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WEEKLY ISSUE: iPhone Sales Chatter and Select List Earnings Announcements

WEEKLY ISSUE: iPhone Sales Chatter and Select List Earnings Announcements

It has been a busy week on a number of fronts. Over the last several days along with my fellow Tematica teammates I’ve been attending Inside ETFs 2018, the leading ETF industry conference in Hollywood, FL.  We’ve met with a wide variety of ETF issuers, some of which embracing new investing strategies, while others are focusing on new and different geographic strategies. On the Tematica Investing Select List I’ve sporadically used ETFs to capture broad-based thematic exposure when it’s made sense. One such example is the ETFMG Prime Cyber Security ETF (HACK) that is benefitting from our Safety & Security investing theme. HACK shares are up some 16% since we added them to the Select List several weeks shy of a year ago. As these new ETF products become available in the coming months, I’ll be kicking the tires on those that fit our thematic investing framework.

While the government has re-opened with funding set to carry it through Feb. 8, the stock market greeted the 3-day shutdown with little more than a yawn, as evidenced by the continued melt up over the last week. As expected, that move higher reflects a growing number of companies reporting better than expected December quarter earnings and boosting 2018 forecasts as they incorporate tax reform into their outlooks. I expect we will be seeing more of the same over the next few weeks as December quarter reporting runs its course.

Riding the Accelerating Shift Towards Digital Commerce.

There are likely to be a number of tax reform beneficiaries on the Tematica Investing Select List, with one of them being United Parcel Service (UPS). Over the last few weeks, UPS shares have had a strong showing and are now up nearly 30% since we added them to the Select List last February. I continue to see UPS benefitting from the accelerating shift toward digital commerce that is part of our Connected Society investing theme, and with roughly two-thirds of their operating profit derived from the U.S. I expect the company to deliver upside to 2018 EPS expectations vs. the current consensus EPS of $7.17 when it reports on Feb. 1. We will look to get ahead of the herd on this and boost our price target to $140 from $130, which offers additional upside, but not enough to warrant committing fresh capital at current levels.

  • We are boosting our price target on United Parcel Service (UPS) shares to $140 from $130.

 

Select List Companies On Tap to Report Earnings This Week

From a Select List perspective, we have just two companies reporting this week – LSI Industries (LYTS) and Starbucks (SBUX). Earlier this week I shared my view that LSI’s results and outlook could be hampered by winter storms and freezing temperatures that hit in December and earlier this month. Given the prospects of President Trump’s rebuilding US infrastructure framework, we’ll look to add to LYTS on a meaningful pullback.  With regard to Starbucks, some of the key factors that I’ll be watching include beverage-food attach rates, the pace of new store openings in the U.S. and China as well as new menu initiatives for both food and beverage.

  • Our price targets on LSI Industries (LYTS) and Starbucks (SBUX) shares are $10 and $74, respectively.

 

Chatter Around iPhone X Shipments

The bulk of our earnings reports will be had next week, but we are once again hearing much chatter on the iPhone demand, particularly for the latest iPhone X from Apple (AAPL). The latest comes from JPMorgan, which on the back of reports out of Taiwan, is calling for a sharp decline in iPhone X shipments. Interestingly, we are already hearing chatter about three new iPhone models, two of which will have cheaper prices than the $1,000 iPhone X model and two that will have organic light emitting diode displays. We continue to see that as a positive for Universal Display (OLED) shares in 2018 as other opportunities (TVs, other connected devices, interior automotive lighting and eventually general lighting) come to market. Universal Display shares have been a bit wobbly over the last few days, most likely due to some profit taking ahead of earnings, but all data being received points to more upside ahead for OLED shares.

As I have shared many times, that ramp in OLED production is also positive for our Applied Materials (AMAT) shares over the coming quarters as well. With regard to Applied, while it won’t report its quarterly results for several weeks, competitor Lam Research (LRCX) will report after tonight’s close. Over the last week, AMAT shares have been on a tear following upbeat semiconductor bookings and backlog reports, and odds are Lam’s results will add another log to the fire. Another one will be had from Intel’s quarterly report after Thursday’s market close. Its comments on chip demand from PCs, data centers and other applications as well as its capital spending plans for 2018 will be the noteworthy items to watch.

  • Our price target on Universal Display (OLED) shares is $225
  • Our price target on Applied Materials (AMAT) shares is $65.

Getting back to Apple, I continue to like the company’s improving position in our Connected Society investing theme as it is about to expand its presence with virtual assistant and smart speaker HomePod. I also like that Apple’s efforts to bring proprietary content to its devices appears to be picking up steam. On the Netflix (NFLX) earnings call earlier this week, it shared that “Apple is growing its programming, which we presume will either be bundled with Apple Music or with iOS” and reminded investors that Apple’s content budget for original programming is $1 billion. I’d point out that Apple has over 1 billion iOS users across the globe.

I see that making Apple’s already sticky devices even more so. Apple shares in my view are very much like Amazon (AMZN) shares – they are to be owned and not traded, and we’ll use weakness to improve our long-term cost basis on this company that is riding multiple thematic tailwinds.

