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Woeful Earnings from Kroger Has Us Tightening Position in UNFI

Woeful Earnings from Kroger Has Us Tightening Position in UNFI

While many have been focused on the retail environment —and we count ourselves among them here at Tematica — we’ve also been watching the painful restaurant environment over the past few months. It’s been one characterized by falling same-store-sales and declining traffic – not a harbinger of good things when paired with rising minimum wages.

For those that are data nut jobs like we are, per TDn2K, same-store sales for restaurants fell 1.1 percent in May, a decline of 0.1 percentage points from April. In May, same-store traffic growth was -3.0 percent. Now for the perspective, the industry has not reported a month of positive sales since February 2016 – that’s 15 months! One month shy of the bad streak the May Retail Sales Report has been on. Clearly not a good operating environment, nor one that is bound to be friendly when it comes to growing revenue and earnings.

Reading those tea leaves, we’ve avoided that the restaurant aspect of our Fattening of the Population investing theme, and with Ignite Restaurant Group filing bankruptcy, Cheesecake Factory (CAKE) warning about its current quarter outlook we confident we’ve made the right decision.

But people still need to eat, and we’ve seen consumers increasingly flock back to grocery stores in 2017. Year to date, grocery retail sales are up 1.7 percent through May. Breaking down the data, we find that in recent months those sales have accelerated, with March to May 2017 grocery sales up 2.8 percent year over year and standalone May grocery store sales up 2.2 percent year over year.

Yet, when grocery company Kroger (KR) reported in-line earnings for its latest quarter, it lowered its 2017 EPS outlook, cutting in the process to $2.00-$2.05 from the prior $2.21-$2.25, with the current quarter to be down year over year. Aside from price deflation in the protein complex and fresh foods, the company cited its results continue to be pressured by rising health care and pension costs for employees, as well as the need to defend market share amid “upheaval” in the food retailing industry. We see that as company-speak for Kroger and its grocery store competitors having to contend with our

We see that as company-speak for Kroger and its grocery store competitors having to contend with our Connected Society investment theme that is bringing in not only Amazon (AMZN), MyFresh, and FreshDirect into the fray, but also leading Wal-Mart (WMT), Target (TGT), and Safeway among others to expand their online shopping capabilities, which in some cases includes delivery. Another reason not to get off the couch when shopping.

Candidly, we’re bigger fans of companies that focus on profits over market share given that short-term market share led strategies, often times with aggressive pricing, tend to sacrifice margins, but focusing on profits tends to lead to better market-share over the long-term. We’ve seen the “strategy” that Kroger is adopting many times in the past and while it may have short-term benefits, increasing prices later on, runs the risk of alienating customers.

Getting back to Kroger’s guidance cut, that news sent Kroger’s shares down almost 20 percent on Thursday and led to United Natural Foods (UNFI) shares to fall more than 3.5 percent, while Amplify Snacks (BETR) slumped by 2 percent. In our view, most of Kroger’s bad news was likely priced into UNFI’s mixed guidance last week when it reported its own quarterly earnings. Without question, 2017 has been a rough ride for UNIF shares despite the Food with Integrity tailwind, but despite Kroger’s guidance cut, management shared on the company earnings call that it continues “to focus on the areas of highest growth like natural and organic products.” Even Costco Wholesale (COST) recently shared it has room to grow in packaged organic food items, excluding fresh), which plays to the strengths at both United Natural Foods and Amplify Snacks.

 

Tightening Our Position in UNFI, But Staying the Course with BETR

With our Food with Integrity thematic tailwind still blowing and UNFI shares down just 7.5 percent relative to our blended cost basis on the Tematica Select List, we’ll remain patient with the position. That said, from a technical perspective the shares are near support levels and if they break through $38.50 the next likely stop is between $33 and $34. Therefore, to manage potential downside risk, we’re instilling a stop loss on UNFI shares at $38.50. As we do this, we’ll acknowledge the tougher operating environment and reduce our UNFI price target to $50 from $65, which still offers upside of just over 25 percent from current levels.

  • We are keeping our Buy rating on United Natural Foods, but trimming our price target back to $50 from $65.
  • We are instilling a stop loss at $38.50 to manage additional downside risk near-term.

With regard to Amplify Snacks, with today’s close the shares are down just 6 percent from our late April Buy recommendation. Generally speaking, these single digit stocks tend to be volatile and require some extra patience, and that’s the tact will take with BETR shares. Our price target remains $11.

  • We continue to have a Buy on Amplify Snacks (BETR) shares and our price target remains $11.

