Identifying Early Trends

Chris Camillo, a trader featured in Unknown Market Wizards, has a trading edge based on identifying early trends.

Here is Chris in the book:

I was a very early investor in National Beverage Corporation, which is this weird company in Florida that manufacturers La Croix, and La Croix accounts for the majority of their revenue. So National Beverage Corporation was almost a pure play on La Croix. Everything I do is about early detection of change. That’s it. I always knew that if we could develop something to detect change early, that was all you needed on Wall Street. What is the earliest point you can identify change? It’s always going to be when people are talking about something. We were able to recognize the social shift away from soda and toward sparkling water early, and La Croix just happened to be the brand sitting there when that cultural shift occurred.

Chris has refined his trading process by identifying a trend, and analyzing whether the stock has priced in the trend. If it hasn’t, he calls it an “information imbalance”.

Here is Chris again:

Whenever I come across a piece of information that I think the market doesn’t know or is not paying attention to, I have to determine whether it can move the needle for the company. Sometimes the company is so big, and the information is so limited in scope, that it doesn’t make any difference. If I believe the information could potentially be significant, I then have to determine to what degree it has already been disseminated to the investment public. If it’s already market knowledge, then I have to assume it is reflected in the price. If the information is both significant and not yet disseminated, I then have to research whether there might be any extraneous factors that could meaningfully impact the company during the time window of my trade. Is there any impending lawsuit, or management change, or new product line, or anything that could trump the information I am trading on? Once I have excluded all the factors that could nullify the relevance of the information, I then conclude there is what I term an “information imbalance.”

In the book, author Jack Schwager sums up Chris’s edge by the following:

The key lesson is that being observant and highly attuned to new behavioral trends, both in your everyday life and in social media, can be a source for uncovering trading opportunities. For example, consider trades such as Cheesecake Factory and P.F. Chang’s, which Camillo identified by observing Middle America’s reaction to these chains—a response he knew Wall Street would be blind to. Observation of consumer response to a product can even identify trading opportunities in the largest companies, as was the case for Camillo’s long position in Apple based on his seeing how people reacted to the first iPhone.

These are five trends that have the potential for revealing an information imbalance opportunity.

Buy Now Pay Later (BNPL Services)

Given the rapid increase in interest rates over the past year, store credit cards are becoming less enticing for consumers.

As the WSJ reports:

The average interest rate for retail cards is 28.93%, compared with 21.19% for all credit cards, according to Bankrate.com, a personal-finance website. 

Fast growing tech firms like Affirm are built around Buy Now Pay Later financing plans:

While buy now, pay later options are still nascent, they are growing. The practice is a modern take on old-fashioned layaway plans and lets shoppers get the goods up front but make interest-free payments over time, usually in four installments over six weeks.

Instead of earning a profit from customers who keep balances on their store cards, retailers pay fees to the financial-technology companies that offer buy now, pay later plans, including Klarna Bank, Affirm Holdings and Afterpay. Overall, the services are still a small part of spending; they accounted for 7.6% of all online sales from January through October.

The trends to monitor here are interest rate and consumer related.

Will consumers using these BNPL continue to make payment on time? What happens if a growing segment of borrowers miss their payments and fall victim to 30% interest rates?

Also consider government regulation. A new law could put a cap on APR rates which could impact the earnings of BNPL services:

Some lawmakers have called for caps in annual percentage rates at 18% as U.S. households’ credit-card debt has topped $1 trillion for the first time. Groups of credit-card issuers have said that the 18% cap would restrict the availability of this type of credit for some consumers. 

Zero-Emissions Trucks

Zero-Emission Trucks are coming. California has already passed laws requiring new trucks to be zero-emission.

As the WSJ reports:

California is requiring that beginning Jan. 1, new trucks calling at the state’s seaports be zero-emission vehicles. The state is also requiring that a growing share of truck sales and fleets in the state run on clean fuels, with a goal of phasing out diesel big rigs over the next two decades.

An important question is how will these zero-emission trucks be powered? Electric? Or something else? Hydrogen appears to be on the horizon:

Hydrogen trucks have a range of up to 500 miles and refueling takes about 30 minutes. The fuel-cell trucks are also several thousand pounds lighter than battery-electric rigs, allowing truckers to haul heavier, revenue-generating loads.

Multiple auto companies are working on hydrogen trucks:

Nikola is the front-runner so far in the hydrogen-truck field, but traditional manufacturers including Kenworth, Hyundai Motor and Volvo Trucks are also developing hydrogen fuel-cell big rigs.

The challenge however, is a lack of hydrogen infrastructure:

Hydrogen-powered trucks are only just starting to trickle into California and hydrogen-fueling stations are years behind their battery-electric peers. “We’re still in kind of this beta-testing mode,”

There appears to be multiple opportunities with zero-emission trucks.

Opportunities in auto companies, companies building Hydro infrastructure, fleet companies (or companies that service fleets as they transition to zero-emission trucks). Or companies like Samsara that are building technology for industrial companies.

