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Costco Shares Fall, But Was It All Bad News For This Cash-Strapped Consumer Play?

Costco Shares Fall, But Was It All Bad News For This Cash-Strapped Consumer Play?

On Friday shares of Costco Wholesale (COST) came under pressure triggered by quarterly earnings that missed expectations Thursday night. While revenue for the quarter was a whisper below expectation, earnings for the quarter were impacted by gross margin pressure primarily due to lower gas profitability vs. a year ago. You’ve probably noticed that gas prices have undergone a large double-digit increase since last year, and even Costco is not immune. In our view, this highlights the company’s thin retail margin structure, which can create earnings volatility from time to time.

We’ve seen such thin margins before when examining brick & mortar retailers across the board from Macy’s (M) and Kohl’s (KSS) to Kroger (KR). It makes for a challenging business, but when it comes to Costco, there’s a key differentiator above and beyond its offering of bulk products.

While many focused on the earnings miss, we have been far more focused on Costco’s announced membership price increase that will bring its primary membership to $60 from $55 and its Executive Memberships in the US and Canada to $120 from $110. We see those $5 and $10 increases as not egregious, especially when compared to the $100 increase in the annual fee for American Express’s (AXP) Platinum Card that kicks in later this year, and we suspect the vast majority of Costco members won’t blink at the price hike.

From an investor perspective, we like the announced price hikes because it translates into higher membership fees, which account for roughly 75 percent of overall operating income and help stabilize quarterly retail margin swings. Paired with more warehouse locations as Costco continues to grow its footprint and as Cash-strapped Consumer turn increasingly to Costco for fresh foods as well as bulk items, we continue to see solid revenue and earnings growth ahead. Exiting its most recent quarter, Costco had 728 warehouses, up from 698 in the year-ago quarter, with plans to add another 29 locations during 2017. More locations with more members paying more in membership fees equal more operating income to be had in the coming quarters. As any student taking Financial Statement Analysis knows, operating income is one of the key determinants of Net Income and EPS generation

Given the business model dynamics and Costco continuing to benefit from the Cash-strapped Consumer tailwind, we’re inclined to revisit the shares in the coming weeks with an eye toward getting them back on the Tematica Select List at better prices.

For those looking for more insight on the bulk product and warehouse club industry, but with a hefty dose of our Connected Society investing theme be sure to check out our most recent podcast where we talk with the CEO of Boxed.

Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week.

This week, we’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes.

We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List, including Universal Display (OLED), Nuance Communications (NUAN), AT&T (T), Dycom Industries (DY), CalAmp (CAMP) and Alphabet (GOOGL) as well as Amazon (AMZN). Already Amazon has announced it will bring its Alexa VDA to Motorola’s smartphones, and we see that as the tip of the proverbial iceberg his week.

As the Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting today what’s called a “skinny budget”, (which we view as the “opening bid budget”) tomorrow night President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform — “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on how to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition. Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been:

  • The improving, but not stellar economic data
  • The hope that President Trump’s policies will jumpstart the economy.

We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

 

Need to Keep Our Eyes on Both Sides of the Equation

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

For that reason, we’re going to make some defensive adjustments to the Tematica Select List, which has enjoyed the market rally over the last few months and led to strong moves in our Universal Display (OLED), AMN Healthcare (AMN), Costco Wholesale (COST) shares as well as several others.

 

With an eye toward preserving profits, we are going to introduce the following stop losses:
  • Alphabet (GOOGL) at $800
  • Universal Display at $70
  • AMN Healthcare at $37
  • PowerShares NASDAQ Internet Portfolio ETF (PNQI) at $90

 

Alongside these new stop losses, we’re also going to raise several existing ones:
  • Boost our stop loss on AT&T (T) to $36 from $31
  • Raise our stop loss on International Flavors & Fragrances (IFF) to $115 from $105
  • Boost our stop loss on Costco Wholesale to $170 from $165
  • Increase our stop loss on Disney (DIS) shares to $100 from $87

 

Again, our thought is better to be safe than sorry given where the market currently sits. We’ll continue to review other positions on the Tematica Select List with similar actions where and when it makes sense.

 

Prepping the Tematica Select List for the summer heat

Prepping the Tematica Select List for the summer heat

We always love it when organizations catch up to our way of thinking. In this case it’s a reminder that the vector of the global economy is down and its velocity slow . . . a beat we’ve been drumming for weeks here at Tematica Research.

In this week’s edition of Tematica Investing, we dig into the data, including confirmation of our view of the next move by the Fed, as well as:

  • More institutions are cutting growth expectations, and we continue to see a capped market with the high probability of earnings revisions to be had for the back half of 2016. We will continue to be selective with new positions, and add to existing ones strategically. Read more >>
  • As we start to feel the summer heat, we’re adding two Scarce Resource water plays to the Tematica Contender List: American Water Works (AWK)and Aqua America (WTR). Read more >>
  • Updates on Amazon (AMZN), AT&T (T), PetMeds Express (PETS), Starbucks (SBUX) and Disney (DIS). Read more >>

Click the link below to download the full report.