 

 

 

Retail Sales Data for the Month of May Confirms Several Thematic Investment Themes

Retail Sales Data for the Month of May Confirms Several Thematic Investment Themes

This morning we received the May Retail Sales Report, which missed headline expectations (-0.3% month over month vs. the +0.1% consensus) as well as adjusted figures that exclude autos sales for the month (-0.3% month over month vs. +0.2% consensus). Despite the usual holiday promotional activity, retail sales in May were the weakest in 16 months due in part to lower gasoline prices, which had their biggest drop in over a year. In our view, the report confirms the challenging environment for brick & mortar retailers, despite those lower gas prices, while also affirms our decision not to participate in the space with the Tematica Select List as there were some bright spots below that headline miss.

Almost across the board, all retail categories were either essentially flat or down in May compared to April. The exception? Nonstore retail sales, clothing, and furniture — and nonstore obviously mostly comprised of online retailers since the Sears catalog isn’t in the mailbox too often these days. Comparing May 2017 retail sales to year-ago levels offers a different picture – nearly all categories were up with a couple of exceptions, the most notable being department stores. Again, more confirmation to the “why” behind recent news from mainstays of U.S. mall retailers like Macy’s (M), Michael Kors (KORS), Gymboree Corp. (GYMB) and Sears (SHLD).

Some interesting callouts from the report include that year over year, nonstore retail sales rose 10.2% percent, which brings the trailing 3-month year over year comparison for the category to 11.4%. This data simply confirms the continued shift toward digital commerce that is part of our Connected Society investing theme and is a big positive for our positions in Amazon (AMZN), Alphabet (GOOGL) and United Parcel Service (UPS).

We only see this shift to digital accelerating even more as we head into Back to School shopping season in the coming weeks and before too long the year-end holiday shopping season. While it is way early for a guesstimate on year-end holiday spending, eMarketer has published its view on Back to School spending this year and calls for it to grow 4 percent year over year to $857.2 billion. If that forecast holds, it will mean Back to School spending will account for roughly 17 percent of eMarketer’s 2017 retail sales forecast for all of 2017.

Not ones to be satiated with just the headlines, digging into the report we find more confirmation for our Connected Society investing theme – eMarketer sees e-commerce related Back to School shopping growing far faster, increasing 14.8% to $74.03 billion in 2017. As we like to say, perspective and context are essential, and in this case, should that e-commerce forecast hold it would mean Back to School e-commerce sales would account for 8.6% of total retail sales (online and offline) for the period, up from 7.8% last year.

 

The Connected Society Won’t Be the Only Theme In Play for Back to School Shopping

Given the last several monthly retail sales reports, as well as the increasing debt load carried by consumers, we strongly suspect our Cash-strapped Consumer theme will also be at play this Back to School shopping season, just like it was last year. In its 2016 findings, the National Retail Federation found that “48% of surveyed parents said they were influenced by coupons, up five percentage points from the prior year, while others said they planned to take advantage of in-store promotions and advertising inserts, and 53% said they would head to discount stores to finish prepping for the new school year.”

With consumer credit card debt topping $1 trillion, consumers are likely to once again use coupons, shop sales and hunt for deals, and that bodes very well for the shift to digital shopping. With Amazon increasingly becoming the go-to destination for accessories, books and video, computers and electronics, office equipment, sporting goods and increasingly apparel, we see it continuing to gain wallet share over the coming months.

 

Food with Integrity Theme Seen in Retail Sales Report As Well

Getting back to the May Retail Sales report, another positive was the 2.2% year on year increase in grocery stores compared to data published by the National Restaurant Association that paints a rather difficult environment for restaurant companies. The latest BlackBox snapshot report, which is based on weekly sales data from over 27,000 restaurant units, and 155 brands) found May was another disappointing month for chain restaurants across the board. Per the report, May same-store sales were down -1.1% and traffic dropped by 3.0% in May. With that in mind, we’d mention that last night Cheesecake Factory (CAKE) lowered its Q2 same restaurant comp guidance to down approximately -1%. This is a reduction from prior guidance of between 1% and 2%.

Stepping back and putting these datasets together, we continue to feel very good about our position in Food with Integrity company Amplify Snacks (BETR), as well as spice maker McCormicks & Co (MKS) as more people are eating at home, shopping either at grocery stores or online via Amazon Fresh and other grocery services. Paired with the shifting consumer preference for “better for you” snacks and food paves the way for Amplify as it broadens its product offering and expands its reach past the United States. As we shared in yesterday’s weekly update, United Natural Foods (UNFI) should also be enjoying this wave, but the company recently lowered its revenue guidance, so we’re putting UNFI under the microscope as we speak and we could very well be shifting our capital soon.

