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Author Archives: Chris Versace, Chief Investment Officer

About 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…."
We expect Facebook will answer the call for more privacy safeguards

We expect Facebook will answer the call for more privacy safeguards

Over the weekend, the Sunday morning political talk shows put Facebook (FB) the spotlight following renewed privacy concerns and that is hitting FB shares this morning.

This privacy concern renewal stems from news that data firm Cambridge Analytica came to access information about potentially tens of millions of users without their explicit permission to build “a system to target individual U.S. voters with political advertisements.” As has become clear, Cambridge Analytica worked on Donald Trump’s 2016 presidential campaign and “and has come under scrutiny in special counsel Robert Mueller’s investigation into whether Trump associates colluded with Russia’s efforts to interfere in the U.S. election.” It’s been estimated that Cambridge improperly accessed private information from more than 50 million Facebook users, and was not deleted despite Facebook’s demands beginning in 2015. Per Facebook, it learned this month the data had by Cambridge was not destroyed.

This morning it is being reported that Republican Senator John Kennedy and Democratic Senator Amy Klobuchar are calling Facebook CEO Mark Zuckerberg to testify before Congress. Those two join a growing list of people calling for Facebook to explain how the data was used, what policies were violated, what legal implications are to be had, and why Facebook didn’t disclose what happened until late last week despite knowing of the abuse in 2015.

Clearly, there will be a number of questions to answer, and we see this as a renewed call for Facebook to mature as a company and instill better safeguards for user privacy. While its possible these headlines could lead to some short-term disruption in user activity and advertising spend, we see them as somewhat in the rearview mirror with Facebook already refocusing on quality user engagement. We’ll continue to monitor the developments, but our suspicion is Facebook has already been laying the groundwork to address such privacy concerns.

At the same time, the company continues to focus on not only video advertising, but also expanding its Watch tab, which should help drive both user engagement and advertising revenue. The same can be said about its move to broadcast live sporting events as well as develop its own proprietary content that would position the shares inside our Content is King investing theme. As we have said many times in the past, the only thing better than having one of our thematic tailwinds pushing on a company’s business is having two or more.

  • Our long-term price target for Facebook (FB) shares remains $225.
SPECIAL ALERT: Walking Away from Universal Display Shares… For Now

SPECIAL ALERT: Walking Away from Universal Display Shares… For Now

  • We are issuing a Sell rating on the shares of Tematica Select List resident Universal Display (OLED) as short-term headwinds mount.
  • As we exit the position, despite their 2018 performance to date we’d note OLED shares have generated a return of more than 100% since being first added to the Select List in October 2016. On a combined basis, our two Buy actions for the shares on the Select List have returned a blended return of more than 47%.
  • As we cut Universal Display (OLED) shares from the Tematica Investing Select List, we will place them on the Contender List, looking to call them back up when signs of fresh industry capacity additions emerge.

While I continue to have a long-term bullish outlook on the organic light emitting diode display opportunity and Universal Display (OLED) shares, we are seeing mounting headwinds in the short-term that will likely restrain the shares.

The latest blow is coming from news that organic light emitting diode display adopter Apple (AAPL) is developing a competing technology dubbed MicroLEDs. While that tech likely won’t be commercialized for several years, it along with other near-term headwinds like the temporary slowdown in organic light emitting diode capacity additions, have taken their toll on OLED shares.

While I continue to expect new products containing organic light emitting diode displays to be announced and hit market shelves later this year, odds are OLED shares will remain range bound at best until we have clear signs the industry is once again increasing capacity. This means watching equipment orders from the likes of Tematica Investing resident Applied Materials (AMAT) and others. The downside risk is industry adoption of the technology is slower than previously expected, which means would lead to even further downside in OLED shares. Given the shifting risk to reward profile in the shares near-term, I’m opting to exit the shares, walking away with still impressive gains in the position until we see clear signs of a rebound in demand.

Speaking of AMAT shares, later this week Micron (MU) will be reporting its quarterly results I’ll be assessing its outlook and what it means for not only our Connected Society and Disruptive Technologies investment themes, but for AMAT shares as well.

 

Weekly Issue: Looking for Trump-Proof Companies

Weekly Issue: Looking for Trump-Proof Companies

We exited last week with the market realizing there was more bark than bite associated with President Trump’s steel and aluminum tariffs. That period of relative calm, however, was short-lived as the uncertainty resumed in Washington yesterday in the form of changeups in the administration with Trump letting go Secretary of State Rex Tillerson just after agreeing to talks with North Korea, and more saber rattling with trade actions against China for technology, apparel, and other imports. This also follows Trump’s intervention in the proposed takeover of Qualcomm (QCOM) by competitor Broadcom (BRCM).

While many an investor will focus on the “new” volatility in the market, I’ll continue to use our thematic lens to look for companies that are “Trump-Proof” in the short-term. That’s not a political statement, but rather a reflection of the reality that the modus operandi of President Trump and his Twitter habit often cause significant swings in the market as the media attempts to digest and interpret his comments.

How will we find these so-called Trump-proof companies? By continuing to use our thematic lens to uncover well-positioned companies that are benefitting from thematic tailwinds that alter the existing playing field, regardless of the latest noise from Washington politicians.

At least for now, volatility is back in vogue and that is bound to drive headlines and other noise. I’ll continue to focus on the data, and if you read this week’s Monday Morning Kickoff you know we are in the midst of a whopper of a data week. While the Consumer Price Index (CPI) for February was in line with expectations, and on a year over year basis core rose 1.8% — the same as in January — which should take some wind out of the inflation mongers. This morning we have the February Retail Sales report, which in my view should once again serve up confirming data for our positions in Amazon (AMZN) and Costco Wholesale (COST), which continue to benefit from our Connected Society and Cash-strapped Consumer investing themes.  Later in the week, the February reading on Industrial Production should confirm the demands that are exacerbating the current heavy truck shortage here in the U.S. – good news for the Paccar (PCAR)shares on the Tematica Investing Select List.

