Menu

Category Archives: Guilty Pleasures

Wedbush upgrade confirms our stance on Starbucks

Wedbush upgrade confirms our stance on Starbucks

Over the weekend, Barron’s published an excerpt from Wedbush’s price target hike and upgrade on Starbuck (SBUX) shares last week. We’ve been patient with the shares during the summer given it’s a seasonally weaker time frame for the company. As the summer comes to an end, we are encouraged by Wedbush’s findings that Starbucks same-store sales are trending better than expected. We attribute this in part to the company’s revamping and expanding its food menu, which is likely driven higher consumer tickets.

As we head into the cooler months, we suspect the demand for hot beverages and food will lead to further sequential improvements in domestic same-store sales. We also see the company’s global same-store sales benefitting from the recent decision to buy the remaining 50% share of its East China business from long-term joint venture partners Uni-President Enterprises and President Chain Store for approximately $1.3 billion in cash. With the agreement, Starbucks will assume 100% ownership of approximately 1,300 Starbucks stores in Shanghai and Jiangsu and Zhejiang Provinces. As part of that announcement, Starbuck reiterated plans to have a total of 5,000 stores in mainland China, the company’s fastest-growing market outside of the U.S.,  by 2021. In our view, this roll-out keeps Starbucks within our Rise & Fall of the Middle Class and Affordable Luxury tailwinds.

  • Our price target on Starbucks (SBUX) shares remains $74.

We are upgrading Starbucks (ticker: SBUX) to Outperform from Neutral. We are increasing the price target to $60 from $57.

Checks indicate U.S. comps tracking in line with expectations. Our recent checks of 5% of U.S. co-owned locations point to same-store-sales (SSS) growth in line with fiscal-fourth-quarter consensus of 3.5%. Mobile order and pay continues to be cited as a meaningful driver with increased frequency. We continue to model 3% for the fiscal fourth quarter, but based on our checks we view a rounded-up 4% U.S. comp as realistic should this trend continue through September.

Source: Starbucks to See Boost From China Acquisition – Barron’s

WEEKLY ISSUE: Making a Measured Bet on this Guilty Pleasure Gaming Company

WEEKLY ISSUE: Making a Measured Bet on this Guilty Pleasure Gaming Company

In this Week’s Issue:

  • Let Luck Be Our Lady — Adding MGM Resorts to the Tematica Select List
  • Fallout from Apple’s WWDC 2017 Event Has Us Upping Stop-Loss on OLED
  • The Apple Halo Effect Shines on More than Just the iPhone Ecosystem
  • Apple’s HomePod Announcement Also Has Implications on AMZN, GOOGL and NUAN, Leading Us to Instill a Stop-Loss on Nuance

 

Since last week’s issue of Tematica Investing, we have to say that things more or less remain unchanged. All three major market indices are up, led by the Nasdaq and the same group of companies that have powered its outperformance relative to the S&P 500 and the Dow Jones Industrial Average since mid-January. Most of these same stocks — Amazon (AMZN), Alphabet (GOOGL) and Facebook (FB) — have powered the Tematica Select List higher, but we’ve also benefitted from continued climb in Universal Display (OLED), Applied Materials (AMAT), and USA Technologies (USAT), each of which is being driven by its own aspect of our various investing themes.

In the race to reach $1,000, we’ve seen both AMZN and GOOGL shares cross and move back from that would be magical line in the sand. From our perspective, much like a tailor tells us when we cringe at our waist size when getting measured for a new suit – it’s just a number. At least when it comes to our age and waist size!

What matters most when assessing a stock price is whether the thematic tailwinds are still blowing, and in the case of both Amazon and Alphabet, it’s a resounding yes. Even as the shares encroach upon our respective price targets — $1,100 for Amazon and $1,050 for Alphabet — we continue to see signs that the core respective investing themes – Connected Society and Asset-Lite Business Models – show no signs of abating. As we’ve said before, even as we look to once again revisit our price targets, much the way we have with Universal Display shares as its outlook has strengthened over the last several months, these are stocks to own, not trade. That remains our position.