 

May Data From ADP and Challenger Offer Confirmation for Several Tematica Select List Positions

May Data From ADP and Challenger Offer Confirmation for Several Tematica Select List Positions

This morning we received the Challenger Job Cuts Report as well as ADP’s view on May job creation for the private sector. While ADP’s take that 253,000 jobs were created during the month, a nice boost from April and more in line with 1Q 2017 levels, we were reminded that all is not peachy keen with Challenger’s May findings. That report showed just under 52,000 jobs were cut during the month, a large step up from 36,600 in April, with the bulk of the increase due unsurprisingly to retail and auto companies.

As Challenger noted in the report, nearly 40% of the May layoffs were due to Ford (F), but the balance was wide across the retail landscape with big cuts at Macy’s (M), The Limited, Sears (SHLD), JC Penney (JCP) and Lowe’s (LOW) as well as others like Hhgregg and Wet Seal that have announced bankruptcy. In total, retailers continued to announce the most job cuts this year with just under 56,000 for the first five months of 2017. With yesterday’s news that Michael Kors (KORS) will shut 100 full-price retail locations over the next two years, we continue to see more pain ahead at the mall and fewer retail jobs to be had.

Sticking with the Challenger report, one of the items that jumped out to us was the call out that,

“Grocery stores are no longer immune from online shopping. Meal delivery services and Amazon are competing with traditional grocers, and Amazon announced it is opening its first ever brick-and mortar store in Seattle. Amazon Go, which mixes online technology and the in-store experience, is something to keep an eye on since it may potentially change the grocery store shopping experience considerably, “

 

In our view, this means the creative destruction that has plagued print media and retail brought on by Amazon (AMZN) is set to disrupt yet another industry, and it’s one of the reasons we’ve opted out of both grocery and retail stocks. The likely question on subscriber minds is what does this mean for our Amplify Snack Brands (BETR) position? In our view, we see little threat to Amplify’s business; if anything we see it’s mix of shipments skewing more toward online over time. Not a bad thing from a cost perspective. We’d also note that United Natural Foods (UNFI) is a partner with Amazon as well.

  • Our price target on Amazon (AMZN) remains $1,100 and offers more than 10% upside from current levels.
  • Amplify Snack Brands (BETR) has an $11 price target and is a Buy at current levels.
  • Our target on United Natual Foods (UNFI) is $65, and the recent pullback over the last six weeks enhances the long-term upside to be had.

We’d also note comments from Chipotle Mexican Grill (CMG) that its recent cybersecurity attack hit most Chipotle restaurants allowing hackers to steal credit card information from customers. In a recent blog post, Chipotle copped to the fact the malware that it was hit with infected cash registers, capturing information stored on the magnetic strip on credit cards. Chipotle said that “track data” sometimes includes the cardholder’s name, card number, expiration date and internal verification code. We see this as another reminder of the down side of what we call both our increasingly connected society and the shift toward cashless consumption. It also serves as a reminder of the long-tail demand associated with cyber security, and a nice confirmation point for the position PureFunds ISE Cyber Security ETF (HACK) shares on the Tematica Select List.

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

 

Tematica Chief Investment Officer Chris Versace Joins Cheddar to Discuss Chipotle’s Comeback Story

Tematica Chief Investment Officer Chris Versace Joins Cheddar to Discuss Chipotle’s Comeback Story

With the Burrito chain’s health scare firmly in the rearview mirror, the question still remains if this Foods with Integrity investment theme company can make the full comeback and overcome a new set of hurdles that sit in front of them.

CLICK HERE TO WATCH (forward to the 38 min mark): http://www.cheddar.com/videos/147086
WEEKLY ISSUE: Earnings and Washington Drama Take Center Stage

WEEKLY ISSUE: Earnings and Washington Drama Take Center Stage

In this Week’s Issue:

  • No Real Shock in AT&T’s (T) Earnings, However, Some of the Details Have Us Downgrading Dycom (DY) from a “Buy” to a “Hold”
  • What We’re Expecting Later This Week in Earnings Reports from Amazon (AMZN), Alphabet (GOOGL) and Starbucks (SBUX)
  • Developments in Our Positions in DIS, HACK, IFF, BETR

 

With the pace of corporate earnings picking up this week, we have a lot to cover so we’ll keep our opening comments rather brief.

You’ve likely noticed the strong rise to the market this week, following the initial round of French elections. That euphoria, however, could be short-lived as the market’s focus returns to earnings and the unfolding drama in Washington. While the earnings reports we’ve received thus far have been encouraging, in sifting between the headlines there are some reasons to be concerned and as we get the bulk of this week’s reports today and tomorrow, we suspect more concerns will bubble to the top.

On the political front, there is the risk of a federal government shutdown (low probability in our opinion), the renewed GOP effort on healthcare reform and now  Trump’s tax proposal. To us, the combination of earnings and Washington happenings are likely to cause some renewed uncertainty in the market, which could lead to some giveback in its recent gains. Yes, we know new records were set in the Dow Jones Industrial Average and the Nasdaq Composite Index, but in our view that only means stretched market valuation are even more so. Given the findings of the Bank of American Merrill Lynch institutional money manager survey we shared in this week’s Monday Morning Kickoff that 83 percent find the stock market over-valued, we suspect that level has only ticked higher in the last few days.

