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COCKTAIL INVESTING: Apple’s Lame Event, Euro Junk Bonds, Cryptocurrencies, NFL Comes to Amazon

COCKTAIL INVESTING: Apple’s Lame Event, Euro Junk Bonds, Cryptocurrencies, NFL Comes to Amazon

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This week, Tematica’s investing mixologists Chris Versace and Lenore Hawkins start off the podcast talking about one of the lamest presentations they’ve seen in a number of years. Yes, we’re talking about Apple’s September special event held on September 12th. Rather than spoil it for you here, all we’ll say is we knew the event was headed downhill fast when the first thing mentioned about the new iPhone was the pretty colors it would come in. We share our takeaways and insights for that event as well as for the latest economic data and thematic signals that are the backbone of our thematic investing lens.

  • We share why we were nonplussed with Apple’s new iPhones and other product updates as well as its one true surprise to come – wireless charging. Essentially, we see these efforts as just shoring up Apple’s market position rather than breaking new ground. Looking at the Apple ecosystem, however, we see several companies that are poised to benefit from technologies being deployed in the new Apple Watch as well as the iPhone X. Chris shares his view on which companies are poised to benefit as these new products hit shelves in the coming weeks.
  • Much like Apple’s shares that were climbing in anticipation of this week’s reveal, the overall stock market has continued to move higher despite growing number of warning signs. We shared several market unnerving items earlier in the week and now we’ve added Euro junk bond yields falling below that for U.S Treasuries to the list. Yep, you heard us right, and Lenore explains why this is important.
  • With football season underway (that’s American football, Lenore), we’re already seeing broadcast viewership dropping like a bad fumble compared to last year. We explain how our Connected Society theme is at work, and what it means for broadcast networks as Facebook, Amazon and Google focus on content, including live sports.
  • We’ve been vocal about the “death of the mall,” but team Tematica was pleasantly surprised by Nordstrom’s new strategy to leverage services to fend off Amazon and others. Listen to our take on what this means and some speculation on our part as to what may follow.
  • Cryptocurrencies like Bitcoin are making headlines, but why is JPMorgan Chase CEO Jamie Dimon likening Bitcoin to tulip bulbs? Lenore digs into this and shares why we are just in the early innings of cryptocurrencies.
  • The latest JOLTS provided ample confirmation for our Tooling & Retooling investment theme. Barring some trade and immigration reform, the report also signaled the speed of the domestic economy is likely capped. We explain why that is as well as why the August PPI reading isn’t helping the Fed meet its inflation target.
  • Over the coming week, we’ll be eyeing several key economic reports, including August Retail Sales, as well as the Fed’s September FOMC meeting on September 20. We expect Hurricane Harvey to show some disruption in the August Retail Sales Report, but it’s the combined impact of Harvey and Irma that might have a more cautious tone coming out of the Fed next week.

 

Companies mentioned on this podcast
  • Alibaba (BABA)
  • Alphabet (GOOGL)
  • Amazon (AMZN)
  • Apple (AAPL)
  • Applied Materials (AMAT)
  • AT&T (T)
  • AXT Inc. (AXTI)
  • Comcast (CMCSA)
  • Costco Wholesale (COST)
  • CVS Health (CVS)
  • Equifax (EFX)
  • Facebook (FB)
  • Hulu
  • JPMorgan Chase (JPM)
  • Netflix (NFLX)
  • Nordstrom (JWN)
  • Qorvo (QRVO)
  • Skyworks Solutions (SWKS)
  • Universal Display (OLED)

 

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TV viewership for NFL games falls further, but Amazon disruption lies ahead

TV viewership for NFL games falls further, but Amazon disruption lies ahead

 

As we’ve entered the latest season, NFL ratings have continued to fall. While some may attribute it to concussion-related concerns, we see the loss in viewers stemming from the need to compete with consumers being able to watch what they want, when they want, where they want. In other words, it’s the confluence of our Connected Society and Content is King investment theme in a nutshell.

To date, robust streaming solutions have lagged for live sporting events and live news coverage, but that is changings. Last year, Twitter (TWTR) streamed Thursday night NFL games, and this year Amazon is taking over those reigns beginning September 28th.

Given its broader reach, we suspect Amazon (AMZN) will have far greater success with the venture. The larger question, however, is what does all of this mean for TV networks, sports league broadcast rights and advertising dollars?  To date, the networks have been able to weather the shift in advertising dollars away from “old” media, but that could be changing as live sports and live news rides the intersection of our Content is King and Connected Society themes.

On a side note, we here at Tematica always love when something is done in a fun way with a wink and smile. That has us thoroughly enjoying Amazon’s ad for its upcoming streaming efforts. Cue the giggles!

 

The NFL season opener, which saw the Kansas City Chiefs upset the defending Super Bowl champion New England Patriots, earned an overnight 14.6 rating among households. That’s down from the 16.5 rating for the comparable outing last year, when the Denver Broncos battled the Carolina Panthers in a Super Bowl L rematch. The 25 share for Thursday’s game was also down from last year’s 29 share.

