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…."
The seemingly unstoppable upward movement of equity markets may have met its match last night. Yesterday, the first day of trading in 2020, saw the Nasdaq 100 rise 1.6%, the Nasdaq Composite gain 1.3%, the Dow 1.2%, and the S&P 500 0.8% driven in large part by the news that China’s central bank cut reserve requirements, unleashing a material level of liquidity.
This morning things have changed. US equity futures are in the red on the news that General Qassim Soleimani, Iran’s top commander who led a special forces unit of Iran’s elite Revolutionary Guards and has been a key figure in Middle East politics, was killed by a US drone strike in Baghdad. As we warned in yesterday’s piece, this comes after a New Year’s Eve attack by Iran-backed militias on the US Embassy in Baghdad. The Defense Department’s statement, issued last night at 10 pm ET, can be read here, and a response on Twitter from Iran’s Foreign Minister Mohammad Javad Zarif is here.
As 5G fires up across the nation and beyond, this chip-maker will likely be called on to let phones connect to new and old generations of networks.
As the smartphone market has matured, it has become increasingly tied to replacement demand.
Look at these statistics: As of December 2019, there are 5.175 billion unique mobile subscribers across the globe, according to the Global System for Mobile Communications, or GSM Association. As surprising as it may sound, the last big quarter for smartphone shipments was the fourth one in 2016. So, despite the seasonal pattern for stronger smartphone sales in the back half of the year, the 1.4 billion units shipped in 2018 was relatively unchanged year-over-year. Prospects for shipments in 2019 also point to modest growth year-over-year.
As we move through 2020, mobile operators will light up their next generation 5G networks that will likely be…
Bristol-Myers Squibb, Amgen and Abbott Labs all recently raised their dividends and should prosper amid the aging population.
One of my investment themes, as I look for structural changes tied to the evolving economic, demographic, technological and psychographic landscapes, is the Aging of the Population. It’s no secret that several countries are experiencing a demographic shift in their populations that skews older. Here in the U.S., the first baby boomers started turning 70 in 2016, but in the coming years, the percentage of the U.S. population that is 65 years or older will explode.
By 2030, all baby boomers will be older than age 65. This will expand the size of the older population so that one in every five residents will be retirement age. At the same time, we are living longer, with the most recent data published by the Census Bureau showing average U.S. life expectancy rose to 78.6 years in 2017, up from 68 years in 1950. According to data published by Care Patrol, which focuses on safer senior living, by 2020 roughly 15 million of the elderly population in the U.S. will have some form of disability and by 2030, “more than 6 of every 10 boomers will manage more than one chronic condition.”
More people living longer is a development that will give rise to greater and in some ways different demands…
As investors get ready to close the books on 2019, we will, of course, review those stocks that beat the S&P 500’s year-to-date return. Those winning stocks go hand-in-hand with the common investor phrase “generating alpha.” One of those alpha generators is…
This is the last full week of trading in 2019 as the markets will slow considerably after that given the Christmas and New Year’s holidays.
Following Friday’s developments that have likely taken a meaningful amount of uncertainty out of the market, odds are investors will once again turn to assess the speed of the global economy and earnings prospects in 2020. With that said, let’s take a more granular look at what’s on tap over the next five trading days.
Before we take a gander at the domestic economic data…
Everybody loves getting a present, be it an expected or unexpected one, and we are certainly in the present-giving time of year. For investors, the unexpected present could be a surge in the share price of one of their holdings, a larger-than-expected dividend increase or, in some very special instances, a special dividend.
Special dividends are dividends paid to shareholders that are outside the usual quarterly dividend payment, and as its name suggests, they are not expected recurring payments. That said, there are some companies that tend to pay special dividends to shareholders on a frequent basis. Very recently one of those companies not only declared its latest special dividend but also announced a 20% increase in its quarterly dividend.
In last week’s issue of Tematica Investing, I shared with you that I was tending to some family business, more specifically seeking guardianship of my 87 year old father who is suffering from dementia. The good news is the court sided with us. The not so good news is I have a long road ahead of me of straightening out my dad’s affairs across the board.
