Menu

Category Archives: Tematica Investing

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.

 

 

 

Boosting OLED and AMAT price targets after AMAT’s latest beat and raise quarter

Boosting OLED and AMAT price targets after AMAT’s latest beat and raise quarter

 

KEY POINTS FROM THIS ALERT:

  • Last night Applied Materials (AMAT) delivered another beat and raised its quarterly outlook due to strength across the board in its semi-cap and display equipment businesses.
  • Based on the strength of Applied’s chips and display business, we are once again boosting our price target on AMAT shares, this time to $70 from $65. We continue to rate AMAT shares a Buy at current levels.
  • We are also boosting our Universal Display (OLED) price target to $225 from $200, which keeps our Buy rating intact.

 

After the market close, Applied Materials (AMAT) reported stronger than expected October quarter EPS and raised its outlook for the current quarter relative to consensus expectations. Powering that boosted outlook is the company’s backlog, which now spans $6.03 billion, up 32% year over year, with increases in semiconductor systems, display, and other businesses. Reviewing the company’s results and its drivers — which include the rising demand for chips as our Connected Society and Disruptive Technologies investing themes continue to expand as well as robust demand for organic light emitting diodes displays — we are boosting our price target on AMAT shares to $70 from $65.

In my view, Applied’s CEO summed up what is driving its business rather well on the earnings conference call last night:

“In the annual war for leadership in the smartphone market, handset manufacturers are adding more and more functionality to their devices. IoT applications are expanding rapidly and data generation is exploding. Major inflections are taking place in the data center, and there’s an emerging battle for leadership in high-performance computing and artificial intelligence. And there is huge demand for new display technology, while at the same time, average screen sizes for both TVs and mobile devices are growing considerably.”

  • Based on the strength of Applied’s chips and Display business, we are once again boosting our price target, this time to $70 from $65.
  • We continue to rate AMAT shares a Buy at current levels.

 

 

The October Quarter and AMAT’s Outlook

For the October quarter, Applied delivered EPS of $0.93 excluding non-recurring items on revenue of $3.97 billion, up 41% and 20% year over year, respectively. Sales improvements were had at all three of the company’s business units – Semiconductor Systems (up 14% year over year), Display (up 50% year over year), and Applied Global Services (up 20% year over year). Profit margins rose nicely at the Semiconductor Systems business, but it was the jump in margins at the Display business to 31.8% from 22.8% in the year-ago quarter that led the company’s overall margins to move higher.

On the housekeeping front, during the quarter Applied spent $385 million to repurchase 8 million shares of common stock at an average price of $48.65. Given the health of its business units, Applied should continue to generate ample cash following the $3.6 billion it generated over the last 12 months (roughly 25% of revenue), the company continues to look at returning capital to shareholders. Applied has a track record of boosting its dividend, but on the earnings call, last night shared that as we get clarity on tax policy it will revisit its mix of share repurchases vs. dividend increases. I see that as a rather prudent move, but either way, it means more capital being returned to shareholders, which is not a bad thing at all in my view.

Based on the strength of its markets and its backlog, Applied’s view is it will earn EPS of $0.94-$1.02 on revenue between $4.0-$4.2 billion in the current quarter. That makes the October quarter another “beat and raise” one for the company given current quarter expectations for EPS of $0.91 on $3.97 billion in revenue. I expect AMAT shares will trade up on this news, and with the underlying drivers pointing to a continued upcycle for chips and display, I expect a number of price target hikes to be had in the coming days. Team Tematica will continue to monitor the demand drivers for Applied’s business to determine if the company’s beat and raise track record is likely to continue in 2018. Based on what we’ve seen so far, we are inclined to think that is more likely than not.

 

Boosting our Universal Display Price Target

On the earnings call last night Applied Materials also shared that it now sees demand for its Display business even stronger than it last forecast, which called for 30% growth year over year. What I found more compelling, however, was that based on the investments being made in the display industry today Applied sees roughly half — 50% — of all smartphone screens being organic light emitting diode displays by 2020. That is far stronger than the IHS forecast that called for organic light emitting diode displays to account for 40% of all smartphone screens by 2022.

With the outlook for this display technology expanding more rapidly than expected in smartphones, plus ramping in the use of OLEDs in other markets (TVs, automotive lighting, general illumination), the outlook for Universal’s chemicals and high margin licensing business looks even brighter. This, in turn, has us once again boosting our Universal Display price target to $225 from $200.

  • We are boosting our Universal Display (OLED) price target to $225 from $200, which keeps our Buy rating intact.
WEEKLY ISSUE: Making Heads or Tails Out of Tax Reform

WEEKLY ISSUE: Making Heads or Tails Out of Tax Reform

 

Earlier this week, we provided a slew of updates as we scaled into the Trade Desk (TTD) position on the Tematica Investing Select List, boosted a few price targets and prepped for Thursday’s earnings from Applied Materials (AMAT).

Normally in these weekly issues of Tematica Investing we tend to focus on our thematic investing framework, but from time to time one particular ingredient to that framework can bubble up and take a commanding presence in the market. In today’s case, we’re referring to the political environment as Washington focuses on tax reform. After months of speculation over tax reform, we now have competing proposals on how to reduce corporate taxes and put more capital in the hands of individual taxpayers.

