🗞️ Watch Out for Gold Diggers

WHILE YOU POUR THE JOE… ☕️ 
I Will Survive

The shooter didn’t get the memo; President Trump was already famous, and he didn’t need to be shot to become so. In a sad day for our republic, an assassination attempt 🔫 took place at a Pennsylvania Trump rally, and love him or hate him, you have to be glad there wasn’t any more loss of life that day.

Our condolences go out to the families of the attendees who were tragically injured and later passed that day; we do hope that America finds its way back to an economic, moral, and social leadership role.

When the market opens today, I’d watch out for the first hour’s action, especially when it comes to bonds and gold stocks 🪙. These will be proxies for international markets and their views on what happened on Saturday.

Speaking of a deteriorating system, and gold, let’s get on with today’s email 📧…

ASSET ALLOCATION
An Unpopular Take on Our Future

Before the U.S. Dollar became the world's reserve currency and gave the Federal Reserve unlimited power to print as much money as it sees fit (which is always more than the country's actual needs), our currency was pegged to a limit. That limit was set by gold.

Back in the day, the value of our Dollar was set by the price per ounce of gold so that the world could exchange gold for dollars and vice versa. Then, something happened as the world caught onto our inflation in the 1970s 📈.

The price of gold in open markets started to rise past our peg. That's English for the market thinking our Dollars were worth less and less, as the U.S. was going through a challenging economic period with high inflation back then, as it is today.

Stagflation, defined as low economic growth combined with high inflation, is a nightmare and also terrible for a currency. So, what did the government do? It removed us from the gold standard and made the Dollar a free-floating currency 🕊️.

That made being a Forex trader the sexiest job in the world, as you could now trade millions of Dollars based on your opinion about the U.S. economy, and so could other nations.

So you probably know what happened right after that, right? Gold prices skyrocketed from roughly $300 to an all-time high of just over $2,600. It was a good day to be a macro trader.

Now, here’s the interesting part 👀.

Notice that gold prices are now back to attempting a new all-time high? Yet the dollar index ($DXY) has not budged to show any sort of weakness recently? That’s what some (including us) would call manipulation.

Since the Dollar can be manipulated by getting other central banks to buy it and keeping interest rates high to artificially pose a currency as strong, it’s not a good gauge of our inflation anymore.

You know what is? Gold. And that open market is telling us all we need to know about the dollar, it isn’t good 😨.

Countries like China are buying up gold like crazy and increasing their reserves of the ‘currency.’

At the same time, China is letting go of U.S. bonds as a sign of doubt about the nation’s ability to repay its debts plus interest.

** Quick tip 🔎: A bond is a loan with principal and interest and a payoff date like any other. So, China holding U.S. bonds simply means the U.S. borrowed money from China, and now China is saying, “I want my money.”

This means that the global arena is questioning the Dollar’s strength and, by extension, the economy.

You may want to go over our last post on Friday, in which we break down some of the trends working against the economy and present some downside cases for stocks moving forward.

Knowing that gold prices could keep increasing this year, to the tune of 6% or more, according to Goldman Sachs, you could seriously start considering a trip to Costco (NASDAQ: COST) and buy gold bars, maybe a gold watch, or simply buy gold stocks. Here’s one we liked:

Royal Gold (NASDAQ: RGLD)

If this is your first time reading us, you know that we throw most academic views out the window, and implement our combined experience from investment banks and hedge funds to come up with our investment theses.

With this out the way, here’s why we picked Royal Gold over other mining peers:

We are looking for the outliers 👀 here, in valuation multiples and in earnings per share growth rates. It is through the outliers that you typically can align yourself with the momentum trades.

So, we noticed a few things on Royal Gold.

• The stock is among the top valued companies on a price-to-sales (P/S) basis, not the highest, but still among the top 4.

• The tie breaker comes through the 12-month forecast for earnings per share growth (EG2 column).

Our conclusion from this data is that markets are willing to overpay today for tomorrow’s sales in these companies. But, Wall Street is only backing these valuations for one stock, Royal Gold, based on EPS projections 📈.

We did some digging to figure out why markets are willing to pay so much for future sales in this stock, apart from the fact that gold prices are set to rally.

Here’s what we found:

The company has up to 24 locations in the development stage, which means production is imminent, directly benefitting revenue and earnings, of course.

So, the market could be indirectly betting on these locations turning to production in the coming months, which makes sense.

More than that, the past quarterly financials are here to show strengthening cash flows in the business.

Operating cash flows, a proxy for operating income that cannot be manipulated through ‘creative accounting’ is on the rise, by nearly 27.2% on the year.