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

In Conclusion . . .

Later this week, I’ll be sharing my thoughts on Amazon’s Amazon Go store that opened earlier this week, which has the potential for Amazon to once again disrupt the traditional retail space by automating the checkout process. If you missed this Thematic Signal that cuts across our Connected Society and Disruptive Technologies investing themes, The New York Times has a pretty good overview and you can find it here. Again, as the Inside ETF conference wraps up, I’ll have more detailed thoughts on this and what it means for not only Amazon, but others as I look at it through our “buy the bullets, not the guns” strategy.

 

Winter weather slows construction, but rebuilding is the longer-term story

Winter weather slows construction, but rebuilding is the longer-term story

Last week shares in Tematica Select List company LSI Industries (LYTS) fell roughly 1% compared to the upward moves in the overall market. I attribute that move lower to the weaker than expected December Housing Starts report. I can understand the sympathy on the fall off as many scrutinize the shortcoming in this latest construction report, but we’d remind subscribers that LSI’s business is heavily, heavily skewed toward non-residential construction. By comparison, the Housing Starts reports discusses just that – housing, for both single-family and multi-family structures.

Given the differences in the types of construction we aren’t likely to see much correlation between the non-residential and residential construction data. That being said, we know that good weather offers a more favorable construction environment, while bad weather can hamper construction activity be it residential or non-residential.

With that in mind, peering into the December Housing Starts reports shows a sharp fall in residential construction activity in the Northeast and South, both of which were hit with and are being hit with severe winter weather. A corroborating indicator of this was found in yesterdays’ December Industrial Production report that showed a sharp pick up in utility activity as consumers looked to stay warm. Given the weather thus far in January that has featured winter storms and near record or new record lows in much of the country, odds are weather will continue to impact construction activity in the current quarter.

Now let’s circle back to our LYTS shares.

In a few days, we’ll get the December Architectural Billing Index, and odds are it’s going to see some weather impact as well. Soon after, on Jan. 25, LSI will report its December quarter results and we would be shocked if there was no impact on its December quarter or if it didn’t factor into its outlook for the current quarter. Currently, LYTS shares are hovering close to our $6.73 entry point on the Select List, and we’d look to scale into the position below $6.25 should that come to pass late next week.

We continue to see LSI’s business benefitting from post-hurricane rebuilding efforts as well as incremental spending to be had as part of President’s Trumps initiative to rebuild US infrastructure. With Washington trying to once again sort out a measure to prevent the government from shutting down, we suspect those infrastructure details to emerge in the next week to 10 days, ahead of the next State of the Union Address on Jan. 30. If the announcement comes ahead of LSI’s earnings report, we would expect the company to discuss how its business will benefit, putting the concern over the January weather in the rear view mirror.

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

 

 

Apple: Don’t listen to the short-term chatter

Apple: Don’t listen to the short-term chatter

 

Over the last few days there has been a slew of headlines for Tematica Investing Select List holding Apple (AAPL), one of the core companies behind our Connected Society investing theme. There has been an upgrade of the shares as well as a downgrade, respectively, by investment firms Maxim and Longbow Research. That’s not the only push/pull that we’ve seen in the share price. The other has been favorable data vs. the historical seasonal downtick in smartphone volumes as we move from the December quarter into the March one.

The favorable data came in the form of the latest CIRP numbers, which indicate Apple increased its U.S. iPhone activations ten points in the final quarter of 2017, from a 29% share in the September quarter to 39% by December. More significantly, new phone activations were up five points year over year, from 34% in Q4 2016 to 39% in the same quarter last year.

Part of the downgrade at Longbow, which lowered its rating to Neutral from Buy, likely stems from the seasonal slowdown in smartphone sales we are once again hearing about from component suppliers. Given the magnitude of the iPhone on Apple’s overall business, it’s not surprising that this is once again coming into focus. Apple has previously warned that investors should avoid reading too much into supply chain speculation because of its size and complexity. With Apple having launched three new flagship products in 2017, including the higher-priced and higher-margin iPhone X, we’re not going to overthink this but we will be paying attention.

Apple is set to report its December quarter earnings on Feb. 1, which will give us all the key metrics for the quarter. Odds are Apple will offer some vague guidance on smartphone volumes, and the earnings conference call will likely be littered with folks trying to get Apple CEO Tim Cook and others to spill something. But Apple has been doing this a long time, and they are well rehearsed in not answering questions they don’t want to.

This means zeroing in on what is said by key suppliers in the Apple ecosystems both ahead of Apple’s reporting date and after. The day before Apple’s earnings, Qualcomm (QCOM) will issues it results. Soon after, we’ll hear from RF chip company Skyworks Solutions (SWKS) and chip company Cirrus Logic (CRUS), which focuses on audio and voice signal applications and reports on Feb. 5. Another company I’ll be listening to is Broadcom (AVGO), which supplies a variety of connectivity chips including Bluetooth and WiFi to the smartphone markets as well as others.