 

 

An Update on Our Once Star Performer, Universal Display (OLED)

A few weeks ago, I shared an update on Universal Display (OLED) shares, which have been essentially treading water following the company’s December quarter results. Later today, the management team will be presenting at the Susquehanna’s Seventh Annual Semi, Storage & Tech Conference. Odds are the management team will reiterate its view on market digesting the organic light emitting diode capacity additions made over the last several quarters, but I expect they will also describe the growing number of applications that will come on stream in the next 3-6 quarters.  As of late February, Susquehanna had a positive rating on OLED shares with a price target of $200 and I suspect they will have some bullish comments following today’s presentation.

 

Considering the ripples to be had with the latest Connected Society victim, Toys R Us

Over the weekend we were reminded of the situation facing many brick & mortar retailers that are failing to adapt their business to ride our Connected Society investing theme. I’m referring to toy and game retailer Toys R Us, the one-time Dick’s Sporting Goods (DKS) or Home Depot (HD) of its industry. Like several sporting goods retailers and electronic & appliance retailers such as Sports Authority, Sports Chalet, and HH Gregg that have gone belly up, if Toys R Us doesn’t get a last-minute lifeline or find a buyer it will likely file Chapter 7.

It’s been a rocky road for the one-time toy supermarket company as it entered bankruptcy in September, aiming to emerge with a leaner business model and more manageable debt. The company obtained a new $3.1 billion loan to keep the stores open during the turnaround effort, but results worsened more than expected during the holidays, casting doubt on the chain’s viability. The company entered this year with more than 800 stores in the U.S. — under both the Toys “R” Us and Babies “R” Us brands, but by January, it announced the shuttering of 180 locations.

The pending bankruptcy to be had at Toys R Us is but the latest in the retail industry, but it’s not likely to be the last. Claire’s Stores Inc., the fashion accessories chain with a debt load of $2 billion, is also preparing to file for bankruptcy in the coming weeks as is Walking Co. Holdings Inc.

What these all have in common is the increasing shift by consumers to digital commerce and the growing reliance on retailers for what is termed the direct to consumer (D2C) business model. Certain branded apparel, footwear, and other consumer product companies, like Nike (NKE) have embraced Amazon’s formidable logistics capabilities and this has benefitted our United Parcel Service (UPS) shares. As we have said before, and we recognize it sounds rather simplistic, when you order products online they have to get to where they are being sent. Hello UPS!

Now let’s consider the ripple effect of the pending Toys R Us bankruptcy.

When events such as this occur, there is a liquidation effect and a subsequent void. As we saw when Sports Authority went bankrupt, the businesses at Nike and Under Armour (UAA) were impacted by liquidation sales in the short term. At the same time, both lost the recurring sales associated with Sports Authority. Odds are we will see the same happen with Toys R Us with companies like Mattel (MAT) and Hasbro (HAS) taking it on the chin. In my view these companies are already struggling as teens, tweens and kids of all ages shift to digital games, apps and e-gaming, which are aspects of our Connected Society and Content

In my view these companies are already struggling as teens, tweens and kids of all ages shift to digital games, apps and e-gaming, which are aspects of our Connected Society and Content is King themes. When was the last time you saw an elementary schooler play with Ken or Barbie? More likely they are on an iPad or Microsoft (MSFT) Xbox while their older siblings are playing the new craze sweeping the nation – Fortnite. And yes, that it appears the rumors are true and Fornite will soon be available across Apple’s iDevices.

Looking at the financial performance of Mattel, not even the all mighty Star Wars franchise could save them from delivering declining revenue and earnings this past holiday shopping season. On the liquidation front, we are likely to see the toys businesses at Target (TGT) as well as Walmart (WMT) take the brunt of the blow. But here too this is likely just another hit as these two retailers have already been dealing with falling revenue at Mattel and Hasbro. Walmart is the largest customer for Mattel and Hasbro, accounting for about 20% of total sales for each toy maker. Both toy companies get nearly 10% of their revenue from Target too.

One of the investing strategies that I employ with the Select List is “buy the bullets, not the guns” which refers to buying well-positioned suppliers that serve a variety of customers. In situations like what we are seeing in the brick & mortar retail sector, we can turn that strategy upside down and uncover those companies, like Mattel and Hasbro, that we as investors should avoid given the multiple direct and indirect headwinds they are currently facing or about to.

 

Our Costco thesis remains intact

Our Costco thesis remains intact

Last night Costco Wholesale (COST) reported quarterly results that in our view are being misinterpreted by investors. While the company reported EPS for the quarter came in at $1.59 per share that included a $0.17 per share tax benefit that resulted from tax legislation passed by Congress vs. the expected $1.45 per share, it’s top line results continue to show Costco making wallet and market share gains. Net sales for the quarter came in at $32.3 billion, a 10.8% increase over the $29.1 billion achieved in the year-ago quarter. Excluding the impact of FX and gas, Costco sales rose 5.4% year over year for the quarter.

In our view, context is key and pitting Costco top-line results vs. those for Target (TGT) or Kroger (KR) confirm those share gains. For their latest quarters, Target reported adjusted top-line growth of 3.6% year over year, while this morning Kroger reported year over year sales growth of 2.7% excluding fuel. Also, scrutinizing Costco’s internal metrics confirm those share gains.  These include membership renewal rates (90.1% in the U.S. for the quarter) and membership growth (50.4 million member households vs. 49.9 million at the end of the prior quarter).

From a geographic perspective, U.S. sales rose 7.1% (5.7% ex-gas and FX); Canada + 8.7% (2.5% ex gas and FX); and Other/International up 15.7% (7.4% ex gas and FX) for the quarter with E-commerce sales up more than 28% year over year. Those share gains were also reflected in the February same-store sales data that was shared last night as well. For the month, net sales rose 12.8% to $10.21 billion with:

  • US up 9.0% (7.5% ex-FX and gas)
  • Canada +8.4% (up 3.2% ex-FX and gas)
  • Other/International up 22.2% (14.1% ex-FX and gas)
  • E-commerce +38% (up 37% ex-FX and gas)

In addition to the brick & mortar wallet share gains being had, we’d also note the reported E-commerce growth metrics. Management has continued to focus on improving its digital offering while also improving its search capabilities and checkout experience. I also suspect its relationship with Instacart and others is driving digital grocery, which should alleviate bearish concerns over Amazon as it relates to Costco’s business.

