Menu
Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week.

This week, we’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes.

We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List, including Universal Display (OLED), Nuance Communications (NUAN), AT&T (T), Dycom Industries (DY), CalAmp (CAMP) and Alphabet (GOOGL) as well as Amazon (AMZN). Already Amazon has announced it will bring its Alexa VDA to Motorola’s smartphones, and we see that as the tip of the proverbial iceberg his week.

As the Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting today what’s called a “skinny budget”, (which we view as the “opening bid budget”) tomorrow night President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform — “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on how to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition. Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been:

  • The improving, but not stellar economic data
  • The hope that President Trump’s policies will jumpstart the economy.

We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

 

Need to Keep Our Eyes on Both Sides of the Equation

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

For that reason, we’re going to make some defensive adjustments to the Tematica Select List, which has enjoyed the market rally over the last few months and led to strong moves in our Universal Display (OLED), AMN Healthcare (AMN), Costco Wholesale (COST) shares as well as several others.

 

With an eye toward preserving profits, we are going to introduce the following stop losses:
  • Alphabet (GOOGL) at $800
  • Universal Display at $70
  • AMN Healthcare at $37
  • PowerShares NASDAQ Internet Portfolio ETF (PNQI) at $90

 

Alongside these new stop losses, we’re also going to raise several existing ones:
  • Boost our stop loss on AT&T (T) to $36 from $31
  • Raise our stop loss on International Flavors & Fragrances (IFF) to $115 from $105
  • Boost our stop loss on Costco Wholesale to $170 from $165
  • Increase our stop loss on Disney (DIS) shares to $100 from $87

 

Again, our thought is better to be safe than sorry given where the market currently sits. We’ll continue to review other positions on the Tematica Select List with similar actions where and when it makes sense.

 

The Stock Market Marches Higher and So Does the Tematica Select List

The Stock Market Marches Higher and So Does the Tematica Select List

The last week has been a barn burner for a number of our positions on the Tematica Select List. We had earnings from AMN Healthcare (AMN) and International Flavors & Fragrances (IFF) that led both positions to move higher, January Retail Sales that were bullish for our Amazon (AMZN) shares and to a lesser extent our Alphabet (GOOGL) shares, and big move in our Universal Display (OLED) shares. Part of the catalyst for that move in Universal Display (OLED) shares was bullish comments from Applied Materials (AMAT) on the rising capacity for organic light emitting diode displays. On the back of that as well as accelerating growth in chip demand, we added Applied Materials shares as a Disruptive Technology play on the Tematica Select List with a $47 price target.

Yesterday’s Flash February PMI reports from Markit Economics point to an improving global economy complete with input prices moving higher. We suspect this will be on the Fed’s mind as we get more data ahead of the March FOMC meeting that is just a few weeks out. Our position is the Fed is likely to wait until firm details of President Trump’s economy stimulus plans and tax overhaul have been announced and digested. Given the likelihood that won’t happen ahead of the March FOMC meeting, we think there is a higher probability the next Fed rate hike will be had at its May meeting. Of course, the coming data will be key and that means pouring over the next iteration of Fed meeting minutes that will be published later today.

Later in the week, we have earnings from Universal Display (OLED). Consensus expectations for Universal’s December quarter results are EPS of $0.42 on $68.6 million in revenue. We expect a bullish outlook to be had when Universal reports its results this Thursday. Our price target on OLED shares sits at $80.

Before we get to some housekeeping items, here’s a quick recap of where our various positions sit on the Tematica Select List. Remember, our thematic style of investing is long-term in nature, which means we are inclined to use share price weakness to scale into Buy rated positions provided the thematic thesis remains intact:

 

Buy rated stocks on the Tematica Select List continue to be:

  • Alphabet (GOOGL) – Asset-Lite Business Models
  • Amazon (AMZN) – Connected Society
  • Applied Materials (AMAT) – Disruptive Technology
  • CalAmp Corp. (CAMP) – Connected Society
  • Disney (DIS) – Content is King
  • Dycom Industries (DY) – Connected Society
  • Facebook (FB) – Connected Society
  • International Flavors & Fragrances (IFF) – Rise & Fall of the Middle Class
  • McCormick & Co, (MKC) – Rise & Fall of the Middle Class
  • Nuance Communications (NUAN) – Disruptive Technology
  • PureFunds ISE Cyber Security ETF (HACK) – Safety & Security
  • Starbucks (SBUX) – Guilty Pleasure
  • United Natural Foods (UNFI) – Foods with Integrity

 

Subscribers should continue to hold shares of: 

  • AMN Healthcare (AMN) – Aging of the Population
  • AT&T (T) – Connected Society
  • Costco Wholesale (COST) – Cash-strapped Consumer
  • PowerShares NASDAQ Internet Portfolio ETF (PNQI – Connected Society

 

Remember, the full list of positions on the Tematica Select List, along with detailed price targets, recommended stop-limit prices and returns are always listed on the Holdings / Performance page you can access by clicking here or on the white and green “Select List Performance” box on the top right of this page.