According to NBC’s total audience delivery metric, 22.2 million viewers, down from 2016’s haul of 25.4 million viewers, but up from Sunday Night Football’s average for the 2016 season (20.5 million). (While airing on Thursday, the NFL kickoff game is always presented as Sunday Night Football. Thursday Night Football premieres next week on CBS and NFL Network.)

This is the second year in a row the first NFL game of the season has brought diminishing returns.

Amazon is launching its first-ever livestream of an NFL game on Thursday, Sept. 28.To get you very — or at least somewhat — excited about it, Amazon has just released an ad that forced involuntary giggles to emerge through the gaps in my teeth.

Source: Amazon amusingly hypes Bears vs. Packers livestream – CNET

WEEKLY ISSUE: Thematic Tailwinds Blow Strong, Even as Market Fundamentals Bring Concern

WEEKLY ISSUE: Thematic Tailwinds Blow Strong, Even as Market Fundamentals Bring Concern

Even though our concerns over the underlying fundamentals of the market remain — especially amidst this most recent rebound — thematic tailwinds continue to propel several of our positions on the Tematica Select List, particularly those tailwinds for the Cash-Strapped Consumer and Connected Society investment themes.

 

The week started off in rebound mode for the stock market. The damage from Hurricane Irma, while severe with several million people still without power, was far less than the devastation many forecaster models had been predicting. That sigh of relief sent stocks climbing on Monday and put the major market indices back to new record highs. While many likely cheered that rebound — especially those investors that have only recently returned to the market — several underlying dynamics remain, which could make for potential trouble in the coming weeks.

Those concerns are the same items we recapped earlier this week as part of our thought process behind Goldman Sachs (GS) CEO Lloyd Blankfein sharing the current market environment has him “unnerved”. Unfortunately, these items did not fade with the passing of Irma, nor are they likely to and in the case of market’s stretched valuation, the rebound is only exacerbating things further. Furthermore, we have yet to see any markedly downward revisions into GDP forecasts for the current quarter, despite the tens of billions in hurricane damages and business interruptions. Hardly surprising, given the regional Federal Reserve banks adjust their forecasts to published economic data and the impact of the two storms has yet to turn up in the data. But it will in the coming weeks, just the way it did in the August auto & truck data, and will in the August Retail Sales data out later this week.

From the perspective of the Tematica Select List, we continue to see the August Retail Sales report putting some much-needed perspective around Costco Wholesale (COST) shares given the simply stellar monthly comparable sales figures the company has been delivering.

  • We continue to rate Costco Wholesale (COST) shares a Buy with a $190 price target.

 

When Market Concerns Arise, Relying on a Thematic Approach is Even More Crucial

Amid the noise in that retail sales data, we suspect our Connected Society theme and our Amazon (AMZN) shares will be share gainers from the recent Back to School shopping season. That’s also a positive for the position in United Parcel Service (UPS) that is on the Tematica Select List, and we see those shares being strong performers once again in the upcoming holiday shopping season that increasingly includes Halloween.

As crazy as it may seem, in 2016 American spent roughly $8.4 billion on Halloween. We’re already seeing rows and rows of Halloween candy line our grocery stores, even though soda manufacturers like Coca-Cola (KO) and PepsiCo (PEP), and now sports drinks companies, are looking to reduce sugar content in their offerings. We see the unsweetening of the beverage category continuing to benefit our position in International Flavors & Fragrances (IFF) as manufacturers look to replace that oh so yummy sugar taste with other appealing, yet healthier, solutions. Should the move to limit sugar spill over into candy and other confections, it would be another shot in the arm for IFF shares and potentially McCormick & Co. (MKC) as well. We’ll be talking more on this during this week’s Cocktail Investing Podcast.

 

  • We continue to rate shares of Amazon (AMZN) a Buy at current levels, and our price target remains $1,150.
  • United Parcel Service (UPS) shares, up more than 14% since being added to the Tematica Select List, are now less than a handful of dollars away from our $122 price target. As such, we rate UPS shares a Hold at current levels. As a reminder, that’s a true Hold, not Wall Street speak to exit the shares.
  • The same can be said with International Flavors & Fragrances (IFF) shares, which are up nearly 17% on a blended basis. Our price target on IFF shares remains $145, however, we are revisiting this target with an upward bias.
  • Our price target on McCormick & Co. (MKC) shares remains $110.

 

 

Looking Ahead to the End of the 3rd Quarter

When we exit this week, we will have two weeks left, not only in September, but in 3Q 2017 as well. It means in roughly a month’s time, we will once again be back in the quarterly earnings deluge. Given what I discussed above, I’ll be watching and listening as companies issue business updates over the next few weeks due in part to Harvey and Irma, and putting it into perspective for Tematica Select List positions. While the debt ceiling conversation has been kicked down the road until December, next week’s Federal Reserve monetary policy meeting, which is likely to leave interest rates unchanged, should clue us a bit more into the Fed’s balance sheet unwinding timetable.

