Menu
Weekly Issue: Insights on Apple, Cutting Trade Desk and a look at eGaming and Body Cameras

Weekly Issue: Insights on Apple, Cutting Trade Desk and a look at eGaming and Body Cameras

 

KEY POINTS FROM THIS WEEK’S ISSUE:

  • Raging fires in So-Cal has us cutting Trade Desk shares loose
  • Here’s why we’re avoiding body camera stocks
  • Speaking of Apple…
  • Some mobile gaming stocks go under the microscope

 

It’s been a wild ride in the market this past week, as investors shift their view from “will tax reform pass” to “with tax reform likely, which sectors will benefit?” Candidly we find this to be the wrong question to ask, not just because we believe sector investing is dead (it is!) but because we see a better question being which thematically well-positioned companies are poised to benefit from lower tax rates in 2018?

We’re rolling up our sleeves, proceeding with that analysis and we’ll have some answers in the coming days. In the meantime, we’ve got another full weekly issue of Tematica Investing to share with you. Here goes…

 

Raging fires in So-Cal has us cutting Trade Desk shares loose

Shares of digital advertising platform company Trade Desk have been under renewed pressure this week, in part due to weakness in the Nasdaq Composite Index, but also to the fires raging in southern California. As a reminder, Trade Desk is headquartered in Ventura, California and despite the prospects for half of all global advertising to be spent online by 2020, odds are Trade Desk will experience either some disruption or distraction in the current quarter that could lead to the company missing quarterly expectations. We’ve seen how share prices react to such misses, and we’d rather get out ahead of any potenital miss to expectations and minimize the impact to Select List.

As such, we are cutting Trade Desk shares loose at market today, which will generate a blended loss of more than 17% across the two tranches on the Tematica Investing Select List. We’ll look to revisit the shares once the full extent of the damage has been priced into the shares.

  • We are issuing a Sell on Trade Desk (TTD) shares.

 

 

Here’s why we’re avoiding body camera stocks

One of the key investment themes that we talk quite a bit about here at Tematica is the Connected Society investment theme and the impact it is having on industries and companies. It’s not to take anything away from our other themes, it’s just the Connected Society has been a disruptive force across a growing number of industries. We’re seeing its impact stretch across how we shop, bank, communicate and consume content ranging from video and audio to news and even stock information.

We’re also seeing the impact outside of consumer-facing opportunities in part with the Internet of Things, but also with our Safety & Security investing theme. As a quick reminder, this theme spans defense, homeland security, personal security, and cybersecurity, but also law enforcement. When it comes to law enforcement we have seen a number of new items ranging from rubber bullets to bean bag guns come to market, but with the Connected Society, we are seeing a shift from reactive to proactive monitoring via body cameras. It’s a razor to razor blade business model, with the body cameras serving as the razor and the data management the ongoing spend, a model that is similar to buying new blades every month.

Interestingly enough, I received a subscriber email that was asking about a company that falls into this category – Digital Ally (DGLY). Trading at just under $3 per share the past month, DGLY shares are well off their 52-week high of $6 per share, and yet have a consensus price target of $5. That along with the underlying fundamentals of the body camera market were more than enough to get me to look at the shares.

Not to be all Debbie Downer, but in reviewing the company’s financials, I have a few cautionairy observations to share:

  • The company’s business model has been and looks to be currently upside down. In that I mean it’s operating expenses vastly outweigh its revenue stream. Over the last 12 months, Digital Ally’s revenues totaled a whopping $15.2 million, while its operating expenses over the same period hit $26.6 million
  • It should come as little surprise the company is bleeding on its bottom line and hemorrhaging cash, which it doesn’t have much of. Exiting the September quarter Digital Ally had $0.3 million in cash and short-term equivalents. In the same quarter, its net loss was $3.5 million.

 

As the saying goes, the numbers don’t lie and simply put, DGLY shares are not a pretty picture. This lack of balance sheet strength in the face of ongoing losses was one of the flag’s I identified with Blue Apron (APRN) shares and I see it here with Digital Ally as well. And for those keeping score, Blue Apron shares are down 27% since my initial bearish comments on October 24th.

Aside from the financial statements, there are other concerns that also have me steering away from DGLY shares — namely back and forth patent infringement cases with competitors WatchGuard and Axon Enterprise (AXON), the company formerly known as Taser. These cases are always messy, with companies throwing resources at legal fees and that’s going to hurt a company with Digital Ally’s balance sheet. Based on what is seen here, it’s quite possible that Digital Ally could be one of those companies that vanishes unless it were to undergo what would likely be a painful and dilutive secondary offering that injects capital onto the balance sheet.

Is it possible that Digital Ally could be a takeout candidate? Perhaps, but as one Chief Financial Officer once shared with me when I asked him why not buy out a struggling company to improve his company’s competitive position – “why buy it now when in a few months I can probably buy it for cents on the dollar?” It was a great point, and besides what acquirer would want to step into the current lawsuit mess?

Better to move along and examine other potential candidates than take a flyer on a stock that is cheap for a reason. And for those wondering, that same set of lawsuits, as well as another factor, has me on the sidelines with Axon Enterprise shares as well. That other factor I mentioned is the current pilot program being run by the Jersey City Police Department that is testing a new smartphone app called CopCast that would allow police officers to turn an everyday smartphone into a body camera. While this is the first test in country, the JCPD has already expanded its pilot program to 250 officers from an initial ten. We’ll continue to monitor both this program, as well as those body camera company lawsuits. On the one hand, the outcome of that monitoring program could be a positive for the Apple (AAPL) shares on the Tematica Investing Select List, on the other it could mean revising DGLY and AXON shares. Time will tell.

 

 

Speaking of Apple…

Over the last week as part of the move lower in the Nasdaq, shares of smartphone company Apple (AAPL) moved lower by 2% — a hair better than the 2.2% decline in the Nasdaq. We here at Tematica remain upbeat on this recent addition to the Tematica Investing Select List with our confidence in Apple buoyed by two recent findings. First, a new report from Barclays’ surveyed 1,000 people and found that 62% will upgrade their smartphone in the next year, while 72% plan on doing so in the next 18 months. Of those upgrading, 54% are planning on choosing an iPhone with 35% choosing the iPhone X. It’s worth noting this iPhone X percentage is significantly higher than the August Barclays’ survey that found just 18% of would be Apple buyers would be willing to spend $1,000+ on the iPhone X.

The second report comes from IHS Markit, which forecasts that Apple will sell 88.8 million iPhones in the current quarter – its biggest quarter ever. As robust as that might be, the item that caught our analytical eye was the notion that Apple needs to ship just 31 million iPhone X units for its overall iPhone average selling price to crack $700 – another new record for the company. IHS’s forecast hinges on the collapsed shipping times for the iPhone X, which have fallen from 5-6 week initially, to roughly one week as Apple ramped production.

