Author Archives: Chris Versace, Chief Investment Officer

Key Points from this Week’s Issue:

• Boosting our price target on International Flavors & Fragrances (IFF) shares to $165 from $160;
• Increasing our price target on USA Technologies (USAT) to $11 from $9;
• Raising our Alphabet (GOOGL) price target to $1,200 from $1,150.
• Lifting our Costco Wholesale (COST) price target to $200 from $190.
• Following a 21% move in United Parcel Service Shares (UPS), we are selling half the position at current levels. As we do this, we’ll set a $120 stop loss that should yield a minimum return of just over 17% for our remaining UPS shares.

Happy new year and welcome to 2018! As we begin the year, on behalf of team Tematica I’d like to wish you a healthy and profitable road ahead.

Before we look forward to the 250 trading days to be had in 2018, let’s take a quick moment to enjoy the successes we saw on the Tematica Investing Select List in 2017. To level set, the S&P 500 finished 2017 up 19.5%, one of its best moves in several years. Utilizing our thematic lens during 2017 the Select List had 9 positions that handily outperformed that benchmark with returns ranging between 31%-208%:

• Alphabet (GOOGL)
• Amazon (AMZN)
• AXT Inc. (AXTI)
• Applied Materials (AMAT)
• Facebook (FB)
• International Flavors & Fragrances (IFF)
• United Parcel Service (UPS)
• Universal Display (OLED)
• USA Technologies (USAT)

I’d call out that several of those outperformers were added to the Select List back in 2016 and serve as an example of being patient investors provided we continue to receive confirming thematic data points. I’d also note, we identified several of these positions well ahead of the herd, which eventually came around to see what we did in these business and their corresponding shares.

As I look into 2018 with an eye on the Select List, I continue to see further upside for the vast majority of existing positions. Over the last few weeks, a number of supporting data points have come out including:

• Apple (AAPL) devices accounted for 44 percent of smartphone and tablet activations over the holidays, with nearly a third of those coming from new devices including the iPhone 8, 8 Plus and X, according to new data from Flurry Analytics. We also see this as a positive for both our Universal Display (OLED) and Corning (GLW) shares.
• According to news from CNBC, Amazon (AMZN) said customers shopped on its website at “record levels” throughout November and December. Over the course of one week, more than 4 million people became Prime members or started a free trial, sending its membership count to new highs. There is also growing chatter that Amazon is poised to disrupt the pharmaceutical industry in 2018 and murmurs beginning to point to Amazon entering the banking sector.
• Universal Display (OLED): Monthly sales of organic light emitting diode TVs in the Japan market surpassed the 10,000-unit mark for the first time in November, according to data compiled by the Japan Electronics and Information Technology Industries Association. We see this as a precursor to the upcoming annual CES tradeshow, which has historically been a showcase for TVs hitting the market later in the year. We see the ramping demand for organic light emitting diode displays as a positive for display equipment demand at Applied Materials (AMAT).
• AXT (AXTI), Applied Materials and Nokia (NOK): With the 3rd Generation Partnership Project (3GPP), a collaboration among groups of telecommunications associations, announcing its round of 5G specifications, DigiTimes is reporting that a number of Taiwan chip and optical component suppliers are pivoting their business not only toward 5G chipsets but also optical communication ones in light of the demand associated with 5G network base stations and backhauling data traffic.

Boosting IFF, USAT, GOOGL and COST price targets

There are a few Select List positions that are bumping up against their respective price targets, such as International Flavors & Fragrances (IFF), USA Technologies (USAT), Alphabet (GOOGL), United Parcel Service (UPS) and Costco Wholesale (COST), which climbed more than 17% for us in 2017. As you probably recall, over the last year, I’ve raised our price targets on IFF, USAT, and GOOGL shares several times, and over the holidays I’ve put fingers to spreadsheet to revisit. Today, I am making the following price target changes:

• Boosting the price target on International Flavors & Fragrances (IFF) shares to $165 from $160;
• Increasing the price target on USA Technologies (USAT) to $11 from $9;
• Raising our Alphabet (GOOGL) price target to $1,200 from $1,150.
• Lifting our Costco Wholesale (COST) price target to $200 from $190.