On a side note, I was at a local Costco this past weekend when it opened, and it was not only packed to the gills, but the checkout lines were several people deep as was the new membership line.

From a fundamental perspective, we see the company has benefitted and continues to do so from the lack of domestic wage growth for roughly 80% of the workforce over the last year that is prompting debt-laden consumers to stretch disposable spending dollars where they can. The latest data from the Federal Reserve showing a gap up in credit card charge-offs in 4Q 2017 vs. 4Q 2016 serves as a confirming point and sets the stage for more should the Fed boost interest rates as expected. The bottom line is given economic constraints, Cash-Strapped Consumers will continue to flock to Costco be it in person or online as the company continues to expand its offering.

As we have discussed previously, one of the key differentiators for Costco is its high margin membership fee business, which accounts for more than 70% of the company’s pre-tax income. During the quarter Costco slowed its pace of new warehouse openings to 1 from 5 in the prior quarter but shared it aims to open two in the current quarter followed by 18 openings and three relocations in the subsequent quarter. All told, Costco will open 22-23 new locations during the current fiscal year, which sets the stage for continued membership fee income growth in the coming quarters.

Understanding these two perspectives keeps us bullish on COST shares.

  • Our price target on Costco Wholesale (COST) shares remains $200

 

 

WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

 

Our Latest Thoughts on Trump Tariffs

The stock market roller coaster of the last few weeks is clearly continuing. This week we have President Trump’s potential steel and aluminum tariffs take center stage, shifting the attention away from Fed Chief Jerome Powell last week. When I shared with you my view the market would trade data point to data point until the end of the Fed’s Mar. 20-21 monetary policy meeting, I certainly didn’t expect let alone anticipate these tariffs and their escalating conversation to be a part of it. In a post earlier this week, I shared my view that Trump is once again utilizing the negotiating strategy he laid out in his book, Art of the Deal. In another one today, I gamed out what is likely to happen should Trump go forward with the tariffs.

Last night’s resignation of Trump economic advisor Gary Cohn has certainly fanned the flames of uncertainty over the tariffs, with more people thinking that Trump is “serious.” In an effort to counterbalance that resignation, this morning Commerce Secretary Wilbur Ross shared that Trump “has indicated a degree of flexibility on tariffs for Canada and Mexico.” That Cohn-related walk-back by Secretary Ross, combined with comments made yesterday by Treasury Secretary Steven Mnuchin that indicated that “once a new NAFTA deal is reached, the trading partners wouldn’t be subject to the tariffs” confirms my view that Trump remains on the Art of the Deal negotiation path.

In my post earlier this morning about the tariffs, I shared that we will likely see choppy waters as this issue comes to a resolution and leads up to the Fed’s next monetary policy meeting conclusion on March 21. Expect volatility to remain in place and the coming economic data will either amplify or quell its magnitude. Barring any breaking news, I’ll be on The Intelligence Report with Trish Regan on FOX Business to discuss all of this at 2 PM ET today.

While many fret over the market swings, my perspective is that the domestic economy remains on firm footing and barring a trade war volatility will allow us to pick up thematically well-positioned companies at better prices. A great example of this was had earlier this week with the February heavy truck orders that served to confirm my thesis behind Paccar (PCAR) shares.

When Costco Wholesale (COST) reports its quarterly results after the market close, we should see similar confirmation in the form of not only wallet share gains via its top line results, but also in rising membership fees as more consumers look to stretch the disposable income they do have, a key component of our Cash-Strapped Consumers investment theme.

To set the stage for Costco’s report tonight, consensus expectations for the quarter sit at EPS of $1.46 on revenue of $32.7 billion, up from $1.17 and $29.8 billion in the year-ago quarter. As a reminder, one of the key differentiators for Costco is the high margin membership fees that are poised to grow as the company continues to open new warehouses. This means, at least for me, that roadmap, will be one of the areas of focus on the company’s post-earnings conference call. I’ll also be listening to see the impact of tax reform on the company’s outlook for 2018.

  • Our price target on Paccar (PCAR) shares remains $85.
  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Getting back to the Tematica Investing Select List

In last week’s issue, I began sharing some much-needed updates across the Select List, and I’m back at it again this week with a few more. Over the next few weeks, I’ll look to round out the list before we break at the end of March and get ready to gear up for 1Q 2108 earnings season.

Yes… I know… before too long it will once again be time for that zaniness.

All the more important to share these updates with you so we set the table for the earnings meal to be had.

 

Amazon (AMZN),  Connected Society

Simply put, Amazon shares have been a champ so far in 2018 rising more than 30%, which brings the return on the Select List to more than 100% since being added back in 2016. I’ve said these shares are ones to own, not trade given the accelerating shift to digital commerce, and growing adoption of the high margin, secret sauce that is Amazon Web Services as more businesses turn to the cloud. As filled with creative destruction as those two businesses are, it looks like Amazon is poised to offer further disruption in the healthcare and financial services business given conversations with JPMorgan (JPM), Berkshire Hathaway (BRK.A), Capital One (COF) and others.

I’ve raised our price target several times on AMZN shares, and it increasingly looks like that will have to happen again and then some depending on how soon these new layers of disruption materialize.

  • Our price target on Amazon (AMZN) shares remains $1,750.

 

Starbucks (SBUX), Guilty Pleasure

Year to date, Starbucks shares are essentially unchanged compared to where they were trading as we exited 2017. And the same is true if we look at the shares over the last year – they are up modestly. What we are dealing with here is a company that is once again in transition as it looks to invigorate its domestic business while growing its presence in still underserved markets outside the US like China and Italy. One of the central strategies in both areas is to leverage its high-end Reserve Roastery concept, which keeps the company very much in tune with our Guilty Pleasure investing theme.

