🪨 This Gravel Stock Rocks

Happy Sunday to everyone on The Street.

May was a crazy month. Most of the conversation was centered around the debt ceiling debacle which I addressed a few weeks ago. Surprise! It was resolved in the eleventh hour. I'll be honest, I didn't follow it that closely. Too much noise, too many members of the media trying to take themselves seriously about something they knew was going to be resolved. If you had to pick a winner, sounds like McCarthy came out on top even though some of his squad thinks he's a sell-out. That's the analysis our team at The Flag outlined, based on the countless right/left-leaning opinion pieces we read and distill on a daily basis. Give it a look if you haven't already.

Another theme that got some coverage — but maybe not as much as I was expecting — was the string of corporate boycotts that started after Bud Light partnered with Dylan Mulvaney. AB InBev shares just posted their worst month since 2020. Meanwhile, Target's stock got walloped as well after introducing a divisive LGBTQ Pride line of clothing to stores across the country.

Again, I wasn't paying too much attention to either of these stories. I thought (and still kind of do) that they would flare up for a few weeks and then everyone would move on to the next controversy. But now I'm not so sure, especially when it comes to Bud Light. When your core demo is making jokes about drinking the beer, that's not a great sign. I'm curious to see if this teasing has some staying power, or if it tapers off.

That's all I've got for now. Tell me what I missed or what I should be watching during the final month of 2Q23. Hope you all have a wonderful Sunday.

— Brooks

Throwing Social Media For a Loop

Did you hear about Amazon’s FTC settlement? The tech giant will have to refund customers $30 million for using Ring and Alexa to collect the voice data of young children. There’s a reason some families don't want to broadcast their best memories for all the world (and social media algorithms and data silos) to see.

Loop offers a safe alternative for families who want to share memories with their loved ones, but not the general public. Invest in reuniting your family with the Loop app and digital frame. Or invest in a company backed by Silicon Valley royalty with $2M+ in revenue by investing in Loop itself!

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Review

US stocks finished higher Friday after the debt ceiling bill was passed by the Senate. Shortly after, the legislation was sent to President Biden’s desk to be signed and finalized into law, raising the limit and preventing US default.

On the earnings front, Lululemon beat both top- and bottom-line estimates with earnings per share of $2.28 and a 24% increase in revenue at $2 billion. The retailer’s year-over-year sales in China alone grew by 79%. The athleticwear company also raised its full-year guidance to $9.44 to $9.51 billion and expects its full-year profit to range between $11.74 and $11.94 per share, about $0.25 higher than previous expectations.

On the economic front, the unemployment rate in the US increased from 3.4% to 3.7%, the highest level since October 2022 and above market expectations of 3.5%. However, in terms of the absolute number of jobs added, it was a banner month. Payrolls increased by 339,000 in May, better than the 190,000 Dow Jones estimate. This is now the 29th straight month of positive job growth, which could complicate the Fed’s decision to take a break with rate hikes or keep moving them higher.

In company-specific news, Meta Platforms announced it will block news on Facebook and Instagram in California if the California Journalism Preservation Act becomes law. The law has already made it through the state Assembly, but still needs to be approved by the state Senate. If passed, the legislation would require large social media and technology platforms to pay publishers for news they host.

In total for the week, the Dow Jones Industrial Average jumped 669 points or 2.02%, while the S&P 500 added 1.83%. The Nasdaq Composite surged 2.04%.

Preview

Tomorrow, the week will begin with the release of the ISM services PMI for the month of May. This metric increased to 51.9 in April, which was just above expectations and marked a fourth consecutive month of growth in the services sector. Additionally, investors will get an update on the number of new orders for manufactured goods in May. In April, these increased 0.9%.

On Tuesday, investors will be looking at the IBD/TIPP Economic Optimism Index, which surveys the overall outlook for the US economy. This index dropped 5.8 points to 41.6 in May, well below expectations. The metric has been pessimistic, or at a reading below 50, for the past 21 months.