As we look to put these iPhone outlook puzzle pieces together, there are other moves afoot at Apple. Yesterday, as part of its tax repatriation moves, the company announced that over the next five years it expects to contribute $350 billion to the US economy, create 20,000 jobs in the process, and bump up its Advanced Manufacturing Fund to $5 billion from $1 billion. The stock market greeted that news with open arms as Apple shares moved higher. The real move to be had, however, will be when Apple shares its view on how tax reform will impact its 2018 EPS. Current estimates call for the company to earn $11.46 per share this fiscal year, up from $9.21 last year. We’re also be listening to see if Apple ups its quarterly dividend of $0.63 per share or authorizes another share repurchase program.

Understandably, that news took over the headlines, but there was other news to be had. According to a new report from Variety, following the pull out by HBO, Apple will take over the lease at a new Culver City, California 128,000-square-foot development. This adds to Apple’s Los Angeles area footprint in a meaningful way, seeing that Culver City is also the location where Beats is headquartered. The widespread belief is this will be the space where Apple houses its original content efforts. After sitting on the sidelines for a number of years, Apple is slowly dipping its toe into the content creation waters, moving past that silly Carpool Karaoke show with pending programs with Reese Witherspoon and Jennifer Aniston, Nichelle Tramble Spellman’s “Are You Sleeping,” and a 10-episode comedy sketch show starring Kristen Wiig.

Despite its reputation, Apple tends not to be a first mover, but rather one that makes its move at the tipping point of a technology or consumer behavior. We’ve seen this time and time again with new technologies and the iPhone, and we suspect we are seeing this with its push into original content. Given Apple’s array of connected devices and changing demands from viewers that increasingly opt to stream the content they want, when they want it, on the device they want it on without having to buy it, the direction makes perfect sense. From our perspective, here at Tematica, it was only a matter of time for Apple to make this move as it looks to follow the example set by Netflix – leverage original content to lure subscribers — to make its devices even stickier with consumers. Hopefully, Apple will have a stronger starting lineup than Amazon (AMZN) has with its original Prime Video offering.

Finally, it appears that we will soon see Apple’s virtual assistant in a smart speaker, better known as HomePod, hitting shelves. Reportedly, Apple supplier Inventec has started shipping the device, and expectations are that between Inventec and Hon-Hai Precison Industry, the other HomePod supplier, Apple will ship 10-12 million units in 2018. Much like other new non-iPhone products, including the Apple Watch, the HomePod probably won’t have a significant impact on Apple’s revenue and earnings during its first year, but it does help shore up Apple’s efforts in the Connected Home alongside Apple TV at a time when Amazon and Alphabet/Google are making inroads.

And here’s a wild thought, given all the digital assets at Apple’s disposal and its growing presence in the payments industry, how long until we hear rumors of an “AppleCoin”?

The bottom line on Apple is we continue to see the company as a core holding of our Connected Society and Cashless Consumption investing themes, and the added tailwind of our Content is King investing theme could improve its position in our increasingly digital lifestyle.

  • Our price target on Apple shares remains $200, and we are inclined to be buyers on weakness following the company’s December quarter earnings report on Feb. 1

 

Kicking the tires on Rite Aid shares

Kicking the tires on Rite Aid shares

There are several facets to our Aging of the Population investment theme, ranging from the obvious — assisted living, pharmaceuticals, financial services and vitamins and supplements — to the not so obvious such as online shopping, disruptive technology and artificial intelligence which can help maintain independence as the physical realities of an aging body take hold.

We as a people are also living longer, and statistics tabulated by Milliman show an encouraging pattern of increased life expectancy which will trigger increased consumption patterns in the population for medical services and pharmaceuticals. This should be a positive tailwind to pharmacy companies, such as CVS Health (CVS), Walgreen Boots (WBA) and Rite Aid (RAD) that are also pivoting their businesses toward health and wellness offerings. This tailwind also bodes well for the pharmacy businesses at Tematica Select List holding Costco Wholesale (COST) and other companies, like Kroger (KR) and other grocery chains, that have pharmacies.

Looking back over 2017, it was a painful year for Rite Aid, as its shares fell around 75%. Part of that reflects regulators blocking the acquisition of Rite Aid by Walgreens Boots Alliance for some $9.4 billion. After attempts to structure a deal that would placate regulators, this past September the two companies announced that Rite Aid would instead sell off more than 1,900 stores and three distribution centers to Walgreens for $4.375 billion in cash. Rite Aid is in the process of transferring those stores and facilities over to Walgreens, a process that’s expected to span through most of 2018. In exchange, Rite Aid will be receiving an influx of cash, which it has earmarked to primarily reduce the outstanding debt on its balance sheet. That debt reduction should drive a favorable decline in interest expense, enabling the company to drop more to its bottom line in the coming quarters.

Current Wall Street expectations call for Rite Aid to post losses of $0.06 per share in 2018 and $0.03 per share in 2019. Those consensus figures are tallied from six active analysts following Rite Aid and their consensus price target is $2.07, with a consensus view of “Hold.”

