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Why our small companies fund is underweight the retail sector

It’s a tough time to be a retailer, what with increasing interest rates, fuel and energy costs putting a squeeze on consumer spending. And some retailers…



It’s a tough time to be a retailer, what with increasing interest rates, fuel and energy costs putting a squeeze on consumer spending. And some retailers are particularly adversely affected. Which is why investors need to be highly selective – especially when it comes to buying shares in consumer discretionary businesses.

Gary Rollo and Dominic Rose manage the Montgomery Small Companies Fund with an approach to managing risk I’ve not seen elsewhere. Using a bottom-up research-driven process to determine preferred holdings, they keep a vigilant eye on the ‘shape’ of the portfolio, adjusting holdings based on the idea of known knowns, and known unknowns.

At the moment the portfolio is overweight beaten-up stocks that might be characterized as ‘growth’ stocks and GARP (Growth at a Reasonable Price) companies.  It is also overweight companies investors might classify as Energy Security and Digital Infrastructure companies.

While success in the selection of stocks to be overweight is an important source of alpha, so is the selection of stocks to be underweight. On that front, old-world fund managers, which are found in the Financial sector are being eschewed. With the performance of agriculture arguably as good as it gets, stocks in this space are commanding a major underweight position in the portfolio. Meanwhile, rising rates have rendered REITS an underweight, while rising rates is also a reason for an underweight position in consumer discretionary stocks.

Consumer Discretionary is, of course, a broad sector and there are many players with different risk, sales and customer profiles. Vendors promoting large discretionary purchases (think Nick Scali, ASX:NCK) for example, may experience the current conditions differently to Lovisa (ASX:LOV), whose performance may prove more resilient thanks to a target customer that is employed but probably too young to have a mortgage and therefore less exposed to rising interest rates.

Figure 1. Australian retail trade nominal – monthly series

Source: ABS, Macquarie Research

Nevertheless, there’s an irrefutable cloud over the entire sector and it’s illustrated in Figure 1.  According to Macquarie Research’s analysis of ABS data, COVID and the associated lockdowns raised consumption levels dramatically above trend and therefore pulled-forward consumption from future years. Australian shoppers are estimated to have been overconsuming (above trend) to the tune of approximately 15 per cent. And according to Macquarie, in the Household Goods subsector, excess spending is 22 per cent. Moreover, domestic retail profits are estimated to be 64 per cent higher in 2023 versus the pre-COVID levels of 2019.

Meanwhile, the commencement of Reserve Bank interest rate rises is important because they will impact consumption already at an unsustainable level. 

A retail spending vacuum

The implication is consumption must return to trend and for that to be achieved a steep drop in consecutive rates of growth must occur. In other words, negative rates of consumption growth – even sharply negative – must be generated for consumption to return to long-term trend rates of growth.

But of course, that is only the case if consumption were to return to trend quickly.

A different and perhaps gentler return-to-trend picture may be evolving if recent CBA real-time spending data is considered.

Instead of the ‘cliff drop’ scenario proposed by some commentators, credit and debit card data from the CBA at the end of September revealed spending had plateaued, since March, at 1.3 times 2019 (pre-pandemic) levels. Taking inflation into account, the data suggests volumes might in fact be declining.

More recently, a cursory glance at CBA real-time debit card data (Figure 2.) suggests spending remains buoyant.

Figure 2. CBA real-time debit and credit card spending 28 October 2022

While the CBA’s internal credit and debit card spending data between March and September revealed a plateauing of spending, the data since, and to October 28, reveals spending remains elevated; however, a deeper dive shows non-retail card spending growth has edged higher recently due to rising utility bills. Meanwhile, retail card spending growth appears to have indeed plateaued.

But a false sense of a security may be garnered from this picture because of the delay in real-world impacts from the rate rises to date. Some analysts suggest consumers have only experienced 75 basis points of the 275 basis points of rises that have occurred since the RBA began raising rates in May 2022.

Additionally, the resumption of a 46.0 cents per litre fuel excise on 29 September 2022 acts like an additional tax on consumers, and don’t forget the jump in gas and electricity bills set to be imposed on householders this quarter.

Understandably, Gary and Dominic are underweighting the retail sector. That doesn’t mean a zero weight, but it does mean the small-cap market’s relatively heavier weighting to retail stocks.

