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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…."
See, fundamentals do matter

See, fundamentals do matter

Welcome to this week’s edition of Tematica Investing. As you recall, this is the publication that replaces my old Growth & Dividend Report newsletter. Each week in Tematica Investing we’re going to provide you with investment ideas and strategies based upon our proprietary thematic investing framework, and takes a long-view approach to investing based upon documented trends that are uncovered while analyzing the intersection of economic, demographic, psychographic, regulatory and technological factors.

Now, in this week’s edition:

  • There are no new additions to the Tematica Select List today, however, we continue to examine new opportunities for it and the Tematica Contender List . . .read more.
  • As we expected, volatility is back on Wall Street as the herd once again begins to focus on fundamentals.
  • Looking at what’s up with the Tematica Select List as Physicians Realty Trust (DOC) makes a big transaction
  • We’re not taking it easy, we’re adding a new theme to the Tematica stable – The Fountain of Youth.
  • All that and more thematic confirmation ripped from the headlines

Click the link below to download the full report

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Nike: Just Do It? Maybe not quite yet

Nike: Just Do It? Maybe not quite yet

Here we are again, another update to Tematica Investing, your weekly service that replaces the Growth & Dividend Report.

In this week’s edition, we tackle:

  • Expectations for GDP in the current quarter fell even further this week.
  • As expected Fed Chairwoman Janet Yellen pushes out potential rate hike timing
  • Dividend stocks come back into vogue as Yellen’s comments reverse hawkish comments last week and that’s good news for several of our holdings.
    Examining Nike ([stock_quote symbol=”NKE”]) and Under Armour ([stock_quote symbol=”UA”]) shares, but only one gets on the Tematica Contender List
  • More thematic confirmation ripped from the headlines…
  • Other securities mentioned in this report include: Alibaba (BABA), Apple (AAPL), AT&T (T) Dick’s Sporting Goods (DKS), Facebook (FB), Finish Line (FINL), Foot Locker (FL), General Mills (GIS), Lions Gate Entertainment (LGF), ParkerVision (PRKR), Physicians Realty Trust (DOC), Qualcomm (QCOM), Regal Entertainment Group (RGC), Shoe Carnival (SCVL) and Target (TGT).

Click the link below to download the full report

downalod-pdf

The Fed “Knows When to Hold’ em” as we build our contender list

The Fed “Knows When to Hold’ em” as we build our contender list

We know this may sound a bit like “the dog ate our homework” excuse as we are getting this week’s Tematica Investing out later than usual, but we wanted to address what the Fed had to say, or more like what they didn’t do.

That’s right, we dig into the outcome of the Fed’s March FOMC meeting that left interest unchanged, but led to a revision in expectations that means the Fed is increasingly less likely to boost interest rates in the coming months. In other words, as we’ve been saying for a while now, slower growth and currency headwinds will continue to restrain growth in the coming months. As such, we will continue to look for disruptive technologies, pain points and other tectonic shifts that fuel our thematic investing lens as well as smartly priced dividend payers that are also benefiting from our thematic tailwinds.

  • Also this week we add another two companies to the Tematica Contender List, both are a part of our Connected Society investing theme and stand to benefit form the increasing amount of time people are spending on Digital media. We also share the latest edition of Thematic Signals, otherwise known as Ripped from the Headlines confirmation of our investing themes unfolding around us in the world we live in.
  • While the Fed left interest rates unchanged coming out of its March FOMC meeting, it revised its GDP and inflation forecast for the US economy modestly lower vs. December expectations.
  • Regal Entertainment ([stock_quote symbol=”RGC”]) continues to benefit from a robust box office and indications point to more of the same ahead. We are reviewing our price target on RGC shares with an upward bias.
  • We are removing Philip Morris International ([stock_quote symbol=”PM”]) shares from the Tematica Select List and issuing a Sell rating at current levels
  • We are adding ComScore ([stock_quote symbol=”SCOR”]) and Nielsen NV ([stock_quote symbol=”NLSN”]) to the Tematica Contender List as part of our Connected Society investing theme given the continued shift in advertising spend to Digital platforms from TV, Radio and other legacy media.
  • More confirmation for our thematic investing lens is found in this week’s edition of Thematic Signals

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Closing out a Cashless Consumption Position in PYPL

Closing out a Cashless Consumption Position in PYPL

Actions for this Week

The following are the changes in ratings or strategy we are making as of Friday February 26, 2016:

  • Following the sharp rebound in the stock market this week, and weakening economic and market fundamentals, we’re rating ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares as a “Buy”.
  • Following PayPal /American Express rumors, we’re updating our PayPal ([stock_quote symbol=”PYPL”]) rating to “Sell”.