Trimming back our position in UPS shares

With UPS shares, we’ve enjoyed a 21% move over the last 11 months and while the company is well positioned to capitalize on the $90 billion in returns this holiday season as well as post-holiday sales according to research firm Optoro, we have roughly 5% upside to our $130 price target. Over the coming year I continue to see UPS’s business benefitting from the ongoing shift to digital commerce that is a cornerstone of our Connected Society investing theme, but in the coming weeks, we will see a seasonal slowdown as the impact of the holiday sales season is once again in the rearview mirror. Being prudent investors, we are trimming the position on the Tematica Select List back and reducing it by half at current levels.

• We are trimming back the United Parcel Service (UPS) position by selling half the position at current levels.
• As we do this, we’ll set a $120 stop loss that should yield a minimum return of just over 17% for our remaining UPS shares.

What’s ahead in the coming weeks?

Over the next several weeks there will be a number of catalysts to be had for both existing Select List positions as well as prospective ones. Several paragraphs above I mentioned the upcoming CES technology trade show, which runs Jan. 9-12. The week after we will see the earnings report spigot turn on and then near the end of January we have the State of the Union Address 2018 (Jan. 30). Ahead of that presidential address, President Trump is expected to release his rebuilding U.S. infrastructure framework, and I’m already looking at other candidates for the Select List now to join our LSI Industries (LYTS) shares.

As we get ready for this, I’ll also be assessing potential EPS upside to be had due to the impact of tax reform. As I shared in this week’s Monday Morning Kickoff, we’re already starting to see market strategists boost their price targets on the S&P 500. In scrutinizing those targets against their revised 2018 EPS expectations, the reality is they are not looking for much multiple expansion, which means those targets rest largely on EPS growth. The big question is will the benefits of tax reform be spent by consumers and businesses alike or will it be used by consumers to reduce debt while businesses fund buybacks and dividends due to skilled worker shortages that could deter property, plant equipment, and other investments?

The answer is we’ll see, and with the market trading at more than 20x 2017 EPS expectations for the S&P 500, any disappointment is bound to weigh on the overall market. That makes the upcoming earnings season and corporate outlooks more crucial than usual as investors look to not only assess the impact of tax cuts but also the health of their businesses in the 9th year of the current business cycle. While the holiday season and related spending is winding down, I’m assembling our shopping list should short-term investors get a bought of post-holiday indigestion in the coming weeks.

As we have said before, Amazon is the poster child for thematic investing given the sheer number of our investment theme tailwinds it is current riding, and that has made the company a force when it comes to disrupting industries. Several weeks ago, I shared the chatter that Amazon is looking to gain entry into the pharmaceutical market and it is now reportedly meeting with generic drug makers, which would enhance its position in our Aging of the Population investing theme.

This is not exactly brand new territory for Amazon, given its 1999 investment in drugstore.com, which was scooped up in 2011 by Walgreen Boots Alliance (WBA) in 2011 and shut down in 2016. The question we’re pondering here at Tematica is whether Amazon’s potential interest in pharmaceuticals was one of the catalysts that prompted CVS to go after Aetna? Given the potential impact, it does make sense that CVS would look to preserve its business by tying up its 9,700 stores with Aetna’s 44 million customers. It also makes a new CVS a far bigger player in our Aging of the Population investment theme.

We’re also seeing a contender for our Disruptive Technologies investing theme, Synaptics (SYNA), announce a new fingerprint scanning technology called “Clear ID”, which delivers what the company calls “one-touch high-resolution scanning through full cover glass.” Synaptics claims that its Clear ID technology is twice as fast as 3D facial recognition and requires only one touch to access a smartphone. We see this as a clear shot to Apple’s (AAPL) new FaceID, and as much as we love Apple and our Apple products, we are a bit confounded that Apple has done away with TouchID all together with its new flagship iPhone X model. Synaptics is a supplier to Apple for its iPhone touch screen, and this could signal something for the next iPhone iteration, but when we step back we here at Tematica can envision Clear ID moving beyond just smartphones into other markets that are looking for solutions that are in sync with our Safety & Security investing theme.

Perhaps one of if not the biggest disruptor to watch for in 2018 will be progress on 5G wireless technology.

Mobile connectivity, a cornerstone of our Connected Society investing theme, has been an evolving disruptor that has rocked some industries hard and is busy reshaping others even as I type these words. Given the data speeds associated with 5G networks that will make downloading an HD quality movie in seconds a snap, help power the networks and communications behind autonomous cars and enable the industrial internet, better known as IoT, it’s safe to say we are in for another phase of Connected Society disruption with 5G. In 2018, it means watching companies like Verizon (VZ), AT&T (T) and T-Mobile USA (TMUS) moving from launching test networks to being construction nationwide networks. To keep tabs on that and what it means for the Nokia (NOK) and AXT Inc (AXTI) shares on the Tematica Investing Select List, we’ll be watching signs and progress at specialty contractors like Dycom Industries (DY) that are the ones that actually construct the network.

