Barron's Streetwise - Reshoring, Weights, and Waxing

Episode Date: August 19, 2022

A strategist offers stock picks that can benefit from deglobalization. Plus, an analyst has investment ideas for the subscription economy. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. A lot of the jobs have been in areas like the South and the Midwestern United States. So when you look at those areas, we've actually seen manufacturing job listings accelerating quite substantially and more so than for the overall U.S. Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe, and the voice you just heard is Jill Carey-Hall. She's a U.S. stock strategist at Bank of America Securities, and she has an update on reshoring, or American companies moving overseas operations back home.

We'll hear what it means for the economy and which stocks could benefit. We'll also say a few words about the subscription economy, covering everything from streaming to car washing to body waxing. No, Kelly Clarkson! Listening in is our audio producer, Jackson. Hi, Jackson. Hi, Jack. You think people are going to get that Kelly Clarkson reference?

It's from the movie The 40-Year-Old Virgin, Steve Carell getting his chest hair ripped off. Well, that scene's burned in my mind. Will the lawyers let us use the clip? I don't know, but I'm going to fight for it. Okay. And last question, how do you think Kelly Clarkson feels about being a part of that movie moment in history?

Well, I question whether that was some sort of product placement. You think she paid them to be in the movie. If I understand what you're saying correctly, Kelly Clarkson outbid Jordan Sparks for that spot. I think Jordan Sparks was after that movie, but. Okay, fair enough. The S&P 500 index was recently down just 9% year-to-date if we include dividends. That's a remarkable comeback. At its low point in mid-June, the index was down 23%.

Companies have been beating earnings estimates. Job growth is solid. The country has now regained all of the jobs lost during the pandemic. Pay is growing nicely. The inflation rate is still exceptionally high, but it did just tick a touch lower last month and gasoline prices have been falling. And this past week, we got minutes from the Federal Reserve's policy meeting in late July. In other words, the Fed released 12 pages of detailed notes on the information that its staffers presented to its open market committee. That's the folks who decide where short term interest rates should be.

The minutes also laid out the thinking of committee members. And although these members plan to keep raising rates to fight inflation, the minutes showed that some of them have turned cautious over the risk of raising rates too quickly. That's the kind of news that stock investors like to hear, because lower interest rates are seen as a boost to both economic activity and asset prices. So financial skies are turning sunnier. Why then do I still feel like keeping my umbrella close? Maybe it's because the stock market bottom didn't seem all that painful. I'm not a financial masochist, understand. And I don't want to make light of the significant losses people took in certain stocks.

There were some growth stocks that dropped more than three quarters from their peak at one point, like Coinbase, Shopify, Carvana, Peloton, and Rivian Automotive. But broad conditions usually look worse when stocks hit bottom just ahead of a new bull market. Consider an indicator called the rule of 20. It has a perfect record predicting bull markets going all the way back to 1935, according to B of A. Take the trailing price to earnings ratio of the stock market and add it to the year over year inflation rate. If the sum is below 20, then conditions are right for the stock market to have hit bottom. The lowest the trailing PE got was about 15.5, and the inflation rate at the time was 9%,

for a sum of 24.5. More recently, the trailing PE was 18.2, and the inflation rate was eight and a half for a sum of twenty six point seven. We never satisfied the rule of 20, which means that either the rule has stopped working or stocks will have another leg down. If you think about it, what the rule is really saying is that market bottoms tend to form when stock prices are pessimistic at the same time that demand for goods and services is sluggish. I'm not sure that we got to that point this past summer. Then there's consumer spending. We just got healthy retail numbers for July, but some stores say they see signs of shoppers trading down. As an example, instead of deli meats at higher price points, customers are increasing purchases of hot dogs as well as canned tuna or chicken.

That's the chief financial officer of Walmart talking to analysts during the company's earnings call this past week. So shoppers are trading down from deli meats to chicken. Those aren't exact substitutes, but the difference in price is a big one. At a supermarket near me, I recently saw chicken legs and thighs selling for about one quarter of the price per pound as sliced ham at the deli. Jackson, you impressed with my shopping savvy? I don't know where to begin.