 

Exciting Updates to Your Tematica Investing Service . . .

Amazing as it might seem, we’ve got less than one week to go until we close the book on February. We suspect you’re likely thinking that means before too long mild temperatures will be on the way, and we’re right there alongside you. Here at Tematica, we’ll be coming up on the one-year anniversary since we opted to self-publish our products. As we said at the time, we wanted more editorial control to provide the kind of service and insight we think our subscribers deserve.

Over the last year, you’ve probably noticed several happenings that build on our Monday Morning Kickoff and premium products, like Tematica Investing. We added weekly Thematic Signals, which is our Tematica take on “ripped from the headlines” but with a thematic perspective. As we see it, Thematic Signals is a constant reminder of our 17 investment themes at work in and around us each and every day. Those signals are posted to our website on nearly a daily basis and then an email is sent out summarizing all of them on Friday afternoons.

Lenore Hawkins
Tematica Research Chief Macro Strategist

A few months ago we brought Lenore Hawkins on as Tematica’s Global Macro Strategist, and if you’re not checking out Elle’s Economy over at TematicaResearch.com on a regular basis, we have to say you’re missing out.

More recently in a move that has Chris Versace’s as happy as a dog getting his belly scratched, we are back podcasting with Lenore chiming in as well with her usual wit and insights. We’ve already had the CEO of US Concrete (USCR) on the program as well as the CEO of mobile advertising disruptor Digital2Go, and we’ve got a number of great guests coming up in the coming weeks including IBM (IBM), InterDigital (IDCC), Skyworks Solutions (SWKS), Boxed, and several cyber security companies. Versace always enjoys these conversations because you never know what useful tidbits a guest might drop. You can find the Cocktail Investing podcast each and every week right here on TematicaResearch.com

 

After all of that, one might think we’d take it easy for a while . . . We’re not.

Rather, we’ve kicked things up even further by sharing our thoughts on a more frequent basis. You’ve probably noticed the “Tematica Investing Posts for XX/XX/2017” that have started to hit your email. Our thinking is the stock market is a quick moving and dynamic animal, not one that should only be addressed once per week. Each day, you’ll get a mid-day recap of what we’ve published in the last 24 hours including our latest thoughts on the economy, key thematic data points, new positions on the Tematica Select List (like yesterday’s Applied Materials (AMAT) addition), and position updates.

The goal is not to overwhelm you, but rather share in real-time digestible thematic insights and action that much like the Hippocratic oath is aimed at helping you be a smarter investor without doing any harm in the process.

We’d love to hear your feedback at customerservice@tematicaresearch.com

 

 

Many Reasons to be Bullish on This Semi-Cap Company

Many Reasons to be Bullish on This Semi-Cap Company

We are adding shares of Applied Materials (AMAT) to the Tematica Select List as the company’s business is poised to benefit from our Disruptive Technology investing theme over the coming 12-24 months. Applied Materials is a leading nano- manufacturing equipment, service, and software provider to the semiconductor, flat panel display (FPD), and solar industries. In short, it builds the capital equipment that is used to manufacture chips, display and solar panel components. Our price target of $47 offers upside of roughly 30 percent and equates to just over 17x expected 2018 earnings in the range of $2.75 per share. By comparison, consensus expectations call for AMAT to deliver EPS of $2.55-$2.60 this year, up from $1.75 in 2016. Our rating is a Buy up to $41-$42.

Why We’re Adding AMAT Shares to the Tematica Select List

It’s been a while since we’ve seen the TV ad touting cotton as the fabric of our lives. Over the last few years, as we’ve been migrating more and more into the digital society, we’ve thought the new fabric of our lives is chips. As we know from our devices, be it a laptop, smartphone, tablet, we are facing the need for more computing power, greater connectivity speeds and more connections into more things (cars, homes, and that Internet of Things thing).

There are also newer and in some cases disruptive technologies — like emissive display technology organic light emitting diodes (OLEDs), a technology that is catching fire in the smartphone market, TVs and wearables. In short, there is a pronounced increase in the for chips, which is also spurring a pickup in new semiconductor capital equipment. We know this given our existing position in Universal Display (OLED) shares.

Exiting December, North America-based manufacturers of semiconductor equipment posted $1.99 billion in orders worldwide and a book-to-bill ratio of 1.06, according to the December Equipment Market Data Subscription (EMDS) Book-to-Bill Report published by SEMI. December bookings rose more than 28 percent compared to November 2016 and were up nearly 48% on a year over year basis.

