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Introducing The Thematic Leaders

Introducing The Thematic Leaders

 

Several weeks ago began the arduous task of recasting our investment themes, shrinking them down to 10 from the prior 17 in the process. This has resulted in a more streamlined and cohesive investment mosaic. As part of that recasting, we’ve also established a full complement of thematic positions, adding ones, such as Chipotle Mexican Grill (CMG) and Altria (MO) in themes that have been underrepresented on the Select List. The result is a stronghold of thematic positions with each crystalizing and embodying their respective thematic tailwinds.

This culmination of these efforts is leading us to christen those 10 new Buy or rechristened Buy positions as what are calling The Thematic Leaders:

  1. Aging of the Population – AMN Healthcare (AMN)
  2. Clean Living – Chipotle Mexican Grill (CMG)
  3. Digital Lifestyle – Netflix (NFLX)
  4. Digital Infrastructure –  Dycom Industries (DY)
  5. Disruptive Innovators – Universal Display (OLED)
  6. Guilty Pleasure – Altria (MO)
  7. Living the Life – Del Frisco’s Restaurant Group (DFRG)
  8. Middle-Class Squeeze – Costco Wholesale (COST)
  9. Rise of the New Middle-Class – Alibaba (BABA)
  10. Safety & Security – Axon Enterprises (AAXN)

 

By now you’ve probably heard me or Tematica’s Chief Macro Strategist Lenore Hawkins mention how Amazon (AMZN) is the poster child of thematic investing given that it touches on nearly all of the 10 investing themes. That’s true, and that is why we are adding Amazon to the Thematic Leaders in the 11th slot. Not quite a baker’s dozen, but 11 strong thematic positions.

One question that you’ll likely have, and it’s a logical and fare one, is what does this mean for the Select List?

We wouldn’t give up on companies like Apple (AAPL), Alphabet (GOOGL), Disney (DIS), McCormick & Co. (MKC) and several other well-positioned thematic businesses that are on the Select List. So, we are keeping both with the Thematic Leaders as the ones that offer the most compelling risk-to-reward tradeoff and the greater benefit from the thematic tailwinds. When we have to make an adjustment to the list of Thematic Leaders, a company may be moved to the Select List in a move that resembles a move to a Hold from a Buy as it is replaced with a company that offers better thematic prospects and share price appreciation. Unlike Wall Street research, however, our Hold means keeping the position in intact to capture any and all additional upside.

Another way to look at it, is if asked today, which are the best thematically positioned stocks to buy today, we’d point to the Thematic Leaders list, while the Select List includes those companies that still have strong tailwinds behind their business model but for one reason or another might not be where we’d deploy additional capital. A great example is Netflix vs. Apple, both are riding the Digital Lifestyle tailwind, but at the current share price, Netflix offers far greater upside than Apple shares, which are hovering near our $225 price target.

After Apple’s Apple Watch and iPhone event last week, which in several respects underwhelmed relative to expectations despite setting up an iPhone portfolio at various price points, odds are the iPhone upgrade cycle won’t accelerate until the one for 5G. The question is will that be in 2019 or 2020? Given that 5G networks will begin next year, odds are we only see modest 5G smartphone volumes industry-wide in 2019 with accelerating volumes in 2020. Given Apple’s history, it likely means we should expect a 5G iPhone in 2020. Between now and then there are several looming positives, including its growing Services business and the much discussed but yet to be formally announced streaming video business. I continue to suspect the latter will be subscription based.  That timing fits with our long-term investing style, and as I’ve said before, we’re patient investors so I see no need to jettison AAPL shares at this time.

The bottom line is given the upside to be had, Netflix shares are on the Thematic Leaders list, while Apple shares remain on the Select List. The incremental adoption by Apple of the organic light emitting diode display technology in two of its three new iPhone models bodes rather well for shares of Universal Display (OLED), which have a $150 price target.

Other questions…

Will we revisit companies on the Select List? Absolutely. As we are seeing with Apple’s Services business as well as moves by companies like PepsiCo (PEP) and Coca-Cola (KO) that are tapping acquisitions to ride our Clean Living investing tailwind, businesses can morph over time. In some cases, it means the addition of a thematic tailwind or two can jumpstart a company’s business, while in other cases, like with Disney’s pending launch of its own streaming service, it can lead to a makeover in how investors should value its business(es).

Will companies fall off the Select List?

Sadly, yes, it will happen from time to time. When that does happen it will be due to changes in the company’s business such that its no longer riding a thematic tailwind or other circumstances emerge that make the risk to reward tradeoff untenable. One such example was had when we removed shares of Digital Infrastructure company USA Technologies (USAT) from the Select List to the uncertainties that could arise from a Board investigation into the company’s accounting practices and missed 10-K filing date.

For the full list of both the Thematic Leaders and the Select List, click here

To recap, I see this as an evolution of what we’ve been doing that more fully reflects the power of all of our investing themes. In many ways, we’re just getting started and this is the next step…. Hang on, I think you’ll love the ride as team Tematica and I continue to bring insight through our Thematic Signals, our Cocktail Investing podcast and Lenore’s Weekly Wrap.

 

 

WEEKLY ISSUE: Booking more Habit gains and redeploying into another Digital Lifestyle investment

WEEKLY ISSUE: Booking more Habit gains and redeploying into another Digital Lifestyle investment

Key points in this issue

  • We are issuing a Sell on Habit Restaurant (HABT) shares and removing them from the Tematica Investing Select List. As we say goodbye to Habit, we’d note the position generated a blended return of more than 80% over the last four months.
  • We are issuing a Buy on Alibaba (BABA) shares as part of our Digital Lifestyle investing theme with a $230 price target.
  • Chatter over Apple’s (AAPL) potential new products begins to swell ahead of its upcoming Fall event, and it’s looking for our Universal Display (OLED) shares as well. Our price targets for AAPL and OLED shares remain $225 and $150, respectively.

 

Exiting Habit Restaurant Shares

A few weeks ago we took some of our Habit Restaurant (HABT) shares off the table, which gave us a tasty 68% profit on that half of the position. In the ensuing weeks, Habit shares have continued their climb higher and with last night’s close, the remaining portion of our HABTshares were up almost 89% from our early May buy. Not only is that a hefty profit, but it equates to a very rich valuation as well.

