Heatwave Trades 🏖️☀️🤑

Welcome to Alternate Universe!

In today’s edition:

• Scorching gains with heatwave trades 🏖️

• Job opportunities at recently funded European startups 👇

• Revolut’s CEO has a new side project 🧐

The Crux 🔴

The world is getting hotter.

Between March and May, India registered at least 60 deaths due to heat-related illnesses. This alarming trend will continue unless we meet our 2030 emission goals.

Last year saw the highest global temperatures recorded since the start of the industrial age. There is an 80% likelihood that the annual average global temperature will temporarily surpass 1.5°C above pre-industrial levels at least once in the next five years.

Having worked in impact investing, I understand the significant efforts required to achieve these goals. However, I will not focus on the long-term investments necessary to reach these targets in this issue.

Instead, I want to highlight a few stocks that could benefit from the recurring and intensifying summer heatwave trend.

Profit over purpose? 🤔

Sometimes, it's not just about saving the world—it's also about enjoying an extra scoop of ice cream.

—

Certain industries are negatively impacted by heat anomalies.

In a recent study by Amir Hosseini, which investigated the impact of heat anomalies on financial performance, both the transportation and hospitality industries were found to underperform.

Presumably, dragging a whole family across Disney World in 40-degree heat is far from appealing. 🙃

On the flip side, I wanted to answer a simple question.

Which stocks would do well in a heatwave?

Basically - what do we do more of in summer?

I broke these down into 3 buckets

• Bucket #1 - keep cool

• Bucket #2 - stay refreshed

• Bucket #3 - take a break

The rules are simple

1. I am not shorting stocks.

2. I am not looking for long-term holds although some of these picks are attractive year-round.

3. I am looking for short-term trade ideas that can benefit from a boom in summer business and potentially announce a better-than-expected earnings call.

Vamos

🐰🕳️⌚

Bucket #1 - Keep Cool 🍃

Trane Technologies (NYSE:TT)

Market cap: $74.98 B

I believe the clearest opportunity lies in HVAC companies.

In addition to the heatwave thesis, companies like Trane and Carrier are also benefiting from AI tailwinds. Data centers, especially with the introduction of AI chips that generate significant heat, have substantial cooling needs.

The combination of these two markets presents a unique opportunity for HVAC companies.

Trane, in particular, has outstanding financials. The company has consistently grown its revenues, operating margins, and ROIC while maintaining low debt levels. I believe this can also be a longer-term play in one’s portfolio, and I already own a small portion of my portfolio in Trane.

Carrier (NYSE:CARR)

Market cap: $57.17 B

Carrier has weaker financials but is recuperating. The company has shifted its strategy to focus solely on cooling and heating, leading to a series of divestments in its portfolio. These include the sale of its industrial fire and security business units to Sentinel Capital Partners and Honeywell, respectively.

Carrier expects 20% of its commercial business to be driven by the growth of AI and data center expansion over the coming years. To strengthen its position as a leader in 'Intelligent Climate and Energy Solutions,' Carrier invested €12 billion to acquire the German heat pump manufacturer Viessmann Climate Solutions.

Bucket #2 - Stay Refreshed 🍹

Davide Campari Milano (BIT: CPR)

Market cap: $11.48 B

The Instagrammable orange colour.

The Italian culture hype.

Or simply the marketing genius of the Campari Group?

Since the early 1900s, the aperitif has been a staple of Italian daily life, enjoyed with snacks post-work. However, since its acquisition by the Campari Group, Aperol has become the leading brand in their portfolio. Unlike Martini, search volume data for Aperol peaks in summer and again around Christmas and New Year’s.

This trend is growing every year.

However, the stock has performed poorly over the last few months. In January, Campari Group announced it would sell $1.3 billion in shares and debt to fund the acquisition of the iconic French cognac brand, Courvoisier. This acquisition coincided with news that China would start an anti-dumping investigation against European brandy.

Another trending drink, popular in the DACH region, is Lillet. This aperitif can be used as an alternative to Aperol for making a spritz. Owned by Pernod Ricard, Lillet is part of the company's specialty brands segment, which also includes Malfy and Monkey47.

In 2023, this segment generated a total revenue of €755 million, accounting for just 6% of Pernod Ricard's overall revenue. In contrast, Aperol represents a hefty 23% of Davide Campari's revenue, making it more susceptible to seasonal fluctuations and stock moves.

Vita Coco (NASDAQ: COCO)

Market cap: $1.57 B

The small-cap company, which went public in 2021, dominates the US coconut water market with over 50% share. Coconut water, known for its health benefits and refreshing taste, offers a hydrating alternative to plain water, thanks to its high water and electrolyte content.

The global coconut water market is projected to grow at an annual rate of 14.4% from 2024 to 2032. This growth trend is reflected in VitaCoco's consistent double-digit revenue growth since its IPO. According to the latest guidance, the company is expected to exceed $500 million in revenue this year. Social trends, such as the recent viral TikTok trend featuring Coconut Water Iced Coffee, are also contributing to its popularity.