From an investing perspective, there has been much buildup over what this could mean for both the U.S. economy as well as corporate profits and earnings per share as early as 2018. If you’re thinking this sounds like expectations are likely ahead of themselves, we’re right there with you.

As I shared in this week’s Monday Morning Kickoff, differences between the competing House and Senate tax reform plans have brought a new layer of uncertainty to the market as evidenced by the retreat in major market indices over the last several days. This has been especially true for small-cap stocks as the businesses underneath those companies tend to be primarily U.S.-based, which means changes to tax reform relative to what was expected are bound to cause investors to re-bake the cake that is 2018 forecasts, potentially to the downside. Moreover, potential aspects of tax reform proposals could make it more difficult for small-cap companies to retain or attract talent needed to drive their businesses.

 

Let’s review WHERE WE ARE WITH TAX REFORM 

We recently received the GOP’s Tax Cuts and Jobs Act, which on its face looks to promote job growth, overhaul and simplify the tax code and reduce taxes. Over the last week, a competing plan from the Senate has emerged that, while it has the same basic framework as it cuts the corporate tax rate to 20%, has several more tax brackets than the House plan, establishes a lower tax rate for pass-through businesses and cuts individual rates.

As one can imagine, there are several differences that include pushing out corporate tax cuts until 2019 and preserving popular tax breaks, such as mortgage interest and medical expenses, and keeps a minimum tax rate of 10% for lower earners. It also removes the state and local tax deduction entirely.

As these competing plans gets parsed and negotiated, the one potential change that will rankle investors is delaying the cut in corporate taxes until 2019 and what that could mean to economic projections, corporate spending and job creation for 2018. The Conference Board is forecasting real GDP to reach 2.5% in 2018, up from 2.2% this year and 1.5% in 2016, despite there being headwinds associated with the dollar’s recent rise as well as prospects for higher interest rates year over year. While there will be some debate over the impact of pushing out tax cuts, odds are at a minimum it increases the headwinds to growth to be had in 2018.

As Larry Kudlow pointed out over the weekend, there are several risks to pushing out corporate tax cuts, including a greater use of tax avoidance and sheltering strategies next year and potential revenue loss as the tax delay could “deter foreign companies from coming to the United States.”

What I like about Kudlow is he points out there are issues with tax plans from both the House and Senate, but he also goes on to say that “differences between the two plans should narrow in conference.” Meaning the current proposals are a work in progress.

Kudlow is not alone, but there are others, like the pro-growth, limited-government Club for Growth, that are raising red flags that could make the closing of differences not quite so easy. For example, the Club for Growth argues the provision relating to “pass-throughs,” such as small and family-owned businesses, is misleading. While the first 30% of their income would be taxed at 25%, the remaining 70% would be taxed at as much as 45.6%.

Even the blended rate equates to at least 35%, which the club points out “means no tax cut at all for most small business and family-owned companies.” Let’s remember that new businesses, which tend to start out as pass-throughs, “account for virtually all new job creation in the U.S. and nearly 20% of gross job creation,” according to a 2015 study by the Kauffman Foundation.

It seems fairly logical that if we want to spur job creation and grow the taxable base, the pass-through item will need to be revisited. If not, it means potentially recalculating consumer spending expectations for 2018 and beyond, and as we know, consumer spending is directly or indirectly responsible for roughly two-thirds of the domestic economy.

Another provision that has gone largely ignored, yet will impact the ability of corporations to retain good talent, is the provision that imposes retroactive taxes on “nonqualified deferred compensation” (NQDC) plans. For more on the ins and out of these plans, here’s a good overview.

As reported by Bloomberg, the issue is this:

“The initial version of the Tax Cuts and Jobs Act (H.R. 1) would have severely curtailed the use of nonqualified deferred compensation plans by lumping that compensation into an employee’s taxable wages. The bill also would have expanded these packages to include stock options and stock appreciation rights, making them all subject to wage taxes. 

“Under the amendment to the House bill, nonqualified deferred compensation packages — including future commission payments and stock options — will continue to follow current law in tax code Section 409A and will be subject to tax only when compensation is cashed out.” 

Turning to the Senate bill, in its current form it would tax money set aside in nonqualified deferred compensation plans immediately compared to today, as explained by Fidelity, “you don’t pay income taxes on deferred compensation until you receive those funds.”

If the policy change in the Senate proposal finds its way into the final tax reform bill, the growing consensus is it “could force many U.S. companies to stop offering these types of programs,” and that calls into question how companies would retain key executives and other talent. While it could be argued that larger companies may possibly weather the storm better, this would appear to be another headwind for smaller companies that more often tend to rely on less than a handful of key people to drive the company and execute its vision.

 

Where do we go from here? 

According to House Speaker Paul Ryan, the Ways and Means Committee has approved the Tax Cuts and Jobs Act and now the bill will head to the House floor for a vote later this week. Let’s remember the bill must not only pass the House, but also the Senate, and that likely means there will be much back and forth to be had in the coming days.

