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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…."
An NFL ‘Thursday Night Football’ Games Win Cements Amazon’s Content Plans

An NFL ‘Thursday Night Football’ Games Win Cements Amazon’s Content Plans

If there is one company that blurs the lines across several of our investment themes and their tailwinds it is Amazon (AMZN). From the accelerating shift to digital commerce and cloud that is a part of our Connected Society investing theme to Cashless Consumption and increasingly our Content is King investing themes, Amazon continues to make strides as it expands the scale and scope of its Prime offering.  The latest includes beating out Twitter (TWTR), Facebook (FB) and Google’s (GOOGL) YouTube to stream the NFL’s Thursday Night Football. We’ll see how many viewers stream these games across Amazon’s Prime Video footprint across its various TV, tablet and smartphone apps, but in our view, this goes a long way to cementing Amazon’s position in content.  

 The only thing better than one thematic tailwind pushing on a company’s business is two… so you can imagine how powerful three of them must be! Our only question is how long until Amazon expands into our Guilty Pleasure investing theme?

The NFL has a new streaming host for part of its Thursday Night Football package.Amazon will stream the 10 games broadcast by NBC and CBS next season as part of a one-year, $50 million deal, according to The Wall Street Journal and The Sports Business Journal.

The games will be available exclusively to Amazon Prime subscribers, per The Sports Business Journal.

Amazon beat out Twitter, Facebook and YouTube for the rights, according to the report. Twitter paid $10 million last season to provide live streaming services for the same number of games.

Link to Story: Reports: Amazon lands $50M deal to stream NFL ‘Thursday Night Football’ games

 

Details of this story are featured on this week’s Cocktail Investing podcast. Click below to listen:

 

Shifting Consumer Preferences Favor Food with Integrity Bullets Not Restaurant Shares

Shifting Consumer Preferences Favor Food with Integrity Bullets Not Restaurant Shares

It’s no secret the restaurant industry is having a tough time given restaurant traffic data and less-than-flattering industry articles as it grapples with several consumer-centric issues. We received yet another indication of that restaurant pain last week when Sonic Corp. (SONC) reported a 7.4 percent decline in same-store-sales. The company’s management team chalked up the drop to “a sluggish consumer environment, weather headwinds and share losses…” amid a “very intense” competitive environment. Predictably, the company is retooling its menu offering and even though it’s late to the party, it is also jumping on the smartphone bandwagon.

Stepping back there is a larger issue that Sonic and other restaurants have to contend with – declining restaurant traffic that is due not only to lower prices at grocery stores but also to the shift in consumer preferences to healthier foods. That preference shift is toward natural and organic offerings as well as paleo, gluten-free and others and that’s one of the reason’s we’ve favored shares of United Natural Foods (UNFI) as grocers expand their offering to meet that demand.

Even as companies like Coca-Cola (KO) and PepsiCo (PEP) tinker with their carbonated soft drink formulas to reduce sugar, the new enemy, they have to do so without sacrificing taste. Some investors may remember the whole New Coke thing back in 1985 that was ultimately a failure given the different taste. As Coca-Cola, PepsiCo and even Dr. Pepper Snapple (DPS) look to reformulate to ride either the lower sugar or better-for-you shift, it bodes rather well for flavor companies like International Flavors & Fragrances (IFF) or Sensient Tech (SXT).

That shifting preference has led several restaurant companies such as Panera Bread (PNRA) and Darden’s (DRI) Olive Garden to change up their menus in order to lure eaters. Over the last several years, Panera has been working to eliminate artificial additives in its food to make it “cleaner” for consumers and in 2015 it released a “no-no” list of more than 96 ingredients that it vowed to either remove from or never use in food. Darden is shifting to lighter fare recipes that have far fewer calories than prior ones. Even Chipotle (CMG), the one-time poster child for our Food with Integrity investing theme until its food safety woes last year, has come to fulfill its pledge of using no added colors, flavors or preservatives of any kind in any of its ingredients.

These are all confirming signs of our Food with Integrity investing theme that Lenore Hawkins and I talked about on last week’s podcast. Here too with these new menu offerings, it’s a question of how can restaurants offer healthier alternatives without sacrificing flavor? To us, the answer is found in  International Flavors & Fragrances, McCormick & Co. (MKC) and Sensient shares as well as other flavor companies.

Against that backdrop — – the shift to eating not only at home but eating food that is better for you – we have serious doubts when it comes to the quick service restaurant industry. According to the data research firm Sense360, which analyzed data from 140 chains and 5 million limited-service visits, 38% of heavy quick-service restaurant users reduced their visits in February, compared with the period before Christmas. Not exactly an inspiring reason to revisit shares of Sonic or several other QSR (Quick Service Restaurant) chains like McDonald’s  (MCD) or Wendy’s (WEN) at a time when bank card delinquency rates are climbing, subprime auto issues are doing the same, student debt levels loom over consumers and real wage growth has been meager at best.

While more people eating at home is a positive for Kroger (KR) and Wal-Mart (WMT), our “buy the bullets not the gun” approach continues to favor shares of McCormick and International Flavors & Fragrances in particular.  For those unfamiliar with “buy the bullets, not the gun” it’s a strategy that looks to capitalize on select industry suppliers that serve the majority of the industry with key components or other inputs. Shining examples of this strategy have included Intel (INTC), Qualcomm (QCOM) and recently acquired ARM Holdings. Common traits among them include a diverse customers base and strong competitive position with a leading market position for their products. The same holds true for both McCormick and International Flavors & Fragrances, which are also benefitting from our Rise & Fall of the Middle Class investing theme.

Quick Thoughts on Alphabet and McCormick Shares

Quick Thoughts on Alphabet and McCormick Shares

Alphabet Gets Dinged, But Is Already Responding to Advertiser Concerns

The last few days have seen a rating downgrade on Asset-lite Business Model company Alphabet (GOOGL) and its shares to Market Perform from Outperform by Bank of Montreal and a new Hold rating at Loop Capital. Despite the accelerating shift toward digital commerce and streaming content that is benefitting several of Alphabet’s businesses, the shares are caught in a push-pull over the recent snafu that placed ads next to what have been described as “offensive and extremist content on YouTube.”