Finally, while you start preparing your holiday shopping lists, I expect the political battles in Washington will once again flare up as the 2017 election season kicks into gear, just as Team Trump looks to make its case, hopefully with some concrete details, for tax reform. Giving a shot in the arm to potential political uncertainty, this morning North Korea showed trademark defiance over new U.N. sanctions imposed after its sixth and largest nuclear test.

The bottom line is we’ve seen volatility return to the market in September, and there are reasons to think we will see more of it before we enter 4Q 2017 in just a few weeks. While we continue to turn over new candidates for the Tematica Select List, we’ll continue to be patient until those potential positions have the right mix between potential upside vs. downside. Like always, our thematic lens will continue to be our North Star.

 

 

The Silver Lining in Apple’s Otherwise Lame Special Event

Some quick words on Apple’s (AAPL) special event yesterday – it was lame!

As we feared, not only did the company’s latest products show off iterative at best features, the presentation was less than enthusiastic, as was the reception by attendees at the new Steve Jobs Theater. Candidly when Apple began talking about its new retail footprint and then started the iPhone conversation with new colors, we had a feeling it was all about to go downhill. And we were right. What ensued was a noticeable groan be it for the lack of compelling new features or the fact that Apple’s “one more thing” – the iPhone X – and its $1,000 price point won’t begin shipping until early November, far later than anyone had expected.

While we missed the move in Apple shares in recent months, we see yesterday’s underwhelming event serving as a reminder that at least for now, Apple’s business remains reliant on the slower growing smartphone market. Odds are Apple will continue to gain incremental share and generate significant cash, but the opportunity for real growth from here hinges on either a new business category or a new must-have product from an existing one. As we shared earlier this week, neither of those appears to be on the near-term horizon. Given several thematic tailwinds that power its various businesses, we’ll continue to look for an opportune entry point, but for now, it looks like the shares will fall victim to “buy the rumor, sell the news.”

 

Now for the better news…

Just because growth is lacking at Apple, there were several announcements yesterday that bode rather well when it comes to growth for Universal Display (OLED) and AXT Inc. (AXTI). Regarding Universal Display, Apple did announce it is adopting organic light emitting diode displays in the iPhone X with its Super Retina Display, however, again, that product is not set to ship until early November. This likely means a modest push out in expectations. We see that, however, as a modest bump in the road for the capacity constrained organic light emitting diode industry that is hog tied due to demand from not only Apple but other smartphone vendors as well as other applications (TVs, wearables, interior automotive lighting). If Apple follows its historical pattern, and we think it will, we expect the Super Retina Display to make its way down the lineup into other iPhone models as well as those for iPads as supply eases and newer iterations are introduced.

While Apple’s didn’t specifically point to a display capacity shortage as the culprit behind the later than expected ship time for the iPhone X, its timetable when paired with recent comments from Applied Materials (AMAT) certainly suggest the industry remains constrained relative to demand. Moreover, with applications such as TVs calling for larger display sizes vs. those for smartphones and wearables, the industry is likely to be constrained for some time, especially as more TV vendors look to bring more models featuring that technology to market over the coming quarters. We see that as a good problem for Applied Materials and its display equipment business. The next update from Applied will be at its 2017 Analyst Day on September 27, and we expect an upbeat tone not only for its display business but from its semiconductor capital equipment one as well.

  • Currently, Universal Display (OLED) shares are up a whopping 149% since we initiated the position in October, and in many respects, the outlook continues to brighten.
  • As we move into 4Q 2017 and with increasing clarity on the growing number of applications we will be revisiting our $135 price target, odds are with an upward bias.
  • We continue to be bullish on Applied Materials (AMAT) shares and our price target remains  $55.

 

Turning to AXT Inc (AXTI), Apple did announce it was bringing standalone wireless connectivity to its latest Apple Watch. In order for that to happen, Apple has to pack the device with cellular technology, which means RF semiconductors that are based on AXT’s compound substrates. This is one more step in the expanding array of connected devices under the Internet of Things umbrella. From our perspective, the untethering of Apple Watch from the iPhone makes this newest model the one consumers are most likely to desire. While it’s still not enough to move the needle for Apple, it does move it for AXT.

  • We will use this incremental demand to bump our price target on AXT (AXTI) shares to $11 from $10.50. The added upside keeps our Buy rating on the shares in place.

 

On a disappointing note . . .

There was no update on Apple Pay in yesterday’s event, other than how with its new iPhone X it is utilizing its new Face ID technology as part of the payment process with Apple Pay. We were hoping for a more meaningful update given our position in USA Technologies (USAT), but we’ll happily settle for the news coming out of CVS Health (CVS) that it is utilizing new vending machines at “select landmark locations to outside of its store footprint. These machines will be stocked with things like over-the-counter medications, beauty and personal care products, eye care and oral health care products, first aid items, batteries, phone chargers, earbuds, and healthy snacks and beverages. We see this as yet another expansion in the unattended retail market that hinges on cashless consumption that is enabled by USA’s products and services.