During the last few weeks, the stock market, as measured by the S&P 500, has undergone a powerful rally. As of last night, that market had climbed 8.6% from its Feb. 11 close. While we are enjoying the market’s move higher, the economic data has continued to point to a slower domestic and global economy. Examples include the following:

  • China’s official Purchasing Managers’ Index fell to 49.0 in February, marking the lowest reading since November 2011.
  • The Caixin/Markit Manufacturing PMI February reading for China dropped to 48.0, contracting for the 12th straight month.
  • China’s services sector continued to expand in February, but at its slowest pace since late 2008.
  • Euro-zone factory activity expanded at its weakest pace during the last year in February, with its manufacturing PMI falling to 51.2 from 52.3 in January.
  • Japan’s February PMI hit at 50.1 in February, down from 52.3 in January.
  • While a tad better than last week’s Flash February reading of 51.0, the final February manufacturing PMI reading for the United States fell to 51.3 from 52.4 in January. This marked the slowest increase in 28 months.
  • The ISM manufacturing perked up to a reading of 49.5, from 48.2 in January, but February was the fifth consecutive month with a reading in contraction territory. We’d note the last time this happened was during the 2009 financial crisis.
  • The domestic services economy edged down in February per the Institute for Supply Management and even the Fed’s Beige Book reported a “marginally weaker tone” in February than January.
  • Total U.S. carload traffic for January and February fell 13.5% year over year, according to data from the Association of American Railroads.

Taking all those data points together, along with those from January, tells us that the velocity of the global manufacturing economy slowed further in February. Quarter to date, the global economy appears to be hitting another speed bump. My concern is the increased probability of a repeat of what happened coming into 2016 — slow or weakening economic data, currency headwinds and cuts to earnings expectations.

Turning back to the stock market… the recent and welcome market rally has pushed the NYSE McClellan Oscillator (an indicator of market breadth based on the number of advancing and declining issues on the NYSE) even higher than last week and back to levels from which we’ve seen the market correct significantly.

sc-NYOP

In addition, as of last night, the S&P Capital IQ Short-Range Oscillator shows the market is now significantly overbought — two times overbought to be precise.

Conditions warrant staying cautious near-term

What this tells me is we once again are back in cautious territory and that means that not only are the ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares a buy at current levels, but we need to be cautious when adding new positions in the short-term as well. Our current thematically driven and dividend-heavy portfolio has served us well in 2016, allowing us to easily outperform the market indices.

Given the increasing probability that growth and earnings expectations will need to be revised lower yet again, amid the current overbought nature of the market, my plan is to keep these more defensive positions in Aging of the Population play Physicians Realty Trust ([stock_quote symbol=”DOC”]), Connected Society play AT&T ([stock_quote symbol=”T”]), Guilty Pleasure investment Philip Morris International ([stock_quote symbol=”PM”]) and Content is King holding Regal Entertainment Group ([stock_quote symbol=”RGC”]) intact. Even American Capital Agency Corp. ([stock_quote symbol=”AGNC”]), with its monthly dividend stream and annual dividend yield at better than 13%, warrants holding as things are poised to once again get a little bumpy.

Here’s the thing — we’ll once again have a chance to buy thematically well-positioned companies at better prices and more compelling risk-to-reward trade-offs. Let’s not jump the gun, but rather be patient and prudent. As an experienced carpenter would say, “measure twice and cut once.”

Closing PYPL position post PayPal/American Express Rumors

The best performer over the last week has easily been PayPal ([stock_quote symbol=”PYPL”]) shares, which rose more than 5% to $38.80. That has our PYPL shares up 16.6% since mid-September vs. less than 1.7% for the S&P 500. Fueling the recent move in PYPL shares was a rumored tie-up between PayPal and charge and credit card company American Express ([stock_quote symbol=”AXP”]). However, Wall Street was very quick to shoot that rumor down. With takeout speculation abating and concerns over the direction of the market near-term, my thought is it’s better to take profits and look to buy PYPL shares back at better prices. Long-term, I continue to like the company’s position as a standalone play for our Cashless Consumption investing theme. Therefore, we are updating our rating on  Paypal to “Sell” at this time.

Thematic tailwinds continue to be a guiding light in the market storm

Thematic tailwinds continue to be a guiding light in the market storm

Actions for this Week

The following are the changes in ratings or strategy we are making as of Friday February 26, 2016:

  • Use the recent market strength to capture profits by selling half your position in  Philip Morris International (PM), AT&T (T) and PayPal (PYPL) shares.
  • On the remaining PM position, suggest setting a stop loss at $87 and raise the recommended stop loss on PYPL shares to $33 from $31.
  • Maintain “Hold” rating Tematica Select List positions AGNC, DOC, PM, RGC, SH and T.
It’s been another up and down week for the stock market, once again shaped by the moves in oil prices. These movements can cause short-term disruptions in stock prices as evidenced by the gyrations of the last few weeks, but our thematic tailwinds continue to be a guiding light in the market storm.

Over the last few weeks we’ve recommended investors continue to sit on the sidelines preferring to keep our powder dry amid the market turbulence as we wait for more favorable risk to reward profiles in stock prices. On the dividend side of our holdings — which continues to outperform— as of the market’s close last night, our position in Philip Morris International ([stock_quote symbol=”PM”]) is up more than 15% from my initial recommendation and both AT&T ([stock_quote symbol=”T”]) and PayPal ([stock_quote symbol=”PYPL”]) shares are up more than 10% including dividends.