We expect additional forecasts to follow, but with the iPhone X making a number of “best of” lists, it appears this latest iPhone could once again be the holiday gift to get.

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

 

 

Some mobile gaming stocks go under the microscope

One of the key themes that caught investor attention over the last few quarters is the accelerating shift to digital consumption, especially mobile consumption that is part of our Connected Society investing theme. We saw this over the recent Thanksgiving-to-Cyber-Monday holiday shopping period, as digital sales over the five-day period hit a new record of $19.6 billion. Based on reports from Adobe (ADBE), Shopify (SHOP) and others, it appears that mobile sales rose to equal 40%-45% of all digital shopping sales this year.

We would also point out this shift to digital shopping is not occurring just inside the U.S. This year, Alibaba’s Singles Day hit $25.3 billion in sales, with over 90% of Alibaba’s sales made on mobile devices compared to 82% in 2016 and 69% in 2015.

I believe we can all agree that there is a pronounced shift underway favoring mobile consumption.

A few weeks’ back, we shared some thoughts on e-sports, which tie into how gaming is becoming a new kind of content that people consume not only by themselves or in small groups, but also in communal experiences. And in size… such size that corporate advertisers are sitting up and taking notice when such events are selling out Madison Square Garden for instance. It’s safe to say that eSports and video games fall well within the scope of our Content is King investing theme, on top of the Connected Society theme given the demands the games place on connectivity over the internet as well as viewing and playing over mobile devices.

Put these two tailwinds together, and it means looking at mobile gaming, and as luck would have it another subscriber asked about shares of Glu Mobile (GLUU) and Zynga (ZNGA). In the case of Glu — aside from the fact that they count companies like Activision and Hasbro (HAS) as strategic partners, and which game titles they have (if the dog doesn’t like the dog food, what’s the point in owning the company) — the key investor concern entails wrapping our head around 2018 expectations compared to 2017. We are essentially at that time of year when we make the transition to relying more on 2018 metrics and valuations, and it makes sense as we are inclined to own new positions into at least the first half of 2018.

In the case of Glu, the answer to the question set we’ll be asking is how does the company intend to meet (or beat) consensus expectations that have it delivering EPS of $0.09 in 2018, up from a -$0.08 loss this year? It’s a hefty swing, especially when 2018 revenue is expected to grow a tad more than 5% year over year.

The question for Zynga (ZNGA) is a bit different. It is expected to deliver EPS of $0.13 next year, up from $0.10 this year, which is 30% EPS growth, but why the sharp drop compared to year over year EPS growth this year, especially when 2018 revenue is slated to rise by more than 9%?

If you ask a carpenter how they look to minimize mistakes, the answer you usually get is “measure twice and cut once.” Essentially, that’s what we’ll be doing as we get to the bottom of those questions as well as others over the coming days.

As we do that, I’m going to offer a disclaimer of sorts. While we’ve smartly added companies like USA Technologies (USAT) and AXT Inc. (AXTI) to the Tematica Choice List, we generally stick with larger capitalization stocks, which tend to be more liquid and have better established business models, a track record of earnings and cash flow, better capitalized balance sheets and in some cases dividends.

All things being equal, those kinds of companies are less risky and less volatile than micro-cap stocks like Digital Ally or small-cap ones such as Glu Mobile, which often lack institutional investors and whose shareholders tend to be littered with speculators, not investors. In some cases, those stocks are nothing but glorified option plays, and we leave that kind of trading to our Tematica Options+ service, which focuses on trading options and other aggressive trading tactics, while here at Tematica Investing we are long-term and patient investors.

That’s not to say we won’t take advantage of a mismatch between a company’s stock price and the opportunity to be had, rather we’re going to examine each thematic contender on its own individual merits from a thematic and financial perspective. That being said, as we examine GLUU and ZNGA shares, I’ll be doing the same with Activision Blizzard (ATVI), Electronic Arts (EA) and Take-Two Interactive (TTWO) as well.

Before we close out this week’s issue, I’d like to hammer home that the answers to the questions we asked above and ones like them are what we consider to be the basic building block of analyzing and understanding a company and now its business is performing. For those subscribers that are looking for a more detailed set of primer questions, we – that’s Tematica Chief Macro Strategist Lenore Hawkins and myself – included them in Chapter 10 of our book, Cocktail Investing – Distilling Everyday Noise into Clear Investing Signals. And yes, that book inspired our weekly podcast and it would make a great holiday present to a burgeoning investor.

 

 

 

Weekly Issue: Black Friday, Tax Reform and Boosted Dividends in Time for the Holidays

Weekly Issue: Black Friday, Tax Reform and Boosted Dividends in Time for the Holidays

Black Friday Through Cyber Monday Provide Confirming Data Points for Amazon (AMZN) and UPS Positions

Earlier this week, we not only issued our Tematica Investing thoughts on the holiday shopping weekend, which was very confirming for our Connected Society investment theme thesis on both Amazon (AMZN) and United Parcel Service (UPS), it was also the topic of conversation between Tematica’ Chief Macro Strategist Lenore Hawkins and myself on this week’s earlier than usual Cocktail Investing Podcast. As a reminder, we see United Parcel Service as the sleeper second derivative play on the shift to digital shopping this holiday season and beyond.

Per data published by GBH Insights, on Black Friday alone, Amazon garnered close to half of all online sales, which set new record levels on Thanksgiving as well as Black Friday and Cyber Monday. As we learned yesterday, this year’s Cyber Monday was the biggest sales day for online and mobile ever in the US as online sales hit $6.59 billion, up 16.8% year over year. As Lenore and I discussed on the podcast, spending on mobile devices continued to take share from desktop and in-store spending during Thanksgiving and Black Friday, and that also happened on Cyber Monday as mobile sales broke a new record by reaching $2 billion.

Yesterday, Amazon issued a press release sharing it was the “’best-ever’ holiday shopping weekend for devices sold between Thanksgiving and Cyber Monday. After reviewing the data and prospects for Amazon’s business this holiday season as it benefits in part from its expanding private label brand business as well as the even greater than expected shift to digital commerce this holiday shopping season, we are boosting our price target on AMZN shares to $1,400 from $1,250. While some may focus on the implied P/E of 175x expected 2018 EPS of $7.98 for our new price target, it equates to a price to earnings growth (PEG) rate of roughly 1.0% as Amazon is set to grow its EPS by a compound annual growth rate of just over 184% over the 2015-2018 period. Even if 2018 expectations are a tad aggressive, after taking a more conservative 2018 view our new $1,400 price target equates to a PEG ratio between 1.1-1.3x, which we find more than acceptable from a risk to reward perspective.