As I mentioned above, we here at Tematica see the aging of the U.S. population unfolding as more baby boomers pass 70 years of age, making it a multi-year tailwind to the pharmacy business, particularly as people are living longer. That’s not to say it will be easy peasy for Rite Aid considering the pharmacy businesses at CVS Health, Walgreens, Walmart (WMT), Kroger (KR), Costco Wholesale and others. Note, we haven’t even mentioned the rumblings of bricks and mortar crusher Amazon’s (AMZN) potential entry into the category.

I’m not going to sugar coat it, folks. What all of this tells me is Rite Aid is a turnaround story, and expectations are low, which also makes it a “show-me story.”

The hope/opportunity is that the Rite Aid management team is able to transform the company quicker than expected by leveraging the 20.7 million customers in its loyalty program, improving its offerings and shrinking its operating costs as it looks to offset reimbursement pressure. Management has already identified some $96 million in administrative cost savings, and I suspect there could be more savings to be had in the coming quarters as Rite Aid continues to right size itself.

I also see the company’s predominantly domestic footprint making it a solid beneficiary in terms of tax reform. As I shared in yesterday’s weekly issue of Tematica Investing, tax reform related EPS benefits are arguably all over the map, but Rite Aid should see some lift to its 2018 EPS forecast – the question is how much? More than likely this combination will lead to better-than-expected EPS performance over the coming quarters, and with the current low expectations that would likely move RAD shares, especially if its analyst following became either more bullish or less bearish on the company.

The question is one of magnitude in terms of tax reform benefits vs. expectations, and for that reason, I’m inclined to hold off on adding RAD shares to the Select List until we have some clarity on this key issue, especially since Rite Aid has been received income tax benefits in recent quarters. With the company’s next earnings report likely to occur in early April, we can look at results from CVS Health and Walgreens to get a handle on the potential tax reform impact to be had at Rite Aid. CVS shared that as a result of tax reform it sees its effective tax rate to run near 27% this year, which should increase its cash flow by roughly $1.2 billion, but Walgreen’s recent guidance did not factor in any impact from tax legislation.

Not very helpful, and rather than jump the gun on this, I’ll continue to assess the potential benefit on Rite Aid’s business and what it could mean for its shares. Until that clarity arrives, I’m adding Rite Aid shares to the Tematica Contender List as part of our Aging of the Population investment theme.

WEEKLY ISSUE: As the market moves higher, getting ready for Select List earnings

WEEKLY ISSUE: As the market moves higher, getting ready for Select List earnings

Over the last week, we’ve seen the domestic stock market set to break through to new highs, and that, as well as favorable thematic fundamentals, has had a very positive impact to the Tematica Investing Select List. Positions in a number of holdings have risen in excess of the market’s “year to date” move of 3.8% as of last night’s market close. Such notable performers include Universal Display (OLED), Corning (GLW), MGM Resorts (MGM), United Parcel Service (UPS), Starbucks (SBUX) and of course Amazon (AMZN) and Apple (AAPL). Several of those were beneficiaries of the favorable Connected Society and Disruptive Technologies data points came about during last weeks CES 2018 technology conference and the December Retail Sales report.

By comparison, yesterday I shared my view on Barnes & Noble (BKS) shares, which serves as a reminder of the challenges to be had by a company and a management team that are grappling with a thematic headwind. As we have seen time and time again, a thematic tailwind is not to be underestimated and requires the right change in strategy to overcome. It’s not easy and can be painful for investors that get sucked into the “it’s cheap trap.”  Year to date, BKS shares are down nearly 21% and we’re just 12 trading days into 2018. It could be a very painful year for Barnes & Noble, just like 2017 was for Blue Apron (APRN) and that stock has only gotten “cheaper.”

 

 

Prepping for 4Q 2017 Earnings

As we move deeper into 4Q 2017 earnings season, we are seeing the Wall Street herd once again come around and upgrade companies that we’ve been bullish on and reside on the Tematica Investing Select List. Two cases in point are MGM Resorts (MGM) and International Flavors & Fragrances (IFF) shares – the former saw its price target raised to $44 from $41 at JPMorgan, while the latter was upgraded to Outperform from In-line at Evercore ISI. Alphabet/Google (GOOGL) shares saw their price target bumped to $1,300 from $1,150 at Piper Jaffray this week as well.

Digging into these price actions, we find the majority of them reflect the expected benefit of tax reform on corporate bottom lines, which at this point are essentially educated guesses by Wall Street. Directionally, they are right of course, but the lingering question is to what degree will the benefit of tax reform drop to corporate bottom lines as well as what form. Bernstein estimates tax reform should boost Bank of America’s (BAC) bottom line by roughly 16% in 2018, and FedEx (FDX) suggested it could see more than $4.50 in incremental EPS due just to tax reform, which equates to more than a 30% jump year over year.

