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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…."
Amid a Las Vegas tragedy, remaining patient with MGM shares

Amid a Las Vegas tragedy, remaining patient with MGM shares

This morning shares of Guilty Pleasure company MGM Resorts (MGM) are under some pressure following the Las Vegas shooting that saw a gunman fire on a crowd of people at an outdoor country music festival. Reports are still being filed, but as of now, the current assessment is that at least 50 people were killed. Again, a tragic event outside of the Mandalay Bay Hotel, which is owned by MGM Resorts, but one that is likely not to be repeated.

As we’ve seen in the past these disruptions, while horrific, tend to only have a short-term impact on the stock, as things settling down to “normal” before too long. We see Las Vegas casinos likely amping up their already considerable security procedures in response, and tourist traffic returning to normal before too long.

Including today’s events, the MGM shares on the Tematica Investing Select List are down just under 2% since we added them in early June. We will remain patient with the position as we wait for the next round fundamental data – monthly gaming figures from Macau and Nevada.

  • Our price target on shares of Guilty Pleasure company MGM Resorts (MGM) remains $37
Applied Materials serves up a better than expected 2017 Analyst Day

Applied Materials serves up a better than expected 2017 Analyst Day

Yesterday was a big day, and while you may be thinking about the headlines surrounding the revealed GOP tax plan I’m talking about the very upbeat 2017 Analyst Day held by Disruptive Technology company Applied Materials (AMAT). I expected the company to deliver a bullish take on the health of its end markets, but candidly it was even stronger than expected as the company offered not one, not two, but three-year guidance. That’s right it offered its take on 2020 with earnings of $5.08 per share and announced a new $3 billion share repurchase program.

As we are fond of saying here at Tematica, context is key and that 2020 EPS of $5.08 compares to consensus EPS of $3.20 this year and $3.60 next year. Continuing the context, adding the new $3 billion buyback program to the mix brings the total outstanding buyback to roughly $4 billion. At current share price levels, ls the company could buy up to 81.6 million shares, roughly 7.5% of the total outstanding share count. As one might suspect, the underlying strength of this outlook lies in robust chip demand not only due to smartphones but also ramping Internet of Things applications, big data and artificial intelligence (A.I.) that are part of our Connected Society and Disruptive Technology investing themes.

Inside its multi-year forecast, Applied is calling for a compound annual growth rate of 23% for its Display business. In our view confirms the growing adoption of organic light emitting diode displays (OLEDs) and reinforces our bullish stance on Universal Display (OLED) shares. When we first introduced Universal Display shares, we compared it to the transition to light emitting diodes that took several years and also started in mobile phones but expanded into other applications as industry manufacturing capacity rose and prices declined. We continue to see the same evolution happening with OLEDs, and that should drive demand for Universal’s chemicals as well as expand its high-margin intellectual property business.

In sum, what was expected to be a positive development for both Applied Materials and Universal Display was even stronger than expected. On the back of this more than favorable outlook, we are boosting our price target on AMAT shares to $60 from $55. For now, our price target on OLED shares remains $175.

  • On the back of this more than favorable outlook, we are boosting our price target on Applied Materials (AMAT) shares to $60 from $55.
  • Our price target on Universal Display (OLED) shares was recently raised to $175 from $135, and we remain quite comfortable with that revision.
WEEKLY ISSUE: Nike offers several points of confirmation; Boosting two price targets

WEEKLY ISSUE: Nike offers several points of confirmation; Boosting two price targets

Yesterday, we received the first of what is likely to be quite a bit on potential tax reform. If the efforts we’ve seen pertaining to repeal and replacing Obamacare are any indication, tax reform will take some time and call for reaching across the aisle. We’re cautiously optimistic such reform can take place in a lasting fashion as it would help give a boost to disposable incomes, which would be a boon to the consumer spending led U.S. economy. We’ll have more on this as it develops as well as implications of other happenings inside the Beltway, from more barbs with North Korea to President Trump’s regulatory reform overview to be shared next week.

 

Making some adjustments to the Tematica Investing Select LIst as we close the quarter

As the new tax policies are put forth and put under the microscope, we will soon close the books on September and 3Q 2017. With a few days left in the current quarter, the S&P 500 is up 3.3%, and we’ve had a number of positions ranging from AXT Inc. (AXTI), USA Technologies (USAT), International Flavors & Fragrances (IFF) and Facebook (FB) handily beat that index. Some of our more recently added positions, including this week’s Corning (GLW) and last week’s LSI Industries (LSI) have dipped along with the market these last few days, but our outlook for both remains undiminished.

