Left Brain Thinking: Growth Rotates to Commodities, Retail

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. And today, well, we're discussing a market that's in the midst of rotation. It's kind of ending some opportunities but also creating new ones in places where growth investors might might not have been looking until now. Here to discuss it is Noland Langford. He's the chief executive at Left Brain Investment Research, and you can learn more about the firm and all its work at leftbrainir.com and on Twitter @leftbrainir. Noland Langford, great to chat with you again.

Hey, good afternoon, Chuck. That's always exciting to be, to be back on the show.

It's always exciting to be talking the market with you because you are looking for places where the market has a little bit of giddy-up. And what we're seeing right now is that things are changing. So how is that changing the opportunity set for you? I mean, as I hinted, it's got to be making you look at some things that, well, they haven't necessarily been off the radar screen, but they haven't been anywhere near the center of the radar for a while, right?

Absolutely. You're, you're seeing that all over the place with this rotation. And I agree, it's bringing up some ideas that we had had top of mind several years ago. Economic conditions are much different now. So you're right, we're starting to see the reappearance of some names, in a lot of cases much to our delight.

So let's talk about where you are going broadly first. What are the areas of the market where growth is being squeezed and you're saying, hey, it's— I can't find the horses fast enough? And what are the areas you're now finding those faster courses in?

That's a really good question. To remind listeners, you know, we're a fundamental shop primarily, but we're also a multi-factor shop. So we look at technically how shares are acting, and then there's some quantitative factors that we're looking at, a lot based off business momentum, primarily with earnings and sales and revenue growth. And our system that we use, our Securities Evaluation Application, Jarvis kicks us out things that we should look at every week, and we reviewed those, and there is a few areas that are coming up that continue to surprise us, both not only in their share performance, but also in the analyst upgrades for expectations for, for how they're doing. So a few areas that surprise us and are very interesting: retail. We spoke about retail earlier this year. It has continued to perform. There are some individual names that are not only getting the catalyst from people reentering society, there are a few names that we're looking at that are helping themselves right along. And we're just, I don't want to say surprised, but we're really impressed at how these businesses are performing. So retail will be one area that we've looked at. Another area that we're looking at with renewed interest is this area around inflation and commodities. And we're not speaking just oil, but a lot of these other natural resource areas where you see inflation sort of show up in either producer costs or consumer costs. You know, a lot of the share prices have moved up. And what we're trying to figure out is whether the supply-demand warrants it, given where we are in the economic reopening. And so those are two areas for us that really stand out.

In terms of retail, A, is it the online retailers or is this going back to bricks and mortar? And B, is this a play that is for you likely to be short-term as we see everybody, you know, get the pent-up, I'm done with COVID let me go spend, and that kind of works its way through? Is this a short-term thing or is this going to be a bit of a longer-term rotation?

It's a really good question. I think retailers were starting to come more to the view, maybe retail is starting to get their act together. You know, for so many years, it was online eating up offline. The sales and revenue, all of the sales growth and revenue growth was going to these internet-based retail shops that were really eating up people's trips to the mall and the margins at the mall. I think since COVID there's a few things that's happened that sort of reshaped that dynamic. One, I think retailers are starting to get really, really smart, right? And so a lot of these retailers, they have online access to buy their merchandise, just like the competitors online. But what they have in addition to is they also have an offline presence. So now they can use that offline presence to have consumers come back and have returns, or for warehousing or shipping merchandise. And that's part of it. They sort of, kind of figured this thing out that if a customer has an affinity for a certain retailer's merchandise, whether it's online or offline, maybe they give them a second look. So I think that's one thing that's happening. It's a capitalist society. Retailers are just sort of getting smarter about how they do things. I think the other thing that has happened, Chuck, is COVID now with the CDC mandate last week, more people are reentering society. We haven't gotten the all clear yet to go to the office, but clearly every place else we have, including the malls, restaurants, the schools, you name it. So I think a year, a year or so away with no new merchandise or threads, I think not only has styles changed, I think as people come out and they have more excess discretionary cash, I think they're going to want to improve their look. I think that also is driving retail. And I hate to say it, but it could be that some people now are starting to re-warm to the mall or in-person. You know, there's only so many experiences that you can have online where you order things, they don't fit, and you spend half a day trying to get them back. So I think that, that certainly could be part of it. And then there's this other tricky thing that I think these retailers are doing. I don't have any anecdotal evidence now, but clearly styles have changed. A lot of people like to come out, touch, feel their merchandise, and see it, particularly when you've been cooped up for a year and a half. But there's this other dynamic where the sizes have changed. So if you go to the mall and you haven't been in a while, and you're used to wearing a medium and you try on a medium, to your consternation, it probably won't fit. And in some retailers, the old medium is now a new small, but in other retailers, the old medium is now a large. So again, it forces you to really come in. So I think this may be— it'll be interesting how sustainable it is, but I think certainly retailers have smartened up.

I love how you're blaming the retailers for the weight that some of us have gained. And the clothing manufacturers for the fact that, hey, you know, it's COVID-19, you've been through it, you weigh 19 pounds more, your clothes don't fit the same, and it's because of that. But I do make the bigger point. I guess the last question here is, as you're looking at these things, when you're saying, okay, we're gonna make a rotation for you because you're looking for those fast growth opportunities, how many stocks, I mean, how many retailers are gonna fit your bill and be something that you actually add to the portfolio? How many of the commodities-driven companies? Because on the one hand, I get that there could be a bunch. And on the other hand, I know you want the best opportunities in any given spot. Even if there's a good growth opportunity, if it doesn't quite cut it or there's something better, you're looking for the fast horse.

Yeah, I would agree. I wouldn't say the fastest horse, but certainly the, the best thoroughbred in the field we can find. Run by the best jockey. That's what we're looking for. How long we stay with him depends on how long him or her keeps winning. And in retail right now, you're right, on our board this morning we have, uh, 3 or 4 names here that we're going to do a deep dive on that look really, really interesting, all with sort of a different story attached to them and a different catalyst but all in the retail sector that we expect to get better, where revenues are going up. We expect margins to go up. And because of that, valuations will likely expand as people get a hold of the story. So I don't want to lead you to believe it's our number one category, but it is something that has been showing up for months and weeks. We're starting to do work and we're starting to be believers. And we think that this reflation or this new attention to retail will probably be with us some time. At the very least through year-end.

And it'll be interesting to watch. And of course, if folks want to watch, they're going to get some new reports and more up at leftbrainir.com. Nolan, thanks so much for joining me to talk about it.

Thanks a lot, Chuck. You have a great week. I can't wait to be back with the listeners again.

Left Brain Thinking is a joint production of Left Brain Investment Research and MoneyLife with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my hour-long weekday podcast at moneylifeshow.com. Thanks to my guest, Nolan Langford, chief executive at Left Brain Investment Research. Learn more about the firm and its analysis and find out about those retailers and commodity-driven stocks we've been talking about at leftbrainir.com. They're on Twitter @leftbrainir. Left Brain Thinking is available every Wednesday. Please subscribe on your favorite podcast app and plan to put your left brain thinking cap on every week. Until next Wednesday, stay safe, everybody.