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Hope and enthusiasm can only carry the market so high for so long

Hope and enthusiasm can only carry the market so high for so long

Waiting for the Fed’s Economic Forecast Update

What a week it’s been! We’ve received a solid February jobs report, endured a March snow storm and late last night even saw another round of would-be news on President Trump’s 2005 tax return. Those two later stories were far less newsworthy than was widely anticipated as Trump paid a 25 percent tax rate and winter storm Stella’s impact wasn’t as extreme as expected, although it did leave trading volumes rather light yesterday. They would have been so regardless, as the market is still in wait-and-see mode as it eyes today’s afternoon announcement from the Federal Reserve on interest rates.

What was once thought of as a long shot, has reversed course and picked up steam with the market now widely anticipating the Fed to modestly boost interest rates. The rate increase is expected even though, as we pointed out in this week’s Monday Morning Kickoff, the Atlanta Fed has done nothing but trim its GDP expectations for 1Q 2017 over the last few weeks. Odds are, today’s latest iteration of that GDPNow report will see a boost up from the dismal 1.2 percent reading owing to the February Employment Report, but it will be hard pressed to break past the 1.9 percent GDP print for 4Q 2016.

Keeping in mind the Fed has a knack for boosting interest rates at the wrong time, and it looks increasingly like Trump’s fiscal policies will take longer than many have expected to take hold and boost the economy, we here at Tematica will continue to tread prudently and cautiously in the near-term.

 

Hope and enthusiasm can only carry the market so high for so long.

Yes, each week we continue to see confirming data points for our 17 investment themes, which you can see in our Friday missive that is Thematic Signals, but we remain concerned over the market’s stretched valuation and the simple fact that expectations have to catch up with the current economic reality.

Now when many hear talk like that, the first reaction is to get nervous. It’s understandable, but we’re not suggesting a market correction is coming. Even though there are signs the economy has slowed, it is still growing as evidenced by the recent reports from Markit Economics and ISM. Our thinking is that a market pullback — something we define to be in the 3-6 percent range — may not be popular to all the recently returned investors, but it would take, to quote former Fed Chief Alan Greenspan, some of the “irrational exuberance” out of the market. Not a bad thing as it would allow us to revisit some thematic contenders that have moved higher and faster than they probably should over the last four and a half months.

Like Warren Buffett is often quoted saying, “Price is what you pay, value is what you get.”

We couldn’t agree more.

Aside from the now largely expected interest rate increase itself, let’s remember the Fed tends to be very vague in its language and the market has a habit of not really listening to what the Fed is trying to communicate. As the Fed boosts interest rates, we’re likely to get an update on its economic and inflation forecasts in its policy statements and its that language that will either soothe the market or give it some indigestion.

 

You’ve probably come to the conclusion that it’s best to stand pat for now, and we certainly agree. 

We’ve got a number of positions on the Tematica Select List that are benefitting from pronounced multi-year tailwinds, like Connected Society company Dycom Industries (DY) and the 5G deployment; Disruptive Technology plays Universal Display (OLED) and Applied Materials (AMAT); Aging of the Population and AMN Healthcare (AMN) and the PureFunds ISE Cyber Security ETF (HACK) that is part of our Safety & Security investing theme to name just a few.

Two stocks we will be watching closely are Food with Integrity United Natural Foods (UNFI), which reported good quarterly earnings last week and recently stopped out Costco Wholesale (COST) shares. Both stocks drifted lower last week, with UNFI a tad below the average cost basis of $42.95 on the Tematica Select List and Costco shares breaking through their 50-day moving average at $167.34. When we’ve seen such moves in COST shares previously, it tends to take more than a few weeks for the shares to settle out. Given our Cash-strapped Consumer investing theme and the Costco’s continued expansion, as well as announced membership price hike, that should drive membership-related profits higher.

  • We’ll continue to keep our eyes on COST for an opportunity to jump back in.

 

Ways to Get Prepared for Future Moves

Be sure to listen to the latest edition of Cocktail Investing, in which Tematica Chief Macro Strategist Lenore Hawkins and I talk with Steve Fredette of Toast, a restaurant technology company at the intersection of the Connected Societyand Asset-lite investment themes. We’ll have another episode out tomorrow that will wrap up all the key market and economic data with a special guest Jack Mohr, who up until recently worked with Jim Cramer — yes that Jim Cramer — managing his Action Alerts Portfolio.

Also be sure to come back to Tematica Investing during the week to see our latest thoughts and comments on the economy, the market and stocks, both in and out of the Tematica Select List.

