Eagle, CO
On February 28th, 2019, I was traveling home from Belize (with my beautiful wife) via Southwest Airlines (LUV). When we landed in Houston to make our connecting flight, the flight attendant revealed a “secret” to all the passengers on the airplane…
If you have ever flown Southwest, you know that the flight attendants are encouraged to have a little fun with passengers.
Anyway, the secret this guy shared with us was that Southwest was about to start travel to Hawaii, for the first time in its history!
Most people wouldn’t give it a second thought… other people would consider the impact on say, Hawaiian Airlines (HA) business and stock price.
On March 4, 2019, Southwest Airlines announced its first services to Hawaii would start on March 17.
By March 22nd, shares of HA had dropped from $30 when I landed in Houston and learned the secret, to around $24.50 – down 18% in a couple weeks. Or a gain of 18% for anyone who shorted it!
I’ll come back to this story in a minute…
Last month I informed you that we were going to stop taking on new clients at least for a while and asked for some feedback. We heard from several of you already and we thank you for taking the time to respond. For those of you who haven’t had a chance to respond, or missed last month’s commentary:
I would like to invite each of you to tell us how we are doing.
What do we not do that you think we should start doing for you?
What do we do now, that you dislike and wish we’d stop doing immediately?
What do we do that you love… that you’d like us to continue doing?
Send your correspondence to info@elevatecapitaladvisors.com
It has been plenty busy around Elevate over the past month, even without pursuing new relationships. We have compiled a long and growing list of projects which we will now begin to prioritize (in conjunction with the feedback we receive from you) and implement them.
I am already enjoying spending more time focused on security analysis & selection and portfolio management. I am also getting used to a healthier work-life balance, personally.
Performance
The S&P 500 (SPY) was pretty flat for the month of May, with technology stocks and the Nasdaq (represented by QQQ) lagging behind, down slightly for the month. The Dow Jones Industrial Average (DIA) actually performed better than both SPY and QQQ
The Appreciation Strategy, which is heavily exposed to technology, underperformed the S&P 500 which is its stated benchmark. The strategy was in alignment with the Nasdaq.
The Income Strategy crushed its benchmark (50% of SPY) for the month, again, and is handily beating its benchmark for the year.
Since my last commentary, we added two new positions to the Appreciation Strategy. With some of the cash we had from taking profits on TTD, WPM, UI, and some of MELI - we took the opportunity to shift some exposure away from high-growth technology by including DR Horton (DHI) and Lockheed Martin (LMT).
Most have probably heard of Lockheed Martin (LMT). Many may not have heard of DR Horton (DHI), so I will tell you it is in the business of building homes. These are both more “industrial” names and represent a good diversifying impact on the Appreciation Strategy.
We maintain plenty of technology exposure in the Appreciation Strategy, which I continue to believe will serve us well in the long run. And even though I think the Nasdaq is the place to be, 2021 has shown us that other parts of the market can outperform for extended periods.
You probably know that the USA spends a lot on “defense.” Defense spending is always a hot topic of debate during presidential elections and the recent one was no different. President Biden just released his 2022 defense budget which calls for $715 Billion of spending and includes a 2.7% pay raise for troops (but inflation isn’t even 2%?). It also specifically mentions hypersonic and other “next generation” weapons development to counter capabilities developed by China and Russia. This is in addition to the usual warships and aircraft.
Lockheed Martin will win a huge chunk of that $715B. And whatever comes next year. Check out it's page on hypersonic weapons development.
The United States is under-housed. That means there is a lot more demand for homes than there is inventory of homes to buy. This is causing massive price increases just about everywhere in the country.
This is a great situation for anyone in the business of building and selling homes. It is and has been a “seller’s market” for about as long as I can remember. I remember when I was sure that I had overpaid for my home in 2016, but it has only increased in value since then.
That is what happens when the government prints more money than houses.
The houses cost more in terms of dollars.
Here is the other factor… Homebuilders got burned the worst during the financial crisis. Some of the people who run those companies remember all too well what happened the last time the country was oversupplied with homes to buy, and these people will not overbuild again. At least not soon.
Check out the chart of monthly supply of homes in the USA:
Combine that with housing affordability which is mostly a function of low interest rates, and homebuilders are in a great place to keep producing strong returns until the Supply & Demand economics of the national market change, materially.
A simple affordability scale goes from 100 to 200. A reading of 100 tells us a typical person can afford to buy 100% of a typical house in the U.S. And a reading of 150 means he can afford 150% of the typical home price. The higher the number, the better-positioned folks are to buy a home. And that means more demand for homebuilders to start building.
The National Association of Realtors keeps track of this data and shares some of it with St. Louis Fed who posts it to their website.
Below is a longer term look at affordability. Although it is from May of last year, not much has changed since then.
We’ll need to keep an eye on interest rates. If they rise from here, that could be a headwind for the homebuilders. One other wild card is lumber. Given the massive demand for new homes, and that lumber companies learned the same lessons as homebuilders last time the country was oversupplied with homes, lumber prices have soared causing the cost of a new home to rise by $36,000 according to CNBC. Thankfully, DR Horton gets to pass the cost of lumber on to the buyer of the home which in turn increases the revenue that would have otherwise been booked.
And the Fed says there is barely any inflation!
Adding to housing demand may be the more than 11 million Americans who are behind on their rent and could face eviction as soon as June 30th.
Outlook
Domestic coronavirus vaccinations rose to 303 million through yesterday, with 42.1% of the population fully vaccinated.
Yesterday afternoon, the US Government relaxed some of its travel warnings for destinations around the globe. Here is the (very short) list of countries that have no advisories at all!
So, if Eswatini is on your bucket list, now may be the time! As you travel there (or wherever your destination may be), think of each time you interact with the economy….
Will you fly? (BA)
Or take a cruise? (CCL)
Maybe rent a car? (CAR)
Or just hail a ride? (UBER)
What will you eat? (CMG)
Will you use a travel booking site? (BKNG)
Will you demand dollars to spend? ($DXY)
Will the merchant accept the dollars or demand bitcoin? (BTC)
How much crude oil will be consumed because of your travel? (USO)
As the country and world are vaccinated and resume more normal activities, the economy will boom again.
Over the next few months, some of the most fundamentally overvalued companies in in the market might even “grow into” their valuations by seeing their stocks not rise very much for a while, even though revenues are booming compared to COVID lock-down revenues.
You see, the stock market tends to lead the economy, in my experience. For example, the market dropped harder and faster than ever in history last year, before we really locked down. Then, it rose almost as dramatically as it fell for the rest of the year when the economy was at its absolute worst and headed into a presidential election!
Hard to believe, but that is exactly how it went down.
Is it that hard then, to believe that the market could nosedive while at the same time the global economy sees the biggest uptick year-over-year, in history? Not for me. I sort of expect it.
But that said, I don’t pick tops or bottoms and I am not speculating that the market will crash from here. The trend is currently up (more for SPY than QQQ) and we are along for the ride.
We trim positions as they get over extended, and we sell covered calls when we don’t want to sell shares. We add to positions when they drop but stay above our stops. And when we stop out, we reposition based not on the current environment but rather, based on what I see the current environment leading to in the next 6-12 months.
For now, the main theme is the reopening of the global economy.
In closing
You can expect my next commentary to be posted to the website on July 6th. At which time I should be homeless and have a new puppy!
Wish me luck, and…
As always, thank you for reading!
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisor
PS – whether or not I shorted HA, I will never tell!
Legal Information and Disclosures
This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.