UPDATE

🌤️ Happy Tuesday

Good morning; we hope you had a great Monday to start the week.

We have been hard at work the last couple of weeks using updated calculations and metrics to shine a light on less-known stocks. Bringing you a watchlist in addition to finance news is one of the reasons we started this newsletter, and we're happy to have a solid watchlist this week.

Read time: 6 minutes

WEEK IN REVIEW

📈 Market Performance

New York Stock Exchange by Supermac1961, via flickr

From last Tuesday's market opening to yesterday's market close, the S&P as a whole increased by around 1.58%. Notably, there were two instances where the index crossed above the 4,200 point mark: once on Friday and once on Monday.

• As of Monday's market close, the index sits at 4,192.63 points. Although the increase to 4,200 points didn't hold, the index overall sits at a value higher than last week.

• Though small, any gains in the S&P are a welcome sign. Discussions between President Biden and Congress about raising the debt ceiling are likely a leading cause for the slower-than-usual growth as investors are wary of making big moves. (Source: Reuters)

🏰 Campus Cancellation

Disney announced that it would no longer be building its planned Florida campus, which was to be located in the town of Lake Nona. The reversal of the $900 million corporate campus is the latest in an ongoing feud between the company and Florida Governor Ron DeSantis. (Source: WSJ)

💼 Dimon to Stay On, as Others Depart

Despite several other lead executives in the finance space announcing their departures or eventual retirements, JP Morgan CEO Jamie Dimon, 67, made clear he doesn't plan to retire soon.

• He noted, however, that he is aware that he won't be able to lead the largest U.S. Bank forever, but that he is still working at the same intensity he always has been. (Source: Bloomberg)

WEEKLY WATCHLIST

📆 Short Term Swings

For this week, the two stocks on our watchlist aren’t related by industry, but both have potential short-term opportunities that investors may pick up on. 

As we’ll explore, earnings reports and general season changes can briefly decrease the stock price, prompting investors to pick up shares at a discounted price before the stock recovers.

STOCK #1

PayPal Holdings Inc (PYPL)

We reported on PayPal a few weeks ago, however, recent swings in the share price have gained our attention once again. Despite beating the revenue and EPS estimates during May’s earnings season, PYPL stock saw a substantial drop after the company detailed its operating margins.

From May 8 (when the company’s earnings were reported) to Monday’s market close, the stock price dropped around 16.5%. This dip in the share price of a company that is otherwise highly valued has caused many value investors to buy up discounted shares. (Source: Silicon Valley Business Journals)

PYPL (6-month), via Google Finance

✅ Increasing cash flows: PayPal’s free cash flows have been steadily increasing since 2012. This is a great sign for classical value investors.

🛑 No dividend: PayPal does not currently pay a dividend to shareholders.

✅ Undervalued according to DCF: Based on our discounted cash flow model, a single PYPL stock at Monday’s market close price of $63.03 is between 22-25% undervalued.

✅ Low debt: Of the total Enterprise Value (EV) of PayPal, debt is approximately 13% (10.42B) compared to a market cap of 87% (70.32B).

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STOCK #2

Cedar Fair (FUN)

Cedar Fair is a company that owns and manages amusement parks across the country. In addition, the company manages a roster of waterparks including the popular Texas waterparks, Schlitterbahn Galveston and New Braunfels.

• Because families with children frequently visit waterparks, visits increase during summer, spring break, or other times when schools are likely off.

As schools start letting out for this summer, families are likely to plan visits to the various Cedar Fair parks which, historically, increases the stock price during those times of the year. As shown below, the stock price increased during July 2022 and March 2023 (summer and spring break, respectively).

FUN (1-year), via Google Finance

⚠️ Unmoving cash flows: For the past 10 years, Cedar Fair’s free cash flows have stayed constant except for a COVID drop and quick recovery.

✅ Solid dividend: With a 2.68% dividend yield, Cedar Fair pays out a decent dividend to shareholders every quarter.

✅ Undervalued according to DCF: According to our discounted cash flow model, a single FUN stock at Monday’s market close price of $44.81 is around 20% undervalued.

🛑 Higher debt: Of the total Enterprise Value (EV) of Cedar Fair, debt is approximately 50% (2.3B) compared to a market cap of 50% (2.3B).

MARK IT. EXPLAINED

💵 Tackling T-Bonds

Secretary Janet Yellen by International Monetary Fund, via flickr

As President Biden and Congress continue to negotiate an increase to the debt ceiling, there is widespread fear that both parties will fail to resolve the problem. In this event, the U.S. Government would be forced to default on at least a portion of its outstanding debt, including U.S. treasury bonds.

• These are globally regarded as one of the safest and most liquid assets across international markets, so if a default were to occur, serious damage could be incurred to U.S Treasury credibility. 

What are US Treasury Bonds, and why are they so important? Let’s break this down:

• Treasury bonds, or T-bonds, are simply debt agreements made by the U.S. government to American citizens.

• The government leverages this debt, along with tax revenues, to fund day-to-day operations and key initiatives, such as defense spending.

🏦 Purchasing Bonds (and What You Should Know)

Investors can either purchase T-bonds directly through a Treasury auction or via a secondary resale market and then receive semi-annual interest payments until maturity. T-Bond pricing is primarily dictated by interest rate changes and market demand, as the events over the last year have demonstrated.

• As interest rates rise, the prices of existing bonds decrease as their fixed interest payments become inferior compared to recently issued bonds with higher coupon rates. The same is true conversely. The coupon rate, not to be confused with yield, is the interest rate return bondholders receive on the bond’s face value (usually $1000).

If an investor purchases a bond at face value, the coupon rate will equal the yield. However, if an investor purchased a bond at a discount (below face value) their yield would be higher because they pay less upfront but still receive the fixed coupon payment. If they purchased at a premium, above face value, their yield would be lower for the inverse reason.

📈 T-Bonds as an Investment

Why are T-Bonds more popular than other bonds such as corporate or municipal bonds? The answer is, they are virtually risk-free. 

• These bonds are backed by the “full faith and credit of the U.S. government,” an institution that has never defaulted on debt (until maybe now) and whose currency is the global reserve.

• While stocks and commodities typically carry higher expected returns, their lack of price stability is not ideal for use as collateral. Therefore, T-Bonds are commonly used as collateral across international markets, whether through loans, margin accounts, or other forms of financial transaction.

They are the benchmark for most debt securities and collateral, so if a U.S. default were to occur, it could have far-reaching consequences across financial markets and the broader economy. (Source: TheStreet)

ONE MORE THING

🤝 Keep in Touch

This week's issue was edited and published by Abbas Akhtar. Our MARK IT. Explained section was written by contributing editor Mario Montero-Ruberu.

• For general announcements or updates on what we're working on, follow Abbas on Twitter 👉 @RealAbbasAkhtar

• Also, we want to hear your feedback! Send any comments or suggestions to [email protected]

Thanks again for reading!

Nothing MARK IT. publishes constitutes professional and/or financial advice, nor does any information published by MARK IT. constitute a comprehensive or complete statement of the matters discussed.

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