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Amazon shares some Prime Day results, Bullish 5G comments from Ericsson

Amazon shares some Prime Day results, Bullish 5G comments from Ericsson

Key points in this issue:

  • Our $1,900 price target for Amazon (AMZN) shares is under review with an upward bias.
  • Our price target on United Parcel Service (UPS) remains $130.
  • Our price target on Dycom (DY) shares remains $125.
  • Our price target on AXT Inc. (AXTI) shares is $11.
  • Our price target on Nokia (NOK) shares is $8.50.

 

Follow up on Prime Day 2018

As the dust settles on Amazon’s (AMZN) 2018 Prime Day, the company shared that not only did Prime members purchase more than 100 million products during the 36-hour event, but that it was also the “biggest in history.” While details were limited, this commentary like means the 2018 event handily eclipsed last year’s. Adding credence to that was the noted addition of Prime Day in Australia, Singapore, the Netherlands, and Luxembourg, which brought the total event country count to 17. It was also reported that Prime Day Sales on Amazon’s third-party marketplace were up some 90% during the first 12 hours of Prime Day this year.

All very positive, but still no clarity on the overall magnitude of the event relative to forecasts calling for it to deliver $3.4-3.6 billion in revenue. There was also no mention about the number of new Prime members that joined the Amazon flock, but historically Prime Day has led to a smattering of conversions and with it occurring in 17 countries this year, including four new ones, odds are Amazon continued to draw in new Prime users.

As we mentioned yesterday, our $1,900 price target for Amazon shares is under review with an upward bias. In looking at Prime Day from a food chain or ecosystem perspective, we see it benefitting the package volume for Tematica Investing Select List resident United Parcel Service (UPS). I’ll be looking for confirming data in comments from United Parcel Service when it reports its 2Q 2018 quarterly results on July 25 as well as any insight it offers on Back to School shopping and the soon to be upon us year-end holiday shopping season. Let’s also keep in mind that UPS will share those comments one day before Amazon reports its quarterly results on July 26.

  • Our $1,900 price target for Amazon (AMZN) shares is under review with an upward bias.
  • Our price target on United Parcel Service (UPS) remains $130.

 

Ericson’s 5G comments are positive for Dycom, AXT and Nokia shares

Also yesterday, leading mobile infrastructure company Ericsson (ERIC) reported its 2Q 2018 results, and while we are not involved in the shares, its comments on the 5G market bode very well for our the shares of specialty contractor Dycom Industries (DY) and compound substrate company AXT Inc. (AXTI) as well as mobile infrastructure and wireless technology licensing company Nokia (NOK).

More specifically, Ericsson called out that its sales in North America for the quarter increased year over year due to “5G readiness” investments across all of its major customers. This confirms the commentary of the last few weeks as AT&T (T) and Verizon (VZ) – both of which are core Dycom customers – move toward commercial 5G deployments in the coming quarters.

We’ve also heard similar comments from T-Mobile USA (TMUS) as well. But let’s remember that 5G is not a US-only mobile technology, and we are seeing similar signs of readiness and adoption for its deployment in other countries. For example, the top three mobile operators in South Korea are working to launch the technology in March 2019. Mobile operators in Spain are bidding on 5G spectrum, France has established a roadmap for its 5G efforts and recently the first end to end 5G call was made in Australia.

While the US will likely be the first market to commercially deploy 5G service, it won’t be the only one. This means similar to what we have seen with past mobile technology deployments such as 3G and 4G LTE, this global rollout will span several years. While Ericsson’s North American comments bode well for our DY shares, these other confirmation points keep us bullish on our shares of AXT and NOK as well.

  • Our price target on Dycom (DY) shares remains $125.
  • Our price target on AXT Inc. (AXTI) shares is $11.
  • Our price target on Nokia (NOK) shares is $8.50.

 

AT&T and Time Warner launch WatchTV, with new unlimited data plans

AT&T and Time Warner launch WatchTV, with new unlimited data plans

The dust has barely settled on the legal ruling that is paving the way for AT&T (T) to combine with Time Warner (TWX), and we are alread hearing of new products and services to stem from this combination. No surprise as we are seeing a blurring between mobile networks and devices, social media and content companies as Apple (AAPL), Facebook (FB), Google (GOOGL) and now AT&T join the hunt for original content alongside Netflix (NFLX), Amazon (AMZN), and Hulu, which soon may be controlled by Disney if it successfully fends of Comcast to win 21st Century Fox.

