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Making thematic sense of the July Retail Sales report

Making thematic sense of the July Retail Sales report

Key points for this alert:

  • Our price target on Amazon (AMZN) remains $2,250.
  • Our price target on Costco Wholesale (COST) remains $230.
  • Our price target on Habit Restaurant (HABT) is getting a boost to $17 from $16.
  • We are also bumping our price target on McCormick & Co. (MKC) shares to $130 from $110 as we get ready for seasons eatings 2018.

 

Following on the heels of the July Retail Sales report we received Wednesday, this morning Walmart (WMT) reported stellar July quarter results led by stronger than expected same-store sales and a 40% year over year increase in its e-commerce sales. From our perch, we see both reports as positive for our positions in both Amazon (AMZN) and Costco Wholesale (COST) as well as Habit Restaurant (HABT) and McCormick & Co. (MKC) shares.

Digging into the better than expected July Retail Sales report that showed Retail up 0.4% month over month and 6.0% sequentially, top performers were Food Services & drinking places (up +9.7% year over year), Nonstore retailers (+8.7%) and Grocery Stores (+4.9%) year over year. In response to that report, as well as the news that China and the US are heading back to the trade negotiation tables, our Habit Restaurant shares continue to sizzle. That stellar showing in July for Food Services & drinking places brought the trailing 3-month comparison to up more than 8% year over year.

To me, this echoes the data we’ve seen of late that points to the rebound in monthly restaurant sales, which is due as much to price increases as it is to improving customer volume, particularly at Fast Casual restaurants like Habit. As evidenced by Habit’s recent blowout June quarter earnings report, the company continues to execute on the strategy that led us to add the shares to the portfolio back in May. On the heels of the July Retail Sales report, I find myself once again boosting our price target on HABT shares to $17 from $16 as the underlying strength is continuing into the current quarter.

With just over 6% upside to our new price target for Habit, it’s not enough to commit fresh capital to the position. Given the surge in HABT shares – more than 80% since we added them to the Tematica Investing Select List this past May – as well as their current technical picture (see the chart below), I’m inclined to opportunistically use the position as a source of funds in the coming weeks.

 

 

While one might think those gains have come at the expense of grocery stores, and in turn, a potential blow to McCormick’s, the July figure for grocery was also the best in the last three months. What this tells us is people are likely paying more for food at the grocery store and at restaurants, which reflects the combination of higher food prices as well as the shift to food, drinks, and snacks that are healthier for the consumer (and a bit more expensive in general). On that strength and the forward view that will soon have us waist deep in season’s eatings, we are boosting our price target for MCK to $130 from $110. That includes some post-June quarter earnings catch up on our part for McCormick and its ability to grow its top line as part of our Clean Living and Rise of the New Middle Class investing themes, as well as wring out cost synergies associated with acquired businesses. In the coming months, I expect we will once again see this Dividend Dynamo boost its quarterly dividend, keeping MKC shares as one to own, not trade.

Getting back to the July Retail Sales report, the Nonstore retail July figure bodes very well for continued share gains at Amazon and other retailers that are embracing our Digital Lifestyle investing theme as we head into the holiday shopping season. Moreover, I see the e-commerce sales gains at Walmart – up +40% in the July quarter as well as those by Costco Wholesale, up  33% year to date — serving to confirm the accelerating shift by consumers to that modality of shopping as more alternatives become available. Helping Walmart is the addition of over 1,100 brands year to date including Zwilling J. A. Henckels cutlery and cookware, Therm-a-Rest outdoor products, O’Neill surf and water apparel, Shimano cycling products and the brands available on the dedicated Lord & Taylor shop, like Steve Madden footwear. Let’s remember too that Amazon continues to pull the lever that is private label products across a growing array of categories, and those margins are superior to those for its Fulfilled by Amazon efforts.

Speaking of Costco, its July sales figures showed a 6.6% year over year increase in same-store sales, which as we learned by comparing that with the July Retail Sales report was magnitudes stronger than General Merchandise stores (+3.3% year over year) and Department Stores (+0.3% year over year). Yes, Costco was helped by its fresh foods business, but even there it topped Grocery sales for the month. The clear message is that Costco continues to win consumer wallet share, and more of that is likely to be had in the coming months as consumers contend with the seasonal spending pickup.

The big loser in the July Retail Sales report was the Sporting goods, hobby, musical instrument, & bookstores category, which is more than likely seeing its lunch eaten by Amazon, Walmart, and Costco. All three of these companies are embracing the increasing digital lifestyle, targeting rising incomes in the emerging markets and helping cash-strapped consumers in the US stretch those dollars. As we have said many times before, the only thing better than the tailwinds of one of our investing themes is the combination of several and these companies are benefitting from our Digital Lifestyle, Rise of the New Middle Class and Middle-Class Squeeze investing themes.

All in all, the last 24 or so hours as very positive for our AMZN, COST, HABT and MKC shares on the Tematica Investing Select List.

  • Our price target on Amazon (AMZN) remains $2,250.
  • Our price target on Costco Wholesale (COST) remains $230.
  • Our price target on Habit Restaurant (HABT) is getting a boost to $17 from $16.
  • We are also bumping our price target on McCormick & Co. (MKC) shares to $130 from $110 as we get ready for seasons eatings 2018.

 

WEEKLY ISSUE: Scaling deeper into Dycom shares

WEEKLY ISSUE: Scaling deeper into Dycom shares

Key points from this issue:

  • We are halfway through the current quarter, and we’ve got a number of holdings on the Tematica Investing Select List that are trouncing the major market indices.
  • We are using this week’s pain to improve our long-term cost basis in Dycom Industries (DY) shares as we ratchet back our price target to $100 from $125.
  • Examining our Middle-Class Squeeze investing theme and housing.
  • A Digital Lifestyle company that we plan on avoiding as Facebook attacks its key market.

 

As the velocity of June quarter earnings reports slows, in this issue of Tematica Investing we’re going to examine how our Middle-Class Squeeze investing theme is impacting the housing market and showcase a Digital Lifestyle theme company that I think subscribers would be smart to avoid. I’m also keeping my eyes open regarding the recent concerns surrounding Turkey and the lira. Thus far, signs of contagion appear to be limited but in the coming days, I suspect we’ll have a much better sense of the situation and exposure to be had.

With today’s issue, we are halfway through the current quarter. While the major market indices are up 2%-4% so far in the quarter, by comparison, we’ve had a number of strong thematic outperformers. These include Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), AXT Inc. (AXTI), Costco Wholesale (COST),  Habit Restaurant (HABT), Walt Disney (DIS), United Parcel Service (UPS), Universal Display (OLED) and USA Technologies (USAT).  That’s an impressive roster to be sure, but there are several positions that have lagged the market quarter to date including GSV Capital (GSVC), Nokia (NOK), Netflix (NFLX), Paccar (PCAR) and Rockwell Automation (ROK). We’ve also experienced some pain with Dycom (DY) shares, which we will get to in a moment.

Last week jettisoned shares of Farmland Partners (FPI) following the company taking it’s 3Q 2018 dividend payment and shooting it behind the woodshed. We also scaled into GSVC shares following GSV’s thesis-confirming June quarter earnings report, and I’m closely watching NFLX shares with a similar strategy in mind given the double-digit drop since adding them to the Tematica Investing Select List just over a month ago.

 

Scaling into Dycom share to improve our position for the longer-term

Last week we unveiled our latest investing theme here at Tematica – Digital Infrastructure. Earlier this week, Dycom Industries (DY), our first Digital Infrastructure selection slashed its outlook for the next few quarters despite a sharp rise in its backlog. Those shared revisions are as follows:

  • For its soon to be reported quarter, the company now sees EPS of $1.05-$1.08 from its previous guidance of $1.13-$1.28 vs. $1.19 analyst consensus estimate and revenues of $799.5 million from the prior $830-$860 million vs. the $843 million consensus.
  • For its full year ending this upcoming January, Dycom now sees EPS of $2.62-$3.07 from $4.26-$5.15 vs. the $4.63 consensus estimate and revenues of $3.01-$3.11 billion from $3.23-$3.43 billion and the $3.33 billion consensus.