United Natural Foods Reports In-line Quarterly Results, Still Riding the Fresh & Natural Wave

United Natural Foods Reports In-line Quarterly Results, Still Riding the Fresh & Natural Wave

Last night Food with Integrity company United Natural Foods (UNFI) reported in-line quarterly earnings of $0.50 per share on revenue that rose 11.7% year over year to hit $2.29 billion. Despite that double-digit revenue growth, revenue for the quarter fell short of expectations by $50 million — not a big deal in our view, but we suspect some will look past the double-digit growth and focus on this being the second consecutive quarter where revenue fell just shy of expectations. To us that shortfall is overshadowed by the more than 16% increase in earnings before interest tax & depreciation (EBITDA) and the 12% increase in net income — we always like to see profits growing faster than revenue as it denotes margin expansion.

Given the continued deflationary environment the food and grocery industry is contending with, all in all, we were rather pleased with United Natural’s quarterly results as it continues to benefit from shifting consumers preferences and reap the benefits from cost savings initiatives and synergies with companies acquired in the last year. With those deflationary pressures poised to continue, the company is undertaking another initiative that will shed roughly 265 jobs in the current quarter, with benefits to be had in following ones. This latest effort is expected to result in pre-tax charges of $3.5-$4 million.

Even after this new initiative the company guided 2017 in line with expectations:

  • fiscal 2017 revenue between $9.38-$9.46 billion, an increase of approximately 10.7%-11.7% over fiscal 2016, and consensus expectations of $9.4 billion;
  • adjusted EPS in the range of $2.53 to $2.58 vs. the current consensus forecast of $2.54 per share.

Stepping back, we continue to see consumer shifting preferences to fresh, organic and natural products. Last week, grocery chain Kroger (KR) commented that it continues to “focus on the areas of highest growth like natural and organic products” and we’ve seen companies like Costco Wholesale (COST) continue to expand their fresh and natural offering to boost basket size and shrink time between visits. Against that backdrop that is not occurring at just Kroger and Costco, we continue to like United Natural’s strategy to expand its footprint, including its UNFI Next program that looks for new products and emerging brands and its e-commerce platform.

  • Our price target on UNFI shares remains $60, which offers more than 30% upside from current levels. As such we are keeping our Buy rating intact.

 

 

The Future of Snack Foods is… Bugs?

The Future of Snack Foods is… Bugs?

The shifting consumer preference toward food that is good for you (protein, natural, organic and others) has resulted in some interesting corporate moves including Hershey’s purchase of Krave and subsequent  dried meat bars. Some companies, like PepsiCo prefer to be more forward thinking and therefore monitor potential new snacks and ingredients. While crickets based protein bars from Exo are already available, we question the degree to which bug protein will make it at least in the western world.

“Bug-related stuff is big,” says Nooyi, speaking at the Net/Net event at the New York Stock Exchange.The multinational food-and-beverage behemoth Pepsi spends considerable time and resources predicting what consumers will want to snack on in the future so that it can be the provider of those snacks.Adam Jeffery | CNBCIndra Nooyi, CEO of PepsiCo.

What customers will want, soon enough, is cheap sources of protein.

“One year, three year, five year, ten year: we have different people looking at different horizons, because if you believe in the ten year horizons and what we are seeing, some of the weirdest food and beverage habits are showing up,” says Nooyi. Even if consumers are not ready for those trends now, Pepsi needs to be prepared.

Source: Pepsi CEO names the snack food of the future: bugs

With Earnings Cracks Appearing in Market, We’ll Stay on the Sidelines

With Earnings Cracks Appearing in Market, We’ll Stay on the Sidelines

UPDATE: 11:00am Wednesday October 12, 2016

Earlier today, we sent out our weekly issue of Tematica Investing. (The original post is below).

We always love hearing from our subscribers when they tell us how much they enjoy Tematica Investing not only for its insightful investing thoughts and recommendations but because we try to keep it fun as well.

Believe it or not, we also like it when a subscriber drops us a line to point out something we missed — sometimes it’s a more than useful data point and sometimes it’s pointing out that a position was stopped out.

The latter happened today thanks to one of our loyal subscribers reminded us that AT&T (T) shares crossed through our $39 stop loss on Monday, which closed out the position with an 18 percent return. 

The bittersweet issue, however, is we were stopped out on the very day when owning the shares at the end of the day qualified us for the next $0.48 per share dividend payment on November 1.

If you didn’t set the price limit — well, then I guess it’s one of those cases like back in elementary school when you didn’t do your homework, but end up having a substitute teacher anyway. You live to see another day.

Here’s the thing…

Over the last several weeks, AT&T shares have drifted lower falling more than 10 percent in the process. We continue to like the company’s sticky and inelastic mobile business as well as its enviable dividend yield that currently sits just under 5 percent as it continues to invest in its soon to be released DirectTV Now video streaming service. In our view, that service puts AT&T in a much firmer competitive stance to battle Comcast (CMCSA) and Verizon (VZ).