In the recently reported January quarter, Applied’s order book rose more than 85 percent year over year, as orders for its silicon and display businesses rose more than 85 percent and 200 percent, respectively. The silicon business is benefitting from strong 3D NAND demand, given significant power and performance advantages over other memory solutions, as well as silicon to power applications, 4K video, as well as compute-intensive applications like artificial intelligence and smart vehicles.

 

As part of the Internet of Things, we’re seeing sensors and communications being added to a variety of commercial and consumer products as well. These and other applications are, on a combined basis, driving robust demand for additional semiconductor capacity and that is fuel for Applied’s semiconductor business. We see this reflected in capital spending budgets at companies like Intel (INTC), which is boosting its 2017 budget by $2.5 billion year over year to $12 billion. Taiwan Semiconductor (TSM)‘s 2016 capital spending came in at $10.2 billion, ahead of the expected $9.5 billion, and the company is slated to spend another $10 billion in 2017.

The accelerating ramp in OLED display demand was the primary driver of that robust Display order activity, and Applied noted the demand has only strengthened over the last several months. “In the past few months, our view of display spending has strengthened further. We now see customers increasing their investments by around $3 billion in 2017, $1 billion more than we thought in November. Our early view of 2018 is also positive.” It added: “50% of our demand going forward for this year is new customers for the mobile OLED”, with orders improving across all of its mobile OLED customer base. We strongly suspect a significant factor in this ramping Display demand is Apple (AAPL) adopting OLED displays in its next iPhone iteration. Odds are that shift will push other smartphone vendors to adopt OLED display.

One overarching driver over the long term is ramping capacity for semiconductor capital equipment and display technologies in China as it consumes a growing number of devices. In total, wafer fabrication equipment (WFE) sales in China are expected to reach $7 billion in 2017, compared to $6.7 billion in 2016 and $3.4 billion in 2013, according to SEMI, with more significant spending likely in 2018. With easier export controls in China compared to several years ago, companies like Applied can now ship more advanced tools into the country.

Against such a rosy outlook, we’d note semiconductor capital equipment demand tends to be dependent on the health of the economically sensitive semiconductor and consumer electronics industries. This means that we will continue to keep our eyes tuned not only to chip demand and fabrication utilization levels, but also the underlying economic tone of the global economy.

Valuation and Price Target

Our $47 price target equates to 17-18x expected 2017-2018 EPS, which we’d note is a discount to 52-week high price multiples in the range of 21-22x earnings that were accorded to AMAT shares during 2015 and 2016. On the downside, AMAT shares have bottomed out at roughly an average P/E multiple of 12x over the last few years. Applying that multiple to slated 2017-2018 earnings points to downside near $30-$32, and those are levels near which we’d look to scale into our position on share price weakness, as along as the current outlook remains intact.

 

The Bottom Line on Applied Materials (AMAT)
  • We are adding shares of Applied Materials (AMAT) to the Tematica Select List.
  • Our price target of $47 offers upside of roughly 30 percent.
  • Our rating is a Buy up to $41-$42.

 

What We’re Watching This Week

What We’re Watching This Week

[MM_Access_Decision access=’true’]
The Article Below is Exclusively for Tematica Research Members
[/MM_Access_Decision]

[MM_Access_Decision access=’false’]
You do not have access to this content until you upgrade to a Tematica Membership. Click here for details.
[/MM_Access_Decision]

 

As you probably know, this week is a shortened one following the 3-day holiday that was President’s Day. We still have a number of companies reporting their quarterly earnings this week, and that includes the Tematica Select List’s own Universal Display (OLED). The shares have had a strong run, up just over 28 percent year to date, and that likely has them priced near if not at perfection. Last week, Applied Materials (AMAT) gave a very bullish view when it comes to the ramping organic light emitting diode manufacturing capacity, as the industry prepares for Apple (AAPL) and others switching to this display technology. Consensus expectations for Universal’s December quarter results are EPS of $0.42 on $68.6 million in revenue. We expect a bullish outlook to be had when Universal reports its results this Thursday.

Alongside Universal Display, there will be a few hundred other companies reporting. Among those, we’ll be tuning into reports from Wal-Mart (WMT), Macy’s (M), JC Penney (JCP) and TJX (TJC) for confirming data on our Amazon (AMZN) thesis. Similarly, we’ll be looking at Cheesecake Factory’s (CAKE) for confirmation in the restaurant pain that is benefitting our McCormick & Co. (MKC) and United Natural (UNFI) shares.

On the economic data front, the calendar is a tad light, with the highlight likely to be the next iteration of the Fed’s FOMC minutes. Given Fed Chairwoman Janet Yellen’s two-day testimony on Capitol Hill that we touched on above, we’re not expecting any major surprises in those minutes. Even so, we’ll be pouring over them just the same.