While we as consumers have become used to having the content I want, when I want it with Tivo and then the content I want, when I want it on the device I want it on with streaming services, it looks now like it will be “the content I want, when I want it, on the device I want on the platform I choose.” All part of the overlapping to be had with our Connected Society and Content is King investing themes that we are reformulating into Digital Lifestyle – more on that soon.

In short, a content arms race is in the offing, and it will likely ripple through broadcast TV as well as advertising. Think of it as a sequel to what we saw with newspaper, magazine and book publishing as new business models for streaming content come to market… the looming question in my mind is how much will today’s consumer have to spend on all of these offerings before it becomes too pricey?

And what about Sprint (S) and T-Mobile USA (TMUS)…

 

Taking advantage of the recent approval of its merger with Time Warner, AT&T on Thursday announced WatchTV, a new live TV service premiering next week — and initially tied to two new unlimited wireless data plans.

WatchTV incorporates over 30 channels, among them several under the wing of Time Warner such as CNN, Cartoon Network, TBS, and Turner Classic Movies. Sometime after launch AT&T will grow the lineup to include Comedy Central, Nicktoons, and several other channels.

People will be able to watch on “virtually every current smartphone, tablet, or Web browser,” as well as “certain streaming devices.” The company didn’t immediately specify compatible Apple platforms, but these will presumably include at least the iPhone and iPad, given their popularity and AT&T’s long-standing relationship with Apple.

The first data plan is “AT&T Unlimited &More”, which will also include $15 in monthly credit towards DirecTV Now. People who pay extra for “&More Premium” will get higher-quality video, 15 gigabytes of tethered data, and the option to add one of several “premium” services at no charge — initial examples include TV channels like HBO or Showtime, and music platforms like Pandora Premium or Amazon Music Unlimited.

&More Premium customers can also choose to apply their $15 credit towards DirecTV or U-verse TV, instead of just DirecTV Now.

WatchTV will at some point be available as a $15-per-month standalone service, but no timeline is available.

Source: AT&T uses Time Warner merger to launch WatchTV, paired with new unlimited data plans

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: Adding back a specialty contractor to Select List

WEEKLY ISSUE: Adding back a specialty contractor to Select List

 

  • We are issuing a Buy on Dycom Industries (DY) shares with a $125 price target as part of our Connected Society investing theme.
  • We are adding LendingClub (LC) shares to the Tematica Investing Contender List and will revisit the shares following the resolution of the current FTC complaint.
  • Our price target on Costco Wholesale (COST) and Amazon (AMZN) shares remain $210 and $1,750, respectively.
  • Our long-term price target on shares of Applied Materials (AMAT) remains $70.

As we inch along in the second half of the current quarter, the stock market is once again dealing with the flip-flopping on foreign trade. Last week there appeared to be modest progress between China and the US but following comments from President Trump on the pending summit with North Korea and “no deal” regarding China’s bankrupt ZTE, trade uncertainty is once again gripping the markets. Several weeks ago, I cautioned we were likely in for some turbulent weeks – some up some down – as these negotiations got underway. In my view, there will be much back and forth, which will keep the stock market on edge. I’ll continue to utilize our thematic lens and look for compelling long-term opportunities in the coming weeks, just like the one we are about to discuss…

 

Adding back shares of Dycom (DY) to the Tematica Investing Select List

Late last summer, we exited our position in specialty contractor and Connected Society food chain company Dycom Industries (DY) that serves the mobile and broadband infrastructure markets. Yesterday, following an earnings miss and reduced guidance from the company, its share dropped 20% to $92.64. The reason for the miss and outlook revisions stemmed from weather-related concerns during the February and March months as well as protracted timing associated with key next-gen network buildouts.

Clearly disappointing, but we have seen such timing issues before in the buildouts of both 3G and 4G/LTE networks before. In today’s stock market that double disappointment hit DY shares, no different than it has other companies that have come up short this earnings season.

We’ve often used pronounced pullbacks in existing positions to sweeten our average cost basis, and today we’re going to use this drop in DY shares to add them back to the Tematica Investing Select List.

Why?

Two reasons.