Moreover, on the back of several negative earnings pre-announcements from Honeywell (HON), Dover Corp. (DOV), Illumina (ILMN) and Fortinet (FTNT) and Alcoa’s (AA) revenue shortfall and revised lower outlook, we are using the current weakness in AT&T shares to scale back into what we see as safer harbor as earnings season kicks into gear.

Our price target on the shares remains $44. We are holding off issuing a protective stop loss as we will use market volatility this earnings season to improve our cost basis should the opportunity arise.

I apologize for the confusion on this, and more importantly for the implications on returns.  But my stance is, and will always be, that we own up to our mistakes and set the record straight.

Thank you for your business, and let us know if you have any questions.

Chris Versace
Chief Investment Officer
Tematica Research, LLC

ORIGINAL POST: 10:00am Wednesday October 12, 2016

Well, how many more ways can we talk about the disparity between market valuations and earnings reality?

As is so often the case, a picture is worth 1,000 words (In our case, probably 25,000 words) and today the following image floated across our Twitter feed, which pretty much summed it all up:

beergoggles

Thanks to Danielle DiMartino Booth (@DiMartinoBooth ) for sharing it, and you can read more in her post on LinkedIn by clicking here.

 

This week’s issue of Tematica Investing includes:

  • A tough week of negative earnings pre-announcements for the stock market so far, we dig into which companies are finally coming to grips with reality and what it means for our investment themes and holdings.  Read More >>
  • With September quarter earnings just getting started, we are inclined to keep our inverse ETF positions intact to hedge against what we see as a volatile market ahead. Read More >>
  • To get ready for the earnings onslaught, we’re publishing the earnings calendar over the next few weeks for the Tematica Investing Select List to give you a heads-up as to which firms are announcing when. See Calendar >> 
  • Updates, Updates, Updates — AT&T (T), Costco Wholesale (COST), Sherwin Williams (SHW) and Universal Display (OLED)

 

You can click below to download the full report.
downalod-pdf

 

When the market presents opportunity, we take it

When the market presents opportunity, we take it

To be successful in the markets, you often have to maintain the perspective that NFL commentators and analysts talk about on Sunday afternoons:  “take what the defense is giving you.”As we’ve turned the page from September and the third quarter of the year, there are certainly ample obstacles ahead: the presidential election, OPEC production, any potential move on Fed rates, aggressive earnings expectations — just to name a few.
It means we will continue to be prudent with the Tematica Investing Select List as we see to maximize returns ahead while minimizing risk. And if there was an underlying theme to this week’s issue — not an investing theme, but a theme in its truest sense — it would be “opportunity”.  Opportunity to shore up a few things ahead of the third quarter earnings storm that comes at us in full gale next week, and opportunity to make a key addition.

This week’s issue of Tematica Investing includes:

Taking another run at this Cash-strapped Consumer thematic position

Taking another run at this Cash-strapped Consumer thematic position

Including today, there are just three trading sessions left for the week, for the month of September and for the third quarter of 2016 — that will make for a neat and tidy wrap-up to things come Friday evening!

Last week, of course, we had the Fed standing firm with interest rates, which the market gladly welcomed with open arms. Then this week, the headlines have been dominated by Monday’s presidential debate, which according to Nielsen, averaged 84 million TV viewers — the most in the history of the debates. Add in the many millions who likely watched it via live streams on the web and you get a pretty hefty number.

Who won the debate?

That’s not a call for us to make. To some extent America won with so many people at least engaged in the process. We could question the motivations of many for tuning in — and frankly if America is really winning at all with this election — but at the very least an informed electorate is a better electorate and that is a good thing.

The reality is, it is going to be a close election, which means the markets will likely continue to move sideways until after the votes are tallied in November and Wall Street and the boardrooms across the country have a better handle on what the landscape will be for the next four years.

That doesn’t mean we’re standing still. 

This week’s issue of Tematica Investing includes:

  • HEADING BACK TO THE WAREHOUSE: After being stopped out of our position in Costco (COST) earlier in the year, we’re taking another run at this Cash-strapped Consumer play, adding it back onto the Tematica Select List. Read More >>
  • THERE IS SUCH A THING AS A BAD WIN: Nike posted results last night, and while results beat EPS expectations, it wasn’t a pretty win. The market reacted immediately, both when results were posted, and then again after the company earnings call. We have a plan for what we’re going to do with our position in this Rise & Fall of the Middle-Class position. Read More >>
  • END OF THE QUARTER MEANS OUR WORKLOAD RAMPS UP: while things don’t pick-up full bore until next week, the flow of earnings announcements have already started. We’re getting prepped for CalAmp’searnings, while also covering updates on SHW, WHR, T and DY. And lastly, in the quiet before the storm, we dig into one of the names on our Contender List that could soon be coming off the bench, Universal Display (OLED). Read More >>

 

You can click below to download the full report.

downalod-pdf

As we’re waitin on Yellen, we review thematic data points

As we’re waitin on Yellen, we review thematic data points

While the decision appears to be a foregone conclusion, given all the data we’ve reviewed and re-reviewed here at Tematica Research the past few weeks, the reality is we’re all waiting in anticipation for Janet Yellen and crew to announce this afternoon what we already know — that the Fed will once again do nothing and leave interest rates remained unchanged.