Historically speaking, Starbucks has been a company that has been able to successfully pivot its business when it has stumbled, and in our view, that merits some patience with the shares. Helping fuel that patience is the knowledge that Starbucks intends to return $15 billion to shareholders over the next three years in the form of dividends and buybacks.

  • Our price target on Starbucks (SBUX) shares remains $68

 

Disney (DIS), Content is King

Disney shares have traded off some 3% thus far in 2018, which is not unsurprising given we are in the seasonally weakest part of the year for the company. That said, the latest Marvel film, The Black Panther, is crushing it at the box office and ups the ante for the next Avengers film that will hit theaters in a few months. Disney continues to leverage these and other characters as it revamps its theme parks and hotels, which should drive attendance despite yet another round of price increases.

The big “wait and see” for Disney over the coming months will be its move into its own streaming services for both ESPN and eventually a Disney content-centric service. While I see this as Disney making the right moves to address the chord cutting headwind that is part of our Connected Society investing theme, to paraphrase the great film Bull Durham, just because Disney builds it doesn’t mean people will stream it. In a positive move, Disney installed James Pitaro as the new president of ESPN. Mr. Pitaro’s background as chairman of Disney Consumer Products and Interactive Media, as well as the head of Yahoo! Media, sends investors the signal that getting the streaming services in place will be a top priority going forward for ESPN.

The next catalyst to be had for Disney will be spring break and then the summer movie season. Between now and then, I expect Disney will continue to put its massive buyback program to work.

  • Our price target on Disney (DIS) shares remains $125

 

United Parcel Service, Connected Society

Our UPS shares were hard hit earlier in the year given renewed concerns that Amazon would expand its own logistics offering. At the time, my view was this was an overblown concern, and it still is. This week, we saw Stifel Nicolaus warm up to the shares, upping them to a Buy rating with a $121 price target given what it sees as a “strong underlying package and freight businesses.”

Each month in the Retail Sales report we see the share gains had at non-store retailers, and we know companies ranging from Costco and Walmart (WMT) to Nike (NKE) and many others are embracing the Direct to Consumer (D2C) business model. All of this bodes well for UPS shares over the coming year.

The one potential hiccup to watch will be negotiations with the Teamsters Union this summer. If that brings the shares near or below our Select List entry point, I’ll look to scale into this position ahead of the seasonally strong second half of the year.

  • Our price target on United Parcel Service (UPS) shares remains $130.

 

 

What Investors Need to Know About the Implications of Trump’s Tariffs

What Investors Need to Know About the Implications of Trump’s Tariffs

 

A couple of days ago, I shared my view that President Trump’s tariff overtures are more than likely a negotiating tactic as he looks to tackle yet another of his campaign promises – international trade. The resignation of Gary Cohn on Tuesday, President Trump’s top economic adviser and the head of the National Economic Council, have certainly fanned the flames that this might not be a bluff by Trump — either that or Gary Cohn was unwilling to play the game.

I continue to think Trump is following the negotiating strategies he laid out in his 1987 book, Art of the Deal. But as an investor, we have to game out the potential outcomes so we can assess the potential risk and position ourselves accordingly. 

 

Should Trump enact the seemingly unpopular trade tariffs on steel and aluminum, what then? 

For starters, with an increase in the cost of importing from other countries and a lack of price pressure on American suppliers, steel and aluminum will become more expensive to U.S. companies. No big surprise there. The companies impacted will be wide, ranging from manufacturers of aircraft, high-speed rail, cars, trucks, construction equipment, motors, satellite dishes, smartphones, tablets and appliances. And let’s not forget cans, which will impact the price of food, soda and beer, as well as a variety of other products.

What this means is the cost production for Boeing (BA), Ford (F), General Motors (GM), Navistar (NAV), Paccar (PCAR), Caterpillar (CAT, Deere (DE), Cummins (CMI), Apple (AAPL), Dell, Whirlpool (WHR), Coca-Cola (KO), PepsiCo (PEP), Molson Coors (TAP), Anheuser Busch (BUD), and numerous others will rise. 

 

Will those companies look to change to domestic suppliers? 

Most likely, but that will take not only time, but require more domestic capacity to come on line. As we’ve seen in the domestic oil industry, it’s not as easy as flicking a light switch – it takes time, and more importantly, it takes people, the right people. That’s right, the skill set to work in a steel or aluminum plant is not the same as working at McDonalds (MCD), the Gap (GPS) or an AMC Theater (AMC).

What we’re likely to see amid a rise in demand for domestic steel and aluminum is rather similar to what we are seeing in the freight industry. The currently capacity constrained domestic truck market has led to sharp increases in freight costs cited by a growing number of consumer product companies ranging from Tyson Foods (TSN) to J.M. Smucker (SJM) and Ross Stores (ROST). 

The same materials constraints is poised to happen to homebuilders this spring, given the current lumber shortage… and yes the current truck shortage could mean a double whammy for homebuilders like Toll Brothers (TOL), D.R. Horton (DHI), Lennar Corp. (LEN) and the rest of the industry, both public and private, as they truck materials to new building sites.

We’ve talked quite a bit about how rising home prices due to low supply have likely priced out a number of prospective buyers. Let’s also remember the rising level of consumer debt and lack of wage gains for the vast majority of workers that Lenore Hawkins, Tematica’s Chief Macro Strategist, and I have been talking about on the Cocktail Investing Podcast and writing about. What this probably means is more consumers will be priced out of the housing market as homebuilders look to offset rising costs with higher prices. Basic economics. 

Getting back to the impact of the proposed Trump tariffs, while they would help potentially level the playing field for steel and aluminum companies like AK Steel (AKS), Steel Dynamics (STLD), Century Aluminum (CENX), Arconic (ARNC) and other, in the short to medium term they will more than likely lead to higher prices. 

While companies may look to offset those rising costs, the reality is that in today’s world where a public company must at a minimum meet the bottom EPS expectations lest it’s stock price get crushed, odds are they will raise prices to minimize the hit to the profits and the bottom line. We’ve seen this time and time again over the years at Starbucks (SBUX) with a nickel here and there price increase with its latest in September ranging from 10 to 30 cents on a variety of menu items. 

