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Key Market Outlook(s) and Pick(s)

On Tuesday, I joined Steve Lai on BBC News to discuss markets, earnings, banks, the Fed, tech, the IMF, and more. Thanks to Steve and Joao Da Silva for having me on:
 

Bank of America Fund Manager Survey Update

On Tuesday, we put out a summary of the monthly Bank of America “Global Fund Manager Survey.” This month they surveyed 193 institutional managers with ~$468B AUM:

Here were the 5 key points:

1) Opinion follows trend. Fund manager allocation to EM equities has jumped to a net 46% overweight, up from 27% last month — the highest since February 2021. This was a trade you couldn’t give away at the start of the year (other than to our loyal Hedge Fund Tips audience), yet now that EM is outperforming the U.S. 2-1, it’s suddenly all anyone wants to talk about.
 

2) Sentiment among fund managers based on cash levels, equity allocation, and global growth expectations has climbed to an eight-month high, rising to 5.8 from 5.3. Yet these readings remain well below prior market peaks like late 2024 (Trump 2.0), 2021 (Blue Wave), 2018 (Tax Cuts), or 2014 (BRICS). Plenty of gas left in the tank.
 

3) Recession expectations among fund managers have fallen to their lowest levels since February 2022, with a net 69% saying a global recession is unlikely compared to the Liberation Day peak when 42% expected one – exactly why this remains one of the most hated V-shaped rallies. As we have pointed out in recent weeks, Fed rate cuts in a non-recessionary environment have historically seen stocks up on average ~17% one year out.
 

4) 33% of fund managers now view an AI equity bubble as the biggest tail risk for the first time on record, up from just 11% last month. Managers seem to be waking up to the fact that Mag 7 earnings growth has been cut by more than half to just 14% this quarter, while multiples have yet to come down at a commensurate rate.
 

5) Watch as they do, not as they say. Despite growing fears of an AI equity bubble and a record 60% of managers viewing global stocks as overvalued, they continue to neglect defensive areas of the market, most notably consumer staples. Fund managers are now net 24% underweight staples (1.5 standard deviations below the long-term average), a 12-point drop from 12% underweight last month and the lowest allocation since April ’21. We continue to view these “boring” corners of the market as ripe hunting grounds for opportunity.
 

VF Corp Update
 

With Q3 earnings season kicking off and many of our holdings set to report next week, we thought it was a good time to revisit an exciting update from one of our larger positions. Last month, VF Corp announced the sale of Dickies to Bluestar Alliance in an all-cash deal worth $600 million, expected to close by the end of 2025:
 

After VF’s reporting structure changed last quarter to remove Dickies from disclosure, spun as an effort to “simplify reporting and make performance easier to track,” it became increasingly clear the brand was struggling, not a top priority, and likely headed for sale. Dickies had posted three consecutive years of double-digit revenue declines, falling to just $542 million in FY2025, with no sign of an inflection as sales continued to drop last quarter.

While VF doesn’t break out operating income by brand, we can do some quick back-of-the-envelope math to get a rough idea. The Work segment, which includes Dickies and Timberland Pro, generated $833 million in revenue and $53 million in operating income in FY2025, with Dickies accounting for roughly two-thirds of segment sales. Even assuming Dickies contributed two-thirds of the operating income, which is VERY GENEROUS given Timberland’s relative strength, and applying D&A consistent with historical averages, the deal implies a multiple north of 12x EBITDA and ~1.1x sales, a premium to the overall company.

All things considered, offloading the struggling brand should have investors over the moon, especially at that price. Credit to management, who originally had no plans to divest the brand, for recognizing the opportunity and making it happen.

On top of that, the deal removes another headache by allowing VF to further deleverage, taking out a solid chunk of the $4.15 billion in long-term debt on the balance sheet. Management plans to use the full cash proceeds to address the upcoming EUR 500 million in long-term notes due March 2026, avoiding the need to tap the ABL and incur additional interest expense. That move will reduce leverage by more than half a turn and put VF well on track to reach its 2.5x target by FY2028, with the next maturity not until March 2028. With the rest of the business continuing to accelerate and generate solid free cash flow, VF should be able to handle future obligations organically. That begs the next question: with a $2 billion authorization already in place, at what point will management start buying back stock hand over fist?
 

