Menu
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: Many Confirming Data Points from Retail Sales Report

Weekly Issue: Many Confirming Data Points from Retail Sales Report

 

KEY POINTS FROM THIS ISSUE:

  • Our price target on Amazon (AMZN) shares remains $1,750
  • Our price target on United Parcel Service (UPS) remains $130
  • Our price target on Costco Wholesale (COST) remains $210.
  • Our price target on Habit Restaurant (HABT) shares remains $11.50
  • Our price target on Applied Materials (AMAT) shares remains $65.
  • Our price target on Apple (AAPL) shares remains $200.

 

Yesterday, we received the latest monthly Retail Sales report and it once again confirmed not only several of our investing themes, but also several of our Tematica Investing Select List holdings as well. While I and others at Team Tematica put these and other such reports through the grinder to ensure we understand what the data is telling us, I have to say some reports are more of a pleasure to read than others. In this case, it was a great read. First, let’s dig into the actual report and then follow up with some thematic insight and commentary. 

April Retail Sales – the data and comments

Per the Census Bureau, April total Retail Sales & Food Services rose 4.7% year over year, with the core Retail Sales ex-auto parts and food services up 4.8% compared to April 2017. A modest downtick compared to the year over year growth registered in March, but a tad higher than the February comparison.

Subscribers will not be bowled over to learn the two key retail drivers were gas stations (up 11.7% year over year) followed by Nonstore retailers (9.6%). The two categories that have been a drag on the overall retail comparisons – Sporting goods, hobby, book & music stores and Department Stores – continued to do the same in April falling  1.1% and 1.6%, respectively. Scanning the last few months, the data tells us things have gotten tougher for those two categories as the last three months have happened.

With gas stations sales up nearly 11% over the last three months compared to 2017, real hourly earning’s barely up per the latest from the Bureau of Labor Statistics and consumer debt up to 26% of average disposable income (vs. 22% during the financial crisis per the latest LendingTree Consumer Debt Outlook) there’s no way to sugar coat it – something had to give and those two continue to take the brunt of the pain. As gas prices look to move even higher as we switch over to more costly summer gas blends and interest rates poised to move higher, it means consumers will continue to see discretionary spending dollars under pressure.

In keeping with our Connected Society and Cash-strapped consumer investing themes, consumers are turning to digital shopping to hunt down bargains and deals, while also saving a few extra bucks by not heading to the mall. That is, of course, positive confirmation for our position in Amazon (AMZN) shares as well as United Parcel Service (UPS) shares, which have had a quiet resurgence thus far in 2018. That move serves to remind us that connecting the dots can lead to some very profitable investments, and as I like to say – no matter what you order from Amazon or other online shopping locations, the goods still need to get to you or the person for which they are intended. I continue to see UPS as a natural beneficiary of the accelerating shift toward digital commerce.

  • Our price target on Amazon (AMZN) shares remains $1,750
  • Our price target on United Parcel Service (UPS) remains $130

 

April retail sales confirms our bullish stance on Costco

Costco Wholesale (COST) shares have been on a tear since their February bottom, and in my view each month we get a positive confirmation when Costco reports its monthly sales data as increasingly Cash-strapped Consumers look to stretch their disposable dollars was had in Costco Wholesale’s (COST) April same-store-sales report. For the month, Costco’s US sales excluding gas and foreign exchange rose 7.9%, once again showing the company continues to take consumer wallet share. As for the critics over how, late Costco had been to digital commerce, over the last few months its e-commerce sales have been up 31%-41% each month. While still an overall small part of Costco’s revenue stream, the management team continues to expand its digital offerings putting it ahead of many traditional brick & mortar focused retailers.

Finally, we need to touch on one of the key profit generators at Costco – membership fee revenue, which is tied to new warehouse openings.  If we look at the company’s recent quarterly earnings report we find that 73% of its operating profit is tied to that line item. As part of its monthly sale report, Costco provides an updated warehouse location count as well. 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. That number should climb by another 17 new locations by the end of August and paves the way for continued EPS growth in the coming quarters.

  • Our price target on Costco Wholesale (COST) remains $210.

 

Two favorable data points for recently added Habit Restaurant shares

Last week, we added shares of Habit Restaurant (HABT) to the Tematica Investing Select List with an $11.50 price target. Since then, we’ve had two positive data points, including one found in yesterday’s Retail Sales report. The first data point was from TDn2K, a firm that closely watches monthly restaurant sales. For the month of April, TDN2K reported same-store sales for the month rose 1.5%, the best showing in over 30 months. The April Retail Sales report showed year over year April retail sales at Food services & drinking places rose 3.8%, bringing the trailing 3-month total to up 3.6% on a year over year basis.