On Wednesday, the US trade gap will be updated for the month of April. The US balance of trade hit a four-month low of $64.2 billion in March as exports increased 2.1%. This increase was prompted by sales of crude oil, fuel oil, natural gas, passenger cars, and travel. The 30-year fixed-rate mortgage, which currently sits at 6.91%, will also be adjusted next week.

On Thursday, investors will get an update on the state of US unemployment with the numbers of new and ongoing jobless claims. For the week ended May 27, the number of Americans filing unemployment came in at 232,000.

Earnings Spotlight

Tomorrow, two major software companies will offer an update on their respective businesses: GitLab (GTLB) and Sprinklr (CXM). Investors will look for more good news from GitLab. The open-core company reported revenue of $123 million last quarter, locking in five straight quarters of revenue growth.

Tuesday will bring reports from Thor Industries (THO) and Dave & Busters (PLAY). Thor Industries will be in the hot seat as Q1 revenue dropped nearly 40% on a yearly basis. Keep an eye out for a report from Smuckers (SJM) as well.

On Wednesday, GameStop (GME) will fill investors in on its new blockchain project, while Campbell Soup Company (CPB) will potentially discuss the new look of its iconic cans and its $50 million investment into its Camden HQ. There will also be a report today from Rent the Runway (RENT), which has struggled to grow since going public in late 2021.

The major earnings reports will wrap up on Thursday this week as DocuSign (DOCU) and Vail Resorts (MTN) keep investors in the loop. Like most other tech companies, DocuSign has been on a mission to cut costs and streamline its business over the past few months. Investors will be eager to hear more specifics on how the digital document company plans to do that.

This Stock Might Rock Your World

Demand Building in the US

Timing is everything — and, when it comes to CRH (CRH), time seems to be on its side. The Dublin-based building materials company is making its debut on the New York Stock Exchange, just in time for a new spate of legislation that should drive demand for its products. Chief among them: aggregates, the rocks used to make concrete, cement, and asphalt.

Thanks to the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the Chips Act, close to $2 trillion in spending will pour into the economy. Much of that will go to building battery plants, chip facilities, and other green infrastructure, all of which require building supplies.

Valuation Gap Fixed?

Despite the opportunity in the States, and the 23% gain in the stock during the past 12 months, shares of CRH are considered to be undervalued. The company currently trades at 11x the estimated 2024 earnings. US rivals Martin Marietta Materials (MLM) and Vulcan Materials (VMC) trade at 22x and 25x forward earnings, respectively, even though CRH has a similar growth outlook to those two companies.

Once CRH is trading in the US, it should make it easier for the company on multiple fronts. Take buys for starters. That has been a key focus for CRH, and it makes sense. The aggregate industry is fragmented with the top ten players accounting for one-third of the annual output in the US. Bigger companies with deep pockets can snap up the smaller players and boost market share.

Low to High Profile with US Listing

Then there is CRH’s low profile stateside. A US listing will help CRH improve its name recognition with US investors and close some of the valuation gaps with its rivals. Reporting rules in the US will also make it easier to compare CRH to its two American competitors. That could, in turn, drive the stock higher.

Its perfect timing is already showing up in the results. Commercial construction activity in the US was up 19% in March year-over-year, and road construction is up 20%. More of the same, if not better, can be in the cards for soon-to-be US-listed CRH.

A Marvell to Behold

Forget Nvidia

Nvidia (NVDA) isn’t the only way to play AI in the semiconductor market. Marvell Technology (MRV), a scrappier but formidable semiconductor company, is also poised to benefit from the AI boom.

It's also cheaper than Nvidia, even if shares are up 71% in 2023. Marvell lodged its best day on record last month, gaining 32% after beating Wall Street’s expectations for earnings and revenue.