While the stock market has rebounded, there are still reasons to remain cautious. . . 
WTIC Light Crude Spot Prices

WTIC Light Crude Spot Prices

The recent rally in the stock market has been due in part to organizations like the OECD and others that are calling for more monetary stimulus. Let’s remember, we have yet to feel the full impact of the oil price drop, but the evidence is mounting:

  • Comments from the CEO of Devon Energy ([stock_quote symbol=”DVN”]) imply most US shale producers need $55-$60 oil to work
  • We’re beginning to hear about more oil related layoffs as Halliburton cut another 5,000 jobs following up on cuts of 4,000 jobs in the December quarter.
  • Wells Fargo ([stock_quote symbol=”WFC”]) has set aside $1.2 billion for potential oil and gas sector loan losses as different forecasts suggest up to 35% of public oil companies could face bankruptcy.
  • A report from Deloitte found 175 such companies are facing “a combination of high leverage and low debt service coverage ratios.” Odds are more financial institutions that just Wells Fargo will be hit should Deloitte be correct.
Meanwhile, the economy in China is expected to have contracted even further in February

February would mark the seventh consecutive monthly decline in China’s manufacturing sector. Per a poll conducted by Reuters based on 23 economists, China’s official manufacturing Purchasing Managers’ Index (PMI) is expected to dip to 49.3 in February from 49.4 a month earlier. We’re already seen the ripple effect into the Eurozone, and that along with oil related loan losses helps explain why European Central Bank chief Mario Draghi is ready to do “whatever it takes” come March.

Taken all together, these data points lead us to conclude that there is likely another shoe to drop, and that shoe will not only weigh on the market, but it will probably lead to job destruction along the way. Keep in mind, the jobs created in the oil and energy sector have been some of the better paying ones created over the last few years, compared to the those in the retail, hospitality and other sectors that have led recent job growth

All of this is likely to keep the Fed’s hand off the interest rate button in next few weeks.

$NYMOT: NYSE McClellan Oscillator

$NYMOT: NYSE McClellan Oscillator

Finally, we also have to acknowledge that short covering has helped propel the market higher over the last few days even though the fundamentals (economic growth, earnings expectations) have not changed much in the last few days. That short covering has led the NYSE McClellan Oscillator (an indicator or market breadth based on the number of advancing and declining issues on the NYSE) to rebound sharply over the last few days, past levels from which we’ve seen pullbacks in the market.

So this short selling activity is yet another reason to remain cautious near-term in my view, which means we are maintaining our “Hold” rating on ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares.

Trimming back our PM, T and PYPL positions, and checking some stop losses

Rather than dawdle, we recommend using the recent strength in the market to trim back positions in Philip Morris International ([stock_quote symbol=”PM”]), AT&T ([stock_quote symbol=”T”]) and PayPal ([stock_quote symbol=”PYPL”]) by selling half of each. This move will lock in double-digit gains, while leaving some skin in the game should the market climb higher in the near-term. We are also recommending at this time that investors set a stop loss for PM shares at $87 and raising the stop loss on PYPL shares to $33 from $31.

Over the last few weeks a number of thematically well positioned companies have had their share prices retreat to more attractive levels. Examples include Netflix ([stock_quote symbol=”NFLX”]), Amazon ([stock_quote symbol=”AMZN”]), and Skyworks Solutions ([stock_quote symbol=”SWKS”]) to name a few. Should another pullback in the market come to pass as I expect, we’ll be watching these and other thematic contenders closely.

What’s playing at the box office?

Year to date the movie box office is up 1.6% year over year due to strong performances from “Deadpool”, “The Revenant”, “Kung Fu Panda 3”, and of course “Star Wars: The Force Awakens”. In just under a month “Batman v Superman: Dawn of Justice” will drop and soon after that “Captain America: Civil War” will hit in early May. Other tent pole films from Disney and other film companies have 2016 looking like a better year for bodies in seats, and we all know that drives sales of those high margin snacks and beverages.

This points to additional upside for Regal Entertainment ([stock_quote symbol=”RGC”]) shares, which closed last night up more than 6% including dividends since our initial “Buy” rating in mid-January recommendation. The next sign post for the shares will be on March 8th when the management team gives it presentation at the Raymond James Institutional Investors Conference in Orlando, FL. For investors who have already made a move on RGC shares, we recommend you continue to hold them; for those that haven’t jumped in yet you could still do so lest they pass $20, at which point we do not recommend committing fresh capital. Our RGC price target remains $24.

Coming up, earnings from Physicians Realty Trust

On Monday, our Aging of the Population play, Physician Realty Trust ([stock_quote symbol=”DOC”]), reports its quarterly earnings. Consensus expectations for the quarter are sitting at earnings per share of $0.26 on revenue of $39.2, up 18% and more than 100% year over year, respectively.  Remember, Physicians Realty has been upsizing and using its balance sheet to grow its leased property footprint to doctors, hospitals and other healthcare delivery systems. In late January the company completed a secondary offering that garnered it net proceeds of more than $320 million, and the company should shed more light on its plans to put that capital to work and grow its footprint in 2016.