Even as those names have moved higher this past week, we’ve seen investor appetite favor some of our more defensive names, including McCormick & Co. (MKC) and International Flavors & Fragrances (IFF), both of which are up more than 1 percent over the last five days. Not surprisingly, we are seeing these kinds of companies, the ones that have a rising dividend policy and inelastic aspects to their businesses, come back into favor as uncertainty once again creeps back into the market.

Whether it’s the recent happenings in London, fired FBI Director James Comey’s pending testimony before Congress, investigations into Russian meddling, Trump once again trying to pivot his policy efforts to get out of stall speed, the European Central Bank meeting or elections in Britain, there is no shortage of things to preoccupy investors. As we keep one eye and ear on these events, we’ll continue to watch the data unfold and make our moves accordingly with the Tematica Select List. As we shared in this week’s Monday Morning Kickoff and described in last week’s Cocktail Investing Podcast, we are seeing GDP expectations for the current quarter begin to wither and beginning to see downward revisions for 3Q 2017 as well. It’s going to make for an interesting summer, but we’ll be there to guide you through it.

As we get ready for the soon to be on us summer, we’ll be reviewing both price targets and stop losses up and down the Tematica Select List. Now, let’s get to some updates and a new recommendation that centers on our Guilty Pleasure investing theme.

 

 

Let Luck Be Our Lady — Adding MGM Resorts to the Tematica Select List

Our Guilty Pleasure investing theme examines a variety of companies and businesses that range from alcohol, beer and spirits to chocolate, tobacco and gaming. We examine each of these, and when the time is right, meaning a thematic tailwind is blowing and there is sufficient net upside to be had, we’ll add shares to the Tematica Select List. That’s what we’re doing today with MGM Resorts International [stock_quote symbol=”MGM” show=”symbol”] shares.

While widely recognized mostly for its domestic gambling and hospitality business that includes casino, rooms, food and beverage, entertainment and retail-related revenue, we are adding MGM shares to the Tematica Select List primarily because of the positive inflection unfolding in Macau China, per monthly data reported by the Macau Gaming Inspection and Coordination Bureau.

Before digging into MGM’s overseas business, it’s helpful to spend some time understanding the full scale of the company’s domestic business, the bulk of which includes operations within Las Vegas, with properties that include the Bellagio, MGM Grand, Mandalay Bay, The Mirage and Luxor. The company has expanded in recent years outside of Vegas, opening resorts in Michigan, Mississippi, New Jersey and one just last year in Maryland at National Harbor just outside of Washington, DC.

MGM’s domestic casino operations account for roughly 76 percent of the company’s overall square footage and 86 percent of its guest rooms. If you are looking for greater detail, those domestic operations also account for roughly 87 percent of overall slots and 69 percent of overall gaming tables. Viewed somewhat differently, the company’s overall Casino operations generate roughly 55 percent of revenue in the most recent quarter, with the two next largest businesses – Rooms and Food & Beverage – accounting for 21 percent and 16 percent of revenue, respectively. While the company will often discuss its Entertainment and Retail businesses, it’s those three – Casino, Rooms, and Food & Beverage – that are the key levers for revenue and profits.

Monthly data released by the Nevada Gaming Board showed April gaming revenue rose 1.2 percent year over year statewide, even though Las Vegas Strip revenue dipped some 3 percent year over year. For the fiscal year to date, which spans from July 2016 to April 2017, both Las Vegas Strip and overall Nevada gaming is up 3 percent. Forecasts for the just-passed Memorial Day weekend suggest a rebound in Las Vegas for May, as about 328,000 people were slated to descend on Las Vegas from last Thursday to Tuesday, which according to AAA and the Las Vegas Convention and Visitors Authority make Las Vegas the seventh-most-popular destination to kick off the summer travel season. According to the Las Vegas Convention and Visitors Authority, those out-of-town visitors were to spend about $252.6 million on food, hotels and gambling during the Memorial Day weekend, nearly 1 percent more than the same time last year.

Given its presence in Las Vegas, we see MGM’s portfolio of casinos, restaurants and hotels benefiting. With U.S. airlines expecting to carry 234 million passengers from June 1 through Aug. 31 — up from the summer record of 225 million a year ago, according to the trade group Airlines for America — we see MGM’s Las Vegas operations having a solid summer. Lending a helping hand will be MGM’s investments in T-Mobile Arena and the Park Theater. Subscribers know that we here at Tematica love our data, and we’ll be monitoring that from the Nevada Gaming Board each month to make sure the fundamentals are on track. Outside of Vegas, MGM’s domestic business should benefit from full year contributions from MGM National Harbor and Borgata, both of which opened to much fanfare and are using headline entertainment to lure hotel guests and gamblers.

