Feed the Tree

I knew going in I’d likely be pretty lousy at writing on a regular schedule. Hence the name, and the reason I wouldn’t dream of charging you. But even I’m surprised at how little I’ve written of late. In my defense, I’ve been distracted trying to work out some non-stock stuff on the Gulf Coast (one of these days I am going to write 6,000 words on the disfunction caused by the vertical integration of the forestry industry), but I have no excuse.

I’ll do better. And I have exciting news coming soon that will address one of the primary complaints I hear from you about this newsletter. Coming soon. Sooner than recent history would suggest.

It’s particularly bad that I’ve skipped through earnings season, which should be a busy time around here. But I’ll be honest: This has been a pretty unremarkable earnings season. When I started this, I said Fits and Starts would be “an ongoing conversation with myself” about the markets and what is going on in the world. And although the hot take merchants on CNBC might scream otherwise, the current market is pretty run-of-the-mill boring. There isn’t much of a day-to-day conversation to have.

Last year we were treated to the well-manicured nonsense about a coming nirvana where the Fed is forced to rapidly crash interest rates, yet the economy was booming. Then there was the bliss and harmony of the so-called soft landing. Both missed the point. The Fed was never going to crash rates the way some had predicted (and please don’t mistake the futures markets as prediction markets, futures serve hedging purposes that make them terrible at predicting). And a soft landing is not pure bliss.

Right now, the lower to middle class is hurting. They’ve hurt worse, and things are not a disaster, but they are hurting. The upper middle class by in large is still doing fine. But even there, data suggests the “YOLO spend whatever and spend it NOW because there could be a global pandemic tomorrow!” is over. They are thinking a little less about today, and more about tomorrow. They haven’t hit the brakes, but they are not tapping the gas as often.

This is the soft landing everyone is talking about. It is the current upper middle-class vibe, and they are the ones on CNBC and talking to the people on CNBC. Their consensus is the consensus.

To keep the analogy going, you can still end up in a ditch even if you decelerate somewhat. There are huge number of potential destinations from here, from good through ok to not good. (I don’t see either extreme, great or disaster, in the near-term). And none of us have a clue where we end up. This is the lull. And anyone who tells you otherwise is trying to sell you something. We wait and see. It is all we can do.

But that’s not to say nothing interesting happened in earnings season. Let’s briefly hit on a few favorites who had a rough time this quarter.

I’ve said repeatedly on here that General Dynamics is my favorite name among defense primes for 2024. So, of course, General Dynamics went and delivered an earnings miss. The stock fell about 5% on the news. (I’ll note it is now well-above where it was pre-earnings, which is the problem I have with writing earnings quick reactions in the first place. But here we are.)

Here’s what happened: GD’s defense businesses are fine. Their subs, and especially the Columbia-class program, are one of the rare things that is not facing the knife from the Navy. Land equipment will need a major refresh across Europe post-Ukraine. The wild card is the Gulfstream biz jet business. It has been an albatross over the past decade. The bull thesis is that it is time for the biz jet cycle to turn. Gulfstream has a pretty new jet to sell into this wave.

Or at least it will. The story of the quarter is that the G700, the pretty new jet, was not certified as quickly as we all had hoped. That’s not really their fault. The FAA just revamped the certification process, which caused the hoped for “around year-end” timeframe to fall into March. Or just about the end of the quarter. So, Gulfstream’s deliveries were a lot weaker than expected. The G700 is now certified and flying. But the first lot of 20 planes or so carried some of the R&D work and therefore lower margins. We’re now looking at the profit surge coming in the second half of 2024. No reason to hit the panic button.

On to Kinsale, the little insurance company who (usually) could. That stock lost about one-fifth of its value after reporting results that beat expectations. Huh?

If it feels like we’ve had this conversation before, it is because we have. The same thing happened last Fall. And the answer is the same. Kinsale is a great business. Insuring axe throwing venues and other silly things is immensely profitable if done well, and the data indicates that Kinsale does it better than anyone.

But the valuation is silly. Insurance companies valued at 9x book need to invent a perpetual growth machine to justify that valuation. And Kinsale management itself has been screaming from the rooftops for a while now “WE CAN’T KEEP GROWING LIKE THIS!!!” Yet guidance that suggests management is actually being serious, and silly growth levels are unsustainable, inevitably rattles investors.

Make no mistake: Kinsale remains on a path to be a much larger company over time. Sure, things could go wrong. But I continue to be a content owner with a cost basis well below the current valuation. If the market freakout continues perhaps one day I’ll buy again. But with some companies, even really really good companies, being neither a buyer nor a seller is the best way to be.

Without actually boring you with my 6,000-word treatise on forestry, I will say one of the biggest issues with forestry is that the trees take so damn long to grow. You plant them, you fertilize them, you take care of the soil around them, and you still consider yourself lucky if your loblolly grows more than two or three feet each year. (And that rate is considered rapid in this business!)

At the end of the day, all you can do is wait. That’s true if you are standing in a grove in Livingston Parish. It is true if you are a stock investor or a macro watcher.

It doesn’t make for great content generation, but it is the way things work.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.