Weak Economic Readings Are Good News for Our Positions

Weak Economic Readings Are Good News for Our Positions

From a market perspective, this holiday-shortened trading week certainly started off on a high note, reflecting what appeared to be progress in stabilizing oil prices in an OPEC and non-OPEC production deal. As more details became clear, however, it appeared there were cracks already in the works as oil production levels were to be frozen at January 2016 levels. Soon thereafter, we learned that Iran would be able to continue ramping up its production, which raised eyebrows over the likelihood that this deal would have even more problems. As we’ve seen in the past when oil prices collapse, these agreements tend to be fraught with side dealings. Time will tell if that once again turns out to be the case.

After two more days of an up market that built on Friday’s strong move, which was mostly oil and buyback-upsizing driven, we were reminded that there is still much uncertainty out there. I’m not referring to the 2016 presidential election, although as we inch closer and closer, it is becoming harder to guess who will be facing off with whom this fall.

No, I’m taking about the rash of news that hit on Thursday in the form of:

  • The U.S. Energy Information Administration (EIA) showing that U.S. crude stockpiles rose by 2.1 million barrels.
  • And then also this from the EIA — “U.S. Gulf of Mexico (GOM) crude-oil production is estimated to increase to record high levels in 2017 even as oil prices remain low. The EIA projects GOM production will average 1.63 million barrels per day in 2016 and 1.79 million b/d in 2017, reaching 1.91 million b/d in December 2017. GOM production is expected to account for 18% and 21% of total forecast U.S. crude-oil production in 2016 and 2017, respectively.”
  • Finally, the Organization for Economic Cooperation and Development (OECD) cut its 2016 economic-growth forecast once again. The group lowered its 2016 global-growth forecast by 0.3 percentage points to 3% for the year. That’s the second cut since October, when the OECD pegged 2016 growth at 3.6%.

Of course, government statistics and forecasts like the OECD’s tend to be a beat or two behind what’s happening on the economic dance floor, so you should keep tabs on other indicators in addition to these.

Candidly, that announcement was hardly surprising given the economic data we’ve been getting, and even that has been teed up by other data that I’ve been watching.

Chinese manufacturing remained slack in January, including the weakest reading for the government’s official purchasing managers’ index since August 2012. Longtime readers know that one data point I closely follow is the Association of American Railroads’ (AAR) weekly reading on U.S. railcar traffic and loadings. Let’s just say that if you’ve been paying attention to this indicator in the year-to-date period, the recent contracting regional Fed manufacturing reports haven’t been much of a surprise.

The AAR reported this week that U.S. weekly rail traffic totaled 505,148 carloads and intermodal units in the seven days ending Feb. 13. That’s down 3.8% from the same period last year. But a single week doesn’t make a trend, so we need to look at year-to-date data. On that basis, combined U.S. traffic for 2016’s first six weeks has fallen 5.8% year over year to 3,017,321 carloads and intermodal units. A similar drop has occurred in truck tonnage, the Dry Baltic Index and the Cass Freight Index, which combine to indicate that products, assemblies and parts are not moving to where they are needed. As we all know, that is not a good sign for the economy.

Add in the contractionary readings for the Philly Fed and Empire Manufacturing indices this week for February and it lets us know the domestic economy is not rebounding.

Now you might think that was it, but it wasn’t. Yesterday, heavy equipment company Caterpillar ([stock_quote symbol=”CAT”]) presented at the Barclays Investor Conference and shared the following information:

  • CAT expects sales and revenue to be about 10% below 2015.
  • CAT also said it’s seeing a lot of global market uncertainty, as well as overall weak industry demand. Management added that global economic growth is slowing, which generally drives weak industry performance in CAT’s markets.

It looks to me like the OECD may have another round of cuts to make to its 2016 forecast

For those who were hoping the consumer aspect of our economy would provide some needed lift, I’m sad to say that the details from the earnings reports for both Wal-Mart ([stock_quote symbo=l”WMT”]) and Nordstrom ([stock_quote symbol=”JWN”]) tell us something different.

While Wal-Mart reported a beat on fiscal fourth-quarter earnings with $1.49 per share during the latest quarter vs. the $1.46 expected, the chain also issued a lighter-than-expected outlook, including virtually no revenue growth this year.

“Net sales growth is now expected to be relatively flat, which compares to the previous estimate for growth of 3% to 4% on a constant-currency basis,” WMT reported in a statement. “This change reflects the impact from recently announced store closures globally, as well as the continued strengthening of the U.S. dollar.”

Last night, shares of retailer Nordstrom fell 8% following the company’s weaker-than-expected December-quarter results. It posted earnings per share of $1.17 on $4.19 billion in revenue; the consensus estimates from Thomson Reuters called for EPS of $1.22 on $4.22 billion in revenue. Guidance was weaker than the market was expecting.

Taken together, these two retail reports are likely to be harbingers of what’s to come as more retailers begin reporting their last-quarter results. To me, it says the Cash Strapped Consumer theme is alive and well.

Needless to say, I’m glad we have no industrial or retail names inside our current Tematica Select List holdings. In fact, the weak economic news is actually good news for our dividend-heavy holdings, and here’s why — Federal Reserve Bank of St. Louis President James Bullard is saying it would be “unwise” for the central bank to raise rates near-term. That comment is interesting, given that Bullard was one of those supporting rate hikes during most of 2015.

