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Disney Seeks to Cater to China’s Growing Middle Class

Disney Seeks to Cater to China’s Growing Middle Class

Rising disposable incomes in the emerging economies and especially in China have led to a trade up in diets, a thirst for the branded products and now travel and entertainment. This is already starting to influence content decision at the major movie studios and airline destinations,  and this will only accelerate as the influence grows.

Walt Disney Co. has hosted over 600,000 visitors at its first theme park in mainland China since trial operations started early May, and its “enormous potential” has already prompted Disney to expand the resort, said Chief Executive Officer Robert Iger.

The government has predicted China’s $610 billion tourism industry will double by 2020, spurred by a growing middle class. DreamWorks Animation SKG Inc. plans to open its $2.4 billion DreamCenter and Haichang Ocean Park Holdings will unveil what’s slated to be China’s biggest marine park next year. Six Flags Entertainment Corp. is due to open its first park outside North America in 2019.

Source: Disney Sparks Theme-Park Battle to Entertain China’s Middle Class – Bloomberg

China will be bigger for the movie box office in 2017 than the US 

China will be bigger for the movie box office in 2017 than the US 

Whether its characters from Disney’s Marvel, Star Wars or Pixar stable, or even DC’s own Batman and Superman, people will flock to the movies to quench their content thirst. Increasingly the international box office is becoming a bigger and bigger factor in movie decisions. Some film, like Expendables 3, are being made solely because of foreign demand, and the same goes for streaming content from Netflix and Amazon. What this tell us is content is truly king, but it also means content companies are likely to pivot to satiate local preferences. 

China — not the U.S. — is projected to be the leader in box office revenue in 2017, according to PricewaterhouseCoopers.If true, it will mark the first time that the U.S. has not been the top revenue driver in an entertainment and media segment. The Chinese box office is expected to generate $10.3 billion next year, while the U.S. will be at $10.1 billion. By 2020, the Chinese box office will reach $15.1 billion versus just $11 billion in the U.S.

Source: China will be bigger for the box office than the US next year: PwC

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 >>

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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

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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.

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Wading deeper into earnings reports reveals growth expectations not living up to expectations

Wading deeper into earnings reports reveals growth expectations not living up to expectations

It’s earnings season, and with anywhere from a few hundred to more than a 1,000 companies reporting their results, this certainly makes for a volatile time with investors shooting first as results hit the tape and asking questions over the quality of those earnings later.

As we navigate the maze of earnings reports to be had in the coming days, we’ll continue to refine our thematic shopping list and look to pounce on opportunities that offer a compelling risk to reward trade off.

In this week’s edition of Tematica Investing:

  • Wading deeper into March quarter earnings finds growth expectations are not living up to expectations. As we’ve said before, it sometimes takes time for the market to react to the fundamentals, but the fundamentals eventually catch up with expectations.
  • While we expect no-action from the Fed’s FOMC meeting later today, expect Wall Street to parse the commentary on the economy and inflation to determine the Fed’s next course of action.
  • Earnings reports for companies on the Tematica Select List are starting to trickle in, and we see no reason to alter our position in AT&T (T) or American Capital Agency (AGNC) shares at this time.
    Checking in on Chipotle Mexican Grill (CMG) shares, we find more patience is required before pulling the gun on this Food with Integrity contender.
  • We’ve got the latest thematic supporting data points that ripped from the headlines around us.
    Finally, we’re re-introducing an old feature called “What We’re Enjoying” and this week it’s the new Echo Dot from Amazon.

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