The growth in EPS expected for this year and the double-digit growth in cash flows should command a premium valuation in the market. Yet, it doesn’t.

Royal Gold is now trading at a discount to its peers on a cash flow multiple basis, which is where we think the upside will come through.

It doesn’t hurt to check what Wall Street is thinking though:

• Analysts at Cibc World Markets see a price target of $175 a share, or 28.5% upside 🔥 from where it trades today.

• BMO Analysts see a similar $170 a share target, or 24.8% upside from today’s price.

• Short interest has declined by 4.2% in the past month, signaling that bears are bailing on their positions in front of a potential rally.

WEEKSTARTER STOCK
Coffee Bean Mania

Have you checked the price of coffee lately? Spoiler, it’s been going up; take it from an addict himself (I drink too much coffee ☕️).

Coffee futures have been on a tear lately, from $145 to over $250 in the past six months. You know who also suffers from rising coffee prices, other than the everyday drinker like myself? Coffee companies.

And who better to look into for a down cycle opportunity than the one and only Green Medusa?

Starbucks (NASDAQ: SBUX)

After recently reporting its quarterly earnings results, Starbucks shares fell to a new 52-week low 📉. Some may have been scared away, but we appreciate that the stock price is back to levels not seen since 2022.

So, as routine when considering a long-term investment, we started with the two typical questions:

1. Do we think Starbucks will be around in 10 years?

2. If we gave someone $84.8 billion to replicate the Starbucks brand (company’s market cap), could they?

You can answer these yourself and realize that the company can only go up from here. Still, a story without numbers is only a fairytale, so crack open your Excels.

Q2 2024 Earnings Results

When reviewing the past quarterly financials for Starbucks, we found a few exciting trends you should know.

First, total Reward Membership users reached 32.8 million, which is 6% higher than a year ago.

So, the brand is still making headway into everyday society. After all, there’s a reason you walk into class, or work, or a meeting sporting a Green Medusa and not a cup from Dunkin’ (if you are then please, stop hurting yourself).

The exciting part is where sales diverged.

Sales declined by low single digits, while the average ticket price rose 4% in the United States. This makes sense since coffee beans are now much more expensive than at the start of the year, and a rise in price is obviouslyn’t welcomed in today’s inflationary economy.

International stores did a lot worse, despite the company actually lowering ticket prices in those regions, which speaks to the fact that while things are bad here, other currencies sure have it worse than we do 🌍️.

Notice that China was the worst performer of all, and that’s not surprising. The Chinese economy has yet to wake up, but it’s getting there. Inflation for our Chinese friends has been for every month in 2024, signaling a recovery in consumer trends.

All that’s missing is a currency recovery and further economic stimulus. Guess what? With China buying all that gold 🤑, it might be sooner than we thought.

We also have a comment on store count…

Notice that there are 16,600 in the U.S. and only 7,093 stores in China?

Here’s some interesting math behind these store counts:

• On a per capita basis, there are 198 thousand citizens for every one Starbucks location.

• Compare that to the U.S., where there are 2 thousand citizens for every one Starbucks location.

This divergence in covered ground, coupled with China's fastest-growing middle class, creates a massive financial upside 📈 for Starbucks in the coming years.

Here are some more numbers we kept in mind when justifying giving our money to this stock:

• Last 12 months Gross Margin of 73.7%, the highest in company history despite rising coffee costs.

• These margins were achieved by inventory management, showing that the past 12 months were the slowest in inventory turnover since the COVID-19 pandemic.

• ROIC rates are back to nearly all-time highs of 35%, making a wealth compounder out of Starbucks

The most interesting of these is the inventory story, so we graphed it to understand it more:

Notice that Starbucks loaded up on coffee inventories in 2023, taking advantage of the dip in coffee futures prices. Now that coffee is back to a price not seen since 2011, they’re just not buying any more coffee.

All this signals to us that the company will start to go on a new upcycle, and so will its stock price, so keeping these projections in mind, this is how much we think it’s worth 🔎:

Our base case, where we assume sales will barely stay above inflation, but costs will be under a tight control (as is new CEO policy) to keep up with the ROIC rates of 20-30% historically.

All of this would yield a price per share of $123, or 64.4% above 🔥 where the stock has fallen to today.

NOW GO AND MAKE IT HAPPEN
Pinpoint the Debt Cycle

If all that talk about gold prices, bonds, and the demise of our Dollar piqued your interest, then today’s book recommendation 📖 will get you over the line in understanding how we got here and what might come next.

The United States isn’t the first nation to experience this, and it definitely won’t be the last. Still, one thing is for sure: It needs to act now to avoid an almost inevitable fate 🎯.

To your success,

G. 🥃