Also, Fed watcher Jon Hilsenrath of The Wall Street Journal is saying what more and more people are coming to realize: The Fed is unlikely to boost rates in the year’s first half. He said the central bank prefers to wait and measure the economy’s vector and velocity over the coming months. Depending on what the Fed finds, we could see one or two rate increases during 2016’s back half.

This combination of slower economic growth, uncertainty and the increasingly likelihood that the Fed rate hike will be pushed out means our dividend-heavy portfolio should continue to prosper in the coming weeks.

As we keep the current course steady, I’m going to start filling our shopping list. I shared some prospects in the last issue of the newsletter, but I have a few more, including one that should benefit from the continued shift in advertising dollars from traditional media to online and mobile. Given that it is an election year and we have the Olympics, this one sure is looking to be a winner. I’ll share my recommendation once I’ve completed my analysis.

Enjoy your weekend and I’ll see you back here next week.

Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

Actions from this post

Ratings changes included in this dated post

  • Set a protective stop loss at $16 for Physicians Realty Trust (DOC) shares.
  • Maintained “Hold” rating all seven positions in the Tematica Select List — [stock_quote symbol=”AGNC”], [stock_quote symbol=”DOC”], [stock_quote symbol=”PM”], [stock_quote symbol=”PYPL”], [stock_quote symbol=”RGC”], [stock_quote symbol=”SH”] and [stock_quote symbol=”T”].

Despite ending on a high note, this past week was another rough one for the stock market with the S&P 500 falling another 1.3%. The increasingly familiar cast of characters — oil price swings, economic growth concerns, renewed European banking issues and the notion the Fed may not really know what it is doing — all were factors in the market decline this week. Friday’s rebound was led primarily by comments from the energy minister of OPEC member United Arab Emirates that probably sparked some short covering ahead of the holiday weekend, but, all told, oil still dipped for the week, as did the market. A flurry of buyback announcements and insider buying, including leading members of Amazon ([stock_quote symbol=”AMZN”]) and JPMorgan Chase ([stock_quote symbol=”JPM”]), also helped move the market higher on Friday.

From a GDR portfolio perspective, the vast majority of our positons once again outperformed the S&P 500 this week with notable high fliers including Regal Entertainment ([stock_quote symbol=”RGC”]) and our insurance position ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]), which is great to have during turbulent times like these. The one sore spot this week was Physicians Realty Trust ([stock_quote symbol=”DOC”]), which saw its shares drop some 5% this week following comments from competitor HCP Inc. (HCP). With DOC not reporting its quarterly results until Feb. 29, let’s be smart, given the current market, and set a protective stop loss at $16, which will lock in a profit of more than 22% for subscribers that heeded my call to add the shares back in June 2014.  By comparison, the S&P 500 is down 5.5% since then.

While early trading on Friday likely left investors feeling a little better, the reality is there are still a number of concerns that will pressure the market, particular if the comments from United Arab Emirates turn out to be something other than what the market is reading.

We saw this just a few weeks ago and prefer to be cautious ahead of what could be yet another “buy the rumor, sell the news” moment. Other shoes yet to drop include what’s going on with the European banks, the latest corporate earnings and additional economic data in the coming two weeks that will give us a clearer picture of how the current quarter is doing. Earlier this week, Deutsche Bank and others cut GDP expectations for the first half of 2016, and, subsequently, their full-year expectations as well. I expect more to follow.

In the latest issue of Tematica Investing, I shared with you a number of confirming data points for our thematic approach to investing — if you haven’t read it yet, you can find it here. The good news is those confirming data point just keep coming. This week, Gallup reports that obesity rates have hit an all-time high here in the United States at 28% and the number of diabetes cases are at a record high. Those findings indicate that the Fattening of the Population has not diminished one pound. I’m investigating several investments on this theme that are even more attractive, given the year-to-date market drop of just more than 9% for the S&P 500. I’m also keeping my eyes and ears open for more such confirming data points, and, of course, I’ll continue to share them. In fact, I’m working on a new way to bring them to you each week. Stay tuned for more on this

While the market is frustrating for sure, I would much rather “measure twice and cut once” to steal an old carpenter saying when it comes to putting capital to work in this market. We still have roughly 25% of the S&P 500 companies yet to report their quarterly results. In the upcoming holiday-shortened trading week, we’ll be getting 56 S&P 500 company earnings reports. Earnings expectations for the index this year continued to move lower this week to hit $122.42 per share (3.7% year over year) and I suspect it still has room to drift lower as those remaining S&P 500 companies report their results. The expected earnings rise of 3.7% is being aided by huge stock buyback activity. Given the number of upsized share repurchase authorizations that continue to be announced, this is likely to continue in light of some of the significant pullbacks in stock prices. From a fundamental perspective, I’ll look to sidestep any and all financial mumbo-jumbo related to that by continuing to focus on operating profit growth and operating margin expansion.

Turing our gaze to next week, we have no portfolio companies reporting their quarterly results, but we do have a full plate of economic data coming our way. This includes several regional Fed manufacturing surveys and housing reports, as well as the latest Industrial Production reading. We also have both inflation indicators — the PPI and CPI — for January coming at us. But given the moves in oil and other commodities, we are not expecting any pronounced changes in those indices. Following Fed Chair Janet Yellen’s testimony this week, all eyes will be looking to read into the Federal Open Market Committee (FOMC) minutes from the Fed’s Jan 27th meeting when they are released this coming Wednesday, Feb. 17. My view remains that any next increase in rates by the Fed will come later rather than sooner, as I doubt the Fed wants to pour a combination of sand and water on the flailing fire that is the domestic economy amid the latest data.