Turning back to the Macau gaming data, the Macau Gaming Inspection and Coordination Bureau recently reported April gross gaming revenue is up more than 23 percent year over year. This marked the 10th straight month of positive growth, and early indications by research firm Bernstein and others peg June growth to be up 20 to 26 percent year over year. Other forecasts have Macau gaming up double digits over the next several months.

For MGM, its Macau operations were a drag on overall profits in 2014, 2015 and 2016, but with gaming revenue and most likely corresponding food- and hotel-related revenue up as well this year, the business is likely to be far less of a drag in the current and coming quarters. From a metrics perspective, while MGM’s Macau business accounts for 1.3 percent of its overall hotel rooms and 3.7 percent of its slots, it has a far more sizable presence in gaming tables (22 percent) and casino square footage (16 percent) as it caters to “high rollers” and VIPs. Channel checks reported by several Wall Street firms indicate “high roller” and VIP customers provided much of the April revenue boost, which bodes well for MGM’s Macau business.

If we look back at the downturn in MGM’s Macau gaming business that spanned from June 2014-July 2016, it not only hit the company’s overall revenue and earnings, but its share price as well. Consolidated revenue fell to $9.19 billion in 2015 from 10.08 billion in 2014 before rebounding to $9.45 billion in 2016 as Macau gaming recovered in the back half of the year. That fall off, which bled through to the company’s bottom line, resulted in MGM shares falling to a low of just over $18 in July 2015 from a high of $28.29 in March 2014.

Off the very bottom of the Macau gaming issues, MGM shares are up roughly 35 percent over the last twelve months, but with solid prospects in both the domestic and Macau operations, MGM’s business is on a roll. Current consensus expectations have MGM’s EPS reaching $1.27 this year, up from $1.14 last year, but with the most difficult year-over-year comparisons in the June and September quarters. With expectations for EPS to grow in the coming quarters and reach the $1.55 to $1.60 level in 2018, based on historical multiples, we see upside to $37. That offers roughly 14 percent upside from the current share price, but doesn’t factor in the company’s new quarterly dividend of $0.11 per share.

MGM instituted the new dividend just a few months ago, and we take that to be a sign of management’s confidence in the business given the understanding with shareholders what is likely to happen should a company cut let alone trim its quarterly dividend. At the current share price, that annualized dividend yield equates to 1.4 percent. Looking at the company’s balance sheet, it exited the March quarter with $1.4 billion in cash and total debt near $13.1 billion. While that debt load may seem high, the company’s cash flow offers sufficient coverage with earnings before interest tax and depreciation running at 4.1-4.6x based on 2017 and 2018 expectations.

  • We are adding shares of MGM Resorts International (MGM) to the Tematica Select List with a Buy rating and a $37 price target. As we begin this position, we would look to scale into it on any weakness near $30, which would also serve to improve the average cost basis.
  • Because this is a new position, we are holding off setting a protective stop loss at this time.

 

 

Fallout from Apple’s WWDC 2017 Event Has Us Upping our OLED Stop-Loss

Yesterday we published our reaction to Apple’s (AAPL) latest World Wide Developer Conference (WWDC), but we held off discussing how the Tematica Select List is benefitting from what many have come to call the Apple halo effect given the expected 2017 refresh of its iPhone line of products. Again, Apple CEO Tim Cook and the rest of his management team said nothing about the expected new iPhone at Monday’s event — which is likely part of the reason that Apple stock has traded up only modestly following the event.

The reality, however, is that this iPhone product refresh has already led to a ramp-up of industry capacity for organic light emitting diode (LED) displays and the machines that fabricate them. We continue to see the Apple-related demand as part of the overall sea change toward organic LED displays that is benefitting both our Universal Display (OLED) and Applied Materials (AMAT) shares.

