WEEKLY ISSUE: iPhone Sales Chatter and Select List Earnings Announcements
It has been a busy week on a number of fronts. Over the last several days along with my fellow Tematica teammates I’ve been attending Inside ETFs 2018, the leading ETF industry conference in Hollywood, FL. We’ve met with a wide variety of ETF issuers, some of which embracing new investing strategies, while others are focusing on new and different geographic strategies. On the Tematica Investing Select List I’ve sporadically used ETFs to capture broad-based thematic exposure when it’s made sense. One such example is the ETFMG Prime Cyber Security ETF (HACK) that is benefitting from our Safety & Security investing theme. HACK shares are up some 16% since we added them to the Select List several weeks shy of a year ago. As these new ETF products become available in the coming months, I’ll be kicking the tires on those that fit our thematic investing framework.
While the government has re-opened with funding set to carry it through Feb. 8, the stock market greeted the 3-day shutdown with little more than a yawn, as evidenced by the continued melt up over the last week. As expected, that move higher reflects a growing number of companies reporting better than expected December quarter earnings and boosting 2018 forecasts as they incorporate tax reform into their outlooks. I expect we will be seeing more of the same over the next few weeks as December quarter reporting runs its course.
Riding the Accelerating Shift Towards Digital Commerce.
There are likely to be a number of tax reform beneficiaries on the Tematica Investing Select List, with one of them being United Parcel Service (UPS). Over the last few weeks, UPS shares have had a strong showing and are now up nearly 30% since we added them to the Select List last February. I continue to see UPS benefitting from the accelerating shift toward digital commerce that is part of our Connected Society investing theme, and with roughly two-thirds of their operating profit derived from the U.S. I expect the company to deliver upside to 2018 EPS expectations vs. the current consensus EPS of $7.17 when it reports on Feb. 1. We will look to get ahead of the herd on this and boost our price target to $140 from $130, which offers additional upside, but not enough to warrant committing fresh capital at current levels.
- We are boosting our price target on United Parcel Service (UPS) shares to $140 from $130.
Select List Companies On Tap to Report Earnings This Week
From a Select List perspective, we have just two companies reporting this week – LSI Industries (LYTS) and Starbucks (SBUX). Earlier this week I shared my view that LSI’s results and outlook could be hampered by winter storms and freezing temperatures that hit in December and earlier this month. Given the prospects of President Trump’s rebuilding US infrastructure framework, we’ll look to add to LYTS on a meaningful pullback. With regard to Starbucks, some of the key factors that I’ll be watching include beverage-food attach rates, the pace of new store openings in the U.S. and China as well as new menu initiatives for both food and beverage.
- Our price targets on LSI Industries (LYTS) and Starbucks (SBUX) shares are $10 and $74, respectively.
Chatter Around iPhone X Shipments
The bulk of our earnings reports will be had next week, but we are once again hearing much chatter on the iPhone demand, particularly for the latest iPhone X from Apple (AAPL). The latest comes from JPMorgan, which on the back of reports out of Taiwan, is calling for a sharp decline in iPhone X shipments. Interestingly, we are already hearing chatter about three new iPhone models, two of which will have cheaper prices than the $1,000 iPhone X model and two that will have organic light emitting diode displays. We continue to see that as a positive for Universal Display (OLED) shares in 2018 as other opportunities (TVs, other connected devices, interior automotive lighting and eventually general lighting) come to market. Universal Display shares have been a bit wobbly over the last few days, most likely due to some profit taking ahead of earnings, but all data being received points to more upside ahead for OLED shares.
As I have shared many times, that ramp in OLED production is also positive for our Applied Materials (AMAT) shares over the coming quarters as well. With regard to Applied, while it won’t report its quarterly results for several weeks, competitor Lam Research (LRCX) will report after tonight’s close. Over the last week, AMAT shares have been on a tear following upbeat semiconductor bookings and backlog reports, and odds are Lam’s results will add another log to the fire. Another one will be had from Intel’s quarterly report after Thursday’s market close. Its comments on chip demand from PCs, data centers and other applications as well as its capital spending plans for 2018 will be the noteworthy items to watch.
- Our price target on Universal Display (OLED) shares is $225
- Our price target on Applied Materials (AMAT) shares is $65.
Getting back to Apple, I continue to like the company’s improving position in our Connected Society investing theme as it is about to expand its presence with virtual assistant and smart speaker HomePod. I also like that Apple’s efforts to bring proprietary content to its devices appears to be picking up steam. On the Netflix (NFLX) earnings call earlier this week, it shared that “Apple is growing its programming, which we presume will either be bundled with Apple Music or with iOS” and reminded investors that Apple’s content budget for original programming is $1 billion. I’d point out that Apple has over 1 billion iOS users across the globe.
I see that making Apple’s already sticky devices even more so. Apple shares in my view are very much like Amazon (AMZN) shares – they are to be owned and not traded, and we’ll use weakness to improve our long-term cost basis on this company that is riding multiple thematic tailwinds.
- Our price target on Apple (AAPL) shares is $200
In Conclusion . . .
Later this week, I’ll be sharing my thoughts on Amazon’s Amazon Go store that opened earlier this week, which has the potential for Amazon to once again disrupt the traditional retail space by automating the checkout process. If you missed this Thematic Signal that cuts across our Connected Society and Disruptive Technologies investing themes, The New York Times has a pretty good overview and you can find it here. Again, as the Inside ETF conference wraps up, I’ll have more detailed thoughts on this and what it means for not only Amazon, but others as I look at it through our “buy the bullets, not the guns” strategy.