 

What caught my eyes was the big disparity between the modest top line cuts and the rather sharp ones to the bottom line. Dycom attributed the revenue shortfall to slower large-scale deployments at key customers and margin pressure due to the under absorption of labor and field costs – the same issues that plagued it in its April quarter. Given some of the June quarter comments from mobile infrastructure companies like Ericsson (ERIC) and Nokia (NOK), Dycom’s comments regarding customer timing is not that surprising, even though the magnitude to its bottom line is. I chalk this up to the operating leverage that is inherent in its construction services business, and that cuts both ways – great when things are ramping, and to the downside when activity is less than expected.

We also know from Ericsson and Dycom that the North American market will be the most active when it comes to 5G deployments in the coming quarters, which helps explain why Dycom’s backlog rose to $7.9 billion exiting July up from $5.9 billion at the end of April and $5.9 billion exiting the July 2017 quarter. As that backlog across Comcast, Verizon, AT&T, Windstream and others is deployed in calendar 2019, we should see a snapback in margins and EPS compared to 2018.

With that in mind, the strategy will be to turn lemons – Monday’s 24% drop in DY’s share price – into long-term lemonade. To do this, we are adding to our DY position at current levels, which should drop our blended cost basis to roughly $80 from just under $92. Not bad, but I’ll be inclined to scale further into the position to enhance that blended cost basis in the coming weeks and months on confirmation that 5G is moving from concept to physical network. Like I said in our Digital Infrastructure overview, no 5G network means no 5G services, plain and simple. As we scale into the shares and factor in the revised near-term outlook, I’m also cutting our price target on DY shares to $100 from $125.

  • We are using this week’s pain to improve our long-term cost basis in Dycom Industries (DY) shares as we ratchet back our price target to $100 from $125.

 

Now, let’s get to how our Middle-Class Squeeze investing theme is hitting the housing market, and review that Digital Lifestyle company that we’re going to steer clear of because of Facebook (FB). Here we go…

 

If not single-family homes, where are the squeezed middle-class going?

To own a home was once considered one of the cornerstones of the American dream. If we look at the year to date move in the SPDR S&P Homebuilders ETF (XHB), which is down nearly 16% this year, one might have some concerns about the tone of the housing market. Yes, there is the specter of increasing inflation that has and likely will prompt the Federal Reserve to boost interest rates, and that will inch mortgage rates further from the near record lows enjoyed just a few years ago.

Here’s the thing:

  • Higher mortgage rates will make the cost of buying a home more expensive at a time when real wage growth is not accelerating, and consumers will be facing higher priced goods as inflation winds its way through the economic system leading to higher prices. During the current earnings season, we’ve heard from a number of companies including Cinemark Holdings (CNK), Hostess Brands (TWNK), Otter Tail (OTTR), and Diodes Inc. (DIOD) that are expected to pass on rising costs to consumers in the form of price increases.
  • Consumers debt loads have already climbed higher in recent years and as interest rates rise that will get costlier to service sapping disposable income and the ability to build a mortgage down payment

 

 

And let’s keep in mind, homes prices are already the most expensive they have been in over a decade due to a combination of tight housing supply and rising raw material costs. According to the National Association of Home Builders, higher wood costs have added almost $9,000 to the price of the average new single-family since January 2017.

 

 

Already new home sales have been significantly lower than over a decade ago, and as these forces come together it likely means the recent slowdown in new home sales that has emerged in 2018 is likely to get worse.

 

Yet our population continues to grow, and new households are being formed.

 

This prompts the question as to where are these new households living and where are they likely to in the coming quarters as homeownership costs are likely to rise further?

The answer is rental properties, including apartments, which are enjoying low vacancy rates and a positive slope in the consumer price index paid of rent paid for a primary residence.

 

There are several real estate investment trusts (REITs) that focus on the apartment and rental market including Preferred Apartment Communities, Inc. (APTS) and Independence Realty Trust (IRT). I’ll be looking at these and others to determine potential upside to be had in the coming quarters, which includes looking at their attractive dividend yields to ensure the underlying dividend stream is sustainable. More on this to come.

 

A Digital Lifestyle company that we plan on avoiding as Facebook attacks its key market

As important as it is to find well-positioned companies that are poised to ride prevailing thematic tailwinds that will drive revenue and profits as well as the share price higher, it’s also important to sidestep those that are running headlong into pronounced headwinds. These headwinds can take several forms, but one of the more common ones of late is the expanding footprint of companies like Alphabet (GOOGL), Amazon (AMZN) and Facebook (FB) among others.

We’ve seen the impact on shares of Blue Apron (APRN) fall apart over the last year following the entrance of Kroger (KR) into the meal kit business with its acquisition of Home Chef and investor concerns over Amazon entering the space following its acquisition of Whole Foods Market. That changing landscape highlighted one of the major flaws in Blue Apron’s subscription-based business model –  very high customer acquisition costs and high customer churn rates. While we warned investors to avoid APRN shares back last October when they were trading at north of $5, those who didn’t heed our advice are now enjoying APRN shares below $2.20. Ouch!

Now let’s take a look at the shares of Meet Group (MEET), which have been on a tear lately rising to $4.20 from just under $3 coming into 2018. The question to answer is this more like a Blue Apron or more like USA Technologies (USAT) or Habit Restaurant (HABT). In other words, one that is headed for destination @#$%^& or a bona fide opportunity.

According to its description, Meet offers  applications designed to meet the “universal need for human connection” and keep its users “entertained and engaged, and originate untold numbers of casual chats, friendships, dates, and marriages.” That sound you heard was the collective eye-rolling across Team Tematica. If you’re thinking this sounds similar to online and mobile dating sites like Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, and Pairs that are all part of Match Group (MTCH) and eHarmony, we here at Tematica are inclined to agree. And yes, dating has clearly moved into the digital age and that falls under the purview of our Digital Lifestyle investing theme.

Right off the bat, the fact that Meet’s expected EPS in 2018 and 2019 are slated to come in below the $0.39 per share Meet earned in 2017 despite consensus revenue expectations of $181 in 2019 vs. just under $124 million in 2017 is a red flag. So too is the lack of positive cash flow and fall off in cash on the balance sheet from $74.5 million exiting March 2017 to less than $21 million at the close of the June 2018 quarter. A sizable chunk of that cash was used to buy Lovoo, a popular dating app in Europe as well as develop the ability to monetize live video on several of its apps.

Then there is the decline in the company’s average total daily active users to 4.75 million in the June 2018 quarter from 4.95 million exiting 2017. Looking at average mobile daily active users as well as average monthly active user metrics we see the same downward trend over the last two quarters. Not good, not good at all.

And then there is Facebook, which at its 2018 F8 developer conference in early May, shared it was internally testing its dating product with employees. While it’s true the social media giant is contending with privacy concerns, CEO Mark Zuckerberg shared the company will continue to build new features and applications and this one was focused on building real, long-term relationships — not just for hookups…” Clearly a swipe at Match Group’s Tinder.

Given the size of Facebook’s global reach – 1.47 billion daily active users and 2.23 billion monthly active users – it has the scope and scale to be a force in digital dating even with modest user adoption. While Meet is enjoying the monetization benefits of its live video offering, Facebook has had voice and video calling as well as other chat capabilities that could spur adoption and converts from Meet’s platforms.