As of last night’s close, HABTshares were trading at 278x expected 2019 EPS of $0.06 vs. a PE range of 16-80 for peers that that range from El Poll Loco (LOCO) to Shake Shack (SHAK). On a price to sales basis, HABTshares are trading near 1.15x expected 2018 sales, well ahead of the 0.9x takeout multiple at which Zoe’s Kitchen is being acquired by Cava Mezza Grill.

As we often hear, it pays not to fall in love with the stock one owns, lest we are tempted to not do the prudent thing. I still like the Habit Restaurant story, and that goes for its Ahi Tuna burger as well. That said, given the phenomenal run and rich valuation, I’m calling it a day and removing HABTshares from the Tematica Investing Select List. I’ll be keeping tabs on the company and its geographic expansion in the coming months, but I’d be more inclined to revisit the shares at a more reasonable set of valuation metrics.

  • We are issuing a Sell on Habit Restaurant (HABT) shares and removing them from the Tematica Investing Select List. As we say goodbye to Habit, we’d note the position generated a blended return of more than 80% over the last four months.

Gearing into Alibaba Shares

One of the shortcomings in the perspective for most investors is they tend to be focused on the geographic region in which they reside. Given the global nature of our investment themes, I try to keep an open mind and look for thematic opportunities no matter where they are. One such company that sits at the crossroads of our Digital Lifestyle and Rise of the New Middle-Class investments, and has a dash of Disruptive Innovators and Digital Infrastructure is Alibaba (BABA). Alibaba has long been heralded as the Amazon (AMZN) of China given its position in digital shopping (84% of revenue) but that’s about where the similarities end…. For now.

Last week Alibaba reported its latest quarterly results, in which revenue hit $12.23 billion for the quarter, beating consensus expectations of $12.02 billion. Paired with double-digit earnings before interest, tax, depreciation, and amortization (EBITDA) growth is more than overshadowing a $0.02 per share miss on the company’s bottom line, which came in at $1.22 per share.

At Alibaba, all the company’s operating profit is derived from its core commerce business with the remaining 16% of its revenue stream spread across cloud, digital media and innovation initiatives all weighing on that profit stream. By comparison, Amazon’s Amazon Web Services (AWS) is the company’s profit and cash flow secret weapon as I like to call it.

That’s the negative, but if we look at the year over year comparisons of the non-core commerce businesses, not only are they growing quickly, but year over year Alibaba is shrinking their losses across the board.

In many respects this is similar to one of the key concerns investors once had with Amazon not too long ago — can it turn a consistent profit? We have seen Amazon do just that for a number of quarters in a row, and investors have removed that objection, which has sent AMZN shares significantly higher.

With Alibaba, the question is not whether those businesses become profitable, but rather when. Yes, much like Amazon, Alibaba continues to invest for future growth as evidenced by the level of capital spending in the June quarter vs. the year ago and declining cash on the balance sheet.

Both of these reflect investments to — much like Amazon — move past its core commerce platforms, into physical retail and food-delivery services, as well as expanding its footprint in areas such as logistics and in overseas markets.

That said, the company is benefiting from the continued tailwinds of the Digital Lifestyle investment theme. This is evidenced by the continued growth in both active consumers on its retail marketplace as well as mobile monthly active users. Exiting June, the company’s annual active consumers reached 576 million, up nearly 24% year over year, while its mobile monthly active users hit 634 million, up 20% year over year.

Much like Amazon’s Prime business, as Alibaba expands its scope of product and services, at least in the near-term, it should continue to win new users and retain existing ones. Also much like Amazon, Alibaba will continue to grab incremental consumer wallet share. The combination should continue to drive top-line growth and pull its non-core commerce businesses into the black.

Following last week’s earnings report, consensus EPS sits at $5.71 per share, up from the $4.78 achieved in 2017, with expectations of $7.75 in 2019. What the math shows is an expectation for roughly 27% EPS growth over the 2017-2019 time frame, and against that backdrop BABA shares are trading at a PEG ratio of 0.85 based on 2019 EPS expectations.

In coming months, odds are we will see continued growth in China digital commerce as China consumers build up for the year-end holidays and Chinese New Year. That along with other gains in its cloud and digital media businesses should see Alibaba closing the profit gap leading to not only more comparisons to Amazon but to multiple expansion to a PEG ratio of 1.1x that offers upside to $230, if not more.

The one obvious risk is the impact of trade and tariffs between the U.S. and China, which stepped up today. My thinking is given the slowing economic data of late from China and potential mid-term election risk, President Trump could be angling for an October-early November trade win. Not only would that send the overall U.S. stock market higher, but it would remove the trade concerns from BABA shares as well.

  • We are issuing a Buy on Alibaba (BABA) shares as part of our Digital Lifestyle investing theme with a $230 price target.

 

Apple ChatterCcontinues to Build Ahead of its 2018 Product Launch

With Apple’s (AAPL) annual fall event inching closer, chatter about new products is increasing and the internet is filling up with speculation over the number of iPhones and other products that the company could ship later this year. The current buzz has three new models being released:

  • an iPhone X successor
  • a new 6.5-inch iPhone X Plus
  • a mass-market 6.1-inch LCD iPhone with thin bezels and Face ID just like the iPhone X

Accompanying this chatter is speculation concerning the impact on Apple shipments, with DigiTimes saying “new iPhone shipments should hit 70-75 million units through the end of the year, the highest level since the iPhone 6/6 Plus super cycle. This number is purely on new 2018 iPhone shipments, it does not include sales of older generations.”

These happenings help explain the favorable move higher in Apple shares registered in recent days as well as for fellow Select List holding Universal Display (OLED).

Based on the rumblings, it looks like Apple will have two iPhone models utilizing organic light-emitting diode display technologies, up from just one last year, a positive for Universal’s chemical and IP business, especially as shipments of those model will likely continue to grow in 2019. Remember, too, that some months ago Apple was expected to fully transition its iPhone lineup to organic light-emitting diode displays with its 2019 lineup. Going from one model to two or three of its new models appears to be a confirming step as organic light emitting diode capacity expands and display prices come down.

I continue to see an improving outlook for OLED shares as smartphone competitors follow suit and adopt the organic light-emitting diode technology, and its uses expand into other markets (interior automotive lighting, specialty lighting and eventually general illumination, much the way light emitting diodes did). Our price target on OLED shares remains $150.

With Apple, I expect the shares to continue to melt up ahead of its rumored mid- September event and look to revisit our $225 price target based on products the company does announce, not rumors.