There could also be a potential “electric vs hydrogen” play. A bearish view on hydrogen could result in tailwinds for electric vehicles.

Hybrid vs Electric Vehicles

I wrote a recent post highlighting Toyota’s bet on Hybrid vehicles.

Toyota’s leadership believes the crosswinds (cost, lack of charging infrastructure, consumer skepticism) faced by electric vehicles presents an opportunity for Hybrids. Toyota is going all-in on Hybrid vehicles.

Contrast that vision with Tesla, Rivian, and Lucid going all-in on electric vehicles.

Who will win?

On the regulatory front, California has mandated that beginning in 2035, all new vehicles being sold must be zero-emissions. Will this be a boon for electric vehicles? What about the infrastructure?

Also consider what will happen after electric vehicle subsidies from the Federal government run out. How will that impact purchases?

AI: Battle of Models

In the world of AI, the battle of models has begun.

On July 11, Anthropic announced their latest model, Claude 2.

On November 4, xAI (led by Elon Musk) announced their latest model, Grok.

On November 6, OpenAI announced their latest model, GPT-4 Turbo.

On December 6, Google announced their latest model, Gemini.

Will one model rule them all? Microsoft is betting on OpenAI. Amazon and Salesforce are betting on Anthropic. Google is betting on Google. Elon is betting on Elon.

Health & Wellness Fashion: Shoes, Cold Exposure, Water Bottles

Shoes

I’m seeing a chasm between shoes with a lot of cushioning versus shoes with minimal cushioning.

In 2017-2019 the “hot” shoe was made by Allbirds. Today that title belongs to Hoka shoes. Over the past two years I’ve noticed many people in New York City and Southern California wearing Hoka shoes.

The improbable billion-dollar brand started as a word-of-mouth phenomenon in the niche but influential running community. In recent years, Nike and Adidas have ceded ground in the running market, opening a lane for much, much smaller upstarts like Hoka and On. The business also benefited from pandemic tailwinds like hybrid work and casual office dress, as people discovered that sneakers engineered to run down trails also worked as everyday shoes on flat roads and city streets.

Wall Street Journal

Hoka shoes can be described as “comfort” shoes achieved by a lot of padding and cushioning.

Companies like Xero Shoes, Vivobarefoot, and Peluva are taking a different approach to comfort by designing “barefoot” shoes with minimal padding and cushioning. The minimalist design empowers the consumer to experience a natural barefoot sensation, and through hormesis rebuild the strength in their feet so that they don’t need excessive padding and support. These companies see people as having evolved barefoot, and are creating products that emphasize natural movement so that consumers can reconnect to their ancestral roots.

Hoka is the current mainstream. But are minimalist shoes that emphasize strength through hormesis (similar to cold exposure) on the verge of breaking out?

Cold Exposure

In European and Asian cultures, cold exposure is a key component of “Sauna culture”. From a young age Finns, Koreans, Swedes, Russians, and Japanese people visit bathhouses to use a Sauna followed by a cold plunge.

In the last 10 years as “biohacking” became a growing niche within the US, self-proclaimed biohackers began to tout the importance of cold plunge routines. Pro athletes have utilized cold exposure to speed up their recovery.

2 years ago Joe Rogan got an ice bath and posted an Instagram video. Given Joe’s huge audience, this appeared to be a mainstream catalyst.

I’m now seeing everyone from celebrities to Silicon Valley Venture Capitalists share their sauna and cold plunge protocols.

The trend is gaining momentum.

Cold Plunge “lounges” are beginning to appear, products such as the Ice Barrel, and cold water immersion courses.

Water Bottles

Drinking a lot of water and staying hydrated is another theme being adopted by wellness enthusiasts. Pair that with a status symbol product, and you have a potent mix.

Stanley, a century-old brand that you might associate with Grandpa’s camping gear, reports the waiting list for its 40-ounce drinking vessel peaked at 150,000 customers earlier this year after millennial women with large social-media followings helped repopularize it. Sales this year are up 275%, compared with last year, the company says.

The New Office Status Symbol Holds a Lot of Water—and Has a Wait List

The bottle became a status signal for remote employees:

Rhonda Jarrar, Google’s head of talent-outreach partnerships in North America, says Instagram led her to covet a sold-out Quencher. “I’m fully remote, so sadly I don’t get the chance to status-signal to co-workers” in person, she says.

Strategically positioned in your webcam frame or perched on the conference table, the Quencher is bound to draw reactions like the ones Axle Dean Looslie says he received when debuting his overgrown mug at work this month: “‘Oh, you got one? I want one!’”

Although this particular product trend is “priced in”, the recent rise in popularity of the Stanley Quencher bottle is a prime example of how social media paired with market trends can boost a product’s success.

Consider Stanley’s story as you consider looking for other similar types of trends.

There has never been a better platform than TikTok for uncovering things early and deciphering the world’s thoughts and behavior in real time. It’s everything I ever wished for as a social arb investor. My only question is: How long do I have before other people catch on?

Chris Camillo, Unknown Market Wizards