Buckle up, it’s going to be another fun ride next week.

Enjoy the long weekend and I’ll update you again next week.

Our State of Play Following December-Quarter Earnings

Our State of Play Following December-Quarter Earnings

Actions from this post

Ratings changes included in this dated post

  • Set your stop price on PayPal Holdings (PYPL) at $31.00.
  • Maintain “Hold” rating on  AGNC, DOC, PM, PYPL, RGC, SH and T.

It has been a busy week with several hundred earnings reports and a plethora of economic data that continues to point to a slowing in the domestic services economy as the domestic manufacturing economy flirts with a recession. The market continues to grapple with matching the economic reality with slower growth prospects for companies.

We’ve sat on the sidelines these last few weeks savoring the dividend side of our Tematica Select List, but I have been building our shopping list. As earnings start to wane in the coming weeks, and we get ready to act on that growing shopping list, I’ll continue to watch the economic data to avoid any pitfalls if company expectations need to be revised lower yet again.

In the last two weeks, we’ve had nearly all of our recommended companies report their December-quarter results, so I felt a recap was in order:

American Capital Agency Corp. ([stock_quote symbol=”AGNC”]) — Earlier this week, the company reported December-quarter results that fell shy of expectations and came in at $0.54 per share, a $0.03-per-share miss. Book value continued to dip and slipped to $22.59 per share at the end of the quarter, down $0.41 per share compared to the end of the September quarter. Given the deep discount to book value, AGNC repurchased $161 million, or 2.6%, of its outstanding common stock during the quarter. Management stated that if current conditions persist and the shares continue to trade at such a “significant discount,” the company would continue to actively buy back shares. While green shoots are appearing in the company’s core MBS business, the continued drop in 10-year Treasury yields has been a boon to real estate investment trusts (REITs) and other high-yielding securities. With more economic data pointing toward a dramatic slowdown, I see investors continuing to shift toward stocks such as AGNC. Given all of that and the current dividend yield of 14%, AGNC shares are a buy at current levels.

AT&T ([stock_quote symbol=”T”]) — This telecommunications company reported December-quarter results that were largely in line with expectations. I continue to see the company’s wireless offerings as very inelastic and I confirmed this with a poll among my undergraduate and graduate students now that the spring semester is underway. Nearly all of my students said they would trade eating out, buying shoes or some other purchase if it meant having enough money to pay their mobile phone bill. Should the economy continue to slow, the nature of AT&T’s business and its current 5.2% dividend yield make the shares a must-own.

Philip Morris International ([stock_quote symbol=”PM”]) — Earlier today, Philip Morris reported December-quarter earnings of $0.80 per share vs $1.03 a share in the same quarter a year ago. Excluding non-recurring items, however, earnings for the quarter were in line with expectations of $0.81 for the quarter. As expected, revenues continue to be on a slow glide lower, but the company continued to take share during the quarter as it leveraged its key brands, including Marlboro, L&M, Parliament and others. Like many domestic companies that derive a meaningful portion of their revenue from outside the United States, persisting currency headwinds will weigh on the reported results. As such, we will need to dig into the results to better understand the true health of the business. While the company’s 2016 earnings guidance of $4.25-$4.35 per share is below consensus expectations of $4.42 per share, it also forecasts $0.60 per share in expected currency headwinds. That’s a big adjustment in foreign exchange headwinds compared to the impact of $0.27 per share that the company forecasted would impact 2016 this past October. I suspect analysts’ models were not updated in the last few months to account for currency. Adjusting for that, earnings are slated to grow 10-12% in 2016, not fall as the headlines would suggest. To me, that means the odds of another dividend bump in 2016 are looking rather good. You should continue to hold your PM shares.

Physicians Realty Trust ([stock_quote symbol=”DOC”]) — During its December-quarter results, the company shared that it acquired 19 healthcare properties in 11 transactions, as well as three condominium units located in 11 states for an aggregate of $142.6 million. To me, this means despite the current tone of the economy or even the volatility of the stock market, Physicians Realty continues to execute on its business model. As it chewed through those transactions, the company reloaded its transaction gun with an upsized offering of 18.5 million shares that added roughly $290 million to its coffers. As the company continues to execute, we will benefit from the dividend policy associated with its REIT structure. You should continue to hold your DOC shares.

PayPal Holdings, Inc. ([stock_quote symbol=”PYPL”]) — Our Cashless Consumption play, PayPal, saw its shares soar 21% in the last two weeks following better-than-expected December-quarter results on both the bottom and top lines. More specifically, PayPal delivered earnings per share (EPS) of $0.36, $0.02 ahead of consensus expectations, on $2.56 billion in revenue (ahead of the $2.51 billion consensus expectation). While the company’s guidance is in line with Wall Street expectations for the current quarter, that performance should not go unappreciated in light of the current environment. I continue to see PayPal taking market share as payments shift online and onto mobile devices. That behind-the-scenes business powers Apple Pay, Uber and other companies that are humming. Given the company’s pure play status for my Cashless Consumption investing theme and the tailwind at its back, I’m not surprised that RBC Capital Markets reiterated its outperform rating and $42 price target on the shares and that Wedbush upgraded its view on PayPal to Outperform from Neutral with a new $40 price target. We’re up more than 11.5% in PYPL shares. Given this volatile market, let’s be prudent and set a protective stop loss at $31 with a goal of stepping it up as PYPL shares move higher.

ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) — Over the last week, our SH shares have moved up, down and sideways in response to the moves in the S&P 500. With more data pointing toward a manufacturing recession and far slower growth in the services sector, I see further negative revisions to 2016 earnings expectations for the S&P 500 group of companies. Let’s continue to keep this insurance position in place for the time being.

Regal Entertainment Group ([stock_quote symbol=”RGC”]) — While the stock market may be turbulent, the movie box office is off to a strong start in 2016. Year to date, the box office is up 2% year over year and up double-digit percentages compared to prior years. I chalk this is up to follow-through on Star Wars: The Force Awakens, but also a strong showing for Ride Along 2, 13 Hours: The Secret Soldiers of Benghazi and Kung Fu Panda 3. It seems there is something for everyone, including us with The Big Short, which I highly recommend. With tickets up, sales of high-margin snacks and drinks are sure to follow. Regal Entertainment reports its quarterly results next Tuesday (Feb. 9) and you should hold your shares heading into that event.

I’ll have much more for you next week, when I will be trying to finalize the next issue of your newsletter. I’m already working on it and I’m including a number of data points coming out of December-quarter earnings conference calls that confirm our thematic investing perspective is identifying the right tailwinds, as well as the latest economic data that will shape the market and expectations in the coming weeks.

Market Volatility — still sticking around

Market Volatility — still sticking around

As the Northeast dug out from #Blizzard2016 earlier this past week, you could say the slowdown from the storm was a harbinger of what was to come this week in the form of more data pointing toward a slowing domestic and global economy. From my perspective, the Fed’s commentary following their monetary policy meeting this week and the likelihood of the next Fed rate hike slipping from March to May simply confirm that the economy has indeed entered a rough patch. We didn’t really need to see the dismal December Durable Orders Report or the weaker-than-expected 4Q 2015 gross domestic product (GDP) report out this morning, because much of the data in recent weeks clued us in as to what was coming. What did catch me off guard was the Bank of Japan’s move to negative interest rates early this morning, which led to a sharp move higher for the market and the S&P 500 closing up 1.2% for the week, bringing its year-to-date return to -5.6%.

10 year truasury note

While that was happening, the yield on 10-year Treasuries fell once again, and that led many an investor back into higher-dividend-yielding stocks like the ones we’ve kept in our Tematica Select List. In particular, Physicians Realty Trust (DOC), Philip Morris International (PM), American Capital Agency (AGNC) and AT&T (T) all outperformed the S&P 500 this week from a stock price perspective. The big winner for us, however, was our PayPal (PYPL) position, as the company delivered a great quarter that popped the shares over 13% this week. That brings our return in PYPL shares to just under 8% since early September. By comparison, the S&P 500 fell 1.4% over the same time period. With more companies adopting mobile payments, and even more utilizing PayPal’s back-end services for both mobile and online payments as part of my Cashless Consumption investing theme, you should continue to hold your PYPL shares.

Next week, we have several hundred more companies reporting earnings and the usual start-of-the-month economic data will be coming in. This includes December Personal Income and Spending, which should offer some insight on consumers and their spending habits; the ISM manufacturing index; the global PMIs from Markit Economics; December factory orders and the usual assortment of job creation indicators. Based on the preponderance of January regional Fed reports and January flash PMI reports that showed the slowest expansion in the domestic services economy since December 2014 and the second-lowest reading for the manufacturing economy since October 2013, we should not expect a significant pickup to be seen in next week’s data. If this proves to be the case, I would expect to see the chatter grow over the Fed likely pushing out its rate hike from March to May, particularly if Friday’s January Employment Report disappoints.

I will continue to be vigilant during all of that next week. However, given the sheer number of companies reporting their results, there is a high probability there will be more than a few companies offering weaker-than-expected guidance, much like Apple (AAPL), Boeing (BA), Amazon (AMZN) and United Rentals (URI) did in recent days. Already I’m looking at the kinds of businesses that will weather a slower economy given their inelastic natures. For example, will people stop searching on the Internet? Will people stop eating? Are you likely to slow down your use of social media or streaming video? While we may slow down on discretionary spending, odds are those kinds of services and actions will see modest disruption at worst. I can add another — hopefully you will continue to clean both your house and yourself, just as I plan on doing.

As we exit the earnings storm, I expect calmer waters will start to emerge. At that time, we’ll be putting some cash to work, looking to take advantage of the drop in stocks to buy in at much better prices.

