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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.

 

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: Looking for Trump-Proof Companies

Weekly Issue: Looking for Trump-Proof Companies

We exited last week with the market realizing there was more bark than bite associated with President Trump’s steel and aluminum tariffs. That period of relative calm, however, was short-lived as the uncertainty resumed in Washington yesterday in the form of changeups in the administration with Trump letting go Secretary of State Rex Tillerson just after agreeing to talks with North Korea, and more saber rattling with trade actions against China for technology, apparel, and other imports. This also follows Trump’s intervention in the proposed takeover of Qualcomm (QCOM) by competitor Broadcom (BRCM).

While many an investor will focus on the “new” volatility in the market, I’ll continue to use our thematic lens to look for companies that are “Trump-Proof” in the short-term. That’s not a political statement, but rather a reflection of the reality that the modus operandi of President Trump and his Twitter habit often cause significant swings in the market as the media attempts to digest and interpret his comments.

How will we find these so-called Trump-proof companies? By continuing to use our thematic lens to uncover well-positioned companies that are benefitting from thematic tailwinds that alter the existing playing field, regardless of the latest noise from Washington politicians.

At least for now, volatility is back in vogue and that is bound to drive headlines and other noise. I’ll continue to focus on the data, and if you read this week’s Monday Morning Kickoff you know we are in the midst of a whopper of a data week. While the Consumer Price Index (CPI) for February was in line with expectations, and on a year over year basis core rose 1.8% — the same as in January — which should take some wind out of the inflation mongers. This morning we have the February Retail Sales report, which in my view should once again serve up confirming data for our positions in Amazon (AMZN) and Costco Wholesale (COST), which continue to benefit from our Connected Society and Cash-strapped Consumer investing themes.  Later in the week, the February reading on Industrial Production should confirm the demands that are exacerbating the current heavy truck shortage here in the U.S. – good news for the Paccar (PCAR)shares on the Tematica Investing Select List.

 

 

An Update on Our Once Star Performer, Universal Display (OLED)

A few weeks ago, I shared an update on Universal Display (OLED) shares, which have been essentially treading water following the company’s December quarter results. Later today, the management team will be presenting at the Susquehanna’s Seventh Annual Semi, Storage & Tech Conference. Odds are the management team will reiterate its view on market digesting the organic light emitting diode capacity additions made over the last several quarters, but I expect they will also describe the growing number of applications that will come on stream in the next 3-6 quarters.  As of late February, Susquehanna had a positive rating on OLED shares with a price target of $200 and I suspect they will have some bullish comments following today’s presentation.

 

Considering the ripples to be had with the latest Connected Society victim, Toys R Us

Over the weekend we were reminded of the situation facing many brick & mortar retailers that are failing to adapt their business to ride our Connected Society investing theme. I’m referring to toy and game retailer Toys R Us, the one-time Dick’s Sporting Goods (DKS) or Home Depot (HD) of its industry. Like several sporting goods retailers and electronic & appliance retailers such as Sports Authority, Sports Chalet, and HH Gregg that have gone belly up, if Toys R Us doesn’t get a last-minute lifeline or find a buyer it will likely file Chapter 7.

It’s been a rocky road for the one-time toy supermarket company as it entered bankruptcy in September, aiming to emerge with a leaner business model and more manageable debt. The company obtained a new $3.1 billion loan to keep the stores open during the turnaround effort, but results worsened more than expected during the holidays, casting doubt on the chain’s viability. The company entered this year with more than 800 stores in the U.S. — under both the Toys “R” Us and Babies “R” Us brands, but by January, it announced the shuttering of 180 locations.

The pending bankruptcy to be had at Toys R Us is but the latest in the retail industry, but it’s not likely to be the last. Claire’s Stores Inc., the fashion accessories chain with a debt load of $2 billion, is also preparing to file for bankruptcy in the coming weeks as is Walking Co. Holdings Inc.

What these all have in common is the increasing shift by consumers to digital commerce and the growing reliance on retailers for what is termed the direct to consumer (D2C) business model. Certain branded apparel, footwear, and other consumer product companies, like Nike (NKE) have embraced Amazon’s formidable logistics capabilities and this has benefitted our United Parcel Service (UPS) shares. As we have said before, and we recognize it sounds rather simplistic, when you order products online they have to get to where they are being sent. Hello UPS!

Now let’s consider the ripple effect of the pending Toys R Us bankruptcy.

When events such as this occur, there is a liquidation effect and a subsequent void. As we saw when Sports Authority went bankrupt, the businesses at Nike and Under Armour (UAA) were impacted by liquidation sales in the short term. At the same time, both lost the recurring sales associated with Sports Authority. Odds are we will see the same happen with Toys R Us with companies like Mattel (MAT) and Hasbro (HAS) taking it on the chin. In my view these companies are already struggling as teens, tweens and kids of all ages shift to digital games, apps and e-gaming, which are aspects of our Connected Society and Content

In my view these companies are already struggling as teens, tweens and kids of all ages shift to digital games, apps and e-gaming, which are aspects of our Connected Society and Content is King themes. When was the last time you saw an elementary schooler play with Ken or Barbie? More likely they are on an iPad or Microsoft (MSFT) Xbox while their older siblings are playing the new craze sweeping the nation – Fortnite. And yes, that it appears the rumors are true and Fornite will soon be available across Apple’s iDevices.

Looking at the financial performance of Mattel, not even the all mighty Star Wars franchise could save them from delivering declining revenue and earnings this past holiday shopping season. On the liquidation front, we are likely to see the toys businesses at Target (TGT) as well as Walmart (WMT) take the brunt of the blow. But here too this is likely just another hit as these two retailers have already been dealing with falling revenue at Mattel and Hasbro. Walmart is the largest customer for Mattel and Hasbro, accounting for about 20% of total sales for each toy maker. Both toy companies get nearly 10% of their revenue from Target too.

One of the investing strategies that I employ with the Select List is “buy the bullets, not the guns” which refers to buying well-positioned suppliers that serve a variety of customers. In situations like what we are seeing in the brick & mortar retail sector, we can turn that strategy upside down and uncover those companies, like Mattel and Hasbro, that we as investors should avoid given the multiple direct and indirect headwinds they are currently facing or about to.

 

WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

 

Our Latest Thoughts on Trump Tariffs

The stock market roller coaster of the last few weeks is clearly continuing. This week we have President Trump’s potential steel and aluminum tariffs take center stage, shifting the attention away from Fed Chief Jerome Powell last week. When I shared with you my view the market would trade data point to data point until the end of the Fed’s Mar. 20-21 monetary policy meeting, I certainly didn’t expect let alone anticipate these tariffs and their escalating conversation to be a part of it. In a post earlier this week, I shared my view that Trump is once again utilizing the negotiating strategy he laid out in his book, Art of the Deal. In another one today, I gamed out what is likely to happen should Trump go forward with the tariffs.

Last night’s resignation of Trump economic advisor Gary Cohn has certainly fanned the flames of uncertainty over the tariffs, with more people thinking that Trump is “serious.” In an effort to counterbalance that resignation, this morning Commerce Secretary Wilbur Ross shared that Trump “has indicated a degree of flexibility on tariffs for Canada and Mexico.” That Cohn-related walk-back by Secretary Ross, combined with comments made yesterday by Treasury Secretary Steven Mnuchin that indicated that “once a new NAFTA deal is reached, the trading partners wouldn’t be subject to the tariffs” confirms my view that Trump remains on the Art of the Deal negotiation path.