We certainly understand that reputation is a key element at consumer branded companies — from restaurants to personal care products and all those in between. As we said previously, we expect there will be some blowback on Alphabet’s advertising revenue stream, and some estimates put that figure between $750 million – $1.5 billion, but the fact of the matter is that it all comes down how much time elapses before those consumer branded companies return —they will come back, they always come back to Google.

The good news is Alphabet has improved its ability to flag offending videos on YouTube and has the ability to disable ads. The company is going one step further and is introducing a new system that, “lets outside firms verify ad quality standards on its video service, while expanding its definitions of offensive content.”  These new decisions, as well as Alphabet’s stepped up action come at a crucial time, given that Newfronts (which is the time when digital ad platforms pitch their tools and inventory) starts May 1. In our view, Alphabet needs to win back advertisers’ trust and we’re hearing some advertisers that recently pulled their spending, like Johnson & Johnson (JNJ), are already reversing their decision.

The bottom line is while the recent advertising boycott is likely to cause some short-term revenue pain that is likely to be a positive for our Connected Society position in Facebook (FB) shares, the longer-term implications are likely to be positive for Alphabet as these new measures win back companies and provide assurances that their brands are safe on YouTube and other Alphabet properties.

  • While we see potential upside to our $900 price target, we would caution subscribers to wait for the advertising boycott news to be priced into the shares, something that is not likely to happen fully until Alphabet reports its quarterly earnings on April 27. 

 

 

As expected, McCormick Reaffirms Long-Term Guidance, But Its 2H 2017 That Matters

Earlier this morning, ahead of today’s investor day, Rise & Fall of the Middle-Class investment theme company McCormick & Co. (MKC) reiterated its long-term constant currency objectives calling for both annual sales growth of 4 to 6 percent and EPS growth of 9 to 11 percent. Coming off of the company’s recent quarterly earnings, this reiteration comes as little surprise. What will be far more insightful will be management laying out its agenda to cut $400 million in costs between 2016 and 2019, not to mention more details on how it aims to deliver double digits earnings growth year over year in the back half of this year following its recent quarterly earnings cadence reset.

We continue to like the company’s business, which is benefitting from shifting consumer preferences for eating at home and eating food that is good for you as well as rising disposable incomes in the emerging economy. There is little question the company is a shrewd operator that is able to drive costs savings and other synergies from acquired companies. We also like the company’s increasing dividend policy, which tends to result in a step up function in the share price.

  • With just over 12 percent upside to our $110 price target, we need greater comfort the company can deliver on earnings expectations for the second half of the year or see the shares retreat to the $95 level before rounding out the position size in the portfolio. 
  • For now, we continue to rate MKC shares a Hold.

 

 

 

Shifting Consumer Preferences Favor Food with Integrity Bullets Not Restaurant Shares

Shifting Consumer Preferences Favor Food with Integrity Bullets Not Restaurant Shares

It’s no secret that the restaurant industry is having a tough time, given restaurant traffic data and less-than-flattering industry articles as it grapples with several consumer-centric issues. We received yet another indication of that restaurant pain last week when Sonic Corp. (SONC) reported a 7.4 percent decline in same-store-sales. The management team chalked up the drop to “a sluggish consumer environment, weather headwinds and share losses…” amid a “very intense” competitive environment. Predictably, the company is retooling its menu offering and even though it’s late to the party, it is also jumping on the smartphone bandwagon.

Stepping back there is a larger issue that Sonic and other restaurants have to contend with — declining restaurant traffic that is due not only to lower prices at grocery stores but also to the shift in consumer preferences to healthier foods. That preference shift is toward natural and organic offerings as well as paleo, gluten-free and others and that’s one of the reason’s we’ve favored shares of United Natural Foods (UNFI) as grocers expand their offering to meet that demand.

Even as companies like Coca-Cola (KO) and PepsiCo (PEP) tinker with their carbonated soft drink formulas to reduce sugar, the new enemy, they have to do so without sacrificing taste. Some investors may remember the whole New Coke experiment back in 1985, which was ultimately a failure given the different taste. As Coca-Cola, PepsiCo and even Dr. Pepper Snapple (DPS) look to reformulate to ride either the lower sugar or better-for-you shift, it bodes rather well for flavor companies like International Flavors & Fragrances (IFF) or Sensient Tech (SXT).

That shifting preference has led several restaurant companies such as Panera (PNRA) and Darden’s (DRI) Olive Garden to change up their menus in order to lure eaters. Over the last several years, Panera has been working to eliminate artificial additives in its food to make it “cleaner” for consumers and in 2015 it released a “no-no” list of more than 96 ingredients that it vowed to either remove from or never use in food. Darden is shifting to lighter fare recipes that have far fewer calories than prior ones. Even Chipotle (CMG), the one-time poster child for our Food with Integrity investing theme until its food safety woes last year, has come to fulfill its pledge of using no added colors, flavors or preservatives of any kind in any of its ingredients.

These are all confirming signs of our Food with Integrity investing theme that Lenore Hawkins and I talked about on last week’s podcast. Here too, with these new menu offerings, it’s a question of how can restaurants offer healthier alternatives without sacrificing flavor? To us, the answer is found in International Flavors & Fragrances (IFF), McCormick & Co. (MKC) and Sensient shares as well as other flavor companies.

Against that backdrop — the shift to eating not only at home but eating food that is better for you — we have serious doubts when it comes to the quick service restaurant industry. According to the data research firm Sense360, which analyzed data from 140 chains and 5 million limited-service visits, 38 percent of heavy quick-service restaurant users reduced their visits in February, compared with the period before Christmas. Not exactly an inspiring reason to revisit shares of Sonic or several other QSR (Quick Service Restaurant) chains like McDonald’s  (MCD) or Wendy’s (WEN) at a time when bank card delinquency rates are climbing, subprime auto issues are doing the same, student debt levels loom over consumers and real wage growth has been meager at best.