We will continue to be prudent with the Tematica Select List and follow the latest thematic data points. Be sure to tune into the latest episode of the Cocktail Investing Podcast later this week, when we share a number of those data points.

Now let’s get to it…

 

No Real Shock in AT&T’s (T) Earnings, However, Some of the Details Have Us Downgrading Dycom (DY) from a “Buy” to a “Hold”

 

Last night Connected Society investment theme company AT&T (T) reported 1Q 2017 results that met bottom line expectations but missed on revenue for the quarter. With our underlying investment thesis intact — the transformation of the company into a mobile content player from simply a wireless services player — despite the wireless led revenue shortfall in the quarter, we will continue to watch AT&T shares with the intention of using weakness below $40 to round out our position size as the shares settle out from last night’s earnings report.

In looking into the details of what AT&T reported, we find that for the March quarter AT&T delivered earnings $0.74 per share on revenue of $39.4 billion vs. the expected $40.5 billion. The culprit in the revenue miss was a combination of lower new equipment sales (roughly 1 million fewer units vs. a year ago), a more challenging pricing environment and a loss of 191,000 postpaid subscribers — pretty much the same issues that plagued Verizon’s (VZ) Verizon Wireless business in the March quarter. The subscriber winner appears to have been T-Mobile USA (TMUS), but we offer our view that being a winner in an increasingly commoditized and price sensitive business is not really winning long-term.

In a somewhat surprising move, AT&T has decided it will no longer give full-year revenue guidance due to the unpredictability of the mobile handset market. Given the combination of the move to no longer subsidizing mobile phone purchases and a domestic wireless market that is more tied to the phone upgrade cycle than new subscriber growth, we are not shocked that forecasting wireless handset revenue has become increasingly difficult. Offsetting the 2.8 percent drop in AT&T’s revenue year over year, the company improved its consolidated margins by 80 basis points vs. year ago levels due to automation, digitization, and network virtualization. The company targets having 55 percent of its network functions virtualized by the end of 2017, which should offer incremental margin improvement opportunities over the coming quarters.

Our thesis on the T shares has centered on the pending transformation that will occur in the business model following the merger with Time Warner (TWX), which will shift the emphasis away from the increasingly commoditized mobile service business. Even ahead of the closing of that transaction, AT&T has taken steps to position itself within the content arena with the acquisition of DirectTV and the subsequent launch of DirecTV Now. On the earnings call, these were areas of focus with AT&T commenting that it continues to expect approval for Time Warner transaction and we’ve shared the environment toward it in Washington has warmed considerably since the 2016 presidential election. We continue to expect more details in terms of guidance and synergies to be had once the transaction closes late this year.

After what some would say was a slow start, DirecTV Now — the company’s s over-the-top service that offers a wide selection of live television, premium programming and On Demand content — continued to add customers in the quarter. AT&T is looking to get a little more aggressive in the second half of 2017 with DirectTV Now, particularly with wireless bundling and we’ve already started to see new TV ads with Mark Wahlberg touting the offering. With just five months under the belt, we expect AT&T to be patient with this business, especially since it is likely to be a direct beneficiary of the Time Warner’s content library in 2018.

The bottom line is while the revenue miss for the quarter was a disappointment, following Verizon’s results it was hardly a shock to the system. The revenue miss at both companies highlights the reasons for our owning the shares very much remain intact. As we said several months ago, with AT&T’s business poised to transform over the coming quarters, its shares are likely to be rangebound until we have some clarity and understanding on the synergies to be had. That same transformation means that investors are likely to look past near-term ups and downs in the wireless business. In our view, in hindsight, AT&T’s move to snare Time Warner shows the management team is rather forward-thinking and the same can be said for its leading wireless spectrum business as it looks to bring select 5G services to market in 2018.

AT&T’s focus on bringing 5G services to market are, of course, rather positive for our Dycom (DY) shares. During 1Q 2017, AT&T spent $6 billion on capital spending and reiterated its plans to invest $22 billion in full for 2017. With that expected spending level at Dycom’s largest customer unchanged to the upside, and following the additional 5 percent move in DY shares over the last few days, we now have just 6 percent upside to our $115 price target for Dycom.

To keep our Buy rating intact on DY shares from current levels, we’d need to see upside in the shares to more than $125; at the same time we recognize that given the 33 percent move in DY shares over the last three months, they could come under pressure should the market get a little rocky this earnings season. For those reasons, we’re downgrading DY shares to a Hold. We’ll continue to evaluate our price target as we other key customers update their 2017 capital spending plans and should we get wind of an accelerating 5G deployment timetable.