Well, we're going to come to it. I mean, the upgrade would be the whole chicken and the dried beans. Once you get there, give me a call. Okay, we're going to talk more about frugality in a moment. Inflation, as I said, is still quite high. For folks on tight budgets, changes like that or switching to store brands from big name brands can make ends meet. But on the same call, the CEO of Walmart also said that the company is benefiting from more higher income shoppers visiting its stores. These are families with household incomes of over $100,000.

He also said that he has too much inventory, especially for apparel, but that back to school merchandise is selling well, which usually bodes well for other seasons. And he called out a highly specific deal on shirts. Flannel shirts in August, who knew? As I've said before on this podcast, I always have a difficult time telling whether the things I'm thinking are things that other consumers are thinking too. As they say, the plural of anecdote is data. Well, so far, this is just an anecdote. Lately, I've been turning much more frugal for no particular reason. My financial circumstances haven't changed. frugal for no particular reason. My financial circumstances haven't changed. Things are good,

but my family has cut way back on restaurants. My wife and I looked at a list of home improvement projects we were thinking about for the coming year, and we decided we don't need any of that stuff. We could do without new cars for years to come too. I'm canceling most of our streaming services. Maybe I'll just do one at a time from here on. During the pandemic, we tried to buy a new washer and dryer, but there weren't any that we wanted in stock. Now they're all in stock, but we've decided that the ones we have work pretty well. I recently bought twin 40-ounce jugs of light ranch dressing enough to last through Christmas because I like the unit pricing at my local warehouse club. When I got home, I had buyer's remorse, not because I had over ranched, but because I learned that I had missed out on a coupon. Six months ago, I had never been to a

warehouse club and my coupon game was non-existent. Jackson, do you know about the light ranch deal? My coupon game was non-existent. Jackson, do you know about the Light Ranch deal? How long does it take you to go through one of those? If there's a spill, I might have to call an environmental remediation company. I got to check my local bylaws. So what's going on? And are there other shoppers out there who are turning more frugal too? And not just because funds are running low. If so,

it could benefit stores like Walmart that are known for discounting. I noticed that BJ's, one of the warehouse clubs, beat earnings estimates and raised its guidance. One analyst wrote this past week that TJX companies, the owner of TJ Maxx and Marshalls, which specialize in closeout deals on clothing, could benefit from consumers trading down. Of course, if too many of us turn frugal at the same time, it wouldn't be great for the economy. Let's keep an eye out for signs that my anecdote is becoming data. Now then, let's get to reshoring. The pandemic, you might recall, was expected to lead to a wave of U.S. companies bringing some of their overseas operations back home. It was one factor among several.

You saw trade tensions between the U.S. and other regions. You've seen geopolitical conflict. You've seen COVID-19 and the accompanying supply chain disruptions. These have all been driving factors, and a lot of these have continued. We've seen a recent escalation of China-Taiwan tensions, for example. That's Jill Carey-Hull. She's a stock strategist at B of A Securities. The tension around Taiwan, she mentioned, is important because Taiwan is a major source

of chips for U.S. electronics and appliances and other goods. Jill says company pledges around carbon emissions are another factor. Companies can gain greater visibility over their environmental impact by bringing their operations closer. All of it amounts to a view that globalization has peaked and localization will play out from here. But is that happening? Jill says yes. We've definitely seen some evidence of reshoring. So when you look at mentions of reshoring on earnings calls, those have skyrocketed in recent quarters. So a number of companies across different sectors have been mentioning reshoring and indicating plans to do

so. You've seen a lot of the jobs that have been coming back have been in areas like the South and the Midwestern United States. So when you look at those areas, we've actually seen manufacturing job listings accelerating quite substantially and more so than for the overall U.S. Jill says this shift is likely to benefit small and mid-sized U.S. companies. That's because reshoring should drive higher capital expenditures or CapEx. That's an accounting term for spending on things like plants and equipment. Past CapEx cycles have tended to be good for small company stocks. That's because the biggest

companies tend to be the ones doing the bulk of the CapEx, whereas smaller companies tend to be the ones benefiting from it. Jill says that reshoring could play out for years to come and that first in line to profit are industrial companies. Within the industrial sector, a lot of the multi-industrials companies may benefit as there's this increased industrial automation spend. There are other types of industrials that can benefit within the machinery space or engineering and construction. So architectural or engineering firms that serve some of those key reshoring industries like semiconductors or pharmaceuticals, equipment rental companies, reshoring requires equipment. There are other sectors that should benefit from reshoring too. Here's Jill.