Those are just two estimates but they reveal how wide and varied those tax reform expectations are. There is also the potential for companies to utilize the incremental cash flow for purposes other than growing and investing in their business, namely dividend hikes and authorizing new share repurchase programs. Given the disparity between available worker skill sets and skills required by employers that is part of our Tooling & Re-tooling investment theme, the odds of such actions are too high to be ignored in my opinion. While these actions would also help boost shares, the lingering concern is how the market will receive the “news” as it continues to move higher?

We’ll have a better sense over the coming few weeks as we and the market digest the growing number of earnings reports to be had, which should hopefully offer some clarity on the benefits to be had from tax reform. I’m still collecting 4Q 2017 earnings reporting data from companies on the Select List, but even though some of these dates are tentative this is how the next few weeks are shaping up:

  • January 25 – LSI Industries (LYTS), McCormick & Co. (MKC), Starbucks (SBUX)
  • January 31 – Facebook (FB)
  • February 1 – Amazon (AMZN), Apple (AAPL), Nokia (NOK), United Parcel Service (UPS)
  • February 14 – International Flavors & Fragrances (IFF)
  • February 15 – Applied Materials (AMAT), MGM Resorts (MGM)
  • February 21 – AXT Inc. (AXTI)
  • February 22 – Universal Display (OLED)

 

Again, some of these dates are tentative, and as they firm up I’ll be updating this calendar as well as adding those like Alphabet/Google and USA Technologies (USAT) that are currently absent. As we approach these dates, I’ll be sharing consensus expectations as well as levels at which we’d be inclined to scale into each position should the opportunity present itself. No doubt, some of these reports, like those from Apple and Amazon, could offer such opportunities for patient and longer-term focused investors like ourselves. It’s not that I expect them to have bad reports, it’s just that with those companies the hype machine can lead to lofty expectations. My thought is better to expect the worst and be prepared, and be surprised with a better than expected report.

In between these dates, there will be no shortage of companies reporting and those results should not only give us a sense of tax reform benefits to be had, but also update us on the current state of various markets. For example, after today’s market close Alcoa (AA) will report and its commentary as well as outlook for the various markets that it serves, which ranges from automotive to aerospace and industrial applications for aluminum and other cast metals, is a well-accepted barometer of economic activity.

Be sure to check TematicaResearch.com later today for the next Cocktail Investing podcast, and then again tomorrow when I share my view on Rite-Aid (RAD), a company in transition that is angling to ride our Aging of the Population tailwind.

Barnes & Noble: Certain stocks  are cheap for a reason

Barnes & Noble: Certain stocks  are cheap for a reason

Over the last few weeks, we’ve been kicking the tires on several new positions for the Tematica Research Select List and recently added both United Rental (URI) and Vulcan Materials (VMC) to the Contender List. While it’s always exciting to add new positions, we have to remember that even with a stock market that is melting up like the one we are currently seeing, we still need to understand the business dynamics at play for the company behind the shares. Are we seeing thematic tailwinds or headwinds, and are there any catalysts to be had that will alter the winds that are blowing or intensify the force of those winds?

A great example can be found in book and gift retailer Barnes & Noble (BKS), which is attempting to pivot its business model headwind with a new line of stores that have an expanded café as it faces the realities of today’s online world, what we call our Connected Society investment theme. The gist of these new stores is the café will draw people in, but the crux of the issue is will it get people to shop for something more than a cup of coffee or a convenient snack?

Whenever possible, I find a boots on the ground approach, roll up your sleeves and check it out approach is called for. And that’s exactly what I did.

The new Barnes & Noble stores are an interesting concept and I’ve visited one of the few locations that is open in the Washington, DC metro area. It’s a wide-open space, the food is good and the menu includes a variety of soft and adult beverages. For mobile workers looking for a place to hole up, this will give Starbucks (SBUX), Panera Bread (PNRA) and others like them a run for their money.

Back to the question from above —  is sitting in the café likely to alter the changing behavior that is buying books and other things online?

I can say that I, and a score of others, were showrooming the newer books and truth be told I even hunted around for a few copies of the book I co-wrote with Tematica’s Chief Macro Strategist Lenore Hawkins – Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals. For those looking for a copy, I’d recommend buying it online as you’ll get a far better price. No surprise, as that is one of the reasons consumers are flocking to digital commerce — the ability to easily price compare and stretch those disposable spending dollars.

Back to my Barnes & Noble visit . . . did the vast majority of people buy books, that is plunk down cash, card or even smartphone and buy a book or two, a calendar, or some other gift idea?

During the several times I have been there, both during the 2017 holiday shopping season and after, the overwhelming answer was “no.”

And then there was the other shoe to drop.

Barnes & Noble recently shared its holiday sales for the nine-week holiday period ending December 30, 2017, and it was not good. Not good at all. In fact, it was just painful and rather revealing. Year over year for the period, total sales were $953 million, declining 6.4%, and comparable store sales also declined 6.4% for the holiday period. Now, this next piece of data is particularly revealing – during the holiday period, Barnes & Noble’s online sales declined 4.5% year over year.