  • Our price target on AT&T shares remains $45, and we intend to use near-term post-earnings weakness to add to this long-term holding.
  • Our price target on Dycom (DY) shares remains $115 for now and given just percent upside to that target we are downgrading DY shares to a Hold from Buy. 

 

What We’re Expecting Later This Week in Earnings Reports from Amazon (AMZN), Alphabet (GOOGL) and Starbucks (SBUX)

AT&T’s earnings report was just the start of what is to be a frenzied two weeks, as more than 2,000 companies report quarterly results and offer their latest outlook on what’s to come near-term. This week alone we have 40 percent of the S&P 500 reporting, and among that sea of results, we have three more Tematica Select List companies doing the same — Amazon (AMZN), Alphabet (GOOGL) and Starbucks (SBUX) — all after the market close tomorrow (Thursday, April 27).

Here’s what the market’s expecting and our pre-results commentary:

 

AMAZON (AMZN): Amazon shares have been a strong performer amid the escalating brick & mortar retail death spiral, climbing more than 20 percent thus far in 2017. That sharp move higher compared to just 6.7 percent for the S&P 500 likely means expectations are once again running high for Amazon even though consensus expectations call for EPS of $1.13 on revenue of $35.3 billion. We’ve seen this several times over the years and at times Amazon surprises Wall Street with its investment plans that tend to weigh on its outlook. As we saw last September, that mismatch tends to weigh on Amazon shares, offering a solid buying opportunity for long-term investors.

Amazon is a stock to own for the long-term given several powerful tailwinds that power its various businesses. While the right investment strategy is to use weakness to build one’s position, for subscribers who are underweight Amazon, we would suggest holding off right now from adding more shares until after the company reports.

  • For now, our price target on AMZN remains $975.

 

Alphabet (GOOGL): Over the last week, Alphabet (GOOGL) shares have climbed more than 4 percent, bringing the year to date return to more than 12 percent. As we get ready for the company’s 1Q 2017 earnings report tomorrow, let’s remember the YouTube advertising snafu it had during the quarter, which could weigh on overall results. We would advise subscribers underweight GOOGL shares to be patient as we could see better prices late this week or early next. Longer-term, with the continued move in the Connected Society investment theme that bodes well for the core Search business as well as its own shopping portal efforts plus the launching streaming TV service, dubbed YouTube TV, the company still has several multi-year tailwinds behind it. On Alphabet’s earnings call, we’ll be listening for comments on returning capital to shareholders as well as signs the new regime remains focused on margins.

  • Our price target on GOOGL shares remains $975, which offers 10 percent upside from current levels. 

 

STARBUCKS (SBUX): Over the last week or so, Starbucks (SBUX) shares have broken out of the $54-$58 trading range they have been in over the last four months. Part of that move was due to an upgrade by the research arm of Stifel, which now sees upside to $67 for SBUX shares, which compares to our long-term price target of $74. Expectations call for Starbucks to deliver EPS of $0.45 on revenue of 45.41 billion for the March quarter and for the team to guide the current quarter to EPS between $0.52-$0.59 on revenue between $5.6-$6 billion.

They key for us will be the continued expansion overseas as well as an upgrade in the company’s food efforts, which to us are likely to be key areas of focus on the earnings call following the poor reception of its Unicorn Frappuccino. Coffee prices have abated over the last several months, which could help Starbucks project some additional margin lift in the coming quarters.

  • We continue to rate SBUX shares a Buy at current levels. 

 

Developments in Our Positions in DIS, HACK, IFF, BETR

 

The Walt Disney Co (DIS): This morning we’re hearing that Disney’s ESPN network could start issuing pink slips at its flagship cable sports channel today. Several reports suggest the layoffs may be more numerous than the expected, with some 70 employees ranging from anchors, reporters, analysts and online writers losing their jobs in coming weeks. We see this as the latest move by Disney to right the cost structure in a business that is finding its way among chord-cutters and Cash-Strapped Consumers seeking more cost friendly streaming services. Disney continues to explore such options, and we suspect more developments to be had on this in the coming quarters.

With the move in Disney shares in recent weeks, our positions are up 14 percent, with another 9 percent to go to our $125 price target. With a robust movie slate over the coming months that includes Guardians of the Galaxy 2 (May 5), Pirates of the Caribbean: Dead Men Tell No Tales (May 26), Cars 3 (June 16) and Spider-Man: Homecoming (July 7), we’re reviewing potential upside to our $125 price target for DIS. 