  • Chatter over Apple’s (AAPL) potential new products begins to swell ahead of its upcoming Fall event, and it’s looking for our Universal Display (OLED) shares as well. Our price targets for AAPL and OLED shares remain $225 and $150, respectively.

WEEKLY ISSUE: Taking Positions Off the Board and Reallocating Into Existing Positions

WEEKLY ISSUE: Taking Positions Off the Board and Reallocating Into Existing Positions

Key points from this issue

  • We are exiting the shares of Paccar (PCAR), which had an essentially neutral impact on the Select List;
  • We are exiting the shares of Rockwell Automation (ROK), which were a drag of more than 11% on the Select List;
  • We are exiting the shares of GSV Capital (GSVC), which in full returned a modest decline since we added the shares back in April.
  • We are scaling into shares of Applied Materials (AMAT) at current levels and keeping our long-term price target of $70 intact.
  • We are scaling into shares of Netflix (NFLX) at current levels and keeping our long-term price target of $500 in place.

 

After the S&P 500 hit an all-time high yesterday, if the stock market finishes higher today it will mean the current bull market will be 3,453 days old, which will make it the longest on record by most definitions. For those market history buffs, as of last night’s market close, it tied the one that ran from October 1990 to March 2000.

Even as the S&P 500 hit an all-time high yesterday thus far in 2018 it’s up 7.1%. By comparison, we have a number of positions on the Tematica Investing Select List that are up considerably more. Among them are Amazon (AMZN), Apple (AAPL), Costco Wholesale (COST), ETFMG Prime Cyber Security ETF (HACK), Habit Restaurant (HABT), McCormick & Co. (MKC), and USA Technologies (USAT). Not that I’m prone to bragging, rather I’m offering a gentle reminder of the power to be had with thematic investing vs. the herd and sector-based investing.

Over the last few weeks, I’ve been recasting our investing themes, which in some cases has given rise to a new theme like Digital Infrastructure, combined a few prior themes into the more cohesive Digital Lifestyle and Middle-Class Squeeze ones, and expanded the scope of our Clean Living theme. In the next few weeks, I’ll finish the task at hand as well as ensure we have a stock recommendation for each of what will be our 10 investment themes.

As part of that effort, I’m re-classifying USA Technologies (USAT) shares as part of our Digital Infrastructure investing theme. The shares join Dycom Industries (DY) in this theme.

 

Pruning PCAR, ROK and GSVC shares

Once we pass the approaching Labor Day holiday, we will be off to the races with the usual end of the year sprint. For that reason, we’re going to take what is normally the last two relatively quiet weeks of August to do some pruning. This will go hand in hand with the ongoing investment theme reconstitution that will eliminate the stand-alone Economic Acceleration/Deceleration and Tooling & Re-tooling investment themes. As such, we’re saying goodbye to shares of Paccar (PCAR) and Rockwell Collins (ROK). We’ll also shed the shares of GSV Capital (GSVC), which are going to be largely driven by share price movements in Spotify (SPOT) and Dropbox (DBX). As the lock-up period with both of those newly public companies come and go, I’ll look to revisit both of them with an eye to our Digital Lifestyle and Digital Infrastructure investing themes.

  • We are exiting the shares of Paccar (PCAR), which had an essentially neutral impact on the Select List;
  • We are exiting the shares of Rockwell Automation (ROK), which were a drag of more than 11% on the Select List;
  • We are exiting the shares of GSV Capital (GSVC), which in full returned a modest decline since we added the shares back in April.

 

Scaling into Applied Materials and Netflix shares

We’ll use a portion of that returned capital to scale into shares of Applied Materials (AMAT), which approached their 52-week low late last week following the company’s quarterly earnings report that included an earnings beat but served up a softer than expected outlook.

Applied’s guidance called for sales of $3.85-$4.15 billion vs. analyst consensus outlook of $4.45 billion. On the company’s earnings conference call, CEO Gary Dickerson confirmed worries that slower smartphone growth could cause chipmakers to rein in capital spending and reduce demand for chipmaking equipment in the near- term. That’s the bad news, the good news is Applied sees double-digit growth in 2019 for each of its businesses and remains comfortable with its 2020 EPS forecast of $5.08.

From my perspective, I continue to see the several aspects of our Disruptive Innovators investing theme – augmented and virtual reality, 5G, artificial intelligence, Big Data and others – as well as growing storage and memory demands for connected devices driving semiconductor capital equipment demands. There is also the rising install base of semiconductor capital equipment inside China, and with Apple turning to China suppliers over Taiwanese ones to contain costs it likely means a rebound in China demand when the current US-China trade imbroglio ends.

As we wait for that, I suspect Applied will continue to use its stock buyback program During its recently closed quarter, Applied repurchased $1.25 billion or 25 million shares of stock and the company has about $5 billion remaining in buyback authorization. Applied’s next quarterly dividend of $0.20 per share will be paid on Sept. 13 to shareholders of record on Aug. 23.

  • We are scaling into shares of Applied Materials (AMAT) at current levels and keeping our long-term price target remains $70 intact.

Turning to Netflix (NFLX) shares, they are down some just under 20% from where I first added them to the Select List several weeks ago. My thesis on the shares remains unchanged, and I continue to see its streaming video service and original content as one of the cornerstones of our Digital Lifestyle investing theme. Adding to the shares at current levels will serve to reduce our cost basis from just under $420 to just under $380.

  • We are scaling into shares of Netflix (NFLX) at current levels and keeping our long-term price target of $500 in place.

 

 

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: Confirming Thematic Data Points Continue to Pour In

WEEKLY ISSUE: Confirming Thematic Data Points Continue to Pour In

Key points inside this issue:

  • Oh how the stock market has diverged over the last week
  • Ahead of Apple’s (AAPL) upcoming annual product refresh, we are boosting our price target to $225 from $210 for the shares.
  • Our price target on Amazon (AMZN) shares remains $2,250.00
  • Our price target on Costco Wholesale (COST) remains $230.00
  • Our price target on Nokia (NOK) shares remains $8.50
  • Our price target on AXT Inc. (AXTI) shares remains $11.50
  • Our price target on Dycom (DY) shares remains $125.00
  • Here come earnings from Habit Restaurant (HABT)

 

Oh how the stock market has diverged over the last week

Last week the divergence we saw in the major domestic stock market indices continued as both the Dow Jones Industrial Average and the S&P 500 powered higher while the Nasdaq Composite Index and the small-cap heavy Russell 2000 retreated. The technology-heavy Nasdaq moved lower following drops in Facebook (FB) and Twitter (TWTR) late last week, while the Russell’s move lower likely reflecting potential progress on trade following a positive meeting between the US and EU.

