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Grabbing Some Java and Taking Some Profits

Grabbing Some Java and Taking Some Profits

There was no Monday Morning Kickoff this week, due to the Memorial Day Holiday. So we’ve got a few things to cover on this first day of June!

Year to date return, we’re looking at a whopping 2.58 percent for the S&P 500. Pulling the lens cap back even further, we’d see that over the last year, the S&P 500 is actually down 0.5 percent for the 12 months ending May 2016. Net net however, with the market rallying 2.3 percent last week, it was the best week for the S&P 500 over the last twelve.

And so, in this week’s edition of Tematica Investing, we are making two important moves. Here’s what you’ll find in this week’s report:

  • We are initiating a BUY rating on SBUX shares with a long-term price target of $74. Because we aim to use weakness to our advantage, there is no stop-loss recommendation at this time. Read more >>
  • We are issuing a SELL on American Capital Agency Corp. (AGNC) shares. Read more >>
  • Updates, updates, updates on the Tematica Select List. Read more >>
  • This week’s Ask Tematica tackles a question on stop losses. Read more >>
  • We’ve got some good news on the Thematic Signals horizon! As you know there is no shortage of confirming data points for our thematic investing framework, but we’ve devised a more user friendly way for you to get them. Read more >>

Click the link below to download the full report

downalod-pdf

Taking the plunge with this core Connected Society holding

Taking the plunge with this core Connected Society holding

Earlier this week, in the Monday Morning Kickoff, we shared expectations for a much more subdued week, with only a few key economic data points and a slower speed of earnings reports. Talk about not getting what you expect.

Once again we’ve got conflicting views on whether the Fed will hike interest rates in June. We also saw the continued strengthening of the US dollar, and on the back of a greater than expected inventory drawdown, oil prices are nearing $50 a barrel. Combined with the late week rally we saw last week that snapped the prior 3-week losing streak in the market, the S&P 500 is up more than 2 percent over the last few days.

In this week’s edition of Tematica Investing:
  • The ping-pong game over the Fed potentially boosting rates as soon as June continues this week. We will continue to digest data and position theTematica Select List accordingly, balancing the renewed market melt up that has only served to stretch valuations. Read More >>
  • We are adding Amazon (AMZN) shares to the Tematica Select List given its pole position in our Connected Society investment theme, and note the company is also benefiting from Cash Strapped Consumer and other thematic tailwinds. Our price target is $880, and for now we will hold off with a stop loss as we look to use any weakness to scale into this core Connected Society holding. Read More >>
  • This week’s Ask Tematica focuses on whether the US economy is indeed at full employment. Read More >>
  • Rounding out the issue is Thematic Signals, which shows that once again there is no shortage of confirming data points for our thematic investing perspective. Read More >>

Click the link below to download the full report

As earnings kick into 5th gear expected volatility has us on sidelines, for now

As earnings kick into 5th gear expected volatility has us on sidelines, for now

We are waist deep in March quarter earnings with more than 1,400 companies reporting this week — a 40% increase compared to last week. Mixed in that horde are 124 S&P 500 companies (including 2 DJIA components) reporting. By the end of the week that will mean 87% of the S&P 500 group of companies will have reported March quarter results. 

As we’ve shared with you thus far, overall earnings expectations for the S&P 500 group of companies has continued to trend lower since the end of 3Q 2015. The expected volatility has us on the sidelines from jumping on new positions . . . for now. But that doesn’t mean we’re not busy sharpening our pencils and getting ready for the right opportunity. 

In this week’s edition of Tematica Investing:

  • Ahead of its May 9 earnings report, we are adding online pet pharmacy Petmed Express (PETS) to the Tematica Contender List. 
  • Regal Entertainment (RGC) rides the strong movie box office to beat earnings expectations.
  • A Tematica Investing subscriber question opens the door for Amazon (AMZN) shares.
  • We’ve got the latest thematic supporting data points that ripped from the headlines around us.
  • What did we enjoy this week? The Big Green Egg of course.