We have seen some former stalwarts, like Amazon (AMZN) and Alphabet (GOOGL) underperform over the last few months, but we’re heading into the seasonally strongest time of the year for these two companies – we’ll continue to keep both on the Tematica Investing Select List. The same goes for Starbucks (SBUX) as it rolls out its pumpkin flavored beverages and its peppermint mocha alongside other seasonal favorites.

Our price targets remain as follows:

  • Alphabet (GOOGL) — $1,050
  • Amazon (AMZN) — $1,150
  • AXT Inc (AXTI) — $11
  • Corning (GLW) — $37
  • Facebook (FB) — $200
  • LSI Industries (LYTS) — $10

 

We are boosting our price targets this morning on International Flavors & Fragrances and USA Technologies as follows:

  • Raising our IFF price target to $150 from $145;
  • Increasing our USAT target to $6.50 from $6.00

 

These increases offer additional upside, but not enough to warrant subscribers committing new capital at this time. Rather subscribers should continue to own these positions to capture incremental upside and in the case of IFF its dividend stream.

 

Now let’s step back and take a wider view

Our position has been and remains that we are likely to see the recent bout of volatility continue as we close the books on the third quarter of 2017 and roll right into earnings season. That reporting activity will come to a head just as we get the bulk of economic data for the month of September, the proverbial icing on the 3Q 2017 GDP cake. Based on the hurricanes, odds are this data will be a bit wobbly, to say the least, and odds are we will see more GDP revisions for the three months ending in just a few days. While some may look through the economic data, the quarterly results from Darden Restaurants (DRI) earlier this week and the subsequent drop in its shares tell us the market has yet to fully price in the impact of the hurricanes.

Here’s the thing – this could lead to the stock market retrenching from current levels, and in our view letting some of the froth out of the market is a good thing. Candidly, with the market trading near 19x expected earnings – head and shoulders above the 5- and 10-year averages – it begs the question as to how much additional upside is to be had?  This is especially true for investors that are only now returning to the market.

Our strategy for the near-term will be to focus on those companies that have strong thematic tailwinds and whose shares have a more than favorable risk-to-reward tradeoff. This could be in new positions like the ones we’ve added over the last 10 days or it could be in existing ones that come under pressure this earnings season. We always like the former, but the latter is also welcome if it allows us to improve our cost basis for the long-term.

Now, let’s dig into what Nike said last night in its quarterly earnings results – the skinny is, it was reinforcing on several levels for our themes as well as our recent comments on the dollar. Here we go…

 

What’s Nike telling us this morning?

Last night athletic footwear and apparel company Nike reported better than expected quarterly results, but the shares are trading off this morning. Sifting through the results, we see the 3% decline in North American sales as offering credence to our Cash-Strapped Consumer theme, while the 9% growth year over year in China, as well as the 5% year on year improvement in Asia-Pac/Latin America for the company, reflects our Rise & Fall of the Middle-Class thematic. That mix brought Nike’s international business to more than 55% of its overall revenue, and yes during the earnings call last night the company conceded that it has indeed benefitted from the weakening dollar during the last several months.

When it offered its outlook, however, Nike quickly called out that its expected margin contraction with “FX continuing to be the single largest driver.” Yesterday we shared our view the rebounding dollar could present a renewed headwind as the investing herd adjusts it view to incorporate the Fed’s interest rate hike forecast and we see that comment by Nike as confirmation. In addition to the near-term post-hurricane economic slump, this is potentially another reason we could see earnings expectations get reset in the back half of 2017 in the coming weeks.

We’ll look for more confirmation today during Applied Material’s (AMAT) 2017 Analyst Day and tomorrow when McCormick & Co. (MKC) and reports its quarterly earnings. As a reminder, we expect Applied to deliver a favorable demand picture for both its semiconductor as well as display capital equipment businesses, with the former benefitting from ramping demand in China. With regard to McCormick, consensus expectations have the company delivering EPS of $1.05 on revenue of $1.18 billion for the August-ending quarter. As we’ve all seen of late, missing expectations by a penny or two these days is likely to lead to a 4%-8% drop in the share price, and should that happen with MKC shares we’re inclined to scale into the position near or below our original cost basis of $91.80 on the Tematica Investing Select List.