To use the lingo favored by the Fed and economists, we run the risk of inflation. Yes, folks, I said it, inflation, and as we know over the last few weeks that word has become a focus for investors as they look to gauge how far and how fast the Fed will boost rates in 2018 and before too long 2019. We know in watching these higher prices will weigh on the buying activity of Cash-Strapped Consumers and most likely others as items become less affordable. Not sure, consider the median U.S. income last year was all of $31,685 compared to $31,248 in 2000 – over 18 years an income gain of just $437! 

This is where I remind you that the U.S. consumer is a meaningful contributor to the domestic economy, (with consumer spending accounting for nearly 70% of GDP) and Lenore would kick me if I didn’t remind you how far along we are in the business cycle. The combination of rising prices and questionable consumer demand also runs the risk of profit and EPS pressure that would likely weigh on stock prices. 

Boiling it down, the question is does Trump want to run the risk of torpedoing the economy and the stock market, two of his much tweeted about barometers for his presidency?

My thought is probably not.

I do, however, expect Trump and his ego will continue down this negotiation path, ultimately compromising for a better trade deal than the current one. And yes, my fingers are crossed. 

Will it be smooth sailing to that destination? Not likely and we can see last night’s resignation of Gary Cohn, President Trump’s top economic adviser, as a sign the waters will be more than choppy over the next few weeks. 

 

The Response from the EU and Its Potential Impact to the Fed and Interest Rates

Upping the ante, this morning the European Union shared its response to Trump’s proposed metals tariffs saying it would take the case to the World Trade Organization and coordinate its actions with other trade partners that are also against the proposed tariffs from the U.S. The EU went on to share a “provisional list” of U.S. products that would see higher tariffs from the EU, if Trump moves ahead with the import tariffs. The full list has yet to be made public, but among its speculated $3.5 billion impact will to items such as peanut butter, cranberries and oranges. Perhaps EU officials have been busy reading Trump’s Art of the Deal? 

What all this looks like… or at least I hope it is… is a good ol’ fashion game of chicken — international trade negotiation style.

Like most games, there tends to be a winner and a loser, and while it’s possible that Trump comes out ahead on this, the risk he runs will impact the American consumer, the domestic economy and at least certain stocks if not the overall market. 

Remember also that the next monetary policy meeting by the Fed is in two weeks. At its January meeting, the Fed was beginning to shake and bake tax reform implications into its outlooks, and I suspect the Fed heads are likely doing the same with a potential trade war. Do I feel bad for new Fed Chief Jerome Powell? Let’s just say that I wouldn’t want his job, but then again given my pension for calling it like I see it they probably wouldn’t want me. 

 

Blue Apron and GNC, two examples of the struggle to fight against thematic headwinds

Blue Apron and GNC, two examples of the struggle to fight against thematic headwinds

 

In Tematica Investing, we focus on companies that are benefitting from tailwinds associated with our investment themes. As a good institutional portfolio manager knows, avoiding problematic investments is critical as they can sabotage returns to be had from well-positioned ones. In our Tematica lingo, that means avoiding companies that have thematic headwinds bearing down on their businesses and buying companies that are rising the tailwinds.

 

No need to revisit Blue Apron shares

We’ve been bearish on shares of Blue Apron (APRN) and we’ll try not to pat ourselves too hard on the back as we take a victory lap on that call.

As we saw yesterday, there is a good reason to remain that way as Walmart (WMT) is formally getting into the meal kitting business. While many were expecting Amazon (AMZN) to leverage its Whole Foods Market business with its own meal kitting offering (we still are), Walmart is leveraging its position as the largest grocer to enter the fray. The goal for the brick & mortar retail giant is to help build its digital footprint as well as take share from the restaurant industry, which has been pressured by weak traffic and average ticket pressure. Odds are Walmart is also looking to ride the consumer shift toward healthier eating and snacking that is part of our Food with Integrity theme along with a hefty dose of our Connected Society one.

All in all, this looks like a good extension for Walmart and one that is poised to make an already challenging environment even more so for Blue Apron.

 

 

Struggling GNC Holdings looks East

Another company that has been running into a significant thematic headwind is GNC Holdings (GNC). Once a dominant player in the sports performance and nutrition space (otherwise known as body-building), the supplement retailer has been attempting to reposition itself to a wider audience as a seller of “health, wellness and performance products.” As the performance market has moved online and to other sources, GNC has been attempting to capture more women and appeal to the Boomers and their set of nutritional needs, which are far different than the iron clangers in the free weight section of the gym.

To say this stock price chart looks like a one-way roller coaster that only goes down would be an understatement. A better comparison would be an alpine slide that starts extremely high up a mountain, has several twists and turns, but only goes in one direction – down. Since peaking in late 2013 near $60, that’s exactly what we’ve seen with GNC shares as its profits turned to losses despite a comparatively modest dip in revenue over the last few years.

 

 

In perusing the company’s latest 10K filing, the company offers up an explanation of sorts: “Prior to 2017, we had been experiencing declining traffic trends leading to decreasing same-store sales in our retail stores. After extensive consumer research and market analysis, we determined that our business model needed to be reimagined.”

Not exactly what a shareholder, existing or prospective one, wants to hear, but at least we can credit the management for not acting like an ostrich with their head in the ground as Amazon rolled into space as did others. The combination of having to “reimagine” its business model as well as fend of competitors led annual Selling, General & Administrative expenses to rise over 2015-2017 as revenue shrank, pushing GNC to deliver bottom-line losses.

Digging into the financials, the company experienced negative same-store sales in every quarter during 2016 and the first two of 2017. Making matters worse, average transaction amount was in negative territory over the last five quarters, and sales at GNC.com sales were falling as well. December 2017 quarterly sales were up 0.2% in company-owned stores vs. down 1.2% in the September 2017 quarter.