As I see it, Meet Group have enjoyed a nice run thus far in 2018, but as Facebook gears into the digital dating and moves from internal beta to open to the public, Meet will likely see further declines in user metrics. So, go user metrics to go advertising revenue and that means the best days for MEET shares could be in the rearview mirror. To me this makes MEET shares look more like those from Blue Apron than Habit or USA Technologies. In other words, I plan on steering clear of MEET shares and so should you.

 

 

WEEKLY ISSUE: Trade and Tariffs, the Words of the Week

WEEKLY ISSUE: Trade and Tariffs, the Words of the Week

 

KEY POINTS FROM THIS WEEK’S ISSUE:

  • We are issuing a Sell on the shares of MGM Resorts (MGM) and removing them from the Tematica Investing Select List.
  • While the markets are reacting mainly in a “shoot first and ask questions later” nature, given the widening nature of the recent tariffs there are several safe havens that patient investors must consider.
  • We are recasting several of our Investment Themes to better reflect the changing winds.

 

Investor Reaction to All the Tariff Talk

Over the last two days, the domestic stock market has sold off some 16.7 points for the S&P 500, roughly 0.6%. That’s far less than the talking heads would suggest as they focus on the Dow Jones Industrial Average that has fallen more than 390 points since Friday’s close, roughly 1.6%. Those moves pushed the Dow into negative territory for 2018 and dragged the returns for the other major market indices lower. Those retreats in the major market indices are due to escalating tariff announcements, which are raising uncertainty in the markets and prompting investors to shoot first and ask questions later. We’ve seen this before, but we grant you the causing agent behind it this time is rather different.

What makes the current environment more challenging is not only the escalating and widening nature of the tariffs on more countries than just China, but also the impact they will have on supply chain part of the equation. So, the “pain” will be felt not just on the end product, but rather where a company sources its parts and components. That means the implications are wider spread than “just” steel and aluminum. One example is NXP Semiconductor (NXPI), whose chips are used in a variety of smartphone and other applications – the shares are down some 3.7% over the last two days.

With trade and tariffs being the words of the day, if not the week, we have seen investors bid up small-cap stocks, especially ones that are domestically focused. While the other major domestic stock market indices have fallen over the last few days, as we noted above, the small-cap, domestic-heavy Russell 2000 is actually up since last Friday’s close, rising roughly 8.5 points or 0.5% as of last night’s market close. Tracing that index back, as trade and tariff talk has grown over the last several weeks, it’s quietly become the best performing market index.

 

A Run-Down of the Select List Amid These Changing Trade Winds

On the Tematica Investing Select List, we have more than a few companies whose business models are heavily focused on the domestic market and should see some benefit from the added tailwinds the international trade and tariff talk is providing. These include:

  • Costco Wholesale (COST)
  • Dycom Industries (DY)
  • Habit Restaurants (HABT)
  • Farmland Partners (FPI)
  • LSI Industries (LYTS)
  • Paccar (PCAR)
  • United Parcel Services (UPS)

We’ve also seen our shares of McCormick & Co. (MKC) rise as the tariff back-and-forth has picked up. We attribute this to the inelastic nature of the McCormick’s products — people need to eat no matter what — and the company’s rising dividend policy, which helps make it a safe-haven port in a storm.

Based on the latest global economic data, it once again appears that the US is becoming the best market in the market. Based on the findings of the May NFIB Small Business Optimism Index, that looks to continue. Per the NFIB, that index increased in May to the second highest level in the NFIB survey’s 45-year history. Inside the report, the percentage of business owners reporting capital outlays rose to 62%, with 47% spending on new equipment, 24% acquiring vehicles, and 16% improving expanded facilities. Moreover, 30% plan capital outlays in the next few months, which also bodes well for our Rockwell Automation (ROK) shares.

Last night’s May reading for the American Trucking Association’s Truck Tonnage Index also supports this view. That May reading increased slightly from the previous month, but on a year over year basis, it was up 7.8%. A more robust figure for North American freight volumes was had with the May data for the Cass Freight Index, which reported an 11.9% year over year increase in shipments for the month. Given the report’s comment that “demand is exceeding capacity in most modes of transportation,” I’ll continue to keep shares of heavy and medium duty truck manufacturer Paccar (PCAR) on the select list.

The ones to watch

With all of that said, we do have several positions that we are closely monitoring amid the escalating trade and tariff landscape, including

  • Apple (AAPL),
  • Applied Materials (AMAT)
  • AXT Inc. (AXTI)
  • MGM Resorts (MGM)
  • Nokia (NOK)
  • Universal Display (OLED)

With Apple we have the growing services business and the eventual 5G upgrade cycle as well as the company’s capital return program that will help buoy the shares in the near-term. Reports that it will be spared from the tariffs are also helping. With Applied, China is looking to grow its in-country semi-cap capacity, which means semi- cap companies could see their businesses as a bargaining chip in the short-term. Longer- term, if China wants to grow that capacity it means an eventual pick up in business is likely in the cards. Other drivers such as 5G, Internet of Things, AR, VR, and more will spur incremental demand for chips as well. It’s pretty much a timing issue in our minds, and Applied’s increased dividend and buyback program will help shield the shares from the worst of it.

Both AXT and Nokia serve US-based companies, but also foreign ones, including ones in China given the global nature of smartphone component building blocks as well as mobile infrastructure equipment. Over the last few weeks, the case for 5G continues to strengthen, but if these tariffs go into effect and last, they could lead to a short-term disruption in their business models. Last week, Nokia announced a multi-year business services deal with Wipro (WIT) and alongside Nokia, Verizon (VZ) announced several 5G milestones with Verizon remaining committed to launching residential 5G in four markets during the back half of 2018. That follows the prior week’s news of a successful 5G test for Nokia with T-Mobile USA (TMUS) that paves the way for the commercial deployment of that network.

In those cases, I’ll continue to monitor the trade and tariff developments, and take action when are where necessary.

 

Pulling the plug on MGM shares

With MGM, however, I’m concerned about the potential impact to be had not only in Macau but also on China tourism to the US, which could hamper activity on the Las Vegas strip. While we’re down modestly in this Guilty Pleasure company, as the saying goes, better safe than sorry and that has us cutting MGM shares from the Select List.

  • We are issuing a Sell on the shares of MGM Resorts (MGM) and removing them from the Tematica Investing Select List

 

Sticking with the thematic program

On a somewhat positive note, as the market pulls back we will likely see well-positioned companies at better prices. Yes, we’ll have to navigate the tariffs and understand if and how a company may be impacted, but to us, it’s all part of identifying the right companies, with the right drivers at the right prices for the medium to long-term. That’s served us well thus far, and we’ll continue to follow the guiding light, our North Star, that is our thematic lens. It’s that lens that has led to returns like the following in the active Tematica Investing Select List.

  • Alphabet (GOOGL): 60%
  • Amazon (AMZN): 133%
  • Costco Wholesale (COST) : 30%
  • ETFMG Prime Cyber Security ETF (HACK): 34%
  • USA Technologies (USAT): 62%

Over the last several weeks, we’ve added several new positions – Farmland Partners (FPI), Dycom Industries (DY), Habit Restaurant (HABT) and AXT Inc. (AXTI) to the active select list as well as Universal Display (OLED) shares. As of last night’s, market close the first three are up nicely, but our OLED shares are once again under pressure amid rumor and speculation over the mix of upcoming iPhone models that will use organic light emitting diode displays. When I added the shares back to the Select List, it hinged not on the 2018 models but the ones for 2019. Let’s be patient and prepare to use incremental weakness to our long-term advantage.

 

Recasting Several of our investment themes

Inside Tematica, not only are we constantly examining data points as they relate to our investment themes we are also reviewing the investing themes that we have in place to make sure they are still relevant and relatable. As part of that exercise and when appropriate, we’ll also rename a theme.

