Market on Tuesday, 10 Aug 2021

The broader markets were trading higher heading into the last hour of the session Tuesday, although the major indices were mixed with the tech-heavy Nasdaq sagging a bit as investors looked to get back into some of the more cyclically oriented pockets of the market.

The clear winners of the day were industrials stocks that benefit from the bipartisan $1 trillion infrastructure bill. Our card, Nucor, was up more than 9% today, trading at all time high. Also other economically sensitive sectors like the financials that tend to go up when interest rates rise.

Retail was also a standout. Walmart (WMT) caught some love after analysts at Bank of America said investors should buy the stock ahead of five catalysts for the second half of the year. The five catalysts were:

1. A strong sales and earnings per share in the second quarter

2. Potential upside in the third quarter driven by the back-to-school shopping season and continued general merchandise strength

3. Walmart regaining share in grocery (we thought this was a big sticking point the last time the company reported)

4. Walmart U.S. sales growth outpacing Amazon's (AMZN) total "online stores" growth

5. And improving visibility into the company's alternative profit streams, like in healthcare, insurance, and other areas.

With the company set to report second-quarter earnings next Tuesday, August 17th, we should know pretty quickly if the stock's recent move from the low $140s to now approaching $150 is the start of something bigger, or simply a head fake.

Patience is key

Let's talk about the patience virtue here. We have been trading around NUE: we had a position in NUE in March at average 80$ cost basis, we realized big gains in May in the 110$, then the stock pulled back to the low 100$, at which point we bought a smaller position again. It came down to the low 90$ in July, but we remained very confident about the steel cycle. Today Nucor trades at all time high, and our position is up more than 10%.

Walmart has the same story. We had been very frustrated with the fact that Walmart had been underperforming its retailer peers like Costco, Target or Dollar General. At the same time, we were optimistic, as we thought underperformance will eventually equate to opportunity, as the bull market will finally come to love stocks that have not been up. Indeed, our position in WMT has been up 6%, and we believe the gain is not near over yet. 

Coming back to stocks

We also think it is still not too late to be buyers of American Eagle Outfitters (AEO) , even with the stock up more than 4% today. We know that AEO has been a wild stock of late, susceptible to big moves to both the upside and downside. We understand how its volatility has tested the club's patience, but we are sticking with the stock because nothing has changed to our positive fundamental outlook. And the valuation screens cheap at roughly 16.5x earnings estimates that are probably too low plus a 2% dividend yield.

One reason why we think earnings will come in better than expected is the fact that this apparel company should be one of the biggest back-to-school shopping season winners. American Eagle has plenty of exposure to wardrobe upgrading categories such as denim, and the strong momentum at its Aerie brand is only expected to continue. Additionally, recent research from Barclays suggests that AEO has been able to sell its merchandise without being promotional. American Eagle Outfitter's ability to sell merchandise at fuller prices should lead to better margins and higher earnings.