  • Our price target on shares of USA Technologies (USAT) remains $6.

 

Here’s what we’ll be watching for at today’s Apple special event

Here’s what we’ll be watching for at today’s Apple special event

Several of the Disruptive Technologies investment theme companies currently on the Tematica Select List will play a key role in the Apple Special Event scheduled for Tuesday, September 12th. In all likelihood the companies themselves will never be mentioned during the event, but with expectations once again running high ahead the next generation iPhone, here’s what we’ll be watching for as it pertains to the Tematica Select List.

 

Early this afternoon, Connected Society and smartphone reliant Apple (AAPL) will hold its next special event that is widely expected to unveil a bevy of new products, including its latest iPhone models. Much has been made over the last few days of “leaked information” over these new models as well as new iterations for Apple TV and Apple Watch, but as exciting as those other new products may be because the iPhone is the majority of Apple’s revenue and profits odds are investors will focus their attention on those new models.

While we don’t own Apple shares, and we touched on at least one of those reasons yesterday, there are several companies on the Tematica Select List that will be affected by today’s special event – Universal Display (OLED), Applied Materials (AMAT), and AXT Inc. (AXTI) as well as USA Technologies (USAT) and Nuance Communications (NUAN).

 

Universal Display (OLED) 

As subscribers should be aware, Universal Display is a Disruptive Technology investment theme company that supplies needed chemicals and intellectual property utilized in the manufacturing of organic liquid crystal displays (OLEDs). Over the last few months, there has been much talk of ramping demand in an industry that is capacity constrained as Apple begins to adopt the technology in the iPhone while other applications (other smartphone vendors, TVs, wearables and automotive interior lighting) continue to replace existing lighting and displays with OLEDs. There are now indications that Apple is likely to introduce OLEDs in its new premium iPhone, purportedly the iPhone X.

The issue, however, is that it is being reported that the manufacturing of iPhone X device is currently capped at around 10,000 units per day and may not begin shipping until next month. This could be due OLEDs supply constraints, but if this speculation over the iPhone X turns out to be true, we could see a pullback in our OLED shares, especially following the more than 18% move in the last month alone that has the shares bumping up against our $135 price target. We continue to think that as the adoption of OLEDs continues to ramp up, we will see a step-function higher in our price target for Universal Display shares, but in the near-term, our concern is that rapid climb in the share price could hit a “buy the rumor, sell the news” wall following Apple’s event. If such an outcome occurs, our view is subscribers should continue to hold OLED shares for the long-term. If the shares retreated to the $110-$115 level, which would be a sharp pullback, we would view that as another bite at the apple for subscribers that have so far held off buying OLED shares.

  • Our price target on Universal Display (OLED) shares remains $135
  • For now, subscribers that have missed out on OLED shares should look to scoop them up between $110-$115.

 

Applied Materials (OLED) 

If the supposition that Apple’s iPhone X production is capped because of capacity constraints for OLEDs, we see that being a resounding positive for shares of Disruptive Technology company Applied Materials (AMAT). As a reminder, Applied not only manufactures semiconductor capital equipment (the machines that make chips) it does the same for displays, including OLEDs. Applied has been rather frank about the robust demand for OLEDs, and it remains one of the reasons we are bullish on AMAT shares. Others include rising memory demand as well as ramping in-country semiconductor capacity in China.

  • Our price target on Applied Materials (AMAT) shares remains $55.

 

AXT Inc. (AXTI)

We would be surprised to hear Apple talk about 5G wireless technology, which would require several additional layers of RF semiconductors, largely because most wireless carriers like AT&T (T), Verizon (VZ) and T-Mobile USA (TMUS) are still testing the technology. If, however, the Apple Watch is updated to include LTE wireless technology, that would be a source of new demand for RF semiconductors, like those from Skyworks Solutions (SWKS) and Qorvo (QRVO). In turn, that means those companies, as well as other RF semiconductor suppliers of Apple’s, would require additional compound semiconductor substrates from AXT Inc. (AXTI). While we still see the eventual deployment of 5G networks that will drive incremental RF semiconductor demand as the key driver longer-term for AXT’s business, incremental demand from devices like Apple Watch is certainly welcome.

  • Our price target on AXT Inc. (AXTI) shares remains $10.50

 

USA Technologies (USAT) & Nuance Comm. (NUAN)

Finally, during today’s presentations, we’ll also be watching and listening for incremental news on USA Technologies (USAT), an Apple Pay partner, as well as Nuance Communications (NUAN). In iOS 11, Apple will continue to expand the services offered through Apple Pay, and we expect to hear at least some usage statistics from Apple CEO Tim Cook today. With Nuance, voice continues to become the new interface of choice across new applications from smart speakers to chat-bots, like those being rolled out by Google (GOOGL), Facebook (FB) and yes, Apple, and that keeps us bullish on NUAN shares.

  • Our price target on USA Technologies (USAT) shares remains $6
  • Our price target on Nuance Communications (NUAN) remains $21.

