🗞 It's a Hedger's Market Now

WHILE YOU POUR THE JOE… ☕️
Liberation Day 2.0

Bessent and Trump just ganged up to bring us another set of catalysts down the line.

The deadline for tariff deals has been extended to August 1st, down from the initial date set for July. Here’s what this means:

• If other nations don’t comply, we will go back to the original Liberation Day tariffs from April

• Chances are that this will not be met, as the S&P and NASDAQ are at all-time highs, giving negotiations room to get tough and rough

Anyway, we will only begin to act on this when and if we see any changes in the Commitment of Traders report, just like the warnings we saw a few weeks prior to the first Liberation Day.

Speaking of all-time highs, let’s get on with today’s email 📧…

STRIKE GOLD IN THE MARKET
Long / Short Rules

You guys have been enjoying this long/short pitch series, we’ve broken down our most recent idea in the apparel industry which is pretty much ready to be executed based on the levels we gave you last week.

If you missed the first part of the pitch: ⬇️ 

1. Here’s the newsletter breaking the macro drill-down landing us in apparel

2. This one is how we picked the $ONON / $BOOT spread and got the timing down to 95% confidence

Today, we will discuss a bit of the financials behind On Holdings to justify our thesis for going long, protecting our position with the Boot Barn hedge as well.

Bottom Up Time

Taking the most recent quarterly earnings from $ONON, these are a few of the factors that stood out to us.

Of course these aren’t exhaustive, as we have a full financial model behind this, but for the sake of time:

• Revenue growth of 43% YoY

• Wholesale segments grew their share of total revenue, helping $ONON achieve economies of scale and a much better gross margin

• Despite tariffs and FX uncertainty, management is still raising their 2025 guidance

So far so good, but here’s one thing I would like to mention to you.

Earnings per share actually declined more than expected, which is interesting because the stock didn’t react negatively at all, and I think I know why. 👀 

See that massive shift in Foreign Exchange Gain / (Loss)? 💶 

This is what investment bankers would call a non-recurring item, meaning it isn’t part of the core business that $ONON runs, therefore an item that you can easily adjust back into the mix for EBIT / EBITDA.

All told, what this is saying is that the actual EPS were much stronger than the headline report. 📈 

With this in mind, we also need to justify whether the recent revenue bump was a fluke or something that is expected to continue onward into the next quarter.

Turns out, this is only the beginning:

Notice the jump in working capital? It’s mainly driven by receivables stacking up, which in my opinion could be a direct sign of the wholesale business taking off in real time.

Considering that inventory typically moves every 20-60 days for $ONON, we can expect this $125 million in receivables to come through as sales / earnings in the next quarter. 🎯 

So far I hear no objections going against our long in $ONON, especially as we have the $BOOT short to hedge it out.

While this entire trade took me 4 hours to put together, I would be nowhere near an idea if it wasn’t for the systematic process I learned inside Goldman Sachs.

Lucky for you, this entire process has been boiled down into a 3-month program we like to call The Sovereign Trader.

If you trade with $15,000-$30,000 or more, I truly believe this is the best thing you can find out there to really get your account flowing higher, come check if you’re a fit for it ⬇️ 

Apply Here ✅ 

Top to Bottom

Now we need to get a grip on where $ONON stands in relation to peers, especially $BOOT as our short hedge candidate.

I think expanding on our second post for this trade, it is very clear that the market is willing to place a premium on the future sales and EBITDA for $ONON, while $BOOT is the one calling for a FCF premium.

The reason is that $BOOT isn’t making the sort of investments in expansion, so $ONON and its FCF is seen as a bit riskier due to this shift to wholesale.

Now let’s look at the profitability profiles for the comps. 👀 

Obviously, we see $ONON making a lot better usage of its debt than $BOOT and others in the space, something you can see in the higher ROIC metrics with only 19% of debt in its balance sheet.

What this translates to is an ability to expand faster and more responsibly, and there’s plenty of room left considering its capacity utilization of only 0.9x compared to $BOOT and its 1.1x today.

See You There

Remember this chart from the previous post?

We are now sitting at a -2 deviation on a Z-Score basis, which gave us a Pvalue of < 0.05 or 95% confidence of mean reversion. ✅ 

We’ve justified the industry dynamics, the stock selection, and the financials.

Now it’s time to put this trade on.

You can follow it by graphing ONON - 0.602 * BOOT on Thinkorswim and tracking this trade back to its median value.

From today’s deviation at roughly -$45 on the spread, we are looking to exit at -$26 for an approximate 50-70% return. 🔥 

Why Follow Us?

In case you’re wondering what our track record looks like, I’ll just give you two of our recent plays:

1. $DLTR / $COST = 22% in less than a month

2. $FND / $LOW = 18% in less than a month

We can do this all day, in fact this strategy is our bread and butter and the reason people trust us with their money.

How I landed on this is a completely different story from my days as an options gambler lol.

You can learn from my mistakes and see the value of this approach through our free 5-day Email experience here.

See you on the other side,

G. 🫰 

GO AND MAKE IT HAPPEN
The Age of AI

I saw a study recently pointing to the top skills that will likely pay big and be in high demand through 2030.

One of these skills was knowing how to work with big data and AI, which is why I decided to send you today’s book recommendation 📖.

Hope you enjoy it and learn something new along the way as well.

To your success,

G. 🥃