This morning we received the February Flash Manufacturing PMI metrics from Markit Economics and not only did Europe crush expectations hitting a six-year high in February. Across the board, from business activity to backlogs of work and business confidence, the metrics rose month over month. One item that jumped out to us was the increase in supplier delivery times, which tends to be a harbinger of inflation — something to watch in average selling price data over the next few months. Turning to Japan, the Markit flash manufacturing PMI rose to 53.5 in February, its highest level since March 2014, with sequential strength in all key categories — output, exports, employment and new orders. but Japan hit it’s highest level since March 2014.

 


Here at home, the Flash U.S. Composite Output Index hit 54.3 in February, a downtick from 55.8 in January, but still well above the 50 line that denotes a growing economy. The month over month slip was seen in manufacturing as well as the service sector. Despite that slip, new manufacturing order growth remained faster than at any other time since March 2015 and called out greater demand from energy sector clients. No surprise, given the rising domestic rig count we keep reading about each week.

Manufacturers also called out that input cost inflation was at its highest level since September 2014 and we think this is something that will have the Fed’s ears burning.

 


Currently, our view is the next likely rate hike by the Fed will be had at the May meeting, which offers plenty of time to assess pending economic stimulus, immigration and tax cut plans from President Trump. Again, we’ll be watching the data to determine to see if that timing gets pulled forward.

Stay tuned for more this week.

Applied Material’s Outlook for OLEDs Boosts Our Universal Display Price Target

Applied Material’s Outlook for OLEDs Boosts Our Universal Display Price Target

This morning our shares of Disruptive Technology play Universal Display (OLED) are once again climbing higher. We attribute this to the bullish comments that compound semiconductor capital equipment company Applied Materials (AMAT) shared on the organic light emitting diode market on its earnings call last night. Given the current industry shortage for organic light emitting diode displays, AMAT has been a company to watch for potential capacity increases, and AMAT signaled that in a big way last night when it said,

  • “…In the past few months, our view of display spending has strengthened further. We now see customers increasing their investments by around $3 billion in 2017, $1 billion more than we thought in November. Our early view of 2018 is also positive.”
  • “50% of our demand going forward for this year is new customers for the mobile OLED” with orders improving across all of its mobile OLED customer base.

Taken together, these comments confirm the growing adoption of organic light emitting diode displays in the mobile market, principally in smartphones. Reading between the lines, we suspect part of the large increase from “new customers for the mobile OLED” is a thinly veiled reference to Apple (AAPL) and its 2017 iPhone refresh. Looking past mobile, we continue to see growing demand for this disruptive display technology from TV and wearable applications as well as those in Internet of Things applications.

On the back of this news, we are boosting our price target on OLED shares to $80 from $68, which offers upside of just over 10 percent from current levels. Our next catalyst for the shares will be when Universal Display reports its quarterly earnings on Feb. 23. Given the industry developments, we expect the company to offer a bullish outlook for 2017 and beyond. Even so, we’d need to see either upside in the shares in the range of $85-$90 or a pullback below $65 to warrant a Buy rating on OLED shares.

  • We are maintaining our Hold rating on OLED shares even as we bump up our price target to $80 from $68.
Universal Display Shares Feel the Apple Halo Effect

Universal Display Shares Feel the Apple Halo Effect

Today, shares of Disruptive Technology company and Tematica Select List resident Universal Display ([stock_quote symbol=”OLED”]) popped and closed the day up just under 5% to close at $70.35. There were several catalysts behind the move including more chatter over Apple (AAPL) moving its next iteration of the iPhone to organic light emitting diode display technology, and a new Buy rating at investment firm Susquehanna. From our perspective, the former represents more confirming data points behind our thesis on OLED shares, and we certainly love it when a member of the Wall Street herd catches up to what we’re doing over here at Tematica.

Now let’s get to that Apple chatter… The Korean Herald is reporting that Samsung has signed an agreement with Apple to provide 160 million screens for the Apple iPhone 8. Keep in mind that Apple shipped 211 million devices last year and 231 million in 2015. This means Apple could be moving more quickly to the new screen technology than previously thought — a positive for our OLED shares given that Samsung is one of Universal Display’s key customers and licensees.

Also dropping today was a new report from Bloomberg saying Apple is considering Chinese company BOE Technology as a potential organic light emitting diode supplier for “upcoming iPhones.” With BOE currently building two organic light emitting diode facilities in the China province of Sichuan, odds are any potential supply to Apple will be for 2018. Given supply constraints for organic light emitting diode displays that could limit Apple’s use of the technology in one new version of the iPhone this year, we’re not surprised by Apple trying to lock up additional capacity ahead of it coming online. More organic light emitting diode capacity is likely to translate into more chemical sales for Universal Display and bode well for greater licensing revenue as well.

  • We continue to rate OLED shares a Hold and our $68 price target is under review.

We’ll be tuning into semiconductor capital equipment company Applied Material’s (AMAT) December quarter earnings conference call to get the latest view on organic light emitting diode industry capacity expansion plans.