In recent weeks, we’ve shared our view that 2Q 2018 earnings season would likely lead to the resetting of earnings expectations, and it appears that is indeed happening. The stock market, however, didn’t expect that resetting to happen with Facebook, Twitter, Netflix (NFLX) and other high fliers. We also shared how that resetting could lead to some downward pressure in the overall market, so we’re not surprised by how it is digesting these realizations.

Also weighing on the market is the realization the 2Q 2018 GDP figure of 4.1%, which was propped up by government spending and some pull forward in demand ahead of tariff phase-ins, is not likely to repeat itself in the current quarter. As we noted above, there was some progress on trade between the US and EU last week — more of an agreement to work on an agreement — and there are still tariffs with Canada, Mexico, and China to face. And as much as we would like to see last week’s progress as hopeful, we’ve heard from a number of companies about how under the current environment higher input costs will weigh on margins and profits in the back half of the year. The response has companies boosting prices to pass along those increased costs, which could either sap demand or stoke inflation concerns.

We saw that rather clearly in the IHS Markit Flash US PMI for July last week. The headline flash PMI index clocked in at 55.9, a three-month low with the manufacturing component at a two month higher while services slipped month over month. One of the key takeaways was summed up by Chris Williamson, Chief Business Economist at IHS Markit who said, “…the July flash PMI is in line with the average for the second quarter and indicative of the economy growing at an annualized rate of approximately 3%.” The same flash report also showed a steep increase in prices with survey respondents citing the impact of tariffs, but also supply chain delays, which in our experience tends to be a harbinger of further price increases.

Because we’re still in the thick of earnings, we’ll continue to assess the situation as more company commentary becomes available and what it means for profits in the coming quarters. Odds are, however, the Fed, is seeing the above and will remain on a path to boost interest rates in the coming months. We’ll get more on that later today when the Fed exits its latest FOMC policy meeting. Barring a meaningful pick up in wage growth it could lead to more restrained consumer spending. We see that as positives for incremental consumer wallet share gains at Amazon (AMZN) and Costco Wholesale (COST) as we head into the seasonally strong shopping season.

  • Our price target on Amazon (AMZN) shares remains $2,250.00
  • Our price target on Costco Wholesale (COST) remains $230.00

 

Apple delivers and boosting our price target in response

We are boosting our price target on Apple (AAPL) shares to $225 from $210. This boost follows last night’s solid June quarter results and guidance, which topped expectations as investors and consumer prepare for the latest iteration of iPhone and other Apple products to hit shelves in the coming months. Here are some of the highlights from Apple’s June quarter:

  • Reported EPS of $2.34 vs. the consensus forecast of $2.18 on revenue of $53.265 billion vs. the expected $52.43 billion.
  • Year over year revenue grew 17% with led by double-digit increases at iPhone, Services and Other while Mac and iPad revenue declined vs. year-ago levels.

Moreover, the company forecasted September quarter revenue to grow double digits sequentially with prospects for an improving gross margin profile. That combination is leading Wall Street to take its EPS expectations higher, and I suspect we will see a number of price target increases this morning.

As exciting as this is — as well as proof positive the Apple model is not broken as some doomsayers would suggest — in several weeks Apple will take the wraps off its revitalized Fall 2018 new product lineup that is expected to have a number of new models across iPhones and iPads. Some products, like iPads, are expected to get new features such as FaceID, while the iPhone X lineup should expand to larger screen sizes as well as lower cost models utilizing an LCD screen instead of an organic light emitting diode (OLED) one. I see the Apple enthusiasm once again cresting higher as that date approaches.

Now let’s break down the quarter’s results:

iPhone revenue grew 20% year over year to $29.9 billion despite tepid smartphone industry dynamics. During the quarter Apple sold 41.3 million iPhones, which paired with the 19% year over year improvement in average selling price (ASP) to $724 vs. $606 in the year-ago quarter drove the revenue improvement. That surge in ASP reflects ongoing demand from the company’s premium iPhone products – iPhone X, iPhone 8 and iPhone 8+.

The Services business grew 30% year over year to $9.5 billion, roughly 18% of overall Apple revenue vs. 16% in the year-ago quarter. The total number of paid subscriptions rose 30 million sequentially to hit 300 million, up from 185 million exiting the June 2017 quarter. I see this as a positive given the subscription nature of iCloud, Apple Music, Apple Care, Texture and other offerings that drive not only cash flow but revenue predictability. During the earnings call, Apple tipped that it has over 50 million Apple Music listeners “when you add our paid subscribers and the folks in the trial…”

As the Services business continues to grow across the expanding Apple device install base, accounting for a greater portion of revenue and profits, odds are investors will begin to re-think how they value Apple shares, especially as the company’s dependence on iPhone sales is lessened at least somewhat. That will be especially true as Apple tips its original content plans, from both a programming perspective as well as pricing and subscription plan one.

Other products grew 37% vs. the year-ago quarter driven by wearables (Apple Watch, Air Pods, Beats) to account for 7% of overall revenue for the quarter.

For the September quarter, Apple guided revenue to $60-$62 billion with gross margin between 38.0-38.5% (vs. 38.3% in the June quarter). That double-digit sequential revenue improvement looks strong heading into the Fall unveiling of new devices, including multiple iPhone models, which as I mentioned earlier is expected to include a larger screen sized iPhone X model as well as a new iPhone X model and a lower priced one with an LCD screen. That implies a rebound in unit volume growth tied with favorable ASPs to drive iPhone revenue growth in the coming quarters. Of course, I continue to see the next major upgrade cycle tied to 5G, which increasingly looks to go live in North America during 2019 and outside the US thereafter.

Investor confidence in new products and Apple’s new product pipeline should be bolstered by the growth in R&D spending that has now outpaced revenue growth in 24 of the last 25 quarters. Historically speaking, when this has happened in the past, it was a forbearer of Apple unveiling a number of new products, including a new product category or two. While it would be easy to read into the possibilities of potential products as 5G goes mainstream, we’ll continue to focus on the near-term upgrades to be had in a few month’s time and what it means for Apple’s businesses.

Exiting the quarter, Apple’s balance sheet had a net cash position of $129 billion even after retiring some 112 million shares during the quarter. On a dollar basis that was $20.7 billion spent on share repurchases during the quarter, including the last part $10 billion of its prior authorization. That leaves roughly $90 billion under its current $100 billion authorization and we continue to see the company supporting the shares with that mechanism.