  • We are boosting our price target on Amazon (AMZN) shares to $1,400 from $1,250.
  • Our price target on United Parcel Service (UPS) remains $130.

 

Market Moves Higher Ahead of Senate Vote on Tax Reform

The major market indices continued to move higher as the Senate Budget Committee approved the Senate’s tax plan yesterday, which brings it to an expected floor vote tomorrow. This inches the prospects for potential tax reform happening by the end of 2017 a bit higher, although while we remain optimistic we here at Tematica continue to see far greater odds of tax reform happening in 2018 as the House and Senate bills close their respective gap. While both bills cut taxes on businesses and individuals, they differ in the scope and timing of those cuts.

As enthusiasm has gained for tax reform, smaller cap stocks have rallied, as small-caps tend to have greater U.S. exposure in revenue and profit mix compared to bigger, multi-national stocks. The small-cap laden Russel 2000 is up more than 1% this week alone and has risen roughly 2.8% over the last month beating out the Dow Jones Industrial Average, the S&P 500 and even the Nasdaq Composite Index. That small-cap climb, combined with the influence of our thematic tailwinds led the USA Technologies (USAT), AXT Inc. (AXTI) and LSI Industries (LYTS) to rise even faster than the Russell. Over the last month, they’ve risen more than 30%, 18%, and 5% respectively and over the last few weeks, we’ve trimmed back USAT and AXTI shares, booking meaningful wins, while offsetting those gains by closing out positions that have been lagging.

As tax reform lumbers forward, we’ll continue to monitor developments and what they mean for both the market and the Tematica Investing Select List.

 

 

Dividend Dynamo Company McCormick Does it Again

Call me old-fashioned, but I love dividends and I love companies that have the ability to raise their dividends even more. When a company boosts its dividend, it tends to result in a step function move higher in its stock price. If it’s a serial dividend raiser, or as I like to call them a dividend dynamo company, we tend to get a hefty 1-2 combination punch of a step higher in the stock price as well as higher dividend payments. Boom!

We’ve got several such companies on the Tematica Investing Select List, and this week McCormick & Co. (MKC) once again boosted its quarterly dividend. This new 10% increase to $0.52 per share marks the 32nd consecutive year that McCormick has increased its quarterly dividend and offers us even greater comfort with our $110 price target. With regard to this new dividend, it is payable on January 16 to shareholders of record on December 29 – mark your calendars!

  • Our price target on McCormick & Co. (MKC) shares remains $110

 

What We’re Watching For Over the Coming Days

During the next several days, as we exit November a number of economic data points will start to roll in, as well as other key data points such as retailer monthly same-store sales figures. Amid the number of economic reports to be had, we’ll be parsing the October construction spending report and what it means for both non-residential construction activity and shares of LSI Industries (LYTS). The shares have been an “under the radar” mover on a week to week basis, but since adding the position to the Tematica Investing Select List in mid-September are up more than 5%. As August-September hurricane-related construction rebounds, we continue to see further upside ahead for LYTS shares.

  • Our price target on LSI Industries (LYTS) remains $10.

 

While we are understandably bearish on the vast majority of brick & mortar retailers, we remain upbeat with Costco Wholesale (COST) given its higher-margin membership fee income stream. Over the last several months, Costco’s monthly same-store sales reports have shown it is not suffering at the hands of Amazon at all, but rather in keeping with our Cash-Strapped Consumer investing theme, it continues to take consumer wallet share. As Costco shares it November data, we’ll be sure to break it down and assess what it means for our $190 price target.

  • Our price target on Costco Wholesale (COST) remains $190.

 

With Guilty Pleasure MGM Resorts (MGM) shares on the Select List, we’ll also be on the lookout for November gaming data pertaining to Nevada as well as Macau. As we mentioned recently, we are heading into one of the slower seasons for the Las Vegas strip and MGM continues to renovate several choice properties with expectations of reopening them in 1Q 2018. We’ll continue to be patient, and if the opportunity presents itself opportunistic as well given our $37 price target. On the housekeeping font, MGM’s next quarterly dividend of $0.11 per share should arrive in mid-December.

  • Our price target on MGM Resorts (MGM) shares remains $37.

 

 

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.

More year-end trimming — big gains and managing 2017 capital gains

More year-end trimming — big gains and managing 2017 capital gains

KEY POINTS FROM THIS ALERT:

  • Following the continued surge higher in the shares of Cashless Consumption company USA Technologies (USAT), we are trimming back our position by selling one-third of the position, which will produce a gain of more than 85% over the last seven months, and leave ample exposure on the Tematica Investing Select List. As we make this trade, we will also set a stop loss for USAT at $7.50, which will lock in a gain of roughly 65% on the remaining shares.
  • We are also trimming back our position in Disruptive Technology company Universal Display (OLED), which closed last Friday up more than 240% from our October 2016 entry. Similar to the USAT trade, we are selling one-third of the position, which lets us book some fantastic gains, but also ensures meaningful exposure to ramping demand for organic light emitting diode displays. We are also boosting our stop loss on OLED shares to $125 from $100.
  • As we book these gains, we will also offset these gains for tax purposes by matching them with losses. As such, we are exiting our positions in Nuance Communications (NUAN) and the ProShares Short S&P 500 ETF (SH) shares, which are down roughly 7% and 27%, respectively since being added to the Select List in 2017 and 2016.

 

A week ago I shared that we would be doing some year-end house cleaning on the Tematica Investing Select List as well as looking to minimize 2017 capital gains. We are back at that today as we look to match both short and long-term gains with short and long-term losses. Here we go:

 

Trimming back USAT shares

Last week I boosted our price target on Cashless Consumption company USA Technologies (USAT) to $8.00 from $6.50, and the shares proceeded to go on a tear following an upbeat presentation at the Craig-Hallum Alpha Select Conference. I’ve been a long-time fan of the company’s business model that focuses on mobile payments, particularly for vending applications, for some time. As much as I am a fan, with the shares up roughly 85% in the last seven months and having blown past our new price target into overbought territory, it means now is the time to be a prudent investor.

In keeping with the Wall Street saying — bulls make money, bears make money, but pigs get slaughtered — we are going to sell one-third of the USAT position on the Tematica Investing Select List, which will harvest a significant win. Given that we are in the early stages of mobile payments around the globe, the remaining USAT shares will offer us ample exposure to our Cashless Consumption investing theme. Again, we want to be prudent, which means setting a stop loss at $7.50, which locks in a gain of roughly 66% on our remaining USAT shares.