Beyond its core coconut water offerings, VitaCoco has expanded its portfolio. It recently introduced a new flavor, Strawberries & Cream, aimed at attracting customers beyond its traditional health-conscious segment. This product offers a more affordable alternative to Starbucks' popular coconut milk-based drink, Strawberry Açaí Refreshers®.

VitaCoco is also exploring isotonics through its PWR LIFT brand, offering a flavored 'protein-infused water' designed for fitness enthusiasts.

Financially, the company boasts healthy operating margins and minimal debt.

Bucket #3 - Take a Break ✈️

As temperatures rise, tourists flock to Europe every year in search of cultural experiences, visiting landmarks from the Louvre to Parc Güell, the Colosseum to Marienplatz.

Europe remains an ideal summer destination due to its mild, pleasant weather. While parts of Africa and Asia can exceed 40°C and South America experiences winter, average summer temperatures in Europe typically range from 20-30°C (though this is rapidly changing).

One of the main beneficiaries could be European airports.

One intriguing stock that aligns with this thesis is AENA (BME: AENA), the world’s leading airport operator by number of passengers. AENA operates two of the top 30 busiest airports globally, located in Madrid and Barcelona. In addition to its extensive Spanish network, AENA manages airports in Colombia, Mexico, Brazil, and the UK, which helps mitigate seasonal fluctuations.

The peak of passenger traffic typically occurs from June to September. Within its Spanish airport network, domestic traffic has risen by 12.6%, while international traffic has surged by 18.2%, surpassing pre-pandemic levels in both categories.

AENA also offers an attractive dividend yield of 4.04%, with the ex-dividend date set on May 3rd.

The other 2 publicly traded airport companies are Aeroports de Paris (ETR: ADP) and Fraport (ETR: FRA). Both operate key European hubs and multiple international airports.

ADP stands to gain significantly from the upcoming Olympics in Paris this summer, potentially boosting revenues for the subsequent earnings call in October.

Fraport will also benefit from the EURO matches being held in Germany, although Frankfurt is just one of the 10 host cities in the tournament. Moreover, despite over 40% of its revenue coming from outside Germany, Fraport benefits from a robust network of smaller airports in popular tourist destinations such as Mykonos, Kos, Santorini, and Zakynthos.

There are certainly more ways to play this specific bucket - from Booking Holdings and Airbnb. Yet, due to their global reach, they do not offer localized and short-term trades as European airport stocks.

Bonus 🎁

Edgwell Personal Care (NYSE: EPC)

Market cap: $1.97 B

Edgewell presents the most focused opportunity to invest in sunscreen compared to other major brands that are part of larger portfolios.

The company owns popular brands like Hawaiian Tropic and Banana Boat, alongside other segments such as Bulldog and Wilkinson Sword. The Sun/Skin Care segment contributes a third of their revenue and experienced the largest revenue growth among all portfolio segments, at 12%.

I’d love to hear any other heatwave trade ideas I might have missed. 📩

Dig Deeper ⛏️

• The Heat Anomaly Premium

• How Aperol became the “it” drink of the summer season

• AENA FY 2023 Report

• Campari Group Q1 2024 Presentation

• Carrier CFO Goris Talks Divestments, Debt and Buybacks

As always, the financial disclaimer!

This is not investment advice. I am not a financial advisor. Make sure to conduct your thorough research before purchasing or selling financial products.

PS. I own a small position in Trane Technologies as part of my portfolio. Market cap figures may have changed since the time of writing.

Headhunted 🦅

Recently funded private companies need talent! Scout jobs at recently funded European startups, ahead of your competition. 💪

1. Vytal 🇩🇪 Company raised €6.2m to expand its reuseable food packaging system. Hiring an operations manager (link).

2. NatCap 🇬🇧 UK nature intelligence startup closes $10m Series A. Multiple roles available (link).

3. Libattion 🇨🇭 Energy storage company announces €14m. Hiring engineers (link).

4. Feather 🇩🇪 Insuretech company catering to expats living in Europe raised €6m. Now hiring a country launcher in France (link).

5. Heidi 🇬🇧 Ski holiday booking platform closed a £5.6m round. Hiring a sales consultant (link).

6. Axelera 🇳🇱 Closed a $68m Series B to develop edge AI chips — tons of opportunities (link).

Interestingness📔 

• Venture capital's money model is shifting (link)

• Non-alcoholic beer brand, Athletic Brewing, has just closed a $50m funding round to continue its stellar growth (link)

  Missed the piece about the non-alcoholic drinks trend? Check it out here.

• The CFA Institute’s latest report on Gen Z and investing (link)

• Revolut’s CEO, Nik Storonsky, has announced plans to launch a $200m quant VC fund (link)

• Dealroom’s latest data shows the change in VC investment in H1 24 compared to H1 23. UAE startups have raised a whopping $2.5B in the first half of the year, 90% of the total raised in 2022 (link)

📚 New to investing? Grab a PDF copy of my ebook here.

As always, the financial disclaimer!

This is not investment advice. I am not a financial advisor. Make sure to conduct your thorough research before purchasing or selling financial products.

PS. I own a small position in Trane Technologies as part of my portfolio. Market cap figures may have changed since the time of writing.