Ready to Party in Vegas?

Subject: Ready to Party in Vegas?

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In this edition of the Alpha Letter, we cover:

  • Stocks: Tech companies are smashing earnings expectations - what does this mean going forward?

  • Real Estate: How strong is the Las Vegas housing market?

  • Undervalued Stock Idea: Play off rising corn prices

  • Sponsor: Grit Capital Newsletter

Tech companies have been smashing earnings expectations this week. Tesla, Google, Visa, Microsoft, AMD and several others beat expectations in the first two days of the busiest earnings week. 

What does this mean going forward?

The big question coming into 2021 was how the economy and stock market would hold up after Covid subsided. In other words, when the tide of the 2020 crisis receded, would we see a damaged economic infrastructure? Or were we able to escape without creating a systematic collapse?

So far, Q2 earnings are pointing towards the second scenario: Most companies are doing well, consumers are spending money, and pent-up demand is being released into the economy. 

Is the economy healthy?

The one major point that bears point out is the large unemployment numbers. Of course, large unemployment usually means a struggling economy where businesses aren’t hiring. However, the opposite is actually true here: Many service industry companies are having trouble finding people interested in work.

This trend is partially due to the large unemployment benefits being offered by the government. Some people are incentivized to stay unemployed to collect larger benefits, while they last. There’s nothing wrong with that. People respond to incentives and the government has created a good incentive for people to stay unemployed.

So it’s a fallacy to say that high unemployment automatically means the economy is in bad shape. High unemployment due to people’s election to not work doesn’t send the dire economic message that high unemployment in 2009 sent. 

Because of this, I am bullish on the health of the economy and the mid-term outlook for the markets. In almost all ways, companies are doing well. Every time I’ve been to a restaurant on a weekend night over the past couple months, the place is packed with a 45 minute wait.

Remember 2009? Restaurants were closing up because many couldn’t afford the luxury of going out to eat. Do you see that now?

Thankfully, many of the speculative bubbles have been corrected. SPACs with zero revenue have fallen more than 50% over the last couple of months, which tells me the market is behaving relatively rationally. Valuations for tech companies may be high, but I think many of the stronger tech companies justify high valuations.

Momentum Plays

Want to take advantage of some momentum trades? 

Here are a few areas that we are fairly bullish on in the short-term (a few days to a few weeks):

  • Semiconductors - Several chip makers were beat up over the last couple of months due to the semiconductor shortage. This problem is a double-edged sword; Supply is now limited, which could negatively impact revenues. But demand has never been higher, so chip makers who can get creative about pricing or sourcing could do really well. We like AMD, ON Semiconductor Corp (ON), and Teradyne (TER).

  • Tech - Several other tech companies will report earnings today. Apple, Facebook, Qualcomm, Shopify, and ServiceNow could be poised to do well. To clarify, tech can be a tricky play right now. Some names have yet to recover after falling from astronomical highs in late 2020. We’re staying away from companies that are pure stay-at-home plays like Zoom and Peloton. 

  • Reopening - The reopening play is gaining more steam as we’re seeing consumers ready to spend their money on travel and restaurants. MGM Resorts reports earnings today after the bell. We’ll be watching that one closely to help gauge how the reopening is going for Las Vegas. 

Real Estate

While we’re on the subject of reopening, Las Vegas is the most critical market for the reopening of the physical economy.

Will the city be able to attract enough tourists over the next year to not only offset losses from 2020 but also thrive financially?

We found an apartment building that could be a great bet if you believe Vegas is coming back strong. It’s a 15 unit apartment just a few blocks away from Las Vegas Boulevard. 

It’s being offered at a 7.74% cap rate and could yield a 12% cash-on-cash return. Here are the financials used for those calculations:

This property could be a good investment even if Vegas doesn’t flourish in 2021, but you’d definitely benefit over the next few years if demand for the area grows. A growing local economy versus a flat economy could make a $200 a month difference for every single unit. 

Check out the full listing here.

Grit Capital Newsletter

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One of my favorite newsletters is the Grit Capital newsletter. Written by Genevieve Roch-Decter, CFA, a former $100 million portfolio manager.

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Did I mention it’s FREE? Check out the Grit Capital newsletter and let me know what you think in the comments. 

Stock Pick

If you have been following me on Twitter you have probably been seeing my tweets how the price of corn is skyrocketing right now. To take advantage of the rising price of corn I have uncovered a stock idea that I think could double or more from significant operating leveraged tied to higher corn prices.

Meet CVR Partners (“UAN”).

Here is the quick run-down:

  • A master limited partnership that manufacturers and sells nitrogen fertilizers in the United States. Nitrogen fertilizers are used in crops such as corn and beans.

  • The business model has an extremely high fixed cost nature to it. During times of rising prices CVR will print money. In low price environment this bites on the way down.

  • When the price of corn is up this will give incentives to farmers to use more. The price of UAN NOLA has begun skyrocketing, up to $278/ton from $134/ton in just December.

  • Assuming UAN NOLA prices hold steady (I think they increase going forward given the price action of corn) CVR will begin to make a significant amount of money as costs will stay relatively stable. I estimate 2021 EBITDA could be north of $200 million at current prices.

  • CVR is estimated to receive over $300 million in tax benefits for carbon sequestration efforts from Section 45Q.

  • There are 9.25% Callable Notes that are callable in June of 2021. If CVR refinances these notes in the 5% range this will add over $250 million in value to CVR. Proceeds from Section 45Q could amplify this.

  • During the last upcycle CVR had an equity value of $320/unit, with 60% less capacity and nitrogen prices were the same as spot prices now.

I am substantially long CVR and plan to write it up in more detail to paying subscribers this weekend. If you are not a member consider signing up below.

Alpha Thought