In my post earlier this morning about the tariffs, I shared that we will likely see choppy waters as this issue comes to a resolution and leads up to the Fed’s next monetary policy meeting conclusion on March 21. Expect volatility to remain in place and the coming economic data will either amplify or quell its magnitude. Barring any breaking news, I’ll be on The Intelligence Report with Trish Regan on FOX Business to discuss all of this at 2 PM ET today.

While many fret over the market swings, my perspective is that the domestic economy remains on firm footing and barring a trade war volatility will allow us to pick up thematically well-positioned companies at better prices. A great example of this was had earlier this week with the February heavy truck orders that served to confirm my thesis behind Paccar (PCAR) shares.

When Costco Wholesale (COST) reports its quarterly results after the market close, we should see similar confirmation in the form of not only wallet share gains via its top line results, but also in rising membership fees as more consumers look to stretch the disposable income they do have, a key component of our Cash-Strapped Consumers investment theme.

To set the stage for Costco’s report tonight, consensus expectations for the quarter sit at EPS of $1.46 on revenue of $32.7 billion, up from $1.17 and $29.8 billion in the year-ago quarter. As a reminder, one of the key differentiators for Costco is the high margin membership fees that are poised to grow as the company continues to open new warehouses. This means, at least for me, that roadmap, will be one of the areas of focus on the company’s post-earnings conference call. I’ll also be listening to see the impact of tax reform on the company’s outlook for 2018.

  • Our price target on Paccar (PCAR) shares remains $85.
  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Getting back to the Tematica Investing Select List

In last week’s issue, I began sharing some much-needed updates across the Select List, and I’m back at it again this week with a few more. Over the next few weeks, I’ll look to round out the list before we break at the end of March and get ready to gear up for 1Q 2108 earnings season.

Yes… I know… before too long it will once again be time for that zaniness.

All the more important to share these updates with you so we set the table for the earnings meal to be had.

 

Amazon (AMZN),  Connected Society

Simply put, Amazon shares have been a champ so far in 2018 rising more than 30%, which brings the return on the Select List to more than 100% since being added back in 2016. I’ve said these shares are ones to own, not trade given the accelerating shift to digital commerce, and growing adoption of the high margin, secret sauce that is Amazon Web Services as more businesses turn to the cloud. As filled with creative destruction as those two businesses are, it looks like Amazon is poised to offer further disruption in the healthcare and financial services business given conversations with JPMorgan (JPM), Berkshire Hathaway (BRK.A), Capital One (COF) and others.

I’ve raised our price target several times on AMZN shares, and it increasingly looks like that will have to happen again and then some depending on how soon these new layers of disruption materialize.

  • Our price target on Amazon (AMZN) shares remains $1,750.

 

Starbucks (SBUX), Guilty Pleasure

Year to date, Starbucks shares are essentially unchanged compared to where they were trading as we exited 2017. And the same is true if we look at the shares over the last year – they are up modestly. What we are dealing with here is a company that is once again in transition as it looks to invigorate its domestic business while growing its presence in still underserved markets outside the US like China and Italy. One of the central strategies in both areas is to leverage its high-end Reserve Roastery concept, which keeps the company very much in tune with our Guilty Pleasure investing theme.

Historically speaking, Starbucks has been a company that has been able to successfully pivot its business when it has stumbled, and in our view, that merits some patience with the shares. Helping fuel that patience is the knowledge that Starbucks intends to return $15 billion to shareholders over the next three years in the form of dividends and buybacks.

  • Our price target on Starbucks (SBUX) shares remains $68

 

Disney (DIS), Content is King

Disney shares have traded off some 3% thus far in 2018, which is not unsurprising given we are in the seasonally weakest part of the year for the company. That said, the latest Marvel film, The Black Panther, is crushing it at the box office and ups the ante for the next Avengers film that will hit theaters in a few months. Disney continues to leverage these and other characters as it revamps its theme parks and hotels, which should drive attendance despite yet another round of price increases.

The big “wait and see” for Disney over the coming months will be its move into its own streaming services for both ESPN and eventually a Disney content-centric service. While I see this as Disney making the right moves to address the chord cutting headwind that is part of our Connected Society investing theme, to paraphrase the great film Bull Durham, just because Disney builds it doesn’t mean people will stream it. In a positive move, Disney installed James Pitaro as the new president of ESPN. Mr. Pitaro’s background as chairman of Disney Consumer Products and Interactive Media, as well as the head of Yahoo! Media, sends investors the signal that getting the streaming services in place will be a top priority going forward for ESPN.

The next catalyst to be had for Disney will be spring break and then the summer movie season. Between now and then, I expect Disney will continue to put its massive buyback program to work.

  • Our price target on Disney (DIS) shares remains $125

 

United Parcel Service, Connected Society

Our UPS shares were hard hit earlier in the year given renewed concerns that Amazon would expand its own logistics offering. At the time, my view was this was an overblown concern, and it still is. This week, we saw Stifel Nicolaus warm up to the shares, upping them to a Buy rating with a $121 price target given what it sees as a “strong underlying package and freight businesses.”

Each month in the Retail Sales report we see the share gains had at non-store retailers, and we know companies ranging from Costco and Walmart (WMT) to Nike (NKE) and many others are embracing the Direct to Consumer (D2C) business model. All of this bodes well for UPS shares over the coming year.

The one potential hiccup to watch will be negotiations with the Teamsters Union this summer. If that brings the shares near or below our Select List entry point, I’ll look to scale into this position ahead of the seasonally strong second half of the year.

  • Our price target on United Parcel Service (UPS) shares remains $130.

 

 

WEEKLY ISSUE: Is Inflation Rearing Its Ugly Head or Not?

WEEKLY ISSUE: Is Inflation Rearing Its Ugly Head or Not?

Today is the day that we here at Tematica, and other investors as well, have been waiting for to make some semblance of the recent stock market volatility. Earlier this morning we received the January Consumer Price Index (CPI), one of the closely watched measures of that now dirty word – inflation. As a quick reminder, the market swings over the last two weeks were ignited by the headline wage data in the January Employment Report, as well as other signs, such as rising freight costs that led us to add shares of Paccar (PCAR) to the Tematica Investing Select List earlier this week. This topic of resetting inflation expectations and what it may mean for the Fed and interest rates has been a topic of conversation on recent Cocktail Investing Podcast between Tematica’s Chief Macro Strategist Lenore Hawkins and myself.

 

What the January CPI Report Showed and Its Impact on AMZN, COST and UPS

The headline figures from the January CPI report showed the CPI rose 0.5% month over month in January, which equates to a 2.1% increase year over year. Keeping in sync with the headline figure, which includes all categories, the consensus expectation was for a 0.3% month over month increase. The driver of the hotter than expected headline print was the energy index rose, which climbed 3.0% in January, and we’ve witnessed this first hand in the gasoline price jump of late. Excluding the volatile food and energy components, the “core” CPI index was up 0.3% month over month in January, coming in a bit ahead of the expected 0.2% increase. On a year over year basis, that core figure rose 1.8%, which is in keeping with the 1.7%-1.8% over the last eight months. Month over month gas and fuel prices were up 5.7% and 9.5%, respectively.

