Results just reported were surprisingly strong, with the stock up by about 14% in response as I’m writing this.

Several thoughts:

–TGT shares are still almost 40% below their pandemic highs (despite being up by 60% from last September’s lows), while Walmart’s (WMT) are about 50% higher today than at their covid peak

–for a long time my suspicion has been that TGT’s post-pandemic excess inventory problem was larger (maybe a lot larger) than the company cared to admit. Saying so, however, would doubtless have made disposal much more difficult. I take the latest results as a sign that this problem is in the rear view mirror and that business is finally beginning to recover from the pandemic days

–a simple trading rule over the past few decades would have been to own WMT during bad times and TGT during good, following the flow of customers trading down in recession and back up during recovery. There’s still something to this, I think, even though I’m impressed by what I see as a new energy from WMT management (note: I own both TGT and WMT shares). It will be interesting to watch the performance differential from now on

I’ve owned shares of Casey’s General Stores (CASY), a domestic operator of gas stations with convenience stores, for a long time. My initial idea was that for the big oil conglomerates, this part of their business was an afterthought. Not a good afterthought, either. It was/is a mature business, so it’s not glamorous and certainly not a path to top management Having the conglomerate name on the station also makes it a bigger target for consumer anger when oil prices are high.

So consolidation by smart operators in a mature, fragmenting industry was my initial idea.

A while ago, I started thinking that independent gas station chains also have a chance to redefine themselves as the go-to places to charge your EV–something I suspect the big oil companies should also do, but will be loathe to, especially in the US. In fact, Marathon Oil sold its Roadway chain to Seven & i in 2021.

Seven & i

Seven & i was originally a moderately-priced, forward-thinking (for Japan, anyway) domestic retailer who bought the 7-Eleven franchise for Japan, which it turned into the largest and most successful of the “conbini” convenience store chains there. Ultimately, it acquired the failing US parent, as well–and began to reinvigorate and expand it.

Seven & i has been under attack by foreign investors who want the company to break itself up, on the standard idea that the sum of the individual parts will far exceed the market cap of the whole.

To complicate matters, Alimentation Couche-Tard (ATD.TO), the second-largest operator of convenience stores in North America (the Circle K brand), has just made a bid to buy Seven & i, presumably to keep the North American assets and sell off the rest.

my take

Wall Street seems to me to be viewing this as consolidation aimed at retaining critical mass that’s typical in a declining industry. I think that’s right, as far as it goes. I think it’s also possible, though, that operators view their locations as having a second life as EV charging stations.

Walmart (WMT) reported better than expected earnings this morning and upped its guidance for the full year. The stock, which I own, is up by about 7% as I’m writing this.

My overall take is that this is good news/bad news for the US economy. Good news, in that WMT is doing well, bad news in that we don’t appear to be seeing the upcycle rotation away from discounters toward more expensive retailers that typically happens when the economy gathers steam.

Part of the good news is WMT-specific, I think. Its online business is strong, as is ordering groceries for store pickup. My impression (a potentially dangerous thing to base an investment on) is that they’re a lot nicer–cleaner, brighter, friendlier employees–than I remember from, say, ten years ago. So it is arguably able to hold onto customers who traded down during the pandemic.

At the same time, we are beginning to see a slowdown in industrial capacity additions in the US. Firms seem to have decided to wait for the election results in November before committing more capital here. In the dystopia Trump has sketched out–The Handmaid’s Tale meets 1990s Japan, with a dose of apartheid–it would likely be much better to have operations in Canada or Mexico. Presumably, too, the government incentives for domestic investment now in place would be ended.

I was reading a Morningstar article this morning that compiled the common elements in a number of well-managed successful US equity portfolios. The top holdings by weight, on the list are:

Microsoft

Nvidia

Amazon

Alphabet

Apple.