With no identifiable market catalyst on the horizon, odds are stocks, especially small-cap ones, will be range-bound until we have clarity one way or another on tax reform and its timing. While the market waits, we’ll continue to look for well-positioned companies that meet our investment mandate as well as parse data points using our time-tested and trusty thematic lens.

 

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.

 

Special Alert: Tematica’s take on Trade Desk earnings

Special Alert: Tematica’s take on Trade Desk earnings

 

Last night recently added Connected Society / Content is King company Trade Desk (TTD) reported results that beat September quarter expectations. However, after several “beat and raise” quarters, TTD shares were trading off in the aftermarket last night and again in pre-market trading this morning due to “underwhelming” revenue guidance — guidance that was modestly short of consensus expectations. For the current quarter Trade Desk guided revenue to $101 million, while the consensus forecast was $101.6 million. For those doing the math, yes that’s a variance of less than 1% — a variance on guidance, not a variance of actual results, Still, TTD shares are down more than 11%.

What’s going on?

As we mentioned when we added Trade Desk shares earlier this week to the Tematica Investing Select List, the company has a reputation for “beating and raising”.  While it clearly beat September quarter expectations that were looking for EPS of $0.26 on revenue of $76.8 million last night with EPS of $0.35 on revenue of $79.4 million, the guidance, which is likely to prove to be conservative in our view is the issue. Plain and simple, Trade Desk management did not boost its outlook for the current quarter above the consensus view, and that is catching some investors off guard.

We’ve seen this before when a company that has a track record of raising expectations quarter after quarter, suddenly doesn’t follow the expected playbook. Some investors panic and sell thinking “things must be over” or “something is wrong.”

In our experience, more often than not, what we are seeing in Trade Desk — a company that is benefitting from the accelerating shift in advertising spend to digital platforms — is simply re-casting the expectations bar so it can continue to walk over it, beating expectations in the process. To use Wall Street lingo, we suspect Trade Desk is sandbagging the current quarter in order to keep its “under promise and over deliver” reputation intact. While it’s not fun in the short-term, such actions that drive a stock’s price lower offers us an opportunity to improve our cost basis at better prices as we scale into the position.

When we added the shares, we mentioned that there was the chance that Trade Desk could deliver a flub. We didn’t think it was likely, and the performance in the September quarter was robust — a quarter that showed 95% customer retention as well as solid growth across mobile, international and other advertising platforms including audio the underlying business. On the earnings conference call, Trade Desk shared it added “3 large global brands” during the quarter with spending in the test phase.

What this tells us is Trade Desk continues to gain advertising spend share as companies continue to look for ways to reach consumers in today’s increasingly connected and digital world. Considering how brand conscious companies are, and rightly so, we see it as a huge vote of confidence that Trade Desk continues to win and retain customers.

 

Here’s our strategy for TTD shares

Our strategy with Trade Desk shares will be to remain patient with our current shares and sit on the sidelines in the very short-term while sellers weigh down on the stock price. In relatively short order, we expect to be in a position to step in and add to our position at better prices given that we see no slowdown in the shift toward digital advertising.

If there was any doubt, all we need do is look at where people are spending their time — on connected devices. While there may be some bumps along the way, we see this creative destruction in how and where advertising spend occurs as 2.0 version of how the internet impacted newspaper advertising. There is no putting the genie back in the battle, especially as video consumption shifts from broadcast to streaming services, with more players ranging from Facebook (FB), Alphabet (GOOGL), Amazon (AMZN) and Apple (AAPL) getting involved. If anything, we see advertisers pivoting toward Trade Desk.

 

 

Weekly Issue: Exiting One Positioning and Sharpening Our Pencils on Several More

Weekly Issue: Exiting One Positioning and Sharpening Our Pencils on Several More

 

KEY POINTS FROM THIS POST:

  • As Amplify falls out of the slipstream of our Food with Integrity investing tailwind, we are issuing a Sell rating on BETR shares and removing them from the Tematica Research Select List.
  • Our price target on Apple (AAPL) shares remains $200, but as we move through the next several weeks, we will assess iPhone demand data for potential upside.
  • Our price target for Costco Wholesale (COST) shares is $185, which is in line with recent peak price-to-earnings (P/E) and dividend yield multiples over the last few years when applied to expected 2017 earnings prospects.
  • Our $150 price target for International Flavors & Fragrances (IFF) is under review with an upward bias.
  • We are increasing our price target on Universal Display (OLED) to $200 from $175, which keeps our Buy rating intact.

 

 

Over the last several trading days, we’ve had a number of companies on the Tematica Select List report their quarterly earnings. This has us focusing today’s issue on recapping what was said, and sharing our views as well as making any price target adjustments.

Earlier this week, we added a new position to the Select List – Trade Desk (TTD), which we see as riding both our Connected Society and Content is King investing themes. If you missed the special alert, you can find it here. Our price target is $80, and we expect to have more on this following the company’s earnings report this Thursday (Nov. 9th). As we shared in the alert adding TTD shares, while we don’t expect any post-earnings weakness, our strategy will be to use any such development to improve our cost basis as advertising increasingly accelerates toward digital platforms.

You’ll notice that over the last few weeks, we’ve added both Apple and now Trade Desk to the Select List. In the next few weeks, we’ll be looking to position the list for 2018, and that likely means we will do some proactive pruning, shedding those companies that have underperformed significantly or whose tailwinds aren’t blowing as hard. As we do this, we’ll also look to reshape our Contender List as well.

