Daily Rundown: April 6

CHRIS VERSACE: Good morning, "Action Alerts Plus" members. Since we spent much of this week's live call discussing broader themes and answering your questions, I wanted to use today's rundown to hit a few of the stocks we didn't get to on Tuesday. But first, if you missed that live event, you can catch a replay simply by heading over to the AAP home page and clicking on the Video tab.

Now, let's get started today with United Rentals and Vulcan Materials. Those stocks, along with a number of others that are typically more economically sensitive or as they tend to be better known, cyclical stocks, have moved lower this week following renewed concerns about the economy. Now, let's recap those concerns. The March manufacturing PMIs continue to contract and they had soft order data. Job openings fell below the 10 million mark. We also saw a softer than expected March ADP employment change report data.

Now, we talked about all of that with you in our "Alerts". And yes, it moved GDP expectations, tallied by the Atlanta Fed, lower. However, the reason we entered into the portfolios positions with United Rentals and Vulcan Materials was the expected ramp in non-residential construction that would be coming at us because of the Biden infrastructure law, the Chips Act, and the Inflation Reduction Act.

Indeed, as we saw in the February construction spending report out this past Monday, total non-residential construction rose almost 17% year-over-year and it also continued the trend of improving on a sequential basis. But let's look at some other data as well.

That same March ADP employment report showed strong gains in the number of construction jobs. This week, Schnitzer Steel shared it sees a stronger business ahead as those programs ramp in the coming quarters. We also saw rebar prices continue to firm this week. And March rail traffic pointed to continued gains for cement and other aggregates.

So while the market is inclined to hit Vulcan Materials and United Rentals with a broad brush, we're going to look at to take advantage of this recent pullback especially with the shares of Vulcan Materials being that they are below the portfolio's cost basis. Now, sticking with that, some of you have been asking about the recent pullback in Deere shares. And here, too, it's been painted with that same broad brush even though construction equipment is a far smaller piece of the company's revenue and profit stream compared to ag equipment.

Now, the current ag equipment upcycle is poised to continue supported by a few things. First off, continued favorable farmer income as key commodity prices remain at favorable levels compared to the last few years. We also have an aging equipment fleet that needs to be replaced. So if you look back at when we added Deere shares, the current share price offers a favorable risk reward trade off for members that are currently underweight Deere shares.

And finally, let's take a look at Costco after it saw its monthly same store sales fall for the first time in nearly three years. Now, remember, when we examine this data, we have to take a look at the reported comp sales, but also the adjusted comp sales that strip out the impact of gasoline and foreign exchange. And when we do that, Costco's March comp sales rose 2.6% across the entire company. And in the US, they were up slightly.

Now, not going to sugarcoat it. This is weaker than expected. But let's consider a few things. First, Costco always reports ahead of the monthly retail sales report. And what it tells us is usually a pretty good barometer of what we're going to see. Second, retail sales in February fell on an inflation adjusted basis. And we also have to consider that consumers are likely pulling back given not only inflation, but also rising layoffs.

Something we touched on in our note earlier to members this morning. Also today, Buckle shared its March comp sales fell 10% year-over-year after dropping more than 6% in February. Now, we're not involved with Buckle. But this is a very, very sharp change compared to their January comp sales that rose more than 6%.

So when we put all those data points together, it tells us that we are indeed seeing a more thoughtful, more choosey consumer emerge. And in that environment, Costco and its membership-driven model are likely to be winners, especially as Costco continues to grow its warehouse footprint. That's one of the sleeper keys behind Costco and its high margin membership fee income stream that other retailers like Buckle, Target, and a number of others simply don't have.

Now, members that are underweight Costco shares, my suggestion is let the March comp sales report and its impact settle into the shares. I think you'll have a much better opportunity scooping up Costco shares in the coming days. And that is our rundown for today. Thanks for joining us. Markets will be closed tomorrow, so JD and I will be back on Monday to get ready for the week ahead. Until then, have a wonderful holiday weekend.