning, Great Ones? I’m not surprised if you didn’t. The financial media took one look at this report, blanched in fear … and then decided the Federal Reserve and the inflation boogeyman would be a better narrative.
Tapering, tapering … tapering. The Fed needs to taper, according to the Wall Street talking heads, and it’s all you’ll hear about for the rest of the year.
I just wanted to warn you that the Fed winding down its easy-money policy — something we all knew had to happen — is now the big unknown surprise on Wall Street.
Anyway … I digress. Where were we? Ah, yes. July housing starts … the report the financial media glossed over.
So, U.S. homebuilding nearly fell off a cliff last month. We’re talking nearly full-on Thelma & Louise here. Let’s look at the numbers:
- Housing starts: down 7%.
- Single-family starts: down 4.5%.
- Multifamily starts: down 13.1%.
That’s an ugly picture for the U.S. housing market, and rising mortgage rates only exacerbate the problem.
In case you missed it, weekly mortgage applications dropped 2% last week due to these rising mortgage rates. Applications are now down 19% since last year. What’s more, mortgage rates are now at their highest level in more than a month.
But instead of blaming the slowdown on soaring, ridiculously high home prices, Wall Street is still stuck on supply chain hiccups. Conrad DeQuadros, senior economic advisor at Brean Capital, sums up Wall Street’s stance pretty well:
Not a sign of flagging demand? Did you look at mortgage applications, Conrad? Or the plunging prices of raw materials like lumber, which fell 70% since May?
I get it, though: Wall Street likes to look to the future. It’s why Conrad cites the record-high housing backlog as proof of strong demand. Today’s housing starts report had similar data. Let’s look at that, shall we?
- Building permits rose 2.6%.
- Single-family permits fell 1.7%.
- Multifamily permits rose 11.2%.
Let me ask you this, Great Ones: What does the decline in single-family permits and the rise in multifamily permits tell you?
Well, it tells me that the housing market is way overheated and that homebuyers are looking for cheaper options. Since multifamily homes use just as much (if not more) materials than single-family homes … it’s clearly not a supply-side issue as Wall Street wants you to believe.
It’s all about price, and multifamily homes are cheaper for consumers than single-family homes. Still think this is just about supply chains?
If I’ve said it once, I’ve said it a thousand times … the housing market needs a correction. If the 2009 financial crisis taught us anything, it’s that home prices cannot rise indefinitely. The pandemic housing boom will end. There will be a reckoning.
Phew. We made it through your midweek dose of housing market realism! Take a deep breath and stretch. And on second thought…
Let’s not worry about the housing market.
‘Tis a silly place. We all know that tech is the place to be right now for real investment returns. Can you say: lidar tech? ‘Course you can!
Almost every car company is betting on this new tech. Audi alone is investing $16 billion … GM, $27 billion through 2025 … BMW, $35 billion. In fact, Google, Amazon, Apple and even the U.S. Army are investing in it.
And get those nightmarish housing market thoughts out of your head for at least like five minutes until we bring it up again.
Good: Target Hits Its Mark
Middle-class Walmart … erm … I mean, Target (NYSE: TGT) threw down the gauntlet today, challenging other big-box retailers after it released better-than-expected earnings.
The company told naysayers on the Street to scram — and Walmart to “Greet this!” — reporting higher second-quarter sales in everything from clothing to grocery items.
Earnings rang in at $3.64 per share compared to analysts’ expectations of $3.49 per share. Target’s revenue also jumped to $25.16 billion, eking above Wall Street’s measly $25.08 billion estimate.
If that sounds like a small victory to you, keep in mind that Target’s profits are almost double that of their pre-pandemic levels.
In fact, the company’s doing so well that Target CEO Brian Cornell greenlit a $15 billion share buyback program. And companies tend to only buy back stock when they’re feeling confident in future growth … or when they have literally no other ideas of how to spend that money.
I mean, what else would “perfect” Target spend $15 billion on? If you have some ideas, I’d love to hear them — especially the snarky ones. Drop me a line at GreatStuffToday@BanyanHill.com. Honestly, Target’s report didn’t come as any major surprise to me.
After Walmart (NYSE: WMT) whacked Wall Street with its boom stick yesterday, I expected Target to benefit from all those frenzied retail shoppers burning through the last of their sweet, sweet stimmy checks.
Also, like Walmart, Target will keep cleaning house — pandemic be damned. After all, Target is the go-to store for everyone who doesn’t want to shop at Walmart (discounting all of you Whole Foods elitists out there).
Bottom line: If the economy’s got you down and you’re already looking for a possible portfolio hedge, look no further than your friendly neighborhood bullseye.
Better: Half-Baked Crock-Pot Ideas
The Canadian cannabis invasion is the chillest invasion ever. And the North American pot market would get a whole lot more chill if the U.S. made a move on legalization…
Tilray (Nasdaq: TLRY) is betting that legalization — and widespread cannabis sales across the U.S. — is close at hand. Today, it announced a stake in U.S.-based MedMen (OTC: MMNFF) to much investor fanfare for both stocks.
Now, Tilray is probably my second-favorite pot stock behind Canopy Growth (Nasdaq: CGC). Tilray’s growing like a weed, and a stake in a U.S.-based cannabis operation would give it a considerable edge in the U.S. … once we legalize, whenever that happens to be.