Not exactly a recipe for success, but clear signs the company could be in turnaround mode. What makes this potential turnaround interesting is the new partnership with CITIC Capital and Harbin Pharmaceutical Group. As a way of background, CITIC Capital is a global investment firm with a strong position in China and the Harbin Pharmaceutical Group is a joint venture of several China-based pharmaceutical companies. CITIC will invest $300 million in the form of a newly issued convertible perpetual preferred security with a 6.5% coupon payable in cash or in kind and a $5.35 conversion price. GNC will use the funds to repay existing debt and for other general corporate purposes, and on an as-converted basis, CITIC will hold roughly 40% of GNC’s outstanding equity. That’s a significant shareholder and one that will also appoint a total of five members to GNC’s newly expanded 11 member board.

The company expects the transaction to close in the second half of 2018, but it will require regulatory approval in both the U.S. and China. Given the current geopolitical tensions we are reading about almost daily, there could be some speed bumps associated with these approvals. Also too, GNC is ramping marketing associated with its recently launched pricing strategy and loyalty program, One New GNC strategy in the current quarter. This likely means margin pressure is poised to continue.

The bottom line is even though GNC is facing steep competitive domestic pressures, it’s new relationships could pivot its business but there are several hurdles to be overcome. Keyword being “could.” The risk related question I find myself asking is “Yes, I understand what the management team is saying, but what if the pivot or turnaround doesn’t happen as expected?”

We’ve seen many a company that in the face of thematic headwinds and mounting competitive pressures have attempted to reposition their businesses. Few have succeeded. My gut tells me that GNC, much like Blue Apron, Blackberry (BBRY), Angie’s List, GoPro (GPRO), Fitbit (FIT) and others, is on the road to nowhere for investors. But that’s my gut, which means reminding myself to keep an open mind and watch the data as it becomes available.

 

 

 

Heavy truck orders surge in February

Heavy truck orders surge in February

Despite the recent sell-off in Paccar (PCAR) shares, I remain bullish on the shares of this heavy and medium duty truck company given the February industry order data. Early today it was reported that North American orders for Class 8 semi-trucks jumped more than 76% in February as trucking companies are looking to address tight industry capacity that is leading to escalating freight costs. In the December quarter earnings season, we’ve heard many a company report rising freight costs would take a bite out of profits and bottom line earnings. It was that pain point that prompted me to add PCAR shares to the Tematica Investing Select List, and the February data points to higher production levels and better financial results ahead for Paccar.

Preliminary orders in the United States, Canada, and Mexico for the heavy-duty trucks, better known in the industry as Class 8 trucks, hit 40,200 trucks, up from 22,886 in February 2017 according to FTR. The quick perspective is this is the second consecutive month in some time that orders exceeded 40,000 units. As I noted when we added PCAR shares to the Select List, heavy truck orders had been on the rise in 4Q 2017. That led full-year 2017 orders for Class 8 trucks to come in at 290,000 units compared with 164,000 in 2016. I suspect some attributed the sharp rise primarily to pull forward ahead of the federal mandate for the electronic logs (ELDs) from paper logs, which went into effect in December, rather than the truck shortage.

With truck orders continuing to surge in 2018, investors have a clearer view of underlying truck demand and it continues to look bright.

  • We continue to have a Buy rating on Paccar (PCAR) shares and our price target for this Economic Acceleration/Deceleration position on the Select List remains $85.

 

Is Trump Serious About the Tariffs or Is This Just a Big Game of Chicken?

Is Trump Serious About the Tariffs or Is This Just a Big Game of Chicken?

 

After a whipsaw trading week, as we enter the new week I am pondering all the implications of President Trump’s Tariff talk. As Tematica’s Chief Macro Strategist, Lenore Hawkins, discussed in last week’s Weekly Wrap the markets were blindsided last Thursday when President Trump announced that the U.S. will implement a 25% import tariff on steel and 10% tariff on aluminum. Over the weekend, in response to any retaliation from the EU, Trump tweeted a countermove.

 

 

The President’s fresh injection of uncertainty led equities to sell off again this Monday morning as investors and talking heads alike chewed on potential implications to be had.

On Fox Business’s The Intelligence Report with Trish Regan last Friday afternoon— you can watch that video —I shared my view that we have to question whether President Trump will go ahead with these proposed tariffs or is it a negotiating tactic at a time when NAFTA negotiations remain underway? We’ve seen the president pull this tactic from his book, Art of the Deal, several times over the last year and given the potential consequence of a trade war to the domestic economy as well as the stock market, my opinion is we can’t rule this possibility out.

While it’s true that Trump escalated things over the weekend in a tweet saying, “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!” his policy management by tweet returned to his view on how unfair U.S. trade deals are with Mexico and other countries. “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed,” Trump tweeted. As a reminder, during the presidential campaign, Trump promised to renegotiate NAFTA with Canada and Mexico.

 

 

 

Already over the weekend and this morning have seen several Trump lieutenants make the rounds, including White House trade adviser Peter Navarro saying on CNN that “There will be an exemption procedure for particular cases where we need to have exemptions so that business can move forward.”

We’ll have to wait for the next two weeks to pass to see if this is indeed a Trump bluff, but with the U.S. economy, corporate profits and global stock markets all hanging in the balance, it is one massive game of chicken. While there may be a better trade deal to be gained by utilizing this now near playbook-esque negotiating tactic, it will also escalate the geopolitical landscape. If other countries don’t blink, we are likely to see some geopolitical issues weigh on a stock market that is already trading data point to data point ahead of the Fed’s next monetary policy meeting results. It’s going to be a long set of days until March 21st.

Tomorrow, I’ll game out the possible implications of these trade tariffs and what it may mean for the economy, businesses and their stock prices and Trump. Read that post now by clicking here. 

 

WEEKLY ISSUE: The Change in Investor Sentiment and Its Impact on the Select List

WEEKLY ISSUE: The Change in Investor Sentiment and Its Impact on the Select List

 

Later today we will close the books on February 2018 and thus the first two months of the year as well. As we here at Tematica have recounted across our various writings here at Tematica Investing, the Weekly Wrap and the Monday Morning Kickoff as well as our Cocktail Investing Podcast, we’ve seen quite a change in sentiment over the last several weeks as the conversation over the speed of the economy, the tone of inflation and what the Fed may do has taken center stage.