  • Following the continued surge higher in the shares of Cashless Consumption company USA Technologies (USAT), we are trimming back our position by selling one-third of the position, which will produce a gain of more than 85% over the last seven months, and leave ample exposure on the Tematica Investing Select List.
  • As we make this trade, we will also set a stop loss at $7.50, which will lock in a gain of roughly 65% on the remaining shares.

 

Following the same strategy with Universal Display (OLED) shares

Much like USAT shares, the position in Disruptive Technologies company Universal Display (USAT) has also been on a tear this past year, soaring roughly 280% over the last 12 months compared to more than 27% for the Nasdaq Composite Index and 19% for the S&P 500. Again, while we know the ramp in organic light emitting diode display demand will continue in coming quarters, as investors we need to remain prudent.

Therefore, we are employing a similar strategy with OLED shares that we did with USAT shares – we will sell one-third of the position and book a hefty win, while keeping the balance in play to capture additional upside in the coming quarters. We will also boost the positions stop loss to $125 from $100, which will lock in a profit of 135% on the remaining shares.

  • Similar to the USAT trade, we are selling one-third of the Universal Display (OLED) position, which books a gain of roughly 240% from our October 2016 buy-in.
  • We are boosting our stop loss on the remaining OLED shares to $125 from $100.

 

 

Cleaning up the Select List and optimizing year-end capital gains

It’s not lost on us those two trades will deliver some meaningful short and long-term gains. While we’re fans, big fans in fact, of such gains, we’re also fans of minimizing capital gains. As such we’re going to further clean up the Tematica Investing Select List by offsetting those gains with losses as we make the following trades:

  • We are exiting our position in Nuance Communications (NUAN), which is down 8% since it was added to the Tematica Investing Select List in January of this year.
  • We’re also exiting ProShares Short S&P 500 ETF (SH) shares, which are down 27% over the last 20 plus months.

 

Booking losses are never fun, but in this case, it does serve to soften the 2017 tax bill. Not a bad thing at all, especially since it adds back, even more, capital back to the war chest. Given our positions in Amazon (AMZN), Apple (AAPL) and Alphabet (GOOGL), we have ample exposure to voice technology and interfaces that are part of our Disruptive Technology investing theme. And while we are shedding the inverse ETF position, given our concerns with the other overall market that appears to be stalling amid tax reform, we’ll examine other hedging strategies to utilize when the time is right.

 

 

 

SPECIAL ALERT: Some House Cleaning of the Tematica Select List

SPECIAL ALERT: Some House Cleaning of the Tematica Select List

 

KEY POINTS FROM THIS POST:

  • Adding to the Trade Desk (TTD) position and improving the cost basis along the way
  • Funding the TTD move by exiting Teucrium Corn Fund (CORN) shares
  • Boosting our International Flavors & Fragrances (IFF) price target
  • Upping our USA Technologies price (USAT) target as well
  • MGM Resorts (MGM) enters a seasonally slow period
  • What’s expected from Applied Materials (AMAT) on Thursday?

 

As we shared in today’s Monday Morning Kickoff, this week will see a downtick in the pace of corporate earnings. There are, however, still companies worth listening to beyond Applied Materials (AMAT) — the only Tematica Investing Select List company reporting this week. In addition to sharing what’s expected from Applied later this week, today we’re boosting our price targets on International Flavors & Fragrances (IFF) and USA Technologies (USAT) as well as scaling into recently added Trade Desk (TTD) shares, using the proceeds from closing out the position in Teucrium Corn Fund (CORN) shares. We’ve also got an update of MGM Resorts (MGM) following its quarterly earnings report last week.

 

Adding to the Trade Desk position and improving the cost basis along the way

As we shared on Friday, we are using the sharp pullback in Trade Desk (TTD) shares to add to our position on the Tematica Investing Select List, while improving our cost basis from just under $65. Our view is the 21% move lower in TTD shares last week was an extreme overreaction given the company’s current quarter guidance was less than 1% below consensus expectations. At the same time, we only see the shift to digital advertising accelerating as consumers flock to digital platforms from podcasts, like our own Cocktail Investing podcast to various social media and streaming platforms.

  • Adding to the Trade Desk (TTD) position
  • Our price target on Trade Desk (TTD) shares remains $80

 

Funding the TTD move by exiting Teucrium Corn Fund (CORN) shares

To help fund this doubling down in Trade Desk shares — and continuing the process of house cleaning as we prepare to exit 2017 — we are issuing a Sell on Scarce Resource play Teucrium Corn Fund (CORN) shares. Here’s why: last week in its November Crop Production and Supply/Demand Report, the US Department of Agriculture (USDA) shared U.S. corn production reached “175.4 bushels per acre vs. the trade’s expectations of 172.4 bushels per acre and the USDA’s October estimate of 171.8.”

This means despite rising international demand for corn, the ending stocks are much greater than expected a month ago, let alone several months ago, and that has this consumable resource being far less scarce than expected when we added the CORN shares to the Select List. We’ll move the shares down to the Contender List, but it won’t be until the spring 2018 planting season that we look to revisit CORN shares and even then, it will depend on the geopolitical environment for agriculture exports and demand.

While never an enjoyable moment to close a position, we see this as the right move at the right time as the 13% loss endured will offset short-term taxable gains booked earlier in the year when we closed positions in PowerShares NASDAQ Internet Portfolio ETF (PNQI), Costco Wholesale (COST), and more recently CalAmp Corp. (CAMP).

  • We are issuing a Sell on Teucrium Corn Fund (CORN) shares and placing them on the Tematica Investing Contender List.

 

Boosting our International Flavors & Fragrances price target

In last Wednesday’s Weekly Tematica Investing issue, as part of our review of International Flavor & Fragrances (IFF) September quarter earnings that handily beat expectations, I shared that my $150 price target was under review. I can now share that my new price target on the shares is $160, which is in line with the shares average dividend yield of 1.7% over the 2005-2016 period when applied to the current $0.69 quarterly dividend. On a price to earnings basis, my new price target is a modest premium to the 10-year average, but we see as warranted given the rising demand for organic flavoring solutions as well as the shifting preference for non-sugar flavoring that is forcing beverage companies, like PepsiCo (PEP) and Coca-Cola (KO) to reformulate their beverages.

  • Our new price target on International Flavors & Fragrances (IFF) shares is $160, which keeps our Hold rating intact.

 

Upping our USA Technologies price target as well

Last week USA Technologies (USAT) reported mixed September-quarter results, with earnings per share that beat expectations while revenue fell modestly short of Wall Street consensus. Also last week, USA shared it would acquire Cantaloupe Systems, a provider of cloud and mobile solutions for vending and office coffee services. At the same time, the company boosted its 2018 outlook. Factoring in Cantaloupe, USA now sees its 2018 revenue falling in the range of $127 million to $142 million, compared to the pre-earnings consensus of $123.8 million.