While more people eating at home is a positive for Kroger (KR) and Wal-Mart (WMT), our “buy the bullets not the gun” approach continues to favor shares of McCormick and International Flavors & Fragrances in particular.  For those unfamiliar with “buy the bullets, not the gun” it’s a strategy that looks to capitalize on select industry suppliers that serve the majority of the industry with key components or other inputs. Shining examples of this strategy in the tech industry have included Intel (INTC), Qualcomm (QCOM) and recently acquired ARM Holdings. Common traits among them include a diverse customers base and strong competitive position with a leading market position for their products.

The same holds true for both McCormick and International Flavors & Fragrances, which are also benefitting from our Rise & Fall of the Middle Class investing theme.

  • Our price target on MKC shares is $110; we’d be more inclined to scale into the shares closer to $95.
  • Our price target on IFF shares remains $145; as new data becomes available, we’ll continue to evaluate potential upside to that price target. 
Verizon to join AT&T, Comcast and others with its streaming TV service

Verizon to join AT&T, Comcast and others with its streaming TV service

Following in the footsteps of HBO, AT&T, and Comcast, it’s looking like Verizon wants to appeal to the watch what I want, when I want, where I want Connected Society viewer. More competition should serve to improve choice, price and programming choices, and hopefully lower cable bills as well. The question is what does this mean for Hulu?

AT&T will soon have competition for its DirecTV Now service, according to a Bloomberg report, which says that Verizon is preparing to launch its own service in the summer. Verizon Communication…

Verizon Communications Inc. has been securing streaming rights from television network owners in preparation for the nationwide launch of a live online TV service, according to people familiar with the matter. The telecommunications giant plans to start selling a package with dozens of channels this summer.

Source: Verizon launching its own streaming TV service in the summer as net neutrality under threat | 9to5Mac

Assessing the Market as We Get Ready for 1Q17 Earnings Deluge

Assessing the Market as We Get Ready for 1Q17 Earnings Deluge

Despite yesterday’s move higher in the stock market, March to date has seen the Dow Jones Industrial Average move modestly lower with a larger decline in the Russell 2000. Only the Nasdaq Composite Index has climbed higher in March, bringing its year to date return to more than 9 percent, making it the best performing index thus far in 2017. By comparison, the Dow is up 4.75 percent, the S&P 500 up 5.35 percent and the small-cap heavy Russell 2000 up just 0.75 percent year to date.

So what’s caused the move lower in the stock market during March, bucking the upward trend the market enjoyed since Election Day 2016?

Despite the favorable soft data like consumer confidence and sentiment readings, investors are waking to the growing disconnect between post-election expectations and the likely reality between domestic economic growth and earnings prospects. Fueling the realization is the move lower in 1Q 2017 earnings expectations for the S&P 500, per data from FactSet, as well as several snafus in Washington, including the pulling of the vote for the GOP healthcare plan. These have raised questions about the timing and impact of President Trump’s stimulative policies that include infrastructure spending and tax reform.

We’ve been steadfast in our view that the earliest Trump’s policies could possibly impact the US economy was late 2017, with a more dramatic impact in 2018. On a side note, we agree with others that would have preferred to have team Trump focus on infrastructure spending and tax reform ahead of the Affordable Care Act. As we see it, focusing on infrastructure spending combined with corporate tax reform first would have boosted confidence and sentiment while potentially waking the economy from its 1.6 to 2.6 percent annual real GDP range over the last five years sooner. We’d argue too that that would have likely added to Trump’s political war chest for when it came time to tackle the Affordable Care Act. Oh well.

 

Evolution of Atlanta Fed GDPNow real GDP forecast for 2017: Q1

 

So here we are and the enthusiasm for the Trump Trade is being unraveled as growth slows once again. As depicted above, the most recent forecast for 1Q 2017 GDP from the AtlantaFed’s GDPNow sits at 1.0 percent compared to 1.9 percent for 4Q 2016 and 3.5 percent in 3Q 2016. Even a grade school student understands the slowing nature of that GDP trajectory. Despite all the upbeat confidence and sentiment indicators, the vector and velocity of GDP forecast revisions and push outs in the team Trump timing has led to to the downward move in S&P 500 EPS expectations for the current quarter and 2017 in full.

With Americans missing bank cards payments at the highest levels since July 2013, the delinquency rate for subprime auto loans hitting the highest level in at least seven years and real wage growth continuing to be elusive, the outlook for consumer spending looks questionable. Factor in the aging of the population, which will have additional implications, and it looks like the consumer-led US economy is facing more than a few headwinds to growth in the coming quarters. These same factors don’t bode very well for the already struggling brick & mortar retailers like Macy’s, Sears, JC Penney, Payless and others.

Now here’s the thing, currently, the S&P 500 is trading at 18x 2017 expectations —expectations that are more than likely to be revised down than up as the outlook for U.S. economic growth in the coming quarters is revisited. In three days, we close the books on 1Q 2017 and before too long it means we’ll be hip deep in corporate earnings reports. If what we’ve seen recently from Nike, FedEx, General Mills, Kroger and Target is the norm in the coming weeks, it means we’re more likely to see earnings expectations revised even lower for the coming year.

While it’s too early to say 2017 expectations will be revised as steeply as they were in 2016, (which started the year off with the expectation of a 7.6 percent increase year over year but ended with only a 0.5 percent increase following 4Q 2016 reporting), but any additional downward revisions will either serve to make the market even more expensive than it currently is or lead to a resumption of the recent downward move in the market. Either way, odds are there is a greater risk to the downside than the upside for the market in the coming weeks.

Buckle up; it’s bound to get a little bouncy.

WEEKLY ISSUE: Getting prepared before the velocity of earnings reports kicks into higher gear

WEEKLY ISSUE: Getting prepared before the velocity of earnings reports kicks into higher gear

With three trading days left to go in the quarter, we wanted to share some quick thoughts on several Tematica Select List positions, especially those like AMN Healthcare (AMN) and Alphabet (GOOGL), both of which received much attention last week that weighed on the shares of both companies. Even though all the major market indices fell last week, it wasn’t all bad news for the Tematica Select List as International Flavors & Fragrances (IFF) continued it move higher as did Facebook (FB) and several others.