This isn’t exactly a surprise. The position of the top names in the S&P 500 and their weight as a percent of the total market cap of the index are as follows:

Apple 7.0%

Microsoft 6.7%

Nvidia 6.3%

Alphabet (A+C) 3.9%

Amazon 3.4%.

Together the five make up 27.3% of the index.

Because of this huge weighting, how you deal with these five names is probably going to be the most important decision you make as a PM. If not #1, it’s certainly in the top five.

Possibilities:

–one position would be to have more than the index weighting in each of the names. That’s probably the most aggressive stance.

–another would be to neutralize them in the portfolio, that is, to hold the market weighting in each name, with the idea that you don’t have a strong opinion on the merits and just don’t want to be hurt by having one or more at a non-index weight. Nevertheless, even though they won’t be a source of outperformance (the idea, after all is to ensure they won’t generate underperformance) you’ll own them.

–a third would be that you don’t think any of them will outperform. So you underweight each. You know that if you go to zero on each and are wrong, virtually nothing you can do elsewhere will make up for this mistake. So maybe you reduce each to 75% of the index weight and shift the 7% cash you’ve raised to, say, overweight the utility sector. The point here is that the names still show up in the portfolio holdings.

–a variation on the ideas above would be to have the total weighting of the five stocks at a specified level (the simplest would be at a total of 27.3%) but have the individual stock weightings different from the index level. One or two of the five might even be zero–implying the others would be overweights.

The general point, though, is that virtually every professional with the S&P 500 as a benchmark will own most or all of the top five. The crucial piece of evidence–missing from the article–is the overweight/underweight stance of the managers.

Earnings reports that I’m reading are signaling that, in the US at least, the post-pandemic splurge on big ticket items like vacations is slowing. Whether this is due to people running out of money or the Fed’s restrictive money policy probably makes no difference. Arguably, the collapse of the yen carry trade is not simply the result of rising interest rates in Japan but also the sense that rates in the US are on the cusp of decline. If we assume, as we should, that fixed income is the main investment substitute for equities, we can anticipate two effects on stock prices: the market PE should rise and consensus earnings estimates for companies heavily dependent on US consumer spending should contract.

The result of this will likely be a continuation of the market rotation away from the worst-affected consumer cyclicals–like hotels, restaurants, vacation destinations–and into more stable growth or non-consumer areas.

I’ve been driving around in eastern Pennsylvania doing my usual photography work. I stopped in a Wegmans and bought an old-fashioned Charleston Chew candy bar a couple of weeks ago. The price last year was $1.20. It’s now $2.00–and although the packaging is the same, the bar inside is maybe 20% smaller. Around the same time, I was in a Weis supermarket (a wise choice, that company says). I bought a box of Good n Plenty that I expected would contain candy-coated licorice. Lots of sugar and corn syrup, but less than 2% licorice. This pales in comparison with the $16 billion in US income tax Coca Cola is supposed to have avoided over the years through recognizing profits in low-tax jurisdictions. All signs of demand weakness, in my view.

Super Micro Computer (SMCI). Certainly one of the worst pieces of analysis I’ve done in a long time. A nephew pointed it out to me last year. I read the financials and went through the website. I wasn’t impressed. I thought of the competition among box makers during the early days of the PC and figured we’d see a repeat now. What I didn’t know is at that time the only way to get Nvidia AI chips was by buying SMCI boxes. The stock quadrupled within six months, far outpacing NVDA’s double over the same span.

Since then, SMCI has lost 60% of it’s value, however, and NVDA is ~+30%, meaning NVDA has now outpaced SMCI on a 12 month view. What happened? Remember, I’m the dumb money here, but as I see it, NVDA decided it needed a second source to distribute its AI systems. It announced a wide-ranging partnership with Dell in May, which removed the halo around SCMI. This doesn’t make me less wrong about SMCI last year. What it does underline, though, is that the overall chip-making space is very competitive, where competitive advantage can be a fleeting thing. So buy-and-hold isn’t a great strategy.