As I mentioned, retailers will report a variety of experiences through the next few quarters depending on their customers’ sensitivity to rates, fuel and utilities. That explains why Gary and Dominic do retain selective exposure to the sector. Have you examined your holdings and asked similar questions?

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Top 3 commercial real estate REITs to avoid amid a triple whammy

Commercial real estate REITs have been under intense pressure as the industry faces a tripple whammy of high-interest rates, work-from-home, and white-collar…



Commercial real estate REITs have been under intense pressure as the industry faces a tripple whammy of high-interest rates, work-from-home, and white-collar layoffs. On Wednesday, the Fed decided to hike interest rates by 0.25% and signaled that more rate hikes were coming.

And recent data shows that the percentage of people working from home is still sharply higher than where it was during the pandemic. Worse, many large companies like Amazon, Salesforce, and Meta Platforms are laying off thousands of employees. 

Therefore, with debt maturities coming up, there are concerns that the industry will be in trouble for a while. Further, as I wrote in this article on the SCHD ETF, REITs are now competing with cash, with short-term bonds yielding over 5%. So, these are some of the top commercial real estate REITs to avoid during the sell-off. 

Boston Properties 

Boston Properties (NYSE: BXP) stock price has been in a strong sell-off in the past few months. It is trading at $49.63, which is about 63% below the highest level in 2022. This decline is mostly because of the cities where the company operates. 

It is mostly concentrated in places like New York, Los Angeles, San Francisco, and Seattle. These are some of the most troubled cities in the commercial real estate industry. In the most recent earnings statement, the company’s CEO said:

“Many of our clients are experiencing a slowdown in growth or reductions in top line revenue and as a result are focused on cost control including moderating headcount and space use.”

Therefore, in the near term, I suspect that the Boston Properties stock price will continue falling as investors embrace the new normal of high interest rates. In the long term, investors will likely buy the dip as the dividend yield become more attractive.

Kilroy Realty Corporation

Kilroy Realty Corporation’s (NYSE: KRC) stock price has also been in a freefall. It was trading at $29 on Wednesday, sharply lower than its 2022 high of $79. As a result, its forward dividend yield to 7%. 

The stock’s collapse is mostly because of the triple whammy facing the industry and the fact that billions of dollars are coming due. And like Boston Properties, the company’s operations are concentrated in high-risk cities like San Francisco, Seattle, and Austin. 

The only benefit for Kilroy is that it has staggered debt maturities, which meaning that it has more room to adjust its books. As a result, it has no debt maturities until December 2024, as the CEO noted:

“Net debt the fourth quarter annualized EBITDA remains about six times. And we have no debt maturities until December of 2024 and limited interest rate exposure with all of our debt fixed or subject to cap.”

Vordano Realty Trust

Vornado Realty Trust (NYSE: VNO) stock price has dropped lower than most commercial real estate trust stocks. It was trading at $13.80, down by over 72% from the highest point in 2022. This performance is mostly because Vornado is highly concentrated in New York, where occupancy rate remains low. 

Like Kilroy, Vornado has no maturities this year, with the next one coming in mid-2024. Still, because of its focus on New York, Vornado stock will likely continue falling in the near term. The other commercial REIT stock we recently recommended exiting was SL Green. It stock is down by over 10% since the article went live.

The post Top 3 commercial real estate REITs to avoid amid a triple whammy appeared first on Invezz.

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Cashless Society: Panera Bread Debuts “Frictionless” Palm Payment System

Cashless Society: Panera Bread Debuts "Frictionless" Palm Payment System

Amazon’s palm-reading payment technology was first introduced at…



Cashless Society: Panera Bread Debuts "Frictionless" Palm Payment System

Amazon's palm-reading payment technology was first introduced at numerous Whole Foods locations in California, enabling customers to pay for their groceries by scanning their palms at checkout terminals rather than using cash or a card. Now Panera Bread is experimenting with Amazon's cashless payment system as the war on cash marches on. 

On Wednesday, Panera Bread announced plans to roll out a "contactless payment method" to several stores with additional locations in the coming months. The bakery-cafe chain has over 2,000 locations, and its loyalty program has 52 million members. 

"Panera is the first national restaurant company to use Amazon One as both a way for guests to pay and access their loyalty account with their palm," the company said. 

