🌩️ Not Just a Storm Stock

Happy Sunday to everyone on The Street.

Our hearts go out to everyone impacted by Hurricane Ian. What a monster. While the storm soaked up most of the attention on Wednesday (rightfully so), many people missed what one senior London-based banker said was nearly a "Lehman moment."

The TLDR is that the Bank of England abruptly reversed course mid-week, and initiated a massive, impromptu bond-buying program to avoid a meltdown in the UK pensions sector. This is because the new government announced a revised tax plan the week prior, which investors really didn't like – specifically because they think it will exacerbate already record high inflation. As the pound tumbled against the dollar and bond yields jumped, the BoE was forced to buy UK government bonds “to restore order”.

Typically this type of panicked reaction occurs in emerging markets, but now the UK's conflicting monetary and fiscal policies are causing its debt markets to behave like Brazil's.

Bottom line, this isn’t great. It’s hard to tell if this is a one-off event or if a bunch of mini-crisis’ are starting to pile up and the outcome is death by a thousand cuts. Either way, rates continue to be the Sword of Damocles hanging over both Wall Street and Washington’s heads.

Before we dive in, 77% of you said you were Bearish on Bird last week. Right after we released the poll, Crunchbase published this article: Bird Founder’s Stake Now Worth Less Than His Miami Mansion.

Review

US stocks were mixed Friday in the final trading session of September, closing out what was a brutal week, month, and quarter for the market as a whole. Investors remain wary of elevated inflation and the Fed’s hawkish response, including its steady rate hike campaign.

Many worry the central bank’s aggressive stance will tip the economy into a full-blown recession, which has weighed on equities for the better part of the year. New economic data showed inflation remains persistent, as the PCE rose 0.4% in August month-over-month, which was higher than expected.

Also known as the Personal Consumption Expenditure Index, this is a broad measure of consumer spending on goods and services. It’s also the Fed’s preferred measure of inflation.

On that same track, Fed Vice Chair Lael Brainard spoke on Friday and said the central bank is committed to not pulling back prematurely on its tightening policy. With that said, the University of Michigan’s consumer sentiment survey increased slightly last month as inflation expectations moderated.

Overseas, new data suggests Eurozone inflation hit 10% on an annual basis in September. This was driven in part by a jump in energy prices, amid the natural gas standoff with Russia.

Speaking of Russia, Vladimir Putin announced the annexation of a swathe of Ukraine on Friday and pledged victory in the war against Ukraine. It was the biggest annexation in Europe since World War Two.

For the week as a whole, the Dow Jones Industrial Average fell 2.92%. The S&P 500 slipped 2.91%, and the Nasdaq Composite lost 2.69%.

Preview

The manufacturing sector is in focus tomorrow, as the S&P US manufacturing PMI for September is due. This metric surveys purchasing managers to get a sense of whether the sector is expanding, contracting, or staying the same. In August the index fell to its lowest point since July 2020 as new orders slipped. The Institute of Supply Management is also scheduled to release its manufacturing index for September. In August, ISM’s manufacturing index fell 7.5% month-over-month, while raw material prices rose for the 27th month in a row. Also, keep an eye out for August’s construction spending.

Tuesday, the Bureau of Labor Statistics will publish its Job Openings and Labor Turnover Summary for August, also known as the JOLTS report. Job openings came in at 11.2 million in July, which was little changed from the previous month. Investors will be looking to see if the job market is holding strong as the Fed continues its rate hike campaign. August factory orders are also due.

Wednesday, ADP will release its private-sector employment report for September. The economy added 132,000 jobs in August, which was down from the 268,000 added in July. The pending home sales index for August is also due. The MBA will also publish the number of weekly applications for a mortgage, which is a key measure of real estate demand. As the average rate of a 30-year fixed mortgage has risen, applications have fallen.

Thursday, initial and existing jobless claims are due from the Labor Department. Initial claims fell to 193,000 last week, hitting a five-month low. That shows the job market remains robust.

