Landlords Getting Back on The Horse

Moring to those waiting on their coffee to brew… And especially to those landlords (and soon-to-be landlords) out in the audience.

That’s right, multi-family apartment values are declining by nearly 20% so far in the past year, and for those in Florida and Texas, this is good news.

Just like holding your favorite dividend stock, this means that rent inflation is helping you achieve a much better cap rate on your property, as some properties in the Miami/Orlando/Tampa area already show cap rates of up to 7.5% to 8.0%.

Cap rates were only 4.0% six months ago, arguably making properties in the area overly expensive. With the Fed looking to cut rates by (hopefully) September of this year, it looks like buying a rental property by year’s end could be a good play.

Alright, let’s get on with today’s email…

Money Knows No Borders

At least that’s what the fundamentals say. We will reveal a few of the driving forces behind what is making Chinese stocks as attractive as ever, and you - too- will soon see that it is market irrationality and fear that is keeping their valuations low.

The Chinese 10-year bond yield just went below the U.S.’s to start 2024. What this means, on paper, is that the market now sees less risk ahead for the Chinese economy relative to the U.S., and there’s a pretty good reason for that.

Manufacturing PMI measures, which typically predict stock market values with up to 88% accuracy, have diverged for nearly two years between the U.S. and China, favoring China in this case.

If these economic forces truly are setting up the Chinese market for success, it makes sense to see the market expect less risk from China rather than the U.S. as seen in their bond spreads.

One last thing, dividend yields give investor another valuation gauge sending China miles ahead of the U.S.

The $MCHI ETF offers a near 3.0% dividend, above the Chinese bond yield of only 2.3%. Last time spreads were this wide was 2008, where the $MCHI then went onto more than double.

For the $SPY, dividend yields fall way short of the 4.3% bond yields, making U.S. stocks arguably much more expensive on a macro level.

When will these forces revert? No one knows, but the one thing to keep in mind is that as soon as negative media subsides (likely when the whales finish loading up on China), it will trigger an on masse buying of stocks like Alibaba and JD.

Speaking of which…

Last time we made a call on a stock, it ended up going up by more than 15% in a single day… That stock was Zillow.

Because we noticed the level of M2 money supply going back into expansion, and U.S. home listings doing the same, it only made sense to start looking into the sector, with Zillow being a clear outlier.

How we made the magic happen is beyond this email, still, we have another pick for you this week!

Ulta Beauty Inc. (NASDAQ: ULTA)

While not as immediate of a play like Zillow, we still think that this stock is an honorable mention for a medium to long-term investment horizon.

Why? The short answer is that it is the cheapest it has been since, well, forever! The stock’s forward P/E ratio of 14.8x makes for an all-time low valuation for this company.

Because skincare and makeup are two products that customers will always have a budget for, no matter if the economy is booming or busting, it makes for steady and predictable cash flows for investors.

Looking at the company’s profitability, it looks like it has been doing better than ever, especially on a free cash flow equity yield basis (FCF / Total Equity).

Even accounting for some of the heavy investments the company has made to redesign its stores, adding virtually every location to be inside a Target store, return on invested capital (ROIC) is coming back to its usual high.

More than that, the company has been aggressively buying back stock, which tends to lead to incredible outperformance over the long-term.

Last but not least, investors can see how the most recent buyback ($289 million), represents 181.6% of the company’s operating cash flows. The last time management took on such an aggressive stance was 2022, when the stock traded at only 19.0x P/E.

Today, that significantly higher amount in buybacks is justified by an even lower 16.0x P/E ratio.

Analysts at J.P. Morgan Chase see a price target of up to $544, calling for 40% upside, but we think differently…

Our discounted cash flows model (DCF) shows the company to be fairly valued at just shy of $890, do what you will with this information.

For a deeper insight into Ulta’s thesis, check out The Capitalist Letter’s deep dive on the company.

Here is our book recommendation if you wish to learn further from how China is overtaking the U.S. today, written by Wall Street legend Ray Dalio (he manages the world’s biggest hedge fund, so that’s something).

If you found Ulta’s pitch interesting, feel free to tweet to us with your own views (we love opposing ones, saves us from mistakes)…

Now I gotta go, but thank you for making it this far, it really means a whole lot to us having you here at InvestiBrew!