EXPECTATIONS DIVERGENCE
Consumer Basket vs GLP-1 Basket Z-Sore Spread, Offside Capital
Last week I showed you where the opportunity exists.
Today, it’s time to build the portfolio.
We start with the most important signal the market is giving us:
A divergence between two sectors that should trade in lockstep
Over the past few months, one event changed the underlying mechanics leading to this divergence opportunity.
It wasn’t because the GLP-1 trade became stronger…
But because it removed one of the market’s biggest uncertainties around it.
Less uncertainty = no need to keep hedging as much
In our initial GLP-1 boom analysis, I showed you how the hedge was found in this consumer basket.
Every time the GLP-1 names rally, these other consumer names get sold as a hedge.
Now that the convergence is soon to be triggered, this is where the names in our consumer basket begin to outperform.
Not all of them though…
The GLP-1 wave is mostly centered in the US, affecting snacks and sugary drinks the most.
So I have found a company that:
Makes 46% of revenues outside the US
Pushes double-digit growth and over 35% EBIT margins internationally
Has more than priced in the US consumption slowdown
This is strictly a turnaround value play, where I’m betting on the market realizing that fundamentals are stronger than they seem, and that the international business can do more than enough to carry the weight of a US slowdown.
In fact,
Expectations analysis suggests the company will grow revenues by 1.5% over the next 15 years vs a historical average of ~5.6%.
In other words, the GLP-1 slowdown has effectively been pushed too far into the future.
Now what if I’m wrong and this turnaround takes longer than expected?
There’s a perfect call options trade in a peer showing:
~20% annual revenue growth that’s 94% derived in the US
Gross margins going from 40% to over 50% in three years
Now the third-largest functional drinks brand in the US
If I’m right, the spread closes.
If I’m early…
The hedge continues to deliver.
This is why I call this structure:
The Trade After the GLP-1 Boom.
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