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WEEKLY ISSUE: CES 2018 Delivers for the Tematica Investing Select List

WEEKLY ISSUE: CES 2018 Delivers for the Tematica Investing Select List

Welcome to this week’s issue of Tematica Investing, where we leverage our proprietary thematic lens to invest in well-positioned companies when it comes to our investment themes.

Over the last week, we’ve seen one of the best starts to a new trading year in some time, and the Tematica Investing Select List has been benefitted from not only that start but news being made at the currently occurring annual technology tradeshow better known as CES 2018. I’ll recap some of the meaningful announcements below in a minute, but the impact of those results have moved our positions in Universal Display (OLED), Applied Materials (AMAT), Nokia (NOK) and AXT Inc. (AXTI) higher over the last week.

These moves and the causes behind them have me once again revisiting my price targets on OLED and AMAT shares to the upside. Confirming data will likely be had in the coming days as 4Q 2017 earnings begin in earnest next Tuesday. As I discussed in this week’s Monday Morning Kickoff, the likely scenario is we see U.S. listed companies offer an upbeat outlook and use the benefit to be had from tax reform to boost 2018 EPS expectations. On an annual basis, those tax reform related benefits should more than outweigh the cold snap weather and winter storm Grayson disruptions that we have likely encountered with restaurant, retail and construction companies. This means that at least in the near-term investors will need to be choosey, hwoever, the net effect should see the stock market melt higher, especially if more Wall Street strategists boost their price targets for the S&P 500, the proxy for the overall U.S. stock market. I expect this to be the likely scenario.

My perspective that I laid our in this week’s Monday Morning Kickoff remains – I continue to suspect expectations could be getting ahead of themselves given the recent climb in consumer debt levels and continued growth in the lack of qualified workers that could hamstring business investment in the coming months despite lower taxes. The strategy that we’ll follow near term is to listen to the data and look for opportunities – companies at prices that offer a skewed risk-to-reward proposition that is in our favor. It has been that discipline married with Tematica’s thematic lens that has steered us clear of such 2017 disasters as GoPro (GPRO) and Blue Apron (APRN).

 

Watching the Fed minutes this afternoon

Later today, we will receive the next iteration of the Fed’s FOMC meeting minutes. While we know the policy impact from the December meeting, I’ll be interested in seeing more on to what degree the Fed factored in tax reform into its GDP forecasts, and what it sees as some of the swing factors to watch.

 

A first pass from CES 2018

While CES 2018, the annual technology trade show held in Las Vegas that features more than 4,000 exhibitors, officially got underway yesterday, we’ve received a number of announcements in the last few days that have sent tech shares in general, and several of our holdings, higher.

Starting with TVs, which are one of the more high-profile items to kick off the annual gathering, we are starting to see artificial intelligence (AI) embedded into these devices. For example, is adding both Alphabet’s (GOOGL) Google Assistant and Amazon’s (AMZN) Alexa to its latest 4K OLED and Super UHD LCD TV lineup. But TVs aren’t the only things that will embed AI in the coming year – yesterday it was announced by Moen that its cloud-based, Wi-Fi enabled shower system “U by Moen” will add support for Apple’s Siri and Amazon’s Alexa AI assistants in the first half of 2018.

Outside of Moen, both Kohler and Whirlpool (WHR) are also bringing voice activation capabilities to their smart kitchen, bath and appliance products. No stranger to voice assistants in its products, Whirlpool is going one step further as the appliances it is debuting at CES this year can be controlled using Alexa or Google Assistant. Per Whirlpool, its offering includes “dishwashers that can be set and started remotely by voice, refrigerators that homeowners can change temperature settings on using a voice assistant, and washing machines that let the user check with Alexa to see how much time is left on a cycle.”

We’re also seeing connectivity make its way into toothbrushes courtesy of Colgate’s (CL) Smart Electronic Toothbrush uses Apple ResearchKit with the user’s permission to crowdsource toothbrushing data so the company can “anticipate the future of oral care.”

This is a first pass at the CES news flow and I’ll have more over the coming days, so be sure to check back at TematicaInvesting.com for those thoughts.

Stepping back we find the rising number of connected devices – be they through voice assistants, smartphones or other – driving incremental demand for RF semiconductors. This, in turn, bodes very well for incremental substrate demand for AXT’s (AXTI), the basic building block for RF semiconductors from the likes of Skyworks Solutions (SWKS), Qorvo (QRVO) and others.