 

 

 

Why we’re nonplussed on Apple even if the iPhone X is Awesome

Why we’re nonplussed on Apple even if the iPhone X is Awesome

While we too are interested in what Apple (AAPL) will be unveiling tomorrow, we’re not in the camp that expects the company to deliver a “shock and awe” presentation as it showcases its latest and potentially greatest iPhone model. Make no mistake, Apple’s iPhone business is impressive given its market share, margins, and cash flow generation, and it’s a device that many of us, including us here at Tematica, could not live without. The issue is the iPhone appears to be an increasingly iterative one in a market that is plagued by slowing growth and reliant on the upgrade cycle.

The reality is that while Apple will likely continue to enhance the iPhone, and pick up incremental share along the way, it’s no longer the disruptive device that redefined the company and the category. Rather, given the size of the iPhone business, relative to Apple’s revenue, profits, and cash flow, it’s one that it needs to fight and keep up with product upgrades, even as it has ratcheted up its R&D spending in 2016 and 2017. When we’ve seen such activity at Apple in the past, it has often led to new products and new product categories, which keeps us hopeful for the long-term. That said, Apple isn’t the only one that is ramping its R&D spending as our Connected Society theme continues to disrupt existing business models. We’d point to Amazon (AMZN) as the innovator to watch.

 

What We Can Expect to Hear from Apple

The excitement and rumor mongering over the last few months will soon be over tomorrow, September 12, as Apple will unveil it latest iPhone model or potentially models. Also, if the internet chatter is to be believed, upgrades for its Apple TV and Apple Watch products will be on presented as well.

Recent software leaks suggest the unveiling of several iPhone models, with at least one of them including new features in the device itself — things such as Face ID and augmented reality as well as an organic light emitting diode display (OLED). Aside from the hardware, there will be a bevy of new features associated with the latest version of the iPhone operating system, iOS 11. Candidly we’re not all that sure about the “Animoji” feature that uses the 3D face sensors to create custom 3D animated emoji based on the expressions you make into the camera. Our thinking is this feature could be like steroids for the selfie market. Rather than digress, we are very excited about the productivity features inside iOS 11 and what they mean for the iPad. We’ve been beta testers of the iOS 11 on our own iPads, and the improved split screen capabilities alongside true drag and drop, at least in our view, are going to make the iPad what many hoped it would be several years ago — a perfect device for working while on the go.

As great as the new iOS and other new products are likely to be — like the purported Apple Watch with built in LTE connectivity —, the big kahuna at the event will be the iPhone, and it is expected to come along with just as big of a price tag. While there have been many headlines discussing the potential $1,000 price tag for Apple’s new high-end smartphone, let’s remember there are a variety of financing mechanisms from mobile carriers like AT&T and Verizon Communications as well as Apple’s own iPhone financing program.

Yes, some will balk at upgrading to the iPhone X because of its price or lack of a “wow-factor”, but we also know there is a cohort of consumers that see owning the latest Apple device as the latest status symbol for our Affordable Luxury investing theme. We also expect Apple will once again under-produce relative to initial demand, magically once again leading to the latest and potentially greatest iPhone being sold out. Make no mistake, we here at Tematica love all the Apple products we have, and we have plenty of them, but there is no easier way to stock out a new product than to restrict its initial supply. Of course, this only adds to the allure of being an early adopter, much the way until fairly recently spotting a pair of  Apple’s Air Pods has been akin to seeing a unicorn.

We are not surprised to see Apple potentially bringing multiple models to market as it looks to target share gains with the rising middle class in markets such as India and China as well as other more price-sensitive emerging economies. With the iPhone, likely the first internet connected device to be had by a person in these geographies, the device is a beachhead in which Apple can leverage its sticky ecosystem of products and services, in particular, its Apple Pay feature. If Apple is as successful as it has been in the U.S. and other developed markets, it’s a large opportunity for the company as well as shareholders.

The issue with Apple’s global expansion plans for the iPhone is that larger adoption of products and services takes time, and this means that if Apple is successful with these new iPhone models it will continue to be a trapped by its own success. By this we mean consumers flocking to the latest model in droves during the first six months of its release, only to see sales fade as potential buyers wait for the next new model to be had. If this cycle remains, it likely means Apple remains a seasonal business tied to the annual introduction of iPhone models… at least until it introduces either a new product category or an existing business segment delivers a new breakout product that turns the business mix on its head. Given the size of the annual iPhone business relative to the sizes of the Mac, iPad, Services and Other Products business segments, the latter is a daunting task to expect.

Perhaps the greatest risk to the new iPhone is the possibility that between Apple iOS beta software program and the annual rumor mongering, not to mention a disgruntled employee or two, much of what’s been slated to be shared for the new model has already been leaked. This could lead to a meh reception of what has been touted as a “make or break product for Apple.”  In other words, without an unexpected new, new thing to further implant Apple in our Connected Society investing theme, Apple shares could fall victim to “buy the rumor, sell the news” following tomorrow’s special event.

