🚜 John Deere: Farming Long-Term Returns

Happy Sunday! (Unless you were short Gamestop 😬)

This week we’ve got a recap of the short-lived meme stock rally, a glimpse at the FTX bankruptcy proceedings, and an inside look at the world’s largest agricultural technology giant.

Let’s get to it.

News Roundup

🏦 FTX Customers Made Whole? Remember a couple years back when one of the world’s largest crypto exchanges declared bankruptcy and customers could no longer access their money? Well, turns out they found some spare change laying around. Not literally, but by selling off some of the investments that FTX made with customer deposits, FTX was able to recover quite a bit of money.

As a part of the bankruptcy proceeding, FTX customers will receive 118 cents for every dollar they held on the platform. In other words, they get their money back plus interest! Not too bad, right? Well there’s one catch. Anyone who was holding crypto in their FTX account will receive their money back based on the value of the crypto at that time (plus a little extra). For example, if someone was holding 1 bitcoin, they will receive ~$20k. Meanwhile, if they had been able to hold that Bitcoin over the last couple of years, the value of that Bitcoin would stand at ~$67k today. Nevertheless, the fact that they’re salvaging anything after this whole debacle is probably seen as positive news for most FTX customers.

🕹️ Return of the Meme Stocks: After 3 years of silence on Twitter, Keith Gill (aka Roaring Kitty) posted an image that sent several stocks soaring. Gill, who was at the epicenter of the original meme stock rally in 2021, posted an animated picture of a gamer leaning forward in his chair as if to express that he’s getting serious. The world of meme stock investors apparently took this as their rallying cry because Gamestop (NYSE: GME) stock closed up 60% on Monday. While there’s still plenty of volatility day to day in stocks like Gamestop, AMC, and Blackberry, the rally seems to have been short lived as each has retraced most of their games. To capitalize on the rapid price increase, Gamestop management announced that they will be selling 45 million additional shares in an at-the-market offering.

💻 Squarespace is going private: Drag-and-drop website builder Squarespace announced this week that it will be accepting a buyout offer from private equity group Permira. The offer was for $6.9 billion, or $44 per share, which was a ~15% premium to where the stock was trading the day before the announcement. While this might seem like a win for recent shareholders, the takeout price is still below the $50 per share pricetag that Squarespace went public at in 2021.

Quick Hits Earnings:

• Home Depot: The world’s largest home improvement chain delivered its 1st quarter results this week which came in below analysts expectations. With higher interest rates pushing many people to postpone their home improvement projects, transaction volume continues to decline for Home Depot. However, despite posting negative comp store sales for the 6th quarter in a row, Home Depot’s management team reiterated their full-year expectations of growing revenue by 1%. Home Depot’s stock was down 1% this week.

• Walmart: The leading retailer in the US by revenue reported 1st quarter results that topped Wall Street’s estimates. Walmart delivered $161.5 billion in sales, which was up 6% versus a year ago and $6.8 billion in operating income, up 10% YoY. Given the company’s size, analysts often looks to Walmart as an important indicator for US consumers broadly. This quarter, Walmart CFO John Rainey stated “We’ve got customers coming to us more frequently than they have before and newer customers that we haven’t traditionally had” indicating that more and more customers are seeking value as their wallets continue to be stretched. Walmart’s stock was up 7% this week.

• Alibaba: China’s 2nd largest tech company by market cap delivered better than expected revenue for its fiscal 4th quarter but underwhelmed on its profit numbers. The leading Chinese retailer delivered $31 billion in revenue for the quarter which is a 7% increase from the same time last year, but increased investments in its e-commerce business led to a 3% year over year decline in operating income. Alibaba’s stock dropped 7% after the report but has since recovered. Still, long-term shareholders of Alibaba are likely disappointed with the returns thus far. Despite increasing its revenue more than 20-fold since coming public, Alibaba’s stock is still down 5% from its IPO price.

Partner Spotlight: Best Anchor Stocks

Deere: Cultivating Technology

“In the past, we would rely on planting more acres, increasing horsepower, and applying more nutrients. In short, we could always do more with more. However, today, in agriculture, we must do more with less, and our ambition at John Deere is to help our customers do exactly that.”

- John May, John Deere’s CEO, during the most recent investor day

At first sight, Deere might seem like a low-growth, boring company, but the company is currently in the midst of a transition that will not only bring faster growth but also a transition to higher quality and more recurring profits.

Here’s a glimpse at my investment thesis in short:

1.) Deere is becoming a better business

Deere is transitioning from just selling equipment, maintenance, and parts to selling solutions that will be monetized through a recurring revenue model. This will have a profound impact on the company’s quality and cyclicality.

“We are confident in our ability to produce higher levels of returns through the cycle while dampening the variability in our performance over time. This will lead to higher highs and higher lows for our business.”

Josh Jepsen, Deere’s CFO during the 2023 call

2.) A durable and growing business

Few things are more durable than feeding the population, and I believe most of Deere’s industries will enjoy long-term secular tailwinds. Deere has been around for almost 200 years, and I don’t foresee a scenario where the company is not with us for much longer. In my opinion, the company has a high terminal value and is poised to benefit from the technological trend thanks to its installed base.

3.) A very strong moat and an aligned management team

Deere has a very strong moat and an aligned management team. These characteristics significantly reduce the variability of future outcomes and terminal risks. It’s a sleepwell investment for me, irrespective of the cycle.

4.) A reasonable valuation

Deere is a cyclical company, which makes valuation a dangerous topic. Cyclicals tend to appear cheap at cycle peaks and expensive at cycle troughs, and Deere right now looks optically cheap. The company is currently trading at a forward P/E of 14, and a trailing P/E of 11 as sales and profits will most likely drop this year.

To see the full article from Best Anchor Stocks, click the button below.

Product Update

FinChat v3🚀 

A little under a month ago, the team at FinChat launched v3.

This update included some massive improvements to the stock research platform you already know and love. Here are a few of upgrades:

• FinChat Copilot (Completely revamped FinChat’s conversational AI)

• New Charting Features (Improved Exporting and enhanced UX/UI)

• FinChat Notepad

• FinChat Enterprise

This week, our CEO Braden Dennis and Growth & Content Lead Ryan Henderson, recorded a quick 15 minute tutorial highlighting all the biggest improvements.

Meme of The Week

For anyone who was shorting stocks in 2021, this week may have brought back some painful memories.

Keith Gill’s (Roaring Kitty) tweet on Monday sent stocks soaring in a way that was reminiscent of the original meme stock rally of 2021 which caught many short sellers by surprise.

Bronte Capital Chief Investment Officer John Hempton once characterized the 2021 investment environment as: “It was like shooting fish in a barrel, but the fish started shooting back”.

This week was yet another cautionary reminder that shorting stocks can be a risky endeavor, even on the most struggling businesses.