As we shared in this week’s Monday Morning Kickoff and on last week’s Cocktail Investing Podcast, investors are giving the market a re-think as they juxtapose the speed of the economy and prospects for earnings growth near-term. While some shares on the Tematica Select List have come under some pressure, as we noted above, the thematic tailwinds that are powering the businesses behind these companies remain intact. As we get ready for the soon to be upon March quarter earnings season, we’ll be mindful of expectations as we watch for negative earnings pre-announcements. With the deluge of earnings coming at us, we’ll be revisiting stop loss levels in the coming days, and intend to make any and all adjustments before the velocity of earnings reports kicks into higher gear.

We’ve got a full review of the Tematica Select List, so we’ll keep the preamble to a minimum and get to it . . .

Alphabet (GOOGL) 
Asset-lite Business Models

GOOGL shares fell more than 1.0 percent over last week following the decision by a handful of high-profile consumer brands like Verizon (VZ) and our own AT&T (T) to pull advertising from Google’s YouTube over offensive content. While Alphabet doesn’t break out YouTube’s financial performance, this concern over “brand safety” could be a bump in the road for the business as advertisers look to other outlets, from Facebook (FB) to more traditional broadcast and cable TV. Much like fake news, we see this as a temporary set back for Alphabet and suspect before too long Alphabet will put protocols in place for such offensive content.

Also last week it was reported that Alphabet submitted a bid against Amazon and Facebook to stream Thursday Night Football games next season on YouTube. Given the aforementioned YouTube advertising issue, a win here would help smooth over advertisers in our view and Alphabet certainly has the balance sheet to compete.

The accelerating shift toward digital advertising and shopping bodes very well for Alphabet’s core search and advertising business, while the same for streaming bodes well for YouTube. Those drivers have Alphabet tracking to grow earnings more than 17 percent in 2018 vs. 2017 and the shares are trading at 22x consensus 2018 expectations that sit at $38.92 per share, essentially a PEG ratio of 1.25.

  • Our price target on GOOGL remains $975 and the rating is a Buy at current levels.

 

Amazon (AMZN)
Connected Society

Shares of Amazon rose 1.5%, but year to date are up more than 14 percent. Last week brought a number of announcements that, from out vantage point, confirm the company’s position in our increasingly Connected Society and Amazon’s plans to expand its footprint:

  • Amazon acquired all of Souq.com, a Dubai-based online retailer to better position itself in the young and tech-savvy Middle East markets of Kuwait, Saudi Arabia and the United Arab Emirates.
  • Amazon is reportedly partnering with the German logistics company DHL to leverage its Cincinnati/Northern Kentucky Airport to build out its upcoming Prime Air cargo hub operation. We see this as the latest step in Amazon looking to shrink time to customer as part of its growing Fulfilled By Amazon offering. The partnership also reportedly includes the introduction of AmazonFresh food deliveries in Germany starting next month, which also serves to extend service offering deeper into the eurozone.
  • Amazon is also seeking approval from India’s Trade Ministry to invest about $500 million in a grocery venture.
  • For those concerned that Amazon may be putting too much on its plate, it’s being reported that Amazon has postponed a much expected launch into Southeast Asia from 1Q 2017 to sometime later this year.

The common thread among these items is that Amazon continues to expand its footprint, which augurs for continued growth in the coming quarters. Stepping back and looking at the company’s competitive positions that are poised to benefit from their respective tailwinds — the shift to digital consumption (shopping, content streaming, grocery) and Cloud adoption — and are poised for additional share gains, we see favorable revenue and profit growth over the long term.

  • For now, we are keeping our $975 price target intact as well as our Buy rating. As we have said before, Amazon is a stock to own, not trade.

 

AMN Healthcare (AMN)
Aging of the Population

Shares of this workforce management company that serves the health-care industry, and nursing primarily, dropped last week on concerns over the repeal and replacement of the Affordable Care Act. With Republicans pulling the GOP health plan vote last week, and President Trump clearly signaling that he will be moving on with his agenda, we see the pressure that led to the sharp pullback in AMN shares last week abating as the Affordable Care Act remains intact.

We continue to be fans of the pain point that is the healthcare worker shortage, particularly for nurses, that is powering AMN’s business as the domestic population continues to skew older placing greater demands on healthcare.

  • With the rebound in the share price over the last few days, we now have roughly 14 percent upside to our $47 price target, which has us keeping our Buy rating for now. 
  • As the shares approach $43, we would be less inclined to commit fresh capital to the position. 

 

Applied Materials (AMAT)
Disruptive Technologies

Just over a month ago, we added shares of Applied Materials, a leading nano-manufacturing equipment, service, and software provider to the semiconductor, flat panel display (FPD), and solar industries, to the Tematica Select List, with a 12-18-month price target of $47. Recent bullish commentary in Barron’s underscores our bullish view on the company and its shares as it benefits form several multi-year tailwinds that include not only ramping industry capacity for organic light emitting diodes, but also 3D NAND flash and the industry need to add DRAM capacity.

  • We have ample upside to our $47 price target and we’d look to scale into our position on share price weakness below $33, as long as the current outlook remains intact, or on signs the ramp in semi-cap and display equipment is ramping stronger than expected.

 

AT&T (T)
Connected Society

Year to date, AT&T shares have traded sideways, as we wait for more details on the pending merger with Time Warner (TWX). Chatter in and around Washington seems to suggest that President Trump has softened his opposition to the combination of the two companies as it looks to get regulatory approval before the end of the year. This week there is a pending decision to be had in Washington that will create a nationwide publish safety network dubbed FirstNet. That special meeting will be held Wednesday (March 29), and the growing consensus is the ensuing vote is likely to pave the way for AT&T to be awarded with a 25-year deal to build and maintain the much-anticipated nationwide public-safety broadband network. We’ll be looking for the outcome next week, which would be a nice positive for the company’s business and our shares.

  • As more clarity on the merger with Time Warner develops, we are likely to revisit our current $44 price target. 
  • All things being equal we are likely to add to the position below $40.

 

CalAmp (CAMP)
Connected Society

This wireless solutions company competes in the developing Internet of Things market, better known as telematics, and resonates with our Connected Society investing theme. CAMP shares fell just under 2 percent over the last week. Year to date, the shares are up more than 15 percent. Given growing investor concern over growth, we suspect more short-termed investors were taking profits last week given the CAMP story is one weighted toward the back half of the year given the looming electronic logging device (ELD) mandate.

Building off its relationship with Caterpillar (CAT), CalAmp recently introduced AssetOutlook, a telematics application designed to optimize construction operations for off-road equipment and on-road vehicles. CalAmp also recently announced its entrance into the cold-chain and supply-chain visibility markets, an area forecasted to reach $5.4 billion in size by 2021.

  • With ample multi-year growth prospects on the horizon, we continue to rate the shares a Buy with a $20 price target.

 

Dycom Industries (DY)
Connected Society

Year to date, Dycom shares are up more than 15 percent vs. 5.35 percent for the S&P 500. Given the strong move in the shares year to date we suspect some profit-taking has been taking place over the last several days. With the expected win by Dycom customer AT&T (T) this week for a 25-year deal to build and maintain the much-anticipated nationwide public-safety broadband network, we are likely to see some lift in DY. Longer-term as Dycom’s customers deploy both next-generation solutions as well as add incremental capacity to existing networks, we remain bullish on the name.

One risk we have to watch for given the nature of Dycom’s business is disruption due to weather; thus far the company has benefited from mild winter weather, but we now need to account for the recent storm, Stella, that hit the Northeast.

  • Our price target is $115, which offers potential upside of more than 25 percent from current levels and has us rating the shares a Buy.

 

 

Facebook (FB)
Connected Society

Our Facebook shares continued to move higher last week, ensuring its place as the best-performing position on the Tematica Select List thus far in 2017. While we currently have another 9 percent to our $155 price target, there are reasons to think there could be additional upside potential as the company continues to expand the reach of its platforms (Facebook, Instagram, WhatsApp) and their monetization.

Last week Facebook shared that Instagram’s advertising base topped 1 million businesses, which comes at a time when Google is received advertising blowback given some of its content. While that is likely to be a short-term disruption, we see incremental wins by Facebook across its various platforms. On the news front, Facebook is one of several firms hoping to stream Thursday Night Football games next season — this would be a big win for the company, but it is going up against Amazon and Google. We’ll continue to watch for more details.

The next known catalyst for FB shares will be the F8 Annual Developer Conference on Apr. 18, at which we should learn above new product features as well as the recently launched Facebook 360. This event is likely to be a week or two before the company reports 1Q 2017 earnings.

  • For now, our price target remains $155 and our rating a Buy, but should the shares cross $142, we would not add further to the position

 

 

International Flavors & Fragrances (IFF) 
Rise & Fall of the Middle Class

Having climbed more than 11 percent, IFF shares have been a solid performer year to date. Last week the company gave an upbeat presentation at the CAGE Conference 2017 and the positive reception that drove the shares higher also meant we are encroaching on our $145 price target.

With roughly 10 percent upside to that level, we’re not inclined to add fresh capital to the position at or near current levels. As we do this, we recognize new product categories, such as dairy, that aided Coca-Cola (KO) during the December quarter, as well as alternative sweetener demand by beverage companies ranging from Coca-Cola to PepsiCo (PEP) and Dr. Pepper Snapple (DPS), bode well for the flavors business in the coming quarters. The same is true with candy companies looking to cut back sugar, but preserve taste. Even longer term, the outlook remains bright for this market as the Freedonia Group’s forecast calls for global demand for flavors and fragrances to reach $26.3 billion by 2020, which would be a 21 percent increase from $21.7 billion in 2015.

 

  • As new data becomes available, we’ll continue to evaluate potential upside to our $145 price target. 

 

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

Yesterday as part of reporting better than expected February quarter results and reaffirming it full year guidance, McCormick reshuffled EPS expectations for the balance of the year. The company cut expectations for the current quarter due to continued currency headwinds, a higher than usual tax rate and ramping marketing costs for newer products.

As we expected, MKC shares came under some pressure yesterday, but held off reaching the $95 level at which we’d be more inclined to scale into the position. Also as expected, the double-digit earnings growth in the back half of the year was a central topic on the earnings conference call. Our confidence in the company’s ability to deliver centers on its ability to extract price increase outside of the US later this quarter that will have a full impact in the back half of the year following US price increase in January as well headway on its $100 million in targeted cost savings and additional share buybacks.

  • Looking at the bigger picture, consumers continue to eschew restaurants and are shifting their palates to healthier meals, all of which plays into McCormick’s hands. 
  • Our price target on the shares is $110, which offers just under 12 percent upside from current levels. 
  • Again, we’d be more inclined to scale into the shares closer to $95.

 

Nuance Communications (NUAN)
Disruptive Technology

Nuance shares were rose more than 1 percent over the last week and year to date are up more than 13 percent. As the shares moved higher, we continued to get more proof points for voice digital assistants from Marriott (MAR), which is testing Apple’s (AAPL) Siri and Amazon’s Alexa technology to decide which it will use to control devices in its hotel rooms. Also too, Starbucks (SBUX) now allows for mobile orders via Ford (F) vehicles equipped with its SYNC3 voice-activated technology as well as Amazon’s Echo devices.

While we tend to focus on home and car voice applications, we’d remind you that healthcare is a burgeoning market for voice digital assistants and plays into Nuance’s strengths, as does mobile. We view the growing adoption and deployment of VDAs in other applications (smartphone, auto, home, etc.) lending credence to Tractica’s forecast for unique active consumer VDA users to grow from 390 million in 2015 to a whopping 1.8 billion worldwide by the end of 2021. During the same period, unique active enterprise VDA users are expected to rise from 155 million to 843 million.

As that market heats up, it isn’t lost on us that Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Samsung and Huawei are likely to acquire voice-technology companies to improve their capabilities in this area. We can also add IBM (IBM) to that list as it moves toward “human-like accuracy” for speech recognition.

 

  • Against that backdrop, our rating on NUAN shares is Buy and our price target continues to be $21

 

PureFunds ISE Cyber Security ETF (HACK)
Safety & Security

In our view, cyber security should be a part of everyone’s portfolio, especially when we consider that losses from cyber theft, espionage, disruption, and destruction are now spoken of in the trillions of dollars. The global market for cybersecurity, which was only $3.5 billion in 2004, will this year reach $170 billion with the federal government alone will spend $18 billion on cybersecurity. Add these data points to the recent re-introduction of the Developing and Growing the Internet of Things (DIGIT) Act, which shows Congress has estimated that more than 50 billion devices will be connected by 2020, and we are easily reminded that cyber security remains a growth industry.

Our view remains that cybersecurity is a growing issue for individuals, companies and other institutions as connective technologies move past smartphone and other maturing platforms into new areas such as the IoT. The issue is cyber security companies are very much like game console companies — who has the latest offering that is attracting customers? By investing in HACK shares, we get a diversified offering that allows us to catch the rising tide of cyber and related attacks.

 

  • Our price target on HACK shares is $35

 

Starbucks Corp. (SBUX)
Rise & Fall of the Middle Class

Starbucks recently held its annual shareholder meeting at which new CEO Kevin Johnson reiterated the strategy to create new occasions for customer visits, including its new Starbucks Mercado lunch items. We see this building on the company’s food offering, which to date has largely focused on breakfast items. The company is also looking to capitalize on our Food with Integrity investing theme by bringing a line of iced teas to market this summer that have no artificial flavors or sweeteners, as well as gluten-free and vegan food options. With the gluten-free food market expected to grow at an annual rate of roughly 12 percent through 2021, according to global research group Technavio, as investors we applaud Starbucks move to tap into this tailwind. We’d also add this move with iced teas also confirms our position in International Flavors & Fragrances (IFF) as we’re pretty sure Starbucks and others don’t want to sacrifice taste while making these healthy changes.

Amid all of that, Starbucks continues to expand its global footprint as it continues to play the long game, particular in China where it aims to double its store count to 5,000 by 2021. In sum, these initiatives have the company targeting “annual high-single digit unit growth, mid-single digit same store sales growth and EPS growth of 15 to 20 percent.”

The trick in this continued expansion will be ensuring product quality and the consumer experience as the company grows past its 25,000 plus location footprint. We certainly believe the company has watched McDonald’s (MCD) struggle with these issues across its near 37,0000 restaurant locations across the globe and has learned from those mistakes.

While we continue to monitor the company’s top line growth prospects, we’ll also be watching key cost inputs like coffee, which is up 9.7 percent year over year, as well as those for milk (up roughly 7 percent year over year), wheat and other key ingredients. When faced with sustained cost increases Starbucks has tended to implement modest hikes, and while we’ve not heard of any such increases thus far in 2017, we’ll be keeping our ears open. While painful for consumers, these price increases tend to benefit margins when coffee, milk and other input costs fall.

 

  • Our price target on SBUX shares remains $74, which offers 29 percent upside from current levels even before we factor in the quarterly dividend and keeps the shares in the Buy zone. 

 

United Natural Foods (UNFI)
Foods with Integrity

United Natural Foods is a specialty food distributor, which is benefiting from our Food with Integrity tailwind as consumers increasingly look for non-GMO, natural and organic food products, as well as those tied to other lifestyle choices such as gluten-free and paleo. UNFI shares flip-flopped once again last week falling just under 3 percent, but still remain well above their recent post-earnings lows.

According to a study that was recently published in the Journal of the American Medical Association, diet indeed plays a major role in increasing a person’s risk of dying from heart disease, stroke or diabetes — collectively referred to as “cardio-metabolic killers.” In a nutshell, it suggests that in order to lower the risk of dying from a cardio-metabolic disease, Americans likely have to do more than just eat more healthy foods — they have to eat less unhealthy foods as well. We see this as helping explain the shifting consumer preference toward natural and organic products that should continue to drive organic revenues and faster-growing EBITDA at United Natural as it focuses on cost controls.

 

  • Our price target on UNFI shares is $60.

 

 

United Parcel Service (UPS)
Connected Society

Year to date, UPS shares are down more than 7 percent, but are up modestly since we added them to the Tematica Select List in late February. Despite that performance, we continue to favor the shares as the “missing link” in the accelerating shift toward digital commerce. We see this in aggregate each month in the Retail Sales report, but we are also seeing the toll this shift is taking on brick & mortar retailers through a growing combination of store closures and bankruptcies. As those retailers grapple with that shifting landscape, a growing number of them are focusing on direct to consumer via online and mobile platforms, which means more packages needing to be shipped to more people that buying more products online. The bottom line is those packages still need to get to the buyers or the intended recipients, which bodes well for UPS shares. From time to time, there UPS shares get knocked around on chatter than Amazon (AMZN) is building its own logistics business, but that is related to its Fulfilled By Amazon offering and the need to compress shipping as Amazon offers more products under its Prime umbrella. We rather doubt that Amazon is interested in fully replicating UPS’s entire hub and spoke delivery system far and wide across the country.

Given the magnitude of this shopping transformation, we will continue to be patient with UPS shares, especially when there is a holiday shopping lull.

  • Our price target remains $122, which keeps the shares with a Buy rating. 
  • As we are being patient, we’ll be more than happy to collect the current $0.83 per share quarterly dividend, which offers a dividend yield of 3.2 percent at the current share price, and helps support the share price.

 

Universal Display (OLED)
Disruptive Technologies

Shares of this materials and IP licensing company that serves the organic light emitting diode (OLED) display industry climbed nearly 4 percent over the last week, bringing our return to 60 percent since last October. Currently, OLED industry capacity is limited, but adoption by Apple (AAPL) and other smartphone manufacturers, TV vendors and the automotive industry is leading to a pronounced pick-up in this area, which bodes well for Universal’s materials and intellectual property business over the coming quarters. The biggest risk with Universal Display, in our view, is timing associated with new industry capacity coming on stream. Given, however, that our time horizon spans the next few years we are inclined to be patient investors with OLED shares.