First, the inevitability of 5G network deployments from key customers (AT&T) and Verizon (VZ). Those two alongside their competitors have Sprint (S) and T-Mobile (TMUS) have committed to launching 5G networks by year-end, with a buildout to a national footprint to follow over the ensuing quarters. AT&T and Verizon accounted for 24% and 16% of the quarter’s revenue with Comcast (CMCSA) clocking in at just under 22% and Centurylink (CTL:NYSE) around 12%. This positions Dycom extremely well not only for the pending 5G buildout, but also the gigabit fiber one that is underway at cable operators like Comcast. Amid the timing disruptions with AT&T and Centurylink that led to the earnings disappointment and outlook cut, Dycom called out solid progress with Verizon, as its revenue rose more than 80% year over year. There’s also an added bonus – Dycom has little exposure to Sprint and T-Mobile, which are planning to merge and based on what we’ve seen in the past that means spending cuts are likely to be had as they consolidate existing assets and capital expansion plans.

Here’s the thing, while it is easy to get caught up in yesterday’s DY share price drop, it’s akin to missing the forest for the trees given the network upgrades and next-gen buildouts that will occur not over the coming months, but over the coming quarters.

Dissecting Dycom’s quarterly earnings and revised outlook that calls for EPS of $1.78-$1.93 in the first half of the year, to hit its new full-year target EPS of $4.26-$5.15 it means delivering EPS of $2.98-$3.22 in the back half of the year. In other words, a pronounced pick up in business activity that likely hinges on a pickup in network buildout activity from its customers.

I do expect Wall Street price target revisions and analyst commentary to weigh on DY shares in the near-term. Even I am cutting my once $140 price target for the shares to $125. That $140 target was based on 2019 EPS of $7.10 per share and given the company’s comments yesterday I expect 2019 EPS forecasts to be revised down to the $6.00-$6.50 range.

As the 5G buildout gets under way, the reality is that several quarters from now, such EPS and price target cuts could prove to be conservative, but I’d rather be in the position to raise our price target as the company beats EPS expectations. That revised 2019 EPS range derives a price target for DY shares of $120-$130. For now, we’ll split the difference at $125, which still offers almost 35% upside from current share price levels.

  • We are issuing a Buy on Dycom Industries (DY) shares with a $125 price target as part of our Connected Society investing theme.

 

Putting LendingClub shares onto the Contender List

As team Tematica has been discussing over the last several weeks in our writings and on our Cocktail Investing Podcast, we’re seeing increasing signs of inflation in the systems from both hard and soft data points. This likely means the Fed will boost rates four not three times in 2018 with additional rate hikes to be had 2019. That’s what’s in the front windshield of the investing car, while inside we are getting more data that points to a stretched consumer.

  • Per the May 2018 Consumer Debt Outlook report from Lending Tree (TREE), Americans are on pace to amass a collective $4 trillion in consumer debt by the end of 2018. This means Americans are spending more than 26% of their income on consumer debt, up from 22% in 2010 with the bulk of that increase due to non-house related borrowing.
  • The Charles Schwab’s (SCHW) 2018 Modern Wealth Index that reveals three in five Americans are living paycheck to paycheck.
  • A new report from the Federal Reserve finds that 40% of Americans could not cover an unexpected $400 expense and 25% of Americans have no retirement savings.

 

As consumer debt grows, it’s going to become even more expensive to service as the Fed further increases interest rates. On its recent quarterly earnings conference call, LendingClub’s (LC) CFO Tom Casey shared that “Borrowers are starting to see the increased cost of credit as most credit card debt is indexed to prime, which has moved up 75 basis points from a year ago…We have observed a number of lenders increase rates to borrowers…We know that consumers are feeling the increase in rates.”

Again, that’s before the Fed rate hikes that are to come.

The bottom line is it likely means more debt and higher interest payments that lead to less disposable income for consumers to spend. Unfortunately, we see this as a tailwind for our Cash-strapped Consumer investing theme as well as a headwind for consumer spending and the economy. We’ve seen the power of this tailwind in monthly retail same store sales from Costco Wholesale (COST), which have simply been off the charts, and in monthly Retail Sales reports that show departments stores, sporting goods stores and others continue to lose consumer wallet share at the expense of non-store retailers like Amazon (AMZN). The drive is the need to stretch what disposable spending dollars a consumer has.

The reality is, however, that those that lack sufficient funds will seek out alternatives. In some cases that means adding to their borrowings, often times at less than attractive rates.