Now, let’s break down those earnings reports and other key items from the last few days…

 

Exiting Amplify Snacks

Following the second quarter in a row of lackluster quarterly results last night — results that included missing expectations as well as guiding the coming quarters below expectations — we are removing Amplify Snacks (BETR) shares from the Select List and exiting the position. While revenue for the September quarter rose roughly 40% year over year, it didn’t cross the bar that was consensus expectations. Weighing on the company’s performance, however, was the tumble in margins, which reflected the launch of newer snack products as well as increased promotional activity.

Aside from the company’s performance, we are also seeing what looks to be a far more competitive snacking landscape. At the recent 2017 National Association of Convenience Stores Show in Chicago, protein was the snacking buzz word. New products from ConAgra (NYSE) include a Slim Jim Premium line, while Kraft Heinz (NASDAQ) had protein focus with Oscar Mayer meat trays, Philadelphia Bagel & Cream Cheese Dips, Planters NUT-rition mixes and coated Crunchers Nuts. Kellogg (K) highlighted Special K trail mixes and Protein/Nourish Bites. We see these companies and others looking to tap into the paleo and keto snacking wave, and in our view, this helps explain the kicked up use of incentives by Amplify.

  • As Amplify falls out of the slipstream of our Food with Integrity investing tailwind, we are issuing a Sell rating on BETR shares and removing them from the Tematica Research Select List.

 

Apple — Beats Expectations

Last week Connected Society investment theme company Apple (AAPL) delivered better-than-expected earnings and revenue for the third quarter. Management also guided the current quarter in line with expectations, which drove the shares higher. On the earnings call, CEO Tim Cook said the production ramp for iPhone X is going well, but noted that Apple can’t predict a supply/demand balance timeframe at this point.

We see that as Apple being Apple — purposely vague. Even so, the key is that despite reports of tepid iPhone 8 demand, Apple did not disappoint with its guidance for the current quarter, which contains mass production of the higher-average- selling-priced iPhone X as well as the arrival of the holiday selling season. Third- party surveys suggest that smartphones will be in high demand this holiday season.

  • Our price target on AAPL shares remains $200, but as we move through the next several weeks, we will assess iPhone demand data for potential upside.

 

Costco Wholesale — Withstanding Amazon

Last week, Costco Wholesale (COST) reported its October sales, which rose 10% year over year with total company same-store sales up 7.5% (5.6% excluding gas and foreign currency) and e-commerce sales up 31% year over year.

In our view, these results confirm Costco’s ability to withstand the “Amazon effect.” We see Cash-strapped Consumers embracing Costco to stretch their disposable dollars while it opens 25 new warehouses in the coming year following the 26 it unveiled over the last 12 months. As a reminder, the company’s high-margin membership fee is a key driver of its bottom line. We also like that Costco management is stepping up its game to counter grocery moves by Amazon (AMZN) and others by partnering with Instacart.

  • Our price target for Costco Wholesale (COST) shares is $185, which is in line with recent peak price-to-earnings (P/E) and dividend yield multiples over the last few years when applied to expected 2017 earnings prospects.

 

International Flavors & Fragrances — Bested the Top and Bottom Line

Earlier this week the Rise & Fall of the Middle Class and Food with Integrity company that is International Flavors & Fragrances (IFF) reported third-quarter 2017 results that bested both top- and bottom-line expectations. The combination of better-than-expected operating performance during the quarter with continued share count shrinkage led IFF to deliver earnings of $1.42 per share vs. the expected $1.37. With the shares bumping up against our $150 price target, we are parsing the company’s outlook and earnings call comments to revisit potential upside to be had in the shares from current levels.

Breaking down the quarter’s revenue, the higher-margin Flavor’s business accounted for 47% of the quarter’s sales and posted 12% sales growth year over year with organic growth benefiting from across the board growth in its products, especially Sweet. We see that as a confirming sign of the shift toward “better for you food” as food and beverage companies look for sugar alternatives. Sales at the Fragrance business (53% of sales, 51% of operating profit) rose 13% year over year (12% on a currency neutral basis). Of note, the segment’s Fine Fragrance business advanced 20% year over year, which included a helping hand from the acquired Fragrance Resources business.

  • Our $150 price target for International Flavors & Fragrances (IFF) is under review with an upward bias.

 

Universal Display — Continues to Pop

Last week, Universal Display smashed third-quarter top- and bottom-line expectation and guided the current quarter ahead of consensus expectations. That beat and raise popped the shares over the last several days. As we only half-joked about over the summer, we are once again boosting our price target to $200 from $175 as we continue to see further upside in the shares as industry capacity ramps for organic light-emitting diode displays. These continued capacity additions should improve display pricing, making it more cost competitive and foster adoption for new applications, such as automotive lighting and eventually general lighting, beyond smartphones and TVs in the coming quarters.

Next week’s earnings report from Applied Materials (AMAT) should offer even further bullish commentary on the organic light emitting diode market.

  • We are increasing our price target on Universal Display (OLED) to $200 from $175, which keeps our Buy rating intact.