To put it into perspective, AAPL shares have been a stalwart thus far in 2017 — the shares are up 33 percent since last October. It’s been a great run, no doubt. Our strategy, however, has been to “buy the bullets, not the gun” and the result has been even better, with OLED shares are up 134 percent and AMAT shares up 27 percent. As the Apple rumor mill kicks back into gear in a few months, we see it propelling OLED and AMAT shares higher.

  • With OLED shares hovering at our $125 price target, subscribers should hold off adding to positions at current levels as we revisit that target. We will be boosting our stop loss to $100 from $85, which will lock in a profit of more than 88 percent.
  • We continue to have a Buy rating on AMAT shares with a $55 price target.

 

 

The Apple Halo Effect Shines on More than Just the iPhone Ecosystem

Buried among the various Apple comments yesterday, however, there were several that were rather positive for our Cashless Consumption investing theme and the USA Technology (USAT) shares on the Tematica Select List. In particular, it appears that 2017 is a rather big year for Apple Pay, as it will be available at 50 percent of retailers within the U.S. by the end of the year. According to Apple, Apple Pay is already the top contactless payment service on mobile devices, and this retailer deployment has the potential to push Apple Pay into the mainstream. As that happens, we see user adoption escalating and a push — pull emerging with vending machines and the self-serve retail market for USAT’s solutions.

Over the last week, USAT shares have climbed more than 13 percent, bringing the positions return to more than 21 percent since being added to the Tematica Select List on April 19. By comparison, the S&P 500 is up all of 3.5 percent. This is but the latest example of the power to be had by recognizing pronounced thematic tailwinds and identifying well-positioned companies.

  • With roughly 10 percent upside to our $6 price target for USAT shares, we’re notching down our rating to Hold from Buy.
  • Given the volatile nature of small-cap stocks like these, we’re going to hold off setting a protective stop loss on USAT shares for now.

 

 

Apple’s HomePod Announcement Also Has Implications on AMZN, GOOGL and NUAN, Leading us to Instilling a Stop-Loss on Nuance

The introduction of Apple’s connected speaker, dubbed HomePod (you have to love the creativity), is raising some eyebrows with more than a few questions as to what it means for existing connected speaker products and voice digital assistants. The two obvious standouts are Amazon’s Alexa and Alphabet’s Google Home.

To begin with, Apple is marketing the HomePod as a music device first, connected speaker second. Granted the speaker quality in Amazon’s Echo products is not the best, but it’s also not the worst given its informational queries. We also suspect Apple’s HomePod positioning reflects current shortcomings with Siri relative to Amazon’s Alexa, which leverages Amazon Web Services and has an ever expanding skill set. If you’ve ever asked Apple’s Siri the same question as you might ask Amazon Alexa, you will quickly realize that Siri isn’t the sharpest knife in the drawer.

HomePod won’t be released until late 2017, which knowing Apple means it won’t be readily available until sometime in early until 2018. Between now and then, odds are we will see at least one iteration of upgrades to the existing competitors. And for those who are sweating this for Amazon, we’d remind you that near-term Alexa is a small part of the Amazon puzzle. We expect that to change over time as Amazon reaps the benefits of licensing deals for Alexa, but for now, Amazon’s main drivers remains digital commerce and Amazon Web Services.

We will say that Apple’s need to catch up in the voice digital assistant market could lead Apple to acquire additional artificial intelligence or related voice technology companies. Whether it’s Apple or another competitor (say, where is Samsung in the voice digital assistant maker?) we continue to suspect Tematica Select List company Nuance Communications (NUAN), given its voice recognition and natural language solutions, is bound to turn up on corporate M&A radar screens.

  • We continue to have a $21 price target on NUAN shares, which offers 10 percent upside from current levels.
  • With the position up more than 23 percent since we added it to the Tematica Select List last December, we are instilling a stop loss at $18, which will lock in a minimum gain of 16 percent.

 

 

 

 

 

WEEKLY ISSUE: As April starts off more like March than January and February, we tighten up several price targets

WEEKLY ISSUE: As April starts off more like March than January and February, we tighten up several price targets

We have entered 2Q 2017 and with all of two days under our belt, it looks like April is at least starting off more like March than January or February. As we discussed in this week’s Monday Morning Kickoff, we are in what we call No Man’s Land — that time period after the quarter close and before companies start reporting their earnings. It tends to be a time of reduced trading volume, something we’ve seen at both NYSE and Nasdaq listed stocks, as investors wait for tell-tale signs of what’s to come. Another way to phrase it is to say they are waiting for the first signs of what is likely to come.