For those reasons, while it has been a fun and engaging ride over these last seven-plus years, I am choosing to wind down the Tematica Investing newsletter as well as the Thematic Signals podcast.
Could we continue on in some sub-standard fashion? Probably, but after a short while neither you nor I would be happy with that. If we could hit the pause button for several months, that might be an option, but as we all know the investing landscape — thematic and otherwise — is an unfolding story that requires constant attention.
I’ll continue to publish my thematic observations and insights on the Tematica website, and will share the various ripped from the headlines articles and notes that I collect each week and have been sharing with you in the form of Thematic Reads. Will I sporadically touch on the current Thematic Leaders, the Select List, and the Tematica Research Cleaner Living Index? I’d be surprised if I didn’t, but I can’t promise exactly when.
And for those wondering if the newsletter may return one day? All I can say at this time is “perhaps”. If it does, I’ll be sure to let you know. Even I never expected to see Berkeley Breathed’s Bloom County return, and yet it did.
Thank you very much,
Chris Versace Editor, Tematica Investing
Publishers Note:
For those subscribers with remaining balances on their subscription, we will be processing refunds for the balance of your term shortly. If you have questions, please email us at CustomerService@tematicaresearch.com or (571) 293-1977. Thank you for supporting us all these years!
Last week we closed out the month of September, shutting the books on the third quarter and began the final quarter’s march toward the end of 2019. While US stocks rebounded in September, the quarter in full was still a mixed one, as evidenced by a 1.2% rise in both the S&P 500 and the Dow Jones Industrial Average, versus the Nasdaq Composite Index and the Russell 2000 index that each finished the third quarter in the red. By comparison, the Tematica Research Cleaner Living Index (CLRN) soared 5.1% during the September quarter following its 4.0% move higher just in the month of September.
The Tematica Research Cleaner Living Index focuses on those companies poised to benefit from the growing demand for items that are better for you and the planet. The outperformance of the index during the last month of the quarter was led by double-digit moves in eight of the index’s 48 active constituents, including the more than 40% rebound in both Fresh Del Monte Produce (FDP) and Tenneco (TEN) shares, and the more than 24% climb in WW (WW) shares. The move in WW shares finished off a September quarter climb that totaled 95.5% in total, leaving them as the best performing constituent during the quarter. Rounding out the top three performers for the September quarter were Fresh Del Monte Produce, and SolarEdge Technologies (RUN), both of which climbed more than 30% during that 90-day period.
It will come as no surprise when we say the September quarter was filled with a lot of drama. It began with signs of the global economy slowing further, continued with more “two steps forward and one step back” on US-China trade talks, and ended with the impeachment inquiry winding through Washington that could stall any legislative efforts to be had by the current administration. More recently, September data published by ISM and IHS Markit have reignited global growth concerns, and the continued protests in Hong Kong have raised doubts over luxury good sales during the quarter.
All of this sets the stage for what is likely to be a tenuous, if not volatile, September quarter earnings season. Adding wood to that fire are recent earnings reports from FedEx (FDX), US Steel (X), HB Fuller (FUL), Actuant Corp. (ATU), and Landec (LNDC) that included weaker than expected guidance and we are also starting to see negative earnings pre-announcements like those from AXT Inc. (AXTI) and GoPro (GPRO) rear their head.
Taking all of those factors in full, we’ve seen year over year 2019 EPS expectations for the S&P 500 group of companies fall to just 1.8% currently, down from roughly 10% this time last year per data from FactSet. By comparison, the constituents for the Cleaner Living Index are expected to deliver EPS growth of 3.7% in 2019, led by Fresh Del Monte Produce, Brookfield Renewable Partners (BEP), Atlantica Yield (AY), Sanderson Farms (SAFM) and TerraForm Power (TERP).