Of course, the devil will be in the details, and the wording of the statement could lead to a ruckus in the market should the Fed be less than clear… again.

Yes, folks, the language in this afternoon’s official statement will be overly prodded, poked and dissected to determine what may come next, and unfortunately, as so often is the case lately, a jumpy Wall Street could very well fail to read between the lines and comprehend what Yellen and the other “Fed heads” are really communicating.

Ahead of that event, we are staying pat with the Tematica Investing Select List… for now. We’ll let the dust settle, and then decide what moves we want to make.

In today’s issue (a comparably short one to last week’s MONSTER 18-pager!) we recap favorable data points that add credence to our decisions to scale into several thematic positions last week. Later this week, we get more data points to watch in the form August Existing Home Sales and quarterly earnings from Finish Line (FINL), and so we dig into those a bit and dissect what we’ll be looking for.
You can click below to download the full report.downalod-pdf

Using Market Flip Flops to Scale Several Positions and Add a New One As Well

Using Market Flip Flops to Scale Several Positions and Add a New One As Well

A hearty welcome back!

The stock market is moving a little faster and more volatile over the last few days, far different than what we saw through most of the summer. Inside this issue we recap the drivers for the flip-flopping — it’s a technical term, trust us 😉 — of the market and what’s  likely to be on investor radars next.

While some see pain as the market has fallen 2.5 to 2.7 percent depending on the index one is looking at, we see better prices for recently added positions like Sherwin Williams (SHW) and United Natural Foods (UNFI)even though their thematic tailwinds continue to blow. We’re doubling down on these two names and another — details inside.

We’re issuing a Buy rating on speciality contractor Dycom Industries (DY)and placing it on the Tematica Select List with a $115 price target, which offers more than 35% upside from last night’s closing price. While you may read speciality contractor and have a preconceived thought or two, Dycom is a crucial part in working with AT&T (T), Verizon (VZ) and Comcast (CMCSA)in expanding their existing networks and deploying the next and future generations. That makes Dycom a Connected Society contractor in our eyes. More details inside.

Any normal issue would not be complete without some updates on existing Tematica Select List positions. Because we’ve been away, we’ve got more than a few and that’s pushing this issue to the max (or at least 18 pages). All the latest and greatest, is just a click away.

You can click below to download the full report.

downalod-pdf

As food prices drop we make a move on a Foods with Integrity thematic opportunity

As food prices drop we make a move on a Foods with Integrity thematic opportunity

In this week’s edition of Tematica Investing:

  • Download Tematica InvestingWe are issuing a Buy on shares of United Natural Foods (UNFI) as part of our Food with Integrity investing theme. Our price target is $65, which offers more than 35 percent upside. We intend to build this position size over time and as such we are holding off issuing a stop loss recommendation at this time.  Read full report >>
  • We’ve got several Tematica Select List updates to share, including
    • AT&T (T)
    • CalAmp Corp. (CAMP)
    • Nike (NKE)
    • Under Armour (UA)
    • And several others. Read More . . .
  • Heads up! Just as you’ll be coasting into the last days of summer, after adding 5 new positions in as many weeks we too will be taking some time off to recharge our batteries before the final push for 2016 begins. So, there will not be an issue on Wednesday, September 7. Your next issue of Tematica Investing will be on September 14. 

 

You can click below to download the full report.

 

downalod-pdf

When it comes to Fitbit (FIT), is now the right time to jump in?

When it comes to Fitbit (FIT), is now the right time to jump in?

If you saw a great product on sale at the store, you would be excited, maybe even ecstatic, if it was one you had been looking at for some time. The same is true with stocks!

We all tend to get caught up in the emotional response of the market moving lower, which usually is viewed as a bad thing, rather than an OPPORTUNITY to buy shares at an even better price. When viewed through that lens, who doesn’t love it when stocks go on sale… so long as the fundamentals and business drivers remain intact.

Here’s a great example — at the Consumer Electronics Show held earlier this month, Fitbit ([stock_quote symbol=”FIT”]) announced its first smart watch, dubbed the Blaze  . . .

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