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The Coachman's Report - One step forward, two steps back!

Well folks, markets posted their worst day in a while yesterday with the S&P 500 recording a 4% loss by close while we provided you with an in-depth update on the situation in Ukraine (Quick FYI, all Wednesday reports going forward will include a geopolitical/economic update). Today, we return to the conventional Coachman’s Report format with an added section on the state of commodity markets - keep reading for some targeted, event-driven trades to beat the unsystematic risk of this largely red market!


“The law speaks too softly to be heard amidst the din of arms.”

- Gaius Marius


Market Talk

Well well well, yesterday was a moment of reckoning for the industry essentially thought to have been price-gouging throughout the pandemic - consumer staples fell like they never have before, will Target, Amazon and Walmart respectively dropping 25%, 8% & 7% through the trading day. This dragged the consumer discretionary sector index within the S&P 500 down 6.6% by close - outstripping the S&P 500’s 4% drop. Overall, this spiked volatility just under 20% for the day, with the VIX rising to 30.96…interestingly enough, despite the risk-off environment yesterday, flows into fixed income did not match the extent of the equity sell-off as the US 10-year yield receded less than a bp by bond market close; other safe-haven assets in the form of gold remained mainly unchanged to just a bit higher, keep reading for an in-depth commentary on the current state of commodities.


Commodities (& Reco)

Starting off with energy (because how can you not right now?) a majority of contracts traded lower this week except for one - nat gas, which has been rallying 136% since the start of the year and is up 4% today alone. That said, while futures are holding at this level, long-term forecasts into 2023 predict a return to the $4/BTU level. Shifting sights, while agricultural commodities are largely mixed, livestock is a clear winner being led by Lean Hog varieties - Softs would be a close second with both Sugar and Coffee trading up 1-2%. While many ags and energies have already rallied, there may still be some room to experience upside within the metals markets, specifically, within non-precious base metals. Out of this segment, copper presents some decent upside catalysts, especially given its fall from the $5 dollar level and wide-ranging uses; we’ll make a copper producer recommendation within the coming days.


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Long: Target ($TGT-NYSE) | Timeline: 2-10 Days

An overreaction by the market provides a unique buying opportunity to investors searching for a (usually) stable company, well-poised to perform well during the coming months. The massive 25% drop seen during Wednesday’s trading session was brought on after Target missed out on adjusted EPS, reporting $2.19 with an analyst expected $3.69. The company management has stated that this was due in part to rising fuel, inventory and labour costs. While none of those factors look like they will improve in the near term, Target is in a great position to benefit from the ongoing fears of a broader recession across the US. As inflation persists, and gas prices soar, many folks have been searching for new ways to pinch pennies as purchasing power plummets. As such low budget/discount stores will be a more attractive, if not the only option for everyday Americans.

Tuesday’s price action is reminiscent of Netflix’s sudden drop earlier this year, however, the two businesses couldn’t be more unlike each other. Netflix was a high-growth company with an inflated P/E ratio, that stalled on growth expectations and eventually a decline in users. Target is a brick-and-mortar staple with a conservative P/E of 11.46, far below the S&P average P/E ratio of 19.83. Even when looking at direct peers such as Walmart, P/E of 25.14, and Costco, P/E of 34.6, which also both fell significantly during Wednesday’s trading session, Target seems undervalued in comparison. In terms of timing, a savvy investor would consider making this trade later in the day, as oftentimes sudden and severe negative price action can continue into the proceeding trading session. At the end of the day, I see this as a buying opportunity as people will cancel their Netflix subscriptions, cut down on Uber rides, and cut back on dining out, much sooner than they will stop their purchasing of relatively low-cost food and home essentials.


Short: LXP Industrial Trust (LXP:NYSE) | Timeline: 7-10 days

Lexington Realty Trust (LXP) is a publicly-traded real estate investment trust (REIT) that owns a portfolio of real estate assets consisting primarily of investments in single-tenant net-leased industrial properties across the United States. Announced in an official press release, LXP is no longer evaluating "strategic alternatives” as expressed concern towards "significant changes to macroeconomic, geopolitical, and financing conditions” - a red flag for investors as the company is unsure as to whether or not they will be able to navigate this turbulent market. Taking a look at the chart, the most significant pattern is the death cross that has recently occurred as this stock establishes itself in a down-trend. The catalyst? A 20% gap-down - is very scary for investors as sentiment has shifted negative since then. The RSI has also dropped to oversold levels since the gap down and is still pointed downwards as a rebound doesn’t seem to be in the playbook for this stock anytime soon.


Chart of the Day: Key Federal Reserve Personnel Through The Ages

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