Click the link below to download the full report

click to download

Entering Choppy Waters as Earnings Velocity Picks Up

Entering Choppy Waters as Earnings Velocity Picks Up

Actions from this post

Ratings changes included in this dated post

  • Maintain DOG, SH, RWM as “BUY”: We expect the volatility of the markets to once again be upon us, not just because the S&P Short Range Oscillator closed yesterday at 9.2 percent (compared to just 3.9 percent a week ago), but because that Oscillator is now back to 2x overbought levels. We continue to rate DOG, SH and RWM inverse ETFs Buy at current levels.
  • ADDING DIS MAY $105 CALLS: We are adding Disney (DIS) May $105 calls(DIS160520C00105000) that closed last night at $1.57 to the Tematica Pro Select List. We would buy these calls up to $1.85 and to minimize potential downside we are setting a stop loss at $1.15.
  • ADDING XLY MAY $80 CALLS: We are also adding Consumer Discretionary SPDR ETF (XLY) May $80 calls (XLY160520C00080000) that closed last night at $1.24 to the Tematica Pro Select List. We would be comfortable adding to the position up to $1.50; to manage downside risk, we are setting a stop loss at $1.00.
  • CONTINUE TO HOLD PCAR SHORT CALL: Data supporting our short call in Paccar (PCAR) shares continues to mount, but a key determinant of whether or not we scale into the position will be found in quarterly results from heavy truck retailer Rush Enterprises (RUSHA) due this morning.

Earnings season kicks into high gear this week. Despite the headline print of the Dow Jones Industrial Average, which has climbed just over 1 percent over the last week given the moves in the 30 stocks that comprise the index, we’re seeing choppy waters emerge following March quarter results from Netflix (NFLX), IBM (IBM) and Intel (INTC). Intel in particular shared it will cut 11 percent of its workforce as it shifts focus from PCs to other markets including data centers and the Internet of Things. To us here at Tematica, that means Intel is finally catching up with what is driving the Connected Society. 

Intel is not alone in announcing layoffs — also this week Nordstrom (JWN) shared it will cut 400 jobs at its corporate headquarters, which raises questions over spending habits of more well off consumers. To us, it means consumers are turning elsewhere to shop —another confirming datapoint of not just our Cashstrapped Consumer thematic, but also the Connected Society — and we continue to see Amazon (AMZN) as a primary beneficiary (see more on this below). We’ve also started to see more ratings downgrades on the likes of Boeing (BA), Bloomin Brands (BLMN), Intel, Badger Meter (BMI), Spirit Airlines (SAVE) and Toll Brothers (TOL) to name a few.

In short, we expect the volatility of the markets to once again be upon us, not just because the S&P Short Range Oscillator closed yesterday at 9.2 percent —compared to 3.9 percent just a week ago — but because that Oscillator is now back to 2x overbought levels.

To us this means, continuing to hold onto our heeding positions that are our inverse ETFs — ProShares Short Dow30 ETF (DOG), ProShares Short S&P 500 (DOG) and ProShares Short Russell2000 (RWM) — as well as our more defensive positions in Health Care Select Sector SPDR ETF (XLV) and iShares Barclays 20+ Year Treasury Bond ETF (TLT).

Adding Disney Calls and Another Call Trade on the House of Mouse, Marvel, Lucas

Despite the growing gloom, there are still bull markets to be had with companies poised to benefit. One of those is easily found in our Content is King investing theme and in yesterday’s Tematica Investing we added shares of content and merchandising champ Disney (DIS) to the Tematica Select List. If you missed it, you can read it here, but in a nutshell Disney has several powerful catalysts that have started to kick in thus far in 2016 with several more coming over the next several quarters. The more well known ones are found on the upcoming slate of Marvel, Lucasfilm, and Pixar movies that range from Captain America, Dr. Strange, Star Wars and Finding Dory. Those films will drive merchandizing and other key content platforms, such as gaming and music to name a few. Disney has also adopted surge pricing at its existing theme parks and in June it will open its largest park in China dubbed Shanghai China.

From our perspective these layered catalysts kick in over the next few months, and while we see DIS shares as a core holding for our Content is King investing theme, we see each catalyst adding to the share price.

In order to capture greater returns, we’re adding the DIS May $105 calls(DIS160520C00105000) that closed last night at $1.57 to the Tematica Pro Select List. We are comfortable buying these calls up to $1.85; to limit downside in the position, we are setting a stop loss at $1.15.

Adding a Multi-Thematic ETF Call

Also in yesterday’s Tematica Investing we shared another way to invest and capture the upside we see in DIS shares — through the Consumer Discretionary SPDR ETF (XLY), which counts DIS shares as its third largest holding behind Amazon.com (AMZN) and Home Depot (HD). In addition to meaningful upside to be had with DIS shares, we see Amazon benefitting from the continued shift to online and mobile shopping that is a key tenant of our Connected Society investing theme, while Home Depot is a natural beneficiary of the spring season. Other key holdings of XLY include Comcast (CMSCA), McDonald’s (MCD) and Starbucks (SBUX) and each of these are potential candidates in our Connected Society, Fattening of the Population and Affordable Luxury/Guilty Pleasure investing themes, respectively.