  • Our price target on Applied Materials (AMAT) shares remains $55
  • Our price target on McCormick & Co. (MKC) shares remains $110

The Impact of the Nike — Amazon Deal

Turning back to Nike’s earnings conference call, heading into it, one of the things we wanted was more color on was the company’s invigorated relationship with Amazon (AMZN). We were not disappointed. During the call, even we were somewhat surprised by how blunt Nike was about the pressures facing U.S. retail when it said:

“…a developed market like North America must embrace change to its legacy retail infrastructure. As the leader, we’re fully committed to energizing and growing the marketplace through both our own NIKE Direct businesses and with strategic wholesale partners… over the past 90 days, it has become increasingly evident to all that the North America marketplace is undergoing significant transformation. Several quarters ago, we said that the U.S. retail landscape was not in a steady state, but rather would continue to be disrupted by the accelerating consumer shift to digital and more personal brand experiences… those shifts are now profoundly impacting the more undifferentiated dimensions of retail, resulting in store closures, bankruptcies, and a promotional environment… We’ve proven, I think, through our ability to create some real great success with other consumer-oriented digital partners like Tmall and Zalando that there isn’t a real opportunity here, and we’re excited about where that can go with Amazon (AMZN).”

In our view, those comments sum up the impact on brick & mortar retail that is being had by our Connected Society investing theme. Odds are, Nike is only one of the initial branded apparel companies that will look to leverage Amazon’s logistics and related infrastructure, and this keeps up long-term bullish on AMZN shares.

  • Our long-term price target on Amazon (AMZN) shares remains $1,150.

We also clearly heard Nike is embracing several aspects of our Disruptive Technology theme when it said, “…we target doubling our direct connection to consumers, we are ramping up investment in digital capabilities ranging from data science and analytics to machine learning to augmented reality to image recognition and personalization.”

The only thing better than a company riding one of our investment tailwinds is when it is riding two or more. Over the last three months, NKE shares have underperformed the overall market falling nearly 2.5% vs. the S&P’s 3.3% climb. As the investing herd digests Nike’s comments and the shares drift lower, we’ll revisit the potential upside and downside to be had over the coming 12-18 months. If it’s compelling, we’ll be back with more on this Rise & Fall of the Middle-Class company that is looking to leverage our Connected Society and Disruptive Technology themes.

 

Lackluster Demand for the Apple iPhone 8 Puts Pressure on OLED and others

Lackluster Demand for the Apple iPhone 8 Puts Pressure on OLED and others

Yesterday we witnessed a sharp decline in technology stocks as evidenced by the declines in Facebook (FB), Amazon (AMZN), Alphabet (GOOGL), Netflix (NFLX) and Apple (AAPL). Regarding Apple shares, yesterday’s move lower simply adds to the recent pressure on the shares we’ve seen since the company’s lackluster September special event as investors question iPhone 8 model demand ahead of the early November launch of the iPhone X. Of course, snafus with the latest Apple Watch and MacOS High Sierra aren’t helping a company that seems plagued either a lack of vision or remaining trapped in a position until technology forces align for its next new product.

Pressure on Apple shares has overflowed and resulted in the same downward pressure on our Universal Display (OLED) shares, slipping from a high of $142 on September 19, down to a hair below $125 when the market closed last evening. We’ll continue to keep OLED shares on the Tematica Select List however, as Apple adopts its technology across other devices, and as demand from other devices (other smartphones, TVs, wearables, automotive interior lighting) climbs in the coming quarters. As a reminder, tomorrow brings the 2017 Analyst Day from Applied Materials (AMAT) and we expect bullish comments for both its semiconductor capital equipment business as well as its display business.

 

Other Market & FED Notes

We’ve noted that we have seen the Wall Street herd rotate sectors as of late, with water and electric utilities being strong performers of late — both part of our Scarce Resource investment theme. While the S&P 500 Volatility Index (VIX) may be near record lows, the recent performance of those safe havens signals that investors are in a wearisome mood. Another group that has performed well over the last several weeks is multinational companies, which have benefitted from the dollar’s renewed weakness in July, August and early September. We’ve seen this with our Amazon (AMZN), International Flavors & Fragrances (IFF), and Facebook (FB) shares to name a few.

More recently, however, we’ve seen the dollar rebound modestly, and with the Fed talking up several interest rate hikes in as many quarters, we are likely to see the dollar move further off early September lows. This brings Fed Chairwoman Janet Yellen’s speech this afternoon into focus. Will we get much more from Yellen on the pace of balance sheet unwinding vs. what the Fed shared last week? Probably not, but we’ll still be looking to parse her usual clear as mud words.

The expected lack of “new info” from the Fed will likely keep the market mentality fixated on the Fed’s forecasted interest rate hike timetable. We here at Tematica prefer to remain data dependent when it comes to contemplating potential Fed rate hikes. That view led Federal Reserve Bank of Minneapolis President Neel Kashkari to reiterate his view yesterday that raising rate now is a bad idea:

“When I look at the economy, I don’t see any signs the economy is close to overheating… I see no need to tap the brakes and attempt to moderate the economy with higher short-term rates.”