While our investment thesis on HABT centers on the company’s geographic expansion, these data points point to an improving business for its existing locations. Paired with the pending menu price increase, we see this data pointing a stronger operating environment in the coming quarters.

  • Our price target on Habit Restaurant (HABT) shares remains $11.50

 

Gearing up for earnings from Applied Materials

After tomorrow night’s close Disruptive Technologies company Applied Materials (AMAT) will report its quarterly earnings. Expectations call for it to deliver EPS of $1.14 on revenue of $4.45 billion. For those at home keeping score, those figures are up 44% and 26%, respectively, on a year over year basis.

As the current earnings season got underway, we heard very positive commentary on the semiconductor capital equipment market from several competitors, including Lam Research (LRCX). This lays the groundwork for an upbeat report despite the softness we are seeing in the organic light emitting diode display market. With more smartphone models poised to adopt that display technology, including more favorably priced ones from Apple (AAPL), Applied’s outlook for its Display business tomorrow night could be the canary in the coal mine for shares of Universal Display (OLED).

With regard to the core semiconductor capital equipment business, I continue to see longer-term opportunities for it associated with a number of emerging technologies and applications (growing memory demand, 5G chips sets, 3D sensing, smarter automobiles and homes, and augmented reality to virtual reality and the Internet of Things) that will drive incremental chip demand in the coming years. I’m also hearing that China’s state-backed semiconductor fund, The National Integrated Circuitry Investment Fund, is closing in on an upsized 300 billion-yuan fund ($47.4 billion) fund vs. the expected 120 billion-yuan ($18.98 billion) to support the domestic chip sector. This buildout was one of my focal points behind adding AMAT shares to the Select List over a year ago.

Since then AMAT shares are up more than 50%, and this upsized demand from China is poised to drive them even higher in my view. Before that can happen, however, the semiconductor industry has taken a leading role in the current U.S.-China trade conflict. This means I’ll continue to monitor this development closely.

As we get ready for the upcoming earnings report, let’s also remember Applied buyback program. I suspect the company was in buying shares during the April lows. We’ll get a better sense when we compare year over year share counts once I have the earnings report in my hands.

  • Our price target on Applied Materials (AMAT) shares remains $65.

 

Tim Cook confirms Apple’s move into original content

Apple’s move into original content has to be one of the worst-kept secrets in some time. There have been hiring’s of key people for key roles as well as content partners that have spilled the beans, but now Apple CEO Tim Cook quietly confirmed the move while appearing on “The David Rubenstein Show: Peer-to-Peer Conversations” on Bloomberg Television by saying

“We are very interested in the content business. We will be playing in a way that is consistent with our brand,” Cook told Bloomberg. “We’re not ready to give any details on it yet. But it’s clearly an area of interest.”

A summary of that conversation can be found here, and my $0.02 on this is Apple will be looking to leverage original content to increase the sticky factor for its devices as well as attract new customers for those devices. This is similar to the strategy behind its services business that includes iCloud, Apple Music, Apple Pay and other offerings. We could hear more of this in a few weeks at Apple’s 2018 World Wide Developer Conference but given the expectation for its content to roll out after March 2019 odds are we won’t hear much just yet.

  • Our price target on Apple (AAPL) shares remains $200.

 

 

 

WEEKLY ISSUE: A Guilty Pleasure or a Habit? In this case it’s the same

WEEKLY ISSUE: A Guilty Pleasure or a Habit? In this case it’s the same

 

KEY POINTS FROM THIS ALERT:

  • We are adding shares of Habit Restaurant (HABT) to the Tematica Investing Select List as part of our Guilty Pleasure investing theme with an $11.50 price target.
  • We are boosting our price target on USA Technologies (USAT) shares to $12 from $11 following robust margin performance in the March quarter and strong prospects for more realized synergies with its Cantaloupe acquisition and new Ingenico relationship.
  • After reporting March quarter earnings that saw its net asset value per share continue to climb, we continue to rate GSV Capital (GSVC) shares a Buy with an $11 price target.

 

After formally adding shares of Disruptive Technology company AXT Inc. (AXTI) back to the Tematica Investing fold earlier this week, we’ve got a jam-packed issue this week that includes a new recommendation that brings an active position in our Guilty Pleasure investing theme onto the Tematica Investing Select List. Let’s get to it…

Adding Habit Restaurant shares to the Tematica Investing Select List

People need to eat. That’s a pretty recognizable fact. Some may eat more than others, some may eat less; some may eat meat, others may not. But at the end of the day, we need food.

