24 Trades for 2024
Citrini Research: 24 Trades For 2024
Introduction - What is this?
Every year, around the end of December (always after the last FOMC), I create a list of trade ideas for the coming year. Some I already have on, some I am planning on entering within the next few weeks, some never get put on.
The point of the exercise is less about finding a bunch of surefire high conviction plays (if I could pull 24 high conviction trade ideas in a month I’d either be a billionaire or way too convinced on way too many things) and more about preparation..
Are they all great ideas? Of course not, there’s 24 of them. But they’re good to have in your back pocket as the year plays out, or maybe they’ll start a thought process that results in something you otherwise would not have happened upon. Think of this more like a watchlist for interesting things than a list of portfolio positions.
The first time I shared this process publicly was here on my twitter account at the end of 2022. I’m glad I did this, because I think it shows the potential of having a deep back catalog of trades ready for various scenarios.
We’ll go through the performance of the trades listed for 2023 at the end, so you can get an idea of what this exercise accomplishes (and what the hit rate is like). To preface, however, the main purpose here is preparation. Most of these ideas are things that are suited for reacting to developments throughout the year, or perhaps useful if current trends continue or even just solely presented to put something in front of you that you wouldn’t otherwise look at.
It’s the end of the year, an absolutely crazy year for that matter.
And that, of course, means we get to prepare to do it all again but differently. Here’s what I’m thinking…
Factor-Based Equity Trades
Trade Idea 1: R2K Interest Quintile Long/Short Baskets
I believe this could be a very useful strategy in the coming year, regardless of which way rates go, and these are baskets you want to be ready to execute on.
On quarterly rebalance dates, Russell 2000 (R2K) Index is sorted into 10 deciles (equal buckets) ordered from the highest interest coverage (Interest Coverage Ratio = EBIT/Total Interest Incurred) to the lowest interest coverage.
Since only securities, for which this metric is available, are included, each decile has about 115 securities. Each decile portfolio is equally weighted, quarterly reconstituted and rebalanced. The chart shows that in 2022 the long best interest coverage short worst interest coverage portfolio realized massive gains. However, recently in 2023, that tide appears to be turning as expectations of rate cuts in 2024 grow.
If we hit the refinancing wall with rates still at 5%, you should probably consider flipping this and going long the 9th decile and short the 2nd - expecting performance to mimic the 10/1 returns in 2023.
However, as long as rate cuts are actively being priced into 2023 the current trade is going to be a mean reversion of the Long Best/Short Worst strategy.
Here are the names in the best and worst interest coverage quintile baskets.
Trade Idea 2: CitriniResearch Small-Mid Cap 50
The potential of the US economy avoiding a recession as well as the significant, prolonged underperformance of small cap stocks has resulted in a few decent deals (even in small caps that are up YTD, the valuation is still depressed despite the recent rally). As we’ve discussed in the subscriber chat, the ways we are playing this so far have been long IWM/short SPY (RTY v. ES) and, more specifically, playing the unwind in megacap crowding with long RSP/short SPY.
For 2024, I’ve gone through the most compelling opportunities between 250M and 10B with a bias towards smaller companies. While it was a very compelling strategy last year to simply buy the underperformers, I think it will be a bit more nuanced this year as we enter into a potentially elevated rate environment with continued economic resilience (yet not as elevated as the market was prone to believe). I’ve put together the 50 most interesting (whether from a business quality or valuation perspective or both) below:
Here are the 50 Small-Cap Value names I believe are most compelling.
Thematic Equity Trades
Trade Idea 3 (Basket): Long Blue Collar Jobs & Vocational Training:
The economy has added many jobs, but many people are working 2-3 low-quality jobs. For these people, the current economy feels like a recession, and recessions tend to boost enrollment in vocational schools and higher education like nursing and trades. Companies like Adtalem Global Education (previously DeVry), Laureate Education (LAUR), Grand Canyon Education (LOPE), Perdoceo Education (PRDO), Universal Technical Institutes (UTI), Strategic Education (STRA) and Lincoln (LINC) all can benefit from the lack of qualified technical laborers in the United States resulting in significantly higher wages and many of them have benefitted from the “nearshoring” demand for skilled labor in Mexico and Latin America - like LAUR. ASGN VTRU. I’d personally implement this as a basket, equally weighting LAUR US, LOPE US, UTI US, PRDO US, STRA US and LINC US, however my first collaborator (poached from Fintwit Capital Management in during the latest rumors of a pod blowing up) has more conviction on the first one
Trade Idea (Single Name Thematic): Universal Technical Institute (UTI US)
Universal Technical Institute is a system of technical colleges throughout the United States. Their main revenue segments accrue from vocational schooling within auto, HVAC, and industrial maintenance trades.
Wages within PPI trade services have increased dramatically from pre-pandemic trends. We believe this is a secular shift as younger demographics have opted for non-traditional income streams (social media, streaming, e-com). Our overall view is that non-traditional income streams are currently peaking as they do not add any societal value or advancements. Heightened wages within the vocational trade will shift enthusiasm back into the sector - allowing UTI to experience a boosted profit cycle. Some of these changes are already being displayed within UTI graduation rates, up 16% vs. pre-pandemic.
Valuation: UTI currently trades at an attractive market multiple of 4x fwd EV/EBITDA. Management has guided for 10% FY top-line growth in 2024, which we believe is conservative due to recent industry trends. If incremental topline growth reaches management's base target we believe the stock can rerate to historic ~7.5x EV/EBITDA trends implying 45% upside in the name.
Catalyst: In 2016 UTI issued preferred equity to Coliseum Capital Management, LLC to secure $70mn in medium term funding. With the company's cash flow position now much more attractive, Coliseum has converted the entirety of their pref equity into common equity representing 1mn shares outstanding as of 12/19/2023. We view this as a major overhang lift, as the company can use incremental cash flow previously utilized in the private placement to fund capital investments and share repurchases.
Paywall Below, with 21 more trades: