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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…."
Jerry Seinfeld Teams with Netflix and What’s Wrong With That?

Jerry Seinfeld Teams with Netflix and What’s Wrong With That?

There is little question that streaming content is altering the playing the field, not just how people consume audio and video content, but increasingly where certain content can be found. First, it was movies, then TV shows, but as back catalogs were seemingly pervasive, streaming services like Netflix, Hulu, and Amazon have looked to differentiate themselves through proprietary content. It used to be as Bruce Springsteen sang, “57 channels and nothin’ on,” but that has morphed into hundreds of channels that need to be filled. The end result is an arms race for quality content that is likely to hasten the switch to streaming video services from traditional broadcast and cable networks. If asked, “What’s wrong with that?” for Seinfeld jumping ship to Netflix, we would say nothing… nothing at all.

Jerry Seinfeld is headed for Netflix.The comedian has signed a multifaceted production deal with the streaming giant, The Hollywood Reporter has learned. Under the pact, Seinfeld’s award-winning Crackle series Comedians in Cars Getting Coffee will move with new episodes to Netflix, with the comedian also set to film two new stand-up specials exclusively for the streamer.

The Seinfeld deal marks the latest investment in comedy for Netflix, which also shelled out $20 million each for a pair of Chris Rock stand-up comedy specials. Netflix’s entry into the stand-up space has created a growing arms race to land top talent in an increasingly competitive landscape against featured players Comedy Central, Showtime and HBO, among others. Other comedians who recently have gone to Netflix include Amy Schumer, who made a name for herself via Comedy Central, and Dave Chappelle.

The deal is a blow to Sony Pictures Television’s little-watched streaming service Crackle, which had been the exclusive home for Comedians in Cars, with Seinfeld’s deal with the independent studio expiring.

Source: Jerry Seinfeld Teams With Netflix for Two Stand-Up Specials, More ‘Comedians in Cars’ | Hollywood Reporter

Auto Insurers to feel the pain of Connected Society and Asset-Lite Consumers

Auto Insurers to feel the pain of Connected Society and Asset-Lite Consumers

When confronted with a structural change, like the one posed by the combination of self-driving auto technology and the psychographic shift toward fewer people owning cars instead opting for  Uber, Lyft,  Zipcar and the like most tend to contemplate the first derivative. Often times though the ripple effect to be had is far larger and in this case if fewer cars are being sold, it means fewer auto insurance policies at State Auto Financial Corp., Geico and Progressive are likely to be written and paid for.

Each of these trends could dent the global auto insurance industry. As they begin to converge, the damage could be irreparable. In mature markets, auto insurance could drop by as much as 80% by 2040, according to a recent Blue Paper report from Morgan Stanley Research and Boston Consulting Group (BCG), “Motor Insurance 2.0.”

The report, which includes findings from a proprietary global consumer survey and market modelling, looks at how transportation is changing, how the insurance industry is trying to reposition, and what it mean for investors, related sectors, policy makers, and consumers.

Source: Are Auto Insurers on Road to Nowhere? | Morgan Stanley

Apple to get into the Content is King theme

Apple to get into the Content is King theme

Apple and the iPhone have been at the forefront of our Connected Society investment theme and Apple Pay lands the company in our Cashless Consumption theme as well. For a long time, Apple has held off creating original content preferring instead to be a platform via iTunes and its app ecosystem for others to distribute their content (Netflix on iPads, iPhones and Apple TV as an example). With the battle for the device consumer heating up, Apple is taking a page out of Content is King companies Disney (DIS) and Comcast (CMCSA) and moving into content to shore up its competitive position. We’ve seen Netflix do this and Amazon (AMZN) is charging ahead as well. From a thematic sense, if Apple can get the programming right, three thematic tailwinds are better than one or two.

Apple Inc. is planning to build a significant new business in original television shows and movies, according to people familiar with the matter, a move that could make it a bigger player in Hollywood and offset slowing sales of iPhones and iPads.These people said the programming would be available to subscribers of Apple’s $10-a-month streaming-music service, which has struggled to catch up to the larger Spotify AB. Apple Music already includes a limited number of documentary-style segments on musicians, but nothing like the premium programming it is now seeking.

Source: Apple Sets Its Sights on Hollywood With Plans for Original Content – WSJ

Making a Nuanced Move With The Tematica Select Investment List

Making a Nuanced Move With The Tematica Select Investment List

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Over the last week, while many have been watching the Dow Jones Industrial Average flirt with 20,000, the Nasdaq Composite Index continued to climb higher. That led our Connected Society investment theme positions in Facebook (FB), Alphabet (GOOGL) and Amazon (AMZN) higher over the last week.

  • Even so, we still have ample room to our respective price targets for each of those positions and our buy rating on all three remains.

 

Over the last few months, we’ve been talking about the impact of food deflation, which has been confirmed by our Cash-strapped Consumer play that is Costco Wholesale (COST) as well as grocery chain Kroger (KR) and others.

We’ve also called out the inability of restaurants to harness that deflation for their own margins given minimum wage increases and other cost drivers. The latest findings from Fitch Ratings sees restaurant sales slowing this year, and the NPD Group expects traffic will be flat this year, with a 2 percent decline at dine-in restaurants offsetting a 1% increase at quick-service concepts.  We expect confirmation to be had this coming earnings season, and if Kona Grill’s (KONA) 4 percent decline in same-store sales for the December quarter is any indication it’s not going to be pretty.

Still, we know that people need to eat and are continuing to shift toward organic and natural foods and other products, which bodes well for our McCormick & Co. (MKC) and United Natural Foods (UNFI) shares. Recent findings from a new poll conducted by Pew Research Center underscore our bullish position. According to the Pew poll, 55 percent of Americans believe that “organic food, particularly organically grown fruits and vegetables, are healthier than conventional.” The same poll also showed a growing distrust of GMO foods and concern over pesticide use.

A different study conducted by the European Parliament’s Independent Research Service, titled “Human health implications of organic food and organic agriculture,” concluded that eating organic food improves early development, reduces pesticide exposure, strengthens the nutritional value of food, and mitigates disease risks.
We do not see this as a short-term fad and point to a recent report from Research and Markets that forecasts the global market for organic food to grow at “a CAGR of over 14 percent during 2016-2021, on account of high demand for organic food.”

  • Both MKC and UNFI remain Buys at current levels.

 

rogueonecharact-6d3c3120104-originalOn the continued strength of Rouge One at the box office and the news that Content is King investment theme company The Walt Disney Co. (DIS) is firming up plans for a streaming ESPN service, our Disney shares moved higher over the last several days.

The same can be said with our CalAmp (CAMP) shares following management’s presentation at the annual Needham Growth Conference that focused on its expanding market opportunities across fleet management, Connected Car and enterprise asset tracking markets.

Adding Nuance Communications (NUAN)
to the Tematica Select List as Voice Goes Big

Last week was the tech world descended upon Las Vegas for CES 2017. The annual trade show kicks off the new year and introduces a number of new consumer gadgets that we’re likely to see — some this year and others in the coming ones.

Among the sea of announcements, there were a number that focused on one aspect of our Disruptive Technology investing theme and that is the area of voice recognition technology. Over the years we’ve seen various incarnations of this technology, most recently with Siri from Apple (AAPL), Cortana from Microsoft (MSFT), Google Assistant from Alphabet (GOOGL) and Alexa from Amazon (AMZN). Each of these has come to the forefront like in products like Amazon Echo and Google Home that house these virtual digital assistants (VDAs), but for now one of the largest consumer-facing markets for voice interface technology has been the smartphone. Coming in 2016, Parks Associates found that nearly 40 percent of all smartphone owners use some sort of voice recognition software such as Siri or Google Now.

 

 

In 2016, the up and comer was Amazon as sales of its Echo devices were up 9x year over year this past holiday season and “millions of Alexa devices sold worldwide this year.” If you’re a user of Amazon Echo like we are, then you know that each week more capabilities are being added to the Alexa app such as ordering a pizza from Dominos (DPZ), calling for an Uber, checking sports scores and weather to getting holiday cocktail recipes.

As we entered 2017, Amazon announced that Prime members can voice-order their next meal through Amazon Restaurants on their Alexa-enabled devices including the Amazon Echo and Echo Dot. Once an order is placed, Amazon delivery partners deliver the food in one hour or less. Pretty cool so long as you have Amazon Restaurants operating in and around where you live.

 

 

Virtual digital assistants cut across more than just smartphones and devices like Amazon Echo and the recently announced Google Home. According to a new report from Tractica, while smartphone-based consumer VDAs are currently the best-known offerings, virtual assistant technologies are also beginning to penetrate other device types including smart watches, fitness trackers, PCs, smart home systems, and automobiles.

We saw just that at CES 2017 with some landscaping changing announcements for VDAs. Alphabet had several announcements surrounding its Google Home product at CES 2017, including integration into upcoming Hyundai and Chrysler models; and acquiring Limes Audio, which focuses on voice communication systems, and will likely be additive to the company’s Google Home, Hangouts and other products. Microsoft also scored a win for Cortana with Nissan.

While those wins were impressive, the big VDA winner at CES was Amazon as it significantly expanded its Alexa footprint on deals with LG, Dish Network (DISH), Whirlpool (WHR), Huawei and Ford (F). In doing so Amazon has outflanked Alphabet, Microsoft and even Apple in the digital assistant market. To us, that’s another leg to the Amazon stool that offers more support to the share alongside the digital shopping/services, content, and Amazon Web Services businesses. You don’t need to read between the lines to think that we still see big upside to our $975 Amazon price target.

To be fair, Apple originally did not license out its Siri technology and only in June 2016 did it announce that it would open the code behind Siri to third-party developers through an API, giving outside apps the ability to activate from Siri’s voice commands, and potentially endowing Siri with a wide range of new skills and datasets.
Tractica forecasts that unique active consumer VDA users will grow from 390 million in 2015 to 1.8 billion worldwide by the end of 2021.  During the same period, unique active enterprise VDA users will rise from 155 million in 2015 to 843 million by 2021.  The market intelligence firm forecasts that total VDA revenue will grow from $1.6 billion in 2015 to $15.8 billion in 2021.

 

An Overlooked Player in the VDA Segment

Nuance Communications logoThe one drawback when it comes to the VDA market is the players mentioned above have large existing businesses, which means their respective VDA businesses, at least in the next few yeas, will have at best modest influence on their overall financial picture. In keeping with our “buy the bullets not the guns,” coming out of CES 2017 we find ourselves looking at speech technology and voice recognition company Nuance Communications (NUAN).

Nuance’s voice solutions compete in four markets:

  • Healthcare (49 percent of revenue): In this business, Nuance supports clinical documentation workflows and electronic medical record (EMR) adoption through flexible offerings, including transcription services, dictation software for the EMR, diagnostics workflow, and mobile applications. Recently Nuance released Dragon Medical Advisor, an AI Assistant for doctors. More than 500,000 clinicians and 10,000 healthcare facilities worldwide use Nuance’s healthcare solutions, which are sold through customers that include Cerner (CERN), Epic, McKesson (MCK), UPMC, Cleveland Clinic, Siemens, and the Mayo Clinic. Over the last few quarters, Nuance has been transitioning this business from a perpetual license business to a software as a service (SAAS) one, but with that shift expected to be largely completed by the second half of 2017 that revenue drag should be eliminated.
  • Enterprise (20 percent of revenue): This business segment offers automated intelligent self-service solutions that include speech and artificial intelligence (AI) technologies that reduce or replace human contact center agents with conversational systems, across voice, mobile, web and messaging channels. Think of when you call your bank, broker or even consider using the phone to call for a pizza from Dominos (candidly we’re not sure why you would call given the ease of the Domino’s app that can be used on either your smartphone, Apple TV, or Amazon’s Alexa, but hey that’s us). Representative customers include Avaya, BT, Cisco, DiData, Genesys, Huawei, MoshiMoshi, NICE, Telstra, and Verint. Nuance’s customers include: American Airlines, Amtrak, Bank of America, Barclays, Dominos, Delta, Deutsche Telekom, e*trade, ING Bank, Lloyds Banking Group, T-Mobile, Telefonica, Telstra, and Vodafone.
  • Mobile (19 percent of revenue): Here Nuance offers a portfolio of specialized virtual assistants and connected services built on voice recognition, text-to-speech, natural language understanding, dialog, and text input technologies across automotive, device and mobile operator solutions. With regard to automotive in particular, Nuance has announced Daimler, Ford and BMW as customers, and as evidenced at both CES 2017 and the 2017 North American International Auto Show we are nearing the tipping point for the Connected Car, which should bode well for this business segment.
  • Imaging (12 percent of revenue): In this division, segment Nuance provides software solutions and expertise that help professionals and organizations to gain optimal control of their document and information processes. Customers and partners include Ricoh, Xerox, HP, Canon, and Samsung. This business has been bumping along at around 11 to 12 percent of revenue the last few years as Nuance has reorganized itself over the last several quarters.

When we step back from Nuance’s business segments and look at the overall market growth for voice recognition technologies, BCC Research sees it growing to $184.9 billion in 2021, up from $90.3 billion in 2015. Breaking these two markets down into Consumer and Enterprise markets, BCC expects the Consumer market to grow to $95.9 billion in 2021 from $54.4 billion in 2016 and the Enterprise market to reach $79.0 billion by 2021 up from $44.0 billion in 2016. Viewed against that larger market, we see ample room for Nuance to expand beyond the $1.9 billion in revenue it generated in 2016.

Over the last few years, after delivering significant revenue growth during 2010-2014,  the pace of revenue growth, while positive, has dipped. Part of that is due in part to erosion for the transcription business in the company’s Healthcare business, as well as the shift from a contract business model to a Cloud based one that offers integrated solutions. In 2016, roughly 70 percent of the company’s revenue stream was recurring in nature, up from 65 percent or so in 2015.

What this tells us is the bulk of the revenue shift is largely behind the company. Like a turning tanker, these changes take time, but once they catch momentum they tend to pick up speed and Nuance should see its recurring revenue growth to 70-75 percent of overall revenue during 2017. As investors, we like the nature of a recurring revenue model, given that it affords far greater visibility and shares tend to be rewarded with better multiples given that predictability.

We’ve seen the power of this business shift already at Adobe Systems (ADBE), which now has more than 70 percent of its revenue recurring in nature, up from 19 percent in 2011, and its shares that have climbed to just over $108 from $28 at the end of 2011.

Looking Ahead to 2017 for Nuance

The growth businesses at Nuance include its automotive, voice biometrics, omni-channel customer care, unified print and scan solutions, Dragon Medical, CDI and diagnostics. Paving the way is the company’s most recent quarterly bookings, which were up 45 percent year on year. Longer-term we expect more applications across the consumer electronics market to develop. As noted above, Whirlpool is working with Amazon and odds are that means before too long we’ll see VDAs built into various appliances across the kitchen and laundry rooms. In our view, that’s just scratching at the surface.

The big question circling Nuance is the competitive landscape, particularly the move by Amazon, Alphabet and Apple to open up their application programming interface (API) to third-parties. Just like Rackspace (RACK) specializes in Cloud computing, but thus far has remained unharmed by Amazon’s AWS, Nuance specializes in selling to global brands, health care, and large corporations, which are not likely to utilize Google’s free API for its business needs. As you’ve probably notice with Android, one of the issues with a free API is malware and cyber hacking.

It’s also not lost on us that Alphabet recently acquired Limes Audio to improve its voice recognition capabilities. As anyone who has used Apple’s Siri knows, it’s far from perfect in voice recognition and voice to text. In our view, this means Nuance could be an attractive candidate for a larger player that needs to improve its technology positioning.

 

What are NUAN shares worth?

In looking over historic multiples, including P/E and Enterprise Value to Revenue, and applying them to consensus 2017 earnings expectations that call for EPS of $1.59 on revenue of just over $2 billion, we see upside to $21 and downside to just under $15.

At the current share price — $15.45 as of market close on 1/10/17 — NUAN shares are trading at under 10x expected 2017 earnings of $1.59 per share. We certainly like that risk-to-reward trade-off in NUAN shares at a time when voice technology is expanding its market size across the device, automotive and Internet of Things markets.

 

Bottomline on Nuance Communications (NUAN)
  • We’re adding NUAN shares to the Tematica Select list with a price target of $21.
  • Because this is a new position, we are holding off with a stop loss recommendation at this time, preferring to use near-term weakness to scale into the position and improve the cost basis.

 

* We strongly recommend you use the link below to download the full report on Nuance Communications (NUAN), which includes background on our Disruptive Technology thematic as well as financials on NUAN.

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2016 – Another Year Thematic Investing Beats the S&P 500

2016 – Another Year Thematic Investing Beats the S&P 500

Looking back 2016 was quite the year with Greek debt relief, the EU’s tax crackdown, the sale of Yahoo ([stock_quote symbol=”YHOO”]) and rumored takeover of Twitter ([stock_quote symbol=”TWTR”]), the unexpected Brexit vote and the ensuing British Pound Sterling’s plunge to multi-decade lows, the Italian referendum followed by Prime Minister Renzi’s resignation, the troubled Monte dei Paschi (BMDPY) bailout, Russian hacking, OPEC’s deal to cut output, and one of the most vicious presidential campaigns culminating in Donald Trump’s election, followed by the Fed’s lone rate hike in 2016 and a corresponding surge in the US dollar. We think we would be hard-pressed to find many that predicted all of those happenings this time last year.

We also think there were few and far between that thought back in January 2016 that the S&P 500, the preferred metric among fund managers, would have climbed 9.5% by the end of 2016. Let’s remember, after the first several weeks of 2016 that index was down just over 8.7%. That makes the rebound and climb higher over the balance of 2016 that much more impressive if you bought the market.

The problem is, despite all the mutual funds and ETFs that are out there, very few investors actually “buy the market.” Buying the market can, at times, deliver rewards as we saw in 2016. According to Openfolio, the average investor in 2016 didn’t “buy the market” and instead had a gain of roughly 5%, due in part to having their portfolio too concentrated in stocks that didn’t perform. Let’s face it, if you didn’t own shares of Goldman Sachs in the back half of 2016, odds are you didn’t beat the Dow Jones Industrial Average.

Lest we let the year’s heady gains of cloud our judgment, for every 2016 — where buying an ETF that mimicked the performance of the S&P 500 or the Dow worked well by year’s end — there tends to be a year like 2015 when the S&P 500 fell nearly 1%. While we tend to hear about the great bull market that transpired during the late 1980s and 1990s, we also have to remember that if you were an investor that, “bought the market” in early 2000, it would have taken you until July 2007 to recoup your losses. Then came the Great Recession, which meant if you held “the market,” it meant meaningful positive returns would have eluded you until after March 2013.

As we like to say perspective is everything. That same perspective also reminds us that the world is a very different place than it was in the last part of the 20th Century. Consider that back then there was no such thing as the smartphone, the Internet, Amazon, streaming content, online shopping, mobile payments, and texting only caught on toward the end of the 1990s. Back then we also saw a labor force growing versus the relatively stagnant levels since the financial crisis.

We live in a very different world today compared to a few decades ago, which makes comparisons more like apples to oranges than apples to apples. There continue to be many transformative elements at play today and we are only now starting to see the impact of some, like mobile commerce and artificial intelligence, as well as augmented and virtual reality, that will likely see that transformation continue. That’s before we contemplate what will happen once President-elect Trump becomes President Trump. While we are optimistic about the pending policy changes and what they could mean for businesses and stock prices, they have yet to be fully spelled out, which makes it hard to assess their potential impact.

As we say at Tematica Research, only by thinking differently than the herd can you truly outperform the market. We believe that traditional sector investing is dead, and investors need to position themselves to capture the shifting landscapes that are resulting in pronounced tailwinds and headwinds. That thinking led to our creation of the Thematic Index, which reflects our 17 investment themes across more than 150 stocks.

 

So how did the Thematic Index perform in 2016?

Once again it outperformed the S&P 500 in 2016, marking the sixth consecutive year it has done so. Some of our stronger performing thematics in 2016 included Tooling & Re-Tooling, Economic Acceleration/Deceleration, and Scarce Resources.

Were all of our 17 themes strong performers in 2016? Of course not, but the overall performance speaks to having a balance thematic portfolio rather than favoring any one particular theme.

Before accounting for dividends, eight of our investment themes outperformed the market by a wide margin, one was essentially in line with the S&P 500 and eight underperformed with two of those under performing themes down slightly for the year. There were a number of high fliers across our 17 investment themes, including Grand Canyon Education ([stock_quote symbol=”LOPE”]), iRobot ([stock_quote symbol=”IRBT”]), IDEXX Laboratories ([stock_quote symbol=”IDXX”]) and Mueller Water Products ([stock_quote symbol=”MWA”]), Parker-Hannifin ([stock_quote symbol=”PH”]), Wynn Resorts ([stock_quote symbol=”WYNN”]), and ZELTIQ Aesthetics ([stock_quote symbol=”ZLTQ”]) to name just over a handful. The index was also dealt a helping hand from M&A activity during the year, which led to hefty gains in Lifelock, LinkedIn, and ARM Holdings.

It wasn’t all peaches and cream, as the Thematic Index felt the weight associated with drops in Stonemore Partners, Corrections Corp. of America ([stock_quote symbol=”CXW”]), Nuance Communications ([stock_quote symbol=”NUAN”]) and Under Armour ([stock_quote symbol=”UAA”]).  We’ll reassess those under-performing positions to see if either the thematic drivers that first landed them in the Thematic Index are intact or has the business has shifted such that they are no longer in the thematic slipstream. During the December quarter, we exited Corrections Corp. of America and Shake Shack ([stock_quote symbol=”SHAK”]), replacing them with OSI Systems ([stock_quote symbol=”OSIS”]) and Insulet Corp ([stock_quote symbol=”PODD”]).

We’ll continue to make refinements and needed adjustments to the Thematic Index as dictated by the shifting and intersecting landscapes of economics, demographics, psychographics, technology and other key factors to identify the companies best positioned to ride the thematic transformation and avoid those companies that either can’t or won’t adjust their business model. In our view, those latter companies are poised to hit a headwind that will not only impact their business, but their stock price as well. When it comes to investing minimizing the number of underperforming positions can be as important as identifying the winners if you’re looking to beat the market. When it comes to investing minimizing the number of underperforming positions can be as important as identifying the winners if you’re looking to beat the market.

 

The Best Stock for 2017

The Best Stock for 2017

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We’re back! We hope you enjoyed Christmas and the year-end holidays.

We’ve closed the books on 2016 and thanks to the push higher since early November, the S&P 500 closed the year up 9.5 percent. The other major market indices — the Dow Jones Industrial Average and the Nasdaq Composite Index — also finished out 2016 up more than 13 percent and 7 percent, respectively. That’s far better than most thought the market would do back some 11 months ago and certainly much better than what we were looking at towards the end of last summer.

 

indices

 

Even with those year-end results, we can’t lose sight of the fact the market has faded as we closed out 2016. While there was fervent hope around mid-December that the Dow would cross the 20K line before year’s end, the index faltered as of late, which could be attributed to a combination of profit taking and a sobering view over how far, how fast the stock market has moved since the election in November.

 

Before we jump on the 2017 train,
let’s take a moment to look back at 2016

In hindsight, 2016 was quite a year with Greek debt relief, the EU’s tax crackdown, the sale of Yahoo (YHOO) and rumored takeover of Twitter (TWTR), the unexpected Brexit vote and British Pound Sterling’s plunge, the Italian referendum and the troubled Monte dei Paschi (BMDPY) bailout, Russian hacking, OPEC’s deal to cut output, and one of the most vicious presidential campaigns that culminated with Donald Trump’s election, and was followed by the Fed’s lone rate hike in 2016 and a surge in the US dollar. We think we would be hard-pressed to find many that predicted all of those happenings this time last year.

 

The Resiliency of the Markets

Despite all of those happenings, the Dow, S&P 500 and Nasdaq all hit historic highs during the year, even though 2016 earnings expectations were dialed back throughout the year. At the start of 2016, analysts were projecting year-over-year earnings growth of 5.3 percent on revenue growth of 4.4 percent for the year. As we all know by now, during the first half of the year the S&P 500 companies reported falling revenues and earnings, with the second half delivering better performance. Sifting through that performance data, however, we find 4Q 2016 earnings will dip following the 6.4 percent sequential increase achieved in 3Q 2016.

The bottom line is earnings delivered by the S&P 500 group of companies is likely to have increased less than 1 percent in 2016 compared to 2015, leaving S&P 500 earnings relatively unchanged since 2014. To be fair, there have been several drags on those results, including big earnings declines from energy companies as well as other such contractions at telecom, industrials and materials companies. While there are prospects for a reversal at energy companies over the coming quarters, the reality is the S&P 500 is closing 2016 with a P/E ratio near 18.9 — remember that number.

Looking back, the S&P 500 peaked on December 13th, following investor enthusiasm for potential tax cuts, deregulation and fiscal spending that on a combined basis would jump-start economic growth. Since December 13th, however, the S&P 500 was trading sideways until last week when it fell roughly 1 percent. We see this cooling off as reflection of the sobering view that not only has the market move been too far, too fast, as well as the growing realization that not only did the pace of economic growth slip in the fourth quarter, but odds are the impact of Trump policies will not be felt until at least the second half of 2017 at the earliest.

We’d note the Tematica Select List had several positions that handily beat the S&P 500’s December quarter return of 3.3 percent. We had strong showings during the December quarter from our AMN Healthcare (AMN; Aging of the Population), AT&T (T; Connected Society), Disney (DIS; Content is King), Dycom Industries (DY; Connected Society), and United Natural Foods (UNFI; Food with Integrity) positions.

The Latest Set of Expectations from Wall Street Strategists for 2017

As a whole, the strategists on Wall Street see the S&P 500 climbing to the 2,300 to 2,500 range, for a potential increase of 2.5 to 11.5 percent in 2017. The range for expected 2017 S&P 500 company earnings spans from a low of $123.90 to a high of $134 per share.

Averaging out those 15 forecasts, the consensus price target for the S&P 500 is 2,356 and consensus earnings expectations for the S&P 500 group of companies lands at $127.46, up 5 percent and 7.4 percent, respectively.

Based on those averages, the P/E multiple accorded to the S&P 500 to hit that average price target is 18.5x. Given that expected modest contraction from the current 18.9x multiple (remember, that’s the number we said to keep in mind), this tells us one of the key drivers of stock prices next year will be earnings growth. As such, we’ll continue to focus on those companies that are poised to grow their earnings faster than the S&P 500. By this, we mean real earnings growth, not spanx-led earnings growth that hinges more on buybacks, which give a cursory appearance of improved fundamentals rather than true operating profit growth and margin expansion. In other words, we’ll be seeking growth in 2017 and beyond, much like we have with a number of our existing positions.

As we sharpen our pencil to kickoff 2017, the vast, vast majority of companies have yet to deliver their December quarter results, which are likely to include some initial or updated views on what they see coming over the coming quarters. We’ve already heard several mention the potential impact of continued dollar strength, and we suspect we are bound to hear more about the impact of higher energy costs that will flow through to higher gas prices should OPEC production cuts stick. We also expect to hear more on the impact of higher minimum wages given that 19 states are boosting minimum wages in 2017.

 

What the Data is Telling Us

Towards the end of 2016 in the Monday Morning Kickoff, we touched on the negative revisions in the Atlanta Fed’s GDP Now 4Q 2016 forecast to 2.5 percent, and pointed out that even after that downtick it stood well above the 4Q 2016 forecast offers by the NY Fed and several investment banks. Last week it was rather quiet on the data front, but the data we did get — November Pending Home Sales and the December Chicago PMI — both missed expectations. While the December Chicago PMI dipped in December to 54.6 from November’s 57.6, we’d note its fourth quarter average of 54.3 is the highest it has been in two years.

What we found most interesting in the December Chicago PMI report was the findings from a “special question” that pertains to the outlook for 2017 — over half the respondents said they expect their business “to prosper, aided by tax reforms and deregulation.” Not to be overly cynical, but the risk we see is those expectations being ahead of themselves vs. what we’re likely to see near-term. The likely reality is those expectation hinge on policies President-elect Trump has yet to flesh out fully, and while we too are optimistic, we see a two steps forward, one step back kind of progress in the coming months for the economy and the stock market.

As you can imagine, we’re rather curious to see the Atlanta Fed’s next update to GDP Now that lands on Jan. 6 as well as updates for those other GDP forecasts. Odds are we will still see a downtick in 4Q 2016 GDP expectations compared to 3Q 2016, but we’ll have a better sense after this week’s usual start of the month data. In this case, it will include the December ISM indices as well as the December PMI readings from Markit Economics and the usual Employment Data build up that culminates with the December Employment Report. In other words, by the end of next week, we should have a pretty good feel for 4Q 2016 GDP. We’ll also get some insight into the Fed’s December rate hike as we digest those FOMC meeting minutes next week.

 

While Lite on Earnings, the week ahead includes two key events 

From an earnings perspective, things are rather lite this week, but we do have the Citi 2017 Internet, Media & Telecommunications Conference, which is likely to have some commentary relevant to our Amazon (AMZN) shares. Also, this week is CES 2017, the annual global consumer electronics and consumer technology tradeshow, that should generate quite a bit of news surrounding new gadgets and technologies. In the past, this annual conference has shed some light on what’s coming for our Connected Society and Disruptive Technology investment themes and we see that happening once again.

Among the CES news flow, we’ll be listening for any and all commentary regarding organic light emitting diode demand, and what that means for our Universal Display (OLED) shares — more on why further down. Comments on wireless/wireline network build outs and 5G deployments at the show as well as those for the Connected Car should bode well for our Dycom Industries (DY) and CalAmp (CAMP) shares.

  • All three stocks — OLED, DY and CAMP — are rated buys at current levels.

 

Also on the dais at CES will be Amazon (AMZN) as well as Under Armour (UAA) — not your typical presenters at the largest electronics show in the world. Amazon will be taking the stage to discuss artificial intelligence, digital assistants and its Alexa family of products. Ahead of tomorrow’s conference kickoff, Lenovo has announced it has partnered with Amazon to offer up the Alexa digital assistant in its own digital assistant device called Smart Assistant. We’ve noted a similar deal with Hyundai in the past that puts Alexa into the car, and suspect we will be hearing more such announcements in the coming months.

Under Armour CEO Kevin Plank, on the other hand, will give a keynote at CES 2017 that will likely discuss connected fitness, including UA’s UA Record, MapMyFitness, Endomondo, and MyFitnessPal, all of which have been unified to run on Amazon Web Services… yeah, that company again.

  • We continue to rate both AMZN and UAA shares buy at current levels.

 

As that event dies down, the North American International Auto Show of Detroit 2017 will soon take its place only to be followed by the presidential inauguration on Jan. 20th. At that show, we’ll be listening for developments on the Connected Car, Connected Truck and telematics front and what it may mean for our CalAmp shares. Also too, we’ll be eyeing new car models to see if they are incorporating OLED technology for in-car lighting and instrumentation panel displays.

If you were expecting a calm before the 4Q 2016 earnings storm, our advice to you is enjoy the quiet while it lasts. As 2016 moves further and further into our rearview mirror, and we’ll be looking ahead in the coming weeks to take advantage of any near-term pullback in the market as expectations come to grips with near-term economic reality. We suspect this means we’ll find share prices of companies we want to own at better prices than we’ve seen in recent weeks.

This has us excited to enter 2017 and we hope you are too.

 

Tematica Best Pick for 2017

As we begin 2017, several positions on our select list have been named “best picks for 2017” at several bulge bracket Wall Street firms:

  • Amazon (AMZN; Connected Society) – Top Pick for 2017 at Evercore
  • Facebook (FB; Connected Society) – Top Pick for 2017 at Evercore
  • Alphabet (GOOGL: Asset Lite) – Top Pick for 2017 at Evercore
  • Starbucks (SBUX; Guilty Pleasure) – Top Restaurant Pick for 2017 at Nomura

As much as we’d like to claim surprise, we have to admit that we’re not. We just wonder if those firms are starting to recognize the thematic drivers behind those companies and their businesses that led us to add them to our select list in the first place.

Ever since the 2016 presidential election, the domestic stock market has been on fire, which means we need to look past the current market move and any pullback that is likely to happen as 2017 gets underway. Given our thematic way of looking the world, instead of the herd centric sector perspective, we see a number of tailwinds powering on in 2017. For example, we don’t see any slowdown in the shift toward digital commerce, nor do we see it abating for the growing consumer preference toward streaming media. Both of those, as well as other drivers, will continue to pressure already capacity restrained mobile and broadband networks.

That’s certainly an enticing opportunity for investors, but as we move into 2017 we are also at a key tipping point for organic light emitting diode (OLED) display technologies. In the past we’ve seen the impact of similar Disruptive Technologies thematic companies as we call them when TV moved from bulky and hot cathode ray tube displays to much sleeker liquid crystal display (LCD) screens and then again when light emitting diodes became the backlight source of choice for LCD TVs, collapsing their thickness and heat emission in the process. We’ve already started to see OLED technology replace LCD displays in the smartphone market, helping improve thickness and battery life in Samsung’s smartphone models.

In 2017, more smartphone companies, including those based in China as well as Apple (AAPL) are poised to replace existing smartphone displays with OLED based ones. A recent Wall Street Journal article that said, “Analysts widely expect the next iPhone to adopt a technology called organic light-emitting diode, at least for high-end versions. OLED displays, which are thinner, more flexible and give better contrast, will eventually replace the current liquid-crystal displays, or LCDs.”

Outside of Apple speculation, we continue to hear more reports of increasing industry capacity to meet rising demand from smartphone, TV, wearables and other markets that are set to adopt OLED technology. Both LG and Sony (SNE) recently announced they will be bringing its first OLED-based TV to market, debuting the products at 2017 CES in January. If history holds, it means a slew of competitive responses from Samsung, and other mainstays in the TV market. Soon after we have the North American International Auto Show (Jan. 8-22) and we’ll be looking for a variety of used of OLEDs at the show including lighting and instrumentation.

To date, industry manufacturing capacity for organic light emitting diodes has been constrained industry, but existing players such as Samsung and LG as well as newer entrants are adding organic light-emitting diode capacity to meet demand from the smartphone market as well as new applications that include OLED TVs, wearables, virtual reality and augmented reality, and for emerging opportunities including automotive OLED display and lighting.

 

OLED technology is poised to hit a tipping point during 2017

Signposts to watch include orders for semiconductor capital equipment that are used in manufacturing OLED displays. Simply put, the industry has to enough manufacturing capacity in place to meeting expected demand. Breaking down new order flow at companies like Applied Materials (AMAT), Veeco Instruments (VECO) and Aixtron AG (AIXG) reveals these orders have already begun to mount. More evidence that 2017 is poised to be the OLED tipping point.

From an investor perspective, those three capital equipment companies are not pure-plays on the OLED tipping point, just beneficiaries. Much the way Cree Inc (CREE) was the pure play on the light emitting diode (LED) wave of disruptive technology, Universal Display (OLED) is the OLED pure-play. Much the way Qualcomm (QCOM) has a push-pull between its chip and higher margin licensing business, so too does Universal Display with its OLED chemicals and licensing business. Moreover, Universal already counts the big players in the OLED industry — Samsung and LG — as customers. As their capacity and capacity from others ramps, so too should demand for Universal’s chemical business.

We see several catalysts coming in the first half of 2017, including the aforementioned 2017 CES as well soon to follow events such as Mobile World Congress 2017 and CeBIT 2017, which should propel OLED shares higher. As products announced at those events launch we are apt to see the Wall Street following grow for OLED shares, especially once we learn Apple’s plans for its next iPhone. Keep in mind the Apple halo cuts both ways, which means OLED shares could be volatile, but we would use that to build the position throughout 2017 given that 2018 looks to be a better volume year.

 

Adjusting the Contender List

Over the last few weeks, we’ve been reflecting not only on our select list positions, but also the Tematica Contender List. Given the way stocks have run over the last eight weeks and prospects for a pullback, odds are there will be more than a few we’ll want to add. That means making some room on the contender list. As such, we’re removing Verizon (VZ), EPR Properties (EPR), Lifelock (LOCK), Immersion (IMMR) and comscore (SCOR) from the list of prospects. While it’s never fun to ship off your toys, we know that at some point there’s a pretty good chance they could one day make their way back onto the contender list and perhaps even the select list.

Click here to see the full Contender List (listed below the current holdings)

 

Tematica at Business Insider

We hope you enjoyed the break over the holidays, but we were a tad busy spreading the word on thematic investing, which included a new article we penned for Business Insider. If you missed, “Here’s how thematic investing really works” you can read it by clicking here. It offers some insight into how we think not only about some of our existing themes, but also sheds some light on how we think about potential ones. We also point out some of the faults we find with would be thematic ETFs. Give it a read, we’ll think you’ll enjoy it.

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Alibaba to invest big time in entertainment taking on Netflix and Amazon

Alibaba to invest big time in entertainment taking on Netflix and Amazon

2016 was a year of marked investment in content from the likes of Netflix, Amazon and Alphabet. But there are more companies entering the fray including Facebook and even Apple. Given the global thirst for content, which both Amazon and Netflix are aiming to cater to, it comes as little surprise that Alibaba is looking to invest in Content, which we all know is King. If there is any question about that, we’d point you to the US box office and Rogue One: A Star Wars Story.

Alibaba Digital Media and Entertainment Group, the entertainment affiliate of Alibaba, plans to invest more than 50 billion yuan ($7.2 billion) over the next three years, the affiliate’s chief executive said.

In an internal email seen by Reuters and confirmed by an Alibaba group spokeswoman, the affiliate’s new CEO Yu Yongfu pledged to invest in content, saying “he didn’t come to play.”

Alibaba’s entertainment business underwent a major reorganisation in October, marking a total consolidation of the company’s media assets.

Source: Alibaba entertainment affiliate to invest over $7 billion over next 3 years

Why the On-Demand Economy Doesn’t Make the Thematic Cut

Why the On-Demand Economy Doesn’t Make the Thematic Cut

We keep hearing that thematic investing is gaining significant popularity in investing circles, especially when it comes to Exchange Traded Funds (ETFs). For more than a decade, we’ve viewed the markets and economy through a thematic lens and have developed more than a dozen of our own investing themes that focus on several evolving landscapes. As such, we have some thoughts on this that build on chapters 4-8 in our book Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns

One of the dangers that we’ve seen others make when attempting to look at the world thematically as we do, is that they often confuse a trend — or a “flash in the pan”  — for a sustainable shift that forces companies to respond. Examples include ETFs that invest solely in smartphones, social media or battery technologies. Aside from the question of whether there are enough companies poised to benefit from the thematic tailwind to power an ETF or other bundled security around the trend, the reality is that those are outcomes — smartphones, drones and battery technologies — are beneficiaries of the thematic shift, not the shift itself.

At Tematica Research, we have talked with several firms that are interested in incorporating Environmental, Social and Governance — or ESG — factors as part of their investment strategy. Some even have expressed the interest in developing an ETF based entirely on an ESG strategy alone. We see the merits of such an endeavor from a marketing aspect and can certainly understand the desire among socially conscious investors to ferret out companies that have adopted that strategy. But in our view and ESG strategy hacks a sustainable differentiator given that more and more companies are complying. In other words, if everyone is doing it, it’s not a differentiating theme that generates a competitive advantage that will provide investors with a significant beta from the market.

But there is a larger issue. A company’s compliance with an ESG movement is not likely to alter the long-term demand dynamics of an industry or company, even if certain businesses enjoy a short-term surge in revenues or increased investor interest based on a sense of goodwill.

For example, does the fact that Alphabet (GOOGL) targets using 100 percent renewable energy by 2018 alter the playing field or improve the competitive advantage of its core search and advertising business? Does it do either of those for YouTube?

No and no.

At the risk of offending those sensitive about their fitness acumen, it makes as much sense as investing in an ETF that only invests in companies with CEOs who wear fitness trackers. Make no mistake, our own Tematica Research Chief Macro Strategist Lenore Hawkins, a fitness tracker aficionado herself, would love to see more fitness trackers across the corporate landscape, but an ETF based on such a strategy means investing in companies across different industries with no cohesive tailwind powering their businesses, likely facing very different market forces that overshadow the impact of the one thing they have in common. To us, that misses one of the key tenants of thematic investing.

The result is a trend that is likely to be medium-lived, if not short lived. Said another way, it looks to us to be more like an investing fad, rather than a pronounced thematic driven shift that has legs.

Subscribers to our Tematica Investing newsletter know we are constantly turning over data points, looking for confirmation for our thematic lens, as well as early warning flags that a tailwind might be fading or worse, turning into a headwind. As we collect those data points, we mine the observations that bubble up to our frontal lobes and at times, ask if perhaps we have a new investing theme on our hands. Sometimes the answer is yes, but more often than not, the answer comes up “no”.

Now you’re in for a treat! Some behind the scenes action if you will on how we think about new themes and why one may not make the cut…

 

The On-Demand Economy:  Enough to become a new investing theme?

 Recently we received a question from a newsletter subscriber asking if the number of “on-demand” services and business emerging were enough to substantiate the addition of a new investment theme to go along with the other 17 themes we currently track.

By on-demand, we’re talking about those services where you can rent a car, (Lyft or Uber) or find private lodging (AirBnB) with the click of a button for only the time you need it rather than rent an apartment or studio for a week or month. It also refers to the many services that will deliver all the ingredients you need to prepare a gourmet meal in your own kitchen, such as the popular service Blue Apron or HelloFresh.

It was an interesting question because we have been debating this at Tematica Research for quite some time. We’re more than fans of On Demand music and streaming video services like those offered by Amazon (AMZN), Netflix (NFLX), Pandora (P), Spotify and Apple (AAPL).  Ultimately, we came to the conclusion that the real driver behind the on-demand economy is businesses stepping into fill the void created by a combination of multiple themes, rather than a new theme in of itself. Here’s what we mean . . .

Take the meal kit delivery services like Blue Apron, what’s driving the popularity of this service? We would argue that it’s not the fact that people like seeing their UPS driver more. Rather it is the result of underlying movement towards more healthy and natural foods that omit chemicals and preservatives — something we have discussed as the driver behind our Foods with Integrity theme — on top of a bigger Asset Light investment theme in which consumers and businesses outsource services, rather than accumulating assets and then performing the service themselves. The on-demand component of Blue Apron is not driving the theme, but is a beneficiary of what we call the thematic tailwind.

The challenge with the shift towards healthier cooking, that sits within our Foods with Integrity thematic, is the amount of work, and in many cases equipment, it takes to cook such foods — the shopping, the measuring, the cutting, special cooking utensils and preparation time, not to mention the cost. Recognizing this pain point, Blue Apron saw opportunity and consumers have flocked to it. As we see it, the meal delivery services are an enabler that addresses a pain point associated with our Foods with Integrity theme, rather than an independent theme unto itself.

There is also a clear element of the Connected Society investment theme behind these services, given how customers order the ingredients to prepare the meals – via an app or online – as well as our Cashless Consumption theme, given the method of payment does not involve cash or check and Asset Light whereby consumers pay for the end product, rather than investing in assets so that they can make it themselves. So that we are clear, the primary theme at play here is Foods with Integrity, but we love to see the added oomph when more than one theme is involved.

 

 Let’s look at Uber, the on-demand private taxi service. 

We’re big users of the service, particularly when traveling, and we love the ease of use. To us, while the service offered by Uber is very much On-Demand, from the customer perspective, it fits into our Asset Light theme, as it removes the need to own a car. If you think about, what’s?  the amount of time you spend using your car compared to the amount of time it spends parked at home, at work or in a parking lot? The monthly cost to own and maintain that vehicle vs. the actual number of hours it is used offers a convincing argument to embrace an Asset Light alternative like Uber.

We also like the payment experience — or the lack of an experience. We’re talking about having the ride fee automatically charged. No cash, no credit card swiping or inserting, no awkward “how much do I tip?” moments. It’s our Cashless Consumption theme in all of its glory, walking hand-in-hand with Asset Light — and the only thing better than a strong thematic tailwind behind a company is two!

The biggest users of the Uber and Lyft services, and the ones driving the firms’ valuations to stratospheric levels, are the Millennials who are opting to just “Uber “ around town — it’s become a verb — or use a car-sharing service like a ZipCar (ZIP) or the like.

Sure, Millennials have the reputation of being a more thrifty, frugal group compared to previous generations. But we have to wonder is it them being thrifty or just coming to grips with reality?

With crushing costs of college and student loans, as well as stagnant wage growth, many young workers are forced to cobble together part-time and contractor jobs rather than enjoying a full-time salaried position, so what choice do they have? Why buy a car and pay for it to sit there 95% of the time when you can just pay for it when you need it?

We call that the Cash-strapped Consumer theme meets Asset Light, and many businesses have also stepped in to service this rising demand for what has become known as the “sharing economy.”

 

Finally, what is the underlying function of all these on-demand services?

As we mentioned earlier, it’s the ability to connect and customize the services that consumers want through a smartphone app or desktop website, or from our thematic perspective, the Connected Society.

One of the key words in the previous sentence was “service.” According to data published by the Bureau of Economic Analysis in December 2015 and the World Bank, the service sector accounted for 78 percent of U.S. private-sector GDP in 2014 and service sector jobs made up more than 76 percent of U.S. private-sector employment in 2014 up from 72.7% in 2004. Since then, we’ve seen several thematic tailwinds ranging from Connected Society and Cash-strapped Consumer to Asset Light and Disruptive Technologies to Foods with Integrity that either on their own, or in combination, have fostered the growth of the US service sector. Given the strength of those tailwinds, we see the services sector driving a greater portion of the US economy. What this means is folks that have relied heavily on the US manufacturing economy to power their investing playbook might want to broaden that approach.

Now let’s tackle the thematic headwinds here

Headwinds involve those companies that are not able to capitalize on the thematic tailwind. A great example is how Dollar Shave Club beat Gillette, owned by Proctor & Gamble (PG), and Schick, owned by Edgewell Personal Care (EPC), by addressing the pain point of the ever-increasing cost of razor blades with online shopping. Boom — Cash-strapped Consumer meets Connected Society.

While Gillette has flirted with its own online shave club, the price of its razor are still significantly higher, and as far as we’ve been able to tell, Schick has no such offering. As Dollar Shave Club grew and expanded its product set past razors to other personal care products, Unilever (UL) stepped in and snapped it up for $1 billion.

Going back to the beginning and the impact of the food delivery services like Blue Apron — are we likely to see food companies build their own online shopping network? Most likely not, but they are likely to partner with online grocery ordering from Kroger (KR) and other such food retailers. That still doesn’t address the shift toward healthy, prepared meals and it’s requiring a major rethink among Tyson Foods (TF), Campbell Soup (CPB), The Hershey Company (HSY), General Mills (GIS) and many others. Fortunately, we’ve seen some of these companies take actions, such as Hershey buying Krave Pure Foods and Danone SA (DANOY) acquiring WhiteWave Foods, to better position themselves within the thematic slipstream.

The key takeaway from all of this is that a thematic tailwind can be thought of as a market shift that shapes and impacts consumer behavior, forcing companies to make fundamental changes to their business model to succeed. If they don’t, or for some reason can’t, odds are their business will suffer as they fly straight into an oncoming headwind.