Given the upside to be had at Disney and these other core holdings, we are adding the XLY May $80 calls (XLY160520C00080000) that closed last night at $1.24 to the Tematica Pro Select List. We would be comfortable adding to the position up to $1.50; to manage downside risk, we are setting a stop loss at $1.00. 

Rush Enterprises to Give Direction on Paccar Short

Along with the market melt up, we’ve witnessed the short in heavy truck company Paccar (PCAR) move against us these last several days despite weak fundamentals. The most notable was the disappointing March Industrial Production reading, which marked the 6th month of contrition out of the last 7 months. In the below chart, we see the historically tight correlation between the year over year change in Industrial Production has diverged in 2016, but as we have seen time and time again, at some point fundamentals catch up with a climbing stock price.

We see the weakening fundamentals for Paccar that include lackluster economic activity, falling heavy truck orders and weak guidance from Paccar competitor Navistar (NAV) all weighing on Paccar’s March quarter performance and current quarter outlook.

IUSCIPIY_PCAR_chart-5

We will get further insight into the tone of the heavy truck market and Paccar’s prospects this morning when Rush Enterprises (RUSHA), a retailer of commercial vehicles and related services, which includes a network of commercial vehicle dealerships, reports its March quarter earnings. In the company’s 2015 10-K filing with the SEC, Rush notes that “We are dependent upon PACCAR for the supply of Peterbilt trucks and parts, the sale of which generates the majority of our revenues.” As such, we see Rush’s results as a guiding hand for what Paccar will likely say when it reports its March quarter results next Tuesday (April 28).

After analyzing Rush’s quarterly results and digesting comments on its related earnings conference call, we will assess the prospects of adding to our Paccar short position and/or revisiting a put position in PCAR shares. Should we make any such additions to the Tematica Select List we will issue a special alert detailing the specifics of our actions.

Recap of Action Items from this Week

  • Continue to Hold inverse ETF’s DOG, SH and RWM, as well as defensive ETF TLT.
  • Adding DIS May $105 calls (DIS160520C00105000) up to $1.85 with a stop loss at $1.15.
  • Adding XLY May $80 calls (XLY160520C00080000) up to $1.50 with a stop loss at $1.00.
  • Continue to Hold short position in PCAR
Thematic tailwinds continue to be a guiding light in the market storm

Thematic tailwinds continue to be a guiding light in the market storm

Actions for this Week

The following are the changes in ratings or strategy we are making as of Friday February 26, 2016:

  • Use the recent market strength to capture profits by selling half your position in  Philip Morris International (PM), AT&T (T) and PayPal (PYPL) shares.
  • On the remaining PM position, suggest setting a stop loss at $87 and raise the recommended stop loss on PYPL shares to $33 from $31.
  • Maintain “Hold” rating Tematica Select List positions AGNC, DOC, PM, RGC, SH and T.
It’s been another up and down week for the stock market, once again shaped by the moves in oil prices. These movements can cause short-term disruptions in stock prices as evidenced by the gyrations of the last few weeks, but our thematic tailwinds continue to be a guiding light in the market storm.

Over the last few weeks we’ve recommended investors continue to sit on the sidelines preferring to keep our powder dry amid the market turbulence as we wait for more favorable risk to reward profiles in stock prices. On the dividend side of our holdings — which continues to outperform— as of the market’s close last night, our position in Philip Morris International ([stock_quote symbol=”PM”]) is up more than 15% from my initial recommendation and both AT&T ([stock_quote symbol=”T”]) and PayPal ([stock_quote symbol=”PYPL”]) shares are up more than 10% including dividends.