Realizing Kashkari is a lone voting wolf inside the Fed, odds are the herd view will continue to influence the prevailing narrative in the near-term. We’ll remain patient as that group will once again take some time to come around to how we see things.

In the short-term, a continued rebound in the dollar is likely to pressure multinational companies ranging from General Electric (GE) and Caterpillar (CAT) to the likes of Amazon, Facebook, Applied Materials, and even MGM Resorts (MGM) that are on the Tematica Select List. With this in mind, we’ll be closely dissecting the forward guidance to be had from Nike (NKE) later today and the Select List’s own McCormick & Co. (MKC), which reports this Thursday (Sept. 28).

As the herd continues to feel its way around, we’re inclined to re-test our thematic thesis on the stocks comprising the Select List, but given what we’ve seen in our Thematic Signals we have reason to believe our thematic tailwinds continue to blow.  As we do this, we’ll remember this week unveils President Trump’s tax reform proposal followed by the administration’s regulatory agenda that will be outlined next week (Oct. 2), not to mention all the amped-up geo-political news between the U.S. and North Korea.

Odds are the next few weeks, will be tumultuous, but let’s remember that “fortune favors the prepared” and that’s what w we aim to be. This means looking for thematically well-positioned companies that offer favorable risk-to-reward dynamics, like the recent addition of Corning (GLW) and Nokia (NOK), as well as opportunities to scale into existing positions on the Tematica Select List.

 

 

Adding a Glass Disruptor to the Tematica Investing Select List

Adding a Glass Disruptor to the Tematica Investing Select List

Key Points from this Post:

  • We are adding shares of Disruptive Technologies company Corning (GLW) to the Tematica Investing Select List with a Buy rating and a long-term price target of $37.

  • Paired with the current dividend yield, the shares offer 25% upside to that target.

 

Recently, Apple (AAPL) unveiled its new iPhone models, both the iPhone 8 and the iPhone X each are designed to have a glass backing. If history holds, odds are this additional glass backing will lead to more iPhone repairs as users drop their iPhones (and yes, we noticed Apple bumped up its Apple Care prices for screen replacement with the new all glass models). Aside from that potential nuisance, others attending the Apple event had this to say:

“The iPhone 8 and 8 Plus look pretty much the same as their predecessors, but they have a new back cover that’s coated in glass and gives them a somewhat fresher look. The glass blends into the sides of the phone incredibly well, better than we’ve seen on other phones. There’s a subtle density to the glass, too, and overall it looks a lot better than the back of the 7. That glass back allows for wireless charging, which is one of the big new features here.”

As one might expect, Apple was on record saying the iPhone 8 and iPhone 8 Plus have “the most durable glass ever in a smartphone, front and back.” While we have yet to feel the device ourselves, the specs suggest the added heft could be due to a denser glass. The iPhone 8 and iPhone 8 Plus are slightly heavier at 5.22 ounces and 7.13 ounces respectively, compared to 4.87 ounces and 6.63 ounces for the iPhone 7 and iPhone 7 Plus respectively.

The key here is Apple’s shift to glass will likely drive incremental glass demand, much the way its shift to organic light emitting diode displays with the iPhone X is spurring demand for those products, and in turn driving up the share prices of Tematica Select List stocks Universal Display (OLED) and Applied Materials (AMAT). If Apple sticks to its knitting it means deploying wireless charging across other iPhone models and perhaps iPads in the coming quarters. If we’re right that would lead to even more glass demand as the glass is required for such charging, rather than a metal or plastic form factor.

Outside of Apple, we’re also seeing larger and larger format TVs come to market that are also driving demand for glass, while fiber to the home is driving glass demand as well. Let’s remember that wireless backhaul is also a big consumer of glass and 5G has the potential to up the ante for glass fiber. We also suspect there will be a fair amount of smartphone copycats that offer front and back glass on new smartphone models as well in the coming months. Again, more demand for glass, specialty materials and coatings.

All of this bodes very well in our view for specialty glass and ceramics company, Corning (GLW), which derives 80% of its revenues and profits from the display, optical communication and specialty materials markets. In our view, these material science capabilities at Corning’s are one of the keys to enabling both new form factors as well as connectivity solutions, including wireless charging. As such we see the company primarily riding tailwinds associated with our Disruptive Technology investing theme, even though evidence of man-made glass dates back to 4000 BC and Corning as a company was launched in 1851.

We see Corning’s position in our Disruptive Technologies theme cemented by comments from Apple, a customer of the company’s glass products, when it said, “Corning is a great example of a supplier that has continued to innovate and they are one of Apple’s long-standing suppliers… This partnership started 10 years ago with the very first iPhone.” While “talk may be cheap,” in May Apple announced Corning would be the recipient of $200 million from Apple’s new Advanced Manufacturing Fund to support Corning’s R&D, capital equipment needs and state-of-the-art glass processing. Our thinking is if Apple calls you a disruptor, you pretty much are one. As far as the other 20% of Corning’s revenue, it is derived from businesses that serve environmental and life science markets.
 