Ladies and gentlemen, this kind of deal is exactly why we got involved with VF Corp in the first place. There are plenty of other beaten-down apparel names out there that look cheap, whether it’s Nike, Lululemon, or even Under Armour. We have no doubt that over time, those names will get a bid and start to turn around. But something we always look for in investments, and a central part of our thesis on VF, is the value of having multiple “outs.” For my poker players out there, you understand exactly what this means. VF’s portfolio of 11 brands gives Bracken Darrell plenty of options to buy, sell, or lean into in this environment. It started with the $1.5 billion Supreme sale last summer to deleverage the balance sheet, and now Dickies is the latest “out” to leverage. That has been VF’s playbook since 1899: buying, building, and selling a portfolio of brands, and we don’t see that changing anytime soon.

Not to mention, we’re betting on one of the best jockeys out there to lead the turnaround, Bracken Darrell. During his eight years at Logitech, the stock went from $5 to $133, delivering a 27-bagger. A $1 million investment in Bracken would have turned into $27 million. For those who haven’t already listened to our interview with him below, it’s well worth your time. You will quickly understand two things:

1) Why we have so much confidence in Bracken.

2) With the stock still trading at $14, why the only question we have been asking is how many shares we can possibly get our hands on.

Just a few days after the Dickies announcement, Bracken Darrell and CFO Paul Vogel spoke at the Wells Fargo Consumer Conference, giving more details on the Dickies deal and a high-level update on each of the brands in the portfolio. Below are the five key takeaways and a highlighted transcript from that discussion:

1) The aggressive cleanup actions at Vans, which drove ~40% of the brand’s decline last quarter, are expected to be fully completed by Q4. After closing ~20% of DTC stores over the past two years, the store footprint is now largely where it needs to be, allowing the focus to shift toward delivering great products and marketing. Bracken expects Sun Choe’s influence to become increasingly evident with new products this holiday season and even more in the Spring. Marketing efforts, especially the SZA artistic director partnership, are set to ramp up heading into the holidays, with plenty of “interesting” initiatives planned.

2) The North Face continues its push to become a true four-season brand, targeting 2x growth in apparel, 2x in bags and equipment, and 3x in footwear. Bracken expects the Spring/Summer collection to mark the real start of this transformation, supported by marketing and a pipeline of new products that will only grow from here. A key part of the strategy will be replicating TNF’s success in EMEA and APAC in the U.S., with a stronger focus on premium products.

3) Timberland continues to show strength, with Bracken describing it as a “resurgence in the interest of the yellow boot.” Importantly, this momentum is spilling over into other products, with both the boat shoe and Euro Hiker showing positive sales trends. Management attributes much of the success to renewed interest at the premium end of the market, driven by key collaborations like Louis Vuitton and Pharrell, similar to the dynamic now emerging at Vans, where the Valentino set of products are selling out.

4) Altra, a brand management had hardly mentioned in prior calls and is now beginning to focus on, is tied for the #1 trail running shoe and is one of the fastest-growing road running shoes, posting 20% growth last quarter. The brand continues to show strength and has significant potential to scale, with awareness still only at 8%.

5) Management expects that cost reductions, strategic pricing actions, and plant relocations will fully offset tariff costs by next year, compared to the $60–$70 million impact projected for this fiscal year. VF also has little to no exposure to de minimis.
 

General Market

The CNN “Fear and Greed Index” ticked down to 36 this week from 53 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)
 

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) ticked down to 84.57% this week from 86.24% equity exposure last week.
 

Our podcast|videocast will be out sometime today. We have a lot of great data to cover this week.  Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.

Not a solicitation.

*Opinion, Not Advice. See Terms

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