Over the next several weeks, I’ll be sharing these repositions and renamings with you, and then providing a cheat sheet that will sum up all the changes. As I run through these I’ll also be calling out the best-positioned company as well as supplying some examples of the ones benefitting from the theme’s tailwinds and ones marching headlong into the headwinds.

First up, will be a recasting of our Rise & Fall of the Middle-Class theme.  As the current name suggests, there are two aspects of this theme — the “Rise” and the “Fall” part. It can be confusing to some, so we’re splitting it into two themes.  The “Rise” portion will be “The New Global Middle Class” and will reflect the rapidly expanding middle class markets particularly in Asia and South America. On the other hand, the “Fall” portion will be recast as “The Middle Class Squeeze” to reflect the shrinking middle class in the United States and the realities that poses to our consumer-driven economy.

We’ll have a detailed report to you in the coming days on the recasting of these two themes, how it impacts the current Select List as well as other companies we see as well-positioned given the tailwinds of each theme.

 

 

Lord & Taylor’s owner Hudson Bay increasingy focused on digital

Lord & Taylor’s owner Hudson Bay increasingy focused on digital

What can we say other than it’s the latest sign of the woes faced by traditional brick & mortar retailers – the closing of once iconic flagship locations as they are caught between the push-pull of our investment themes. In this case it’s the accelerating shift toward digital shopping that is part of our Connected Society or Digital Lifestyle investing theme as well as our Cash-strapped Consumer one.

While Hudson Bay once expected to keep a scaled down version of the iconic Lord & Taylor location on Fifth Avenue, it has since decided to throw in the towel all together. Future generations may never know the beauty of Lord & Taylor’s Holiday Windows… unless Hudson Bay gives them a digital makeover as well.

 

Hudson’s Bay (HBAYF), the Canadian-based owner of Lord & Taylor and Saks Fifth Avenue, agreed last October to sell the Fifth Avenue store to WeWork for $850 million. The iconic store is located between 38th and 39th Streets and not far from Times Square.

The original plan was for the store to become WeWork’s New York headquarters after the 2018 holiday season. After that, approximately 150,000 square feet of the building would continue to be run as a scaled-down Lord & Taylor.

But that is no longer the case. Hudson’s Bay said late Monday that it “has decided not to maintain a presence at [the Fifth Avenue] location following turnover of the building to WeWork.”

The company said that “exiting this iconic space” — which first opened in 1914 — is a reflection of “Lord & Taylor’s increasing focus on its digital opportunity and [Hudson’s Bay] commitment to improving profitability.”

Hudson’s Bay is turning to Amazon rival Walmart (WMT) for assistance in the digital shopping arena. Walmart announced last November that Lord & Taylor will have a flagship store on Walmart.com.

The companies added last month that the online store is set to launch in the coming weeks with more than 125 brands and will feature free two-day shipping for orders over $35.

Source: Lord & Taylor is closing its 5th Ave store

Weekly Issue: Black Friday, Tax Reform and Boosted Dividends in Time for the Holidays

Weekly Issue: Black Friday, Tax Reform and Boosted Dividends in Time for the Holidays

Black Friday Through Cyber Monday Provide Confirming Data Points for Amazon (AMZN) and UPS Positions

Earlier this week, we not only issued our Tematica Investing thoughts on the holiday shopping weekend, which was very confirming for our Connected Society investment theme thesis on both Amazon (AMZN) and United Parcel Service (UPS), it was also the topic of conversation between Tematica’ Chief Macro Strategist Lenore Hawkins and myself on this week’s earlier than usual Cocktail Investing Podcast. As a reminder, we see United Parcel Service as the sleeper second derivative play on the shift to digital shopping this holiday season and beyond.

Per data published by GBH Insights, on Black Friday alone, Amazon garnered close to half of all online sales, which set new record levels on Thanksgiving as well as Black Friday and Cyber Monday. As we learned yesterday, this year’s Cyber Monday was the biggest sales day for online and mobile ever in the US as online sales hit $6.59 billion, up 16.8% year over year. As Lenore and I discussed on the podcast, spending on mobile devices continued to take share from desktop and in-store spending during Thanksgiving and Black Friday, and that also happened on Cyber Monday as mobile sales broke a new record by reaching $2 billion.

Yesterday, Amazon issued a press release sharing it was the “’best-ever’ holiday shopping weekend for devices sold between Thanksgiving and Cyber Monday. After reviewing the data and prospects for Amazon’s business this holiday season as it benefits in part from its expanding private label brand business as well as the even greater than expected shift to digital commerce this holiday shopping season, we are boosting our price target on AMZN shares to $1,400 from $1,250. While some may focus on the implied P/E of 175x expected 2018 EPS of $7.98 for our new price target, it equates to a price to earnings growth (PEG) rate of roughly 1.0% as Amazon is set to grow its EPS by a compound annual growth rate of just over 184% over the 2015-2018 period. Even if 2018 expectations are a tad aggressive, after taking a more conservative 2018 view our new $1,400 price target equates to a PEG ratio between 1.1-1.3x, which we find more than acceptable from a risk to reward perspective.

  • We are boosting our price target on Amazon (AMZN) shares to $1,400 from $1,250.
  • Our price target on United Parcel Service (UPS) remains $130.

 

Market Moves Higher Ahead of Senate Vote on Tax Reform

The major market indices continued to move higher as the Senate Budget Committee approved the Senate’s tax plan yesterday, which brings it to an expected floor vote tomorrow. This inches the prospects for potential tax reform happening by the end of 2017 a bit higher, although while we remain optimistic we here at Tematica continue to see far greater odds of tax reform happening in 2018 as the House and Senate bills close their respective gap. While both bills cut taxes on businesses and individuals, they differ in the scope and timing of those cuts.

As enthusiasm has gained for tax reform, smaller cap stocks have rallied, as small-caps tend to have greater U.S. exposure in revenue and profit mix compared to bigger, multi-national stocks. The small-cap laden Russel 2000 is up more than 1% this week alone and has risen roughly 2.8% over the last month beating out the Dow Jones Industrial Average, the S&P 500 and even the Nasdaq Composite Index. That small-cap climb, combined with the influence of our thematic tailwinds led the USA Technologies (USAT), AXT Inc. (AXTI) and LSI Industries (LYTS) to rise even faster than the Russell. Over the last month, they’ve risen more than 30%, 18%, and 5% respectively and over the last few weeks, we’ve trimmed back USAT and AXTI shares, booking meaningful wins, while offsetting those gains by closing out positions that have been lagging.

As tax reform lumbers forward, we’ll continue to monitor developments and what they mean for both the market and the Tematica Investing Select List.

 

 

Dividend Dynamo Company McCormick Does it Again

Call me old-fashioned, but I love dividends and I love companies that have the ability to raise their dividends even more. When a company boosts its dividend, it tends to result in a step function move higher in its stock price. If it’s a serial dividend raiser, or as I like to call them a dividend dynamo company, we tend to get a hefty 1-2 combination punch of a step higher in the stock price as well as higher dividend payments. Boom!

We’ve got several such companies on the Tematica Investing Select List, and this week McCormick & Co. (MKC) once again boosted its quarterly dividend. This new 10% increase to $0.52 per share marks the 32nd consecutive year that McCormick has increased its quarterly dividend and offers us even greater comfort with our $110 price target. With regard to this new dividend, it is payable on January 16 to shareholders of record on December 29 – mark your calendars!