You know, semiconductors need to diversify production away from some of the global regions. And with the recent U.S. CHIPS Act, we would see, you know, semi-cap equipment vendors as beneficiaries. And then lastly, you know reshorten these regions, that's going to expand the need for services like regional banking, financial services, warehousing. So when you think about regional banks or REITs, these are sectors that have a lot of representation within the small and mid-cap benchmarks within the U.S. So we see small and mid-cap regional banks and industrial REITs that have exposure to these regions as beneficiaries. Jill mentioned the CHIPS Act. That's designed to get companies to make more semiconductors in the U.S. In a recent report on the CHIPS Act,

investment bank Piper Sandler called Intel an obvious beneficiary, but also named four smaller chip companies that stand to gain. Wolfspeed, ticker W-O-L-F, Macom, that's M-T-S-I, Skywater, S-K-Y-T, and 2-6, that's I-I-V-I. About that last one. If you ever see a company name written out as II-VI, you can impress some of your friends and loved ones by explaining that those are Roman numerals and the right way to say the company name is 2-6. Then you can tell them that the name comes from infrared optical crystalline compounds made from the elements in the second and sixth groups on the periodic table, like cadmium telluride.

Be sure to say that last part loud enough for passersby to hear too. If my calculations are correct, your explanation will probably end with rapturous applause from everyone in attendance, so don't be startled by the noise. You're welcome in advance. attendance, so don't be startled by the noise. You're welcome in advance. Not as rapturous as I was picturing, but okay. B of A Securities has its own list of small and mid-sized companies that it sees as likely beneficiaries of reshoring spending. Among those that have buy ratings from the firm's analysts are Rockwell Automation, ROK, Ansys, that's A-N-S-S, United Rentals, U-R-I, and Keycorp, ticker KEY. Thank you, Jill.

Coming up, put on your members-only jackets. We're going to hear from an analyst about four subscription service companies he thinks can weather an economic slow patch well after this quick break. Calling all sellers. Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more.

Welcome back. I spoke a short while ago about cutting back on costs, including subscriptions for things like streaming. But then again, I also mentioned shopping at a warehouse club. That's a subscription service. So some of them are well suited for the current economy. One analyst I recently spoke with is bullish on several companies that combine subscription offerings and franchise business models.

When you have a company that has a franchise model, it tends to be capital light. It also tends to be very predictable in nature and high margin. And then when you have a membership model, companies like Netflix and others, you tend to see stickiness in those membership levels. And that provides also a level of predictable revenue as well. That's Randall Connick. He's an analyst at Jefferies.

Does everyone know what a franchise is? It's a business model where an operator pays a company to use its name and resources. Typically, there's an upfront payment and ongoing payment. The operator benefits from things like national advertising and in some cases, starting with strong brand recognition from day one. Operators are expected to run their locations in keeping with the brand and sometimes must make ongoing purchases of supplies or equipment from the company. When Randy says that franchises tend to be capital light, he means that operators help pay the cost of expansion, so these businesses can grow faster than they otherwise would

if the company had to fund its own growth. And when he says they tend to be predictable and high margin, that's because the operators take on much of the business risk of their particular locations. The company itself collects steady fees. Of course, its long-term success depends on keeping its operators happy. Some of the companies Randy covers are in industries where membership models have long been common, and some aren't. We cover Planet Fitness in the gym space, we cover Mr. Car Wash in the car wash space. And then we cover European Wax in the waxing space or the out-of-home waxing

space as well. So I do think, you know, we're... I thought that was a car business at first, European Wax, but we're talking about a totally different kind of waxing, I gather. Yes, sir. Yes, we are. Okay, so let's dig into these names. Planet Fitness is, of course, the big gym chain known for dirt cheap memberships. Here's Randy. It's like the Walmart of the fitness industry, right? It's got the most units. So there's over 2100 units. It's growing its units by over 100 a year. Normally in a normal environment, pre-pandemic, they were growing 250 units per year. That's a little lower these days because of coming out of COVID. But still, it's the highest unit growth player in the industry. It's the largest player in the industry. And then, you know, what also is pretty great about Planet Fitness, it's the cheapest player in the industry with you can get to become a Planet Fitness member for only $10 a month.