Late yesterday, the American Petroleum Institute released data showing a 3.9 million barrel increase in crude stockpiles for the week ended Feb. 9, along with a 4.6 million barrel rise in gasoline stocks and a 1.1 million barrel build in distillates. With crude inventories once again on the rise as US oil production has risen in response to the recent surge in oil prices from September to late January, we’ve seen oil prices retreat to December levels and odds there is more relief to come.

As we wait for others, who if you’ve seen the whipsaw in stock market futures today are simply reacting to the January headline CPI figure, to get some clearer heads about themselves and digest the internals of the report, I’ll share our thoughts on the January Retail Sales report that was also published this morning.

Staring with the headline figure, January Retail Sales came in at -0.3% month over month, falling short of the 0.2% consensus forecast. Excluding auto and food, January core retail sales fell 0.3% month over month; on a year over year basis, retail sales rose 3.9% with nonstore sales leading the way (up 10.2%) followed by gas stations sales (up 9.0% year over year), which is of little surprise given our January CPI conversation above. We do see that nonstore figure as further confirmation for not only our Amazon (AMZN) and United Parcel Service (UPS) shares, but also our Costco Wholesale (COST) ones as it continues to embrace our Connected Society theme.

  • Our price target on Amazon (AMZN) shares remains $1,750
  • Our price target on Costco Wholesale (COST) shares remains $200
  • See my comments below for my latest thoughts on UPS shares

 

Market’s Knee-Jerk Reaction to January Retail Sales Offered Opportunity in PCAR, Not BGFV

Despite the 3.9% year over year January Retail Sales print, the market is focusing on the month over month drop, which was one of the weakest prints in some time. Here’s the thing, we here at Tematica have been talking about the escalating level of debt that consumers have been taking on as a headwind to consumer spending and despite the post-holiday sales, consumers tend to ramp spending down after the holidays. Odds are these two factors led to that month over month decline, but even so up 3.9% year over year is good EXCEPT for the fact that gas station sales are bound to fall as gas prices decline.

If we look at these two reports, my take on it is a skittish stock market is once again knee-jerk reacting to the headline figures rather than understanding what is really going on. The initial reaction saw Dow stock market futures fall from +150 to -225 or so before rebounding to -125. As data digestion occurs, odds are concerns stoked by the initial reactions will fade as well

With market anxiety still running higher compared to this time last year or even just six months ago, I expect the market to cue off the major economic data points to be had in the coming weeks building to the Fed’s next FOMC meeting on March 20-21. As I pointed out on this week’s podcast, at that meeting we’ll get the Fed’s updated economic forecast and I expect that will have chins wagging over the prospects of three or four rate hikes to be had in 2018.

In the meantime, I’ll continue to look for opportunities like I saw with Paccar (PCAR) shares on Monday, and avoid pitfalls like the one I mentioned yesterday with Big Five Sporting Goods (BGFV). And for those wondering, per the January Retail Sales Report, sporting goods sales 7.1% in January. Ouch! And yes, I always love it when the data confirms my thesis.

  • Our price target on Paccar (PCAR) shares remains $85

 

Waiting on Applied Materials Earnings Announcement

After today’s market close, Applied Materials (AMAT) will share its latest quarterly results, and update its outlook. As crucial as those figures are, in recent weeks we’ve heard positive things from semi-cap competitors, which strongly suggests Applied should deliver yet another good quarter and a solid outlook. Buried inside those comments, we’ll get a better sense as to the vector and velocity for its products, both for chips as well as display equipment.

Those comments on the display business will also serve as an update for the currently capacity constrained organic light emitting diode market, one that we watch closely given the position in Universal Display (OLED) shares on the Tematica Investing Select List. I see this morning’s announcement by Universal that it successfully extended its agreement with Samsung though year-end 2022 with an optional 2-year extension as reminding investors of Universal’s position in the rapidly growing technology. With adoption poised to expand dramatically in 2018, 2019 and 2020, I continue to see OLED shares as a core Disruptive Technologies investment theme holding.

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

 

 

Should We Be Concerned About UPS Amid Amazon Announcement?

Several paragraphs above I mentioned United Parcel Service (UPS) shares, and as one might expect the headline reception to the January Retail Sales Report has them coming under further pressure this morning. That adds to the recent news that our own Amazon (AMZN) would be stepping up its business to business logistics offering and competing with both UPS and FedEx (FDX). Of course, this will take time to unfold, but these days the market shoots first and asks questions later. At the same time, we are entering into a seasonally slower time of year for UPS, and while yes consumers will continue to shift toward digital shopping as we saw in today’s retail sales report, the seasonal leverage to be had from the year-end holidays is now over.

 

 

While it may sound like we are getting ready to give UPS shares the ol’ heave ho’, along with the February market gyrations, it’s been a quick ride to the $106 level from $130 for UPS shares, and this has placed them into the oversold category. From a share price perspective, the shares are back to levels last seen BEFORE both the 2017 Back to School and year-end holiday shopping seasons. With prospects for digital shopping to account for an even greater portion of consumer wallets in 2018 and 2019 vs. 2017, we’re going to be patient with UPS shares in the coming months as we wait for the next seasonal shopping surge to hit.

  • Our long-term price target on UPS shares remains $130.

 

TRADE ALERT: Freight pain leads to this Economic Acceleration/Deceleration addition

TRADE ALERT: Freight pain leads to this Economic Acceleration/Deceleration addition

 

KEY POINTS FROM THIS ALERT:

  • We are issuing a Buy on truck company Paccar (PCAR) with an $85 price target as part of our Economic Acceleration/Deceleration investment theme.

With the market’s volatility over the last several days, a number of stocks are revisiting levels that are 5%, 10%, 15% lower than they stood at end of January. And while investors have been thunderstruck by the market gyrations, the day to day data from the December quarter earnings season as well as recent economic data, has continued to confirm certain opportunities. One of the recurring drum beats this earnings season has been companies ranging from Tyson Foods (TSN, Hershey (HSY), Packaging Corp. of America (PKG), Sysco (SYY) and J.M. Smucker (SJM) to Tractor Supply (TSCO) and Prestige Brands (PBH) talking about rising freight costs and the impact on earnings.

One of the culprits is the national shortage in available trucks, which has sent shipping costs soaring, with retailers and manufacturers in some cases paying over 30% above typical rates to book last-minute transportation for cargo. This, of course, goes hand in hand with the accelerating shift toward digital commerce that we talk about, a shift that led Amazon to correctly assess back in 2013 that as more shoppers bought products online, “parcel volume was growing too rapidly for existing carriers to handle.” As that shift to digital commerce has happened, we’ve seen that forward-looking view come to play out, and odds are it’s only going to get worse. According to Statista, e-commerce sales accounted for 9.1% of total U.S. retail sales in 3Q 2017, but we see that only growing further. In South Korea, e-commerce represented 18% of all retail sales in 2016 with forecasts calling for that percentage to reach 31% by 2021. We may not reach such a level for years to come, but each percentage point that e-commerce gains, means more product that needs to be shipped from a warehouse to the buyer.