While the stock market has rebounded, there are still reasons to remain cautious. . . 
WTIC Light Crude Spot Prices

WTIC Light Crude Spot Prices

The recent rally in the stock market has been due in part to organizations like the OECD and others that are calling for more monetary stimulus. Let’s remember, we have yet to feel the full impact of the oil price drop, but the evidence is mounting:

  • Comments from the CEO of Devon Energy ([stock_quote symbol=”DVN”]) imply most US shale producers need $55-$60 oil to work
  • We’re beginning to hear about more oil related layoffs as Halliburton cut another 5,000 jobs following up on cuts of 4,000 jobs in the December quarter.
  • Wells Fargo ([stock_quote symbol=”WFC”]) has set aside $1.2 billion for potential oil and gas sector loan losses as different forecasts suggest up to 35% of public oil companies could face bankruptcy.
  • A report from Deloitte found 175 such companies are facing “a combination of high leverage and low debt service coverage ratios.” Odds are more financial institutions that just Wells Fargo will be hit should Deloitte be correct.
Meanwhile, the economy in China is expected to have contracted even further in February

February would mark the seventh consecutive monthly decline in China’s manufacturing sector. Per a poll conducted by Reuters based on 23 economists, China’s official manufacturing Purchasing Managers’ Index (PMI) is expected to dip to 49.3 in February from 49.4 a month earlier. We’re already seen the ripple effect into the Eurozone, and that along with oil related loan losses helps explain why European Central Bank chief Mario Draghi is ready to do “whatever it takes” come March.

Taken all together, these data points lead us to conclude that there is likely another shoe to drop, and that shoe will not only weigh on the market, but it will probably lead to job destruction along the way. Keep in mind, the jobs created in the oil and energy sector have been some of the better paying ones created over the last few years, compared to the those in the retail, hospitality and other sectors that have led recent job growth

All of this is likely to keep the Fed’s hand off the interest rate button in next few weeks.

$NYMOT: NYSE McClellan Oscillator

$NYMOT: NYSE McClellan Oscillator

Finally, we also have to acknowledge that short covering has helped propel the market higher over the last few days even though the fundamentals (economic growth, earnings expectations) have not changed much in the last few days. That short covering has led the NYSE McClellan Oscillator (an indicator or market breadth based on the number of advancing and declining issues on the NYSE) to rebound sharply over the last few days, past levels from which we’ve seen pullbacks in the market.

So this short selling activity is yet another reason to remain cautious near-term in my view, which means we are maintaining our “Hold” rating on ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares.

Trimming back our PM, T and PYPL positions, and checking some stop losses

Rather than dawdle, we recommend using the recent strength in the market to trim back positions in Philip Morris International ([stock_quote symbol=”PM”]), AT&T ([stock_quote symbol=”T”]) and PayPal ([stock_quote symbol=”PYPL”]) by selling half of each. This move will lock in double-digit gains, while leaving some skin in the game should the market climb higher in the near-term. We are also recommending at this time that investors set a stop loss for PM shares at $87 and raising the stop loss on PYPL shares to $33 from $31.

Over the last few weeks a number of thematically well positioned companies have had their share prices retreat to more attractive levels. Examples include Netflix ([stock_quote symbol=”NFLX”]), Amazon ([stock_quote symbol=”AMZN”]), and Skyworks Solutions ([stock_quote symbol=”SWKS”]) to name a few. Should another pullback in the market come to pass as I expect, we’ll be watching these and other thematic contenders closely.

What’s playing at the box office?

Year to date the movie box office is up 1.6% year over year due to strong performances from “Deadpool”, “The Revenant”, “Kung Fu Panda 3”, and of course “Star Wars: The Force Awakens”. In just under a month “Batman v Superman: Dawn of Justice” will drop and soon after that “Captain America: Civil War” will hit in early May. Other tent pole films from Disney and other film companies have 2016 looking like a better year for bodies in seats, and we all know that drives sales of those high margin snacks and beverages.

This points to additional upside for Regal Entertainment ([stock_quote symbol=”RGC”]) shares, which closed last night up more than 6% including dividends since our initial “Buy” rating in mid-January recommendation. The next sign post for the shares will be on March 8th when the management team gives it presentation at the Raymond James Institutional Investors Conference in Orlando, FL. For investors who have already made a move on RGC shares, we recommend you continue to hold them; for those that haven’t jumped in yet you could still do so lest they pass $20, at which point we do not recommend committing fresh capital. Our RGC price target remains $24.

Coming up, earnings from Physicians Realty Trust

On Monday, our Aging of the Population play, Physician Realty Trust ([stock_quote symbol=”DOC”]), reports its quarterly earnings. Consensus expectations for the quarter are sitting at earnings per share of $0.26 on revenue of $39.2, up 18% and more than 100% year over year, respectively.  Remember, Physicians Realty has been upsizing and using its balance sheet to grow its leased property footprint to doctors, hospitals and other healthcare delivery systems. In late January the company completed a secondary offering that garnered it net proceeds of more than $320 million, and the company should shed more light on its plans to put that capital to work and grow its footprint in 2016.