A slew of employment data is on the way Friday, including nonfarm payrolls as well as the unemployment rate for September. In August, total nonfarm payrolls rose by 315,000 while the unemployment rate ticked up to 3.7%. Also watch for last month’s labor force participation rate and average hourly earnings. Finally, the Fed is scheduled to publish August’s consumer credit numbers as well. The metric rose in July but at a slower pace than the previous month.

On the earnings front, Acuity Brands (AYI) reports Tuesday while both Lamb Weston Holdings (LW) and Helen of Troy Limited (HELE) are up on Wednesday. Constellation Brands (STZ) will host a call with analysts and investors on Thursday and Tilray Brands (TLRY) wraps up the week on Friday. Constellation Brands is the nation’s largest beer importer, as measured by sales. Investors will want to see how the firm is navigating inflationary pressures, particularly given the price of key raw ingredients is up, such as grain.

After Pivoting From In-Person to Online Events, This Community Sold for $22M

Before the pandemic hit in 2020, Create & Cultivate, a community for women professionals and entrepreneurs, was focused on in-person events.

When the spread of COVID-19 pushed everyone online, founder Jaclyn Johnson quickly pivoted to virtual events, which allowed the bootstrapped company to continue to grow — and she sold a majority stake the next year for $22 million.

Click here to keep reading and sign-up for They Got Acquired, a newsletter that shares stories of companies that sell for $100,000 to $50 million.

Chicken Soup Scoops Up RedBox

A Small Cap Streamer

Remember RedBox? The movie-rental chain that puts kiosks in the entrances of 24/7 stores like Duane Read? Well, about a month ago it was acquired by another company you may have forgotten about: Chicken Soup for the Soul Entertainment (CSSE). And yes, Chicken Soup for the Soul Entertainment is a publicly traded company, not just a collection of self-help books. In fact, this small-cap stock may be one of the more interesting ways to play the future of cordless TV, especially with this recent acquisition.

In addition to giving Chicken Soup access to a network of 36,000 DVD rental kiosks spread across the country, Redbox offers ad-supported movies online. This digital catalog bolsters Chicken Soup’s existing offerings which includes Crackle and PopcornFlix.

Soup Consolidation

The RedBox buy comes at a time when ad-supported streaming is having a moment. Both Netflix (NFLX) and Walt Disney (DIS) are integrating ad-supported tiers to their services, turning the entire ecosystem into well… something closer to normal TV.

Nevertheless, with household names backing ad-supported streaming, Chicken Soup thinks advertisers can’t ignore it for much longer. The company is already selling ad inventory on behalf of smaller ad-supported streaming services like Philo and Crunchyroll and expects that business to expand.

Chicken Soup is optimistic that its acquisition of Redbox will pay off. Not only does it gain thousands of kiosks but its headcount goes to 1,500 from 200. The combined company is projected to generate $100 to $150 million of EBITDA next year. Revenue is projected to be $500 million, which is double what Wall Street is expecting in 2022.

Investors Aren’t Sold…Yet

Despite Chicken Soup’s optimism, investors aren’t convinced a turnaround is imminent. The stock is off 50% year-to-date. That ignores the fact that Chicken Soup expects revenue to double. Then there’s the takeover play. The streaming video market is fragmented with several ad-supported services vying for consumers’ attention. That could spark consolidation in the market. Chicken Soup says it wants to be a player, making strategic buys. It may also be a target for a larger suitor looking to expand. If that were to happen shares could jump.

Ad-supported streaming looks like it’s the next iteration of cordless TV and Chicken Soup could become a major player. It doesn’t have major brand recognition in the space just yet but the RedBox acquisition certainly gives it a large footprint. Whether or not it is a hit remains to be seen.

Not Just a Storm Stock

Portfolio Power-Up

Strong storms are heartbreaking. They destroy everything in their path, knocking out power for millions. Just look at Ian’s destruction from earlier this week.

A lack of power might provide a tailwind for companies like Generac (GNRC). The Fortune 1000 company sells backup generators for residential, light commercial, and industrial markets. With that said, clouds are still hovering over its stock, which is down 50% so far this year. In fact, it is currently the 16th worst performer in the S&P 500.