That is poised to drive semiconductor manufacturing utilization rates higher and bodes well for incremental orders at semi-cap company Applied Materials (AMAT), which is also benefitting from the ramp in organic light emitting diode display demand I noted above. With AMAT shares trading at just 13.5x on expected 2018 earnings, I’m once again reviewing my $65 price target with an upward bias.

I also see Amazon making a significant “land grab” with its Alexa voice assistant, which, in our view, bodes very well for continued growth in Amazon’s Prime membership and the company capturing consumer wallet share.

  • We continue to rate AXT Inc. (AXTI) shares a Buy at current levels and our price target remains $11.
  • We continue to rate Applied Materials (AMAT) shares a Buy at current levels and our price target remains $65.
  • We continue to have a Buy on Amazon (AMZN) shares, and our price target remains $1,400.

 

 

Weekly Issue: More trimming and more gains, this time with AXTI shares

Weekly Issue: More trimming and more gains, this time with AXTI shares

KEY POINTS WITH THIS ALERT

  • We are trimming back our position in AXT Inc. (AXTI), which closed last night more than 60% above our mid-June entry point. we are selling one-third of the position, which lets us book some fantastic gains, but also leaves ample exposure on the Tematica Investing Select List. As we make this trade we’re also adding a stop loss at on AXTI at $8.25, which ensures a minimum return near 27% on the remaining shares.
  • Prepping for the official start of the 2017 holiday shopping season
  • Waiting on Tax reform and what it may mean for small-cap cap stocks
  • Applied Materials (AMAT) offers bullish outlook on Mad Money

Note: We’re bringing the weekly Tematica Investing issue to you a day earlier than usual given the likelihood that a significant number of subscribers will, like many, many other folks, be traveling tomorrow ahead of the Thanksgiving holiday. Usually, the day before and after Thanksgiving see lower than usual trading volumes as investors and traders look to turn the holiday into an unofficial four day weekend. As we digest our turkey, trimmings and that extra piece of pie, Team Tematica will be analyzing the Black Friday data, reporting our findings on Monday.  

From all of us here at Team Tematica, we wish you and yours a very Happy Thanksgiving! And if you see Tematica’s Chief Macro Strategist Lenore Hawkins on Fox Business this Friday remember that pickles and pecan pie do not mix well together on Thanksgiving.

 

More trimming and more gains, this time with AXTI shares

Over the last week, we’ve done some trimming and pruning to the Tematica Investing Select List, shedding shares in USA Technologies (USAT) and Universal Display (OLED), while offsetting those gains by exiting Nuance Communications (NUAN), Teucrium Corn Fund (CORN) and ProShares Short S&P 500 ETF (SH) shares. You can see the details here  in case you missed it.

Today we are back at the trimming again, but this time with Disruptive Technologies company AXT Inc. (AXTI) following yesterday’s 12% gain in the shares, which closed just 5% below our $11 price target. That rapid move brought the positon’s return to more than 60% as of last night’s close since we added the shares to the portfolio in mid-June.

Do we see additional upside in the shares as 5G mobile networks are deployed and high-speed broadband deployments in data centers, wireless backhaul, and other applications grow in the coming quarters? We sure do, but we also are prudent investors. As such, we are trimming the AXTI position back, which returns a hefty slug of the capital deployed from when we originally added the shares, while keeping ample exposure to capture additional upside in the coming quarters.

In short, while we are making a prudent move today, we’re going to let this winner run given the favorable fundamentals, and over the coming days, we’ll look to crunch the numbers to determine additional upside to be had from current levels.

  • We are trimming back our position in AXT Inc. (AXTI), which closed last night more than 60% above our mid-June entry point.
  • We are selling one-third of the position, which lets us book some fantastic gains, but also leaves ample exposure on the Tematica Investing Select List.
  • Our $11 price target is under review.
  • As we make this trade we’re also adding a stop loss at on AXTI at $8.25, which ensures a minimum return near 27% on the remaining shares.

 

Prepping for the official start of the 2017 holiday shopping season

As I noted above, later this week as Thanksgiving 2017 fades we’ll see the 2017 holiday shopping season heat up. Several weeks ago, I shared several forecasts all of which call for 2017 holiday shopping to rise 3.5% to 4.5%, with digital commerce sales poised to grow multiples faster, leading companies such as Amazon (AMZN) and United Parcel Service (UPS) to win consumer wallet share.