Recall how long Kodak was the gold standard for family photographs, yet today it is nowhere to be seen, killed by forces that emerged completely from outside its industry. As digital cameras became ubiquitous with the advent of the smartphone and the cost of data transmission and storage continually fell, the capture and sharing of images was revolutionized. Kodak didn’t keep up, thinking that film would forever be the preferred medium, and paid the ultimate price.

As thematic investors, we want to own those companies with a thematic tailwind at their back — or maybe even two or three! — and avoid those that either seem oblivious to the headwind or won’t be able to reposition themselves, like a hiker who finds he or she has already gone way too far down the wrong path and is so utterly lost, needs to be helicoptered to safety.

Of course, when it comes to these “On-Demand Economy” darlings — Uber, Dollar Shave Club, Airbnb —few if any of them are publicly traded, which frustrates us so, since most of them are tapping into more than one thematic tailwind at once. If and when they do turn to the public markets for some added capital and we get a look into the economics of these business models, then we’ll also get to see the key performance metrics and financials behind these businesses.

In the meantime, stay tuned as we will be discussing more readily investable thematics next.

Closing Out 2016: What a Year it Has Been!

Closing Out 2016: What a Year it Has Been!

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As we write this, there are just over six trading days left in 2016. It’s been quite a year on all fronts, but in particular, for the stock market as nearly all of the year’s gains have come in the last several weeks. It seems every few days since the 2016 presidential election the major market indices are posting new highs to the board, including again last night as the Dow flirted with the 20,000 mark, which it is still doing this morning — what a tease!

When we look at the market landscape through our thematic lens we see that a number of our investing themes have performed rather well during 2016. From Aging of the Population and our shares in AMN Healthcare (AMN: +21.31%), to our Connected Society theme and our positions in Dycom Industries (DY: +5.46%), AT&T (T: +10.62%) and CalAmp (CAMP: +7.27%) shares, and Universal Display (OLED: +11.32%) that is a Disruptive Technology play, all of these have performed admirably and we see more upside ahead in the coming quarters.

The same holds true for Alphabet (GOOGL: +11.07%), Facebook (FB: +0.24%) and Amazon (AMZN: +3.9%) that round out our Connected Society holdings, but it’s also the case with Food with Integrity company United Natural Foods (UNFI: +15%) and Cash-strapped Consumer play Costco Wholesale (COST: +9.78%).

We also booked a number of wins over the last 12 months:

  • Aging of the Population and PetMeds Express (PETS) shares, up 13%; 
  • Cashless Consumption with USA Technologies (USAT), up more than 28%, and PayPal (PYPL) up just under 14%;
  • Connected Society and AT&T (T), up 18%;
  • Content is King theme and Regal Entertainment (RGC) shares, up more than 22%;
  • Guilty Pleasure and Philip Morris International (PM), up more than 17%;
  • Rise & Fall of the Middle Class and Kraft Heinz (KHC), up more than 15%.

With the S&P 500 up just under 11% year-to-date, we would argue that it pays to think different from the herd to uncover pronounced thematic tailwinds and uncover the companies best positioned to ride them.

To be fair, from time to time, we do fall short and in our minds both Sherwin Williams (SHW: -13.14%) and Whirlpool (WHR: -13.32%) serve as reminders to let the data talk to us.

In sum, it’s been a barn burner for the stock market post-2016 election, but as we’ve pointed out once again in this week’s Monday Morning Kickoff., the stock market has a habit of getting ahead of itself. Even CNBC’s Market Strategist Survey of 13 strategists’ outlooks published since the US election found the median 2017 S&P 500 price target is 2,325 — that is 2.5 percent ahead of where the S&P 500 currently resides.

Comments from industrial conglomerate Honeywell (HON) offered a more tempered view, which coincides with recent economic data discussed in greater detail in this week’s Monday Morning Kickoff. If you’re not reading each week’s Monday Morning Kickoff you receive as part of your Tematica Investing subscription, you’re really missing out.

In addition, we starting to hear from companies such as Adobe Systems (ADBE) to Nike (NKE), FedEx (FDX), Honeywell and General Electric cite the impact of the strong dollar on their respective 2017 outlooks. As we ponder that, we’d also note:

  • Stretched valuation as the market continues to climb higher of late
  • The current reading of 77 or Extreme Greed on CNN’s Fear and Greed Index.
  • The Consumer Confidence Index is now at its highest since July 2007.
  • The Dow Jones Industrial Average, S&P 500 and the Russell 2000 at or near overbought levels

To us here at Tematica, all of that against the current market environment means we are likely to face a move in the market in early 2017 that will remove some of the current froth. One of Coca-Cola’s old marketing slogans — “A pause to refresh” — is what we’re likely to see, as before too long companies report their December-quarter results. As they do that, some will no doubt raise expectations for 2017 and others, as you’ll see with sneaker retailer Finish Line (FINL) down below, are bound to disappoint.

From our perspective, the thematic tailwinds that power each of our positions on the Tematica Select List not only remain intact but, as we are seeing in the case of the Connected Society, Rise & Fall of the Middle Class, Disruptive Technologies, are only getting stronger. As good as a year as 2016 was for our thematic strategy, we see 2017 being even better. In other words, we’re just getting started…

 

Updates Updates Updates 

Amazon (AMZN) Connected Society 

After a few turbulent weeks, our Amazon shares are off to a solid start this week due to several pieces of news, a few of which solidly confirms one aspect of our thesis on the shares.

The first comes from The Wall Street Journal, which we posted to the Thematic Signals section of our website suggests Amazon is “looking at developing mobile technology for scheduling and tracking truck shipments.” We’d caution that the herd tends to miss what Amazon is doing as often as it gets it right.

In this case, given Amazon’s growing number of warehouse locations and the expanding role of Fulfilled By Amazon (FBA), we would not surprised to see Amazon flex its logistics muscles to get its cost under control as well as have greater control over deliveries. Should this turn out to be the case, we see it very much inline with Amazon’s air cargo efforts — a supplement to current logistics services offered by United Parcel Service (UPS) and others. We’ll continue to monitor this to see how real it is, and if so what the potential implications are.

The second piece of news comes from a new data published by Prosper Insights and Analytics that shows Amazon taking a clear lead in holiday shopping this year. After surveying 7,000 US adults, Propers Insights and Analytic found 26% bought “most” of their gifts from Amazon this year, up 10% over year-ago levels. (That 26% would include nearly all of us here at Tematica!)

Trailing well behind Amazon is Wal-mart (WMT) at 14.5% followed by Target (TGT), Kohl’s (KSS), Macy’s (M) and others, including Best Buy (BBY) and JCPenney (JCP), all of which were in the “single-digit range.”

We find the Prosper Insights and Analytics report rather confirming for the part of our Amazon thesis that focuses on the accelerating shift toward digital shopping and a key part of the Connected Society theme. Paired with data from comScore (SCOR) that online desktop spending is up double-digits since Thanksgiving, it looks like the holiday shopping season will be an Amazon one far more people year over year.

Next up, last night FedEx (FDX) reported inline revenue for the quarter that was up just over 19% year over year. The company, however, missed earnings expectations primarily due to lower operating profit at FedEx Freight and the company’s network expansion. That expansion is likely due to FedEx continuing to position itself for the structural shift that favors digital commerce, one of the key tenants behind our Amazon (AMZN) thesis.

As evidenced by FedEx comments during the earnings call last night, it has much work to do on its e-commerce catch-up initiatives, given “that non-e-commerce deliveries to residences and business-to-business traffic represent the vast majority of FedEx Corporation’s estimated $60 billion in FY ‘17 revenues.”

On the bright side for our Amazon shares, FedEx called out the “continued rapid growth of e-commerce” and the “rapid rise in e-commerce.” Add to this the latest data from comScore (SCOR) that showed online desktop spending continues to accelerate as we close in on the Christmas holiday. comScore noted:

“For the holiday season-to-date, $55.2 billion has been spent online, marking a 13% increase versus the corresponding days last year. The most recent week, Dec. 12-18, posted a strong 15% growth in online sales, marking $7.6 billion in desktop spending during the last full week before Christmas.” 

