WEEKLY ISSUE: As the market moves higher, getting ready for Select List earnings
Over the last week, we’ve seen the domestic stock market set to break through to new highs, and that, as well as favorable thematic fundamentals, has had a very positive impact to the Tematica Investing Select List. Positions in a number of holdings have risen in excess of the market’s “year to date” move of 3.8% as of last night’s market close. Such notable performers include Universal Display (OLED), Corning (GLW), MGM Resorts (MGM), United Parcel Service (UPS), Starbucks (SBUX) and of course Amazon (AMZN) and Apple (AAPL). Several of those were beneficiaries of the favorable Connected Society and Disruptive Technologies data points came about during last weeks CES 2018 technology conference and the December Retail Sales report.
By comparison, yesterday I shared my view on Barnes & Noble (BKS) shares, which serves as a reminder of the challenges to be had by a company and a management team that are grappling with a thematic headwind. As we have seen time and time again, a thematic tailwind is not to be underestimated and requires the right change in strategy to overcome. It’s not easy and can be painful for investors that get sucked into the “it’s cheap trap.” Year to date, BKS shares are down nearly 21% and we’re just 12 trading days into 2018. It could be a very painful year for Barnes & Noble, just like 2017 was for Blue Apron (APRN) and that stock has only gotten “cheaper.”
Prepping for 4Q 2017 Earnings
As we move deeper into 4Q 2017 earnings season, we are seeing the Wall Street herd once again come around and upgrade companies that we’ve been bullish on and reside on the Tematica Investing Select List. Two cases in point are MGM Resorts (MGM) and International Flavors & Fragrances (IFF) shares – the former saw its price target raised to $44 from $41 at JPMorgan, while the latter was upgraded to Outperform from In-line at Evercore ISI. Alphabet/Google (GOOGL) shares saw their price target bumped to $1,300 from $1,150 at Piper Jaffray this week as well.
Digging into these price actions, we find the majority of them reflect the expected benefit of tax reform on corporate bottom lines, which at this point are essentially educated guesses by Wall Street. Directionally, they are right of course, but the lingering question is to what degree will the benefit of tax reform drop to corporate bottom lines as well as what form. Bernstein estimates tax reform should boost Bank of America’s (BAC) bottom line by roughly 16% in 2018, and FedEx (FDX) suggested it could see more than $4.50 in incremental EPS due just to tax reform, which equates to more than a 30% jump year over year.
Those are just two estimates but they reveal how wide and varied those tax reform expectations are. There is also the potential for companies to utilize the incremental cash flow for purposes other than growing and investing in their business, namely dividend hikes and authorizing new share repurchase programs. Given the disparity between available worker skill sets and skills required by employers that is part of our Tooling & Re-tooling investment theme, the odds of such actions are too high to be ignored in my opinion. While these actions would also help boost shares, the lingering concern is how the market will receive the “news” as it continues to move higher?
We’ll have a better sense over the coming few weeks as we and the market digest the growing number of earnings reports to be had, which should hopefully offer some clarity on the benefits to be had from tax reform. I’m still collecting 4Q 2017 earnings reporting data from companies on the Select List, but even though some of these dates are tentative this is how the next few weeks are shaping up:
- January 25 – LSI Industries (LYTS), McCormick & Co. (MKC), Starbucks (SBUX)
- January 31 – Facebook (FB)
- February 1 – Amazon (AMZN), Apple (AAPL), Nokia (NOK), United Parcel Service (UPS)
- February 14 – International Flavors & Fragrances (IFF)
- February 15 – Applied Materials (AMAT), MGM Resorts (MGM)
- February 21 – AXT Inc. (AXTI)
- February 22 – Universal Display (OLED)
Again, some of these dates are tentative, and as they firm up I’ll be updating this calendar as well as adding those like Alphabet/Google and USA Technologies (USAT) that are currently absent. As we approach these dates, I’ll be sharing consensus expectations as well as levels at which we’d be inclined to scale into each position should the opportunity present itself. No doubt, some of these reports, like those from Apple and Amazon, could offer such opportunities for patient and longer-term focused investors like ourselves. It’s not that I expect them to have bad reports, it’s just that with those companies the hype machine can lead to lofty expectations. My thought is better to expect the worst and be prepared, and be surprised with a better than expected report.
In between these dates, there will be no shortage of companies reporting and those results should not only give us a sense of tax reform benefits to be had, but also update us on the current state of various markets. For example, after today’s market close Alcoa (AA) will report and its commentary as well as outlook for the various markets that it serves, which ranges from automotive to aerospace and industrial applications for aluminum and other cast metals, is a well-accepted barometer of economic activity.
Be sure to check TematicaResearch.com later today for the next Cocktail Investing podcast, and then again tomorrow when I share my view on Rite-Aid (RAD), a company in transition that is angling to ride our Aging of the Population tailwind.
