What’s Old is New Again: First Quarter Cyclical Demand

Spiral staircaseYear after year we find certain names heat up ahead of critical events. These spikes in demand can be triggered by a number of factors:  Some are propelled by the market, such as commodity prices, and others are dictated by consumer-driven seasonal factors.

The calendar gives us hints as to which names may see action from borrowers. Quarterly earnings announcements are a common trigger for changes in securities lending demand.  Seasonal consumer spending can also push securities into the spotlight.

In this post, we take a closer look at some of the Q1 cyclical names in the US.

Sanderson Farms, Inc. (SAFM)

We typically see an increase in demand for Mississippi-based poultry processing company Sanderson Farms (SAFM) around their earnings announcements. SAFM has significant exposure to the US dollar versus other major currencies. The firm is also directly impacted by commodity prices — specifically grain — given it is such a significant input cost. SAFM has seen improved profit margins in recent years thanks to the decreasing cost of grain, however some analysts question how the company will fair when this trend reverses. SAFM, along with their competitor Pilgrim’s Pride (PPC), have both experienced long term directional demand and similar short interest patterns.  The stocks have also displayed a pattern of demand spikes around earning reports.

 

The Buckle (BKE)

Holiday sales forecasts and reports are critical to many companies in the retail sector, including The Buckle (BKE). The US desk consistently sees demand increase for BKE leading into the back-to-school and Christmas seasons and also ahead of their earnings announcements for these same periods.  BKE has faced the same struggles as many stocks in the sector as E-commerce eats away at traditional brick and mortar sales.  Buckle’s gross margins have also been declining in recent years as the company struggles to boost revenues amid a competitive pricing environment.  Further, the firm’s net profits have taken a hit due to increasing rent expenses. BKE did not offer a specific sales forecast for the 2016 holiday quarter, however weak November comparable-store net sales have investors anticipating the worst.  BKE has also been a long term focus of directional demand and we see a direct correlation to increased short interest trends ahead of these critical periods.

 

Weight Watchers International Inc. (WTW)

A New Year brings resolutions and none seems more popular each year than to focus on health, wellness and shedding recently gained holiday pounds. It should be no surprise that Weight Watchers International Inc. (WTW) comes back into focus each January.  The first six weeks of the year are crucial to companies in the weight-loss industry because consumers are more likely to commit to a new diet in this period than any other during the year.  These cyclical challenges are compounded by year-round competition from new entrants in the weight loss space.  The rise of free apps, healthy meal delivery services and activity monitors are all cutting in to WTW’s bottom line and prompting borrowers to seek shares of the stock.

 

Match Group Inc. (MTCH)

With Valentine’s Day around the corner, the US desk is seeing increased demand for Match Group Inc. (MTCH). MTCH brands include Match, OkCupid, PlentyofFish, Tinder, and  BlackPeopleMeet.   According to data provided by Match, the online dating market has grown nearly 42% since 2011.  MTCH has been a long-term focus of bearish sentiment since it went public in November 2015.  The demand is driven by concerns of cannibalization between brands, their ability to maintain growth, and concentration in the online dating segment.  In spite of these concerns, the share price is up over 45% from the IPO price of $12.  The increase in price has created new entry points for bearish investors and opportunities for lenders.