 

More earnings on deck this week

This week we’ll get results from several more Select List holdings, including MGM Resorts (MGM), USA Technologies (USAT), Disney (DIS) and newly added Trade Desk (TTD). All of this means, that yes it will once again be another busy week for us here at Tematica. Next week, we have earnings from Applied Materials (AMAT) coming at us, but all in all, it should be a much calmer week… of course, that may depend on what happens with tax reform.

Special Alert: Adding this digital advertising platform company to the Select List

Special Alert: Adding this digital advertising platform company to the Select List

  • We are adding shares of Trade Desk (TTD), a company that straddles our Connected Society and Content is King investing themes, with an $80 price target and a Buy rating.
  • Trade Desk will report its 3Q 2017 earnings after Thursday’s market close; while we don’t expect any post-earnings weakness, our strategy will be to any such development to improve our cost basis as advertising increasingly accelerates toward digital platforms.
  • This is a new addition to the Select List, and at this time there is no stop loss recommendation.

The Tematica Investing Select List has been and in our mind should continue to benefit from the accelerating shift toward digital advertising that is captured in the Facebook (FB), Alphabet (GOOGL) positions. This past earnings season was a robust one for both with advertising facing businesses growing leaps and bounds compared to year-ago levels. Let’s keep in mind, that’s before either one has put a meaningful dent in broadcast TV, the holy grail of advertising spend. The thing is both companies are focused on that with Watch at Facebook and several properties at Alphabet’s YouTube.

From the “platform to be shifted to” space, we have that pretty well covered with FB and GOOGL shares. But what about from the ad spending perspective? What tools and services are they using to help choose and optimize their advertising spend?

This brings us to Trade Desk, (TTD), a technology company that provides a self-service, cloud-based platform for ad buyers. Through this platform, which puts Trade Desk in the high-margin software as a service camp, ad buyers can create, manage, and optimize more expressive data-driven digital advertising campaigns across 500 billion digital ad opportunities per day across a variety of formats. These include display, video, audio, native and social, on a multitude of devices, including computers, mobile devices, and connected TV.

We’ve heard the cord cutting stories, the shift to mobile video consumption and how traditional cable companies are losing subscribers to streaming and other over the top services, especially with Millennials according to brand Intelligence firm Morning Consult. It’s not just the Millennials, however, given the steep costs associated with cable. The average cable bill in America is over $100 a month, which is almost 50% more than 10 years ago, and as we’ve pointed out previously debt-ridden consumers that have seen modest wage growth are looking for ways to cut back their spending. In some cases, it’s a choice between cable vs. the combination of streaming and mobile services.

What this means is Trade Desk is in the running not just for the $50 billion display advertising market or the $235 billion TV advertising market, but the $650 billion total global ad spending market. As more of that market shifts to digital platforms, which we are seeing per Facebook and Alphabet, it expands Trade Desks available market. Currently it’s estimated that only 2% of the $650 billion total global ad spending market has embraced programmatic advertising like that offered by Trade Desk. While we don’t expect programmatic advertising to become 100% of the global ad spending market any time soon, modest better growth to 4%-5% or better paves the way for significant growth ahead at Trade Desk.

We have often said that shifts like this take time to materialize, but much like a turning tanker when they pick up momentum the shift accelerates significantly. We are starting to see that in programmatic advertising and we will watch for confirmation among broadcast TV and agency advertising spend in the coming quarters.

As this occurs, Trade Desk is one of the preferred partners. Recently, the company again earned the top Net Promoter Score for Demand Side Platforms (DSP) in the latest Programmatic Intelligence Report from Advertiser Perceptions. The ranking was based on survey findings of more than 360 ad buyers at both brands and agencies. As grand as that is, we find even more solace in Trade Desk’s customer base, which coming into 2016 measured more than 560 with the top three customers being among the who’s who in advertising — Omnicom Group Inc. (OMC), WPP plc and Publicis Groupe (PUBGY) – each of which represented more than 10% of gross billings in 2016.

In reviewing 3Q 2017 results from Trade Desk’s top customers, Omnicom reported overall advertising up more than 4% on an organic basis. By comparison WPP reported its 3Q 2017 was up 1.1% year over year, with stronger growth of more than 4% for its Advertising, Media Investment Management business. Even Interpublic Group (IPG), which is not a top three Trade Desk customer, reported “advertising business had solid U.S. growth in both our larger networks and our domestic independence.”

This tells us the overall advertising market continues to grow, which is a positive for Trade Desk. What we find even more confirming for adding TTD shares is that on its earnings call, Interpublic cited significant new digital assignments during the quarter, including a new U.S. digital project from McDonald’s (MCD). Interpublic’s Chairman and CEO, Mike Roth, also shared that clients bringing their digital advertising spend in-house, which in our view bodes well for Trade Desk and its programmatic platform.

Our strategy with Trade Desk will mimic that of Apple (AAPL) – we’re adding TTD shares ahead of earnings this Thursday after the market close, and should the report disappoint we’ll look to scale into the shares given the ongoing shift toward digital advertising. Consensus expectations have it serving up EPS of $0.27 on revenue just shy of $77 million.