With that in mind, above I mentioned LendingClub. For those unfamiliar with the company, it operates an online credit marketplace that connects borrowers and investors in the US. It went public a few years ago and was heralded as a disruptive business for consumers and businesses to obtain credit based on its digital product platform. That marketplace facilitates various types of loan products for consumers and small businesses, including unsecured personal loans, unsecured education and patient finance loans, auto refinance loans, and unsecured small business loans. The company also provides an opportunity to the investor to invest in a range of loans based on term and credit.

Last year 78% of its $575 million in revenue was derived from loan origination transaction fees derived from its platform’s role in accepting and decisioning applications on behalf of the company’s bank partners. More than 50 banks—ranging in total assets of less than $100 million to more than $100 billion—have taken advantage LendingClub’s partnership program.

LendingClub’s second largest revenue stream is derived from investor fees, which include servicing fees for various services, including servicing and collection efforts and matching available loans with capital and management fees from investment funds and other managed accounts, gains on sales of whole loans, interest income earned and fair value gains/losses from loans held on the company’s balance sheet.

The core loan origination transaction fee business along with the consensus price target of $5.00, which offers compelling upside from the current share prices, has caught my interest. However, there is one very good reason for why I am recommending we wait on LC shares.

It’s because the Federal Trade Commission (FTC) has filed a complaint against LendingClub, charging that it has misled consumers and has been deducting hidden fees from loan proceeds issued to borrowers. Moreover, as stated in the FTC’s complaint, Lending Club recognized that its hidden fee was a significant problem for consumers, and an internal review by the company noted that its claims about the fee and the amount consumers would receive “could be perceived as deceptive as it is likely to mislead the consumer.”

Given the potential fallout, which could pressure LC shares, we’ll sit on the sidelines with LendingClub and look for other companies that are positioned to capitalize on this particular Cash-strapped Consumer pain point.

  • We are adding LendingClub (LC) shares to the Tematica Investing Contender List and will revisit the shares following the resolution of the current FTC complaint.
  • Our price target on Costco Wholesale (COST) and Amazon (AMZN) shares remain $210 and $1,750, respectively.

 

Sticking with shares of Applied Materials

Last week Disruptive Technology company Applied Materials (AMAT) reported quarterly results that once again topped expectations but guided the current quarter below expectations. As I mentioned above with Dycom shares, the current market mood is less than forgiving in these situations and that led AMAT shares to give back much of the gains made in the first half of May.

The shortfall relative to expectations reflected reported weakness in high end smartphones, which is slowing capital additions for both chips and organic light-emitting diode display equipment. This is the latest in a growing number of red flags on smartphone demand, which in my view is likely to be the latest transition period in the world of smartphones. For those wondering about our Apple (AAPL) shares, the company already issued a sequentially down iPhone forecast when it reported its own earnings several weeks back as it upsized its own buyback program.

Again, looking back on my Dycom comments above, mobile carriers are about to embark on building out their 5G networks, which will drive incremental RF semiconductor chip demand as well as drive demand for new applications, such as semi-autonomous and autonomous cars. I see 5G devices with near broadband data speeds driving the next smartphone upgrade cycle. When that happens, there are also other technologies, such as artificial intelligence, augmented reality, and virtual reality that will be moving into a greater number of these and other devices. On its earnings call, Applied shared it’s starting to see ramping demand for artificial intelligence, big data a cloud related applications. I see more of this happening in the coming quarters… again, the long-term forest vs. the quarterly tree… and I haven’t even mentioned the internet of things (IoT).

Another driver I’m watching for Applied’s semi-cap business is the ongoing buildout of in-China semiconductor capacity. The item to watch for this is The National Integrated Circuitry Investment Fund, which represents the Chinese government’s primary vehicle to develop the domestic semiconductor supply chain and become competitive with the U.S.  chip industry leader the US. That fund is reportedly 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. As we have seen in the headlines with ZTE as well as the Broadcom (AVGO) bid for Qualcomm (QCOM), the semiconductor industry has taken a leading role in the current U.S.-China trade conflict. As I continue to watch these trade discussions play out, I’ll only be assessing implications for the National Integrated Circuitry Investment Fund and our Applied Materials shares.

In terms of organic light emitting diode displays and revisiting shares of Universal Display (OLED), the industry is still in a digestion period given the capacity ramp for that technology and the smartphone transition I touched on above. We’ve got OLED shares on the Tematica Investing Contender List and I’ll be watching them and signs of ramping demand as we move through the summer months.