Over the weekend, legendary investor Warren Buffett once again offered some sage advice in his annual letter to Berkshire Hathaway (BRK.A) shareholders. Among the annual learnings offered up from the “Oracle of Omaha”, Buffett talked about the outperformance to be had by being an investor as opposed to a trader and thinking of investments as “interests in businesses, not as ticker symbols.” I could not agree more, but then again that speaks to how I use Tematica’s investment themes to identify well-positioned companies. When it comes to Buffett, he’s not exactly bad company to be lumped into.

In the same shareholder letter, we see how this investing style has led Buffett to outperform the S&P 500 over the long-term. While I would not be so bold to say we are in that same camp, I think we can all agree that we’ve seen the outsized returns that are possible when investing from a thematic perspective. In the coming review of the Tematica Investing Select List, I’ll highlight some of those returns as well as share some of my current thoughts on its holdings.

Rather than inundate you with pages and pages of updates here today, I’m splitting the overall update into two parts. Those companies that don’t appear in today’s issue, such as Amazon (AMZN), Apple (AAPL) and a few others, will be covered in the next weekly edition of Tematica Investing… here we go

 

Applied Materials (AMAT) Disruptive Technologies

Since being added to the Select List, just about a year ago, AMAT shares have risen 60% in that time — one of the strongest performers on the Select List. Both its business and share price have benefitted from the rising demand for chips, which has led to the current upcycle in spending on semiconductor capital equipment. While many of the talking heads are bemoaning slower growth prospects for the smartphone market, the devices continue to pack more functionality and storage inside their packages, and this is before 5G.

Voice recognition technology and greater processing power to handle that, as well as augmented reality and virtual reality, are all leading to greater chip dollar content in these devices despite slower unit growth. Per Applied, average semiconductor content per smartphone rose 30% in 2017. To use the investing lingo, we are seeing rising average dollar content per device that is poised to step up again in 2019-2020 as those aforementioned 5G chips make their way into smartphones.

We’re also hearing quite a bit about the growing voice assistant market as Apple (AAPL) launches its Home Pod and Amazon (AMZN) touted 2017 was a banner year for its Alexa powered devices. What’s not really talked about, however, is the typical voice assistant has around 30 chips and a total of 200 square millimeters of silicon, roughly twice the area of a smartphone application processor.

Now let’s think about not only the new types of voice assistants we are seeing from Amazon with video screens, but how these digital assistants are being embedded in other devices ranging from TVs to a road map that includes home appliances and autos. All of these digital assistants are connected back to servers like Amazon Web Services and the artificial intelligence workloads require server architectures that have up to eight times more logic and four times more memory content by area than traditional enterprise servers.

The bottom line is the Internet of Things, big data, augmented reality, artificial intelligence, data centers and storage are driving incremental chip demand. This tailwind has led Applied to raise its wafer spending forecast among its customer base to $100 billion over 2018-2019, up from $90 billion in 2017-2018. One of the wild cards for potential upside to that forecast is China, which continues to add domestic capacity, which is benefitting Applied given its leading market share position in the region.

All the while Applied’s Display business continues to benefit from larger format TVs as well as the ramp in organic light emitting diode display capacity. These drivers have led Applied to forecast more than 30% growth at its Display business in 2018, which follows nearly 60% growth in 2017.  As if that wasn’t enough, Applied recently upsized its quarterly dividend to $0.20 per share from $0.10, and increased its stock buyback programs by adding another $6 billion on top of the remaining $2.8 billion under its existing authorization. All in all, this makes for a compelling case when it comes to owning AMAT shares.

  • Our price target on AMAT remains $70.

 

Costco Wholesale (COST) Cash-Strapped Consumer

The decision to first add and then scale into COST share between last June and September has certainly paid off as the shares are up more than 19% on a consolidated basis. With each monthly same-store sales report, Costco shows it continues to thwart not only Amazon, but its business continues to garner consumer wallet share, outperforming grocery and other retailers in the process. The long and short of it is I see Costco thriving as consumers look to stretch their increasingly under-pressure disposable income, while other bricks-and-mortar retailers struggle.

We will look to assess the impact of tax reform on the Costco’s business and what that means for EPS estimates and our price target when Costco next reports its quarterly results on Mar. 7. I also expect the company to share offer a rich update on its e-commerce initiatives as well as its roadmap for new warehouse openings in 2018. As a reminder, the membership fee revenue stream is extremely profitable for Costco.

  • Our Price target on COST remains $200.

 

ETFMG Prime Cyber Security ETF (HACK) Safety & Security

It’s been almost a year since we added shares in this cybersecurity-focused ETF to the Select List and they are up just shy of 20%. With cyber-attacks becoming the next theater of warfare in the 21stcentury, I continue to favor the diverse approach to be had with holding HACK shares over owning just one or two cyber security companies. If you missed the overview on our Safety & Security investment theme published in a recent cyber security special report published by The Washington Times, you can find it here.

  • With cyber threats poised to continue in 2018 and beyond, and the Internet of Things offering a target rich environment, I am boosting my HACK price target to $40 from $35.

 

LSI Industries (LYTS) Economic Acceleration/Deceleration

Since adding shares of this non-residential construction-related company to the Select List this past September, the shares have climbed more than 21%, even after yesterday’s post Powell market sell off. While we wait for more on President Trump’s rebuilding U.S. infrastructure framework to trickle out, the next known catalyst for LYTS shares will be the January Construction Spending report from the Census Bureau that will be published later this week. Looking at the Architectural Billings Index (ABI), Architecture firms started 2018 on a positive note as AIA’s index rose to 54.7, its highest January score since 2007. I see the ABI as a leading indicator of building activity and view the uptick as very positive for LYTS.

  • My price target on LYTS remains $11.

 

On a side note, for those wondering why we’ve held off bringing DY shares back onto the Select List, you have no further to look than the December and January New Home Sales figures that fell roughly 7.5% each due to the impact of winter weather. As we put the impact of that weather behind us, including having it factored into Dycom’s quarterly results and its share price, we’ll revisit this soft circled stock.