Remaining patient in the face of more near-term pain for Disney shares

Remaining patient in the face of more near-term pain for Disney shares

In recent weeks, shares of Content is King company Walt Disney (DIS) have drifted lower as the company shared it is pulling its content from Netflix (NFLX) and embarking on its own streaming services for Disney, Marvel and Star Wars content as well as ESPN. This move brings more than a few questions at a time when candidly there is no clear cut catalyst for the shares. Investors don’t like uncertainty and hence the slow drift lower in the shares to the recent $101-$102 level, that is in line with our entry points in the shares, from $110-$111 just over a month ago.

Given new developments that include CEO Bob Iger sharing that Disney’s 2017 EPS would be flat year over year, vs. consensus expectations that were looking for year on year growth near 2.5%, and the impact of Hurricane Irma on its Florida operations, we expect DIS shares could come under additional pressure in the near-term. One strategy would be to exit the shares, another is to recognize that in the next few months Disney will once again be back at the box office as well as opening new attractions at is very profitable parks business. As a reminder, the company recently opened Frozen land and is slated to open Toy Story land in 2018 followed by Star Wars Land in 2019. These new and branded attractions are likely to entice former park visitors as well as attract new ones.

As the water and impact of Irma subside, we will look to use any incremental near-term pain in DIS shares to improve our cost basis, remembering the company had a whopper of a share buyback program in place exiting the June quarter. On that corresponding earnings conference call, Disney signaled it would repurchase between $2.2-$3.2 billion of stock in the current quarter. Odds are that effort will help backstop the shares in the coming days. Our bias is to use any pullback that brings the shares closer to the $90 level to improve the positions cost basis. Recognizing the potential impact of Irma, and remaining questions on its proprietary streaming business, however, we are reducing our price target to $120 from $125.

  • While we expect further near-term disruptions at Disney (DIS) owing to Hurricane Irma, we will remain patient with the shares.
  • We are trimming our price target to $120 from $125.
Facebook’s Content is King effort Watch goes live… will you watch it? 

Facebook’s Content is King effort Watch goes live… will you watch it? 

 

We’ve seen a number of companies, like Netflix (NFLX) and Amazon (AMZN) look to position themselves within our Content is King investing theme. It’s a smart strategy as that proprietary content is a competitive moat that helps reduce customer churn. With Watch, Facebook (FB) is looking to push into streaming video and vie with Alphabet’s (GOOGL) YouTube as a home for longer-form video. And Facebook is hoping to grab a bigger chunk of money from advertisers’ TV budgets, by steering users toward content with more 15-second ad-break opportunities.

It’s worth noting that in addition to smartphones and desktops, Watch is available on several connected-TV platforms: Apple TV, Amazon Fire TV, Android TV and Samsung Smart TV. We like the multi-platform approach, especially since Apple TV has yet to get Amazon’s Prime Video… perhaps we’ll hear more on that on Sept. 12 at Apple’s next big event?

Starting Thursday, Facebook’s Watch feature — essentially a programming guide to episodic shows hosted on the social platform — will become broadly available to users in the U.S., after a three-week limited beta run.

The Watch guide is stocked with several hundred shows, a mélange of scripted, reality, documentary and sports content of varying lengths from both traditional media companies and individual digital creators. (Here’s a select list of shows currently in Watch or coming soon.) The new Watch tab isn’t the only way to access the series: They’re also available through Facebook’s new “Show Pages,” which provide features specifically for episodic video content.

 

Source: Facebook Launches Watch Feature, Shows in U.S.: Will Viewers Tune In? | Variety

WEEKLY ISSUE: Shedding Dycom Shares, Remaining Bullish on UPS and Facebook

WEEKLY ISSUE: Shedding Dycom Shares, Remaining Bullish on UPS and Facebook

Throwing in the Cards on Dycom (DY)

Before we get things started this week, early this morning Connected Society company Dycom (DY) reported an EPS beat for the quarter but issued a weaker than expected outlook for the current quarter. Of late, we’ve noticed stock price fatigue when a company beats expectations and raises its outlook, and that likely means Dycom’s report will be met with investors shedding the shares. In recent years, we’ve seen similar reports from companies met with sharp moves lower, and given the current environment, we see the odds of that happening with DY shares rather likely.

We expect the management team to discuss the rationale and drivers behind its recast guidance on the earnings call this morning. As investors, we’ll want to cap the potential pullback in the shares on the Tematica Select List and that has us exiting the position. As Wall Street analysts parse the data and lower their EPS expectations we see target price cuts being set lower as well.

  • We are issuing a Sell rating on Dycom (DY) shares.
  • As we do this, we will shift DY shares to the Tematica Contender List because it will only be a matter of time before mobile operators pony up to expand existing network capacity and build out their 5G as well as gigabit fiber networks.