We all know that brick & mortar retail is having a challenging time as it squares off against Select List holding Amazon (AMZN) ups the ante, and Walmart (WMT) is pulling out the stops – acquisitions, repositioning Sam’s Clubs into distribution centers, and new digital offerings – to compete. But Barnes & Noble is seeing its online business contract at a time when consumers are increasingly shifting their buying preference to this modality. We saw this in spades this holiday shopping season and in the December Retail Sales report released on Friday that showed Non-store retail sales rose 12.7% year over year and 11.0% for the last three months of the year vs. the same period in 2016. For context during those two periods, retail sales rose 5.6% and 5.9% year over year, respectively.

From my eyes, it sure seems Barnes & Noble is fighting the same headwinds it has been over the last few years, and at least thus far, it’s strategies to right itself have not been paying off.

Now let’s add some perspective, for the company’s last three quarters it generated bottom line losses and for what should be its seasonally strongest quarter it’s business contracted, both in-store and online. Making matters even worse, the last two reported quarters missed expectations by a decent margin. Put it all together, and it says the company’s business continues to, put it politely, be challenged and there is not a lot of confidence to be had right now in the management team.

This is a reason to pass on BKS shares. Plain and simple. No matter how tempting they might look.

Some investors may be tempted by the current dividend yield that clocks in at more than 11%. That’s a heady dividend yield and one that is bound to catch eyes, but again let’s remember that recent string of bottom line losses and the fact the company’s current quarterly dividend runs just shy of $11 million per quarter vs. the $11.3 million in cash it had on its books exiting October. The issue may not be with the current dividend, but if the headwinds plaguing the company continue, odds are people will begin to question the company’s ability to maintain the current quarterly dividend of $0.15 per share without dipping into other borrowings on its balance sheet.

I’d rather stick with our Amazon shares and the Costco Wholesale (COST) shares on the Select List, especially as Costco continues to deliver robust same-store sales growth figures each month.

  • Our price target on Amazon (AMZN) shares remains $1,400
  • Our price target on Costco Wholesale (COST) shares remains $200
Jana’s issue is parental responsibility, not Apple’s

Jana’s issue is parental responsibility, not Apple’s

Over the last few days, our Apple (AAPL) shares have risen but underperformed the larger movement in the technology-laden Nasdaq Composite Index. Some of this could be attributed to the lack of Apple’s presence at CES 2018, an event that is teeming with virtual assistant wins for Amazon’s (AMZN) Alexa be it in cars, PCs, and household as well as bathroom appliances. Also throwing some cold water on Apple shares this week has been a resurgence in concern over the addictive nature of smartphones. That follows statements from activist investor Jana Partners and pension fund California State Teachers’ Retirement System urged Apple to develop new software tools to help parents limit phone usage as well as study the mental health impacts of spending excessive time on mobile devices.

Concerns over the addictive nature of technology are nothing new. We’ve heard similar arguments with video games, and yet we are now seeing the rise of professional e-sports teams complete with corporate advertising, arenas, and sponsorships. Halfway through 4Q 2017, the media picked up on comments over the addictive nature of Facebook (FB) made by former president Sean Parker.

As we think back on this, it echoes comments from decades ago that “TV will rot your brain, kid” and yet in recent years we have seen a shift in how and where we consume video content.

Perhaps smartphones and social media may be addictive, but we also have to recognize they are the Swiss army knives for how we consume information and other content, shop and transact, and communicate. The short of it is, these devices touch many facets of our daily lives, and if what we are hearing at CES 2018 it looks like they will be touching more of it.

Getting back to Apple, the company has had parental control settings in its iPhone and iPads dating back to 2008. These controls have allowed for the restriction the kinds of apps, movies, games and other content children can access. With iOS 11, Apple added a “Do Not Disturb While Driving” feature as it continues to stress both safety and privacy.

Will Apple make additional changes? Apple has already shared it will make its current crop of tools more robust, which likely means it will be a topic at this year’s World Wide Developer Conference, Apple’s seemingly annual showcase for its software. We see that as Apple doing the right thing, but we would be remiss if we didn’t point out that it is a parent’s responsibility to oversee a child’s screen time – be it on a smartphone or TV – rather than pas the buck to Apple or one day Samsung, Sony or another company. After all, let’s remember that all of these devices come with an off switch for a reason.

This likely means the current headlines will likely pass and investors will once again focus on the current iPhone upgrade cycle, growing services business, and new products both from the company, like the Home Pod, and others that will make the iPhone a very sticky device. Data suggests iPhone ASPs will benefit from the mix shift toward higher priced and higher margin iPhone X upgrades this quarter, and we are already hearing about new iPhone models for 2017 that will adopt organic light emitting diode technology, a positive for the Universal Display (OLED) shares on the Tematica Investing Select List.

  • We continue to rate Apple (AAPL) shares a Buy with a $200 price target.
  • We continue to rate Universal Display (OLED) a Buy with a $225 price target.