Historically, the trucking industry has been associated with the economic cycle. When the economy is growing, more goods (parts, subassemblies, products) need to be shipped to customers at factories, distribution sites, warehouses and so on. According to the American Trucking Association, the trucking industry accounts for 70.6% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. This has made freight traffic a good barometer of the economy, and the December year over year increase of 7.2% in the Cass Shipments Index capped off a year in which the ATA’s truck tonnage index rose 3.7%, the strongest annual gain since 2013.

 


As truck tonnage climbed in late 2016 and 2017, industry capacity has been tightening after tepid tonnage in most of 2015 and the first half of 2016 leading to the robust jump in freight costs we described above. This data point from DAT Solutions puts in all into perspective – “there were about 10 loads waiting to be moved for every available truck in the week ending Jan. 20, compared with three in the same week last year…”

 

As freight costs climbed in the back half of 2017, so too did heavy truck orders, which have continued to climb into 2018. According to ACT Research, December 2017, which saw a 76% increase in truck order volume was the best month for orders since December 2014. In full, due to the year-end surge, 2017 saw truck orders hit 290,000 units, up 60% year over year. That strength continued into January with monthly truck orders hitting some 47,000 units, the highest level since 2006.

 

 

This data is not surprising, given that for the first three weeks of January, national average spot truckload rates were higher than during the peak season in 2017, according to DAT. January was also the fourth consecutive month in which truck orders were above the 30,000 mark. Initial heavy truck forecasts put orders near 300,000 for 2018, however tight industry capacity combined with companies that are benefitting from tax reform and looking to replace older, less fuel-efficient trucks, we could see that some lift to that forecast in the coming months.

But that’s heavy truck orders, and while four months above 30,000 paves the way for a pick-up in business, the real question to focus on is heavy truck retail sales. Heavy truck, otherwise known in the industry as class 8 trucks, industry retail sales were 218,000 units in 2017, compared to 216,000 vehicles sold in 2016, with forecasts calling for 235,000-265,000 trucks to be sold in the U.S. and Canada during 2018.

Looking outside the U.S. and Canada, the data shows an improving European economy and that should give way to a favorable truck market there as well. European truck industry sales above 16-tonnes were a robust 306,000 trucks in 2017, and It is estimated that European truck industry sales in that category will be in the range of 290,000 to 320,000 trucks in 2018.

 

Paccar – more than a leading heavy truck company

And that brings us to Paccar (PCAR), whose shares have fallen some 15% as the domestic stock market moved sharply lower over the last two weeks. The company is an assembler of heavy-duty trucks, with an estimated market share near 31% in the U.S. and Canada, as well as medium duty trucks (think the kind you see being driven locally by United Parcel Services (UPS) and FedEx (FDX)). That business drove 53% of its truck deliveries in 2017, with the balance coming from Europe (36%) and other markets (11%). As truck retail sales improve in the U.S., Canada and Europe, even absent additional share gains, Paccar’s truck business in terms of revenues and profits should see a nice lift.

The improving truck market also bodes well for Paccar’s high margin truck financing business – while it generated just 6.5% of total revenue in 2017 with operating margins that are more than double the truck business, it accounted for 12% of overall operating profits.

The third leg to the Paccar stool is its Parts business (20% of 2017 revenue, 28% of 2017 operating profit), which stands to benefit from the time lag between truck orders and sales in a capacity constrained industry, where up-time for existing equipment will be crucial.

Given the industry dynamics and Paccar’s position, we are seeing revenue and earnings expectations move higher in recent weeks, with the current consensus calling for EPS of $5.34 this year up from $4.26 in 2017 on a 13% revenue increase to $20.6 billion. With the company only recently sharing its 2018 tax rate will be 23%-25% vs. 31% in 2017, we could see the 2018 consensus move higher in the coming weeks.

As mentioned above, Paccar’s share price has fallen some 15% in the last two weeks, which in our view makes the shares rather compelling given our $85 price target. That target equates to just under 16x 2018 EPS. Over the prior seven years, PCAR shares have bottomed at an average P/E of 12.2x, which derives a downside target of $67.65 based on current 2018 EPS expectations. On the upside, the average peak multiple over those same years of just over 17x hints at a potential price target near $95. Looking at a dividend yield valuation, we see upside vs. downside of $82 vs. $60.

As we add the shares, we’ll split the difference with an $85 price target, and we’ll look to aggressively scale into the shares should the market come under further pressure and drag PCAR shares closer to $60. In terms of sign posts to watch for the shares in the coming days and weeks, monthly heavy truck data as well as tonnage stats and manufacturing industrial production data is what we’ll be watching. As the current earnings season winds on, we’ll be focusing on the results and outlook from Rush Enterprises (RUSHA), which owns the largest network of commercial dealerships in the U.S., with more than 100 dealerships in 21 states.

 

The bottom line for this alert today:

  • On Monday morning we are adding Paccar (PCAR) shares to the Tematica Investing Select List.
  • Our price target for PCAR shares is $85, nearly 26% above where the shares closed on Friday February 9.
  • At this time we are not setting a protective stop loss, but instead will look to scale further into the shares should further pressure drag them closer to $60 per share. 

 

Earnings from Apple, Amazon, Alphabet and UPS lead to several price target changes… and not all of them are moving higher

Earnings from Apple, Amazon, Alphabet and UPS lead to several price target changes… and not all of them are moving higher

 

In the last 24 hours we’ve had four Tematica Investing Select List positions – United Parcel Service (UPS) Amazon (AMZN), Alphabet (GOOGL) and Apple (AAPL) – report their quarterly earnings. Across the four companies, it was a mixed bag — on one hand, we have solid performance and profits at Amazon and Apple, while on the other hand, both United Parcel Service and Alphabet lagged in converting their respective topline strength into profits. We’re going to dig into company specifics below, but in summary:

  • We are increasing our long-term price target on Amazon shares to $1,750 from $1,400, which keeps our Buy rating on the shares in place. As a quick reminder, we continue to see Amazon as a company to own not trade
  • We are maintaining our $200 price target on Apple, which also keeps our Buy rating intact.
  • With Alphabet shares, we are now boosting our price target to $1,300 from $1,150, which offers upside of 15% from current levels. Subscribers that are underweight GOOGL shares are advised to let the full impact of last night’s earnings announcement be had and wade into the shares in the coming days.
  • We are trimming our United Parcel Service price target to $130 from $132.

 

United Parcel Service

Shares of United Parcel Service slumped throughout the early part of the day yesterday, and while they did recover off their lows, the day ended with the shares down just over 6% following the company’s December quarter earnings report. Inside that report, the company reported slightly better than expected top-line results of $18.83 billion, up 11.2% year over year, vs. the expected $18.2 billion. The issue that pressured UPS shares was revealed in the 2.5% year over year increase in EPS to $1.67 even though that figure was slightly ahead of expectations. Comparing those two growth rates as well as looking at the year over year drop in operating margin for the quarter to 12.2% from 13.1%, we find UPS’s network capacity was once again overwhelmed by the shift to digital shopping in the US. Outside of that business, its profits climbed at its International business as well as Supply Chain and Freight Segment.