  • Our price target on McCormick & Co. (MKC) shares remains $110

 

What We’re Watching For Over the Coming Days

During the next several days, as we exit November a number of economic data points will start to roll in, as well as other key data points such as retailer monthly same-store sales figures. Amid the number of economic reports to be had, we’ll be parsing the October construction spending report and what it means for both non-residential construction activity and shares of LSI Industries (LYTS). The shares have been an “under the radar” mover on a week to week basis, but since adding the position to the Tematica Investing Select List in mid-September are up more than 5%. As August-September hurricane-related construction rebounds, we continue to see further upside ahead for LYTS shares.

  • Our price target on LSI Industries (LYTS) remains $10.

 

While we are understandably bearish on the vast majority of brick & mortar retailers, we remain upbeat with Costco Wholesale (COST) given its higher-margin membership fee income stream. Over the last several months, Costco’s monthly same-store sales reports have shown it is not suffering at the hands of Amazon at all, but rather in keeping with our Cash-Strapped Consumer investing theme, it continues to take consumer wallet share. As Costco shares it November data, we’ll be sure to break it down and assess what it means for our $190 price target.

  • Our price target on Costco Wholesale (COST) remains $190.

 

With Guilty Pleasure MGM Resorts (MGM) shares on the Select List, we’ll also be on the lookout for November gaming data pertaining to Nevada as well as Macau. As we mentioned recently, we are heading into one of the slower seasons for the Las Vegas strip and MGM continues to renovate several choice properties with expectations of reopening them in 1Q 2018. We’ll continue to be patient, and if the opportunity presents itself opportunistic as well given our $37 price target. On the housekeeping font, MGM’s next quarterly dividend of $0.11 per share should arrive in mid-December.

  • Our price target on MGM Resorts (MGM) shares remains $37.

 

 

Boosting Price Target on UPS Shares Amid eCommerce Surge

Boosting Price Target on UPS Shares Amid eCommerce Surge

Key Points from this Post:

  • We are boosting our price target on United Parcel Service (UPS) shares to $130 from $122. Our new price target is a tad below the high end of the price target range that clocks in at $132, and offers an additional 7.6% upside from current levels.
  • As additional holiday sales shopping forecasts are published, we’ll be double and triple checking our UPS price target for additional upside.
  • Our price target on Amazon (AMZN) shares remains $1,150.
  • Our price target on Alphabet (GOOGL) shares remains $1,050

 

We have long said that United Parcel Service shares are the second derivative to the accelerating shift toward digital shopping. Whether you order from our own Amazon (AMZN), Nike (NKE), Wal-Mart (WMT), William Sonoma (WSM) or another retailer, odds are UPS will be one of the delivery solutions.

As we enter 4Q 2107 this week, we’re seeing rather upbeat forecasts for the soon to be upon us holiday shopping season. We’d note that most of these forecasts focus on the period between November and December/January, more commonly known as the Christmas shopping and return season that culminates in post-holiday sales that have retailers looking to make room for the eventual spring shopping season. With Halloween sales expected to reach $9.1 billion this year up 8.3% year over year per the National Retail Federation, we suspect there will be plenty of costumes, candy, and other items for this “holiday” that are purchased online.

Now let’s review the 2017 holiday shopping forecasts that have been published thus far:

Deloitte: Deloitte expects retail holiday sales to rise as much as 4.5% between November and January of this year, vs. last year’s rise of 3.6%, to top $1 trillion. In line with our thinking, Deloitte sees e-commerce sales accelerating this year, growing 18%-21% this year compared to 14.3% last year, to account for 11% of 2017 retail holiday sales.

eMarketer is forecasting total 2017 holiday season spending of $923.15 billion, representing 18.4% of U.S. retail sales for the year, 0.1% decline from last year. Parsing the data from a different angle, that amounts to nearly 20% of all 2017 retail sales. Digging into this forecast, we find eMarketer is calling for US retail e-commerce sales to jump 16.6% during the 2017 holiday season, driven by increases in mobile commerce and the intensifying online battle between large retailers and digital marketplaces. By comparison, the firm sees total retail sales growing at a moderate 3.1%, as retailers continue to experience heavy discounting during the core holiday shopping months of November and December.

As we saw above, a differing perspective can lead to greater insight. In this case, eMarketer’s data puts e-commerce’s share of this year’s holiday spending at 11.5% with the two months of November and December accounting for nearly 24% of full-year e-commerce sales.

AlixPartners: Global business-advisory firm, AlixPartners, forecasts 2017 US retail sales during the November-through-January period to grow 3.5%-4.4% vs. 2016 holiday-season sales. Interestingly enough, the firm arrives at its forecast using some mathematical interpolation – over the past seven years, year-to-date sales through the back-to-school season have accounted for 66.1% to 66.4% of retail sales annually, with holiday sales accounting for 16.9% to 17.0%.

NetElixir: Based on nine years of aggregate data from mid-sized and large online retailers, NetElixir forecasts this year’s holiday e-commerce sales will see a 10% year-over-year growth rate. NetElixir also predicts Amazon’s share of holiday e-commerce sales will reach 34%, up from the 30% last year.

These are just some of the holiday shopping forecasts that we expect to get, including the barometer that most tend to focus on – the 2017 holiday shopping forecast from the National Retail Federation. What all of the above forecasts have in common is the acceleration of e-commerce sales and the pronounced impact that will have in the November-December/January period.

In looking at revenue forecasts for UPS’s December quarter, current consensus expectations call for a 5.8% year over year increase vs. $16.9 billion in the September quarter. We suspect this forecast could be conservative, and the same holds true for EPS expectations, which likely means there is upside to be had vs. the $6.01 per share in consensus expectations for 2017. Over the 2014-2016 period, UPS shares peaked during the holiday shopping season between 19.3-23.5x earnings, or an average P/E ratio of 21.3x. Applying that average multiple to potential 2017 EPS between $6.01-$6.15 derives a price target between $127-$131.

As consumers continue to shift disposable spending dollars to online and mobile platforms, we continue to see Amazon, as well as Alphabet (GOOGL), benefiting as consumers embrace this shift and Cash-Strapped Consumers look to stretch the spending dollars they do have this upcoming holiday shopping season.

  • We are boosting our price target on United Parcel Service (UPS) shares to $130 from $122, an additional 7.6% upside from current levels.
  • Our price target on Amazon (AMZN) shares remains $1,150.
  • Our price target on Alphabet (GOOGL) shares remains $1,050
Checking the 2017 Corn Harvest and our Teucrium Corn Fund shares

Checking the 2017 Corn Harvest and our Teucrium Corn Fund shares

Key Points from This Post:

  • We remain long-term bullish on Teucrium Corn Fund (CORN) shares given a new China-related wrinkle that could reshape supply-demand dynamics for corn.

  • Near-term, we are entering the peak harvest season for Corn, and we’re watching the weather in the western domestic corn region that could crimp this year’s harvest, which is already shaping up to be the weakest in the last four years.

  • Our long-term price target on CORN shares remains $25

 

In mid-July, we added shares of the Teucrium Corn Fund (CORN) to the Tematica Investing Select List as a Rise & Fall of the Middle Class and Scarce Resource investment theme play on one of the most widely used and consumed commodities – corn. Since that addition of those CORN shares, even though they are off their late August bottom at $17.13, the position is still down 11.5% as of last night’s market close. While we are patient investors, we are human (yes, it’s true!) and that can lead to bouts of frustration with a position. When that happens, being the professional investors that we are, we turn back to the investing premise that led to adding the shares in the first place, checking the data along the way to determine if the thesis remains intact. If it is, then we will remain patient; if not, then we have some decisions to make.

In the case of corn supply-demand dynamics, the below chart is the latest data from the Crop Progress Report published by the U.S. Department of Agriculture’s National Agriculture Statistics Service (NASS):

 

 

What the data above depicts is the current corn crop is shaping up to be the weakest in the last four years. The same data set shows a growing percentage of the current corn crop is in Poor or Very Poor condition. If this condition persists, let alone rises, it will impact the coming harvest. Simple supply-demand dynamics means a weaker than expected supply will likely lead to higher corn prices.