Why Now is the Time for Corning Shares

Current estimates have Corning delivering EPS of $1.70 this year, up from $1.55 in 2016, with consensus prospects calling for EPS of $1.84 next year and $2.00 in 2019. What those figures don’t show is that for the last year plus, Corning has been consistently beating expectations. Paired with the demand drivers we noted above as well as its pledge to return significant cash to shareholders through 2019 in a combination of share repurchases and dividend increases, we are more than just warming up to GLW shares.

While we like the company’s position and prospects, the shares are currently trading at 17.3x and 16.3x expected 2017 and 2018 earnings vs. the average peak P/E multiple of 17.2x over the last few years. This would suggest our upside near-term is limited, but we’ve also learned long ago not to examine just one valuation tool when looking to value a stock. Turning to a dividend yield analysis, the shares have peaked in recent years at an average dividend yield of 1.95%. Applied to the slated 2017 dividend per share of 0.64, this offers us upside to $33 vs. downside near $23 using the average trough dividend yield of 2.8%.

Now here’s the thing — on Corning’s recent 2Q 2107 earnings call, management committed to increasing its annual dividend by at least 10% in both 2018 and 2019. Some quick math shows an annual dividend of at least $0.70 per share next year and $0.77 per share in 2019. Given Corning’s net cash balance sheet — $4.2 billion in cash and equivalents vs. total debt of $3.9 billion) and strong cash generation, the company has ample breathing room for these targeted dividend increases.

Applying those peak and trough average dividend yields kicks out a price target range of $36-$39 and potential downside of $25-$27. That’s a far more palatable upside to downside tradeoff for longer-term investors as glass demand ramps in the coming quarters due to rising demand from a variety of markets and applications. As we see it today, those factors should lead to continued EPS growth in 2018 and 2019, helping support those respective price ranges.

  • We are adding shares of Corning (GLW) to the Tematica Investing Select List with a Buy rating and a long-term price target of $37.
  • Paired with the current dividend yield, the shares offer 25% upside to that target.
WEEKLY ISSUE: Business as usual ahead of the Fed’s September policy meeting

WEEKLY ISSUE: Business as usual ahead of the Fed’s September policy meeting

Stocks continued to inch higher over the last several days ahead of today’s next Fed policy meeting. Over the last few days, we’ve seen GDP expectations for the current quarter revised lower from economists, regional Fed banks and even companies like FedEx (FDX), which sees GDP hitting all of 2.2% this year. I continue to see the Fed taking yet another pass on boosting interest rates later today, and given the impact from the recent hurricanes, the team Tematica view is that while next potential interest rate hike could come late this year, it’s more likely going to be in 1Q 2018.

The more closely watched item in the Fed’s comments will be timing for its balance sheet unwinding, and that means parsing the Fed-speak out this afternoon. Much like interest rates, I suspect the Fed will take a pass this month on kicking that initiative off and revisit the strength of the economy at its October/November meeting, but again, more on that once we have parsed the Fed’s words. We’ll have the Tematica take and what it means for the markets as well as the Tematica Investing Select List tomorrow morning.

Keeping the market somewhat in check yesterday was President Trump’s address to the United Nations General Assembly at which he shared he will take a hard line, vowing to “totally destroy” North Korea if it threatened the United States or its allies. Nothing keeps uncertainty alive lately quite like political drama in DC. Such drams also now includes questions over the potential benefits to the domestic economy with corporate tax reform at a time when the federal budget deficit continues to climb. Let’s also remember we are on the cusp of the 2017 election season, and even as President Trump reaches across the aisle, odds are it won’t be an all “cookies and warm milk” as politicians are vying for their own jobs.  For this reason, I see tax reform more likely toward the end of 2017, which happens to be when the debt ceiling conversation will be resumed.

 

Earnings this week, set the stage for coming 3Q 2107 season

Over the next week and a half we will close the books on 3Q 2017 and face quarterly earnings. Before too long the year-end holidays will be upon us. Last night we had a few earnings reports from FedEx, Bed Bath & Beyond (BBBY) and Adobe Systems (ADBE), and today all three stocks are trending lower. Part of the reason for FedEx missing expectations last night was the disruption it faced due to its recent cyber attack. Such attacks are yet another reminder that the cybersecurity aspect of our Safety & Security theme is a form of insurance in our Connected Society. This keeps us long-term bullish on PureFunds ISE Cyber Security ETF (HACK) shares.