Near-term following the year-end holiday shopping season we are entering the seasonally slower part of the year for UPS’s business. If historical patterns repeat, we’re likely to see the shares range-bound over the coming months with them trending higher as more data shows the continued shift toward digital shopping that is powering its UPS Ground business. With more pronounced share gains likely to reveal themselves in the shopping-heavy back half of the year, we’re inclined to be patient investors with UPS, reaping the rewards as more companies continue to embrace the direct-to-consumer business model either on their own or through partnerships with other companies, like Amazon. We will continue to monitor oil and at the pump gas prices, which could be a headwind to UPS’s efforts to improve margins at its US Domestic business in the coming months. In terms of the company’s 2018 outlook, it guided EPS between $7.03-$7.37 billion, a 20% increase year over year at the midpoint, which is in line with expectations.

 

Apple

After the market close yesterday, Apple reported December quarter results that bested Wall Street expectations on the top and bottom line even though iPhone shipments fell short of expectations and dipped year over year. More specifically, the company served up EPS of $3.89 per share, $0.04 ahead of consensus expectation on revenue of $88.29 billion, which edged out expectations of $87.6 billion. While Apple once again bested expectations, the truly revealing revenue and EPS comparisons are had versus the December 2016 quarter as revenue rose 12.6% year over and EPS 16%.

Year over year revenue improvement was had in the iPad and Services business — the latter benefitting from Apple’s continued growth in active devices, which hit 1.3 billion in January, up from 1.0 billion just two years ago. Mac sales, in terms of revenue and units, edged lower year over year and Apple Watch volumes rose 50% year over year on the strength of Apple Watch 3.  Despite the 1.2% year over year drop in iPhone shipments, the higher priced newer models drove the average selling price in the December 2017 quarter to hit roughly $795 up from $695 in the year ago quarter. That pricing surge led iPhone revenue to climb 12.5% to $61.6 billion. Digging into the results, we find the year over year improvements even more impressive when we consider iPhone X didn’t go on sale until early November and the December 2017 quarter had one less week compared to the December 2016 one.

All in all, it was a solid December quarter for Apple, and as we all know, there has been much speculation over iPhone production levels in the first half of the year, particularly for iPhone X. While Apple did issue its take on the March quarter – revenue between $60-$62 billion (vs. $52.9 billion in the March 2017 quarter), gross margin between 38%-38.5% and operating expenses $7.6-$7.7 billion – it was its usual tight-lipped self when it came to device shipments.

Let’s remember chatter over the last few weeks was calling for steep cuts to iPhone X shipments, but Apple ended the December quarter with channel inventories near the lower end of its 5-7-week target range. On the earnings call, Apple shared that iPhone should be up double digits year over year in the March 2018 quarter with the non-iPhone businesses up double digits as well. If we assume iPhone average selling prices remain relatively flat quarter over quarter, back of the envelope math suggests Apple is likely to ship 48-49 million iPhone units – roughly a 3%-5% drop in shipments year over year. That is far less than the talking heads were talking about over the last few weeks and explains why Apple shares rallied in aftermarket trading.

We see this as a positive for our Universal Display (OLED) shares as well – our price target on those remains $225.

From our perspective, the Apple story remains very much intact and with several positives to be had in the coming quarters. When Apple reports its March quarter results, we expect a clearer picture of how Apple plans to leverage the benefits of tax reform on its capital structure and share potential dividend and buyback plans. Next week, Apple’s HomePod will be released and before too long we expect to hear more about iPad and other product refreshes before the talk turns to WWDC 2018. Along the way, we hope to hear more concrete plans over Apple’s push into original content, a move we continue to think will make its ecosystem even stickier and likely result in even more people switching to Apple devices.

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

 

Amazon

Turning to Amazon, we were expecting a strong quarter given all the data points we received over the accelerated shift to digital shopping during the 2017 holiday season and we were not disappointed. For the December quarter, Amazon’s net sales increased 38% to $60.5 billion. Excluding the $1.1 billion favorable impact from year-over-year changes in foreign exchange rates, the quarter’s net sales still increased a robust increased 36% year over year. By reporting segments, North America revenues rose an impressive 42% year over year, International by 29% and Amazon Web Services (AWS) just under 45%.

More impressive than the segment revenue results was the year over year move in operating income in North America, which rose 107% for the quarter, and the increase in sales in AWS (Amazon’s cloud computing division), with sales increasing 46% for the quarter. That led the company’s overall operating income to climb to $2.1 billion in the quarter, up significantly from $1.3 billion in December 2016 quarter. In our view, after delivering 11 quarters of profitability, Amazon has shown the naysayers that it can prudently invest to drive profitable growth and innovation. Period.

The seasonally strong shopping quarter resulted in Amazon’s North America division being the largest generator of profit for the quarter, a role that is usually had by AWS. Looking at the profit picture for the full year 2017, we find AWS generated nearly all of the company’s operating profit. We continue to be impressed by Amazon’s ability to win not just profitable cloud market share but fend off margin erosion as players like Alphabet and Microsoft (MSFT) look to win share in this market.

If we had to find one issue to pick with Amazon’s December quarter report it would be the continued losses at its International business. Those losses tallied $0.9 billion in the December 2017 quarter and $3.06 billion for all of 2017.  We understand Amazon continues to expand its footprint in Europe and Asia, replicating the Prime and content investments it has made in the US, to drive long-term growth. As we have said before, Amazon is leveraging its secret weapon, AWS (10% of 2017 sales but more than 100% of 2017 operating profits), and its cash flow to fund these long-term investments and as patient investors, we accept that. We would, however, like to have a better understanding what the timetable is for bringing the International business up to at least to break even so it’s no longer a drag on the company’s bottom line.

In typical Amazon fashion, Amazon’s earnings press release contained a plethora of highlights across its various businesses, but the few that jumped out at us were:

  • In 2017, more than five billion items shipped with Prime worldwide.
  • More new paid members joined Prime in 2017 than any previous year — both worldwide and in the U.S.
  • Amazon Web Services (AWS) announced several enterprise customers during the quarter: Expedia, Ellucian, and DigitalGlobe are going all-in on AWS; The Walt Disney Company and Turner named AWS their preferred public cloud provider; Symantec will leverage AWS as its strategic infrastructure provider for the vast majority of its cloud workloads; Expedia, Intuit, the National Football League (NFL), Capital One, DigitalGlobe, and Cerner announced they’ve chosen AWS for machine learning and artificial intelligence; and Bristol-Myers Squibb, Honeywell, Experian, FICO, Insitu, LexisNexis, Sysco, Discovery Communications, Dow Jones, and Ubisoft kicked off major new moves to AWS
  • AWS continues to accelerate its pace of innovation with the release of 497 significant new services and features in the fourth quarter, bringing the total number of launches in 2017 to 1,430.

 

Those are but a few of the three-plus pages of highlights contained in the December quarter’s earnings press release. These and others show Amazon continues to expand its reach, laying the groundwork for further profitable growth in the coming quarters.

In characteristic fashion, Amazon issued revenue guidance for the current quarter that was in line with expectations – $47.75 – $48.7 billion – that equates to year over year growth between 34%-42%. Per usual, the company also issued it “you could drive a truck through it” operating income forecast calling for $0.3-$1.0 billion for the quarter.