"Our philosophy has been centered around leveraging best-in-class technology to create a better Panera experience and using that to deepen our relationship with our loyal guests. Introducing Amazon One, as a frictionless, personalized, and convenient service, is another way we're redefining the loyalty experience," Niren Chaudhary, CEO of Panera Bread and Panera Brands, stated.

At the moment, dozens of Whole Foods locations and Amazon Go stores have integrated Amazon One contactless payment

By summer, Panera Bread might have at least two dozen stores equipped with Amazon's contactless payment system, as reported by Panera's Chief Digital Officer George Hanson in an interview with CNBC.

"We think the payment plus loyalty identification is the secret sauce that can unlock a really personalized, warm and efficient experience for our guests in our cafes," Hanson said. 

The adoption of contactless payment systems by corporate giants like Amazon and Panera Bread, both known for their massive loyalty programs, seems to signal a shift towards a cashless society.

Recall the pivot toward a cashless society was clear as day. Perhaps the coin shortage during the pandemic was a pilot test. And anyone who dared mention a looming cashless society was deemed a 'conspiracy theorist.' 

Just remember who is also shaping the world and influencing corporations and politicians away from a cash economy:

... and the rollout of contactless payment comes just before the Federal Reserve is set to activate its digital dollar in July. 

Tyler Durden Wed, 03/22/2023 - 20:40

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In These Cities, Buying A House Is Cheaper Than A Condo

Data from Point2Homes shows that homes sell for less than 75% of the listed condos in Detroit.



Data from Point2Homes shows that homes sell for less than 75% of the listed condos in Detroit.

The “condo or home?” question has been causing debates and sometimes even fights for many generations. While some talk of the land and value one can get by going farther out, others will not give up their small nook in an exciting city for acres of land anywhere else.

When the location is the same, the logic of “more space will cost you more” is generally the standard — a larger house with a yard will logically cost more than a one-bedroom apartment.

DON’T MISS: 10 Places With Affordable Homes Where You'd Actually Want to Live

But according to numbers crunched by real estate platform Point2Homes, this tendency breaks in a number of U.S. cities. Houses sell for less than 75% of the listed condos in Detroit, 39% of listings in Ohio’s Akron and 36% of the listings in Cleveland.

You Can Buy Four Homes For The Price Of One Condo In This City

The reasons have to do with the fact that, in certain cities, single-family homes are generally older and more dilapidated than the condo towers built in the last decade.

Other cities where homes are generally cheaper than condos include Chicago, Pittsburgh and Jersey City.

“The biggest price difference is in Detroit, where a single-family home is $171,000 cheaper than a condo — although some houses here might need extra TLC,” write the report’s authors. “This cost difference means one could almost buy four detached homes for the median price of one condo.”

One city across the U.S. came out exactly tit for tat — in New York’s Rochester, the median price is $183,000 for both an apartment and a single-family home. 

Meanwhile, Washington’s Belleville and Killeen in Texas are the cities where homes are significantly more expensive — the former, which is a high-end suburb popular among high-earning Amazon  (AMZN) - Get Free Report workers from Seattle, commands a median $1.525 million for a home.

A condo, meanwhile, will only set one back $535,000.

This Is How Long It Takes Buyers With A Typical Income To Upsize

Point2Homes further broke down how long it would take people with a typical income to upsize from a condo to a house. In Rhode Island’s Providence, the difference between $334,000 and $331,000 would only take someone earning the median $60,970 a month’s salary to achieve.

This is significantly less feasible in Honolulu, which has seen an influx of high-earning professionals come in during the pandemic. With an average price of $1,198,000, a median home is 164% more expensive than a condo and would take a household earning a median income more than 10 years to close.

“Back on the mainland, California sets itself apart with the most cities where matching the upsizing price difference would take quite some time,” write the report’s authors. “Perhaps surprisingly, it would be easier in Los Angeles and Long Beach than in Irvine and Glendale, both secondary cities within the Los Angeles-Long Beach-Anaheim metro.”

Cities where the gap is easiest to close include Kansas City as well as Virginia’s Norfolk and New York’s Buffalo — in the latter, the difference is between $198,000 for a house and $188,000 for a condo.

“Cities where the gap is easiest to close include Kansas City as well as Virginia’s Norfolk and New York’s Buffalo,” writes the report.


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