That’s despite the fact it controls three-quarters of the US residential standby power generation market, which comprises roughly half of Generac’s revenue. The rest is derived from commercial and industrial customers, as well as its servicing businesses.

Although it’s down, some analysts don’t think it’s out.

California’s an Untapped Market

It's not only bad weather that drives sales at Generac, which are up 340% from 2012 through 2022. Power outages brought on by wildfires and under investments in state power grids are leaving people without electricity. In 2020, the average US electricity customer lost power for over eight hours. That’s up more than 100% from 2013.

Despite increasing power outages only 6% of households in the US own generators. If that increases by one percentage point alone, it represents an additional $2.5 billion in potential sales for Generac. California, which has been suffering from an increasing number of wildfires, is an untapped area for the company, with only 2.5% of homes equipped with backup power. In the Northeast where generators are more common, penetration rates stand at around 10% to 20%.

Investors Aren’t Electrified

Despite the potential, Wall Street doesn’t quite view Generac as a growth stock. Sales in 2022 are expected to be up 39% year-over-year but increase only 9.4% in 2023. That slowing growth has spooked investors sending the stock down. Value investors haven’t jumped in yet either, leaving shares of Generac languishing.

That may change soon, however. At the midpoint of 2021 shares were trading at 40 times next year’s earnings. Now they are trading at just 13 times. That could be low enough for bargain hunters looking to power up their portfolios.

A Museum Tours Business Scaled to $2.8M in Revenue Using Comedian Actors

Founder Nick Gray never used to be a museum person. He didn’t understand art and found museum tours boring.

That changed in 2011, when he went on a date with a woman who took him to a museum. That experience, Gray explained in a piece for Bench.co, was the motivation for starting his business, Museum Hack.

By 2019, Gray had expanded Museum Hack to five cities and 50 employees, with additional part-time guides to meet growing demand from businesses booking team-building events. The company was bringing in $2.8 million in revenue, Gray told They Got Acquired.

Click here to keep reading and sign-up for They Got Acquired, a newsletter that shares stories of companies that sell for $100,000 to $50 million.

Up For a Little Exploration?

Finding a Way to Play the Oil & Gas Market

Finding the next big thing in the oil and gas market is downright difficult these days. Everything oil and gas related has surged over the past two years amid record prices and robust demand. Finding a way to profit requires investors to think outside the box. One way to do that is to consider APA (APA), the small oil company operating out of Houston. Sure, it drills in Texas, but also in Europe and Egypt. In Egypt, it's the largest oil producer in the country.

APA isn’t stopping there. At a time when US rivals are limiting exploration, fearful of oversupply, APA is expanding. It's in the middle of an exploration project off the coast of South America.

APA Looks Beyond the US

To save money and reduce risk, most US oil companies drill in the eight US shale basins. That’s fine for now, but shale wells do eventually dry out, raising concerns about whether they can produce enough supply to last a decade or more. APA is an outlier. It has the means to produce over the long haul thanks to its investments outside the US.

It's also selling natural gas in Europe and Asia thanks to a deal with Cheniere Energy (LNG). APA is poised to add $750 million in free cash flow from the partnership in 2023, profiting from the spread between US and international oil prices. They’ve been at record highs due to Russia’s invasion of Ukraine.

Stock Oversold?

APA’s stock is up 27% year-to-date, which is a little pricier than its peers. Nonetheless at 3.8 times expected earnings for the next year APA is trading at a discount to the overall industry and the market. That’s largely due to its international exposure. Investors value offshore oil companies less than onshore oil companies.

The current stock price doesn’t include APA’s deal with Cheniere or its exploration in South America. Both could prove to be very lucrative for APA and its investors.

Finding a way to make money in an overheated area of the market is tough but not impossible. APA could be a worthy contender if its exploration bets pay off.

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security. Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing. The Street Sheet is reader-supported. When you buy through links on our site, we may earn an affiliate commission.