Given the lift in revenue, as well as favorable margins associated with Cantaloupe, we’re boosting our price target to $8.00 from $6.50, which offers around 13% potential upside from current levels. This keeps our Hold rating on USAT shares intact.

Getting back to the USA’s results, revenue rose 19%, year to year, to $25.6 million, marking its 32nd consecutive quarter of year-over-year revenue growth. We’d note that even before including Cantaloupe in the outlook for the coming quarters, USA’s base 2018 guidance means the company would have had to grow its revenue another 21% even after we annualized September-quarter revenue.

So, what gives us the confidence the company can continue to deliver on those growth metrics with its core business? Let’s look at some operating metrics from the September quarter:

  • Net new connections rose 37%, year over year, to 26,000, bringing total connection count to 594,000, of which approximately 500,000, or 84%, are a near-field communication (NFC) enabled.
  • USA’s customer base rose by 550 new customers in the quarter and was the highest new customer count it has achieved in two years, bringing the total number of customers on the ePort Connect service to 13,250. While it may be simple or obvious, the more customers on ePort Connect, the more potential transactions there are in vending and unattended retail.

On the earnings call, USA management shared several new developments that bode very well for continued ePort Connect growth in the coming quarters:

  • As part of its partnership with Canteen, the largest automated merchandising company in the United States, offering vending, micro-market, office coffee and dining services to a large network of corporate-owned and franchise locations, two Canteen franchisees will transition their business to 100% connectivity for cashless payments.
  • Premier Food Service, a leading food service provider in Kansas, will upgrade more than 1,400 locations to USA’s ePort Connect service and over 300 kiosks to its consumer engagement and loyalty program.
  • Berkshire Foods, a leading vending and food service company in Connecticut and New York, is widening its footprint with the addition of 1,000 new ePort Interactive and ePort G10-S units to its existing network of approximately 1,500 locations that use USA’s services.

With regard to Cantaloupe, we like the acquisition as it builds on the company’s service offering as well as helps expand its footprint even further. Cantaloupe is headquartered in San Francisco and has approximately 300,000 machines on its service with more than 1,300 operator customers in the U.S., Canada, Australia and South America. The acquisition is expected to close in short order, and as such, we expect more associated synergies to come to light in the coming weeks and months.

  • We are boosting our price target on USA Technologies (USAT) shares to $8.00 from $6.50.

 

MGM Resorts (MGM) enters a seasonally slow period

Last Wednesday, MGM Resorts (MGM) reported its September quarter results, which beat on revenue but missed by $0.02 per share on EPS. Despite that mixed result, due in part to the August typhoon in Macau, the management team echoed comments from Las Vegas Sands (LVS) that it is seeing Las Vegas return to normalized activity levels as the impact of the Oct. 1 shooting fades.

This prompted MGM to issue current quarter guidance for its Las Vegas business that is down low to mid-single digits, far better than many had feared, given the events early in the quarter and led our shares to climb more than 5% on Wednesday. With regard to Macau, activity in Asia’s tourist and leisure capital has also bounced back and MGM confirmed its second property in the region will open late this coming January.

Stepping back, the company shared more on how it responded to the October shooting explaining that, along with other casino operators, it shut down all marketing channels, bringing them back online on Oct. 10. Since then, the company has seen the historical patterns of October — typically the strongest month in the quarter and one of the stronger ones during the year — take hold.

As we move past this relief rally and digest the current guidance, the company’s prospects in the short term will be facing continued spending to revamp several of its properties, as well as open its next Macau property in January. This opening will keep the recent stream of new or updated properties flowing following the acquisition of the Borgata Hotel Casino and Spa in August 2016 and the MGM National Harbor opening in December 2016; we expect it to continue as MGM re-opens its Monte Carlo property as the Park MGM.

There will also be some impact of time shifts, with the Las Vegas convention season in the first quarter of 2018. The company has already booked 80% of its convention room nights for 2018, which is great given that roughly 60% of its business is corporate in nature. It has a robust entertainment calendar at all of its arenas (Mandalay Event Center, MGM Grand Garden or T-Mobile Park Theatre) that should bode well for its hotel, restaurant, and gaming operations.

What this means, at least over the next few months, is that we will have to be patient with MGM shares as spending is curtailed, allowing the company’s operating strategy to flow through to the bottom line. Helping soften the would-be blow, earlier this week the company’s board approved the next quarterly dividend of $0.11 per share that will be paid on Dec. 15. On the earnings call, management reiterated that they remain committed not only to the current dividend but to increase it over time.

Here’s what we’re going to do with MGM shares… Following last week’s 5% move higher in MGM shares, we have roughly 13% upside to our $37 price target, but as discussed above, we see some short-term headwinds that will likely keep the shares range bound. As we move into 2018, we’ll look to revisit our $37 price target provided the company’s investments in new and existing properties wanes, which should enhance the company’s earnings and cash generation.

  • Our price target on MGM Resorts (MGM) shares remains $37.

 

What’s expected from Applied Materials on Thursday?

On Thursday, after the market close, Applied Materials (AMAT) will be reporting its quarterly results. The results come on the heels comments made earlier in the current earnings season regarding growing chip demand due to the expanding roster of connected devices, artificial intelligence, gaming, data center expansion and China’s goal of building its own semiconductor capacity. We’ve also heard bullish display commentary from not only our own Universal Display (OLED), but also LG Display and Samsung as they increasingly focus on organic light-emitting diodes for smartphones, TVs and eventually other applications like automotive and general lighting.

Consensus expectations have Applied Materials achieving EPS of $0.91 on revenue of $3.94 billion for the quarter. We’ll also be reviewing the company’s backlog and book to bill metric for the quarter as we reassess our current $65 price target.

  • Heading into Applied Material’s (AMAT) earnings call on Thursday, our price target on the shares is $65.
  • Our price target on Universal Display (OLED) shares remains $200.

 

WEEKLY ISSUE: Some Underperformers Set to Come out from the Shadows

WEEKLY ISSUE: Some Underperformers Set to Come out from the Shadows

Monday was one of those sort-of holidays that saw banks, the post office and schools closed, but domestic stock markets and a number of other businesses open. The result was once again a more subdued start to the week that leads into what is poised to be a focal point for the stock market as 3Q 2017 earnings kickoff. Over the last several days, we saw through earnings from restaurant company Darden (DRI) and Cal-Maine Foods (CALM) and this week the negative 2017 reset from coatings company Axalta Coating Systems (AXTA). This tells me that not only has Wall Street underestimated the impact of September’s hurricane trifecta — a fact we saw in last Friday’s September Employment Report — but it has likely overestimated the current speed of the economy as well.

