Stephanie Batchelor: Milford Asset Management Analyst on the 'fallen angels' in the US markets

The US market is up almost 16 percent on the year - but big names like Starbucks, Nike, and Lululemon have been struggling.

The consumer discretionary sector has jumped 4 percent, with a number of companies being dubbed 'fallen angels'.

Milford Asset Management's Stephanie Batchelor explains how investors can proceed.

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Episode Transcript

Speaker 1 (00:00):
Now, the US market may be up almost sixteen percent
on the year, but get a load of this. Well
known household names like Nike and Lulu Lemon and Starbucks
had a much tougher time. The entire consumer discretionary sector
is up only four percent, with a growing number of
so called fallen angels. Stephanie Bachelor is from Milford Asset Management. Hey, Stephanie, Hi, Heather,
What exactly is a fallen angel?

Speaker 2 (00:21):
So the term fallen angel was traditionally used to describe
a bond that used to be investment grade but has
since been reduced to essentially junk bond status, but you
can also apply it to stocks. A company that has
historically been seen as really high quality, usually with a
share price that continues to reach all time highs, but
has since fallen significantly and is now out of favor.

(00:43):
Was invested.

Speaker 1 (00:43):
Okay, So I've listed a number there that that are
obviously examples. Why have they performed so poorly?

Speaker 2 (00:50):
Yeah? So there are lots of examples. A couple that
you mentioned the ath leisure companies like Nike and Lululemon.
They've fallen significantly on concerns that they aren't innovating enough.
And losing market share to newer competitors. So from peak
to trough, Nike's share price has fallen about sixty percent
and Lululemon's about fifty percent. Then in the beauty space,

(01:10):
este Lord is down about seventy five percent, primarily due
to very weak sales in China, and Starbucks is another
brand struggling in China and its share price had fallen
about forty percent.

Speaker 1 (01:20):
I mean, it's quite astounding how big those falls are
given that they are household brands. What's next for these companies?

Speaker 2 (01:26):
Now?

Speaker 1 (01:26):
How do they get the investors to love them again?

Speaker 2 (01:30):
Yeah, So, usually we see one of two things. Either
an activist shareholder gets involved. These are investors that buy
a sizable stake in the company and then put pressure
on management to make changes. So a recent example of
this is Bill Ackman taking a stake in Nike. Or
CEOs leave or get replaced, and we saw a remarkable
share price reaction to one of these situations. Recently, it

(01:52):
was announced that the CEO of Starbucks would be leaving
and would be replaced by the CEO of Chipotle. This's
the Mexican food chain that's done extremely well and so
on the day that this was announced, Starbucks shares went
up twenty five percent and CHIPOTLEO shares went down eight percent,
So that market move was effectively a twenty seven billion
dollar slap in the face for the Starbucks CEO and

(02:13):
a twenty seven billion dollar pad on the back of
the Chipotlo sea.

Speaker 1 (02:16):
Interesting. Okay, so in Video right, this is something we've
been talking about just in the last few days. What's
going on here? And also is this an example potentially
of something that's becoming a fallen angel.

Speaker 2 (02:27):
Yes, it's been a rocky few days for in Video.
Over four days of trading, shares are down about fifteen percent,
and that's wiped out about five hundred billion dollars of value.
That's almost the entire value of McDonald's, Disney, and Uber combined.
So it's a huge move. But shares are still up
about one hundred and twenty percent over the last year,
so certainly not a fallen angel. And there are a

(02:50):
few things behind this move. So it started at the
end of last week when in Video reported quarterly results.
It was a strong result, but shares actually fell six percent,
shows how stretched investor expectations had become. Apparently there were
even Bars in New York live streaming the result, So
that's almost the definition of a viral stock. And then overnight,

(03:12):
in Video was down another ten percent as part of
a broader stock market sell off which had a number
of factors at play, one of which was some weaker
manufacturing data that tapped into investor fears around a growth
slowdown in the US. And Nvidia actually fell a little
bit more after hours on some news that the DOJ
has issued a subpoena to in Vidia relating to an
anti trust investigation. So lot's going on. But the last

(03:34):
thing I'd call out is while the two percent moved
down in the S and P five hundred overnight is significant,
you have to put it into the context of the
increased market volatility that we saw in August, with big
swings both down and up. So last night's move is
really just a continuation of that volatility.

Speaker 1 (03:51):
Stephanie, thank you. I really appreciate your time. That Stephanie Bachelor,
Milford Asset Management. For more from Heather Duplicylan Drive, listen
live to News Took said Be from four pm weekdays,
or follow the podcast on iHeartRadio.