What this means is we’ll be watching the progress of the 2017 harvest, and September-October is the peak time for that activity. As of this past Sunday night, just 7% of the U.S. corn crop had been harvested vs. the 5-year average of 11%. While that may seem like a small percentage difference, remember that’s on a base of millions of metric tons.

What’s likely to hamper the harvest and its yield this year is the weather. While the weather in the eastern corn-growing region of the U.S. is looking favorable with dryer, warmer weather, it’s looking rather different in the western corn belt that is the eastern Dakotas, Minnesota, and northern Iowa. In that region, forecasts are calling for dramatically cooler temperatures that could result in scattered frost next week. If that happens, we are likely to see the percentage of the current corn crop that is Poor/Very Poor climb past the current 39% level. Such a move would boost corn prices as well as our CORN shares.

Further complicating the corn supply-demand equation in the medium to longer-term is news that China plans to dramatically boost ethanol use in its gasoline supply, moving to E10 blends by 2020 to help combat pollution and smog. If this move comes to pass, it could lead to a meaningful shift in corn demand dynamics given that China is the world’s largest car market, but is the third largest consumer of ethanol fuel. According to S&P Global Platts, China has the “capacity to produce maybe a billion gallons of ethanol, and that would have to be increased ten-fold to get to this E-10 mandate.” That sound you just heard was eyebrows being popped higher on what that could mean for corn prices.

Near-term we will continue to monitor the weather and what it means to the current corn crop. Should milder than expected weather emerge, and weigh on corn prices in the coming weeks, we’ll look to use that weakness to improve our long-term position in CORN shares given the potential game changer in corn demand in the medium-term.

 

 

Scaling into Costco as it continues to deliver impressive results

Scaling into Costco as it continues to deliver impressive results

 

  • With Costco Wholesale (COST) shares a smidge below our late June $159.72 re-entry price, we will use the current mismatch between share price performance and the company’s business to increase our position in COST shares.

  • Our price target on COST shares remains $190.

 

Late last week, while many were trying to squeeze in the last few days of summer vacation, Cash-Strapped Consumer company Costco Wholesale (COST) reported better than expected August sales, once again proving despite Amazon (AMZN) related fears, Costco continues to gain consumer wallet share. Digging into the August report, in full Costco’s comparable domestic net sales rose 7.3% year over year for the four weeks ending August 27, while the Canadian and International business grew more than 8% and 6% year over year.

Even after we strip out the impact of gas prices, which can be volatile, as well as foreign exchange rates, Costco’s domestic rose more than 6% compared to year-ago level. The same is had with its Canadian results which rose more than 4% compared to year-ago levels and the International segment, up more than 4%. All told, those results bring total company sales up just shy of 6%.

As we like to say context is key and that means comparing Costco’s August sales with those of the last few months. In doing so, we find confirmation for our view that Costco continues to deliver compared to those Amazon related concerns that have weighed on its shares over the last several weeks. In fact, over the last three months, Costco’s comparable sales strengthened climbing a reported 6.0% in June, 6.2% in July and 7.3% in August.

Now let’s add one more layer to the mix – the impact of newly opened warehouses. Over the last three months, Costco opened 9 new locations to bring its total to 741. As impressive as that might be, the year over year comparisons are even more daunting – during the three months ended August 2016, the company opened 7 new locations that brought its total to 715. In other words, year over year ending August 2017, the company averaged nearly 4% more locations for trailing 3-month period. Factoring those additional locations into the sales mix, Costco total sales for the period rose 8.1%.

That doesn’t sound at all like the pain we are hearing from regular brick & mortar retailers, and especially mall-based ones. Yet COST shares are off 12.5% over the last three months. Let’s remember too, with each additional new locations Costco grows its higher margin membership fee income stream, which is a key driver in EPS growth.

In summary:

  • With Costco shares a smidge below our late June $159.72 re-entry price, we will use the current mismatch between share price performance and the company’s business to increase our position in COST shares.
  • Our price target on COST shares remains $190.

 

QUARTER WRAP-UP: Look Back Before Moving Ahead

QUARTER WRAP-UP: Look Back Before Moving Ahead

In this Week’s Issue:

  • A Recap of Our Moves Over the Second Quarter
  • Ahead of 2Q 2017 Earnings Season We’re Adjusting Several Stop Losses
  • What We’ll Be Watching Near-term for the Back Half of the Year

 

This week, rather than a weekly check-in, we’re going to spend our time wrapping up the quarter that was and all its happenings, as well as offer a look ahead to the back half of the year. Along the way, we’re also using this time to tighten up a few of our protective stop-loss levels. Whether you’re reading this on the beach, or in your lonely office while everyone else is on vacation this week, we’ve got a lot to cover, so let’s get to it . . .

 

A Recap of Our Moves Over the Second Quarter

With last Friday’s market close, we shut the books on not only the month of June, but the second quarter of 2017 and the first half of the year. During the last 90 days, we’ve seen several things unfold as the stock market powered higher despite the Fed boosting interest rates, the Trump Bump become the Trump Slump, and an increasing amount of data pointing to a slowing domestic economy. All told the domestic market indices rose between 2.6 to 4.0 percent during the second quarter. The Nasdaq, which came in at the upper end of that range, pared its gains back over the last few weeks as those items we discussed above have bubbled up in investor minds. Over the last quarter, the Russell 2000, a barometer of small-cap stocks returned 2.2 percent, bringing its year to date return to just over 4 percent.

During the quarter, we added a number of new positions to the Tematica Select List, including Cashless Consumption company USA Technologies (USAT), Food with Integrity play Amplify Snack Brands (BETR) and MGM Resorts (MGM), a Guilty Pleasure company if there ever was one. We also added RF semiconductor substrate company AXT (AXTI), as a food chain play on not only Apple’s (AAPL) upcoming iPhone, but also one for the upcoming 5G rollout by the likes of our own AT&T (T) as well as Verizon Communications (VZ) and other mobile carriers. That same 5G rollout, as well as continued 4G LTE and fiber buildouts, are also powering Dycom (DY) shares. Toward the very end of the quarter, we took advantage of the mismatch between the Cash-Strapped Consumer opportunity with Costco Wholesale (COST) when the herd dragged the share price down thinking it is a casualty of the Amazon (AMZN) – Whole Foods (WFM) tie up. Make no mistake, we see casualties spinning out of Amazon’s acquisition, but as we said previously, those look more like Kroger (KR) and Sprouts Farmers Market (SFM).

In addition to these newcomers, the Select List benefitted from strong moves in several Connected Society positions during the quarter, including Amazon (AMZN), Alphabet (GOOGL) and Facebook (FB) as well as the sleeper move in CalAmp (CAMP) shares that climbed more than 23 percent over the three-month period. As impressive as that was, the real champ on the Tematica Select List was Universal Display (OLED), which soared more than 30 percent during 2Q 2017, bringing our total gain to over 100 percent since we added the shares to the Select List in October of last year.

With all of these positions, we continue to see further gains ahead. While the upside in Amazon, Alphabet and Facebook are much talked about, we’d remind you about the Electronic Logging Device mandate that goes into effect late this year and will be a strong catalyst for CalAmp shares. The industry capacity constraint for organic light emitting diodes is bumping up demand from not only Apple, but other applications. That capacity constraint status will span several quarters as it is likely Apple will only have half of its iPhone production using organic light emitting diode displays by 2020 according to a new report from Trendforce. That’s both good for Universal Display (OLED) shares as well as Applied Materials (AMAT).