We’ll also be watching with an eye toward 2020 as investors begin to focus on earnings growth prospects for the coming year and companies begin to gingerly share initial expectations that will shape 2020 forecasts. Based on current 2020 EPS expectations for the Cleaner Living Index constituents, in aggregate, the group is projected to deliver year over year EPS growth of 36.0%, far and above the 10.3% growth forecast for the S&P 500, again per FactSet data. Of the 48 Cleaner Living constituents, 2020 EPS expectations that are likely to have the greatest influence on year over year growth are Tesla (TSLA) and Freshpet (FRPT) as they go from generating bottom line losses to positive EPS as well as TPI Composites (TPIC) and NextEra Energy Partners (NEP).
This week has been a challenging one for me as I’m dealing with my father’s dementia, which culminates with a guardianship hearing for him. You could say I am living in our Aging of the Population investing theme in real time. Even so, I wanted to share some market observations with you, and next week we’ll be back in full force, complete with a new thematic stock pick.
– Chris
Wrapping up the September 2019 quarter
Early this week, we closed out the month of September, shutting the books on the third quarter and began the final quarter’s march toward the end of 2019. While US stocks rebounded in September, the quarter in full was still a mixed one as evidenced by 1.2% rise in both the S&P 500 and the Dow Jones Industrial Average vs. the Nasdaq Composite Index and the Russell 2000 index finished the third quarter in the red.
It will come as no surprise when I say the September quarter was filled with a lot of drama that began with signs of the global economy slowing further, more two steps forward and one step back on US-China trade talks, and ended with the impeachment inquiry winding through Washington that could stall any legislative efforts to be had by the current administration. And then yesterday’s September ISM Manufacturing Index fell out of the proverbial bed as it hit 47.8, marking its second consecutive month in contraction territory and its lowest since June 2009. That reignited concerns over the speed of the manufacturing economy, and places even more scrutiny on consumer spending, the buoy behind the June quarter GDP print of 2.0%.
After those dismal reports, which raised questions over the economy’s vector and velocity as well as stoke expectations for the Fed’s late October monetary policy meeting, the Atlanta Fed trimmed its December Quarter GDP forecast to 1.8% from 2.1%. This only adds to my view that the September quarter earnings season will likely be a minefield for investors.
In two weeks, investors will be staring down that plethora of corporate earnings, which run a high probability of disappointing reports as companies update their guidance to contend with the slowing global economy and continued US-China trade war. Should the World Trade Organization decision on EU aircraft subsidies lead to lead to $7.5 billion in new US tariffs on EU imports, we could see the uncertain trade situation become tenser before the next round of US-China trade talks to be held October 10-11. As we navigate the days leading up to that earnings bonanza, I’ll be keeping tabs on the CNN Money Fear & Greed Index – should it fall back into Extreme Fear, it could make what is likely to be a volatile time even more so.
Here’s the thing, Wall Street is likely focused on something between the next few weeks and the next few months. As we know, however, the tailwinds associated with our investment themes are much longer than that. While some are fretting over what may come in the next few weeks, we’ll be looking at it as an opportunity to buy thematically well-positioned companies at better prices. In many ways, it’s about perspective and as you know we tend to think differently from the Wall Street heard and it continued to serve us well in the September quarter.
We are adding shares of Visa (V) to the Tematica Select List with a $200 price target as part of our Digital Lifestyle investing theme.
We are adding to Living the Life Thematic Leader Farfetch Ltd. (FTCH) at current levels; our price target remains $16
We remain bullish on shares of Thematic King Amazon (AMZN) heading into the holiday season, and subscribers that are underweight AMZN should be buyers at current levels. Our price target remains $2,250.
Visa: Where we want to be for more than just the holidays
We are using the recent pullback in Visa (V) shares to add them to the Tematica Select List as part of our Digital Lifestyle investing theme given the accelerating shift to digital commerce as well as the movement away from cash and check usage.
While most tend to think of online and mobile shopping when it comes to digital commerce, we also are seeing increases in online grocery, ridesharing and ride services, digital forms of payment for metros and subways, and other changes in spending that require a debit or credit card. And while this may come as a surprise to some, roughly $17 trillion of payments were conducted in cash and by check in 2018.