As investors, we recognize this and that means considering where and what consumers eat, and also identifying companies that are poised to benefit from other opportunities. One such opportunity is geographic expansion, and with restaurants it often means expanding across the United States.

Typically, expansion is driven by new store openings, which in turn drive sales. Tracing back its expansion over the last several years, Chipotle Mexican Grill (CMG) had to build up to 2,363 locations. Even with that number of locations, per Chipotle’s recently filed 10-K, the company still expects to “open between 130 and 150 new restaurants in 2018.” At that pace, it would take quite a while before Chipotle has as many locations as McDonald’s (MCD) (more than 14,000) or Starbucks (SBUX) (just under 14,000) in the U.S. exiting last year.

A little over a year ago, Restaurant Brands (QSR), the company behind Tim Hortons and Burger King, acquired Popeye’s in part for food-related synergies but also the opportunity to grow Popeye’s through geographic expansion. In 2016, Popeye’s had some 2,600 locations compared to more than 7,500 Burger Kings in the U.S. For those wondering, that’s greater than the 2,251 locations Jack in the Box (JACK) had in 2017.

And that brings us to a quick service with a California char-grill twist restaurant that is Habit Restaurant (HABT). With just 209 Habit Burger Grill fast casual locations in 11 states spread between the two coasts, Habit has ample room to expand its concept serving flame char-grilled burgers and sandwiches, fries, salads and shakes. And if you’re wondering how good Habit is, I took the liberty of trying its products and sampling its friendly service at one of the few East coast locations — it’s work, someone had to do it. I can certainly understand why this Guilty Pleasure company was named “best tasting burger in America” in July 2014.

In 2017, the company recorded revenue of $331.7 million from which it generated EPS of $0.16. For this year, consensus expectations have it serving up revenue near $393 million, up around 18% year over year, but EPS of $0.05 — a sharp drop from 2017.

What we’re seeing is Habit hitting an inflection point as it engages a national advertising agency, opens 30 new locations this year and contends with higher wage costs (up 6%-7% vs. 2017), as well as test markets breakfast. Inflection point stocks can be tricky largely because even as things go right there can be mishaps along the way. With the company expected to open the greatest number of new locations during the March quarter, I put the shares on the back burner in early March when they were near $10 with a note to follow up after the company reported the March quarter.

Last week, Habit issued its quarterly results with year over year revenue growth near 17%, but still out of reach compared to consensus expectations, and it also missed on the bottom line. Following that report, HABT shares fell x%, bottoming our near $8.20 before settling at $8.60.

What led to the shortfall?

During the March quarter, Habit opened 11 new company-owned locations – more than the expected 7-10 for the quarter — more than one-third of its targeted new openings for 2018. Another factor was rising costs in the form of inputs (beef and chicken in the protein complex and French fries) as well as higher labor costs, particularly in California, during its peak promotional activity.

Now for the positive developments. First, to offset those higher costs the company is implementing a 3.9% menu price hike at the end of May. Second, its expansion plans – with another 20 or so company restaurants this year and 6-8 franchised locations  —remain on track with but at a slower open rate compared to the March quarter.

This expansion should help improve the company’s geographic footprint further as it follows the three new east coast locations openings (Maryland, New Jersey) opened during the March quarter. During the earnings call, the company shared that roughly 20% of its company-operated growth will be on the east coast and about 50% will be drive through locations. On another note, the company is testing a breakfast menu, which in our view is a long-term positive given that per NPD Group findings, breakfast is the fastest growing meal with 80% of that growing being had a quick service restaurants.

Now here’s the thing – no matter what metric you look at for the shares OTHER than P/E they are cheap.  The shares are currently trading at 8.0x on an enterprise value to 2018 earnings before interest, taxes, depreciation and amortization (EBITDA) basis, which is more than 40% discount to the peer group that includes Jack in the Box (JACK), Wendy’s (WEN) and other quick-service restaurants. Some of that discount is warranted as Habit has to wind its way through some likely growing pains, but as I shared above the longer-term driver of the company’s success will be geographic expansion. It bears repeating — we’ve seen this time and time again with restaurant companies ranging from Dunkin’ Donuts to Starbucks (SBUX), Chipotle (CMG) back in the day and Del Taco (TACO) more recently. There is also the chance that another quick service chain will pull a Restaurant Brands-Popeye’s move to jumpstart its own growth metrics.