 

 

Adding two infrastructure beneficiaries to our Contender List

Adding two infrastructure beneficiaries to our Contender List

 

In recent editions of the Monday Morning Kickoff and The Weekly Wrap, we’ve shared data showing non-residential construction has seen an uptick following the powerful hurricanes in the second half of 2017 that hit Texas and Florida. At the same time, there is growing talk in Washington that later this month President Trump will unveil his rebuilding U.S. infrastructure framework ahead of his Jan. 30 State of the Union address. While there are several questions that would need to be ironed out — things such as how the country will pay for that rebuilding effort given the recent tax cut and $20.6 trillion dollar national debt (roughly 105% of GDP) at a time when China is getting its back up about future purchases of U.S. Treasuries — there is little question the country’s infrastructure needs to be rebuilt. I see this very much in line with the “pain point” investing strategy we use here at Tematica alongside our thematic lens.

As I have also shared, we have seen a cold snap that gripped much of the country as well as disruptions due to recent winter storm Grayson. Odds are pretty high that these two factors have led to some construction delays this month. I expect construction and related companies to discuss this weather impact when they report 4Q 2017 results, and it could lead to softer than expected guidance for the current quarter.

Putting all of that together, I am adding shares of Vulcan Materials (VMC), the largest pure-play supplier of construction aggregates (primarily crushed stone, sand and gravel) and a producer of asphalt mix and ready-mixed concrete with a coast to coast footprint, as well as United Rentals (URI), the largest equipment rental company, to the Tematica Investing Contender List.

(As a reminder, Contender List companies are those that we are doing more work on and, in some cases, we’re waiting for the risk to reward tradeoff to reach more appetizing levels. You can view the full Contender List by clicking here, just scroll down the page to below the full Tematica Select List Companies.)

With United Rentals and Vulcan Materials, I see these companies benefitting from the potential rebuilding infrastructure boom to be had over the next several years, which should drive robust EPS growth provided Washington can reach across the aisle and provide funding to rebuild the roads, bridges, tunnels, dams, airports and other parts of U.S. infrastructure that the American Society of Civil Engineers (ASCE) rates a D+. More on the reasons behind that rating and what needs to be done can be found here.

As we start to hear from other construction and related companies next week, I’ll look to assess the potential weather impact to be had on the businesses as well as shares of Vulcan Materials and United Rentals and balance that with potential entry-points that will land them on the Tematica Investing Select List.

 

Doing some Contender List house cleaning as well

As we add Vulcan Materials and United Rentals to the Contender List, I’m also going to clean some house there as well. For starters, a mea culpa of sorts as both Corning (GLW) and McCormick & Co. (MKC) shares have already graduated to the Select List – perhaps a lump of coal was warranted in the Tematica elves stockings this past year. Given continued food quality issues and concerns over consumer spending vs. debt reduction in 2018, we will also shed Chipotle (CMG) shares from the Contender List. Lifelock was acquired in 2017, so that will be removed as well. Exiting CES 2018, we did not see much that inspires confidence in Immersion (IMMR) shares so they too will be removed at this time; that said, we will keep tabs on haptic virtual reality developments and revisit IMMR shares should that technology move past the concept stage.

With 5G gaining ground given recent announcements from AT&T (T) as well as T-Mobile USA (TMUS) and now Sprint (S), I plan on keeping a close watch on Dycom Industries (DY) shares. There is ample reason to be bullish, but given the nature of the specialty construction that they do for their customers – building wireless, wireline and backhaul networks, odds are they experienced some weather-related issues this month. As such, DY shares, as well as VMC and URI, will be under an even closer microscope over the next few weeks.

 

WEEKLY ISSUE: CES 2018 Delivers for the Tematica Investing Select List

WEEKLY ISSUE: CES 2018 Delivers for the Tematica Investing Select List

Welcome to this week’s issue of Tematica Investing, where we leverage our proprietary thematic lens to invest in well-positioned companies when it comes to our investment themes.

Over the last week, we’ve seen one of the best starts to a new trading year in some time, and the Tematica Investing Select List has been benefitted from not only that start but news being made at the currently occurring annual technology tradeshow better known as CES 2018. I’ll recap some of the meaningful announcements below in a minute, but the impact of those results have moved our positions in Universal Display (OLED), Applied Materials (AMAT), Nokia (NOK) and AXT Inc. (AXTI) higher over the last week.

These moves and the causes behind them have me once again revisiting my price targets on OLED and AMAT shares to the upside. Confirming data will likely be had in the coming days as 4Q 2017 earnings begin in earnest next Tuesday. As I discussed in this week’s Monday Morning Kickoff, the likely scenario is we see U.S. listed companies offer an upbeat outlook and use the benefit to be had from tax reform to boost 2018 EPS expectations. On an annual basis, those tax reform related benefits should more than outweigh the cold snap weather and winter storm Grayson disruptions that we have likely encountered with restaurant, retail and construction companies. This means that at least in the near-term investors will need to be choosey, hwoever, the net effect should see the stock market melt higher, especially if more Wall Street strategists boost their price targets for the S&P 500, the proxy for the overall U.S. stock market. I expect this to be the likely scenario.