 

Retailer Woes Means Even Stronger Tailwinds for Amazon

In the last few weeks of March, we had less than stellar results from LuluLemon (LULU), Nike  (NKE), FedEx (FDX) and several other companies. While Urban Outfitters (URBN) won’t report its quarterly results for a while, on Monday night it shared that thus far during the quarter, its comparable retail segment net sales are “mid-single digit negative” vs. up 1 percent in the year ago quarter. Last night, Saks owner Hudson Bay (TSE) shared that overall consolidated sales fell more than 1 percent year over year. More signs that traditional retail remains a challenging environment due in part to Connected Society investing theme company Amazon (AMZN).

Amazon shares, have been on a tear over the last three months, climbing more than 19.8 percent vs. 3.9 percent for the S&P 500. Along the way, the shares have set several new highs, including a fresh intraday high yesterday at $908.54 before closing at $906.83 and firmly in overbought territory. As we head into earnings season, we remember that despite the continued tailwinds that are pushing Amazon’s businesses — the shift to digital consumption and the cloud — Amazon continues to invest heavily in its business. The risk is that from time to time the company’s investment plans tend to be larger than those expected by Wall Street, and when confronted with that realization investors shed shares.

We’ve seen that several times in recent years, and given our view that first-quarter earnings season is likely to bring a return of volatility to the market, we’re going to get a little more cautious on AMZN shares.

  • With an additional 7.5 percent to our $975 price target, we are reducing our rating on AMNZ shares to a Hold from Buy. 
  • We would look to revisit our rating below $850 or on signs that potential upside to our price target is closer to $1,050. 

 

AT&T Gets the FirstNet Nod and That’s Also Good for Dycom

As expected, it was announced AT&T won a lucrative contract to build and manage a nationwide public safety network for America’s police, firefighters, and emergency medical services. Dubbed FirstNet, it will cover all 50 states, five U.S. territories, and the District of Columbia, including coverage for rural and tribal lands. Besides basic voice and Internet service, AT&T expects the network to be used for applications “providing near real- time information on traffic conditions to determine the fastest route to an emergency.”

This win also bodes well for specialty contractor Dycom (DY) that counts AT&T as its largest customer. As Dycom’s other key customers that include Verizon (VZ) and Comcast (CMCSA), deploy both next-generation solutions as well as add incremental capacity to existing networks, we continue to see blue skies ahead for DY shares on the Tematica Select List.

Circling back to the key item of 2017 for AT&T shares — the pending merger with Time Warner (TWX) — chatter in and around DC seems to suggest that President Trump has softened his opposition to the combination of the two companies. We’d note this follows the recent approval of the pending acquisition by the European Commission.

  • As more clarity on the merger between AT&T and Time Warner develops, we are likely to revisit our $44 price target. All things being equal, we are likely to add to our position below $40
  • Our price target on DY shares remains $115.

 

Easter and Spring Break Bode Well For Disney

As we enter peak Spring Break travel season, which bodes well for Disney’s (DIS) parks business, particularly Disney World and its other Florida attractions, we remind subscribers that the company recently announced it was boosting ticket prices, which we may cringe at as consumers, but love as shareholders. Combined with leveraging its Frozen and Star Wars content at the parks over the coming years, we see Disney providing new reasons to revisit these destinations.

Looking beyond the April travel season and continued performance of Beauty and the Beast at the box office, the next catalyst we see for the shares will be several box-office films being released by Disney — 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 have just over 10 percent to our $125 price target for DIS shares.

 

Housekeeping Items

First, if you missed our comments on either Alphabet (GOOGL) or McCormick & Co. (MKC) shares that we posted yesterday, you can find them here and here, respectively.

Second, later this week on TematicaResearch.com we’ll share our thoughts on the purported acquisition of Panera Bread (PNRA) by Guilty Pleasure investment theme company Starbucks (SBUX) as well as our take on the rash of economic data to come later this week.

Third, be sure to the website later in the week for the latest edition of the Cocktail Investing Podcast as well as archived episodes.