With more than 25% upside to our $11.50 price target, which is still a discount to the quick service peer group, and modest downside following the news of the March quarter, the risk to reward profile in HABT shares is rather tasty. As the company continues to expand its footprint East, I’ll continue to review the impact on the business – good and bad — as well as the bottom line and what it means for our price target.

  • We are adding shares of Habit Restaurant (HABT) to the Tematica Investing Select List as part of our Guilty Pleasure investing theme with an $11.50 price target.

 

Robust margins lead us to boost our price target for USAT shares

Yesterday morning USA Technologies (USAT) reported March quarter results that pushed the shares higher in morning trading, and has us nudging our price target to $12 from $11 in response. For the quarter, USA achieved EPS of $0.04, beating the consensus by $0.03, despite missing revenue expectations for the period by just over 6%, as the company’s gross margin rose to more than 33% vs. 25.0% in the year-ago quarter.

That jump in profitability reflects continued growth in USA’s total mobile payment connection base as well as sustained growth in the dollar transaction volume carried over those connections. Exiting the quarter, USA’s total connection base stood at 969,000 across 15,600 customers (up from 504,000 and 12,400, respectively exiting March 2017), with transaction volume climbing to $318 million, up 57% higher year over year.  USA’s margins also benefitted from realized synergies from its November 2017 acquisition of Cantaloupe Systems. As a reminder, Cantaloupe utilizes cloud-based, mobile technologies to offer an integrated end-to-end vending and payment solution for cashless vending, dynamic route scheduling, automated pre-kitting and merchandising and inventory management.

We continue to see that as extremely synergistic with USA’s mobile payment platform for vending and other unattended retail applications, with more incremental revenue and profit synergies to be had in the coming quarters. Central among those synergies is new customer engagements, which should drive additional mobile payment connections and customer growth. Also adding to that is the recently inked multi-year with payment processing firm Ingenico that pairs Ingenico’s hardware, software, security and services products with USA’s mobile payment services platform. As the company’s results and guidance, including the margin commentary, are digested, we expect 2018 EPS to move higher from the pre-earnings report consensus of $0.06 for this year and $0.13 next year.

Do we continue to think that USAT will emerge as a potential takeout candidate as the mobile payment industry continues to grow and mature? Yes, but that does not factor into our new price target of $12.

  • We are boosting our price target on USA Technologies (USAT) shares to $12 from $11 following robust margin performance in the March quarter and strong prospects for more realized synergies with its Cantaloupe acquisition and new Ingenico relationship.

 

Net asset value per share continues to climb at GSV Capital

Last night shares of Asset-lite company GSV Capital (GSVC) reported mixed March quarter results with a beat on the bottom line and a miss on the top line. As I’ve shared before, the real driver of GSV’s shares price is not revenue or earnings, but the trajectory of its investment portfolio, which we measure through its net asset value per share. Exiting the March quarter, that portfolio’s net assets across 29 positions totaled approximately $210.5 million, or $9.99 per share up from to $9.64 per share at the end of 2017, and $8.83 per share exiting the March 2017 quarter.

The company’s top five holdings, which included privately held Palantir Technologies, Spotify (SPOT), Dropbox (DBX), private company Coursera and NESTGVS, accounted for 58% of GSV’s investment portfolio exiting March vs. 39% in the year ago quarter. With consensus price targets of $157 and $33 for Spotify and Dropbox shares, respectively, we continue to see added lift in the company’s net asset value per share. Should the company’s largest holding in Palantir Technologies go public as is widely postulated or be acquired, we would have a third leg to the stool driving GSV’s net asset value growth higher.

Helping the net asset value per share comparisons, GSV repurchased 1.1 million shares during the quarter for $6.2 million, which reduced the shares outstanding by 5% year over year. Following the upsizing of the company’s share repurchase program by an additional $5 million, GSV has roughly $8.8 million remaining. At current levels, the company could repurchase another 1.25 million shares, shrinking its outstanding share count by 6%.

  • After reporting March quarter earnings that saw its net asset value per share continue to climb, we continue to rate GSV Capital (GSVC) shares a Buy with an $11 price target.