We’d note the favorable results at Facebook and Alphabet as well as the track record at Trade Desk for handily beating analyst expectations over the last year. That same track record has led to 2018 EPS expectations climbing to $1.70 from $1.34 a few months ago and that compares to 2017 EPS forecasts that now call for $1.43, up from $1.08 previously. To really put this into context, Trade Desk delivered EPS of $0.89 in 2016, which means its compound annual growth rate over the 2016-2018 period is significant at 38%.

Aside from actual revenue and EPS results, we’ll be assessing the mix of advertising spend, particularly between new and existing customers, as well as customer retention metrics. In the June quarter, Trade Desk had customer retention of 95% with roughly 87% of its 2Q 2917 gross spend from existing customers, which are customers that have been with Trade Desk for over a year.

In terms of the company’s balance sheet, it exited the June quarter with $27 million in debt vs. cash and short-term investments of just over $115 million. Over the past trailing 12 months ending in June, the company generated $40.4 million and $25.8 million of operating cash flow, and free cash flow respectively.

Our $80 price target on TTD shares equates to a PEG ratio of just over 1.2x when applied to the consensus 2018 EPS view of $1.70 per share. As the company continues to benefit from the accelerating shift to digital advertising, odds are we will see that PEG multiple expand as well, just like we’ve seen with Alphabet and Universal Display (OLED). That likely means we could be boosting our TTD price target several times over the coming quarters.

  • We are adding shares of Trade Desk (TTD), a company that straddles our Connected Society and Content is King investing themes, with an $80 price target and a Buy rating.
  • Trade Desk will report its 3Q 2017 earnings after Thursday’s market close; while we don’t expect any post earnings weakness, our strategy will be to any such development to improve our cost basis as advertising increasingly accelerates toward digital platforms.
  • This is a new addition to the Select List, and at this time there is no stop loss recommendation.

 

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

A few days ago in the Monday Morning Kickoff, I cautioned that over the coming days we would see a profound increase in data in the form of economic data and earnings. We are seeing just that as we head into the eye of the earnings storm today and tomorrow. For the Tematica Investing Select List that means results will be had from Connected Society company Facebook after today’s market close, followed tomorrow by Disruptive Technologies company Universal Display (OLED) and the latest addition – Apple (AAPL). Yes, after patiently keeping our eyes on Apple for some time, we finally added the shares back to the Select List given what we see as a robust 2018 for the company. If you missed our deep thoughts on that addition you can find it here, and below we’ve previewed what’s expected from these three companies.

We all know there are a number of factors that influence the market, and two of them – the Fed and prospects for tax reform – will be in full coverage today and tomorrow. This afternoon the Fed will break from its November FOMC policy meeting, and while next to no one expects the Fed to boost interest rates coming out of it, the focus will be the language used in the post-meeting statement. Last week’s stronger than expected 3Q 2017 GDP print of 3.0% — you can read Tematica’s take on that here – and Fed Chairwoman Janet Yellen’s likely status as a lame duck keep the prospects of a rate hike in December fairly high in our view.

Tomorrow, the highly anticipated tax reform bill is slated to be revealed, a day later than expected “because of continued negotiations over key provisions in the bill.” It’s being reported that issues still being negotiated include retirement savings and the state and local tax deduction — two key provisions that involve raising revenue to pay for the plan. As the bill’s details are released, we suspect many will be interested in proposed tax bracket changes and the potential economic impact to be had as well as near-term implications for the national debt. We will have more comments and thoughts on the proposed bill later this week as it, along with the tone of earnings to come, will influence the market’s move in the coming days.

 

A quick reminder on Amazon and Nokia plus boosting our Alphabet price target

Before we preview what’s to come later today and tomorrow, I wanted to remind you that last week, on the heels of Amazon destroying 3Q 2107 expectations, we boosted our price target for AMZN shares to $1,250 from $1,150, keeping our Buy rating intact. As expected, other investment banks and analysts did indeed up their rating and price targets as we move deeper into what is poised to be one of the busiest quarters in Amazon’s history. The wide consensus is that once again digital shopping will take consumer wallet share this holiday season. As Amazon benefits from that e-commerce tailwind following robust Prime membership growth in 3Q 2017, the company is also poised to see its high margin Amazon Web Services business continue to benefit from ongoing cloud adoption. In our view, this combination makes Amazon a force to be reckoned with this holiday season, especially since it remains the online price leader according to a new report from Profitero.

  • As we have said for some time, as consumers and business continue to migrate increasingly to online and mobile platforms Amazon shares are ones to own, not trade.
  • Our price target on Amazon is $1,250.

 

We also used the sharp sell-off in Nokia (NOK) shares to scale into that position as its high margin licensing business continues to perform as its addressable device market continues to expand. That addition helped improve our NOK cost basis considerably as we patiently wait for the commercial deployment of 5G networks that should goose its network infrastructure business. Hand in hand with those deployments, we should see even further expansion of Nokia’s licensing market expand as the connected car, connected home and Internet of Things markets take hold.

  • We continue to rate Nokia (NOK) shares Buy with an $8.50 price target.