  • We are boosting our price target on Amazon (AMZN) shares to $1,750 from $1,400 and we continue to view them as ones to own for the long-term as the company continues to disrupt the retail industry and is poised to make inroads into others.

 

Alphabet/Google

Rounding out yesterday’s earnings blitzkrieg, was Alphabet, which delivered yet another 20% plus increase in revenue for the December quarter. The performance bested Wall Street expectations, but the company’s bottom line disappointed and missed the consensus by $0.37 per share.

For the record, Alphabet reported December quarter EPS of $9.70 vs. the expected $10.07 on revenue of $32.32 billion. At 85% of overall revenue for the quarter, advertising remains the core focus of revenue. Year over year in the quarter, the company’s advertising revenue rose 22% with growth compared to the year ago quarter also had at its Network Members’ properties and other revenue segments.

The difference between the company’s top line beat and bottom line miss can be traced primarily to its Traffic Acquisition Costs (TAC) — the fees it pays to partner websites that run Google ads or services. Those fees climbed 33% year over year to resemble 24% of advertising revenue vs. 22% in the December 2016 quarter. The continued rise in TAC reflects the ongoing shift in the company’s mix toward mobile, which makes the increase not a surprising one as mobile search and content consumption continues to grow faster than desktop.

On a positive note, the company prudently managed operating expenses, which accounted for 26.6% of revenue in the quarter down from 27% a year ago. The net effect led Alphabet’s overall operating margin for the quarter to slip to 24% from 25% in the December 2016 quarter.

Outside of the core advertising business, the company continues to make progress on its other initiatives better known as Google Other, which includes cloud, its Pixel phones and Google Play. On the earnings call, the management team called out that Google Cloud has surpassed $1 billion, a notable achievement but to be fair the company lags considerably behind Amazon in the space. That said, ongoing cloud adoption leaves ample room for future growth in the coming quarters.

Turning to the company’s Other Bets segment, which houses its autonomous vehicle business Waymo, Google Fiber, home security and automation business Nest and its Verily life sciences business units, it continues to be a drag on overall profits given the operating loss of $916 million on revenue of $409 million. The positive to be had is the unit’s revenue climbed 56% year over year and size of the operating drag compressed 16% vs. the year-ago quarter and was less than $940 million it was Wall Street expected it to be. We see that as progress given the less than mature nature of the businesses housed in Other Bets. As they mature further, we expect them to be less of a drag on overall profits with several of them potentially adding to the valuation argument to be had for the shares as they become a more meaningful piece of the overall revenue mix.

On the housekeeping front, the company’s Board authorized the repurchase up to an additional $8.6 billion of its Class C capital stock. With more than $101 billion on the balance sheet in cash and equivalents exiting 2017 the company has ample funds to opportunistically repurchase shares.

  • The net impact of Alphabet’s bottom line miss looks to have the shares open lower this morning, which when paired with our new $1,300 price target (up from $1,150) offers some 15% upside to be had. That along with our view the company’s search and advertising businesses make it a core holding even as it grapples with the transition to mobile from desktop.

 

This week’s earnings season game plan

This week’s earnings season game plan

 

We have quite the bonanza of corporate earnings for holdings on the Tematica Investing Select List. It all kicks off tomorrow with Corning (GLW) and picks up steam on Wednesday with Facebook (FB). The velocity goes into over drive on Thursday with United Parcel Service (UPS) in the morning followed by Amazon (AMZN), Alphabet/Google (GOOGL) and Apple (AAPL). Generally speaking, we expect solid results to be had as each of these companies issues and discuss their respective December quarter financials and operating performances.

Given the recent melt-up in the market that has been fueled in part by favorable fundamentals and 2018 tax rate adjustments, we expect to hear similar commentary from these Tematica Select List companies over the coming days. The is likely to be one of degree, and by that I mean is the degree of tax-related benefits matching what the Wall Street herd has been formulating over the last few weeks? Clearly, companies that skew their geographic presence to the domestic market should see a greater benefit. The more difficult ones to pin down will be Facebook, Apple, Amazon and Google, which makes these upcoming reports all the more crucial in determining the near-term direction of those stocks.

We are long-term investors that can be opportunistic, provided the underlying investment thesis and thematic tailwinds are still intact. Heading into these reports, the thematic signals that we collect here at Tematica tell me those respective thematic tailwinds continue to blow.

As we await those results, we continue to hear more stories over Apple slashing iPhone X production levels as well as bringing a number of new iPhone models to market in 2018. These reports cite comments from key suppliers, and we’ll begin to hear from some of them tomorrow when Corning reports its quarterly results. We’ll get more clarity following Apple’s unusual tight-lipped commentary on Thursday, and even if production levels are indeed moving lower for the iPhone X we have to remember that Apple’s older models have been delivering for the company in the emerging markets. Moreover, the company could unveil a dividend hike or upsized repurchase program or perhaps even both as it shares the impact to be had from tax reform. As I shared last week, there are other reasons that keep us bullish on Apple over the long-term and our strategy will be to use any post-earnings pullback in the shares to improve our cost basis.

In digesting Apple’s guidance as well as that offered by other suppliers this week and next we’ll be keeping tabs on Universal Display (OLED), which is once again trading lower amid iPhone X production rumors. As I pointed out last week, Apple is but one customer amid the growing number of devices that are adopting organic light emitting diode displays. We remain long-term bullish on that adoption and on OLED shares.

We’ve received and shared a number of data points for the accelerating shift toward digital shopping in 2017 and in particular the 2017 holiday shopping season. We see that setting the stage for favorable December quarter results from United Parcel Service and Amazon later this week. We expect both companies to raise expectations due to a combination of upbeat fundamentals as well as tax reform benefits. With Amazon, some key metrics to watch will be margins at Amazon Web Services (AWS) as well as investment spending at the overall company in the coming quarters. As we have shared previously, Amazon can surprise Wall Street with its investment spending, and while we see this as a positive in the long-term there are those that are less than enamored with the company’s lumpy spending.

In Alphabet/Google’s results, we’ll be looking at the desktop/mobile metrics, but also at advertising for both the core Search business as well as YouTube. Sticking with YouTube, we’ll be looking for an update on YouTube TV as well as its own proprietary content initiatives as it goes head to head with Netflix (NFLX), Amazon, Hulu and Apple as well as traditional broadcast content generators.

In terms of consensus expectations for the December quarter, here’s what we’re looking at for these six holdings:

 

Tuesday, JANUARY 30, 2018

Corning (GLW)

  • Consensus EPS: $0.47
  • Consensus Revenue: $2.65 billion

 

Wednesday, January 31, 2018

Facebook (FB)

  • Consensus EPS: $1.95
  • Consensus Revenue: $12.54 billion

 

Thursday, FEBRUARY 1, 2018

United Parcel Service (UPS)

  • Consensus EPS: $1.66
  • Consensus Revenue: $18.19 billion

 

Alphabet/Google (GOOGL)

  • Consensus EPS: $10.00
  • Consensus Revenue: $31.86 billion

 

Amazon (AMZN)

  • Consensus EPS: $1.84
  • Consensus Revenue: $59.83 billion

 

Apple (AAPL)

  • Consensus EPS: $3.81
  • Consensus Revenue: $86.75 billion

 

 

Special Alert: Recapping bullish signals for our Connected Society theme as holiday shopping goes increasingly digital this year

Special Alert: Recapping bullish signals for our Connected Society theme as holiday shopping goes increasingly digital this year

 

KEY POINTS FROM THIS SPECIAL ALERT:

  • Tematica Options+ Subscribers: We are selling half the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) that broke $76.62 this morning, generating a gain of more than 135% over the last 7 trading days. We are also boosting our stop loss to $55 from $32.50.*
  • With today being Cyber Monday, we will be revisiting our Amazon (AMZN) price target as the day’s sales tallies are published.
  • We continue to see Amazon (AMZN), Alphabet (GOOGL), and United Parcel Services (UPS) as beneficiaries of the accelerating shift toward digital commerce.