Who can beat that? Nobody. But how are the margins? If it's only $10 a month, how are the profit margins? That's the beauty of the business model, right? It's this service as a service. But as I said earlier, two components really make up these businesses. A lot of them are membership models, but a lot of them are also franchise business models. So the fact that Planet Fitness is a franchise business model, it keeps those expenses low because it's capital light. So Planet Fitness is running in a normal world, 30 to 40% EBITDA margins, which are pretty high in the stock market. And if it's a franchise model, I guess you always kind of keep an eye on

are the franchisees happy? Is your sense that they're happy? Well, they must be because they've been growing to new heights with now over 2,100 units. The ticker on Planet Fitness is PLNT. That stock quickly multiplied in price following its 2015 IPO, but it hasn't gained much ground since the start of the pandemic. Randy thinks gyms are poised to make a comeback. I asked about connected fitness equipment at home. That's one area where I splurged during the pandemic, and I'm using my machine, so I don't plan on cutting back on those memberships for now. But my experience there might not last last and it might not be typical. Here's Randy.

Yeah, we think the in-home fitness area is going to remain challenged. I have a Peloton as well, and I'm trying to sell mine and I can't find any buyers. So I just think that the name of the game ahead is going back to the gym and that's where something like a Planet Fitness

is going to benefit going forward. Randy covers two other fitness companies with buy ratings. One's called Exponential Fitness. The ticker is XPOF. It calls itself a boutique fitness company. Brands include Club Pilates, Cycle Bar, and something called Stretch Lab, which if it's a taffy dealer, I'm in, but otherwise, no thank you.

Randy also likes a company called F45 Training, where the F stands for functional and 45 is the length in minutes of the rigorous boot camp style workouts. I'm more of an F10 to 15 guy where the F stands for fluffy towel, but to each their own. The ticker on that one is FXLV. Then there are two companies outside of fitness. One is Mr. Car Wash, ticker MCW. Randy says he likes that the car wash business is highly fragmented, filled with mom and pop owners, and that although Mr. Car Wash is the largest player,

it has only a 10% market share, which provides plenty of opportunity for consolidation. And finally, there's European Wax Center or EWCZ. Randy says there's been a trend toward out-of-home waxing and that, like the car wash business, the waxing industry is dominated by mom and pop operators. And when he says mom and pop, I don't know if that's a mom and a pop at each waxing business. That seems weird. Or more moms than pops. Or maybe pop works the register and mom.

You know what? Here's Randy. European wax has over 900 units. The closest competitor to European wax of brand is got over 900 units. The closest competitor to European Wax of brand is got around 100 units. So European Wax is massively larger than the next competitor. And what you do at European Wax is you buy a wax pass, right? You buy, let's say, nine waxes and you get three free. That's kind of the value they provide. And then a person gets waxed maybe once or twice a month. And that provides

predictability in the model for that type of company. It's like me going to a haircut. I get my haircut at the barber every three weeks. You know, waxing is the same kind of way. It's part of your daily, your beauty regimen for the year. That answers a lot of questions for me, actually. The nine wax pass because a lot of these are like an all-you-can-use model. And I know one of the problems with like an all-you-can-eat buffet is you might overeat. I was wondering, are there people out there who are over-waxing because they have an all-you-can-wax pass? But with a nine-wax pass, I guess it must be, people must keep themselves under control better. Thank you, Randy and Jill.

And thank all of you for listening. Jackson Cantrell is our producer. Speaking of which, I'll be away for two weeks, but don't worry. Jackson will keep your ears engaged with podcast episodes while I'm gone. Jackson, what do you have planned? Hang on. Don't give too much away. It's just a tease.

Subscribe to the podcast. Rate it. Review it. And follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week.