Despite a beat at Adobe, the company signaled softer than expected growth for its cloud business. When paired with revenue guidance that was in line with expectations and the stocks sky-high valuation near 40x 2017 earnings per share, it’s not surprising to see ADBE shares trading off today. I point this out because it is another example of good news being ill-received on Wall Street — another reason to think the next few weeks will continue to be volatile.

  • Our price target on PureFunds ISE Cyber Security ETF (HACK) shares remains $35.

 

 

Another brick & mortar retailer looks to leverage Amazon

While earnings reports from FDX, BBBY and ADBE will factor into our larger thinking, what I found far more interesting was the new partnership announced between thematic investing poster child Amazon (AMZN) and retailer Kohl’s (KSS), which includes Kohl’s offering to accept returns for Amazon customers at 82 stores in Los Angeles and Chicago. This is yet another example of a retail-facing company looking to partner with Amazon, and to me, it speaks to the logistics power that is one of Amazon’s core strengths.

Perhaps the management team at Kohl’s saw what I did in the last week’s August Retail Sales Report –  continued pain at department stores as shoppers continue to shift spending to digital platforms. As much pain as we here at Tematica see for brick & mortar retailers in the upcoming year-end holiday shopping season, we see a similar amount of opportunity for Amazon given its footprint expansion over the last year.

  • Our price target on Amazon (AMZN) shares remains $1,150, which keeps the shares a Buy on the Tematica Investing Select List.

 

 

Results at United Natural Foods offer comfort for Amplify Snacks

One of the positions that has been lagging this market move higher is Food with Integrity company Amplify Snacks (BETR), and we used August pullback to improve our cost basis. Since that scaling, BETR shares have once again languished, but commentary last week from United Natural Foods (UNFI) offered a confirming perspective. In United Natural’s earnings report it shared its supernatural net sales were up approximately 6.8% year over year and its supermarket channel net sales increased 8.3% year over year in the quarter. To me, that points to consumers continuing to embrace food that is good for you and bodes rather well for healthy snacking options offered by Amplify. Anecdotally, after visiting several Whole Foods locations over the weekend we can attest to a rebound in traffic and shopping bags.

We will continue to be patient with Amplify Snacks (BETR) shares as the company expands its product offering as well as its reach beyond the U.S. As we have said, we see Amplify as a potential acquisition candidate for PepsiCo (PEP), Snyder’s-Lance (LNCE), Post Holdings (POST), General Mills (GIS) or another snack-food company as they look to expand their presence in the “better for you food” snacking category.

  • Our price target on Amplify Snacks (BETR) shares remains $11

 

 

Recapping moves made earlier this week

As we get ready for what lies ahead over the coming weeks, we made some maneuverings with the Tematica Select List earlier this week. Those moves included adding two new Buy rated positions – LSI Industries (LYTS) and Nokia Corp. (NOK) – and we exited shares of CalAmp Corp. (CAMP). I’d note that one day after we added NOK shares to the Select List, UBS unveiled a “buy” rating on the shares.

Also, this week, our shares of Applied Materials (AMAT) were upgraded to “outperform” at RBC Capital Markets with a new $55 price target; if you’re thinking “that $55 price target sounds familiar” it’s because it has been our AMAT price target for months. As a reminder, Applied will host its 2017 Analyst Day on Sept. 27, and I see that offering an upbeat dialog for both its display  semiconductor capital equipment businesses

  • Our price target on LSI Industries (LYTS) remains $10
    Our price target on Nokia Corp. (NOK) remains $8.50
    Our price target on Applied Materials (AMAT) remains $55

 

Speaking of displays and price targets, yesterday we increased our price target on Universal Display (OLED) shares to $175 from $135, and we are evaluating potential stop loss levels for this position.

As we close this week’s issue, we’d suggest subscribers that missed yesterday’s comments on the current corn harvest as well as a potential longer-term disruptor to corn supply-demand dynamics and what it means for the Teucrium Corn Fund (CORN) shares on the Select List give them a whirl.

  • Our long-term price target on Teucrium Corn Fund (CORN) shares remains $25.
SPECIAL ALERT: Exiting CalAmp shares and booking another hefty win

SPECIAL ALERT: Exiting CalAmp shares and booking another hefty win

Key Points from This Alert:

  • We are issuing a Sell rating on shares of CalAmp Corp. (CAMP) and exiting the position on the Tematica Investing Select List.

  • With this action, CAMP shares have generated a blended return of 39% vs. 14.8% for the S&P 500 since we first added the CAMP position in August 2016.