My perspective that I laid our in this week’s Monday Morning Kickoff remains – I continue to suspect expectations could be getting ahead of themselves given the recent climb in consumer debt levels and continued growth in the lack of qualified workers that could hamstring business investment in the coming months despite lower taxes. The strategy that we’ll follow near term is to listen to the data and look for opportunities – companies at prices that offer a skewed risk-to-reward proposition that is in our favor. It has been that discipline married with Tematica’s thematic lens that has steered us clear of such 2017 disasters as GoPro (GPRO) and Blue Apron (APRN).

 

Watching the Fed minutes this afternoon

Later today, we will receive the next iteration of the Fed’s FOMC meeting minutes. While we know the policy impact from the December meeting, I’ll be interested in seeing more on to what degree the Fed factored in tax reform into its GDP forecasts, and what it sees as some of the swing factors to watch.

 

A first pass from CES 2018

While CES 2018, the annual technology trade show held in Las Vegas that features more than 4,000 exhibitors, officially got underway yesterday, we’ve received a number of announcements in the last few days that have sent tech shares in general, and several of our holdings, higher.

Starting with TVs, which are one of the more high-profile items to kick off the annual gathering, we are starting to see artificial intelligence (AI) embedded into these devices. For example, is adding both Alphabet’s (GOOGL) Google Assistant and Amazon’s (AMZN) Alexa to its latest 4K OLED and Super UHD LCD TV lineup. But TVs aren’t the only things that will embed AI in the coming year – yesterday it was announced by Moen that its cloud-based, Wi-Fi enabled shower system “U by Moen” will add support for Apple’s Siri and Amazon’s Alexa AI assistants in the first half of 2018.

Outside of Moen, both Kohler and Whirlpool (WHR) are also bringing voice activation capabilities to their smart kitchen, bath and appliance products. No stranger to voice assistants in its products, Whirlpool is going one step further as the appliances it is debuting at CES this year can be controlled using Alexa or Google Assistant. Per Whirlpool, its offering includes “dishwashers that can be set and started remotely by voice, refrigerators that homeowners can change temperature settings on using a voice assistant, and washing machines that let the user check with Alexa to see how much time is left on a cycle.”

We’re also seeing connectivity make its way into toothbrushes courtesy of Colgate’s (CL) Smart Electronic Toothbrush uses Apple ResearchKit with the user’s permission to crowdsource toothbrushing data so the company can “anticipate the future of oral care.”

This is a first pass at the CES news flow and I’ll have more over the coming days, so be sure to check back at TematicaInvesting.com for those thoughts.

Stepping back we find the rising number of connected devices – be they through voice assistants, smartphones or other – driving incremental demand for RF semiconductors. This, in turn, bodes very well for incremental substrate demand for AXT’s (AXTI), the basic building block for RF semiconductors from the likes of Skyworks Solutions (SWKS), Qorvo (QRVO) and others.

That is poised to drive semiconductor manufacturing utilization rates higher and bodes well for incremental orders at semi-cap company Applied Materials (AMAT), which is also benefitting from the ramp in organic light emitting diode display demand I noted above. With AMAT shares trading at just 13.5x on expected 2018 earnings, I’m once again reviewing my $65 price target with an upward bias.

I also see Amazon making a significant “land grab” with its Alexa voice assistant, which, in our view, bodes very well for continued growth in Amazon’s Prime membership and the company capturing consumer wallet share.

  • We continue to rate AXT Inc. (AXTI) shares a Buy at current levels and our price target remains $11.
  • We continue to rate Applied Materials (AMAT) shares a Buy at current levels and our price target remains $65.
  • We continue to have a Buy on Amazon (AMZN) shares, and our price target remains $1,400.

 

 

November construction spend and ABI index data are positives for LSI Industries

November construction spend and ABI index data are positives for LSI Industries

Yesterday we received a rather favorable November Construction Spending report. I continue to see the overall improvement in nonresidential spending, — due in part to post-hurricane rebuilding efforts — benefiting the shares of Tematica Investing Select List resident LSI Industries (LYTS) in the weeks to come. Also in the coming weeks, President Trump is set to unveil his rebuilding US infrastructure framework and in my view, this is a likely catalyst to drive LYTS shares higher.

Now let’s recap yesterday’s report from the Census Bureau…

Per the report, November Construction Spending rose 0.8% month over month and 2.4% year over year, continuing the string of improvement that began in August. Breaking the report down, private residential construction rose 1.0% month over month while private nonresidential construction rose 0.6%, a sharp tick higher compared to the modest contraction in October due primarily to a boost in commercial spending (+4.6% month over month. Turning to public construction, nonresidential spending increased 0.9% in November as office spending grew 5.5% and transportation spending rose 3.7%.

Aside from the upbeat view on nonresidential construction offered by this report, I also like that it backs up the recent Architecture Billings Index (ABI) reading for November that hit 55.0 for the month, its strongest reading for 2017. I look at a number of these indices, and it always helps to understand what each’s particular reference scoring system in mind. In the case of ABI, an index score of 50 represents no change in firm billings from the previous month, a score above 50 indicates an increase in firm billings from the previous month, and a score below 50 indicates a decline in firm billings from the previous month.

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