Retail Industry Explodes

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In this edition of the Alpha Letter, we cover:

  • Macro: Retail sales growth crushed it. The options market is overwhelmingly bullish.

  • Stocks: Coinbase made its debut yesterday - but it isn’t the only public crypto brokerage

  • Real Estate: Ever wanted to own a hotel? We found one selling for $265,000 at a 20% cap rate

Macro

Retail sales exploded in March, growing 9.8% compared to the previous month. This figure crushed analyst expectations of 6.1%. The large growth is due to a combination of reopening and $1,400 stimulus checks hitting consumers’ accounts.

American Eagle Outfitters announced that first quarter revenue is tracking above $1 billion, well above the $904 million analysts originally projected. We have highlighted a competitor to American Eagle’s Aerie that is rapidly growing and we think the entire market has missed it (see here).

Several other retail companies are expecting breakthrough numbers. XRT, the S&P retail ETF, is up 45% year-to-date. It still trades at a fairly cheap 10.90x trailing twelve month earnings. Even though much of XRT’s growth has been helped by GameStop’s short squeeze, its other top holdings include Kohl’s, Rent-a-Center, and Dick’s Sporting Goods. 

The option market remains bullish on the overall health of the stock market. VIX hit a 52-week low of 15.94 on Thursday, its lowest level since February 2020. While VIX doesn’t tell us the likelihood of a crash occurring in the future, it is telling us that option traders are feeling positive about the stability of the market.

Option activity in VIX-related instruments like UVXY is extremely low, signaling that volatility is not a huge concern for the market right now. The market’s put/call ratio was 0.43 for Thursday, meaning that 0.43 puts were traded for every 1 call traded on Thursday. A put/call ratio less than 1 usually signals a bullish outlook.

Stocks

Strategy: Momentum

Coinbase (COIN) stock got off to a hot start Wednesday before selling off about $100 into the close. While you typically don’t want an intraday decline of 25% on your stock’s first day trading, Coinbase held strongly above the initial offered price of $250.

Coinbase will be the standard for crypto exchanges as it’s by the far most well-known and largest one. But there are a few other crypto exchanges that you can invest in.

One that I’ve been looking into is Voyager (VYGVF). It’s an OTC stock trading at a $2.87 billion market cap. Voyager was trading as a penny stock last year, but gained huge momentum as Bitcoin broke out in late 2020.

It’s corrected a bit lately and is now trading 26% below its high from earlier this month.

From a fundamental standpoint, Voyager is overvalued. It’s trading far above a reasonable price/sales ratio and has negative earnings. This stock is more of a momentum play. If you don’t think the Bitcoin or crypto rally is over, then Voyager could be a stock to keep on your watchlist that’s correlated with Bitcoin.

At year-end, Voyager reported total assets of $275 million and nearly $3 million in cash. Revenue for Q4 2020 was just above $3.5 million, but the company reported a net loss of almost $9 million. As I said, this is a not a sound fundamental stock. If you’re buying it, you either believe in the long-term growth of the platform or are just holding for a short time period as a momentum play.

I also suspect that Voyager could lag behind the performance of Coinbase. If Coinbase stock does well, we could see other crypto exchanges gain momentum. 

Real Estate

Ever wanted to run a hotel?

We found a pretty unique opportunity for a nice cash-on-cash return. 

This motel in the Upper Peninsula of Michigan is selling for $265,000 at a 20% cap rate. The property includes 13 hotel rooms, six furnished apartments, and one 2 bed/1 bath apartment currently used as the owner’s residence. 

While this investment would likely be best suited for an owner-operator who’d live at or near the property full-time, there could be an opportunity to automate the booking and check-in process to cut down on labor costs or time spent by the owner.

The motel is just a few blocks from Lake Superior and near several forests, so you’d see tourists in both the summer and winter.

Alternatively, the entire property could potentially be converted into apartments. The town is fairly small (about 1,500) so vacancy risk could be high. 

Check out the listing here.

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Alpha Thoughts