Admittedly, compared to Nvidia, that’s chump change. Nvidia’s shares are up 181% so far this year, just recently joining the $1 trillion market cap elite. But both are soaring on expectations AI will take off by leaps and bounds, and the systems to power AI tools will require more specialty semiconductors.

Underappreciated Marvell

Analysts aren’t 100% sure how the AI market will shake out, or what role Marvell will play in it. But for now, they do seem to think it's a viable way to get exposure without breaking the bank. Bank of America analyst Vivek Arya thinks the AI story at Marvell is “underappreciated” and the chip maker will be a beneficiary.

Arya also said demand for generative AI should drive sales of custom silicon for several years and speed up the technology refresh cycles for networking. The analyst raised his price target on Marvell to $70 from $51.

More Catalysts in the Cards

Citi’s Atif Malik is also bullish on the stock, placing shares on what the firm calls a positive catalyst watch. Malik thinks Marvell’s PAM4 DSPs, which connect cloud AI and 5G, will accelerate within the data center space during the second half of the year. The analyst pointed to Marvell’s forecast for AI sales to hit $200 million in 2023, $400 million in 2024, and double in 2025 as catalysts for the stock. “All in all, MRVL AI revenue is expected to grow at a 100% CAGR from FY23-FY25,” Malik wrote in a research report.

Marvell may not be the leading AI chip maker, but it's not a third-tier player either. Investors looking for a cheaper alternative to Nvidia may want to power up with this chip stock.

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Look at the Land of the Rising Sun

Bulls See Black

Don’t look now, but Japan is having a moment.

After decades of stagnant growth, equities in the land of the rising sun reached 33-year highs in recent weeks. Meanwhile, the Tokyo Stock Price Index (TOPIX) recently neared 2,200, its highest closing level since the summer of 1990.

Driving the newfound growth are reforms and dollars pouring into manufacturing. “Some of the changes that we’re seeing there make us excited about it,” said Krishna Mohanraj, portfolio manager at Diamond Hill Capital Management of Japan in a recent CNBC interview. He said he is “cautiously optimistic” about the investment opportunities in the country.

Price Is Right?

Stock prices in Japan have some bulls giddy — even Warren Buffett, CEO of Berkshire Hathaway.

Buffett recently increased his stakes in Mitsubishi, Mitsui & Co, Itochu, Marubeni, and Sumitomo, five major investment companies in the country. When doing so in April, Buffett said that not only are businesses in Japan large and diversified, but they are trading at what he considers cheap valuations.

Even though Japanese stocks have rallied since then, Strategas Securities’ Chris Verrone doesn’t think they are overbought yet. “Momentum often begets momentum in this business, and only the best trends are able to truly get overbought and sustain it — we continue to suspect Japan falls into this category,” the analyst wrote in a research report.

Japan’s Chip Edge

Beyond valuations, bulls point to corporate governance as another reason to keep the country in mind.

The new head of the Japan Exchange Group, Hiromi Yamaji, is calling for further transparency on the part of Japanese companies. The executive took particular issue with the fact that over half of the companies trading on the Tokyo Stock Exchange were sitting in cash and trading below book value.

Then there is the semiconductor opportunity. In case you haven’t heard, chipmaking tends to make for fairly decent business these days. Japan is expected to ramp up production of chips, which could drive growth. In fact, it might be at an advantage over other countries, as it has the infrastructure in place to quickly ramp up production too.

Despite some potential demographic headwinds based on an aging population, it might be worth taking a second look at Tokyo.

Last Week's Poll Results

Are you bullish or bearish on rail stocks over the next 12 months?

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨🟨🟨⬜️⬜️⬜️ 🐻 Bearish

Are you bullish or bearish on Markel over the next 12 months?

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨⬜️⬜️⬜️⬜️⬜️ 🐻 Bearish

Are you bullish or bearish on Uber over the next 24 months?

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨🟨⬜️⬜️⬜️⬜️ 🐻 Bearish

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