 

Also last week, Alphabet (GOOGL) soared following the company’s 3Q 2017 results that crushed expectations and confirmed the company’s position in mobile. More specifically, the company delivered EPS of $9.57, $1.17 per share better than expected, as revenue climbed nearly 24%, year over year, to $27.77 billion, edging out the expected $27.17 billion.

Across the board, the company’s metrics for the quarter delivered positive year-over-year comparisons and in response, we are upping our price target to $1,150 from $1,050. Given its positions in search, both desktop and mobile, the accelerating shift in advertising dollars to digital platforms, and YouTube’s move into both streaming TV and proprietary programming, we continue to rate GOOGL shares a Buy.

  • We are upping our price target on Alphabet (GOOGL) shares to $1,150 from $1,050.

 

After today’s market close, Facebook will report its 3Q 2017 results

Following positive reports from Amazon, Alphabet and even Twitter (TWTR) that confirmed the accelerating shift to digital platforms for advertising and consumer spending, Facebook shares rallied in tandem over the last few days. This brings the year-to-date rise in the shares to more than 55% fueled in part by several investment banks upping their price targets and ratings for the shares. For now, our price target on FB shares remains $200.

Despite the better-than-expected results from those companies mentioned above, we have not seen any upward move in consensus expectations for Facebook’s 3Q 2017 results that will be reported after today’s market close. As I share this with you, those expectations for 3Q 2017 sit at EPS of $1.28 on revenue of $9.84 billion while those for the current quarter are $1.70 in earnings and $12 billion in revenue. On the earnings call, we’ll be looking not only for updated quarterly metrics but also updates on its monetization efforts and how its video streaming offering, Watch, is developing. We see Watch as a salvo against TV advertising given its 2 billion-and-growing user footprint across the globe. We also hope to hear more about Facebook’s virtual reality initiatives and its plan to expand the recently launched online food-ordering capability.

  • As Facebook continues to garner advertising dollars and flexes its platforms to gather more revenue and profit dollars, we are once again assessing potential upside to our $200 price target for this Connected Society company

 

Thursday brings Apple and Universal Display earnings

After tomorrow’s market close we receive earning from Disruptive Technology company Universal Display (OLED) and Connected Society company Apple (AAPL). There have been a number of positive data points to be had for our Universal Display shares over the last several weeks and they have propelled the shares higher by 13% over the last month. That latest move has brought the return on the OLED position that we have had on the Tematica Investing Select List since October 2016 to more than 175%. Patience, it seems, does pay off as does collecting and assessing our thematic signals.

In terms of 3Q 2017, consensus expectations call for the company to deliver EPS of $0.12 on revenue of $47.1 million. We’d remind subscribers the company has a track record of beating expectations and a favorable report this week from LG Display points to that as once again being likely tomorrow.

As noted by LG Display, “Shipments of big OLED TV panels have increased, as 13 manufacturers adopted our products…We plan to focus on investing in OLED products as part of our long-term preparation for the future” away from LCD displays. LG Display also shared it is planning to spend 20 trillion won to expand OLED production through 2020.

We see this rising capacity as bullish for our Universal shares as well as our Applied Materials (AMAT) shares given its display equipment business, but also as a signal that OLED display demand is poised to expand into other markets, including automotive.

  • Our price target on Universal Display shares remains $175.
  • Our price target on shares of Applied Materials (AMAT) remains $65.

 

With regard to Apple’s 3Q 2017 earnings, expectations have this Connected Society company reporting EPS of $1.87 on revenue of $50.8 billion. As we mentioned when we added the position, given the timing of both new iPhone model launches we are likely to see 3Q 2017 results get a pass as investors focus on the outlook for the current quarter. As I shared on Monday, our strategy will be to use any pullback in AAPL shares near the $140-$145 level to improve our cost basis for what looks to be a favorable iPhone cycle in 2018.

  • Our price target on Apple (AAPL) remains $200.
Special Alert: Apple added to the Tematica Investing Select List

Special Alert: Apple added to the Tematica Investing Select List

 

KEY POINTS FROM THIS ALERT:

  • We are adding shares of Connected Society company Apple (AAPL) to the Tematica Investing Select List with a $200 price target.
  • In our view, Apple and its new iPhone models are a 2018 story, and we see the recent string of upwardly revised expectations continuing as Apple tweaks its iPhone production and takes newer models global.
  • We would look to use pullbacks in the AAPL shares to improve our long-term cost basis.

This morning we are adding, some would say finally, Apple (AAPL) to the Tematica Select List. It’s no secret that those of us at Tematica are hardcore users of the company’s products — from MacBooks, iPhones and iPads, to the Apple Watch, Time Machine and various other devices. Despite its deep bench of product, Apple, at least for now, is a smartphone company. Even ahead of the recent launches of its iPhone 8, 8S and iPhone X products, Apple derived the bulk of its revenue and profits from the iPhone.

Apple does have other businesses like Apple TV that bolster its position in our Connected Society investing theme, and the company appears to be branching out into live content similar to Tematica Investing Select List companies Amazon (AMZN) and Facebook (FB). We suspect that like many past products and services, Apple will look to unveil its content offering when it is ready, not when the financial media thinks it will. We see that as an added tailwind on the horizon for AAPL shares, provided it can get the content right. Case in point, we were not won over by Apple’s Carpool Karaoke series; however, per the financial press, Apple appears to have recognized its shortcoming and has gone on a hiring spree to course-correct this effort.