The next few days will give way to several economic reports that will more fully shine a light on the true speed of the economy, and they will help set the table for what is to come over the next few weeks as literally thousands of companies report. As subscribers, you know through our weekly Thematic Signals and our Cocktail Investing Podcast that I co-host with our Chief Macro Strategist Lenore Hawkins, we are constantly scrutinizing data points with our thematic lens and assessing the market.

Now let’s take a look at our overall market view, which is one of the key backdrops when it comes to investing – thematic or otherwise. As we shared on last week’s podcast, the domestic stock market continues to grind its way higher ahead of 3Q 2017 earnings. This march higher is being fueled in part by the return of investor greed as measured by CNNMoney’s Fear & Greed Index. The question we are increasingly pondering is what are those late to the party seeing that allows them to get comfortable with enough upside to now jump into a market that is trading at more than 19x expected 2017 earnings?

With the market priced to perfection and expectations running high, odds are we are bound to see some disappointment. The fact that margin debt is running at record levels is not lost on us here at Tematica, and it has the potential to exacerbate any near-term bump or pullback in the market.

This has us holding steady with the Tematica Select List, but it doesn’t mean we are being idle. Rather, we are scrutinizing contenders and revisiting price points at which we would scale into existing positions. Not quite our 2017 holiday shopping list, but one that as we approach Halloween could be ripe for harvesting.

 

 

Checking in on some of our outperformers

We’ve benefitted from this push higher as the Select List’s positions in LSI Industries (LYTS), Amplify Snacks (BETR), USA Technologies (USAT), Amazon (AMZN), Alphabet (GOOGL) and International Flavors & Fragrances (IFF) have outperformed the month to date move in the S&P 500. With USAT shares, this has them closing in on our $6.50 price target, while the others have ample upside to our respective price targets.

We continue to rate these stocks as follows:

  • Our price target on LSI Industries (LYTS) remains $10.00
  • Our price target on Amplify Snacks (BETR) remains $10.50
  • Our price target on Amazon (AMZN) remains $1,150
  • Our price target on Alphabet (GOOGL) remains $1,050

With USA Technologies (USAT) shares, we will continue to keep them on the Select List and as we reassess our Thematic Signals and other data points for additional upside to be had relative to our $6.50 price target.

The same is true with International Flavors & Fragrances (IFF), given the accelerating shift away from sugar toward food that is good for you vs. the modest upside to our current $150 price target.

 

It’s not all bad news for the underperformers however

While we like to focus on the outperformers, we tend to spend as much, if not more time, on the ones that are underperforming. Currently, that means shares of Costco Wholesale (COST), Nokia (NOK), MGM Resorts (MGM) and recently added United Parcel Service (UPS).

In reverse order, shares of Connected Society derivative company UPS shares came under pressure following comments that Amazon is once again flirting with expanding its own logistics business. While this may happen, it will take years to replicate the hub and spoke to home delivery service currently offered by UPS that is poised to benefit from the accelerating shift to digital commerce this holiday shopping season. We remain bullish on this position and expect the shares to rebound as we move into the 2017 holiday shopping season. We will look to scale into UPS shares closer to $110 should such a pullback in the shares emerges this earnings season.

Shares of Guilty Pleasure company MGM Resorts continue to languish following the recent Las Vegas shooting. In our view, it will take some time for the perception of the business to recover. As that time elapses, we’ll look to improve our cost basis following the better than expected August Nevada gaming data. Below $30 is where we are inclined to make our move, and our price target stands at $37.

We continue to see favorable data on 5G testing and deployments that bode very well for Nokia’s intellectual property business as well as its communications infrastructure business. Much like MGM shares we will be patient and look to opportunistically improve the cost basis on this Disruptive Technologies Select List position.

We have a more detailed look at Cash-Strapped Consumer company Costco down below, but as you’ll soon read we continue to favor the shares despite some concerning developments.

 

So, what’s up with Costco Wholesale?

As we mentioned above Costco is one of the recent underperformers and it comes following last week’s better than expected quarterly earnings results. The issue is that its the earnings call Costco shared that it is seeing a slowdown in membership rates, which Wall Street took to mean “Here comes Amazon!” While we agree that Amazon is set to continue disrupting traditional retail as it leverages Whole Foods into grocery and meal kits, and continues to focus on apparel, Costco’s issue is it opened 16 new warehouses during the first 9 months of its recently completed fiscal year, so odds are it would see some slowing in membership growth.

For those not convinced that Costco’s business is thriving we would point out the following:

  • September 2017: Net sales up 12%
  • August 2017: Net sales up 10.0% year over year with comparable stores sales up 7.3% (up 5.9% excluding gasoline prices and foreign exchange)
  • July 2017: Net sales up 8.8 percent year over year with comparable store sales up 6.2% (up 5.3% excluding gasoline prices and foreign exchange)
  • June 2017: Net sales up 7.0% year over year with comparable store sales up 6.0% (up 6.5% excluding gasoline prices and foreign exchange)

Looking at that data, we see Costco not only as a company that has continued to improve net sales month over month, but one that is hardly suffering the same fate as traditional brick & mortar retailers. Moreover, we would point out the company had 741 warehouses in operation during the August 2017 quarter, up from 715 a year ago. This led to a 13% increase in its high margin Membership Fee revenue, which accounted for nearly all of its net income during the quarter.

As we have said before, the power in Costco’s business model is the warehouses and membership fee income, and we see this continuing to be the case. As part of our Connected Society theme, we will continue to monitor consumer acceptance of delivered grocery. This includes Costco’s new two-day delivery services for both dry groceries and fresh foods that will be free for online orders exceeding $75 from 376 U.S. Costco stores. Unlike many brick & mortar retailers, Costco is not standing around and watching its competitors outflank it, rather it is responding. To us, this suggests the recent pullback is overdone.

  • We continue to have a Buy on Costco Wholesale (COST) shares, and our price target remains $190.

 

 

 

 

WEEKLY ISSUE: Thematic Tailwinds Blow Strong, Even as Market Fundamentals Bring Concern

WEEKLY ISSUE: Thematic Tailwinds Blow Strong, Even as Market Fundamentals Bring Concern

Even though our concerns over the underlying fundamentals of the market remain — especially amidst this most recent rebound — thematic tailwinds continue to propel several of our positions on the Tematica Select List, particularly those tailwinds for the Cash-Strapped Consumer and Connected Society investment themes.

 

The week started off in rebound mode for the stock market. The damage from Hurricane Irma, while severe with several million people still without power, was far less than the devastation many forecaster models had been predicting. That sigh of relief sent stocks climbing on Monday and put the major market indices back to new record highs. While many likely cheered that rebound — especially those investors that have only recently returned to the market — several underlying dynamics remain, which could make for potential trouble in the coming weeks.