Finally, last night Apple’s board of directors has declared a cash dividend of $0.73 per share of the Company’s common stock. The dividend is payable on August 16, 2018, to shareholders of record as of the close of business on August 13, 2018.

In sum, it was a stronger than expected quarter that showed Apple’s various strategies bearing fruit with more to come as it updates existing products and introduces new ones as well as new services. If there was one disappointment in the earnings release and conference call it was the lack of discussion around 5G and original content efforts, but my thinking on that is good things come to those who wait.

  • Ahead of Apple’s (AAPL) upcoming annual product refresh, we are boosting our price target to $225 from $210 for the shares.

 

Nokia scores the biggest 5G contract win thus far

Earlier this week, T-Mobile (TMUS) named Nokia (NOK) as a supplier for $3.5 billion in 5G network gear, making this the largest 5G deal thus far. This is clear confirmation of the coming network upgrade cycle that bodes well for not only Nokia’s infrastructure business but will expand the addressable market for its licensing business as well.

Nokia’s deal with T-Mobile US is multi-year in nature, which means the $3.5 million will be spread out over eight-plus quarters. To put some perspective around the size of that one contract, over the last two quarters, Nokia’s infrastructure business has been averaging a little over $5 billion per quarter.  In our view, this speaks to the diverse nature of the customer base across not only the US but the EU, Africa, and Asia.

The thing is, 5G networks will be coming to each of those geographies over the coming years, and for those further out deployments, mobile carriers will be adding incremental 4G LTE capacity.  In other words, we are at the beginning of the 5G buildout, and it may seem like it has taken longer than expected to emerge, the data points from smartphone components to network builds suggest 2019 will be the beginning of a multiyear upcycle in mobile infrastructure demand.

And a quick reminder, we see the coming 5G buildout and the necessary smartphones and other devices driving demand for AXT Inc.’s (AXTI) compound semiconductor substrates. Those shares have been bouncing around like ping-pong balls of late, but we’ll continue to focus on the long-term drivers such as 5G and the eventual smartphone upgrade cycle.

And I would be remiss if I didn’t touch on Dycom Industries (DY) as well. To me, this T-Mobile US news says it is serious about building out its 5G network, and I strongly suspect both AT&T (T) as well as Verizon (VZ) will be sharing their own buildout plans in the coming days and weeks. These carriers are all about one-upping each other be it on data plan pricing or how good their networks are. As AT&T and Verizon fight back, it’s a solid reminder of the activity to be had for Dycom’s specialty contracting business.

  • Our price target on Nokia (NOK) shares remains $8.50
  • Our price target on AXT Inc. (AXTI) shares remains $11.50
  • Our price target on Dycom (DY) shares remains $125.00

 

Here come earnings from Habit

Quickly turning to Habit Restaurants (HABT), the company will report its quarterly earnings after today’s market close. Consensus expectations are looking for EPS of $0.03 on revenue of roughly $100 million for the June quarter. Ahead of that report, Wall Street is coming around to the Habit story. On Monday, investment firm Wedbush bumped up their price target to $15 from $12 and upped their rating to Outperform from Buy. Yes, I am wondering where they’ve been for the last 30% plus rally in HABT shares…

The gist of the upgrade reflects the positive impact to be had from recent price increases as well as premium pricing associated with delivery. Those are certainly positive drivers for revenue and margins, however, I continue to see the bigger thesis centering on the company’s geographic expansion. That expansion means more burgers and shakes being sold in more locations, drive-thru, and delivery. In other words, it’s the platform that allows for these other margin improving activities. This means I’ll be watching the company’s capital spending plans for the coming quarters.

As tends to be the case, I’ll be reassessing our $11.50 price target with tonight’s earnings report given the shares have sailed right through it over the last few days.

  • Heading into tonight’s earnings report, our price target on Habit Restaurant (HABT) shares remains $11.50.

 

WEEKLY ISSUE: The Potential Impact Tariffs Will Have on 2nd Half Earnings

WEEKLY ISSUE: The Potential Impact Tariffs Will Have on 2nd Half Earnings

 

Given the way the Fourth of July holiday falls this year, we strongly suspect the back of the week will be quieter than usual. For those reasons, we’re coming at you earlier than usual this week. And while we have your attention, Tematica will be dark next week as we recharge our batteries ahead of the 2Q 2018 earnings onslaught that kicks off on July 16.

With the housekeeping stuff out of the way, let’s get to this week’s issue…

Closing the bookS on 1Q 2018

Last Friday, we closed the books on the second quarter, and while it’s true all four major US stock market indices delivered positive returns, the last three months were far more volatile than most expected back in January. Year to date, the Dow Jones Industrial Average remains modestly in the red and the S&P 500 modestly in the green. By comparison, despite being overshadowed in the second quarter by the small-cap heavy Russell 2000, the Nasdaq Composite Index finished the first half of the year with a 9% gain.

From a Tematica Investing Select List perspective, there we a number of outperformers to be had including Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Costco Wholesale (COST), ETFMG Prime Cyber Security ETF (HACK), McCormick & Co. (MKC), USA Technologies (USAT). To paraphrase one of team Tematica’s favorite movies, Star Wards, our themes are strong with those companies. As much as we like the accolades to be had with performing positions, there are ones such as Dycom Industries (DY), Nokia (NOK), AXT Inc. (AXTI) and Applied Materials (AMAT) that had a challenging few months but they too should be seeing the benefits of thematic tailwinds in the coming months.

During the quarter, we did some fine tuning with the Select List, adding shares of GSV Capital (GSVC), Habit Restaurant (HABT) and Farmland Partners (FPI). We also shed our positions in Starbucks (SBUX), LSI Industries (LYTS), Corning (GLW) and International Flavors & Fragrances (IFF) during the second quarter. In making those moves, we’ve enhanced the Select List’s position for the back half of 2018 as the focus for investors centers on the impact of trade and tariffs on revenue and earnings. Let’s discuss…

 

First Harley Davidson, then BMW and General Motors

Last week we were reminded that trade wars and escalating tariffs increasingly are on the minds of investors. Something that at first was thought would be short-lived has grown into something far more pronounced and widespread, with tariffs potentially being exchanged among the U.S., China, the European Union, Mexico and Canada. As we discussed Harley-Davidson (HOG) shared that its motorcycle business will be whacked by President Trump’s decision to impose a new 25% tariff on steel imports from the EU and a 10% tariff on imported aluminum.