 

Over the last few weeks, we’ve seen a sharp rise in CalAmp (CAMP) shares. This likely reflects the pending compliance mandate with Electronic Logging Devices (ELDs) that is currently set for later this year. We say “currently set” because there are efforts underway to derail the December 18th deadline, and more mega-fleets are requesting exemptions to the mandate.

Generally speaking, compliance with regulatory mandates tends to pull demand forward, after which is tails off and hits both revenue and profits. In the case of CalAmp, the shares are now less than 5% from our $21 price target, and we would rather book these stellar returns than keep hanging on for modest upside, only to be burned. Call it the prudent investor in us, but the market issues we recently highlighted are still intact, and we’re seeing GDP estimates for the current quarter revised lower following hurricanes Harvey and Irma. We expect the coming weeks will see corresponding EPS cuts that could weigh on the market. Rather than wait for that to happen, let’s take the money and be patient for our next recommendation.

 

 

 

Yet again, boosting our price target on Universal Display

Yet again, boosting our price target on Universal Display

KEY POINTS FROM THIS POST:

  • We are boosting our price target on Universal Display (OLED) shares to $175 from $135 given the increasingly apparent shortage in organic light emitting diode displays.

  • Maintaining our price target of $55 on Applied Materials (AMAT).

Over the last week following the introduction of the organic light emitting diode display (OLEDs) contained in Apple’s (AAPL) new iPhone X, Universal Display (OLED) shares on the Tematica Investing Select List have come into focus.

How into focus?

Even USA Today ran an article on the iPhone X that cited the current OLEDs shortage as the reason behind the later than expected shipping date for that new flagship Apple (AAPL) smartphone:

“OLED manufacturers can’t build the screens fast enough as they increasingly pop up on smartphones, high-definition TVs, watches, virtual reality headsets and other gizmos. It’s an issue that not only is dogging Apple, costing it billions of dollars in short-term sales, but has tripped up Samsung, HTC and Google, too.”

The article goes on to discuss OLED display dynamics, as well as the demand for the technology from larger format TVs and prospects for other applications. On the heels of that article, we are hearing chatter among traders that Wall Street firms are turning increasingly bullish on Universal Display shares, hence the “pop” in the share price over the last few days — opening above $140 at the bell this morning.

From our perspective, this is not necessarily new information and we’ve suspected that as the Apple event came and went, the herd would recognize Universal Display’s position in the OLED display industry. As the herd once again catches up to us, we’re going to leap ahead of them yet again by boosting our price target on Universal Display shares to $175 from $135. This new price target, which equates to 1.0x on a price to earnings growth basis when applied to consensus 2018 EPS expectations of $2.85 up from $1.10 in 2016, offers just over 20% upside from current levels.

  • We are boosting our price target on Universal Display (OLED) shares to $175 from $135.

 

As we boost this price target, we should also keep in mind the current organic light emitting diode capacity crunch bodes well for display equipment demand at Applied Materials (AMAT). As a reminder, Applied Materials is holding its 2017 Analyst Day on September 27th, and we expect a bullish update on both its display business as well as its semiconductor capital equipment one.

  • Our price target on Applied Materials (AMAT) shares remains $55

 

 

Checking the 2017 Corn Harvest and our Teucrium Corn Fund shares

Checking the 2017 Corn Harvest and our Teucrium Corn Fund shares

Key Points from This Post:

  • We remain long-term bullish on Teucrium Corn Fund (CORN) shares given a new China-related wrinkle that could reshape supply-demand dynamics for corn.

  • Near-term, we are entering the peak harvest season for Corn, and we’re watching the weather in the western domestic corn region that could crimp this year’s harvest, which is already shaping up to be the weakest in the last four years.

  • Our long-term price target on CORN shares remains $25

 

In mid-July, we added shares of the Teucrium Corn Fund (CORN) to the Tematica Investing Select List as a Rise & Fall of the Middle Class and Scarce Resource investment theme play on one of the most widely used and consumed commodities – corn. Since that addition of those CORN shares, even though they are off their late August bottom at $17.13, the position is still down 11.5% as of last night’s market close. While we are patient investors, we are human (yes, it’s true!) and that can lead to bouts of frustration with a position. When that happens, being the professional investors that we are, we turn back to the investing premise that led to adding the shares in the first place, checking the data along the way to determine if the thesis remains intact. If it is, then we will remain patient; if not, then we have some decisions to make.

In the case of corn supply-demand dynamics, the below chart is the latest data from the Crop Progress Report published by the U.S. Department of Agriculture’s National Agriculture Statistics Service (NASS):

 

 

What the data above depicts is the current corn crop is shaping up to be the weakest in the last four years. The same data set shows a growing percentage of the current corn crop is in Poor or Very Poor condition. If this condition persists, let alone rises, it will impact the coming harvest. Simple supply-demand dynamics means a weaker than expected supply will likely lead to higher corn prices.