Those strong results offset weaker showings at Guilty Pleasure company Starbucks (SBUX), Connected Society play AT&T (T) and Content is Kingstalwart Disney (DIS). From time to time, we need to be patient with a position as we wait for the herd to catch up to the thematic tailwinds we’re seeing. That was the case with Universal Display (OLED) as well as Dycom Industries (DY), and we are seeing that with both Starbucks and AT&T. The key to Starbucks is its international expansion, particularly in China where it will benefit from the Rising Middle Class. While we are seeing deflation hit mobile carriers, the AT&T-Time Warner (TWX) combination should transform AT&T’s business from data driven to one that is a better blend of data, advertising and content. We’ve seen the content moat strategy pay off before at Disney (DIS)and Comcast (CMCSA), and we’ll be patient with AT&T shares given the deal doesn’t close until later this year. As far as Disney goes, it was evident earlier this year that 2017 was going to be a transition year for the company. We saw that in its box office line-up, which was one of the lightest in several years. That means we’re in a holding pattern with Disney until October when it begins to release the next iterations from Marvel, Disney Animation and Lucasfilm.

Toward the end of the second quarter, we saw some declines at Rise & Fall of the Middle-Class company McCormick & Co. (MKC), a dividend dynamo company if there ever was one, and Alphabet (GOOGL) shares following the $2.71 billion (€2.4 billion) fine from EU antitrust regulators and their view that Alphabet must “apply the same methods to rivals as its own when displaying their services.” As a reminder, Alphabet’s Google business has 90 days to end the conduct and explain how it will implement the decision, or face additional penalties of up to 5 percent of average daily global revenue. With more than $92.5 billion in cash, Alphabet has ample funds to swallow the fine, however, the implication of the decision could reshape how Google presents search results in Europe — if not eventually elsewhere. As such, we expect the company will review the decision and consider an appeal. Getting back to McCormick, the shares traded off recently, which has them once again back in the Buy zone given the upside to our $110 price target and current dividend yield.

Also during the quarter, we saw a few strong reminders in the form of the WannaCry and Petya ransomware attacks, both of which impacted our Safety & Security investing theme and why PureFunds ISE Cyber Security ETF (HACK) shares are on the Select List. With North Korea launching yet another missile, and the opening of defense deals under the Trump administration, we’re looking at several other aspects of that theme.

When we added Nuance Communications (NUAN) to fold in January, one of the reasons why was that voice, rather than touch, was the emerging interface for devices. During 2Q 2017 we saw that notion go from emerging to center state. Even today, Samsung is talking about launching a connected speaker as it once again follows in Apple’s footsteps, but this time it is way behind not only Apple, but also Amazon and Alphabet. With voice technology spreading to autos and appliances, we remain in the early innings with NUAN shares.

Finally, during 2Q 2107 we shed three positions:

  • We were stopped out of Aging of the Population play AMN Healthcare (AMN) when the shares crossed $37, which led us with a modest gain.
  • The same occurred with United Natural Foods (UNFI), a Foods with Integrity selection, but the positioned booked a loss near 9.5 percent over the last 9 months.
  • Offsetting those results, given some concerns about the Nasdaq giving back its gains (something that has played out as we expected), we exited PowerShares NASDAQ Internet Portfolio ETF (PNQI) shares last week with a return of more than 23.5 percent.

 

Ahead of 2Q 2017 Earnings Season We’re Adjusting Several Stop Losses

We’ll talk more about what we expect for 2Q 2017 earnings season and the back half of the year in a few paragraphs, but before that event kicks off in earnest by this time next week, we are setting or revising a number of protective stop losses. To head a question off, we are not setting ones for Amazon, Facebook, Alphabet and some others that are core positions for the longer-term. Nor are we setting ones for more recently added positions such as COST, AXTI, MGM, and BETR shares as we’re inclined to use weakness to improve the respective cost basis like we recently did with COST shares.

Okay, here we go:

  • Setting a protective stop loss on Starbucks at $50.00
  • USA Technologies (USAT) at $4.50, which worst case means a break-even position for this Cashless Consumption company;
  • United Parcel Service at $100.00, which locks in a modest gain;
  • McCormick & Co. at $90;
  • Applied Materials at $35;
  • CalAmp at $18, which will lock in a profit of more than 30 percent;
  • We will keep our stop loss for International Flavors & Fragrances (IFF) and AT&T (T) at $125 and $36, respectively, as well as Disney and Universal Display both at $100.

 

What We’ll Be Watching Near-term for the Back Half of the Year

With the Fourth of July holiday now past, odds are this will be a somewhat slow and sleepy week as many have opted to utilize the holiday and how it fell on the calendar to turn a few days into a summer vacation. Who can blame them?

While they are getting some rest and relaxation in, and hopefully enjoy several of our investing themes along the way including Foods with Integrity, Guilty Pleasures, and Fattening of the Population (those last two with some degree of moderation of course), those of us manning the desks will have a compressed week with no shortage of data to look at. This includes the latest FOMC minutes being issued later today, followed by the June ADP Employment Report and ISM Service report on Thursday, and Friday’s June Employment Report. All of that comes after disappointing June auto and trucks sales, but General Motor’s (GM) recent cut to its 2017 auto forecast by several hundred thousand units, was there any real surprise to the June data? We think not and odds are it means another leg down for the speed of the economy.

We get this data every month, so why is it extra important this time around?

It’s the beginning of the last data set for 2Q 2017. As all of this data is digested, we expect to see some movement in 2Q 2017 GDP forecasts. Currently, the consensus tabulated by The Wall Street Journal calls for 3.0 percent GDP in 2Q 2017, with 2.5 percent in the second half of the year. On Friday, the Atlanta Fed trimmed its 2Q 2017 GDPNow forecast to 2.7 percent — down from its 4.0 percent on May 1st. On the other hand, the New York Fed’s NowCast sits at 1.9 percent for 2Q 2017 and 1.6 percent for 3Q 2017. These next data pieces will help us complete the puzzle to see if the economy is more in tune with the Atlanta Fed or the New York Fed, and as we’ve discussed over the last several weeks, that will have implications for what is said in the upcoming 2Q 2017 earnings season.

While many will be watching 2Q 2017 results over the coming weeks, we will also be assessing the potential adjustments to 3Q 2017 and 4Q 2017 earnings prospects. Currently, the “herd” is calling for the S&P 500’s EPS to grow more than 11 percent in the second half of 2017 compared to the first half. Keep in mind, the average growth in second half earnings for the S&P 500 compared to the first half over the 2010-2016 period was 5.6 percent. Not to be repetitive, but rather summative, given the speed of the economy, the Trump Slump, oil earnings revisions and ripple effect of GM’s comments among other things, odds are that 11 percent forecast will be coming down.

What this means is there is a far greater probability of volatility returning to the market as these revisions are had. If we’re right and EPS expectations for the S&P 500 get trimmed back, we’ll be faced with one of two things:

  • Either the market becomes that much more expensive than the 17.9x multiple on expected (but still yet to be revised lower) 2017 EPS it closed at on Friday.
  • Or investors will re-asses the market multiple, likely pushing it lower, as those EPS cuts are made.

What this means is we’ll be watching the data over the coming days as well as the ensuing earnings reports, and adjusting the Select List as necessary. This could mean scaling into existing positions or add new ones at better prices. Either way, we’ll be watching and at the ready.

WEEKLY ISSUE: Doubling down on COST as yet another cyber attack provides support for our HACK position

WEEKLY ISSUE: Doubling down on COST as yet another cyber attack provides support for our HACK position

 

In this Week’s Issue:

  • Doubling Down on Costco Shares
  • More Cyber Attacks, Mean It’s a Good Time to Own HACK Shares
  • Alphabet Gets Wrapped on the Knuckles

 

We’re moving deeper into summer with more schools across the country finishing out the academic year. Most would expect that would mean a slower go of things, but that’s hardly been the case. True, the only economic data point to be had this week was the May Durable Orders report, which simply isn’t going to speed up anyone’s 2Q 2017 GDP forecast. Nondefense capital goods orders excluding aircraft — a proxy for business spending — declined 0.2 percent, while shipments of these same goods, which factor into the GDP computation, also declined 0.2 percent. We continue to think businesses are sitting on the sidelines as the Trump Slump is likely to continue through the summer months and into the fall.