We soon heard from BMW (BMWG) that U.S. tariffs on imported cars could lead it to reduce investment and cut jobs in the United States due to the large number of cars it exports from its South Carolina plant. Soon thereafter, General Motors (GM) warned that if President Trump pushed ahead with another wave of tariffs, the move could backfire, leading to “less investment, fewer jobs and lower wages” for its employees. Then yesterday, citing a state-by-state analysis, the new campaign argues that Trump is risking a global trade war that will hit the wallets of U.S. consumers,  the U.S. Chamber of Commerce shared it would launch a campaign to oppose Trump’s trade tariff policies.

With up to $50 billion in additional tariffs being placed on Chinese goods after July 6, continued tariff retaliation by China and others could lead to a major reset of earnings expectations in the back half of 2018. And ahead of that potential phase-in date, Canada’s foreign minister announced plans to impose about $12.6 billion worth of retaliatory tariffs on U.S. goods beginning yesterday. Not all companies may swallow the tariffs the way Harley Davidson is choosing to, which likely means consumers and business will be paying higher prices in the coming months. That will show up in the inflation metrics, and most likely lead to the Fed being more aggressive on interest rate hikes than previously thought.

As part of our Middle-Class Squeeze investing theme, a growing number of consumers are already seeing their buying power erode, and if the gaming out of what could come it means more folks will be shopping with Amazon (AMZN) and Costco Wholesale (COST) and consumer McCormick & Co. (MKC) products.

 

Falling investor sentiment sets the stage for 2Q 2018 earnings

All of this, is weighing on the market mood and investor sentiment as we get ready for the 2Q 2018 earnings season. Remember that earlier this year, investors were expecting earnings to rise as the benefits of tax reform were thought to jumpstart the economy and if Harley Davidson is the canary in the coal mine, we are likely going to see those expectations reset lower. We could see management teams offer “everything and the kitchen sink” explanations should they rejigger their outlooks to factor in potential tariff implications, and their words are likely to be met with a “shoot first, ask questions later” mentality by investors.

Helping fan the flames of that investor mindset, the Citibank Economic Surprise Index (CESI) has dropped into negative territory. We’ve discussed this indicator before as has Tematica’s Chief Macro Strategist Lenore Hawkins, but as a quick reminder CESI tracks the rate that U.S. economic indicators come in better or worse than estimates over a rolling three-month period. When indicators are better than expected, the CESI is in positive territory and when indicators disappoint, it is negative.

As Lenore pointed out in last week’s Weekly Wrap:

While the CESI has just dropped into negative territory, let’s add some context and perspective — the index has had an impressive run of 188 trading days of positive readings, the longest such streak by 37 days in the 15-year history of the index. Now some of that reflects the enthusiasm surrounding tax reform and its economic prospects from the start of the year, but economic reality is now hitting those earlier expectations. Odds are the reality as seen through the trade and tariff glasses will continue to weigh on the CESI in the coming weeks, adding to investor anxiety.

I’d point out the level of anxiety hit Fear last week on the CNNMoney Fear & Greed Index, down from Neutral a month ago. But there is reason to think it will not rebound quite so quickly…

 

Here’s the question investors are pondering

The growing question in investors’ minds is likely to center on the potential impact in the second half of 2018 from these tariffs if they are enacted for something longer than a short period. While GDP expectations for the current quarter have climbed, the concern we have is the cost side of the equation for both companies and consumers, thanks in part to Harley-Davidson’s recent comments.

We have yet to see any meaningful change to the 2018 consensus earnings forecast for the S&P 500 this year, which currently sits around $160.85 per share, up roughly 12% year over year. But we will soon be entering second-quarter earnings season and could very well see results and comments lead to expectation changes that run the risk of weighing on the market. Given the upsizing of corporate buyback programs over the last few months due in part to tax reform, any potential pullback could be muted as companies scoop up shares and pave the way for further EPS growth as they shrink their share count. That means we’ll be increasingly focused on the internals of earnings reports as well as new order and backlog metrics.

There are roughly a handful of companies reporting this week, and next week sees a modest pick-up in reports, with roughly 25 companies issuing their latest quarterly results. It’s the week after, that sees the number of earnings reports mushroom to more than 220. We’ll enjoy the slower pace over the next two weeks as we get ready for that onslaught, but we will be paying close attention to comments on potential tariff impacts in the second half of 2018 and what that means for earnings expectations for both the market as well as companies on the Select List.

 

 

An all-in-one Apple media subscription plan could upset the content cart

An all-in-one Apple media subscription plan could upset the content cart

Apple CEO Tim Cook has been vocal about growing the company’s Services business as way to not only diversify its revenue stream, but in my view also make its iOS and other devices even stickier with consumers. As we have seen before Content is King is a key driver in our Digital Lifestyle investing them and index as consumers will move or remain for original content that resonates with them.

Apple’s move into original content is arguably one of the worst kept secrets, but as we have seen time and time again Apple will make the formal move with a product or service when it’s ready to do so. As Apple prepares for this, it looks to be addressing one of the growing issues faced by consumers – the rising cost of content faced by consumers. These are the same consumers that have cut their pay TV subscription and landline telephone services in a bid to skinny down that monthly bill. Yet, if consumers could see it rival their once costly cable bill.

We therefore find it interesting and potentially compelling that Apple would bundle its content offerings (music, video, news/magazine) into one monthly bill, especially if the price point is $9.99 vs. the current Apple Music monthly subscription that costs $9.99 per month, or $14.99 per month for a family subscription.  While it may take time for Apple to challenge Netflix with original video content, such a move could put a thorn in the side of Hulu, Apple friendly Disney and Spotify but be a boon for those impacted by our Middle Class Squeeze investing theme.

 

Via The Information, Apple is apparently considering combining its upcoming magazine service and original content television, with its existing music subscription, into a single ‘Amazon Prime’-esque subscription. Pricing for this bundle is not clear, right now Apple offers Apple Music for $9.99 per month.The report says Apple will allow customers to subscribe to each service separately, perhaps there is a cost saving in subscribing to the all-encompassing package compared to paying for each individually however.Try Amazon Prime 30-Day Free TrialEchoing a timeline previously reported by Bloomberg, The Information says the company wants to a launch an Apple branded news subscription service in 2019. The company acquired Texture in March of this year, a $9.99/mo subscription service that unlocked access to more than 200 premium magazines.The timeline for Apple’s original content TV efforts is still murky, but there are some hints that the first shows will be ready to air later next year. TV show production is often prone to delays and setbacks, but Apple has enough shows in the wings at the moment that it should still have a healthy offering even if only half of the orders are ready in 2019.