With Amazon once again taking the top spot for best online customer experience in the 12th annual Foresee Experience Index and surveys pointing to more shoppers buying on Amazon this year, we continue to see it in the pole position this holiday shopping season and beyond.

We have ample upside to our AMZN price target of $975, which keeps the shares a Buy. 

 

Costco Wholesale (COST) Cash-strapped Consumer 

This week Citi upgraded the warehouse retailer’s stock to “buy” from “neutral,” saying it sees a clear path to accelerating comparable sales, thanks to the abatement of deflation in food and gasoline. We’d add the continued expansion in the sheer number of warehouse locations bodes well not only for overall sales growth but also higher margin membership fees.

Over the last week, COST shares have rallied sharply to just under $164, which means there is less than 5 percent upside to our $170 price target. As such, we are not inclined to commit fresh funds to this position, nor should subscribers, and thus rate the shares a Hold for now.

 

Disney (DIS) Content is King 

The early estimates are in for Disney’s weekend debut of Rogue One: A Star Wars Story from Box Office Mojo and others, and they have the latest film in the Star Wars franchise taking in $155 million at the domestic box office and $290.5 million worldwide. That’s the 12th-largest opening of all time and marks only the second December film to debut over $100 million. If you guess the first one was last year’s Star Wars: The Force Awakens, you’d be right.

We see Rogue One’s domestic performance as rather impressive and ahead of the $150 million domestic consensus forecast, despite paling in comparison with last year’s Star Wars film. Make no mistake — despite the headlines saying that Rogue One failed to match Force Awakens, few were expecting it to do so, and even on its recent earnings call Disney warned about tough comparisons compared to Force Awakens. Versace saw the film and thought it was fantastic, especially given the rather surprise appearance at the end.

We do see Rogue One speaking to the power of the Star Wars franchise, which now under the Disney umbrella is set to have a new film each year for the next several years. With the holidays soon upon us, we’ll be monitoring Rogue One’s box office progress to gauge its staying power as we head into the holidays.

We’d also note that Rogue One crushed its next closest competitor, Disney’s Moana, which took in $11 million domestically over the weekend, bringing its domestic box office take to $161.9 million and to more than $280 million worldwide. But $150 million to Rogue versus $11 million for Moana clearly shows that once again, Disney is ruling the box office, and we expect the Disney machine to capitalize on the popularity of these films across its other businesses.

In addition to that, DIS shares were added to the US1 list at Bank of America/Merrill Lynch given what it sees as upbeat prospects for Disney’s parks and resorts, as well as its movie studios. Once again it seems we were ahead of the herd.

Our price target on DIS shares remains $125 and remain a Buy.

 

Under Armour (UAA)  Rise & Fall of the Middle Class 

The last 16 hours have seen a whirlwind of comments from Nike (NKE) and Finish Line (FINL), which on their face offer contrasting views on the athletic footwear market. Let’s tackle what they mean for our Under Armour shares.

Last night Nike bested earnings expectations on better than expected revenue, with strong performance in Western Europe, Greater China and the Emerging Markets as well as the Sportswear and Running categories.

There were two wrinkles that emerged during Nike’s earnings call — one was the company’s North America future orders, which came in at -4% vs. the consensus expectations of +1.2%. In recent quarters, Nike has downplayed the importance of its future orders given the growing impact of direct-to-consumer (DTC) and outlet sales, and talked up new products, especially for the basketball and running categories as it incorporates newer technologies, like Air VaporMax and others, across those lines. We’ve seen similar strong results at UA’s online business over the last several quarters.

Our key takeaway from Nike’s earnings call is that athletic footwear remains solid in North America and robust in markets being targeted by Under Armour.

The second wrinkle concerned the impact of the dollar on the company’s outlook, given Nike’s comment that “FX headwinds from further strengthening of the U.S. dollar have put downward pressure on our second half revenue forecast.” Currency is likely to have a more pronounced impact on Nike than Under Armour given that North America accounted for 47% of Nike’s Nike brand business during the November quarter. That compares to North America being roughly 98% of UA’s revenue in its September quarter.

Turning to Finish Line, its shares are getting crushed as the company reported comparable-store sales rose just 0.7% for its latest quarter vs. +8% consensus forecast. Sifting through comments from Finish Line, CEO Sam Sato said, “steep declines in apparel and accessories offset a high-single digit footwear comp gain.” Considering that footwear accounted for 88 to 89% of Finish Line revenue over the last few years, it seems safe to say it’s apparel and accessory business was crushed during the November quarter.

Given some information scrubbed from Finish Line’s Feb. 2016 10-K filing — 73% of Finish Line’s merchandise was purchased from Nike; FL’s top 5 suppliers accounted for 89% of its merchandise, and Finish Line’s business is nearly 100% US based — when comparing Finish Line’s apparel results vs. that for Nike’s North American apparel business, which rose +4% year over year in the November quarter, it sure smells like apparel share loss at Finish Line.

The bottom line for our Under Armour shares is Nike’s North American footwear comments and apparel results, as well as upbeat tone for the holiday shopping season, bode well for UA’s business and our shares. Finish Line’s comments on the other hand likely point to apparel share to other vendors.

Our price target on UA remains $40

 

Universal Display (OLED) Disruptive Technology 

Over the weekend there were several positive mentions for our Universal Display shares. Both articles were bullish, underscoring our thesis on Universal Display shares that the adoption of organic light emitting diode technology will be significant in 2017 and beyond.

Between the two, the more notable mention was in the Technology Trader column in Barron’s that said, “Other suppliers that could benefit in 2017 include module article chiclet Universal Display (OLED), which helps make possible light-emitting diodes, a technology for sharper, more energy-efficient screens that many expect will come to the iPhone 8 next year.”

True enough, the author trotted out the Apple (AAPL) iPhone speculation, but we have been hearing more and more of that.

That brings us to the second mention, which in our view is far more meaty, but also positive for our Universal Display shares.

Over the weekend, The Korean Herald reported, “All of Apple’s iPhone 8 OLED versions will be curved” and the OLED displays are to be sourced from Samsung. The report also goes on to note that “Samsung Display’s curved OLED capacity for Apple is estimated at around 70 million to 100 million units. This is less than half of Apple’s annual sales of the iPhone series, which stand at around 200 million units a year.”

The comment on limited Samsung capacity supports the growing notion that should Apple make the move to OLED display technology, which chatter suggests is increasingly likely, Apple is likely to do so in the higher end model on the next iPhone. While it doesn’t specifically call out the ramping industry capacity for OLED displays we’ve seen via new equipment orders at Applied Materials (AMAT) and Aixtron AG (AIXG), it does reinforce the shortage pain point. With more devices (TVs, wearables, smartphones, tablets) poised to adopt OLED display technology to improve battery performance and design thickness, we see more resources coming to address this pain point, which bodes well for Universal Display’s chemical and licensing business.

Given prospects for far greater OLED usage in 2017 and 2018, we are rolling up our sleeves to determine potential upside to our $68 price target.
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Facebook to copy Amazon and Netflix with original video programming

Facebook to copy Amazon and Netflix with original video programming

We’ve long suspected Facebook would eventually move past short video advertising into longer format programming to capture an even greater portion of the video advertising dollars that are fleeing traditional broadcast TV. It’s got the user base and aims to improve that monetization. Video content, especially outside the US, is a solid strategy to do so. As it does this and brings original programming to its users, much the way Amazon (AMZN) and Netflix (NFLX) are doing, Facebook starts to blur the lines between our Connected Society and Content is King investing themes.

Facebook wants to bankroll its own original video shows, the company’s global creative strategy chief, Ricky Van Veen, told Business Insider on Wednesday.

The videos Facebook wants to license will live in the new video tab of its mobile app and including “scripted, unscripted, and sports content,” according to Van Veen.

Source: Facebook wants to bankroll its own original shows – Business Insider