Wall Street Breakfast

Roaring Kitty returns with Chewy stake and facing lawsuit

Keith Gill discloses 6.6% stake in Chewy and is named in pump-and-dump class action. (0:15) Manufacturing activity contracts again. (2:20) Tech industry turns to nuclear for AI power demands. (4:40)

Show Notes
AI megacap stocks face a tough valuation test this earnings season

Episode transcripts: seekingalpha.com/wsb

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Duration:: 7m
Broadcast on:: 01 Jul 2024
Audio Format:: mp3

Welcome to Seeking Alpha's Wall Street Lunch, our afternoon update on today's market action, news and analysis. Good afternoon, today is Monday, July 1st and I'm your host, Kim Kong, our top story so far. Chewy is rallying after Keith Gill, aka Roaring Kitty, disclosed a $245 million position in the online retailer. With his 9 million 1,000 shares, Gill holds a 6.6% stake. The SEC filing by Roaring Kitty arrived just a few days after he published a mysterious picture of a dog on Twitter, which led to rallies for Chewy and the highly shorted Petco Health and Wellness Company. Of course, Roaring Kitty is spoken favorably about Chewy found a Ryan Cohen in the past in the contents of backing up his bullish thesis on GameStop. Other highly shorted stocks to watch for some extra volatility include Children's Place, Beyond Meat, True Panyon, Lemonade, Coles, Guess, Hurt's Global, and Virgin Galactic. In addition, Gill is facing securities fraud claims in a class action lawsuit over the recent flurry of social media posts that saw the share price of GameStop swing wildly in May and June. The lawsuit was filed by Martin Radov on behalf of other investors that may have had losses from the GameStop drama. The suit alleges Gill engaged in a pump and dump scheme whereby one, shortly before, his May social media posts on X and unknown to investors quietly purchased a large volume of GameStop call options on each trade at comparatively low prices. Two, reignited the mean stock movement and pumped up the value of GameStop securities with his first social media post on X in nearly three years. Three, after the prices of GameStop securities had abated, pumped up the value of GameStop securities again via a June 2nd post of his GameStop portfolio on Reddit, disclosing his large position in GameStop securities, including 120,000 GameStop call options and 5 million shares of GameStop stock, and four by June 13th quietly sold and/or exercised, i.e. dumped, all 120,000 of his GameStop call options for a large profit, seemingly to increase his own stake in GameStop stock by over 4 million shares belatedly revealing as much to investors on June 13th during aftermarket hours. In today's trading, stocks are slightly lower with volume expected to be low through the holiday week. Treasury yields are rising despite some disappointing manufacturing data, the 10-year yield is back near 4.5%. The June ISM manufacturing index edged down to 48.5 versus 49.2 expected and down from 48.7 in May, economic activity in the manufacturing sector contracted for a third consecutive month and for the 19th in the last 20 months. Wells Fargo said, "One interesting thing to watch is the emerging difficulties in shipping and supply chains. The ongoing attacks in the Suez Canal and the associated re-roading is both expensive and time-consuming. We've heard from a number of clients on this topic in recent weeks, but it was conspicuously absent from the respondent comments. For now, at least, the supply chain disruptions are more of an annoyance than a massive disruption." In addition, the June PMI manufacturing index crept up to 51.6, falling slightly short of the 51.7 consensus and up from 51.3 in May. New orders advance for a second straight month, though client demand remained muted and business confidence reached a 19-month low. Among active stocks, Chinese EV makers announced delivery numbers. NIO delivered 21,209 vehicles in June, representing an increase of 98.1% year on year. The deliveries consisted of 11,581 premium smart electric SUVs and 9,628 premium smart electric sedans. NIO's Q2 deliveries jumped 143.9% year on year to 57,373 vehicles. The auto delivered 47,774 vehicles in June, a 46.7% increase year on year. This momentum carried through the entire Q2, with deliveries reaching 108,581, reflecting a 25.5% year on year growth. As of June 30th, its cumulative deliveries reached 822,345 vehicles, ranking first among China's emerging new energy auto brands. And X-Peng delivered 10,668 smart EVs in June, a 24% year on year increase, and up 5% on the month. X-Peng X9's deliveries reached 1,687 units for the month, with its cumulative total up to 13,143 units, just half a year after its launch, maintaining its impressive spreak as the top seller in both the all-electric MPV and three-row model segments in China. In other news of note, as demand for electricity to power AI data centers surges, the tech industry is moving to secure steady supply through nuclear power plants. The Wall Street Journal says talks are ongoing, with the owners of about a third of US nuclear power plants. Amazon Web Services is nearing a deal with Constellation Energy, which owns the largest fleet of US nuclear power plants for direct power supply. AWS in March bought a nuclear power data center campus in Pennsylvania. Vistra and public service enterprise have also been in talks for behind-the-meter deals, where a large customer gets electricity directly from the plant. The renewed interest in nuclear powerboats well for the industry, which has struggled to compete with other renewable sources and cheap natural gas. The data center supply deals could result in a diversion of existing electricity resources, in turn raising prices for other customers. Pargets for reducing emissions may also be impacted as customers turn to natural gas to replace diverted nuclear power. And in the Wall Street research corner, sales growth for AI-related megacap stocks is expected to have cooled in Q2 with that trend continuing through the end of the year. According to the consensus forecasts, NVIDIA, Microsoft, Meta, Alphabet, and Amazon will see a slowdown in sales growth, and with everyone but Amazon seeing a decline in net margins. Goldman's strategist David Costen says, "Sales growth for the five stocks is forecasted slow from 22% year on year in the first quarter to 17% in Q2, further to 50% in Q3 and 14% in Q4. In contrast, sales growth for the median S&P 500 stock will be accelerating, albeit from a slower rate. However on your growth of 2%, 3% 5% and 5% respectively." Despite the expected deceleration in megacap tech profit growth, the stock's valuations generally remain high, Costen added. Although the expected slowdown in sales growth sets a low bar for the group's results, EV sales valuation multiples have increased by 28% year to date. If consensus estimates are realized, the TQ reporting period will be an important test of whether investors are willing to pay the same valuation premium for the group while the EPS growth differential between the megacaps and the rest of the market is forecasted narrow significantly in the second half of 2024 and all of 2025. That's all for today's Wall Street Lunch. Look for links for stories in the show notes section. Don't forget, these episodes will be up with transcriptions at SeekingAlpha.com/WSB. And for a full suite of news, analysis, ratings, and data on stocks and ETFs, go to SeekingAlpha.com