 

* Note: Following the Thanksgiving holiday, we are in a thankful mood and as such we are sharing this latest Tematica Options+ call option trade with all Tematica Investing subscribers. If you would like to upgrade your subscription to include Tematica Options+, please contact us at (571) 293-1977 or email us at customerservice@TematicaResearch.com

 

Holiday shopping data is confirming Our Connected Society Investment Theme on several fronts

We hope you had an enjoyable Thanksgiving holiday, and where appropriate you took advantage of retail sales, both in-store and on digital platforms. Over the coming paragraphs, we’re going to review the weekend spending data that was bullish for our Connected Society investing theme as well as several Tematica Investing Select List positions and preview what’s expected today, Cyber Monday, but the quick takeaway is it confirmed the accelerating shift toward digital commerce that is fueling our positions in Amazon (AMZN) and United Parcel Service (UPS), and to a lesser degree Alphabet (GOOGL) given its search and shopping businesses.

According to Adobe Systems (ADBE), U.S. shoppers splurged more than $1.52 billion online by 5 PM ET on Thanksgiving and went on to part with more than $2.85 billion for the day in full. By comparison, that compares to $1.93 billion in online Thanksgiving sales in 2016. What we found even more incredible was the percentage derived from smartphones – a record 46% according to Adobe.

Turning to Black Friday, per e-commerce platform company Shopify, customers spent as much as $1 million per minute on the internet. Adobe reports that shoppers spent a record-high of $5 billion for the day, up from $3.34 billion in 2016. Another interesting data point, marketing firm Criteo reports that roughly 40 percent of Black Friday online sales were made on mobile devices Pairing Thanksgiving and Black Friday sales at the 100 largest U.S. Web retailers, Adobe found $7.9 billion was spent, marking an 18% increase compared to 2016.

Reports for Black Friday were less favorable for brick & mortar retailers, with many shoppers flocking to stores; however many of them were there only to “showroom” the merchandise. For those unfamiliar with that term, “showrooming” means eying items in person while waiting to complete the actual transaction online, while continuing to bargain hunt online or via mobile. Estimates from ShopperTrak said foot traffic “decreased less than one percent when compared to Black Friday 2016.” Looking at both Thanksgiving Day and Black Friday, however, ShopperTrak found in-store foot traffic was actually down nearly 2% compared to the same two days last year. Not good for brick & mortar at all, but with some context, we see it is simply more of the same given disappointing same-store sales reported by retailers of late.

What we found most interesting in retailer comments was the growing verbiage toward digital commerce . . . 

While some may call it pandering, we see it as more confirmation of the shift we’ve been describing. Case in point, Kohl’s (KSS) CEO Kevin Mansell shared that while the retailer delivered a “record-breaking” Thanksgiving, more than 16 million visits were made to kohls.com, Kohl’s said, outpacing any prior traffic or sales precedents. Mansell went on to say the company fulfilled roughly 40% more orders that were bought online and picked up in stores when compared with Black Friday of last year. Another example was had at J.C. Penney (JCP), which shared that traffic at jcp.com increased at a double-digit pace throughout the week, with most shoppers visiting the site from their mobile devices. And on Thanksgiving Day, Penney’s website received the most visits of any day so far this year.

Rounding out the holiday shopping weekend, today is Cyber Monday and it is expected to become the largest online shopping day in history, generating $6.6 billion in sales, up  16.5% compared to last year’s $5.6 billion according to Adobe. Here’s the thing — if this Cyber Monday sets a new online record, it will be the sixth year in a row the day has done so.

Stepping back, we see all the weekend’s data confirming the shift to digital commerce that has been at the heart of our position in Amazon. The same shift towards online is also driving the search and shopping business at Alphabet and fueling the season surge at United Parcel Service.

As this shopping shift is occurring, we are also seeing Amazon build its own private-label offerings across a growing number of categories, including sportswear, electronics, and accessories to kitchenware. This is placing additional pressure on bricks-and-mortar names such as J.C. Penney and Sears (SHLD). Of course, there is more than enough reason to think there will be even more pain on the way, as traditional retail businesses are pumping up the use of discounts to win business, which should further pressure margins.

In a survey conducted by the Berkley Research Group of more than 100 high-level retail executives in October, 64% of the respondents said they expected promotions to play a more significant role in overall sales during the 2017 holidays. This tells us is there is more trouble ahead for brick & mortar retailers as these companies sacrifice profits to win revenue. That isn’t exactly a sustainable business model and one that tends to lead to declining earnings per share. In our view, those that lack a competitive weapon in its back pocket — weapons like Amazon’s Amazon Web Services or Costco Wholesale’s (COST) higher margin membership fee business — are stocks to be avoided as retailer pain continues.

  • Our price target on Amazon is $1,250 but based on the online shopping strength thus far and what’s expected today we are reviewing that target.
  • As we review our AMZN price target, we are doing the same for Alphabet (GOOGL) shares. Currently, that price target sits at $1,150.
  • Our price target on United Parcel Service (UPS) shares remains $130.
  • Our price target on Costco Wholesale (COST) shares remains $185.

 

Tematica Options+ Subscribers: Trimming back our Amazon call position

* Note: Following the Thanksgiving holiday, we are in a thankful mood and as such we are sharing this latest Tematica Options+ call option trade with all Tematica Investing subscribers. If you would like to upgrade your subscription to include Tematica Options+, please contact us at (571) 293-1977 or email us at customerservice@TematicaResearch.com

As the confirming holiday shopping data is coming in, we’re seeing Amazon shares respond accordingly and that is propelling the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) higher this morning. As we share today’s thoughts with you the AMZN calls are trading past $76.62, which equates to a gain of more than 135% since we added the position just 7 days ago to the Tematica Options+ Select List. As much as we like quick gains, we also like to be prudent and in this case, that means trimming the position back, while leaving a portion intact to capture additional gains to be had this holiday shopping season.

  • We are selling half of the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) that broke $76.62 this morning, generating a gain of more than 135% over the last 7 trading days.
  • As we make this trade, we are also boosting our stop loss on those calls to $55 from $32.50, which should ensure a profit of at least 69% on the remaining call position.