 

The Wild Ride Continues as the East Coast Braces for ‘Snowmageddon’ 2016

The Wild Ride Continues as the East Coast Braces for ‘Snowmageddon’ 2016

Amid the volatility that has led all the major markets lower on a year-to-date basis, yesterday we saw a bit of a reprieve following comments from European Central Bank President Mario Draghi suggesting perhaps another round of stimulative monetary policy could be in the cards. Perhaps he had a preview of this morning’s Eurozone Flash Composite PMI report for January, which hit an 11-month low with declines in both manufacturing and services orders.

Additionally, one of the main drivers of the stock market of late — falling oil prices — recovered a bit yesterday. The move higher in oil prices reflects a smaller inventory build per today’s Energy Information Administration (EIA) report, as compared with the American Petroleum Institute’s previous report. Peering into that EIA report, however, U.S. crude oil inventories are at levels not seen in the last 80 years. While oil prices probably will trend higher near term as the East Coast gets hit with a massive snowstorm this weekend, with U.S. refineries still clocking in at 90.6% capacity utilization and crude oil imports up year over year, I expect the recent oil price bump could be short lived amid the slowing global economy.

This morning’s December read on the Chicago Fed’s National Activity Index marked the fifth consecutive month of contracting national activity in the United States. To me, that adds to the concern raised by the January Empire Manufacturing Report that was published last week and showed “that business activity declined for New York manufacturers at the fastest pace since the Great Recession.” Digging into that report, new orders, shipments and overall business conditions fell sharply during the month. That weakening outlook was reiterated this week in the January Philly Fed Index, which not only remained in contraction territory, but also showed yet another drop in its six-month outlook indicator — down to 19.1 from 24.1 in December and 43.4 in November.

Against that backdrop, it’s not hard to see how in its December earnings report this morning, General Electric’s ([stock_quote symbol=”GE”]) industrials segment posted a 1% decline in both organic profit and revenue for the quarter.

In other economic news, a rather unsurprising December Consumer Price Index report showed a deflationary environment, which I chalk up to the drop in oil and gas prices. Given the weakening economic climate and continued lack of inflationary pressures thus far in the data, there is a high probability the Federal Reserve will leave interest rates unchanged at their meeting next week (Jan. 26-27).

Amid those latest gleanings that show the domestic economy is losing ground, the velocity of earnings reports has started to pick up, and so far I have to say we’ve seen more than a fair amount of disappointing, if not flat out weaker-than-expected, outlooks from IBM ([stock_quote symbol=”IBM”]), Starbucks ([stock_quote symbol=”SBUX”]), Deutsche Bank ([stock_quote symbol=”DB”]), United Continental ([stock_quote symbol=”UAL”]), Intel ([stock_quote symbol=”INTC”]), Union Pacific ([stock_quote symbol=”UNP”]), American Express ([stock_quote symbol=”AXP”]) and others. That velocity only will accelerate further given the number of companies that will be reporting their quarterly earnings next week and the week after. In total, I count more than 1,200 companies issuing their December quarterly results in the next two weeks, with a good percentage of them updating their outlook for the coming months. It’s not all going to be peaches and cream, it probably won’t even be close, given the economic climate that is developing and other factors that are helping to ratchet up uncertainty. In such an environment, management teams tend to be cautious, if not overly so.

Turning to our Tematica Select List holdings, even after factoring in yesterday’s 0.5% move higher in the S&P 500, the index is still down some 8.6% on the year as of Thursday’s market close. That should leave us feeling pretty good with the decision to shed more growth-oriented, and therefore more volatile, positions. Granted, on Wednesday we saw what could have been our first glimmer of market capitulation as the S&P swung 63.9 points (or 3.4%), but the data — both economic and earnings — suggest we have more to go in terms of expectations being reset lower. Such volatility tells me we should continue to treat any bounce as something of the dead cat kind until we see the market gyrations settle down on a sustained basis. I suspect that, like me, you do not want to walk headlong into an unexpected frying pan to the face just because we’d like to think things have settled down even though they probably haven’t.

To me, this is time to calmly and coolly sit back and add to our thematic investing shopping list. That’s what I’ve been doing and plan on continuing to do in the coming week. In the meantime, let’s continue to keep our insurance position, the ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]), intact as it will help hedge us against additional market turbulence.

As I look over our current crop of holdings, many of which offer hefty dividend yields, I am placing our shares of American Capital Agency Corp. ([stock_quote symbol=”AGNC”]) on my watch-closely list. We enjoy a monthly $0.20 per share dividend, which equates to a staggering 15% dividend yield at the current share price, and the shares are trading near a 30% discount to book value at current levels. To me, the factor to watch will be the Fed’s language next week — if it softens a bit, and Fed Chair Janet Yellen once again touts her now infamous “data dependent” line. If she does, I suspect shares of our deeply discounted real estate investment trust will get a boost. If Yellen continues her “tough” interest rate talk, then it could be time to re-evaluate this positon.

For those of you on the East Coast, and more specifically in and around the Washington, D.C., area like me, please hunker down and stay safe this weekend. For those of you looking to generate a short-term profit from the storm, there are the obvious players, such as Home Depot ([stock_quote symbol=”HD”]) and the Utilities Sector SPDR ([stock_quote symbol=”XLU”]), that you should consider. Given our thematic investing perspective and medium-to-longer-term investing time horizon, I’m not making a formal recommendation, but I easily can see those getting a short-term boost from the storm.