 

WEEKLY ISSUE: Robust Earnings and March Retail Sales Bode Well for Select List

WEEKLY ISSUE: Robust Earnings and March Retail Sales Bode Well for Select List

 

Once again, the stock market has shrugged off moves in the geopolitical landscape and mixed economic data to start the week off higher. Not surprising as the highly anticipated 1Q 2018 earnings season has gotten underway and based on what we saw the last two days so far so good. For the record, we had 44 companies that reported better than expected top and bottom line results, a number of them high profile companies such Bank of America (BAC), Netflix (NFLX), Goldman Sachs (GS), Johnson & Johnson (JNJ), and CSX (CSX).

Like I said, so far so good, and while we’re getting some additional nice EPS beats this morning, we’re still very early on in the 1Q 2018 earnings season. Make no mistake, it’s encouraging, but we have a long way to go until we can size up 1Q 2018 earnings performance vs. the high bar of expectation that calls for roughly 18% EPS growth year over year for the S&P 500.

That’s why I’ll continue to parse the data — earnings and otherwise — as it comes through. Last week and this week, we’ll get more of that for March, and that means we can get a view on how those data streams performed in full for 1Q 2018. Case in point, on Monday we received the March Retail Sales Report, which on its face came in at 0.6%, better than expected, and excluding autos and food services the metric also 0.6% vs. February. That translated into a 4.7% increase for retail ex-auto and food services year over year for the month. Stepping back, the data found in Table 2of the report showed that line item rose 4.3% year over year for all of 1Q 2018.

With that information, we can size up which categories contained in the report gained wallet share and identify those that lost it. The two big winners for 1Q 2018 were gasoline stations, up 9.7%, which was no surprise given the rise in gas prices over the last three months, and Nonstore retailers, which also rose 9.7%. We see that data as very favorable for our Amazon (AMZN) shares and boding well for Costco Wholesale (COST) given its growing e-commerce business. Contrasting that figure against the -0.6% for department store sales in 1Q 2108 confirms the ongoing shift in how and where consumers are shopping. Not good news in our view for the likes of JC Penney (JCP) and other mall anchor tenants.

The hardest hit category during 1Q 2018 was Sporting Goods, hobby, book & music stores, which fell 4% year over year. Remember, we’re seeing these categories impacted as well by the shift to digital commerce, streaming services such as newly public Spotify (SPOT) and programs like Amazon’s Kindle Unlimited that looks to be the Netflix (NFLX) of books, audiobooks, and magazines. In my view, the other shoe to drop for this Retail Sales Report category is the Toys R Us bankruptcy that is poised to do to the toy industry what the Sports Authority bankruptcy and subsequent liquidation sales did to Under Armour (UAA), Nike (NKE) and Adidas among others. We’ll get a better picture on that when toy company Mattel (MAT) reports its quarterly results later this week.

I’d also call out that Clothing & Clothing Accessories store retail sales for 1Q 2018 rose just 3.0%, signaling slower growth than overall retail sales – a sign that consumers are spending their disposable dollars on other things or elsewhere. Over the last year, we’ve more than touched on the transformation that is underway with digital shopping, and we continue to see Amazon as extremely well positioned. Likely augmenting that Amazon has moved its Amazon Prime Wardrobe service, its “try before you buy offering,” from beta to launch.

Of course, it requires Prime membership and we see this service as helping drive incremental Prime subscriptions, especially as Amazon continues to improve its apparel offering, both private label and branded. Another headwind to clothing retailers looks to be had in Walmart’s (WMT) upcoming website overhaul that is being reported to have a “fashion destination” that will leverage its partnership with Lord & Taylor. With branded apparel companies looking to reach consumers, some with their own Direct 2 Consumer businesses and others by leveraging third party logistic infrastructure, we’ll keep tabs on Walmart’s progress and what it means for brick & mortar clothing sales. If you’re thinking this should keep our Buy rating on shares of United Parcel Service (UPS), you’re absolutely right.

The bottom line is the March Retail Sales report served to confirm our bullish view on both Connected Society companies Amazon and UPS as well as Cash-Strapped Consumer play Costco.

  • Our price target on Amazon remains $1,750
  • Given its strong monthly same-store sales data and ongoing wallet share gains as it opens additional warehouse locations, we are boosting our Costco Wholesale (COST) price target to $210 from $200
  • Our long-term price target on United Parcel Service (UPS) shares remains $130

 

 

Robust Earnings from Lam Research Bode Well for Applied Materials

Last night Applied Materials (AMAT) competitor Lam Research reported stellar 1Q 2018 earnings and issued an outlook that topped Wall Street expectations. For the quarter, shipments of its semiconductor capital equipment rose 19% year over year, which led revenue to climb more than 30% year over year for the quarter. Higher volumes and better pricing led to margin expansion and fueled a $0.43 per share earnings beat with EPS of $4.79. All in all, a very solid quarter for Lam, but also one that tell us demand for chip equipment remains strong. Those conditions led Lam to guide current quarter revenue to $2.95-$3.25 billion vs. the consensus view of $2.94 billion.