While we wait, I expect Applied will continue to put its robust share repurchase program to use. As we learned in its quarterly earnings report last week, during the quarter, Applied used $2.5 billion of its $8.8 billion share repurchase authorization to repurchase 44 million shares, roughly 4% of the outstanding share count coming into the quarter. I suspect that once the post-earnings quiet period is over, Applied will be putting more of that program to work. I see that as limiting downside from current levels.

Finally, a quick reminder that come June, Applied will be paying its first $0.20 per share dividend.

  • Our long-term price target on shares of Applied Materials (AMAT) remains $70.
  • As we monitor signs of organic light emitting diode display demand, we continue to have shares of Universal Display on the Tematica Investing Contender List

 

 

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

 

 

It’s Wednesday, February 7, and the stock market is coming off one of its wild rides it has seen in the last few days. I shared my thoughts on the what’s and why’s behind that yesterday with subscribers as well as with Charles Payne, the host of Making Money with Charles Payne on Fox Business – if you missed that, you can watch it here.

As investors digest the realization the Fed could boost interest rates more than it has telegraphed – something very different than we’ve experienced in the last several years – the domestic stock market appears to be finding its footing as gains over the last few days are being recouped. Lending a helping hand is the corporate bond market, which, in contrast to the turbulent moves of late in the domestic stock market, signals that credit investors remain comfortable with corporate credit fundamentals, the outlook for earnings and the ability for companies to absorb higher interest rates.

My perspective is this expectation reset for domestic stocks follows a rapid ascent over the last few months, and it’s removed some of the froth from the market as valuations levels have drifted back to earth from the rare air they recently inhabited.

 

Among Opportunity This New Market Dynamic Brings, There Have Been Casualties

While this offers some new opportunities for both new positions on the Tematica Investing Select List as well as the opportunity to scale into some positions at better prices once the sharp swings in stocks have abated some, it also means there have been some casualties.

We were stopped out of our shares in Cashless Consumption investment theme company, USA Technologies (USAT) when our $7.50 stop loss was triggered yesterday. While the shares snapped back along with the market rally yesterday, we were none the less stopped out, with the overall position returning more than 65% since we added them to the Select List last April. For those keeping track, that compares to the 15.3% return in the S&P 500 at the same time so, yeah, we’re not exactly broken up over things. We will put USAT shares on the Tematica Contender List and look to revisit them after the company reports earnings tomorrow (Thursday, Feb. 8).

That’s the second Select List position to have been stopped out in the last several days. The other was AXT Inc. (AXTI) last week, and as a reminder that position returned almost 27% vs. a 15% move in the S&P 500. Again, not too shabby!

The last week has brought a meaningful dip in shares of Costco Wholesale (COST). On recent episodes of our Cocktail Investing Podcast, Tematica Chief Macro Strategist Lenore Hawkins and I have discussed the lack of pronounced wage gains for nonsupervisory workers (82% of the US workforce) paired with rising credit card and other debt. That combination likely means we haven’t seen the last of the Cash-Strapped Consumer investment theme — of the key thematic tailwinds we see behind Costco’s business. While COST shares are still up more than 15% since being added to the Select List, we see the recent 5% drop in the shares as an opportunity for those who remained on the sidelines before the company reports its quarterly earnings in early March.

  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Remaining Patient on AMAT, OLED and AAPL

Two other names on the Tematica Investing Select List have fallen hard of late, in part due to the market’s gyrations, but also over lingering Apple (AAPL) and other smartphone-related concerns. We are referring to Disruptive Technologies investment theme companies Applied Materials (AMAT) and Universal Display (OLED). As we shared last week, it increasingly looks that Apple’s smartphone volumes, especially for the higher priced, higher margin iPhone X won’t be cut as hard as had been rumored. Moreover, current chatter suggests Apple will once again introduce three new iPhone models this year, two of which are slated to utilize organic light emitting diode displays.

Odds are iPhone projections will take time to move from chatter to belief to fact. In the meantime, we are seeing other smartphone vendors adopt organic light emitting diode displays, and as we saw at CES 201 TV adoption is going into full swing this year. That ramping demand also bodes for Applied Materials (AMAT), which is also benefitting from capital spending plans in China and elsewhere as chip manufacturers contend with rising demand across a growing array of connected devices and data centers.

