QUARTER WRAP-UP: Look Back Before Moving Ahead
In this Week’s Issue:
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A Recap of Our Moves Over the Second Quarter
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Ahead of 2Q 2017 Earnings Season We’re Adjusting Several Stop Losses
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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.
