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Nike: Just Do It? Maybe not quite yet

Nike: Just Do It? Maybe not quite yet

Here we are again, another update to Tematica Investing, your weekly service that replaces the Growth & Dividend Report.

In this week’s edition, we tackle:

  • Expectations for GDP in the current quarter fell even further this week.
  • As expected Fed Chairwoman Janet Yellen pushes out potential rate hike timing
  • Dividend stocks come back into vogue as Yellen’s comments reverse hawkish comments last week and that’s good news for several of our holdings.
    Examining Nike ([stock_quote symbol=”NKE”]) and Under Armour ([stock_quote symbol=”UA”]) shares, but only one gets on the Tematica Contender List
  • More thematic confirmation ripped from the headlines…
  • Other securities mentioned in this report include: Alibaba (BABA), Apple (AAPL), AT&T (T) Dick’s Sporting Goods (DKS), Facebook (FB), Finish Line (FINL), Foot Locker (FL), General Mills (GIS), Lions Gate Entertainment (LGF), ParkerVision (PRKR), Physicians Realty Trust (DOC), Qualcomm (QCOM), Regal Entertainment Group (RGC), Shoe Carnival (SCVL) and Target (TGT).

Click the link below to download the full report

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The Fed “Knows When to Hold’ em” as we build our contender list

The Fed “Knows When to Hold’ em” as we build our contender list

We know this may sound a bit like “the dog ate our homework” excuse as we are getting this week’s Tematica Investing out later than usual, but we wanted to address what the Fed had to say, or more like what they didn’t do.

That’s right, we dig into the outcome of the Fed’s March FOMC meeting that left interest unchanged, but led to a revision in expectations that means the Fed is increasingly less likely to boost interest rates in the coming months. In other words, as we’ve been saying for a while now, slower growth and currency headwinds will continue to restrain growth in the coming months. As such, we will continue to look for disruptive technologies, pain points and other tectonic shifts that fuel our thematic investing lens as well as smartly priced dividend payers that are also benefiting from our thematic tailwinds.

  • Also this week we add another two companies to the Tematica Contender List, both are a part of our Connected Society investing theme and stand to benefit form the increasing amount of time people are spending on Digital media. We also share the latest edition of Thematic Signals, otherwise known as Ripped from the Headlines confirmation of our investing themes unfolding around us in the world we live in.
  • While the Fed left interest rates unchanged coming out of its March FOMC meeting, it revised its GDP and inflation forecast for the US economy modestly lower vs. December expectations.
  • Regal Entertainment ([stock_quote symbol=”RGC”]) continues to benefit from a robust box office and indications point to more of the same ahead. We are reviewing our price target on RGC shares with an upward bias.
  • We are removing Philip Morris International ([stock_quote symbol=”PM”]) shares from the Tematica Select List and issuing a Sell rating at current levels
  • We are adding ComScore ([stock_quote symbol=”SCOR”]) and Nielsen NV ([stock_quote symbol=”NLSN”]) to the Tematica Contender List as part of our Connected Society investing theme given the continued shift in advertising spend to Digital platforms from TV, Radio and other legacy media.
  • More confirmation for our thematic investing lens is found in this week’s edition of Thematic Signals

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Closing out a Cashless Consumption Position in PYPL

Closing out a Cashless Consumption Position in PYPL

Actions for this Week

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

  • Following the sharp rebound in the stock market this week, and weakening economic and market fundamentals, we’re rating ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares as a “Buy”.
  • Following PayPal /American Express rumors, we’re updating our PayPal ([stock_quote symbol=”PYPL”]) rating to “Sell”.