At the same time, we’ve also had commentary from some of the Fed heads about the stock market including this from yesterday from San Francisco Federal Reserve Bank President John Williams:

 “The stock market seems to be running pretty much on fumes.”

He’s not alone in thinking the market is overvalued. A record 44 percent of fund managers polled in a monthly survey from Bank of America Merrill Lynch saw equities as overvalued this month, up from 37 percent last month. The surveyed body included 200 panelists with a combined $596 billion under management participated in the survey.

With the S&P 500 trading at roughly 18x 2017 expectations that have more downside risk than upside surprise potential as we discussed in this week’s Monday Morning Kickoff, we suspect we are likely to see more announcements like the one yesterday from General Motors (GM). If you missed it, GM now expects U.S. new vehicle sales in 2017 will be in the “low 17 million” unit range, versus last year’s record of 17.55 million units. Keep in mind, GM has been hard hit lately and seen its US inventory creep up to 110 days of supply in June, up from 100 in May. As GM said, “the market is definitely slowing” and that means we’re going to see more widespread pressure on the likes of Ford Motor Company (F), Honda Motor Company (HMC) and other auto manufactures. Lower production volume also means reduced demand at key suppliers like Federal Mogul (FDML), Dana Corp. (DAN), Delphi Automotive (DLPH) and similar companies. Pair this with the May Durable Orders report, and it’s another reason to see a step down in GDP for the back half of the year.

At the same time, yesterday also brought the news of the Petya ransomware, which in our view not only serves to reinforce our Safety & Security investing theme as well as our position in PureFunds ISE Cyber Security ETF (HACK)shares (more on that below), but also reminds us of the tailwinds powering all of our investing themes here at Tematica. We don’t look to own sectors, but rather companies that are benefitting from multi-year thematic tailwinds – that has been and will continue to be our guiding light, and if we have the opportunity to improve our cost basis in the coming weeks we’ll aim to take it.

In fact, we’re doing that today with shares of Costco Wholesale (COST) right now…

 

Doubling Down on Costco Shares

Last week we added back shares of Costco Wholesale (COST) to the Tematica Select List given what we saw (and continue to see) as an overreaction to the Amazon (AMZN)–Whole Foods (WFM) tie up. Not only hasn’t the transaction closed yet, and it won’t for several months until that occurs. It will be deep into 2018 before any Whole Foods integration is even close to being done. This tells us the market is shooting first and asking questions later… potentially much later.

With COST shares falling another 2 percent over the last week, bringing the two-week drop to more than 11 percent, we’ll use the current share price to improve the position’s cost basis and grow the respective position size to the overall Select List. As we’ve shared before, the real key to Costco’s profits and EPS is its membership fee income, and with more locations set to open in the coming quarters plus a recent membership price hike, we remain bullish on COST shares.

  • With COST shares closing last night at $159.26, we’re going to use the continued drop in share price to lower our cost basis by adding a second position in the shares as of this morning.
  • Our price target on Costco Wholesale (COST) shares remains $190
  • As we scale into the position today, we are setting a stop loss at $135, but we’ll look to move that higher as COST shares rebound.

 

 

 

More Cyber Attacks, Mean It’s a Good Time to Own HACK Shares

When we added PureFunds ISE Cyber Security ETF (HACK) shares back in February this year to the Select List as part of our Safety & Security investing theme, we acknowledge the frequency of cyber attacks would be a likely catalyst for the shares. Simply put, a higher frequency of attacks would not only spur cybersecurity spending, but odds are it would also act as a rising tide as media attention shifts to these attacks lifting all cyber security boats including our HACK shares.

We recently witnessed the WannaCry ransomware attacks, and as we learned during our Cocktail Investing Podcast conversation with Yong-Gon Chon, CEO of cyber security company Focal Point, following attacks were going to get bigger and bolder. That’s exactly what we saw yesterday with “Petya” ransomware that hit firms both large and small with ransomware in Europe and now the US. The attack was first reported in Ukraine, where the government, banks, state power utility and Kiev’s airport and metro system were all affected. It soon spread to including the advertising giant WPP, French construction materials company Saint-Gobain and Russian steel and oil firms Evraz and Rosneft. The new malware uses an exploit called EternalBlue to spread by taking advantage of vulnerabilities in Microsoft Corp.’s Windows operating system, similar to WannaCry and the infected computers display a message demanding a Bitcoin ransom worth $300. Those who pay are asked to send confirmation of payment to an email address.

According to a study by IBM (IBM), the amount of spam containing ransomware surged to 40 percent by the end of 2016 from just 0.6 percent in 2015. While many ransomware attacks are blocked by security software, the number of infections getting through is growing. Symantec (SYMC) said it detected 463,000 ransomware infections in 2016, 36 percent higher than the year before. Odds are that figure is only to go higher in 2017 and 2018.

  • We continue to have a Buy on PureFunds ISE Cyber Security ETF (HACK) with a price target of $35.

 

 

 

Alphabet Gets Wrapped on the Knuckles

Alphabet (GOOGL) is one of the building blocks of our Connected Societyinvesting theme due primarily, but not entirely to the company’s market share leading position in digital search. We define digital search much the way we do digital commerce – it comprises both desktop and mobile activity. Alphabet is also home to some of the most widely used apps across the various smartphone operating systems including YouTube (#2), Google Search (#4), Google Maps (#5), Google Play (#6), Gmail (#8) and Google Calendar (#11).

Google’s YouTube is expanding not only into original content with YouTube Red, but recently copped to targeting TV advertising dollars as well as eventually creating video content with “big name stars.” Alphabet is also bringing a YouTube TV service to market that will stream broadcast TV much the way AT&T’s (T) DirectTV Now and Hulu do. Let’s not forget Google Wallet or Android Wallet.

Putting it all together, Alphabet has several thematic tailwinds pushing its respective businesses as well as burgeoning ones like its Waymo self-driving car initiative that recently partnered with Avis Budget Group (CAR).

One of the items we’ve been watching and waiting for with Alphabet (GOOGL)has been the pending fine from EU antitrust regulators following the ruling that Alphabet had abused its “search engine” power and promoted its own shopping service in search results. Following several years of investigation, yesterday that EU body hit Alphabet with a decision that included a record $2.71 billion (€2.4 billion) fine and “ordered the search giant to apply the same methods to rivals as its own when displaying their services.” Google has 90 days to end the conduct and explain how it will implement the decision, or face additional penalties of up to 5 percent of average daily global revenue.

On its face, the $2.7 billion is a drop in the cash bucket for Alphabet, which ended the March quarter with $92.5 billion in cash. Alphabet could simply swallow the fine, but the implication of the decision could reshape how Google presents search results in Europe if not eventually elsewhere. As such, we expect the company will review the decision and consider an appeal, thereby dragging this out for another few months.

In the short-term the fine is a bump in the road for Alphabet, but we’ll continue to see how this situation develops further and what its implications are for not only Google, but other dominant technology firms such as Amazon (AMZN)that also rely on displayed search results, but also offer their own proprietary products. As we monitor these and other developments, we continue to Alphabet shares as ones to own not trade as we continue to migrate deeper into an increasingly connected society. The same goes for Amazon shares.

  • Our price targets on AMZN and GOOGL shares remain $1,150 and $1,050, respectively.