 

PureFunds ISE Cyber Security ETF (HACK): This week we  received two quick reminders over the downside to our increasingly Connected Society that fuels ourSafety & Security investing theme and bodes well for the PureFunds ISE Cyber Security ETF (HACK) shares on the Tematica Select List. First, last night at the very end of its earnings conference call Chipotle Mexican Grill (CMG) slipped in that it had detected “unauthorized activity” on a network that supports payment processing at its restaurants. Then this morning, French presidential candidate Emmmanuel Macron’s campaign team confirmed it had been the target of at least five advanced cyberattack operations since January.

  • We continue to favor the HACK ETF as a diversified play on the ever-growing need for cyber security, which is just one aspect of our Safety & Security investing theme. 

 

International Flavors & Fragrances (IFF): During PepsiCo’s (PEP) earnings call last night the company reported higher-than-expected quarterly revenue and profit as it benefits from demand for its healthier drinks and snacks and kept a tight leash on costs. The company has said it now gets about 45 percent of its net revenue from “guilt-free” products — beverages that have fewer than 70 calories per 12 ounces and snacks that have lower amounts of salt and saturated fat.

We see that as a very favorable sign for our International Flavors & Fragrances (IFF) shares, which are up more than 8 percent since we added them, which leaves some 4 percent to our $145 price target.

  • Given the accelerating move by PepsiCo and others into health snacks and drinks, we are reviewing that $145 price target for IFF.

 

Amplify Snack Brands (BETR): As you are probably thinking, PepsiCo’s results mentioned earlier are very much in tune with our Food with Integrity investing theme as well as our decision to add Amplify Snack Brands (BETR) to the Tematica Select List last week. Over the last week, BETR shares slipped some 2 percent, but we’d remind subscribers that stocks under $10 can be volatile week to week. We continue to like Amplify’s expanding offering and footprint, and when the company reports its results we expect to hear more on those efforts.

  • We continue to rate BETR shares a Buy with an $11 price target. 
WEEKLY ISSUE: Adding 2 new positions as part of our Cashless Consumption and Food with Integrity themes

WEEKLY ISSUE: Adding 2 new positions as part of our Cashless Consumption and Food with Integrity themes

Welcome back and we hope you enjoyed any and all of the various holidays over the last ten days and didn’t gorge on chocolate and jelly beans.

Since our last issue of Tematica Investing, we’ve seen a shift in market sentiment toward the disconnect between the speed of the economy and earnings expectations, something we’ve been discussing for what seems like more than several weeks. We’ll chalk it up to the forward-looking nature of thematic investing. In our view, it’s always best to be ahead of the market and well positioned than be late and caught with your pants down.

During our downtime last week, we’ve rolled up our thematic sleeves on several companies, and today we are adding two to the Tematica Select List as part of our Cashless Consumption and Food with Integrity investing themes (details further down). As we do this, we’re mindful that 1Q 2017 earnings season is only now gearing up with more than 300 companies reporting this week, more than 975 next week and another 1,250 during the first week of May. Previously we’ve said and we continue to suspect these reports will lead to a reset in earnings expectations for the 2Q-3Q 2017 as economists reduce GDP forecasts and Trump initiatives get pushed into the back half of 2017 at best, with any likely impact not being seen until early 2018.

While that may seem like “Debbie Downer” outlook, we’re hopeful any market pullback will provide the potential to either scale into existing Tematica Select List positions at better prices or begin new ones in well-positioned companies at better prices that we’ve seen in January and February.

Finally, we’d also remind you to head to the Tematica website, Apple’s iTunes, Google Play or other podcast outlet to listen to our Cocktail Investing podcast. Recent episodes have included conversations with The Hartford Funds on its new bond ETFs, and Teucrium Trading on its commodity ETFs as well as the weekly dialog between Chris Versace, Tematica’s Chief Investment Officer, and Lenore Hawkins, Tematica’s Chief Macro Strategist. We’ll have another new episode out this week so be sure to tune in — you don’t want to miss it.

 

Brief Comments on Our Existing Positions

With two new positions on the Tematica Select List to dive into, we’ll keep our larger portfolio comments to the vast majority of positions are little changed over the last two weeks. Of course, there are some exceptions like Dycom (DY) shares, which have climbed more than 8 percent over the last week. We’re also keeping our eyes on AT&T (T) shares, which are hovering just over $40 and look rather tasty given the 4.9 percent dividend yield at current levels. We suspect that yield is bound to attract investors should market volatility ramp over the next three earnings filled weeks.

Oh wait, we’d said we wanted to get to those two new positions… be sure to check back to the Tematica website for additional comments on Facebook (FB), Applied Materials (AMAT), Dycom (DY) and CalAmp (CAMP) and other existing positions later this week.