As this shopping shift is occurring, we are also seeing Amazon build its own private- label offerings across a growing number of categories, including sportswear, electronics, and accessories to kitchenware. This is placing additional pressure on bricks-and-mortar names such as J.C. Penney (JCP) and Sears (SHLD) — the shares in those two companies are down 55%-60% year to date. There, of course, is more than enough reason to think there will be even more pain on the way as traditional retail businesses are pumping up the use of discounts to win business, which should further pressure margins.

In a survey conducted by the Berkley Research Group of more than 100 high-level retail executives in October, 64% of the respondents said they expected promotions to play a more significant role in overall sales during the 2017 holidays. What this tells me is there is more trouble ahead for retail as these companies sacrifice profits to win revenue — not exactly a sustainable business model and one that tends to lead to declining earnings per share.

I’ll be back early next week to share my observations on the weekend holiday shopping activity as well as Cyber Monday, and what it all means for positions on the Tematica Investing Select List.

  • Our price target on Amazon (AMZN) shares remains $1,250
  • Our price target on United Parcel Service (UPS) is $130.

 

Waiting on Tax reform and what it may mean for small-cap stocks

Last Friday, Treasury Secretary Steven Mnuchin told CNBC that he expects a GOP tax cut bill to be sent to President Donald Trump to sign by Christmas. As I shared last week, there are several differences between the tax bill passed by the House late last week and the proposed one by the Senate. With both the House and Senate not in session this week, I don’t expect much movement on tax reform, but that means there are four weeks for the House and Senate to put forth a bill together to reach the president’s desk in time for Christmas. While I’m hopeful, the reality is the next few weeks will tell us how probable this is.

As we’ve seen over the last few weeks, small-cap stocks are likely to ebb and flow over the next few weeks based on the meat of tax reform and whether it will be passed for 2018 or not until 2019. On the Tematica Investing Select List we primarily have large-cap stocks, which are defined as companies with a market capitalization value of more than $10 billion, and two mid-cap stocks in the form of Universal Display (OLED) and Trade Desk (TTD) shares. We do, however, have three small-cap stocks – USA Technologies (USAT), AXT Inc. (AXTI) and LSI Industries (LSI), which means Team Tematica will be on the case as it pertains to tax reform over the next few weeks.

 

Applied Materials (AMAT) offers bullish outlook on Mad Money

Last Friday, Applied Materials (AMAT) President and CEO Gary Dickerson appeared on CNBC’s Mad Money and discussed several aspects of our Connected Society and Disruptive Technologies investing themes and how they are powering the company’s semiconductor capital equipment business. Dickerson also role in artificial intelligence and big data.

https://www.cnbc.com/video/2017/11/17/amat-ceo-the-future-of-competition-changing-fueling-our-business.html?play=1

I see Dickerson’s comments echoing our multi-faceted and multi-year thesis on Applied shares. The next proof point to watch for ramping organic light emitting diode display demand will be the next iteration the global consumer electronics and consumer technology tradeshow that is CES 2018, which runs from January 8-12, 2018. In the coming weeks, we’ll begin to hear more about the various consumer electronic items that will be previewed and debuted at the show, and we expect a smattering of organic light emitting diode display TVs. Already we’re hearing LG will launch a full line up of OLED TVs in 2018, and that OLED TVs are expected to see a meaningful price reduction, which could foster greater consumer adoption. I see both as positives for not only AMAT shares but also Universal Display (OLED) shares.

  • Our price target on Applied Materials (AMAT) shares is $70
  • Our price target on Universal Display (OLED) shares is $225

 

Last week’s Cocktail Investing podcast –
The Rise in our Rise & Fall of the Middle Class investing theme

If you missed last week’s podcast — and shame on you if you did — Lenore Hawkins and I did a deep dive on what’s driving the Rise in our Rise & Fall of the Middle Class investing theme. From sharing why this is happening to what the implications are, we tackle it all. In an upcoming podcast, we’ll be giving the same treatment to the Falling Middle Class in this investing theme, but my advice is listening to last week’s will offer not only some great context, but you’ll also learn why to this day Lenore shuns pecan pie. Download it now for some great entertainment during your holiday travels.