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Weekly Issue: A New Cash-Strapped Consumer Call to Add to the Select List

Weekly Issue: A New Cash-Strapped Consumer Call to Add to the Select List

 

KEY POINTS FROM THIS ALERT:

 

The latest Fed FOMC meeting came and went and the bottom line is yes, the Fed did jack interest rates by another 0.25% as expected, but it also upped its 2018 GDP forecast to 2.5% from 2.1%. That’s the good news, and I’ll have more in-depth comments up on TematicaResearch.com later today. With that news out of the way, let’s instead turn to our current crop of call positions on the Tematica Options+ Select List as well as a new addition that comes as we inch closer toward the Christmas holiday.

 

Adding a call option trade on Cash-Strapped Consumer company Groupon

Nearly two years ago, I shared my concerns over several companies, including Groupon (GRPN), Yelp (YELP) and Angie’s List. The gist of the central concern was they all were features, not products that could fuel an entire business. In between then and now, Angie’s List was acquired by IAC/Interactive Corp. (IAC) and Yelp made a series of moves that enabled it to cross over from bottom-line losses in 2016 to be on track to post earnings per share (EPS) of $0.17 with expectations of $0.37 next year. That led the stock higher by more than 15% over the last year, and the current consensus price target is a hair over $46.

Turning to Groupon, after delivering EPS of $0.04 last year, it’s slated to earn $0.13 per share this year and is expected to deliver EPS of $0.19 next year. Earnings growth like that has my attention, but so does the likelihood its revenue this year and next year will be below 2016. While I’m not a fan of falling revenue, I’m a bigger fan of margin expansion, which is how the company is poised to improve EPS on reduced revenue — a good thing, especially if it can maintain or achieve further margin expansion should revenue rebound. If that proves to be the case, it could be a boon to the company’s bottom-line performance and for those wondering, Groupon has positive free cash flow.

Both Yelp and Groupon have pivoted to businesses that strive to connect people with businesses, be it online or increasingly by smartphones. Another such business is  Quotient Technologies (QUOT), which owns Coupons.com and offers white-label solutions to retailers. With last night’s market close, Quotient shares are trading at 22.6 times expected 2018 earnings, a steep discount to Yelp, which has a price-to-earnings (P/E) multiple of 114 times for next year. By comparison, Groupon shares are trading at 29 times 2018 consensus expectations, and it’s not lost on us that Groupon’s revenue is more than seven times that of Quotient Technology and more than three times larger than that at Yelp.

But as we strive to be smart investors, we know we can’t rely on just one metric. With none of these three companies paying dividends and Yelp’s bottom-line loss in 2016, it makes a P/E-to-growth comparison a little challenging. This brings us to an enterprise value-to-revenue analysis. This shows that at current prices, GRPN shares are trading at 2017 and 2018 revenue, compared to 2.3-to-2.8 times for QUOT shares and 3.1-to-3.5 times for YELP shares.

Here’s the thing: To see a meaningful move in GRPN shares, it doesn’t need to reach the lower valuation ranges of QUOT and GRPN. If it can close the gap somewhat and trade at 1.5 times 2017-2018 revenue, it drives a stock price of more than $8.50 per share. That’s upside of just under 50% from current levels.

The question is what’s the catalyst to get Groupon there?

Given the current state of the average U.S consumer, who faces the combination of potentially higher interest rates on higher debt levels year over year and higher healthcare costs as well as being under-saved for retirement, he and she are embracing ways to stretch their disposable dollars. We’re seeing this in the comparatively strong monthly same-store sales figures put up by Tematica Investing Select List resident and Cash-Strapped Consumer play Costco Wholesale (COST) over the last several months. Moreover, like other domestically focused businesses, Groupon is poised to benefit from tax reform as it continues to improve its user experience and add quality businesses looking to leverage its 50 million customers.

While we could add the shares as a trade over the next four to six weeks, I see a far better risk to reward tradeoff in the Groupon (GRPN) Jan 2018 6.000 calls (GRPN180119C00006000) that closed last night at 0.13. Given the volatile nature of call options in general, we’ll put a stop loss at 0.05 for this trade and will look to acquire the calls up to 0.20.

 

Checking in on Applied Materials, Universal Display, and Amazon Calls

After coming under pressure over the last week along with the overall technology group, our Applied Materials call option – Applied Materials (AMAT) January 2018 $55 calls (AMAT180119C00055000) – came under considerable pressure as well.

We see the pullback in the calls offering subscribers who’ve been sitting on the sidelines despite favorable fundamentals for the company’s semi-cap and display businesses another opportunity to buy. For those that already bought the shares, my recommendation is to use the pullback to improve your cost basis.

Here’s why…

In addition to adding semi-cap capacity, it now appears that China is gearing into the organic light emitting diode display market, as well, as it looks to compete with Korean display companies such as Samsung and LG. Confirming our upbeat on both of the companies business, in the last few days, Wells Fargo initiated coverage on AMAT shares with a “Buy” rating and a $65 price target. In the coming weeks, I expect more positive data points to be had at the upcoming Consumer Electronics Show in early January.

 

Turning to Amazon, today brings the November Retail Sales report, which based on findings over the Thanksgiving – Cyber Monday 2017 period should show a surge in non-store retail sales for the month. According to new data from Adobe Systems (ADBE), every single day year-end holiday shopping data thus far in 2017, holiday shoppers are spending over $1 billion in online revenue, and that is setting a pace for the 2017 holiday season to hit a record $107.4 billion. If this forecast holds, it will make the 2017 holiday shopping season the first to cross the $100 billion mark, according to Adobe Analytics.

 

Housekeeping

It’s that time of year again folks when even we here at Tematica are hit by year-end travel plans during the holiday season, which means we’ll be suspending the regular weekly issue next week and expect to return on January 3rd.

I know that should the need arise I’ll be sharing thoughts on Select List positions and odds are more than a few Thematic Signals will make their way onto TematicaResearch.com. We’d never leave you hanging here at Tematica, and like the mailmen of yore, we aim to deliver no matter what is going on.

On behalf of myself and the rest of Team Tematica, Merry Christmas, Happy Holidays and have some Guilty Pleasure fun along the way as you ring in 2018!

 

 

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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