Infrastructure to be a hot topic in January

Finally, there has been much talk in 2016 and 2017 over the need to rebuild the U.S.’s aging and falling apart infrastructure. We agree, which is why we created the Rebuilding America index that identifies those companies that in our view are best positioned to prosper as President Trump looks to tackle this campaign pledge in 2018. Last week it was revealed that President Trump will unveil his long-awaited framework to rebuild the U.S. crumbling infrastructure in January. This week the World Cement Association shared its view that global cement demand will rise 1.5% in 2018. Digging into the report, we find a far greater rate of demand increase in the U.S. — 6% year over year, up from 2% growth in 2017 — given not only the potential for President Trump’s pending infrastructure rebuilding framework, but also post-hurricane rebuilding efforts. Over the coming weeks, I’ll be looking to migrate one or two companies from the Rebuilding Index to the Tematica Investing Select List to sit alongside our current position in LSI Industries (LYTS).

That’s quite a bit of stock positions to have covered over those 900 or so words, so here’s a quick reminder for those corresponding price targets:

• Heading into its seasonally strongest time of year and with more disruption expected in 2018 as well as further wallet share gains, we continue to rate Amazon (AMZN) shares a Buy, and our current price target is $1,400;
• Disney shares remain a Buy at current levels and our price target for the House of Mouse, Marvel and Star Wars remains $125;
• With a ramping iPhone X cycle that bodes well for revenue and margins at Apple (AAPL), we continue to rate the shares a Buy with a $200 price target;
• We continue to see a bright outlook for both Nokia (NOK) and AXT Inc. (AXTI) as 5G deployments get underway, driving demand for their infrastructure equipment and compound semiconductor products, respectively. Our price targets for these two companies are $8.50 and $11.
• Our price target on LSI Industries (LYTS) still sits at $10, which keeps the shares in the Buy zone.

January also brings the Consumer Electronics Show

Early January also brings the annual geek-fest that is the Consumer Electronics Show, which for investors like us is a must watch event for new gadgets and devices that are slated to hit shelves in 2018. It’s also a time when companies show how they are incorporating new technologies. I expect the upcoming show will feature quite a bit of press around organic light emitting diode displays in smartphones and TVs, and perhaps even automotive lighting. As we saw with this year’s show, seeing as how they are one of the next connected platforms, automobiles are now a part of the show. In addition to display technology, we’ll be watching for new developments and announcements on the Connected Car and 5G.

From a Tematica Investing Select List, the upcoming show should bode rather well for not only Universal Display (OLED) shares but also Applied Materials (AMAT) and Corning (GLW).Heading into 2018, we continue to have Buy ratings on all three of these companies and our respective price targets remain $225, $65 and $37.

Housekeeping

It’s that time of year again folks when even we here at Tematica are hit by year-end travel plans during the holiday season, which means we’ll be suspending the regular weekly issue next week and expect to return on January 3^rd. When we formally return, we’ll recap 2017 in full and share more of my thoughts on what we’re likely to see in 2018.

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

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

In a relatively short time, we’ll close the books on December and for all of 2017 as well. Next week we plan to share some of our thoughts looking ahead to 2018, but first, it always pays to maintain some perspective on the ground we’ve covered these past 12 months.

Looking back, like most years, there were a number of notable events, and more than a few unexpected ones. Some of the former include Whole Foods being acquired by Amazon (AMZN), CVS Health (CVS) angling for Aetna (ATNA), Disney (DIS) pursuing assets of Twenty-First Century Fox Inc (FOXA) and one-time mobile stalwart Qualcomm (QCOM) being the recipient of a takeover bid. That activity and more serves as a reminder that the stock market, much like our investing themes here at Tematica, is a living thing that changes over time and the ripple effects of these changes can have profound reverberations that can reward certain stocks and punish others.

We’ve seen this happen in 2017 given the sharp drop we expected in shares of Blue Apron (APRN) given the potential fall out to be had from the Amazon-Whole Foods tie up, and we could see some at Netflix (NFLX) should a Disney-Fox deal go through. Imagine finally being able to see all of Marvel’s characters on the same screen, at the same time in a movie developed by Marvel. For us comic-book nerds, it would be a dream come true.