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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

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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

Remaining loyal to our disciplined and thematic approach

Remaining loyal to our disciplined and thematic approach

The market move has turned more bearish of late, and we are not surprised Wall Street has adopted the more cautious stance we’ve had these last several weeks. A headline freak out on the April CPI report shows us just how nervous the stock market is these days. We’ll continue to be disciplined when contemplating adding each new position to the Tematica Select List.

In this week’s edition of Tematica Investing:

  • Just doing it with Nike shares. We are issuing a BUY on Nike (NKE) shares with a price target of $66. Because this is an initial recommendation we are holding off with a commensurate stop loss, as we intend to build this position size over time. We would be buyers of Nike up to $59. Read More >>
  • Remaining patient with Costco Wholesale (COST) shares
  • Adding share of EPR Properties (EPR), a Content is King company to the Tematica Contender List. Read More >>
  • Quick Updates on AT&T (T), PetMeds Express (PETS), Regal Entertainment Group (RGC) and Disney (DIS). Read More >>
  • This week’s Ask Tematica focuses on choosing between two different share classes.
  • As promised Thematic Signals returns this week, and there is no shortage of confirming data points for our thematic investing themes. Read More >>

Click the link below to download the full report

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Brexit Vote, the Fed, Slowing Growth, Trump and Clinton . . . Oh My Says the Stock Market!

Brexit Vote, the Fed, Slowing Growth, Trump and Clinton . . . Oh My Says the Stock Market!

Currently, we are dealing with a market that is seesawing around as it attempts to come to grips with slowing growth expectations, even though oil prices have continued to inch higher. But even more uncertainty is on the horizon. Looking ahead, there are a growing number of unknowns in the market, ranging from:

  • The Brexit vote
  • Prospects of the Fed boosting rates in June
  • Aggressive growth expectations in the back half of 2016
  • And the chaos of the 2016 presidential election

Taken alone, any one of these uncertainties is enough to jostle the market around. When combined, they have enough boom to take the wind out of the sails of the recent market rally. As the stock market remains choppy, with mounting uncertainties to be had, we continue to follow our thematic strategy, adding positions prudently only when the time is right.

In this week’s edition of Tematica Investing:

  • We are issuing a Buy on Foods with Integrity play Chipotle Mexican Grill (CMG), taking the shares off the Contender list and placing them on the Tematica Select List with a $550 price target and a $390 stop loss. Read More
  • We are doubling down on Disney (DIS) shares following a solid quarter earnings report that show’s the strength underlying this Content is King company. Our price target remains $125. Read More
  • Keeping tabs on Costco Wholesale (COST) shares, with an eye to add more near $140.Read More
  • Ask Tematica: This week’s question is about buybacks. Yes, they help improve EPS comparisons, but there is a deeper dark side to these programs that we as investors must we aware of. Read More

Click the link below to download the full report

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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
Content continues to be king as we add another position to Tematica Select List

Content continues to be king as we add another position to Tematica Select List

While Sumner Redstone claims to have coined the phrase, it was Bill Gates who over two decades ago brought “Content is King” into the common vernacular when he wrote on the Microsoft website:

Content is where I expect much of the real money will be made on the Internet, just as it was in broadcasting . . . When it comes to an interactive network such as the Internet, the definition of “content” becomes very wide. For example, computer software is a form of content-an extremely important one, and the one that for Microsoft will remain by far the most important. But the broad opportunities for most companies involve supplying information or entertainment. No company is too small to participate.

We are seeing a new era of content given the entrance of companies like Netflix (NFLX), Amazon (AMZN) and Hulu as well as the growing influence of gaming, which has already spawned several cross platform properties. New technologies bring challenges, but at the end of the day no matter where consumers are with whatever device they have in their hands, content is what they will be consuming in one form or another.

It’s at this inflection point where we focus our investment strategy on one of the oldest content producers in the business, the Walt Disney Company (DIS).

In this week’s edition of Tematica Investing:

  • March Housing Starts disappointed, but given its multiplier effect a slower than expected spring housing season probably means a lackluster economy in the June quarter
  • We are adding Content is King company Disney (DIS) to the Tematica Select List with a price target of $125. We would be comfortable adding to the position up to the $106 level, and we are also instating a protective stop loss at $87. As you’ll read in our detailed comments, we are very upbeat about this new recommendation. Investors desiring an alternative strategy to invest in DIS shares could consider Consumer Discretionary Select Sector SPDR Fund (XLY) which counts Disney as its third largest position at 6.7% behind Amazon.com (AMZN,10.4%) and Home Depot (HD,7.4%).
  • The best domestic movie box office in years means we remain upbeat on our position in Regal Entertainment Group (RGC) shares.
  • Kudos to us for not recently adding Nike (NKE) shares to the Tematica Select List, but we continue to watch the shares.

Click the link below to download the full report

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