Finally, in observance of the upcoming Easter holiday, US stock markets will be closed on Friday, April 14. With the aforementioned spring break in full swing next week, we too here at Tematica will be taking a respite as we get ready to gear into 1Q 2017 earnings the following week.

Odds are we won’t be able to keep ourselves from posting some commentary throughout the week on TematicaResearch.com, but your next regularly scheduled Tematica Investing issue will be on Wednesday, April 19.

 

Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

This morning the US Bureau of Economic Analysis published its take on Personal Income & Spending for December. We’re rather fond of this monthly report given the data contained within and the implications for several of our investment themes, including Cash-strapped Consumers as well as Affordable Luxury and the Rise & Fall of the Middle Class. 

So what did the December report show?

Personal Income rose 0.3 percent, far faster than in November, but still below the 0.4-0.5 percentage gains registered in September and October. We saw the same pattern with Disposable Income (which is a better barometer for discretionary spending), as one would expect to see during the holiday shopping laden month of December.

That’s as good a segue as any to remind our readers that holiday shopping during November and December came in stronger than the National Retail Federation had forecasted. The final tally was a year over year increase of 4.0 percent compared to the NRF’s 3.6 percent forecast.

Now you’re probably saying to yourself, “How can that be given all the bad news that we’ve been hearing from Macy’s (M), Target  (TGT), Kohl’s (KSS), Sears (SHLD) and other brick and mortar retailers?”

To be honest, we doubt the average person would have thrown in the “other brick and mortar retailers” part, but we know our readers are smarter than the average bear.

The answer to that question is that non-store sales, Commerce Department verbiage for e-tailers like Amazon (AMNZ), eBay (EBAY) and digital Direct to Consumer business like those found at Macy’s, Under Armour (UAA), Nike (NKE) and other retailers, rose 12.6 percent year over year to $122.9 billion. We certainly like those stats as they confirm several aspects of our Connected Society investing theme, but we would argue a more telling take on the data is that non-store sales accounted for 19 percent of holiday shopping in 2016, up from 17 percent the year before. Nearly one-in-five shopping dollars was spent through online or mobile shopping.

We’ll get a better sense of this shift, which we only see as accelerating, later this week when both United Parcel Service (UPS) and Amazon report their quarterly results for the December quarter. Team Tematica will also be listening to Direct to Consumer comments from Under Armour and other apparel and footwear companies as they too report quarterly results over the next few weeks.

Now let’s take a look at December Personal Spending – it rose 0.5 percent, a tick higher than was expected. Given the NRF data above, it was rather likely we were going to get a better print vs. expectations.

In combining both the income and spending data for the month, we get the savings rate, which fell to 5.4 percent, a five-month low. Compared to a few years ago, that savings level looks rather solid even though it’s well below the longer-term trend line. What we do find somewhat disconcerting, given the prospects for the Fed to boost interest rates up to three times this year after only doing so just two times in the last two years, is the amount of revolving consumer debt outstanding. As evidenced in the graph below, those levels have continued to climb steadily higher during 2015 and 2016.

Should interest rates move higher in 2017, the incremental interest expense could crimp consumer wallets, reducing their disposable income in the process. To us, that could mean less Affordable Luxury or even Guilty Pleasure spending as more become Cash-strapped Consumers.

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

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

Actions from this post

Ratings changes included in this dated post

  • Changing our rating on USA Technologies (USAT) to “Sell”, booking a near 30% return since our “Buy” rating was issued.
  • Updating Kraft Heinz (KHC) to a “Sell” rating, marking a hefty double-digit percentage return.
  • Closing out Disney (DIS), Under Armour (UA), Netflix (NFLX), LifeLock (LOCK), American Airlines (AAL) and Fitbit (FIT) — updated all with a “Sell” rating.
  • That leaves Physicians Reality Trust (DOC), Philip Morris (PM), American Capital Agency (AGNC), AT&T (T) and Regal Cinemas (RGC) in the Tematica Select List — all of which have dividend yields between 4.6% (Philip Morris) and 14% (American Capital Agency). Given the nature of their businesses as well as those dividend yields, those shares are apt to drum up investor interest as people look for safe havens.Let’s continue to hold these shares and “clip our dividend coupons” along the way.
  • Also, we recommend investors add some protection in the form of the ProShares Short S&P 500 ETF (SH), which trades in the opposite direction of the S&P 500.

