🗞 All You Can Eat Stock Picks

WHILE YOU POUR THE JOE… ☕️
Signs of Life

Elliott Asset Management, the guys who got into Starbucks when it was below $80 and brought it to above $100, the same ones who got into Southwest Airlines at $22 and brought it to $31.8, have now eyed Honeywell stock 👀.

Why?

If you’ve followed us for a while, you know that we have a growingly bullish view on manufacturing stocks 📈, such as chemicals and metals like steel. That being said, I’m not surprised to see Elliott timing their acquisition in chemicals, knowing this as well.

That should leave you with the importance of following certain economic indicators and data, such as the PMI indexes.

Speaking of PMI indexes, let’s get on with today’s email 📧…

ECONOIMC ROUNDUP 2.0
Connections Have Been Made

This is the Services PMI index, the manufacturing PMI’s cousin. When the PMI was released last week, we covered the manufacturing sector and identified a couple of industries that showed good potential for a rebound.

Now, those industries did show a connection to the ensuing Services PMI industries and their growth, which we’ll be covering today.

Before we begin, though, here’s something you should know for context: The manufacturing PMI index contracted for 24 months 📉 consecutively, while the U.S. GDP grew during that time.

That means that the Services PMI carried the economy during this time, and that is where the bullish momentum (whatever’s left) for the S&P 500 might be found.

Now that you know this, let’s get on with the PMI breakdown:

Business Activity

Business Activity, one of the most important segments for the PMI is what drives most of the services sector in the economy.

This measure fell by a factor of 2.7% but still is at a 57.2% level (anything above 50% is expansion, below is contraction), which means that activity grew slower.

Nonetheless, it’s still growing, so when we look for potential industries to create a long bias, we better make sure they have a good business activity level.

New Orders

New Orders are the second most important segment here, and that one also slowed down by 2%. Still, like business activity, it remained at 57.4% to push another month of growth.

Again, if we’re looking for a long bias, then we want to see industries with growing business activity and new orders as well.

Employment

Employment measures surprised us a bit, but not fundamentally since expanding business activity and new orders will always lead to higher employment.

What surprised us was the sudden jump of 4.9% to bring the segment to 53% from a previous contraction.

This is key to keep in mind as we head into December and the new NFP report 👀 comes out since it might taint the market’s expectations for further Fed rate cuts.

With this out of the way, you can add growing employment to the list of factors to consider when deciding which industries to pursue here.

Prices

Prices, while not as important in the Services sector as it is in the Manufacturing sector, manufacturing companies will derive their margins from the mix of prices and inventory.

However, the fact that prices remained at a high of 58.1% 🔥 in this index is scary. The Fed relies on cooling inflation and strong labor markets to keep their current interest rate cut paths, which points to a potentially hotter CPI.

Industry Selection

Starting with business activity, we have a few interesting candidates here.

Finance and insurance make sense to us, as capital markets are going to get busy if our inflation theme takes on momentum. Think credit cards and other loans, along with brokerages, as people shift their money around for higher yields.

Insurance? It's pretty self-explanatory. High inflation leads to higher premiums, which lead to higher margins—you get the idea.

The other two to consider are retail trade and transportation and warehousing, which make sense on the trucking and freight side of the rising manufacturing PMI equation.

For retail trade, I am not sure what the call to action might be; so far, all I’ve seen in the cyclical are automakers, so that might be it.

New orders show a similar trend for the above candidates. Finance and insurance, transportation and warehousing, and retail trade are at the top of the sector, showing accelerating growth.

It looks like the evidence is building to throw us into these different industries, but that’s only half the work done; we still need to get down to stock selection.

Stay tuned for new posts as we break down the stocks we pick within these industries using a long/short strategy. 🫰 

 TRADE OF THE WEEK
Encrypted Messages

We gave you Gerdau stock earlier this week, a Brazilian steel maker. Now, we’re giving you another candidate from our stock-picking process in the manufacturing sector.

Today, interest has landed us on Ternium stock 🎯, a steel maker operating across Mexico, Brazil, and the United States.

We suggest you check our post from Monday. In it, we break down the price action dynamics in the basic materials sector, with steel and cooking coal (needed to make steel) leading the way last week.

That’s enough evidence to get us thinking of what the market is looking at and expecting.

Back to Ternium.

The Mexican Peso jumped when the markets learned that Donald Trump would become president.

Why?

Everyone thought this would mean better trade, exports, more business, etc. They’re right, but where they are wrong is thinking this is automatically a good thing for a currency.

It’s not.

In order to trade more and increase exports, you need a weak currency so that other countries with relatively stronger currencies have more buying power for your products and exports.

That said, the peso's return to decline tells us the market is starting to pick up on this trend, which is good for Ternium.

The same story applies to the Brazilian Real: a sharp rally on Trump's win, followed by a decline.

If you're familiar with Monday's post, then you know the Brazilian situation is also directly linked to China looking to get around the U.S. tariffs that will likely be placed on its exports (including steel).

That's also good for Ternium, as it will likely gain some market share of steel exports, and its position in Mexico lets it play with the U.S. at the same time.

This is why Wall Street analysts feel comfortable pushing Ternium’s price target to $52.33, or 53.2% upside 🔥 from today’s price.

Now, we need to check whether Ternium’s ratios make sense right now.

The market is looking for Ternium’s EPS growth to lead the industry, even above Gerdau’s.

That massive growth potential should then allow it to trade at a premium, right? Stocks that grow the most should trade at justifiable higher valuations.

But

That’s not the case for Ternium today, which is where I think the buy opportunity comes from.

As the market is still focused mainly on the U.S. stock market, potential winners in other countries are just being ignored completely, and that’s something you can take advantage of today.

Looking into the market profile, I think a reasonable entry could be around $33.75 👀. In comparison, an immediate price target looks closer to $38 on the time POC (yellow bar).

Then we have the VPOC (red bar) way above near $43, which would be our ideal exit. There might even be a call option structure that is severely undervalued based on the low expectations the market has for this stock.

If we find one, we’ll be sure to share it. 🫰 

NOW GO AND MAKE IT HAPPEN
A Big Machine

Keeping track of all the markets can be challenging, but it’s absolutely necessary if you want to be half-decent at this game. It’s all one big machine, and it’s all connected.

Correlations break down and out all the time, so knowing the context behind different moves is key for you to keep in mind when you scan through the markets, and that’s something today’s book recommendation 📖 can help you with.

To your success,

G. 🥃