To me, that means there is ample room for growth ahead and transaction share gains ahead to be had. Unlike American Express (AXP), Visa also stands to be an indirect beneficiary from consumers looking to stretch their spending dollars by shifting their payments to credit from debit or charge cards that must be paid in full. In other words, our Middle Class Squeeze investing theme. Also unlike banks such as Bank of America (BAC), Wells Fargo (WFC) and other credit card issuers, Visa is paid for each transaction and is far less susceptible by rising credit card delinquencies. Moreover, if consumers shift to debit cards, those transactions still have to be processed over a payment network.
Visa’s global scale and reach are made possible by a network of more than 15,900 financial institution clients that issue Visa-branded products. During fiscal 2018, Visa’s total payments and cash volume grew to $11.2 trillion and more than 3.3 billion cards were available worldwide to be used at nearly 54 million business and merchant locations that span over 160 currencies. For that entire fiscal year, Visa processed 124.3 billion transactions, and through the first half of 2019 those transaction volumes are up more than 11% as its install base of cards has continued to grow. As that install base grows and more physical card swipes, chip insertions and online or mobile ordering take place, Visa’s processing volumes grow.
With operating margins of more than 60%, Visa’s incremental margins on each transaction are significant. This has allowed the company to drive robust earnings growth and cash flow, all while continuing to invest in its payment network and layer on security in today’s increasingly cyber-conscious world. That cash flow has also allowed Visa to increase its quarterly dividend to the current $0.25 per share, up from $0.14 per share in late 2015, as well as fund its share repurchase program. Visa has been an active repurchase of its shares, scooping up almost 44 million shares valued at $6.5 billion. That compares to $8.7 billion in cash generated from operations over the same period. Exiting the June 2019 quarter Visa still had $6.2 billion under its current buyback authorization and $8.8 billion in cash and equivalents on its balance sheet.
And let’s not forget about holiday shopping…
While there is an ongoing shift toward non-cash, non-check transactions, there is also the seasonal nature of shopping and consumer spending that tends to rise during the year-end holidays. More transaction volume means more revenue, profits and cash flow for Visa during this time period. To that, we can add the steady year-over-year climb in online and mobile shopping as it has continued to take wallet share during the holiday shopping season. And yes, it is expected to happen once again this year. According to a new online survey from The Harris Poll and ad exchange network OpenX, shoppers are not only expected to spend more year over year but spend more digitally. Per the survey’s findings consumer expect to increase their holiday shopping by 5% more this year with 53% of their holiday shopping to be done digitally.
These transactional shifts in how consumers around the globe are spending have enabled Visa to grow its earnings on a steady basis. Even during the financial crisis, Visa continued to grow its revenues, which in our view is evidence of the power behind those structural shifts. Over the last several years, Visa has been growing its annual EPS at a double-digit clip, with prospects for that rate to continue this year and next. By applying a price-to-earnings-to-growth (PEG) multiple of 2.0 to expected EPS growth of 16% in the coming year, where the consensus EPS forecast is $6.27 for 2020, we derive our $200 price target. That offers roughly X% upside from current levels. My recommendation would be to add to the shares at better prices, but even so, we’ll get started on this as the consumer get ready to begin shopping for not only the approaching year-end holiday season but also Halloween and Thanksgiving as well.
We are adding shares of Visa (V) to the Tematica Select List with a $200 price target as part of our Digital Lifestyle investing theme.
Adding to Living the Life Thematic Leader Farfetch Ltd. shares
Since we added shares of Farfetch Ltd. (FTCH) to the Thematic Leader board for out Living the Life investment theme, the shares have come under pressure and have entered oversold territory.
This likely has to do with the financing for Farfetch’s New Guard acquisition that will tally $675 million and be equally between cash and stock. We’ll take it as an opportunity to improve our cost basis as we get ready to move into the year-end shopping season, which as noted above will rise nicely year over year and favor digital platforms like Thematic King Amazon (AMZN) and Farfetch.
We are adding to Living the Life Thematic Leader Farfetch Ltd. (FTCH) at current levels; our price target remains $16
We remain bullish on shares of Thematic King Amazon (AMZN) heading into the holiday season, and subscribers that are underweight AMZN should be buyers at current levels. Our price target remains $2,250.
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