What began as a bad start to 2016 only has gotten worse over the last few days. There are a number of reasons behind this move lower as II see the stock market, at best, moving sideways through earnings season, but more likely to come under additional pressure as expectations are scaled back. When I say expectations, I mean those for global growth, oil prices, corporate earnings and so on. You’ve seen me write more than a few times about the aggressive earnings expectations for the S&P 500 this year and the revisions lower that I’ve been expecting have only just begun.

In an environment like this, it tends to be shoot first and ask questions later, particularly as growth expectations get reset. While it is tempting to weather the storm, my preference is to lock in existing gains, limit losses and, above all, preserve capital at times such as this one. I know times like now, when the market seemingly goes down day after day, can be frustrating, if not confusing. I would not be surprised if you were having flashbacks to March 2008, wondering if we are heading for a repeat of what happened from May 2008 to March 2009, a period of intense pain for the stock market.

The famous phrase, “better safe than sorry,” comes to mind. For us, that means exiting the following positons:

  • Changing our rating on USA Technologies (USAT) to “Sell”, booking a near 30% return since our “Buy” rating was issued.
  • Updating Kraft Heinz (KHC) to a “Sell” rating, marking a hefty double-digit percentage return.
  • Closing out Disney (DIS), Under Armour (UA), Netflix (NFLX), LifeLock (LOCK), American Airlines (AAL) and Fitbit (FIT) — updated all with a “Sell” rating. 
  • That leaves Physicians Reality Trust (DOC), Philip Morris (PM), American Capital Agency (AGNC), AT&T (T) and Regal Cinemas (RGC) in the Tematica Select List — all of which have dividend yields between 4.6% (Philip Morris) and 14% (American Capital Agency). Given the nature of their businesses as well as those dividend yields, those shares are apt to drum up investor interest as people look for safe havens.Let’s continue to hold these shares and “clip our dividend coupons” along the way.
  • Also, we recommend investors add some protection in the form of the ProShares Short S&P 500 ETF (SH), which trades in the opposite direction of the S&P 500.

Over the next few weeks, we could get a bounce in the market here and there, but I would feel much better putting capital to work with a strong conviction that the storm has passed. As such, I will keep one eye on the market (the indicator of price) and the other on our investing themes as I look for data points that show companies whose businesses will continue to perform regardless of what’s happened in the stock market over the last month or will happen in the next month or next few months. If you were with me while I write this update, you would hear me muttering questions like some of these:

  • Has the drop in the stock market changed the outlook for cyber attacks and related threats in 2016? Safety & Security
  • Despite the unseasonably warm temperatures in the eastern United States thanks to El Niño, has the California drought situation been eradicated? Scarce Resources
  • Has the shift toward streaming and other digital content consumption slowed because the stock market has lost close to $1 trillion in value, lessening the demand for content? Connected Society
  • By some strange hocus-pocus, have people been “de-aged” so that less than 15% of the population is over 65 years old? Aging of the Population
  • As if by magic, did all of those people with little to no retirement savings suddenly land on firm financial footing? Aging of the Population
  • Over the last few days, has the costly and deadly impact of obesity and the prevalent condition of so many people being overweight been reversed? Fattening of the Consumer
  • Have retailers, both brick & mortar as well as online, shifted to only taking cash and checks as payment for goods and services? Cashless Consumption
  • Are people all of a sudden smoking less in the last few days? If anything, I would argue those who do indulge in this guilty pleasure are probably smoking more and having an extra drink or two along with it. Guilty Pleasure/Affordable Luxury
  • Has the domestic middle class started to expand dramatically in January? Rise and Fall of the Middle Class

And so on… Foods with Integrity… Asset-Lite Business Models… Economic Acceleration/Deceleration… Tooling & Retooling…

The bottom line is these investing themes of ours continue to benefit from the shifting and evolving landscape that is the intersection of the global economy, changing demographics, disruptive technologies, regulatory mandates and other tailwind drivers.

As I said earlier, the stock market is simply the indicator of price.

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 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. To me, this says we’ll be able to buy back a number of the growth positions at the same or lower prices when the current market storm has cleared and things have settled down. Let’s be prudent and patient together.