  • Our price target on Apple (AAPL) remains $200
  • Our price target on Universal Display (OLED) remains $225
  • Our price target on Applied Materials (AMAT) remains $70

 

The 5G Network Buildout is Gaining Momentum – Good News for NOK and DY

This past week beleaguered mobile carrier, Sprint (S), threw its hat into the 5G network ring announcing that it will join AT&T (T), Verizon (VZ), and T-Mobile USA (TMUS) in launching a commercial 5G network in 2019. That was news was a solid boost to our Nokia (NOK) shares, which rose 15% last week. The company remains poised to see a pick-up in infrastructure demand as well as IP licensing for 5G technology, and I’ll continue to watch network launch details as well as commentary from Contender List resident Dycom Industries (DY), whose business focuses on the actual construction of such networks.

Several months ago, I shared that we tend to see a pack mentality with the mobile carriers and new technologies – once one makes a move, the others tend to follow rather than risk a customer base that thinks they are behind the curve. In today’s increasingly Connected Society that chews increasingly on data and streaming services, that thought can be a deathblow to a company’s customer count.

  • Our price target on Nokia (NOK) shares remains $8.50
  • I continue to evaluate upgrading Dycom (DY) shares to the Select List, but I am inclined to wait until we pass the winter season given the impact of weather on the company’s construction business.

 

Disney Offers Some Hope for Its ESPN Unit

Last night Disney (DIS) announced its December quarter results while the overall tone was positive, the stand out item to me was the announcement of the new ESPN streaming service being introduced in the next few months that has a price tag of $4.99 a month. For that, ESPN+ customers will get “thousands” of live events, including pro baseball, hockey and soccer, as well as tennis, boxing, golf and college sports not available on ESPN’s traditional TV networks. Alongside the service, Disney will unveil a new, streamlined version of the ESPN app, which is slated to include greater levels of customization.

In my view, all of this lays the groundwork for Disney’s eventual launch of its own Disney streaming content service in 2019, but it also looks to change the conversation around ESPN proper, a business that continues to lose subscribers. Not surprising, given that Comcast (CMCA) continues to report cable TV subscriber defections. One of the key components to watch will be the shake-out of the rights to stream live games from the major professional leagues — the NFL, Major League Baseball, the NBA. Currently, ESPN is on the hook for about $4 billion a year in rights fees to those three leagues alone — not to mention the rights fees committed to college athletics. Those deals, however, include only the rights to broadcast those games on cable networks or on the ESPN app to customers that can prove they have a cable subscription, not cord-cutters. So the question will be how quick will customers jump on board to pay $5 a month for lower-level games, or will they be able to cut deals with the major professional sports leagues to include some of their games as well.

Nevertheless, I continue to see all of these developments as Disney moving its content business in step with our Connected Society investing theme, which should be an additive element to the Content is King investment theme tailwind Disney continues to ride. With that in mind, we are seeing rave reviews for the next Marvel movie – The Black Panther – that will be released on Feb. 16. The company’s more robust 2018 movie slate kicks off in earnest a few months later.

  • We will continue to be patient investors with Disney, and our price target on the shares remains $125

 

 

 

Nokia: 5G paves the way for higher earnings

Nokia: 5G paves the way for higher earnings

 

Shares of Disruptive Technology company Nokia (NOK) are gapping up nicely this Thursday afternoon, following better than expected December quarter results, and favorable long-term guidance that reflects the pending ramp in 5G mobile technology. For the December quarter Nokia delivered EPS of $0.13 vs. the expected $0.11 and $0.12 in the year ago quarter. Despite a modest dip in revenue for the quarter, Nokia’s revenue for the final three months of the year came in ahead of expectations.

Breaking down the results across the Nokia’s two core businesses – Networks and Nokia Technologies – our core investment thesis on the shares that hinges on the IP licensing business was confirmed as both revenue and profits at Nokia Technologies soared during the quarter. Year over year Nokia Technologies revenue rose 79% year over year and profits rose 145% due primarily to new licensing agreements as well as catch up payments from licensees. With a gross margin of more than 90%, incremental wins like those had during the quarter tend to flow through to the company’s bottom line. During the fourth quarter 2017, Nokia Technologies entered into a multi-year patent licensing agreement with Huawei and received an arbitration ruling related to a contract dispute with BlackBerry.

