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Exiting two positions, adding a new one and sticking with Amazon and Home Depot

Exiting two positions, adding a new one and sticking with Amazon and Home Depot

KEY POINTS FROM THIS POST:

 

 

Throwing in the Towel on Costco

We are tossing in the towel on the Costco Wholesale (COST) October 2017 $173 calls (COST171020C00173000) that closed down another $0.06 yesterday and closed at 0.46. As we shared last week, we were frustrated, but that level of frustration rose even higher over the last few days given the continued degradation in the calls even though Costco continues to put up stellar comparable sales growth metrics. We saw those stellar domestic results that prove positive that Costco is one of the few retailers that continues to thrive despite the herd mentality that is “all Amazon” (AMZN). Good thing we also own the Amazon (AMZN) December 2017 $1000 calls (AMZN171215C01000000), which closed last night at 38.75 vs. our 34.25 buy-in price.

Earlier this week, on the back of the company’s stellar August sales report, we added to the Costco Wholesale positon on the Tematica Investing Select List, which served to nudge the average cost basis a bit lower. Given the cost basis in the Costco Wholesale (COST) October 2017 $173 calls (COST171020C00173000) vs. the current share price, we recognize it is going to be a difficult battle for the calls to reach breakeven. If the last three comparable sales reports haven’t perked up the calls, we think they will have a slim chance of doing so in the coming weeks. We could be wrong, but we would rather fish in more fertile waters like we’re doing with the Amazon calls as well as the recently added Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000) – more on those Home Depot calls in a few minutes.

 

Attention Wal-Mart Shoppers

We will take the returned capital from that closed CostCo positon, and pair it with profits made in our recent AXT Inc. (AXTI) and Utilities SPDR ETF (XLU) call trades as well as the COST calls we sold in early August to buy the Wal-Mart (WMT) January 19, 2018 82.50 calls (WMT180119C00082500) that closed at 2.29.

We’ve said that Wal-Mart is poised to be one of the top two retailers alongside Amazon, and our conviction is rising as Wal-Mart continues to adapt its business to our Connected Society tailwind. We’ve seen Wal-Mart management continue to expand its digital footprint, first organically and then in a more pronounced way with its acquisition of Jet.com. After that strategic purchase, Wal-Mart has made several nip and tuck acquisitions to expand the kinds of products offered at Jet.com, some of which, like Bonobos, will not be offered in Wal-Mart locations.

At the same time, the company, which is also the largest vendor of groceries in the U.S., is seeing a strong pick up in its food business. During its recent June quarter earnings call, the management teams shared its food categories delivered the strongest quarterly comp sales growth in five years. Food sales now account for half of the company’s revenue stream, nearly $200 billion – a strong lead over the second largest grocery chain, Kroger (KR), which has sales of $115.3 billion last year. Part of that is the appeal of Wal-Mart’s every day low prices to the Cash-Strapped Consumer, but here too the company is embracing our Connected Society theme as more than 900 locations offer online grocery.

Quietly, Wal-Mart is becoming “more of a digital enterprise that moves with speed and agility,” that includes experimenting with other tech-based initiatives that include robotics, image analytics to scan aisles for out of stock products.  One example of Walmart’s tech push is its new “Scan & Go” app, which allows shoppers to purchase items in-store without waiting in line or paying at a register. Shoppers will be able barcodes of items they want to purchase and then click a button to pay using their smartphones. They simply have to show a digital receipt to a Walmart greeter on their way out. Pretty cool and yes, we recognize this first very much within our Cashless Consumption investing theme.

With the company embracing several thematic tailwinds as we head into the Halloween season and then the year-end holiday shopping season, we see it capturing greater wallet share at the expense of others that are less able or willing to adapt their business models. One is Kroger, another is Target (TGT), which delivered flat food and beverage comps in its most recent quarter, and then there is Sprouts Farmers Market (SFM) that is already closing locations.

With regard to the call option we’re adding, we’ve selected the January 2018 strike date to capture the bulk of the holiday shopping season, as well as the initial return season that begins immediately after the Christmas holiday and runs into January.

 

And as I am sure you are asking yourself, “what about the Amazon calls?”

 

 

Sticking with Home Depot, watching the narrative on General Motors

On the heels of Hurricane Harvey, we now have Hurricane Irma barreling down on the Caribbean with its sights set on Florida. Irma has been upgraded to a Category 5 hurricane and is widely believed to be one of the most powerful Atlantic hurricanes ever. Moreover, it’s looking to be followed by tropical storm Jose. Odds are this trifecta of back-to-back-to-back storms will hit the economy in a meaningful way, and we expect to see third-quarter GDP forecasts drop as the effect of Irma and Jose wind down.

As the recovery from these storms begins, there is a high probability that Home Depot (HD)’s business will flourish as homeowners as well as contractors look to rebuild and refurnish. If we look at the building products that will be in demand over the coming weeks and months, Home Depot is the “gun” for all of those bullets.

Over the last week, we’ve seen a surge in the Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000), which closed last night at 7.70, up more than 70% from where we added them just last week. Given what Florida and the lower east coast are likely to be in for over the coming days, and let’s be honest, there will be no shortage of media coverage, we’ll continue to hold these calls. We will boost our stop loss to 5.00 from 2.00, which ensures a profit of more than 10%.

 

Now for General Motors (GM)… we’ve been bearish on the shares hence our short position. While Hurricane Harvey put a dent in August auto sales, according to Cox Automotive 300,000 to 500,000 vehicles were destroyed by Harvey’s path — with many of those covered by insurance. This means Harvey has destroyed more vehicles than Hurricane Katrina in 2005 and Hurricane Sandy in 2012, which destroyed 200,000 and 250,000, respectively. Odds are Irma and then Jose will weigh on September auto sales, but as the overall impact of these three storms subsides, it’s likely consumers will begin the arduous task of not only rebuilding and refurnishing but also replacing their cars and trucks.

We suspect that given the magnitude of the cars and trucks to be replaced, the herd will look past any slump in September auto and trucks sales, and focus on the surge in replacement demand to be had. As that activity happens, we are likely to see General Motor’s excess inventory and use of incentives evaporate. Therefore, we are covering our short position on General Motors shares at market.

  • We are covering our short position on General Motors (GM) shares at market.

 

 

 

About the Author

Chris Versace, Chief Investment Officer
I'm the Chief Investment Officer of Tematica Research and editor of Tematica Investing newsletter. All of that capitalizes on my near 20 years in the investment industry, nearly all of it breaking down industries and recommending stocks. In that time, I've been ranked an All Star Analyst by Zacks Investment Research and my efforts in analyzing industries, companies and equities have been recognized by both Institutional Investor and Thomson Reuters’ StarMine Monitor. In my travels, I've covered cyclicals, tech and more, which gives me a different vantage point, one that uses not only an ecosystem or food chain perspective, but one that also examines demographics, economics, psychographics and more when formulating my investment views. The question I most often get is "Are you related to…."

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