 

No Shortage of Confirming Thematic Data Points this Week

While last week ended on a high note with all the major stock indices finished higher, this week we’ve seen a return of volatility to the market thanks to North Korea at the same time Texas grapples with one of the worst hurricanes in recent memory. The people of Houston are certainly in our thoughts this week and in the coming ones as we assess the impact to be had on the both the Texas economy and that of the overall country.

Exacerbating the markets move has been the usual seasonally low trading volume we tend to find at the tail end of the summer. As we called out in this week’s Monday Morning Kickoff, there are a number of reasons to think September, which is usually one of the most volatile months for stocks, is likely to be so once again.

As we prepare that amid the usual end of the month, start of the new month data flow, we’ll continue to take our cues and investment moves from our thematic lens. Even amidst the political tension of the last few weeks, once again there has been no shortage of confirming data points for our 17 investment themes. Earlier this week we shared comments our initial findings on the Amazon (AMZN)-Whole Foods Market (WMF) tie up, but also what the Mayweather vs. McGregor bout meant for Las Vegas and our MGM Resort (MGM) shares as well as how we found positive confirmation for our Applied Materials (AMAT) shares in a filing made by Samsung.

We also shared out take on a recent upgrade to Starbucks (SBUX) shares made by Wedbush following prospects for stronger than expected U.S. same-store-sales. As temperatures start to cool, and holiday shopping season thoughts begin to form we recognize that Starbucks will once again have its semi-addictive seasonal beverage — the Pumpkin Spice Latte — and when matched with its expanded food offering we see the recent trend of better than expected same-store sales continuing.

We’ve also uncovered more signs that brick & mortar retail remains in a worrisome place. First, Simon Property Group (SPG), the nation’s largest mall operator, is asking an Indiana court to issue an injunction to put the brakes on Starbucks phasing out of its 379 Teavana locations over the coming twelve months. No doubt Simon Property Group is feeling the headwind associated with the shift toward digital commerce in a big way, but we have to say this move reeks of desperation. We certainly understand the difficult position Simon Property Group is with its business at risk as more retailers embrace digital commerce solutions on their own or pair with Amazon to leverage its logistics capabilities.

The thing is, while Simon Property Group may try to fight one set of retail closures, in reality, it is a game of “whack-a-mole” as others are popping up to take their place. Over the weekend Affordable Luxury candidate Perfumania Holdings (PERF), which sells discounted perfumes from high-end brands, such as Dolce & Gabana and Burberry, filed for Chapter 11 bankruptcy and intends to close 64 of its 226 stores. We blame the adoption of our digital commerce aspect of our Connected Society theme not only at Amazon, but also Ulta Beauty (ULTA) and Sephora. Sephora, in particular, has focused on digital commerce and has embraced augmented reality, a component of our Disruptive Technology theme, to improve the customer experience.

Sephora is not alone in making cosmetics shopping even easier. Shopping platform FaceCake has partnered with brands like NARS Cosmetics to let online shoppers try on everything from makeup to handbags. Another example is IKEA as its new Catalog App uses augmented reality to allow customers to virtually place and view 200 different IKEA products in their homes. All you need is a smartphone (unfortunately, no Swedish meatballs are included in the online app). As more retailers embrace augmented reality in their apps, we question the need for consumers to visit physical store locations.

Connecting the dots, however, we find the growing usage of augmented reality will speed the shift toward digital commerce, and that bodes very well for our shares of United Parcel Service (UPS) as we head into the seasonally strongest time of the year for the company.

  • Our price target on United Parcel Service (UPS) shares remains $122; given the 10% move in the position, subscribers should continue to hold the share.
  • Those that missed our initial recommendation should look to revisit the shares closer to $105.

 

 

Restaurants Too Are Feeling the “Retail-Mageddon” Pinch

On a related note to the pains retailers are feeling we covered earlier, the restaurant industry is suffering from many of the same woes afflicting retailers – plain and simple, there are too many physical locations, and customers increasingly prefer to have everything delivered to their door.

That’s why pizza chains, especially Domino’s (DPZ) and Papa John’s (PAPA) have been able to gain an edge. Roughly 60% of Papa John’s orders are digital from not only its own app, but also via Facebook (FB)’s name product as well as its Messenger product. As the restaurant industry looks for solutions by leveraging our Connected Society, Disruptive Technology, and Cashless Consumption themes, we see Facebook (FB) and its multi-tiered platform offering benefitting. This along with its move into original content that bodes well for additional advertising, as well as its overall monetization efforts across those platforms keeps us bullish on Facebook shares.

  • Our price target on Facebook (FB) shares remains $200

 

Looking Ahead to the Coming Weeks

As we put the summer behind us in the coming days and absorb the litany of economic data to be had, our intention is to use whatever market volatility emerges to our advantage. This means revisiting recent additions to the Tematica Contender List like Nokia (NOK) and Innovative Solutions (ISSC), but also examining new potential positions for the select list as well.