All these Canadian pot companies need a U.S. ally if they want in on the eventual U.S. market. Otherwise, local companies like CuraLeaf, Cresco, Trulieve and others are going to lock up the market before Canada even gets started.
Canopy Growth partnered with Constellation Brands (NYSE: STZ) because of that brand recognition advantage — since Constellation Brands already has heavy beverage market exposure with Corona, Modelo, Svedka, etc.
Lucky for Tilray, there’s already growing brand recognition for MedMen in the U.S. pot market, both medically and recreationally.
This is a really good move for TLRY, and its deal-making prowess should be noted here. Tilray could’ve paid way more for its stake in MedMen, as buying that many shares outright will push up a stock price rapidly — especially with a relatively tiny, illiquid stock like MedMen.
So, Tilray backdoored buying MedMen stock — not on the open market or via a tender offer, like most big takeovers do, but through convertible debt. Tilray acquired 75% of MedMen’s outstanding secured notes, as well as a sizeable helping of warrants. In short, Tilray bought debt that could be turned into stock.
By buying debt and warrants, Tilray doesn’t actually own any stock directly, and it has limited exposure to MMNFF if the price rises or falls. In a worst-case scenario, this also allows Tilray to quietly kill the deal without actually touching MMNFF stock … since it’s all warrants and debt.
The whole idea was basically to keep Tilray’s acquisition costs down, should it choose to buy MMNFF outright, while allowing the company an escape hatch if it decides to back out.
If the U.S. ever gets moving on federal cannabis legalization, then boom: Tilray has its American foothold already sorted out. Convert the debt and warrants into shares, and you have a well-known brand to start peddling your stash through from the get-go.
Best: The Tool Time Tussle
Just like paying the Target tax to avoid going to Walmart, the same is true of Lowe’s (NYSE: LOW) over Home Depot (NYSE: HD). And just like every other earnings season, you know the DIY duo’s reports were slated back-to-back this week for extra dramatic effect.
So why is Lowe’s up 10% on its report today while HD stock sank 5% yesterday? Both were double beats — what gives?
Spoiler alert, but Barron’s said the quiet part out loud right in its headline: “Lowe’s Stock Is Rising Because Earnings Show It’s Not Home Depot.” Oof.
If you couldn’t tell … Lowe’s quarterly report was “meh.” The bright side is that analysts’ expectations were even more “meh,” so … the stock rallied. Sure, both earnings and revenue beat expectations, but no one really cares about that these days… Lowe’s report was brilliant because of lowballed expectations.
All Wall Street cared about was same-store sales. Home Depot set the bar high with 25% sales growth this time last year and shattered hope for HD investors when that sales growth turned into a 3.4% trickle last quarter.
By contrast, Lowe’s same-store sales dropped 1.6% this quarter, but analysts expected a 2.2% decline. Lowe’s margins also fell in line with analysts’ estimates, while Home Depot’s margins slipped below.
Plus, the fact that Lowe’s even gave sales guidance — while Home Depot didn’t — told Wall Street all it needed to hear. Lowe’s wins the duel of the DIY fates.
Going forward, Lowe’s better hope that Wall Street’s expectations stay low, low, low, low. That, or it could actually court the contractors that it needs to win back after the locked-down DIYers took over Lowe’s squeaky smooth concrete aisles.
That’s the same strategy that Home Depot needs to play as the pandemic-driven housing boom drops off the face of the Earth. Contractors are your friend and lifeblood, once again. In Wall Street’s court of investor opinion, it just helps that Lowe’s isn’t Home Depot, apparently.
In last week’s poll, we asked you to pick your poison … your beverage of choice … as long as it wasn’t hard seltzer.
And before y’all get on me for focusing too much on the booze-a-roony, this poll is clearly market research for consumer trends … and I’m teetotally not an alcoholic, so you can save your concern. I’ll save my concern for the 7.9% of Great Ones who plan on trying the new super edgy hard MTN DEW.
Just … ew DEW. And I knew there’d be one of you to vote for seltzer. There’s always one of you. Thanks for chiming in, though! Truly. Now let’s see what else y’all said.
10.5% of you rep the craft beer life like it’s still the noughties, while another 21.1% of you have a different definition of the “Champagne of Beers.” I quite appreciate the 21.1% of you who agree that Kentucky Straight Bourbon is the only way to go. (Also, what’s with the double 21.1%? Am I going to see 21.1% in my dreams from now on?)
Oh, and our “obligatory joke answer” of ice-cold water, well, turned out to be the most accurate of the bunch with 36.8% of the votes. Hydro-homies representing! Nice. I’m glad you Great Ones remember to hydrate responsibly.
For this week’s poll … we want to know one thing and one thing only.
The … thing? Is it about … housing?
Oh yes. Yes, it is. Have you yourself bought a new house in this boom? The current boom, I mean. You know, the pandemic-propelled one? Where no one wants to admit that house prices are the problem? That one.
Let us know in the poll below:
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As always, if you have more to say than a mere poll can satiate, by golly by gosh, write to us!
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All right, I’m done — you take over the ranting reins in the inbox! We’ll catch up with the results for today’s poll this time next week.
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Until next time, stay Great!
Editor, Great Stuff