From growing memory demand, 5G chips sets, 3D sensing, smarter automobiles and homes, and augmented reality to virtual reality and the Internet of Things, we continue to see a number of emerging technologies that are part of our Disruptive Technologies investing theme driving incremental chip demand in the coming years that will fuel demand for semi-cap equipment. We see this as a very favorable tailwind for our Applied Materials shares. Also, let’s not forget Applied’s recently upsized dividend and buyback programs, which, in my view limits potential downside in the shares.

  • Our price target on shares of Applied Materials (AMAT) remains $70.

 

The Habit Restaurant – Loving the Burgers and Shakes, but Not the Shares Just Yet

People need to eat. That’s a pretty recognizable fact. Some may eat more than others, some may eat less; some may eat meat, others may not. But at the end of the day, we need food to survive, but in some cases for comfort at the end of a long day.

As investors, we recognize this and that means considering where and what consumers eat, and also identifying companies that are poised to benefit from other opportunities as well. One such opportunity is geographic expansion, and with restaurants, it often means expanding across the United States.

Typically, expansion is driven by new store openings, which in turn drive sales. Tracing back its expansion over the last several years, Chipotle Mexican Grill (CMG) had to build up to 2,363 locations. Even with that number of locations, per Chipotle’s recently filed 10-K, the company still expects to “open between 130 and 150 new restaurants in 2018.” At that pace, it would take quite a while before Chipotle had as many locations as McDonald’s (MCD) (more than 14,000) or Starbucks (SBUX) (just under 14,000) in the U.S. exiting last year.

A little over a year ago, Restaurant Brands (QSR), the company behind Tim Hortons and Burger King, acquired Popeye’s in part for food-related synergies but also the opportunity to grow Popeye’s through geographic expansion. In 2016, Popeye’s had some 2,600 locations compared to more than 7,500 Burger Kings in the U.S. For those wondering, that’s greater than the 2,251 locations Jack in the Box (JACK) had in 2017.

This brings us to  The Habit Restaurants (HABT), a Guilty Pleasure company if there ever was one.

With just 209 Habit Burger Grill fast-casual locations in 11 states spread between the two coasts, Habit has ample room to expand its concept serving flame char-grilled burgers and sandwiches, fries, salads and shakes. And if you’re wondering how good Habit is, don’t just listen to me (one of those 209 locations is just a few miles away from him), the company was named “best tasting burger in America” in July 2014.

In 2017, the company recorded revenue of $331.7 million from which it generated EPS of $0.16. For this year, consensus expectations have it serving up revenue near $393 million, up around 18% year over year, but EPS of $0.05 — a sharp drop from 2017.

What I’m seeing is Habit hitting an inflection point as it engages a national advertising agency, opens 30 new locations this year (7-10 in first-quarter 2018) and contends with higher wage costs (up 6%-7% vs. 2017), as well as test markets breakfast. Making matters challenging, the overall restaurant industry has been dealt a tough hand during the first two months of 2018 as winter weather and cold temperatures led to reduced traffic and same-store sales industry-wide, according to research firm TDn2K.

While a recent survey of March restaurant sales published by Baird showed a pick-up, the question I am pondering is to what degree will restaurant sales rebound on a sustained basis as the winter weather fades? I’m asking this question full well knowing the level of credit-card and other debt held by consumers as the Fed looks to hike interest rates several times this year.

Do I like the long-term potential of Habit?

Yes, and I would recommend their burgers, fries, and shakes – without question. That said, the company is not without its challenges, especially as McDonald’s begins to roll out its fresh beef offering nationwide. I had one of those a few days ago and in my view, it’s a clear step up from what Mickie D’s had been serving. You may be getting the idea that I like burgers, and I can easily confirm that as well as my fondness for chocolate shakes.

By most valuation metrics, HABT shares are cheap, but as we all know, cheap stocks are usually cheap for a reason. As such, we want to see how the company performed during the first quarter, the quarter in which the greatest number of new locations were to be opened. Typically, new locations drive up costs, and given the uptick in wage costs, this combination could weigh on the company’s bottom line.

All of this has us sitting on the sidelines with Habit Restaurants shares, which means adding them to Tematica Investing Contender List as part of our Guilty Pleasure investing theme.