What this means is we’ll be watching the progress of the 2017 harvest, and September-October is the peak time for that activity. As of this past Sunday night, just 7% of the U.S. corn crop had been harvested vs. the 5-year average of 11%. While that may seem like a small percentage difference, remember that’s on a base of millions of metric tons.

What’s likely to hamper the harvest and its yield this year is the weather. While the weather in the eastern corn-growing region of the U.S. is looking favorable with dryer, warmer weather, it’s looking rather different in the western corn belt that is the eastern Dakotas, Minnesota, and northern Iowa. In that region, forecasts are calling for dramatically cooler temperatures that could result in scattered frost next week. If that happens, we are likely to see the percentage of the current corn crop that is Poor/Very Poor climb past the current 39% level. Such a move would boost corn prices as well as our CORN shares.

Further complicating the corn supply-demand equation in the medium to longer-term is news that China plans to dramatically boost ethanol use in its gasoline supply, moving to E10 blends by 2020 to help combat pollution and smog. If this move comes to pass, it could lead to a meaningful shift in corn demand dynamics given that China is the world’s largest car market, but is the third largest consumer of ethanol fuel. According to S&P Global Platts, China has the “capacity to produce maybe a billion gallons of ethanol, and that would have to be increased ten-fold to get to this E-10 mandate.” That sound you just heard was eyebrows being popped higher on what that could mean for corn prices.

Near-term we will continue to monitor the weather and what it means to the current corn crop. Should milder than expected weather emerge, and weigh on corn prices in the coming weeks, we’ll look to use that weakness to improve our long-term position in CORN shares given the potential game changer in corn demand in the medium-term.

 

 

SPECIAL ALERT – Adding Nokia shares to the Tematica Select List

SPECIAL ALERT – Adding Nokia shares to the Tematica Select List

 

  • We are issuing a Buy on  Nokia Corp. (NOK) shares with an $8.50 price target.

  • At this time, there is no recommended stop-loss level and we would look to scale into the shares aggressively near $5.50.

 

Yes, you are reading that correctly. After recently adding Nokia Corp. (NOK) shares to the Contender List, we are now adding them to the Tematica Select List given continued progress in its higher margin, intellectual property (IP) business, Nokia Technologies. We’ve seen the power of this Asset-Lite Business Model investment theme before with Qualcomm (QCOM) and InterDigital (IDCC) and it has the power to not only transform Nokia, but deliver EPS  upside relative to expectations.

To jog people’s memory, in the most recent quarter the Nokia Technologies division accounted for 7% of Nokia’s overall revenue, but delivered 37% of operating profit. To be clear, we like the operating leverage in this business. In the coming quarters, we also expect Nokia to benefit from continued wireless infrastructure buildout from both existing 3G and 4G networks as well as eventual deployments on 5G networks.

 

So why add NOK shares to the Select List now?

Early this morning it was announced Nokia won an arbitration battle against LG Electronics, which follows recent deals with Samsung, Apple (AAPL) and Xiaomi Electronics, a Chinese smartphone company. From LG Nokia will receive both a one-time payment, which was not disclosed, as well as recurring revenue that is expected to be in the realm of $275-$300 million. This is a meaningful bump to Nokia’s IP, which had sales of 616 million euros in the first half of 2017, and gives far more comfort in the likelihood of the company hitting 2018 EPS expectations of $0.37, up from this year’s consensus EPS of $0.30. Also too, as Nokia continues to stack up licensees, it becomes increasingly easier to win over its remaining IP targets.

Our price target on Nokia shares is $8.50, which equates to 23x expected 2018 EPS or 1.0 on a price to earnings growth ratio (PEG) basis using the company EPS growth over the 2016-2018 time frame. Given the degree of upside to be had, we are adding NOK shares to the Select List with Buy. At this time, there is no recommended stop-loss level and we would look to scale into the shares aggressively near $5.50.

Over the coming quarters, we expect to see more movement in the company’s wireless infrastructure business as 5G moves from testing and beta to deployment. With Nokia Technologies, the company has booked some impressive wins, and it can turn its attention to Huawei, which according to data compiled by IDC is now the third largest smartphone vendor behind Samsung and Apple. Also, as Apple brings augmented reality into the mainstream with its new iPhone models and does the same with health applications with Apple Watch, this opens the door for other technology licensing opportunities at Nokia given its portfolio of connected health, augment and virtual reality as well as other technologies. What this will require is patience with the shares, but given we are not only thematic investors but ones that have a longer than the herd time horizon that’s just fine with us.