Those concerns are the same items we recapped earlier this week as part of our thought process behind Goldman Sachs (GS) CEO Lloyd Blankfein sharing the current market environment has him “unnerved”. Unfortunately, these items did not fade with the passing of Irma, nor are they likely to and in the case of market’s stretched valuation, the rebound is only exacerbating things further. Furthermore, we have yet to see any markedly downward revisions into GDP forecasts for the current quarter, despite the tens of billions in hurricane damages and business interruptions. Hardly surprising, given the regional Federal Reserve banks adjust their forecasts to published economic data and the impact of the two storms has yet to turn up in the data. But it will in the coming weeks, just the way it did in the August auto & truck data, and will in the August Retail Sales data out later this week.

From the perspective of the Tematica Select List, we continue to see the August Retail Sales report putting some much-needed perspective around Costco Wholesale (COST) shares given the simply stellar monthly comparable sales figures the company has been delivering.

  • We continue to rate Costco Wholesale (COST) shares a Buy with a $190 price target.

 

When Market Concerns Arise, Relying on a Thematic Approach is Even More Crucial

Amid the noise in that retail sales data, we suspect our Connected Society theme and our Amazon (AMZN) shares will be share gainers from the recent Back to School shopping season. That’s also a positive for the position in United Parcel Service (UPS) that is on the Tematica Select List, and we see those shares being strong performers once again in the upcoming holiday shopping season that increasingly includes Halloween.

As crazy as it may seem, in 2016 American spent roughly $8.4 billion on Halloween. We’re already seeing rows and rows of Halloween candy line our grocery stores, even though soda manufacturers like Coca-Cola (KO) and PepsiCo (PEP), and now sports drinks companies, are looking to reduce sugar content in their offerings. We see the unsweetening of the beverage category continuing to benefit our position in International Flavors & Fragrances (IFF) as manufacturers look to replace that oh so yummy sugar taste with other appealing, yet healthier, solutions. Should the move to limit sugar spill over into candy and other confections, it would be another shot in the arm for IFF shares and potentially McCormick & Co. (MKC) as well. We’ll be talking more on this during this week’s Cocktail Investing Podcast.

 

  • We continue to rate shares of Amazon (AMZN) a Buy at current levels, and our price target remains $1,150.
  • United Parcel Service (UPS) shares, up more than 14% since being added to the Tematica Select List, are now less than a handful of dollars away from our $122 price target. As such, we rate UPS shares a Hold at current levels. As a reminder, that’s a true Hold, not Wall Street speak to exit the shares.
  • The same can be said with International Flavors & Fragrances (IFF) shares, which are up nearly 17% on a blended basis. Our price target on IFF shares remains $145, however, we are revisiting this target with an upward bias.
  • Our price target on McCormick & Co. (MKC) shares remains $110.

 

 

Looking Ahead to the End of the 3rd Quarter

When we exit this week, we will have two weeks left, not only in September, but in 3Q 2017 as well. It means in roughly a month’s time, we will once again be back in the quarterly earnings deluge. Given what I discussed above, I’ll be watching and listening as companies issue business updates over the next few weeks due in part to Harvey and Irma, and putting it into perspective for Tematica Select List positions. While the debt ceiling conversation has been kicked down the road until December, next week’s Federal Reserve monetary policy meeting, which is likely to leave interest rates unchanged, should clue us a bit more into the Fed’s balance sheet unwinding timetable.

Finally, while you start preparing your holiday shopping lists, I expect the political battles in Washington will once again flare up as the 2017 election season kicks into gear, just as Team Trump looks to make its case, hopefully with some concrete details, for tax reform. Giving a shot in the arm to potential political uncertainty, this morning North Korea showed trademark defiance over new U.N. sanctions imposed after its sixth and largest nuclear test.

The bottom line is we’ve seen volatility return to the market in September, and there are reasons to think we will see more of it before we enter 4Q 2017 in just a few weeks. While we continue to turn over new candidates for the Tematica Select List, we’ll continue to be patient until those potential positions have the right mix between potential upside vs. downside. Like always, our thematic lens will continue to be our North Star.

 

 

The Silver Lining in Apple’s Otherwise Lame Special Event

Some quick words on Apple’s (AAPL) special event yesterday – it was lame!

As we feared, not only did the company’s latest products show off iterative at best features, the presentation was less than enthusiastic, as was the reception by attendees at the new Steve Jobs Theater. Candidly when Apple began talking about its new retail footprint and then started the iPhone conversation with new colors, we had a feeling it was all about to go downhill. And we were right. What ensued was a noticeable groan be it for the lack of compelling new features or the fact that Apple’s “one more thing” – the iPhone X – and its $1,000 price point won’t begin shipping until early November, far later than anyone had expected.

While we missed the move in Apple shares in recent months, we see yesterday’s underwhelming event serving as a reminder that at least for now, Apple’s business remains reliant on the slower growing smartphone market. Odds are Apple will continue to gain incremental share and generate significant cash, but the opportunity for real growth from here hinges on either a new business category or a new must-have product from an existing one. As we shared earlier this week, neither of those appears to be on the near-term horizon. Given several thematic tailwinds that power its various businesses, we’ll continue to look for an opportune entry point, but for now, it looks like the shares will fall victim to “buy the rumor, sell the news.”

 

Now for the better news…

Just because growth is lacking at Apple, there were several announcements yesterday that bode rather well when it comes to growth for Universal Display (OLED) and AXT Inc. (AXTI). Regarding Universal Display, Apple did announce it is adopting organic light emitting diode displays in the iPhone X with its Super Retina Display, however, again, that product is not set to ship until early November. This likely means a modest push out in expectations. We see that, however, as a modest bump in the road for the capacity constrained organic light emitting diode industry that is hog tied due to demand from not only Apple but other smartphone vendors as well as other applications (TVs, wearables, interior automotive lighting). If Apple follows its historical pattern, and we think it will, we expect the Super Retina Display to make its way down the lineup into other iPhone models as well as those for iPads as supply eases and newer iterations are introduced.

While Apple’s didn’t specifically point to a display capacity shortage as the culprit behind the later than expected ship time for the iPhone X, its timetable when paired with recent comments from Applied Materials (AMAT) certainly suggest the industry remains constrained relative to demand. Moreover, with applications such as TVs calling for larger display sizes vs. those for smartphones and wearables, the industry is likely to be constrained for some time, especially as more TV vendors look to bring more models featuring that technology to market over the coming quarters. We see that as a good problem for Applied Materials and its display equipment business. The next update from Applied will be at its 2017 Analyst Day on September 27, and we expect an upbeat tone not only for its display business but from its semiconductor capital equipment one as well.