  • Our price target is $100, which offers sufficient upside from current levels to warrant a Buy rating.

 

 

Walt Disney (DIS)
Content is King

Disney shares rose just shy of 1 percent last week, bringing the year-to-date return to more than 8 percent and leaving roughly 10 percent upside to our $125 price target. There were two key pieces of news last week, the first of which was the record box office performance of Beauty and the Beast last weekend. We see this offering a number of positives for Disney’s other businesses, just the way Star Wars, Marvel and Pixar films have in the past and should in the coming months.

Also last week was the news over the extension of Chairman & CEO Bog Iger’s contract to July 2019, which should quell concerns over management succession planning at least for the near term. While the bears are likely to pick at ESPN, the reality is we are now in spring break season, which bodes well for Disney’s park business.

As a reminder, Disney recently announced it was boosting ticket prices, which we may cringe at as consumers, but love as shareholders. Combined with leveraging its Frozen and Star Wars content at the parks over the coming years, we see Disney providing new reasons to revisit these destinations.

As we move past March and April, the next catalyst we see for the shares will be several box office films being released  by Disney — Guardians of the Galaxy 2 (May 5), Pirates of the Caribbean: Dead Men Tell No Tales (May 26), Cars 3 (June 16) and Spider-Man: Homecoming (July 7). Those rapid fire releases, likely bode well for this Content is King company across several of its businesses in the second half of 2017.

  • Our price target on DIS shares remains $125.

 

 

Market finally catches up to reality — something we’ve warned about since the Trump Trade took off

Market finally catches up to reality — something we’ve warned about since the Trump Trade took off

Monday was the start of spring, which usually brings in some milder weather and a breath of fresh air. The latter was certainly what the stock market received yesterday when it had its worst day in a number of weeks.

For us here at Tematica, we’ve been talking about the growing disconnect between the stock market, the real speed of the economy and the growing likelihood that President Trump’s stimulative policies will arrive far later than the mainstream expected. The fact that there are several other snafus helping to deter progress is Washington — like the FBI investigation into potential links with Russia, judicial pushback on the second attempted travel ban and an attempt to repeal the Affordable Care Act that doesn’t have full support of Republicans in the House and Senate — are pushing out the focus on infrastructure spending and tax reform.

The good news is that once again the herd is catching up to what we’ve been saying. The not so good news is it means we’re likely to see the stock market give back some of its 2017 gains as these GDP expectations and subsequent earnings expectations get reset. If we look at several companies that reported earnings this week, including Rise & Fall of the Middle-Class contender Nike (NKE), and Economic Acceleration/Deceleration players FedEx (FDX) and Actuant (ATU) each of them have given their own warning signs:

  • Nike’s future orders fell 1 percent;
  • FedEx missed quarterly expectations and cut its 2017 global GDP forecast to 1.6 percent from the prior 2.6 percent;
  • Actuant guided its current quarter earnings and revenue below consensus and reduced the top end of its 2017 EPS guidance.

Overnight we’re also reading that Payless (PSS) may file for bankruptcy next week and Sears (SHLD) mentioned in its latest 10-K filing just a day or two ago that, “substantial doubt exists related to the company’s ability to continue as a going concern.” Candidly given the rise of Connected Society company Amazon (AMZN) in apparel, as well as its Zappos business, we’re a little surprised that Payless has hung on as long as it has.

 

 

The point is we’re starting to see 2017 expectations get adjusted, and the new question we need to focus on is the degree of those negative revisions. With hindsight being 20/20, last year we saw a steady move lower in earnings expectations for the S&P 500 and we wound up seeing 2016 earnings growth come in at a whopping 0.5 percent for those 500 companies.

As we entered 2017, the expectation was those 500 companies would grow their collective earnings more than 12 percent compared to 2016. Even before we get March quarter results, the view on 2017 earnings growth for the S&P 500 has fallen to just over 10 percent. With several highly anticipated policies getting pushed out, odds are companies will have to reset EPS expectations for 2Q 2017 and most likely 3Q 2017 as well, which means we are likely to see full year 2017 expectations come down further.

As this happens, the market will likely continue to wake up to current valuation levels, especially since if the price of the S&P 500 remains steady and earnings get cut, the market valuation will climb. Odds of that happening are rather low given the market’s stretched valuation and it would mean paying more for even slower earnings growth. What this means is we’re likely to see the market move lower over the coming weeks as all of these expectations get rejiggered lower.

 

We’ve been patient as well as selective, and we’ll continue to do so.

The most recent addition to the Tematica Select List, the Connected Society “missing link” that is United Parcel Service (UPS), was one month ago. While we use the expected retrenchment in the market to identify new players for the Tematica Select List, we’ll continue to look for confirming data points for the existing positions. A great example was the piece we published earlier this week on Applied Materials (AMAT) and Universal Display (OLED) as well as Disney (DIS) that saw Barron’s backing our thematic rationale for having these three companies on the Select List.

With 8 trading days left in the quarter, a number of companies will soon be entering their “quiet periods” and that means we’re going to have our “scope up” as it were for potential earnings pre-announcements. If we get more negative warnings than usual, or from some larger blue chip companies, we could see the market get a little bouncy. In times like that, we’ll look to scale into positions where it makes thematic sense, especially if we can reduce the cost basis on the Tematica Select List. It’s a strategy that’s paid off for Dycom (DY), AMN Healthcare (AMN), International Flavors & Fragrances (IFF) and several others positions.

Be sure to check the website for more comments and insights, and be sure to listen to our Cocktail Investing Podcast — it’s all the insight with some good humor and more than few laughs as well.

Bearish Thoughts on General Motors Shares

Bearish Thoughts on General Motors Shares

While higher interest rates might be a positive for financials, at the margin, however, it comes at a time when credit card debt levels are approaching 2007 levels according to a recent study from NerdWallet. The bump higher in interest rates also means adjustable rate mortgage costs are likely to tick higher as are auto loan costs, especially for subprime auto loans. Even before the rate increase, data published by S&P Global Ratings shows US subprime auto lenders are losing money on car loans at the highest rate since the aftermath of the 2008 financial crisis as more borrowers fall behind on payments. If you’re thinking this means more problems for the Cash-strapped Consumer (one of our key investment themes), you are reading our minds.