 

McCormick & Co. (MKC) Rise & Fall of the Middle Class

I remain upbeat on MKC shares, despite no new developments in recent weeks following the favorable data found in the January Retail Sales Report. That data showed food-and-beverage retail sales at grocery stores climbing 4.5% year over year vs. falling same-store sales and traffic in January reported by the National Restaurant Association. While McCormick is heading into its seasonally slow time of year, I remain bullish as consumers look for healthier eating alternatives without sacrificing flavor. This week I’ll be looking to incorporate comments from food and restaurants from Dean Foods (DF), B&G Foods (BGS), Papa John’s (PAPA), Habit Restaurants (HABT) and others as well as the coming economic data into my McCormick tapestry.

  • Thus far in 2018, MKC shares are up some 5%, and as we soon enter the spring eating season I’ll look to review my current $110 price target.

 

MGM Resorts (MGM) Guilty Pleasure

Following a good quarterly report, an upbeat outlook offered by the management team and a 9% hike in the quarterly dividend, shares of this gaming-and- hospitality have moved modestly higher during what is a seasonally slow time of year for the gaming industry. On the earnings call, management shared that it is expects a “strong year” based on the trends it is seeing in both Las Vegas and Macau quarter to date due partly to the recent opening of MGM Macau Cotai as well as the separation this year between the Super Bowl and Chinese New Year. Bolstering that outlook, MGM has a rich line-up of entertainment over the coming months that should draw people to its hotels, restaurants and of course its casinos. For us, we’ll look for confirmation in the monthly gaming data to be had.

  • My price target for MGM shares sits at $39.

 

Nokia (NOK)  Asset-Lite

As the conversation surrounding 5G mobile network deployments has heated up, our shares of Nokia have climbed more than 25% thus far in 2018. That move has brought our overall position in Nokia shares well into the black. This week in particular, 5G is a focal point of the Mobile World Congress 2018 conference and we’ve already learned that T-Mobile USA (TMUS) will build out 5G coverage in 30 cities this year while Spring (S) shared the first five cities for its 5G network that will arrive in 2019.

I see the higher margin Nokia Technologies being well positioned to expand its licensing customer base as 5G networks move mobile connectivity beyond today’s smartphone-centric market into the connected home, connected car, wearables, and the industrial internet — in other words, the Internet of Things. In addition to Mobile World Congress this week, we’ll also be listening to specialty contractor Dycom’s (DY) earnings call for incremental details on the 5G network buildout from its customer base that includes AT&T (T) and Verizon Wireless (VZ).

  • My NOK price target remains $8.50.

 

Paccar (PCAR)   Economic Acceleration/Deceleration

We recently added shares of this heavy-duty and medium-duty truck manufacturer to capitalize on the growing pain point of rising freight costs due to a national truck shortage at a time when the domestic economy is on firmer footing. I’d also note this truck shortage comes amid that secular shift toward digital shopping, which in my view is not going to slow down and will likely exacerbate the shortage in the near-term.

My thesis on PCAR was recently supported by favorable commentary on the heavy-duty truck market from Daimler AG, a competitor to Paccar. ACT Research currently forecasts U.S. Class 8 (heavy-duty truck) retail sales to be 247,000 units in 2018, up from just under 200,000 in 2017, and solid growth in medium-duty trucks as well. Our $85 price target equates to just under 16x estimated 2018 EPS. In terms of signposts for this Buy-rated position, I’ll be watching monthly heavy-duty truck data as well as tonnage stats and manufacturing industrial production numbers.

  • My price target on PCAR shares remains $85.

 

Rockwell Automation (ROK)    Tooling & Re-Tooling

Early this month we added shares of Rockwell Automation (ROK) to the Tematica Investing Select List as part of our Tooling & Re-tooling investment theme with a $235 price target. Rockwell is a leader in industrial automation and information products that serve a wide variety of industries ranging from automotive, textiles, food & beverage, infrastructure, personal care, oil & gas, and life sciences to power generation, semiconductor and other industries.

This earnings season we’ve started to hear from companies, like Boeing (BA) that are boosting capital spending plans and investing in product development as well as its factories. Based on these prospects as well as statistics for private fixed assets that reveal the average age of US factory stock is near 60 years old, the Association For Manufacturing Technology forecast U.S. orders of manufacturing equipment to rise 12% in 2018 up from an annual rate of 9% it forecasted this past November. Given the tax code changes that for the next five years allow companies to immediately deduct the entire cost of equipment purchases compared to writing off only a portion of the cost in a single year, odds are this upgrade and expansion spending will span more than just 2018.

  • My price target remains $235.

 

United Parcel Service (UPS)  Connected Society

When we added UPS shares to the Select List just over a year ago, my view was they were a “second derivative” play on the accelerating of digital shopping. Over the last year, we have seen continued gains in that shift due in part to Amazon branching out into new categories (apparel, lingerie, furniture, and X to name a few), but also as other retailers, like Walmart (WMT), have looked to position themselves where customers.

We see no slowdown in that shift, and while we continue to hear chatter over Amazon developing its own truck fleet, given the size and scope of its network, it will be a long time and quite a capital expense to scratch the surface of that network. If they do, it will be a positive for our PCAR shares. On the housekeeping front with UPS, we sold half the position in early January netting a 22% return.

  • My long-term price target for UPS shares remains $130.

 

Universal Display (OLED)   Disruptive Technologies

Yesterday, we used the sharp pullback in OLED shares to add to our position given our view that we are still in the very early innings of this technology being adopted across a growing number of applications.

  • Our price target remains $225, which keeps OLED shares a Buy.

 

Of course, there were some exits . . .

Also, during the first two months of the year, we were stopped out of both AXT Inc. (AXTI) and USA Technologies (USAT) shares which generated returns of roughly 27% and 66%, respectively. Not too shabby, but all the more impressive when we consider both were added last April, so bear in mind those returns were generated over the span of 9-10 months and handily beat the return had by the major market indices over the respective time frames. Another proof point that thematic investing trumps sector investing… as if we needed yet another reminder.