 

 

Adding Cashless Consumption Company USA Technologies (USAT)

Over the last few days, we’ve been digesting one of Facebook’s (FB) new moves, which is bringing digital payments to its WhatsApp app in India. From a fundamental basis, we see the shift toward digital payments expanding for a number of reasons both here at home as well as in the emerging markets. In the U.S., the proliferation of the smartphone and apps like Apple Pay (AAPL), Square (SQ) and PayPal (PYPL) as well as initiatives from American Express (AXP), Visa (V), MasterCard (MA) and Verifone (PAY), is fostering mobile payment adoption. Recently Chris Versace used Apple Pay to pay for gas at an Exxon Mobil (XOM) station.

We see this as a sign that more applications for mobile payments are coming beyond paying at the grocery store, like we’ve seen people do more frequently. One of the markets that is being tapped, no pun intended, is vending machines, which have already migrated from bills and coins to credit cards. One of the companies behind that shift is USA Technologies (USAT) and it is using its ePort acceptance technology to vending machines as well as kiosks, laundry, arcades and other self- serve and unattended retail applications.

All told, USA Technologies has 11,900 customers and over 500,000 point-of-sale cashless payment connections on the ePort Connect platform. In terms of its revenue stream, recurring monthly service plus transaction processing accounted for approximately 77 percent of fourth-quarter 2016 revenue. We like recurring revenue as it offers predictability as well as cash flow, which in turn tends to offer better valuation metrics. Recently, six Pepsi-licensed bottlers have agreed to bring USA’s payment solutions to 2,000 machines, enabling the firms to track the acceptance of cash, credit/debit cards and contactless payments, including mobile wallet payments such as Apple, Android and Samsung Pay. The rollout includes 1,750 of USA’s touch-screen-enabled ePort Interactive payment devices as well as 370 of its NFC-enabled G9 ePorts, for a total of 2,120 units.

What also caught our eye was that USAT’s cloud-based interactive media and content delivery management system will serve up targeted advertising to consumers visiting these vending operators, including multimedia marketing campaigns, delivery of nutritional information and sampling. This media-content business could drive incremental revenue, with potentially far higher margins compared to USAT’s reported gross margin of 29 percent.

With just four analysts covering the shares and institutional ownership near 45 percent, we suspect USAT shares remain largely undiscovered. Looking at the expectations of those four analysts, the consensus view is for revenue to grow almost 24 percent this year to $96 million before climbing to nearly $115 million in 2018. With Apple launching more banks and credit unions on Apple Pay both in and outside the U.S., as well as Alphabet (GOOGL) doing the same, odds are there is upside to be had with that 2018 revenue forecast, especially as more applications by Verifone and others are deployed. We’d note USA Technologies recently appointed a new chief financial officer, and when this happens there tends to be clearing of the decks, or as some call it, “throwing out everything and the kitchen sink,” when it comes to guidance. In our view, should this come to pass it could allow us to scale into the position at better prices.

 

 

USAT shares are trading at between 1.3x and 1.5x enterprise value to consensus 2017-18 revenue, and the balance sheet is rather clean with net cash of more than $16 million. Year to date, the shares are up modestly and well off the 52-week high of $5.81, which in our view offers an opportunity to begin building a position for the long term. We see upside to $6 over the coming quarters as more mobile payment applications are deployed and acceptance rises. Given USA’s position in self- serve retail and mobile payments, we would not be surprised if it was scooped up one day by Verifone, Par Technology (PAR) or another entity in the space.

 

The Bottomline on USAT Shares:

  • We are adding USAT shares to the Tematica Select List with a Buy rating and $6 price target.
  • Our intention is to build the position out on weakness, scaling into the shares between $3.50 and $3.85, or on signs mobile payment adoption is accelerating faster than expected.
  • We intend to be patient investors and hold the shares as mobile payment adoption grows.

 

 

BETR Shares are a Foods with Integrity Play

If you’ve wandered the aisles of your local grocery chain, odds are you’ve noticed more shelf space and end-caps increasingly giving way to natural, organic and “better for you” foods. Recent comments from Chipotle Mexican Grill (CMG) that it will shed all artificial additives and Darden Restaurants’ (DRI) Olive Garden focusing on healthier recipes echo similar moves by Panera Bread (PNRA) to offer “cleaner” food to customers.

Beverage companies ranging from Coca-Cola (KO) to PepsiCo (PEP) and Dr. Pepper Snapple (DPS) are exploring ways to reduce sugar in their carbonated beverages, and the same is happening at candy companies. We see these moves as confirming signs for our Foods with Integrity investing theme that is also powering the Tematica Select List position in United Natural Foods (UNFI).