Source: Report: Apple mulling all-in-one media subscription plan, combining Apple Music, TV shows and magazines | 9to5Mac

AT&T and Time Warner launch WatchTV, with new unlimited data plans

AT&T and Time Warner launch WatchTV, with new unlimited data plans

The dust has barely settled on the legal ruling that is paving the way for AT&T (T) to combine with Time Warner (TWX), and we are alread hearing of new products and services to stem from this combination. No surprise as we are seeing a blurring between mobile networks and devices, social media and content companies as Apple (AAPL), Facebook (FB), Google (GOOGL) and now AT&T join the hunt for original content alongside Netflix (NFLX), Amazon (AMZN), and Hulu, which soon may be controlled by Disney if it successfully fends of Comcast to win 21st Century Fox.

While we as consumers have become used to having the content I want, when I want it with Tivo and then the content I want, when I want it on the device I want it on with streaming services, it looks now like it will be “the content I want, when I want it, on the device I want on the platform I choose.” All part of the overlapping to be had with our Connected Society and Content is King investing themes that we are reformulating into Digital Lifestyle – more on that soon.

In short, a content arms race is in the offing, and it will likely ripple through broadcast TV as well as advertising. Think of it as a sequel to what we saw with newspaper, magazine and book publishing as new business models for streaming content come to market… the looming question in my mind is how much will today’s consumer have to spend on all of these offerings before it becomes too pricey?

And what about Sprint (S) and T-Mobile USA (TMUS)…

 

Taking advantage of the recent approval of its merger with Time Warner, AT&T on Thursday announced WatchTV, a new live TV service premiering next week — and initially tied to two new unlimited wireless data plans.

WatchTV incorporates over 30 channels, among them several under the wing of Time Warner such as CNN, Cartoon Network, TBS, and Turner Classic Movies. Sometime after launch AT&T will grow the lineup to include Comedy Central, Nicktoons, and several other channels.

People will be able to watch on “virtually every current smartphone, tablet, or Web browser,” as well as “certain streaming devices.” The company didn’t immediately specify compatible Apple platforms, but these will presumably include at least the iPhone and iPad, given their popularity and AT&T’s long-standing relationship with Apple.

The first data plan is “AT&T Unlimited &More”, which will also include $15 in monthly credit towards DirecTV Now. People who pay extra for “&More Premium” will get higher-quality video, 15 gigabytes of tethered data, and the option to add one of several “premium” services at no charge — initial examples include TV channels like HBO or Showtime, and music platforms like Pandora Premium or Amazon Music Unlimited.

&More Premium customers can also choose to apply their $15 credit towards DirecTV or U-verse TV, instead of just DirecTV Now.

WatchTV will at some point be available as a $15-per-month standalone service, but no timeline is available.

Source: AT&T uses Time Warner merger to launch WatchTV, paired with new unlimited data plans

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.

 

 

WEEKLY ISSUE: Taking a Last Sip from Our Venti Latte as We Head into the Summer

WEEKLY ISSUE: Taking a Last Sip from Our Venti Latte as We Head into the Summer

KEY POINTS FROM THIS ALERT:

  • We are issuing a Sell on Starbucks (SBUX) shares and removing them from the Tematica Investing Select List.
  • We are trimming our position in USA Technologies (USAT) shares, selling half the position on the Tematica Investing Select List and keeping the other half in play to capture any potential additional upside.
  • Heading into this week’s Costco (COST) earnings call, our price target is $210.
  • Heading into Apples 2018 WWDC event next week, our price target on Apple (AAPL) shares remains $200.
  • While we watch for a potential Las Vegas strike, our longer-term price target for MGM remains $39.
  • We continue to have a Buy rating and an $85 target for Paccar (PCAR) shares
  • With data points confirming a pick-up in business investment, we continue to have a Buy rating and a $235 price target for Rockwell Collins (ROK) shares.

 

Coming into this shortened week for the stock market following the Memorial Day holiday, we’ve seemingly traded one concern for another. I’m talking about the shift in investor focus that has moved from the pending June 12 meeting between the US and North Korea to renewed concerns over Italy and what it could mean for the eurozone and the euro as well as the overall stock market and the dollar. In last week’s Weekly Wrap, I thought Tematica’s Chief Macro Strategist, Lenore Hawkins, did a bang-up job summing up the situation but as we entered this week it pivoted once again, pointing to the likelihood of new elections that could pave the way for anti-euro forces.

This fresh round of uncertainty led the market lower this week, pulling the CNN Money Fear & Greed Index back into Fear territory from Neutral last week. Not surprising, but as investors assess the situation odds are US stocks, as well as the dollar and US Treasuries, will be viewed as ports of safety. That realization likely means the short-term turbulence will give way to higher stock prices, especially for US focused ones. Multinational ones will likely see a renewed currency headwind given the rebound in the dollar as well as the new fall in the euro.

I’ll continue to keep close tabs on these developments and what they mean for not only our thematic lens, but also for the Tematica Investing Select List. Expect to hear more about this on our Cocktail Investing podcast as well.

 

Cutting Starbucks shares from the Tematica Investing Select List

Given our thematic bent, we tend to be investors with a long-term view and that means it takes quite a bit for me to remove a company from the Tematica Investing Select List. Today, we are doing that with Starbucks (SBUX) and for several reasons. As I just mentioned above, this multinational company will likely see currency headwinds return that will weigh on its income statement.

At the same time, the company has been underperforming of late in same-store sales comparisons, which have slipped to the low single digits from mid-single digits in 2013-2016. The decline has occurred as Starbucks has reaped the benefits of its improved food offering over the last several quarters, and its new beverage offerings of late have underwhelmed. In the March quarter, if it weren’t for price increases, its same-store sales would have been negative.

While I still go to Starbucks as does the rest of team Tematica, the reality is that we are not spending incremental dollars compared to last year outside of a price increase for our latte or cappuccino. Said a different way, Starbucks needs to reinvigorate its product line up to win incremental consumer wallet share. In the past, the company had new beverages and then the addition of an expanded food and snack offering to deliver favorable same-store comparisons. Now with a full array of beverages, food and snacks, the question facing Starbucks is what’s next?

