Fine Tuning Ahead of 2Q 2017 Earnings Season
It’s a sorta sleepy summer week given how the July 4th holiday has fallen, but for those of us that are left manning the desks it has been anything but slow. Even though hordes of investors are taking it easy before the soon to be upon us 2Q 2017 earnings deluge, it’s business as usual this week for us here at Tematica and Tematica Pro. Rather than recap the market performance during 2Q 2107, we’d instead refer you to the opening paragraph of yesterday’s Tematica Investing. While you’re there, you should also check out the last several paragraphs as they set the tone for what we’ll be looking for over the next few weeks.
For those looking for the Cliff Notes version, with more data pointing to a slowing economy and the Trump Slump, we suspect 2Q 2017 earnings will be filled with corporate outlooks that are pared back. If we’re right, and we think we will be proven so, it means earnings expectations for the S&P 500 will be coming down for the back half of 2017 while the Fed looks to take its collective foot off the gas pedal even more.
All of that said, we recognize that many subscribers are likely trying to enjoy the slow week while we crunch the data. With that in mind, we’ll try to keep today’s update far less verbose than usual. If you listened carefully, you probably heard more than a few folks at Tematica roll their eyes just now, but we’ll do the best we can.
Holding Steady Our General Motors (GM) Short Position
As with the Tematica Investing Select List, we here at Tematica Pro are getting ready to parse the data and take action with the holdings as necessary. Given our concerns, which were added to with not only the recent 2017 auto industry guidance cut but also weaker than expected June auto sales, we’re going to hold our inverse ETF positions as well as maintain our short position in General Motors (GM) shares. For subscribers that held off adding positions in ProShares Short S&P500 (SH), ProShares Short Russell 2000 (RWM) or ProShares Short Dow30 (DOG), we would suggest you do so over the coming days as a portfolio hedge to the upcoming earnings season.
As you’ve possibly read by now, June auto sales marked the sixth consecutive decline for the industry and General Motors faired far worse as its sales fell 4.8 percent month over month, more than the industry average of 3 percent. Industry consultant Autodata put the industry’s seasonally adjusted annualized rate of sales at 16.51 million units, which was the lowest rate since February 2015. It came in below Wall Street expectations of 16.6 million vehicles and 2 percent lower than the June 2016 figure. Needless to say this makes General Motors’s upcoming 2Q 2017 earnings report one to watch on July 25 given the likelihood that it will trim production levels as well as its revenue and EPS for the second half of 2017.
- We are holding steady with our short position in General Motors (GM) shares and our price target remains $30. Our buy-stop level remains at $40.
Being Patient with on Costco Calls as Catalysts Loom
Over the last week, even after we scaled into the Costco Wholesale (COST)October 2017 173 calls (COST171020C00173000) calls, they continued to trend lower closing last night at 1.58. While we’re in the red on this one, we have ample time to earn it back, given the October strike date and several catalysts still to be had, including Costco’s June monthly sales data that should come in over the coming days. As we parse the data, we’ll also be closely watching the number of warehouse locations that are open. The company had 732 at the end of May, up from 729 exiting April and it’s stated it will open a dozen more over the coming months. As a reminder, we focus on the number of warehouse locations as it’s a leading indicator of growth in the all-important membership fee revenue and profit stream.
- We will continue to be patient with the Costco Wholesale (COST) October 2017 173 calls (COST171020C00173000) calls, which remain a Buy at current levels.
Dycom and AXT Calls – Waiting by the Phone for AT&T and Verizon Earnings
As we look ahead for guidance on network deployments, both mobile and wireline, it means watching capital spending plans from the likes of AT&T (T)and Verizon Communications (VZ) as well as Comcast (CMCSA). To say July 25 and 27th will be busy days for our Dycom Industries (DY) September 2017 $90 calls (DY170915C00090000) and AXT Inc. (AXTI) November 17, 2017 calls (AXTI171117C00007500) calls is a bit of an understatement as AT&T, Verizon and Comcast will be reporting on those days. Inside their 2Q 2017 results, we’ll be focused on any incremental changes in capital spending for the back half of 2017 and into 2018.
We’ll also be listening for commentary on 5G timing. As we recently shared, 5G deployment tables have pulled in over the last year, and that bodes well for construction activity at Dycom as well as demand for additional RF semiconductor over the coming quarters. Inside those customer earnings reports, we’ll be looking for additional confirmation as well as any hints on the timing for Apple’s (AAPL) next iPhone.
- We continue to rate Dycom Industries (DY) September 2017 $90 calls (DY170915C00090000) a Hold at current levels, and our stop loss remains set at 6.50, which would help lock in a gain of at least 22 percent.
- Last night AXT Inc. (AXTI) November 17, 2017 calls (AXTI171117C00007500) closed at 0.55, leaving the position at break-even for now. We continue to rate the calls a Buy at current levels and would be willing buyers up to 0.75. Given the thin volume that is likely to make the calls volatile from time to time, heading into earnings season we are setting a stop loss at 0.35.
Housekeeping! Stopped out of MGM Resort calls last week.
Last Thursday we adjusted our stop loss on the MGM July 2017 $33 calls (MGM170721C00033000) calls up to 0.90, and that was triggered just a few hours later as MGM shares sagged. As we keep MGM shares in the Tematica Investing Select List, we’ll continue to look for opportunities to revisit them, especially given the sharp fall over the last few days, which saw the calls close at 0.12 last night.