 

For many subscribers, the probable question is “Why now?”

Candidly, we have always kept eyes on Apple’s business given how it touches our Connected Society investing theme as well as its shares. Were we underwhelmed by the company’s September event? Yes, we were, given the staggered nature of the new iPhone launches and the simple fact the company kicked off the event discussing how it was going to revolutionize its Apple Stores vs. talking products. There was also the concern that iPhone sales would pause as shoppers waited for the iPhone X to hit shelves not to mention rumored component shortages.

Over the last few days, orders for the iPhone X commenced and early indications suggest it will be a brisk seller. Almost all Apple store channels are now reporting 5-6 week delivery times for new iPhone orders across all configurations of size and color, which means new online orders will not be fulfilled until early December. The initially low production volumes were due to component constraints for the new 3-D face-scanning sensor and a circuit board for a new camera were to blame and Apple is expected to have this corrected in the coming weeks.

Turning to the iPhone 8, while sales have been tepid ahead of the iPhone X launch in the U.S., this morning a new report from Canalys shows the iPhone 8 has led Apple to break a run of sales decreases that stretches back six quarters. Per the report, Apple should see a 40% annual growth to 11 million iPhone units China during the quarter. As with any new product launch, we see Apple tweaking production between these new iPhone models to better match demand.

In our view, we are likely to see Apple up its iPhone X product and dial back production for the iPhone 8, which is a nice but modest upgrade from the iPhone 7 — a model that continues to sell well. That’s right, it’s not just about the new models – the older ones, which are less expensive, help drive Apple sales in the all-important emerging markets like India, where smartphone penetration is far lower than in the U.S. In the U.S., smartphone penetration passed 80% last year. By comparison, roughly one-third of mobile phone users have a smartphone in India, and that figure is expected to only move higher in the next few years.

As we look back on prior iPhone launches, we find ourselves saying “I’ve seen this movie before” and we have. It usually bodes rather well for Apple and we expect that to be the case once again given the large install base Apple has for the iPhone. Last summer Apple sold its 1 billionth iPhone, but as we know from experience and upgrades, not all phones sold are still in use. According to research from UBS, the number of active devices is around 800 million, roughly 80% larger than when Apple debuted the iPhone 6. Simply put, the larger the number of active users, the larger the number of people upgrading every time Apple unveils a new smartphone, especially as newer versions of iOS tend to make older iPhone painfully slow.

There is also the added benefit of Apple putting would-be iPhone buyers in a box as they look to match either an iPhone upgrade or a new purchase with storage needs. Given the increasing usage of the camera for pictures and video, Apple has upped available storage, but that comes at a cost. We see this as well as the iPhone X helping move Apple’s average iPhone selling prices higher in the coming months.

Apple will report its 3Q 2017 results later this week, and odds are given the timing of the new iPhone model launches the company will get a pass of sorts on that performance. In our view, the guidance will be what investors will be focused on, and they will be listening, as will we, not only on iPhone production commentary, but the timing around these models being launched in other markets. As these models go truly global, it makes the iPhone story and thus Apple’s story a 2018 event. We are not alone in that thinking given that current revenue expectations for 2018 have Apple delivering 17% growth to $266.8 billion vs. 5.5% growth this year. As this occurs, odds are the Wall Street bulls will once again return to AAPL shares, and we want to be there ahead of them.

We recognize Apple can have great quarterly earnings report that leads to AAPL shares popping, but from time to time the company has issued results that caused some degree of investor indigestion. We want to be positioned for the former, but we will use the latter should it happen later this week to improve the cost basis for AAPL shares on the Tematica Investing Select List for the longer-term. In our view, Apple is one of the companies that will expand its offering as our Connected Society continues to expand past smartphones and computers to the home, car and the Internet of Things. Apple is paving the way for proprietary content, adding to its position in the home with its HomePod digital assistant and growing its partnerships in Corporate America.

 

Apple’s story is far from over.

Our price target on Apple shares is $200 or 18x expected current 2018 consensus EPS of $11.16. We’d note that over the last few weeks that 2011 consensus EPS figure has crept up from $10.67, and there is the rather likely possibility we will see that figure move even higher as we enter 2018. Over the last several quarters, Apple has regained its past track record for beating bottom line expectations and given the high profile nature of the iPhone X we would not be shocked to learn Apple has once again sandbagged expectations for the second half of 2017.

Over the last five years, Apple shares have peaked at an average P/E multiple of 16x and bottomed out at 11x. That suggests an upside vs downside tradeoff in the shares between $120-$180, vs. the current share price near $160. As we noted above, we strongly suspect Apple will surprise to the upside in 2018 and could deliver EPS between $12-$13; the current high estimate for Apple EPS in 2018 sits at $13.29. In the coming quarters, provided Apple’s EPS beating track record continues, we see 2018 EPS expectations moving higher, and Wall Street bumping up price targets along the way. If Apple stumbles near-term, we would look to aggressively scoop up the shares between $140-$145.

  • We are adding shares of Connected Society company Apple (AAPL) to the Tematica Investing Select List with a $200 price target.