During the last few weeks, the stock market, as measured by the S&P 500, has undergone a powerful rally. As of last night, that market had climbed 8.6% from its Feb. 11 close. While we are enjoying the market’s move higher, the economic data has continued to point to a slower domestic and global economy. Examples include the following:

  • China’s official Purchasing Managers’ Index fell to 49.0 in February, marking the lowest reading since November 2011.
  • The Caixin/Markit Manufacturing PMI February reading for China dropped to 48.0, contracting for the 12th straight month.
  • China’s services sector continued to expand in February, but at its slowest pace since late 2008.
  • Euro-zone factory activity expanded at its weakest pace during the last year in February, with its manufacturing PMI falling to 51.2 from 52.3 in January.
  • Japan’s February PMI hit at 50.1 in February, down from 52.3 in January.
  • While a tad better than last week’s Flash February reading of 51.0, the final February manufacturing PMI reading for the United States fell to 51.3 from 52.4 in January. This marked the slowest increase in 28 months.
  • The ISM manufacturing perked up to a reading of 49.5, from 48.2 in January, but February was the fifth consecutive month with a reading in contraction territory. We’d note the last time this happened was during the 2009 financial crisis.
  • The domestic services economy edged down in February per the Institute for Supply Management and even the Fed’s Beige Book reported a “marginally weaker tone” in February than January.
  • Total U.S. carload traffic for January and February fell 13.5% year over year, according to data from the Association of American Railroads.

Taking all those data points together, along with those from January, tells us that the velocity of the global manufacturing economy slowed further in February. Quarter to date, the global economy appears to be hitting another speed bump. My concern is the increased probability of a repeat of what happened coming into 2016 — slow or weakening economic data, currency headwinds and cuts to earnings expectations.

Turning back to the stock market… the recent and welcome market rally has pushed the NYSE McClellan Oscillator (an indicator of market breadth based on the number of advancing and declining issues on the NYSE) even higher than last week and back to levels from which we’ve seen the market correct significantly.

sc-NYOP

In addition, as of last night, the S&P Capital IQ Short-Range Oscillator shows the market is now significantly overbought — two times overbought to be precise.

Conditions warrant staying cautious near-term

What this tells me is we once again are back in cautious territory and that means that not only are the ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares a buy at current levels, but we need to be cautious when adding new positions in the short-term as well. Our current thematically driven and dividend-heavy portfolio has served us well in 2016, allowing us to easily outperform the market indices.

Given the increasing probability that growth and earnings expectations will need to be revised lower yet again, amid the current overbought nature of the market, my plan is to keep these more defensive positions in Aging of the Population play Physicians Realty Trust ([stock_quote symbol=”DOC”]), Connected Society play AT&T ([stock_quote symbol=”T”]), Guilty Pleasure investment Philip Morris International ([stock_quote symbol=”PM”]) and Content is King holding Regal Entertainment Group ([stock_quote symbol=”RGC”]) intact. Even American Capital Agency Corp. ([stock_quote symbol=”AGNC”]), with its monthly dividend stream and annual dividend yield at better than 13%, warrants holding as things are poised to once again get a little bumpy.

Here’s the thing — we’ll once again have a chance to buy thematically well-positioned companies at better prices and more compelling risk-to-reward trade-offs. Let’s not jump the gun, but rather be patient and prudent. As an experienced carpenter would say, “measure twice and cut once.”

Closing PYPL position post PayPal/American Express Rumors

The best performer over the last week has easily been PayPal ([stock_quote symbol=”PYPL”]) shares, which rose more than 5% to $38.80. That has our PYPL shares up 16.6% since mid-September vs. less than 1.7% for the S&P 500. Fueling the recent move in PYPL shares was a rumored tie-up between PayPal and charge and credit card company American Express ([stock_quote symbol=”AXP”]). However, Wall Street was very quick to shoot that rumor down. With takeout speculation abating and concerns over the direction of the market near-term, my thought is it’s better to take profits and look to buy PYPL shares back at better prices. Long-term, I continue to like the company’s position as a standalone play for our Cashless Consumption investing theme. Therefore, we are updating our rating on  Paypal to “Sell” at this time.

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

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

Actions for this Week

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

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

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

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

WTIC Light Crude Spot Prices

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

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

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

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

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

$NYMOT: NYSE McClellan Oscillator

$NYMOT: NYSE McClellan Oscillator

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

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

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

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

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

What’s playing at the box office?

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

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

Coming up, earnings from Physicians Realty Trust

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