  • Currently, Universal Display (OLED) shares are up a whopping 149% since we initiated the position in October, and in many respects, the outlook continues to brighten.
  • As we move into 4Q 2017 and with increasing clarity on the growing number of applications we will be revisiting our $135 price target, odds are with an upward bias.
  • We continue to be bullish on Applied Materials (AMAT) shares and our price target remains  $55.

 

Turning to AXT Inc (AXTI), Apple did announce it was bringing standalone wireless connectivity to its latest Apple Watch. In order for that to happen, Apple has to pack the device with cellular technology, which means RF semiconductors that are based on AXT’s compound substrates. This is one more step in the expanding array of connected devices under the Internet of Things umbrella. From our perspective, the untethering of Apple Watch from the iPhone makes this newest model the one consumers are most likely to desire. While it’s still not enough to move the needle for Apple, it does move it for AXT.

  • We will use this incremental demand to bump our price target on AXT (AXTI) shares to $11 from $10.50. The added upside keeps our Buy rating on the shares in place.

 

On a disappointing note . . .

There was no update on Apple Pay in yesterday’s event, other than how with its new iPhone X it is utilizing its new Face ID technology as part of the payment process with Apple Pay. We were hoping for a more meaningful update given our position in USA Technologies (USAT), but we’ll happily settle for the news coming out of CVS Health (CVS) that it is utilizing new vending machines at “select landmark locations to outside of its store footprint. These machines will be stocked with things like over-the-counter medications, beauty and personal care products, eye care and oral health care products, first aid items, batteries, phone chargers, earbuds, and healthy snacks and beverages. We see this as yet another expansion in the unattended retail market that hinges on cashless consumption that is enabled by USA’s products and services.

  • Our price target on shares of USA Technologies (USAT) remains $6.

 

Here’s what we’ll be watching for at today’s Apple special event

Here’s what we’ll be watching for at today’s Apple special event

Several of the Disruptive Technologies investment theme companies currently on the Tematica Select List will play a key role in the Apple Special Event scheduled for Tuesday, September 12th. In all likelihood the companies themselves will never be mentioned during the event, but with expectations once again running high ahead the next generation iPhone, here’s what we’ll be watching for as it pertains to the Tematica Select List.

 

Early this afternoon, Connected Society and smartphone reliant Apple (AAPL) will hold its next special event that is widely expected to unveil a bevy of new products, including its latest iPhone models. Much has been made over the last few days of “leaked information” over these new models as well as new iterations for Apple TV and Apple Watch, but as exciting as those other new products may be because the iPhone is the majority of Apple’s revenue and profits odds are investors will focus their attention on those new models.

While we don’t own Apple shares, and we touched on at least one of those reasons yesterday, there are several companies on the Tematica Select List that will be affected by today’s special event – Universal Display (OLED), Applied Materials (AMAT), and AXT Inc. (AXTI) as well as USA Technologies (USAT) and Nuance Communications (NUAN).

 

Universal Display (OLED) 

As subscribers should be aware, Universal Display is a Disruptive Technology investment theme company that supplies needed chemicals and intellectual property utilized in the manufacturing of organic liquid crystal displays (OLEDs). Over the last few months, there has been much talk of ramping demand in an industry that is capacity constrained as Apple begins to adopt the technology in the iPhone while other applications (other smartphone vendors, TVs, wearables and automotive interior lighting) continue to replace existing lighting and displays with OLEDs. There are now indications that Apple is likely to introduce OLEDs in its new premium iPhone, purportedly the iPhone X.

The issue, however, is that it is being reported that the manufacturing of iPhone X device is currently capped at around 10,000 units per day and may not begin shipping until next month. This could be due OLEDs supply constraints, but if this speculation over the iPhone X turns out to be true, we could see a pullback in our OLED shares, especially following the more than 18% move in the last month alone that has the shares bumping up against our $135 price target. We continue to think that as the adoption of OLEDs continues to ramp up, we will see a step-function higher in our price target for Universal Display shares, but in the near-term, our concern is that rapid climb in the share price could hit a “buy the rumor, sell the news” wall following Apple’s event. If such an outcome occurs, our view is subscribers should continue to hold OLED shares for the long-term. If the shares retreated to the $110-$115 level, which would be a sharp pullback, we would view that as another bite at the apple for subscribers that have so far held off buying OLED shares.

  • Our price target on Universal Display (OLED) shares remains $135
  • For now, subscribers that have missed out on OLED shares should look to scoop them up between $110-$115.

 

Applied Materials (OLED) 

If the supposition that Apple’s iPhone X production is capped because of capacity constraints for OLEDs, we see that being a resounding positive for shares of Disruptive Technology company Applied Materials (AMAT). As a reminder, Applied not only manufactures semiconductor capital equipment (the machines that make chips) it does the same for displays, including OLEDs. Applied has been rather frank about the robust demand for OLEDs, and it remains one of the reasons we are bullish on AMAT shares. Others include rising memory demand as well as ramping in-country semiconductor capacity in China.

  • Our price target on Applied Materials (AMAT) shares remains $55.

 

AXT Inc. (AXTI)

We would be surprised to hear Apple talk about 5G wireless technology, which would require several additional layers of RF semiconductors, largely because most wireless carriers like AT&T (T), Verizon (VZ) and T-Mobile USA (TMUS) are still testing the technology. If, however, the Apple Watch is updated to include LTE wireless technology, that would be a source of new demand for RF semiconductors, like those from Skyworks Solutions (SWKS) and Qorvo (QRVO). In turn, that means those companies, as well as other RF semiconductor suppliers of Apple’s, would require additional compound semiconductor substrates from AXT Inc. (AXTI). While we still see the eventual deployment of 5G networks that will drive incremental RF semiconductor demand as the key driver longer-term for AXT’s business, incremental demand from devices like Apple Watch is certainly welcome.

  • Our price target on AXT Inc. (AXTI) shares remains $10.50

 

USA Technologies (USAT) & Nuance Comm. (NUAN)

Finally, during today’s presentations, we’ll also be watching and listening for incremental news on USA Technologies (USAT), an Apple Pay partner, as well as Nuance Communications (NUAN). In iOS 11, Apple will continue to expand the services offered through Apple Pay, and we expect to hear at least some usage statistics from Apple CEO Tim Cook today. With Nuance, voice continues to become the new interface of choice across new applications from smart speakers to chat-bots, like those being rolled out by Google (GOOGL), Facebook (FB) and yes, Apple, and that keeps us bullish on NUAN shares.

  • Our price target on USA Technologies (USAT) shares remains $6
  • Our price target on Nuance Communications (NUAN) remains $21.