It’s this question as well as the simple fact that the closure of its stores yesterday to deliver racial tolerance training to its employees will weigh not only on same-store sales comps for the current quarter but hit profits as well. Keep in mind too that we are heading into the seasonally slower part of the year for the company.

Taking stock of Starbucks stock, my view is let’s take the modest profit and dividends we’ve collected over the last 24 months and move on.

  • We are issuing a Sell on Starbucks (SBUX) shares and removing them from the Tematica Investing Select List.

 

Trimming back our position in USA Technologies

Since adding shares of USA Technologies (USAT) back to the Tematica Investing Select List in early April, they have risen more than 50%, making them one of the best performers thus far in 2018. While the prospects for mobile payments remains vibrant and we are starting to see some consolidation in the space, I’m reminded of the old Wall Street adage – bulls make money, bears make money and pigs get slaughtered.

Therefore, we will do the prudent thing given the sharp rise in our USAT shares in roughly a handful of weeks – we will trim the position back, selling half the position on the Tematica Investing Select List and keep the other half in play to capture the additional upside. As we do this, we are placing our $12 price target under review with an upward bias. That said, we would need to see upside near $16 to warrant placing fresh capital into the shares.

  • We are trimming our position in USA Technologies (USAT) shares, selling half the position on the Tematica Investing Select List and keeping the other half in play to capture the additional upside.

 

Prepping for Costco earnings later this week

After the market close on Thursday (May 31), Costco Wholesale (COST) will report its latest quarterly earnings. Consensus Wall Street expectations are for EPS of $1.68 on revenue of $31.59 billion.

Over the last several months, the company’s same-store sales show it gaining consumer wallet share as it continued to open additional warehouse locations, which sets the stage for favorable membership fee income comparisons year over year. Exiting April, Costco operated 749 warehouse locations around the globe, the bulk of which are in the U.S. and that compares to 729 warehouses exiting April 2017. The number of Costco locations should climb by another 17 by the end of August and paves the way for continued EPS growth in the coming quarters.

  • Heading into this week’s earnings call, our price target is $210 for Costco (COST) shares

 

Updates, updates, updates, updates

Apple (AAPL)                                                                       
Connected Society

Next Monday Apple will hold its 2018 World-Wide Developer Conference (WWDC), which historically has been a showcase for the company’s various software platforms. This year it’s expected to feature iOS 12, the next evolution in its smartphone and tablet software. Recently it was hinted that Apple will unleash the full power of Near Field Communication capabilities found in those chipsets, which have been inside the iPhone since the iPhone 6 model.

In my view, this is likely to be but one of the improvements shared at the event. Those hoping for a hardware announcement are likely to be disappointed, but we never know if we’ll get “one more thing.”

  • Heading into next week’s 2018 WWDC event, our price target on Apple (AAPL) shares remains $200.

 

MGM Resorts International (MGM)
Guilty Pleasure

Quarter to date, shares of gaming-and-resort company MGM have come under pressure but our position in them is down only modestly. I’m putting MGM shares on watch this week following a vote by Las Vegas casino workers to strike when their contract expires at the end of May. I see that vote as a negotiating tactic with dozens of casino and resort operators, akin to what we’ve been seeing emanating from Washington these last few months.

I’ll continue to watch for a potential resolution and what it could mean for margins and EPS expectations. We’ve been patient with MGM shares, but if a strike ensues I’m apt to exit the position and fish in more fruitful waters for this investment theme of ours.

  • While we watch for a potential Las Vegas strike, our longer-term price target remains $39.

 

Paccar (PCAR)
Economic Acceleration/Deceleration

Over the last month, shares of this heavy-duty and medium-duty truck manufacturer have traded sideways. According to the most recent data point from the Cass Freight Index, shipment rose just over 10% year over year in April. That sets the stage for a favorable April reading for the American Trucking Associations’s For-Hire Truck Tonnage Index that rose 6.3% year over year after increasing 7.7% in February on the same basis.

At the same time, we continue to hear from a growing array of companies that they are facing rising costs due in part to surging trucking rates. Coca-Cola (KO) recently reported a 20% year-over-year increase in freight expense. Procter & Gamble (PG), Hasbro, Inc. (HAS), Danone SA, and Nestle SA also reported higher transportation costs and Unilever (UL) expects high-single-digit to high-teens increases in U.S. freight costs in the coming quarters. All of this confirms the current truck shortage that is fueling robust year-over-year growth in new orders for medium and heavy-duty trucks. Next week, we should get the May data and I expect the favorable year over year comparisons to continue.

As production rises to meet demand, we see a positive impact on Paccar’s business on both the top and bottom lines. Our $85 price target equates to just under 15x current estimated 2018 EPS, which has crept up by a few pennies over the last several weeks to $5.69 per share vs. $4.26 in 2017.

  • We continue to have a Buy rating and an $85 target for Paccar (PCAR) shares

 

Rockwell Automation (ROK)
Tooling & Re-Tooling

Our thesis on Rockwell Automation has focused on the expected pick-up in business investment and capital spending following tax reform last year. As the March quarter earnings season winds down, data collected by Credit Suisse reveals spending on factories, equipment and other capital goods by companies in the S&P 500 is expected to have risen to $166 billion during the quarter, up 24% year over year. That’s the fastest pick-up in capital spending since 2011 and marks a March-quarter record since Credit Suisse started collecting the data in 1995.

That year over year increase is roughly in line with the year over year increase in March 2018 U.S. manufacturing technology orders according to data published in the U.S. Manufacturing Technology Orders report from The Association For Manufacturing Technology (AMT). For March quarter in full, AMT’s data points to a 25% year over year improvement, which is in line with Credit Suisse’s capital spending assessment.

Based on these prospects, as well as statistics for the average age of private fixed assets that reveal the average age of U.S. factory stock is near 60 years old, it appears AMT’s 2018 forecast that calls for a 12% increase in US orders of manufacturing equipment compared to 2017 is looking somewhat conservative.

I’ve also noticed that over the last several weeks 2018 EPS expectations for Rockwell have inched up to $7.87 per share from $7.79, while 2019 expectations have moved higher to $8.81 per share from $8.73. I see those upward movements as increasing our confidence in our $235 price target for ROK shares.

  • With data points confirming a pick-up in business investment, we continue to have a Buy rating and a $235 price target for Rockwell Collins (ROK) shares.