The stock market and the Tematica Investing Select List

While the last few weeks have seen some ups and downs, the down and dirty for the Select List is we had a number of strong performers over the last year as well as a good number of market-beating ones. That’s even after the recent pressure in both technology stocks and small-cap stocks, which we see as the market being fussy.

As we look at those and other positions on the Tematica Investing Select List, we continue to see thematic tailwinds powering them ahead in the coming months and quarters. It can be frustrating at times as we wait for the investing herd to catch up to what we are thematically seeing, but as we have seen with shares of Costco Wholesale (COST), International Flavors & Fragrances (IFF) and USA Technologies (USAT) it pays to listen to the data and be patient. Amid all the buzz of Bitcoin, we’ll continue to that knitting, which has served us so well. That doesn’t mean we’ll be sitting on our laurels, clipping dividends from those Dividend Dynamo companies on the Select List – far from it! We’ll be mining for new data sources and nuggets, stress testing our investment themes and turning rocks over for new candidates and new positions to build on the returns the Select List has generated this year.

With the prospects for tax reform improving, odds are we will see another Santa Claus rally occur even though it means the stock market’s already stretched market is likely to become even more so. That could make finding thematically well-positioned stocks at favorable prices a bit more challenging than it was in 2017, but we’re up to the task and we’ll be sure to add a new position only as the thematics and valuation warrant doing so.

• Our price target on International Flavors & Fragrances remains $160, but we plan on revisiting that target based on what we learn from competitor Givaudan SA’s Middle East non-deal roadshow later this week.
• With shares of USA Technologies (USAT) trading above our $8 price target, we are once again assessing additional upside to be had at current levels. We would not commit fresh capital to the position at current levels.
• As for Costco (COST) shares…

Here Comes the Fed

Later today as the Fed concludes its last FOMC policy meeting for 2017 expectations have baked a rate hike of 0.25% into the market cake. As we’ve said, we see the Fed doing what they can to get their monetary policy tools back in the toolbox given how long in the tooth the current recovery is. What I’ll be taking a harder look at it is the Fed’s economic outlook for 2018 and 2019, which heading into the two-day meeting called for GDP of 2.1% and 2.0%, respectively. Not quite the upswing that President Trump is calling for. During the subsequent press conference, the last for current Fed Chair Janet Yellen, I’ll be once again parsing the Fed speak to determine what might influence monetary policy in the coming months as new Fed Chair Jerome Powell takes the helm as well as items that could lead the Fed to not only accelerate its rate hike timetable.

With Yellen leaving her post and holding her last press conference, it will be interesting to see if breaks form to talk tax reform, infrastructure spending, Bitcoin or the evolving role of the Fed. If the past is indicative of how she will communicate her thoughts today, odds are it will all be less than crystal clear. But again, with one foot out the door wouldn’t it be refreshing for Yellen to be far clearer than usual. We’ll have more on what is and isn’t said today in this week’s Weekly Wrap.

Costco Earnings later this week

After Thursday’s market close, Cash-Strapped Consumer company Costco Wholesale (COST) will report its quarterly earnings. Based on the company’s string of stellar same-store sales reports over the last few months that shows Costco is not suffering from the Amazon-effect, we expect an upbeat report. We will, of course, be closely watching new warehouse figures and outlook for more given their role in generating profits and EPS for the company. Consensus expectations call for EPS of $1.34 on revenue of $31.38 million for the quarter, up 14.5% and 11.7% year over year, respectively.

If we had one concern, it’s the speed at which COST shares have climbed – more than 18% since we scaled into the position on the Select List in early September – and what it could mean for what the market expects Costco to not only report on Thursday, but also forecast for the current quarter and beyond. Over the last several quarters, we’ve seen the damage that can be done when a company delivers either a modest miss for its earnings or offers up a somewhat softer than expected outlook.

While it may not be probable, all things are possible and we’re inclined to remain, patient investors, as Costco continues to expand its warehouse footprint in 2018. That said, with COST shares bumping up against our $190 price target, vs. the Wall Street consensus of $185, we’ll be mining the results to determine incremental upside to be had in the shares.

Housekeeping

PS – I almost forgot to mention this, but given how I am fond of saying that our investing themes are recognizable in the real world, Tematica has finally taken to Instagram. Follow us there ( @TematicaResearch ) as we share visual examples (better known as pictures) of our various investment themes in action as well as some other fun stuff. And for those wondering, we can also be found on Twitter (@TematicaGroup ) and Facebook. Now go finish that holiday shopping already!