 

Best Buy makes progress on digital commerce, but more needed

Best Buy makes progress on digital commerce, but more needed

Earlier today, Best Buy (BBY) delivered better than expected quarterly results, which reflect our increasingly Connected Society. As Best Buy Chairman and CEO Hubert Joly put it, “higher-than-expected growth was driven by stronger consumer demand with technology products” as well as share gains due to competitor closures and bankruptcies. Areas of strength included computing, wearables, smart home, and mobile phones all of which mesh with our Connected Society investing theme.

What really caught our attention was the continued growth in the company’s online business as its quarterly domestic online comparables rose more than 30% year over year, bringing online sales to just over 13% of revenue. In many respects, Best Buy has much more to go, but the management team recognizes this shifting competitive landscape associated with this theme in part because “So much of the customer experience has been starting online.” Acknowledging that, Best Buy conceded that it has “some key categories that are pre-underpenetrated online.”

We’ll continue to monitor Best Buy’s progress in accessing the Connected Society tailwind, but for now, with less than 20% of its revenue derived from digital commerce, we continue to prefer the Tematica Select List position in Amazon (AMZN).

  • We continue to have a Buy on Amazon (AMZN) shares with a $1,150 price target.

In support of maximizing the multichannel retail business, we continue to drive digital innovation to improve the customer experience. In the second quarter our domestic online comparable sales grew 31%. Online sales were more than $1 billion for the second consecutive time in a non-holiday quarter and were 13.2% of domestic revenue, up from 10.6% last year. We are on pace to generate well over $5 billion in domestic online sales this fiscal year.

Another exciting opportunity to maximize the multichannel retail business is our In-Home Advisor program. Our in-home advisors are professional sales consultants with broad product knowledge. They provide free consultations and serve as a single point of contact covering all technology needs across all vendors. In other words, they can help you design including place a great entertainment system, help you pick out your appliance for a kitchen model or help you steam music and content across your home without annoying buffering issues.

After testing the program in several cities, over the last year and a half, we’re currently rolling it out nationally. By the end of September, we will be offering these free in-home consultations across all major U.S. cities nationwide.

We’re very focused on the smart home as a key part of our Best Buy 2020 strategy, and we will continue to enhance this category across our stores and website this year. For example, to demonstrate we’re responsible with voice technology, we’re bringing new Alexa and Google Assistant experiences to 700 stores nationwide in collaboration with Amazon and Google. These enhanced experiences are unique to Best Buy and show how you can completely use voice technology. Especially trained Blue Shirts are on hand to provide advice and of course our Geek Squad agents can help install, set up and support the products.

The new species began arriving to stores in July and the rollout will be complete by the end of the third quarter. Of course, we’re continuing to work on a number of other initiatives around tech support, smart home, mobile and appliances, and we will provide update during our investor day next month.

Source: Best Buy’s (BBY) CEO Hubert Joly on Q2 2018 Results – Earnings Call Transcript 

Initial observations of the Amazon-Whole Foods marraige

Initial observations of the Amazon-Whole Foods marraige

With the official closing of the Amazon (AMZN) acquisition of Whole Foods Market (WFM) yesterday, I made a point of visiting two locations near me outside of Washington, D.C. The traffic in the store was greater than usual for a Monday, as were the length of the lines at the checkout counters. There were a number of prices that were better as has been reported, and there was a pop-up stand for Amazon Echo devices.

What was missing, however, were the appropriate Amazon’s private label brands that are slated to hit shelves at Whole Foods locations, as well as the lockers that will allow for both delivery of items as well as returns.

I say appropriate items because Amazon has quietly expanded the scope of its private label products from food (Happy Belly, Mama Bear and Wickedly Prime) and supplements (Amazon Elements) to fashion, electronics, household items, cosmetics, lingerie, and furniture to name a several. Conversations with the store managers confirmed Amazon private label products will be turning over in the store “over time” where appropriate. That hasn’t slowed Amazon from including Whole Foods’ private label brand, 365 Everyday Value, on its website although based on some basic searching 365 Everyday Value has yet to be offered under Amazon Fresh.

Like many large acquisitions, integration and the targeted synergies come over time, and I are still in the very early days of these two companies being under one roof. I expect the rollout of Amazon private label products to be had at the 470 Whole Foods locations in the U.S. and the U.K. over the coming quarters with added benefits coming (Amazon Fresh, Amazon meal kits and the instillation of Amazon Prime as the new membership rewards program).

As the combined entity flexes its product and logistical offering, I suspect before too long the conversation will shift from “death of the mall” to “death of the grocery store.” One of the “secret weapons” that Amazon has over its grocery and other competitors that range from Kroger (KR) to Wal-Mart (WMT) is the high margin Amazon Web Services, which continues to be embraced by corporate America as it increasingly migrates to the cloud.

One thing I am pondering is based on the number of Whole Foods locations, will Amazon look to make other grocery acquisitions in a bid to reach key markets that have a high concentration of Amazon Prime customers? If so, this could quickly turn the conversation from “the death of the mall” to the “death of the grocery store.”

 

  • We continue to rate Amazon (AMZN) shares a Buy with a $1,150 price target.

Source: Whole Foods prices cheaper with Amazon – Business Insider