 

 

Weekly Issue: More trimming and more gains, this time with AXTI shares

Weekly Issue: More trimming and more gains, this time with AXTI shares

KEY POINTS WITH THIS ALERT

  • We are trimming back our position in AXT Inc. (AXTI), which closed last night more than 60% above our mid-June entry point. we are selling one-third of the position, which lets us book some fantastic gains, but also leaves ample exposure on the Tematica Investing Select List. As we make this trade we’re also adding a stop loss at on AXTI at $8.25, which ensures a minimum return near 27% on the remaining shares.
  • Prepping for the official start of the 2017 holiday shopping season
  • Waiting on Tax reform and what it may mean for small-cap cap stocks
  • Applied Materials (AMAT) offers bullish outlook on Mad Money

Note: We’re bringing the weekly Tematica Investing issue to you a day earlier than usual given the likelihood that a significant number of subscribers will, like many, many other folks, be traveling tomorrow ahead of the Thanksgiving holiday. Usually, the day before and after Thanksgiving see lower than usual trading volumes as investors and traders look to turn the holiday into an unofficial four day weekend. As we digest our turkey, trimmings and that extra piece of pie, Team Tematica will be analyzing the Black Friday data, reporting our findings on Monday.  

From all of us here at Team Tematica, we wish you and yours a very Happy Thanksgiving! And if you see Tematica’s Chief Macro Strategist Lenore Hawkins on Fox Business this Friday remember that pickles and pecan pie do not mix well together on Thanksgiving.

 

More trimming and more gains, this time with AXTI shares

Over the last week, we’ve done some trimming and pruning to the Tematica Investing Select List, shedding shares in USA Technologies (USAT) and Universal Display (OLED), while offsetting those gains by exiting Nuance Communications (NUAN), Teucrium Corn Fund (CORN) and ProShares Short S&P 500 ETF (SH) shares. You can see the details here  in case you missed it.

Today we are back at the trimming again, but this time with Disruptive Technologies company AXT Inc. (AXTI) following yesterday’s 12% gain in the shares, which closed just 5% below our $11 price target. That rapid move brought the positon’s return to more than 60% as of last night’s close since we added the shares to the portfolio in mid-June.

Do we see additional upside in the shares as 5G mobile networks are deployed and high-speed broadband deployments in data centers, wireless backhaul, and other applications grow in the coming quarters? We sure do, but we also are prudent investors. As such, we are trimming the AXTI position back, which returns a hefty slug of the capital deployed from when we originally added the shares, while keeping ample exposure to capture additional upside in the coming quarters.

In short, while we are making a prudent move today, we’re going to let this winner run given the favorable fundamentals, and over the coming days, we’ll look to crunch the numbers to determine additional upside to be had from current levels.

  • We are trimming back our position in AXT Inc. (AXTI), which closed last night more than 60% above our mid-June entry point.
  • We are selling one-third of the position, which lets us book some fantastic gains, but also leaves ample exposure on the Tematica Investing Select List.
  • Our $11 price target is under review.
  • As we make this trade we’re also adding a stop loss at on AXTI at $8.25, which ensures a minimum return near 27% on the remaining shares.

 

Prepping for the official start of the 2017 holiday shopping season

As I noted above, later this week as Thanksgiving 2017 fades we’ll see the 2017 holiday shopping season heat up. Several weeks ago, I shared several forecasts all of which call for 2017 holiday shopping to rise 3.5% to 4.5%, with digital commerce sales poised to grow multiples faster, leading companies such as Amazon (AMZN) and United Parcel Service (UPS) to win consumer wallet share.

As this shopping shift is occurring, we are also seeing Amazon build its own private- label offerings across a growing number of categories, including sportswear, electronics, and accessories to kitchenware. This is placing additional pressure on bricks-and-mortar names such as J.C. Penney (JCP) and Sears (SHLD) — the shares in those two companies are down 55%-60% year to date. There, of course, is more than enough reason to think there will be even more pain on the way as traditional retail businesses are pumping up the use of discounts to win business, which should further pressure margins.

In a survey conducted by the Berkley Research Group of more than 100 high-level retail executives in October, 64% of the respondents said they expected promotions to play a more significant role in overall sales during the 2017 holidays. What this tells me is there is more trouble ahead for retail as these companies sacrifice profits to win revenue — not exactly a sustainable business model and one that tends to lead to declining earnings per share.

I’ll be back early next week to share my observations on the weekend holiday shopping activity as well as Cyber Monday, and what it all means for positions on the Tematica Investing Select List.

  • Our price target on Amazon (AMZN) shares remains $1,250
  • Our price target on United Parcel Service (UPS) is $130.

 

Waiting on Tax reform and what it may mean for small-cap stocks

Last Friday, Treasury Secretary Steven Mnuchin told CNBC that he expects a GOP tax cut bill to be sent to President Donald Trump to sign by Christmas. As I shared last week, there are several differences between the tax bill passed by the House late last week and the proposed one by the Senate. With both the House and Senate not in session this week, I don’t expect much movement on tax reform, but that means there are four weeks for the House and Senate to put forth a bill together to reach the president’s desk in time for Christmas. While I’m hopeful, the reality is the next few weeks will tell us how probable this is.

As we’ve seen over the last few weeks, small-cap stocks are likely to ebb and flow over the next few weeks based on the meat of tax reform and whether it will be passed for 2018 or not until 2019. On the Tematica Investing Select List we primarily have large-cap stocks, which are defined as companies with a market capitalization value of more than $10 billion, and two mid-cap stocks in the form of Universal Display (OLED) and Trade Desk (TTD) shares. We do, however, have three small-cap stocks – USA Technologies (USAT), AXT Inc. (AXTI) and LSI Industries (LSI), which means Team Tematica will be on the case as it pertains to tax reform over the next few weeks.

 

Applied Materials (AMAT) offers bullish outlook on Mad Money

Last Friday, Applied Materials (AMAT) President and CEO Gary Dickerson appeared on CNBC’s Mad Money and discussed several aspects of our Connected Society and Disruptive Technologies investing themes and how they are powering the company’s semiconductor capital equipment business. Dickerson also role in artificial intelligence and big data.

https://www.cnbc.com/video/2017/11/17/amat-ceo-the-future-of-competition-changing-fueling-our-business.html?play=1

I see Dickerson’s comments echoing our multi-faceted and multi-year thesis on Applied shares. The next proof point to watch for ramping organic light emitting diode display demand will be the next iteration the global consumer electronics and consumer technology tradeshow that is CES 2018, which runs from January 8-12, 2018. In the coming weeks, we’ll begin to hear more about the various consumer electronic items that will be previewed and debuted at the show, and we expect a smattering of organic light emitting diode display TVs. Already we’re hearing LG will launch a full line up of OLED TVs in 2018, and that OLED TVs are expected to see a meaningful price reduction, which could foster greater consumer adoption. I see both as positives for not only AMAT shares but also Universal Display (OLED) shares.

  • Our price target on Applied Materials (AMAT) shares is $70
  • Our price target on Universal Display (OLED) shares is $225

 

Last week’s Cocktail Investing podcast –
The Rise in our Rise & Fall of the Middle Class investing theme

If you missed last week’s podcast — and shame on you if you did — Lenore Hawkins and I did a deep dive on what’s driving the Rise in our Rise & Fall of the Middle Class investing theme. From sharing why this is happening to what the implications are, we tackle it all. In an upcoming podcast, we’ll be giving the same treatment to the Falling Middle Class in this investing theme, but my advice is listening to last week’s will offer not only some great context, but you’ll also learn why to this day Lenore shuns pecan pie. Download it now for some great entertainment during your holiday travels.