Housing-related stocks have been significant outperformers this year, largely driven by declining mortgage rates. While we don’t see that much room for continued declines in U.S. longer-term yields, our sense is that incoming data on the U.S. housing market will continue to surprise to the upside through this summer. By way of example, we’ve seen shorter-term positive trends in some of our other housing forward indicators, including the NAHB index and mortgage applications.
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Each month, we publish our favorite long idea stock screens. They encompass many investment styles and themes including value, growth, capital creation, cash usage, corporate actions, dividends, and financial institutions.
Despite last week’s market resilience, we remain tactically cautious, given that (1) renewed trade concerns are likely to extend the ‘soft patch’ well into the summer; and (2) by the time trade deal tailwinds start to impact incoming data, investor focus will most likely have shifted to central bankers becoming incrementally tighter. As such, we remain tactically cautious, but constructive over the intermediate term. In this note, we outline the seven key metrics we’re watching to recommend taking up risk exposures once again, with a U.S.-China trade deal being most important.
This morning (5/17/19), we published a detailed report on Corteva (CTVA), which will be spun-off by DowDuPont (DWDP) [Market Cap of ~$69.2 bn] on June 1st. Corteva is the agriculture division of DowDuPont that produces germplasm, seed traits, crop protection, and other digital services to 10 million customers around the world. It is the product of the merger of DuPont Pioneer, Dow AgroSciences and DuPont Crop Protection businesses. By segment, seeds comprise 55% of sales with crop protection the remainder. Corteva has multiple levers for growing above market given its proprietary biotechnology offered through its seeds and crop protection platforms, which farmers remain significantly invested in to drive higher yields, its #1 positions in corn and soybean, and margin expansion through significant merger cost synergies (cumulative ~$1.2 bn expected by 2021).
Corteva (CTVA) is the agricultural division of DowDuPont (DWDP) [Market Cap of ~ $69.2 bn] and is the product of the merger of DuPont Pioneer, Dow AgroSciences and DuPont Crop Protection businesses. On June 1st, DowDuPont is expected to spin-off Corteva to stockholders of record as of the close of business on May 24th with regular way trading starting on June 3rd. The distribution ratio will be one share of Corteva common stock for every three shares of DowDuPont common stock. Corteva when-issued trading should begin on May 24th. While not publicly traded yet, based on our research, if we assume CTVA trades between 11x and 12x our $2.3bn estimated 2019 EBITDA, this suggests a ~market cap. between $22 and $24 billion. In this note, we summarize the Corteva investment thesis, business overview, financials, and valuation.
From a longer-term perspective, we continue to monitor potential ‘bubbles’ that could turn an ordinary recession into a full-blown crisis. Along this vein, we’re increasingly concerned about corporate leverage, which is now at all-time highs. More specifically, with nearly 50% of the investment grade universe rated only one notch above junk, we believe that many companies have experienced ‘grade inflation’ because their recent performance has been propped up by solid economic growth and low interest rates.
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