With approximately 20,000 patent families, we see Nokia Technologies being well positioned to expand its licensing customer base as 5G networks move mobile connectivity beyond today’s smartphone-centric market into the connected home, connected car, wearables, and the industrial internet – in other words, the Internet of Things. We see this high margin business delivering meaningful EPS expansion in the coming quarters as 5G deployments gain momentum similar to past 3G and 4G rollouts.

One of the leading indicators that we’ll be watching for that expansion will be Nokia’s own networks business as well as that of others. We’ll also be listening to comments from AT&T (T), Verizon (VZ) and T-Mobile USA (TMUS), all of which are expected to begin 5G deployments later this year.

Sticking with Nokia’s Networks business, for the December quarter, currency moved against it, leading revenue to fall 4%; however, on a constant currency basis, revenue was up 2% year over year. For the coming year, Nokia sees the transition to 5G network deployments from 4G/LTE ones weighing on margins in 2018, but as those deployments scale and mature the company sees a more favorable financial impact in 2019 and 2020. We see the above comments about AT&T, Verizon and T-Mobile USA as confirming Nokia’s expectations.

This expected uptick in 5G is reflected in Nokia issuing longer-term guidance and the boosting of its divided points to the confidence in the pending upturn related to 5G. For 2018, Nokia is forecasting EPS of €0.23-€0.27 vs. €0.33 in 2017 rising to markedly to €0.37-€0.42 in 2020. In terms of its dividend, the company has proposed dividend of €0.19 per share for 2017, which is up considerably from the $0.02 per share paid for 2016. In terms of 2018 and beyond, management continues to target a dividend payout of between 40%-70% of EPS. What this likely means is as the Networks business turns up as 5G ramps and Nokia Technologies expands its reach, we are apt to see further increases in the company’s annual dividend.

While this position has been frustrating, the key with any business tied to cyclical spending is to catch the shares as the winds of spending are poised to blow harder driving revenue and earnings higher in the process. That’s what we see in the coming quarters for 5G, and that means being a patient investor with NOK shares.

  • Our long-term price target on Nokia (NOK) shares remains $8.50
Ahead of CES 2018, AT&T targets 5G in 2018. Another positive for NOK and AXTI shares

Ahead of CES 2018, AT&T targets 5G in 2018. Another positive for NOK and AXTI shares

Early this morning it was announced that AT&T (T) “will be providing 5G services in around 12 markets by late 2018” and “plans to add 3 million more locations to the AT&T Fiber network, for a total of 12.5 million locations across 82 metro areas by mid-2019.” This follows comments several weeks ago by T-Mobile USA’s (TMUS) CTO Neville Ray that it would look to deploy its own 5G network across the entire nation by 2020. At the time of the T-Mobile news, we shared the likelihood that AT&T and Verizon (VZ) would soon be putting their own 5G stakes in the ground, and that is what we are seeing today. Given the impact of 5G networks on our Disruptive Technologies and Connected Society investing themes, we are following these developments rather closely.

Whenever I heard of this big spending plans on networks, facilities or other forms of capital spending, my mind switches into detective mode and the first question tends to be: Who benefits?

In this case, it’s who benefits as AT&T opens the purse strings and spends on the network and as its competitors follow suit?

On the Tematica Investing Select List, we have existing positions in mobile infrastructure company Nokia (NOK), as well as AXT (AXTI) whose substrates are the core building block for wireless and fiber optic related semiconductors. Both stocks are trading up modestly today, but I’d note that given the winter storm that is pounding the Northeast today (believe me I know on this as I am huddled in a hotel room about 30 miles outside of Manhattan right now) trading volumes are rather lite.

As I shared in yesterday’s Tematica Investing, I expect to hear much more about 5G next week when CES 2018 is held. Heading into next week, I remain bullish on both Nokia and AXT shares, which have respective price targets of $11 and $8.50.

On the back of the AT&T news, we are eyeing bringing specialty contractor Dycom (DY) back into the Tematica Investing Select List fold. I say eyeing because as much as a positive as the 5G race will be for the company, the record low temperatures across the country and winter storm Grayson are likely to lead to some disruptions in the current quarter for Dycom and could thus push revenue from the first quarter into the second quarter. Once these probable disruptions are priced into DY shares, I’ll look to revisit them as well as other chip companies that are poised to benefit from incremental 5G demand, but must first contend with the seasonal slowdown in smartphone demand.