In 4Q 2016, the rate of car loan delinquencies rose to its highest level since 4Q 2009, according to credit analysis firm TransUnion (TRU). The auto delinquency rate — or the rate of car buyers who were unable make loan payments on time — rose 13.4 percent year over year to 1.44 percent in 4Q 2016 per TransUnion’s latest Industry Insights Report. That compares to 1.59 percent during the last three months of 2009 when the domestic economy was still feeling the hurt from the recession and financial crisis. And then in January, we saw auto sales from General Motors (GM), Ford (F) and Fiat Chrysler (FCAU) fall despite leaning substantially on incentives.

Over the last six months, shares of General Motors, Ford, and Fiat Chrysler are up 8 percent, -2.4 percent, and more than 70 percent, respectively. A rebound in European car sales, as well as share gains, help explain the strong rise in FCAU shares, but the latest data shows European auto sales growth cooled in February. In the U.S., according to data from motorintelligence.com, while General Motor sales are up 0.3 percent for the first two months of 2017 versus 2016, Ford sales are down 2.5 percent, Chrysler sales are down 10.7 percent and Fiat sales are down 14.3 percent.

In fact, despite reduced pricing and increasingly generous incentives, car sales overall are down in the first two months of 2017 compared to the same time in 2016.

 

So what’s an investor in these auto shares to do, especially if you added GM or FCAU shares in early 2016? The prudent thing would be to take some profits and use the proceeds to invest in companies that are benefitting from multi-year thematic tailwinds such as Applied Materials (AMAT), Universal Display (OLED) and Dycom Industries (DY) that are a part of our Disruptive Technology and Connected Society investing themes.

Currently, GM shares are trading at 5.8x 2017 earnings, which are forecasted to fall to $6.02 per share from $6.12 per share in 2016. Here’s the thing, the shares peaked at 6.2x 2016 earnings and bottomed out at 4.6x 2016 earnings last year, which tells us there is likely more risk than reward to be had at current levels given the economic and consumer backdrop.  Despite soft economic data that shows enthusiasm and optimism for the economy, the harder data, such as rising consumer debt levels paired with a lack of growth in real average weekly hourly earnings in February amid a slowing economy, suggests we are more likely to see GM’s earnings expectations deteriorate further. And yes, winter storm Stella likely did a number of auto sales in March.

Subscribers to Tematica Pro received a short call on GM shares on March 16, 2017

 

 

Barron’s Gets Behind our OLED, AMAT and DIS Positions

Barron’s Gets Behind our OLED, AMAT and DIS Positions

Over the weekend, among its many articles Barron’s published two pertaining to several positions on the Tematica Select List — Disruptive Technology plays Universal Display (OLED), Applied Materials (AMAT) and Content is King company Disney (DIS). In our view, each of these articles is bullish for the corresponding shares, but even so let’s review:

In “Corning, Samsung: China’s OLED Spend May Be Big Trouble in 2018, Says Bernstein”  following conversation with 23 companies and industry experts, investment firm Bernstein share their view that, “China is a big force in a rise in spending for display technologies, particularly, OLED, which is taking over from LCD, and also for spending on semiconductors, with the move to so-called 3-D NAND chips.”  The authors of the report go on to say:

“OLED capacity ramp-ups from the Chinese players are even more aggressive than we thought, and hence equipment and material players are benefiting from this ‘OLED capex cycle’. On the semiconductor equipment side, we are seeing a similar story – rising capex for 3D NAND coming from China will translate into good demand for semi equipment makers. Finally, for memory, DRAM supply is tight for now, so read-through is positive for DRAM pricing through 2017.”

We certainly see this rather positive and confirming for our investment thesis on Universal Display and Applied Materials. While many have and will likely continue to focus on Apple (AAPL) and its next iPhone iteration, we see a larger shift going on, much like the one we saw more than a decade ago when light emitting diode (LED) technology exploded. As LED applications expanded from mobile phones and backlighting for LCD TVs to automotive lighting, Cree (CREE) shares took off, which was very positive for our readers at the time since we had a Buy rating on the shares at the time. This time around, we see the same happening for Universal Display shares, especially since we see Universal’s business benefitting from its intellectual property licensing business. In our view that makes the company more like Qualcomm (QCOM) than Cree.

Turning to the second article, “Disney’s Iger On Movies, Parks, ESPN” the author hits a number of points that power our investment thesis — an improving movie slate and recent park price increases that should drive revenue higher this year. The article also bangs a familiar drum that is ESPN, which continues to hemorrhage customers as more and more cut the cord, but it also mentions that Disney is expected to launch its own over the top ESPN service later this year as well as ESPN landing on other over the top services like our own AT&T’s (T) DirectTV NOW. As we recently shared, Disney is also focusing on cost control inside ESPN, including laying off TV, radio, and online personalities as part of a plan to “trim $100 million from the 2016 budget and $250 million in 2017.”

Getting back to Disney’s film business, its latest release, live-action “Beauty and the Beast” delivered a record-setting weekend box office opening with $170 million. Not only was this a record-setting March opening weekend, but the seventh largest domestic opening of all-time. Internationally, “Beauty and the Beast” delivered an estimated $180 million in ticket sales from 44 material markets for an estimated $350 million global opening, making it the #14 on the all-time best list. We can already see the Disney merchandise flying off the shelves now and later this year when the DVD and video on demand releases hit just in time for year-end holiday shopping. Much the way Disney is adding Frozen and Star Wars franchise attractions to its park, we would not be surprised to see a Beauty and the Beast addition as well.

  • We continue to rate Universal Display (OLED) shares a Buy with a $100 price target.
  • Our rating on Applied Materials (AMAT) remains a Buy with a $47 price target. 
  • We continue to rate Disney (DIS) shares a Buy with a $125 price target.