Industry forecasts call for the global organic food and beverage market to grow to $238.4 billion by 2022, up from $89.8 billion in 2015. There are a variety of factors fueling this growth, but the two major ones are growing consumer awareness and increasing interest of large retailers. Over the last several quarters, we’ve seen Costco Wholesale (COST) and Kroger (KR), among others, increase their natural, organic and fresh food offerings. Over the last few quarters, confirming comments from Kroger included “Natural, organic and health and wellness continued to be a food megatrend,” “we continue to focus on the areas of highest growth like natural and organic products,” and“ Our natural and organic sales continue to outpace total sales growth.“

This brings us to Amplify Snacks (BETR), a company whose primary product line is SkinnyPop, a market-leading better for you (BFY) ready-to-eat popcorn brand that uses simple, allergen-free and non-GMO ingredients. Other products include Crisps Topco, Paqui, Oatmega protein snack bars and Perfect cookie products. With the Crisps Topco acquisition that closed in the third quarter of 2016, Amplify acquired a foothold into the international better-for-you snack market, while the Oatmega purchase brings the company into the $6-billion bar category in the U.S.

In terms of customers, Amplify serves the natural, grocery, mass and food service markets across the U.S., with Costco Wholesale and Wal-Mart’s (WMT) Sam’s Club accounting for 22 percent and 12 percent of sales in 2016, respectively. We’d note those percentages have fallen over the last few years from 33 percent and 22 percent as Amplify has continued to grow its revenue from $55 million in 2013 to just under $271 million in 2016.

Current consensus forecast call for Amplify to deliver revenue of $405 million this year before climbing to just under $460 million in 2018. Continued consumer adoption of better-for-you foods, growing distribution both in and outside the U.S. and new product offerings are driving revenue expectations. In 2016, Amplify’s sales in North America accounted for 85 percent of overall revenue, which reflected one quarter of Crisps Topco. Management targets launching SkinnyPop in international markets in the first half of 2017 and Crisps Topco products in the U.S. in early 2018.

 

 

Our price target for BETR shares is set at $11, which offers roughly 23 percent from current levels. The shares recently bottomed out at $7.86, 12 percent below current levels, following a modest earnings miss in the fourth quarter. Our strategy for this Foods with Integrity stock will be to use either market weakness or signs that its products are gaining acceptance and incremental distribution faster than the market expects. Should shares fall below $8.50, we’d be inclined to scale into the position given the favorable risk-to-reward dynamics.

While we don’t invest in companies simply on potential takeout speculation, given the trend of larger companies looking to tap into the growing organic/natural food market there is the possibility that Amplify is showing up on acquisition radar screens. Over the last several quarters we’ve seen

  • Hershey (HSY) acquire Krave to tap into the paleo and protein snack market,
  • Campbell Soup (CPB) bought Garden Fresh Gourmet,
  • Mondelez International (MDLZ) scooped up Enjoy Life Foods,
  • Danone (DANOY) acquired WhiteWave,
  • General Mills bought Annie’s, and
  • PepsiCo attempted to acquire Chobani Yogurt.

As Amplify continues to expand its footprint and deliver continued revenue growth, odds are it will pop up on competitor radar screens that include PepsiCo, Kellogg, General Mills, Snyder’s-Lance and other larger snack and food companies. Again, we are adding BETR shares to the portfolio given the fundamental drivers behind the business, but as investors, we certainly would not fight a premium takeout offer on the shares.

During the coming earnings season, we’ll be listening to comments on the organic, natural and better-for-you food adoption from Wal-Mart, Sprouts Farmer Markets (SFM) and Costco as well as product mix data from PepsiCo, Kellogg (K), ConAgra (CAG), General Mills (GIS) and Snyder’s-Lance (LNCE).

 

The Bottomline on Amplify (BETR) Shares:

  • We are adding BETR shares to the Tematica Select List with a Buy rating and a $11 price target.
  • We would look to scale into the position below $8.50

 

 

Shifting Consumer Preferences Favor Food with Integrity Bullets Not Restaurant Shares

Shifting Consumer Preferences Favor Food with Integrity Bullets Not Restaurant Shares

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

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

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

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

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

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

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

Quick Thoughts on Alphabet and McCormick Shares

Quick Thoughts on Alphabet and McCormick Shares

Alphabet Gets Dinged, But Is Already Responding to Advertiser Concerns

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

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

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

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

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

 

 

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

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

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

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

 

 

 

Shifting Consumer Preferences Favor Food with Integrity Bullets Not Restaurant Shares

Shifting Consumer Preferences Favor Food with Integrity Bullets Not Restaurant Shares

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

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

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

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

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

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

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

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

  • Our price target on MKC shares is $110; we’d be more inclined to scale into the shares closer to $95.
  • Our price target on IFF shares remains $145; as new data becomes available, we’ll continue to evaluate potential upside to that price target. 
Market finally catches up to reality — something we’ve warned about since the Trump Trade took off

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

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

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

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

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

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

 

 

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

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

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

 

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

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

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

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